VerifyMe, Inc. 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2021 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to Commission File Number 001-39332 VERIFYME, INC. (Exact Name of Registrant as Specified in Its Charter) Nevada 23-3023677 (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) Clinton Square, 75 S. Clinton Ave , Suite 510 Rochester , NY 14604 (Address of Principal Executive Offices) (Zip Code) (585) 736-9400 (Registrant’s Telephone Number, Including Area Code) Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, par value $0.001 per share VRME The Nasdaq Capital Market Warrants to Purchase Common Stock VRMEW The Nasdaq Capital Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o or No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o or No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x or No o Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or, an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company,” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer x Smaller reporting company x Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o or No x The aggregate market value of the voting stock held by non-affiliates of the registrant was $ 28,562,382 as of June 30, 2021. Shares of common stock held by executive officers and directors of the registrant have been excluded from this computation in that such persons may be deemed to be affiliates of the registrant. As of June 30, 2021, there were no persons known to the registrant to own 5% or more of the outstanding common stock, and therefore no other persons have been deemed affiliates of the registrant. This determination of affiliate status is not a conclusive determination for other purposes. The registrant had 7,260,985 shares of common stock outstanding as of the close of business on March 7, 2022. DOCUMENTS INCORPORATED BY REFERENCE Portions of VerifyMe, Inc.’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with its 2022 annual meeting of stockholders are incorporated by reference into Part III Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K. TABLE OF CONTENTS Page PART I Item 1. Business 2 Item 1A. Risk Factors 10 Item 1B. Unresolved Staff Comments 18 Item 2. Properties 18 Item 3. Legal Proceedings 18 Item 4. Mine Safety Disclosures 18 PART II Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities 19 Item 6. [Reserved] 20 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25 Item 8. Financial Statements and Supplementary Data 25 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 25 Item 9A. Controls and Procedures 25 Item 9B. Other Information 27 Item 9C. Disclosure Regarding Foreign Jurisdictions that prevent Inspection 27 PART III Item 10. Directors, Executive Officers and Corporate Governance 28 Item 11. Executive Compensation 28 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 28 Item 13. Certain Relationships and Related Transactions, and Director Independence 29 Item 14. Principal Accountant Fees and Services 29 PART IV Item 15. Exhibits and Financial Statement Schedules 29 Item 16. Form 10-K Summary 32 Table of Contents Cautionary Note Regarding Forward-Looking Statements This Annual Report on Form 10-K (“Report”) includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts contained in this Report, including among others, our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. Our actual results and financial condition may differ materially from those express or implied in such forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements including, but not limited to, those factors set forth under Item 1A - Risk Factors and those other risks and uncertainties detailed in our periodic reports and registration statements filed with the Securities and Exchange Commission (“SEC”). We caution that these risk factors may not be exhaustive. All forward-looking statements in this Report are made only as of the date hereof or as indicated and represent our views as of the date of this Report or as indicated. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise, except as required by law. 1 Table of Contents PART I ITEM 1. BUSINESS. Overview VerifyMe, Inc. (“VerifyMe,” the “Company,” “we” “us” or “our”) is a technology solutions provider specializing in products to connect brands with consumers. VerifyMe technologies give brand owners the ability to gather business intelligence while engaging directly with their consumers. VerifyMe technologies also provide brand protection and supply chain functions such as counterfeit prevention, authentication, serialization, and track and trace features for labels, packaging and products. We are a Nevada corporation formed in 1999. We began to commercialize our covert luminescent pigment VerifyInk TM in 2018. Prior to 2021 we completed the initial development stage of our other current technologies and in 2021 we began to commercialize as a Brand Protection Solutions provider. Our brand protection technologies include consumer engagement capabilities, the custom printing of tamper proof secure labels, and utilization of invisible and visible images, printed with our proprietary special composition inks comprised of a rare earth mineral. These inks are compatible and printed with modern digital and standard printing systems such as digital, offset, flexographic, silkscreen, gravure, inkjet and toner-based laser printers. The inks can be used to print both static labels on standard printing systems and variable labels utilizing digital printing systems that include variable images, serialized codes, dynamic bar codes and dynamic QR codes that allow brand owners to engage directly with customers. We have developed and patented a dual-code technology that we believe can connect digital Non-Fungible Tokens (“NFTs”) to physical products. We have developed and patented a device that attaches to a smartphone that brand inspectors or law enforcement can use to read our invisible ink codes into our cloud-based track and trace software that contains our patented verification technology along with algorithms that analyze the label, package or product’s authenticity and diversion activity. We also have a device that informs users that our proprietary invisible ink is present, which can be used for authentication without the need for internet connectivity. Business Update Recent Developments To increase our global presence, we signed two new agreements to market and sell our products. On December 5, 2021, we signed a reseller agreement with Kimoha Entrepreneurs in the United Arab Emirates and on December 21, 2021, we signed a new Sales Consultant agreement with The AAB in South Africa. In September 2021, we received an initial order for 4 million brand protection labels from a new nutraceutical client. This was one of our largest sales to date after implementing a new sales and marketing plan in 2021. On July 6, 2021, we co-sponsored the initial public offering of G3 VRM Acquisition Corp, a special purpose acquisition company, or “SPAC,” through a contribution into G3 VRM Holdings LLC, or the “Sponsor Entity.” The closing of the IPO of 10,626,000 Units, including 626,000 Units pursuant to the partial exercise of the underwriter’s over-allotment, generated gross proceeds of $106,260,000. G3 VRM commenced trading on NASDAQ under the symbol “GGGVU” and is targeting businesses with enterprise values of approximately $250 million to $500 million within the technology and business services industry. VerifyMe, indirectly through the Sponsor Entity beneficially owns approximately 9.42% of the common stock of the SPAC. On June 4, 2021, VerifyMe was added to the Russell Microcap Index. Russell indexes are widely used by investment managers and institutional investors and as benchmarks for active investment strategies. Approximately $9 trillion in assets are benchmarked against Russell’s US indexes. In April 2021, VerifyMe launched a rebranding and messaging campaign to more fully market all of our products and services to include a new website and marketing materials. RainbowSecure TM was renamed to VerifyInk TM and when coupled with VerifyMe Authenticate™ and VerifyMe Track & Trace™ product lines, we believe it provides the only covert serialization and authentication solution on HP Indigo (a division of HP, Inc.) variable digital printing systems. Our patented smartphone authenticator device, VerifyAuthenticator TM is capable of fluorescing, decoding, and verifying invisible VerifyInk TM printed overt and covert codes in the field. This product allows investigators to authenticate product quickly and efficiently throughout the distribution chain, including warehouses, ports of entry, retail locations, and product purchased over the internet. 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 VerifyMe Authenticate™ and VerifyMe Track & Trace™ software through a cloud-based 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.” 2 Table of Contents In March 2021, we signed a sales agency agreement with an HP Indigo’s authorized channel partner in China. This partner 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 them a non-exclusive right to sell our other products in China. In February 2021, we received a purchase order for 2 million pre-printed anti-counterfeiting labels. The labels were 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 purchase order for complete pre-printed tamper-evident labels with VerifyMe™ brand protection and consumer engagement solution was 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 VerifyInk TM 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. COVID-19 Pandemic The COVID-19 pandemic disrupted businesses and affected production and sales across a range of industries, as well as caused volatility in the financial markets, which negatively impacted our results of operations for the year ended December 31, 2021. The full extent of the impact of the COVID-19 pandemic on our customer demand, sales and financial performance will depend on certain developments, including, among other things, the continued duration and spread of the outbreak, the effectiveness of vaccines against new variants, the availability of vaccines and vaccination rates, and the impact on our customers and employees, all of which are uncertain and cannot be predicted. Please see Item 1A, “Risk Factors- Risks Relating to the COVID-19 Pandemic” in this Report for additional information regarding certain risks associated with the pandemic. The COVID-19 pandemic has caused an increase in demand for safety products such as masks and gloves, COVID-19 test kits, medications and vaccines to treat the virus, which we believe has further caused an increase in counterfeit products. Our suite of technology solutions for global manufacturers, distributors and sellers are designed to allow consumers to prove authenticity and we have proactively reached out to global manufacturers who are seeking to provide their customers authenticity in their products. We believe we have a dynamic management and sales team in place with the ability to seamlessly work remotely to minimize any operational disruption. After an approximate one-year COVD-19 related hiatus we begun attending sales conferences and other in-person sales initiatives in September 2021. Although we have been attending in-person sales events, such events are not at full capacity due to the ongoing pandemic. Since we have recently begun face to face sales presentations and trade shows we are experiencing a small increase in travel related costs versus the 12 months preceding September 2021. We expect these travel related costs to grow. VerifyMe has continued to be aggressive in regard to sales and marketing efforts as we have completed a new website which is generating new leads and we have expanded our sales force. We have also started our first social media advertising campaign. New leads are being generated due to these actions. We continue to work with our sales representatives to look for alternative ways to communicate effectively and promote sales both with our customers and potential customers. Further, we anticipate that as a result of the continued COVID-19 pandemic, our customers may still require that their programs be cancelled, delayed or reduced. We will continue to work in partnership with our customers to continually assess any potential impacts and opportunities to mitigate risk. Our Solutions VerifyMe has a custom suite of products, that offer clients the brand protection security, anti-counterfeiting, protection from product diversion, consumer engagement and a robust serialization, track and trace system. These products are combined with “software as a service” or “SAAS” which is stored in the cloud and accessed through the internet. · VerifyMe Engage™ for consumer engagement · VerifyMe Authenticate™ for product authentication · VerifyMe Track & Trace™ for product supply chain control · VerifyMe Online™ for on-line (web) brand monitoring 3 Table of Contents VerifyMe Engage™ services provide the ability for the brand owner to gather business intelligence and engage with the consumer using our authentication test as the initial contact with the consumer. For example, consumers can simply use their smart phone camera to scan our visible unique codes and/or RFID/NFC chips included on products, labels and packages. Once the consumer scans the code, an instant authenticity check is made using algorithms stored in the cloud to determine the products authenticity on multiple factors. This allows brands to understand where their products are being scanned, whether they are legitimate, and form an immediate bridge for communication with the consumer. After a product is authenticated, the brand owner can then engage with the consumer by, for example offering a gift or future discounts, providing marketing materials, videos, product information and specifications, contest entries or cross selling other products through the consumer engagement software. This service allows to the brand owner to gather real-time actionable information on their customer base. To date, we have derived limited revenue from VerifyMe Engage customers in the cannabis industry. VerifyMe Authenticate™ services provide an assortment of tools through our patented products allowing brand owners to instantly authenticate a product, label or package as genuine and or determine if a product has been fraudulently diverted and where such diversion occurred in the supply chain. Brand owners can use our cloud-based web portal to easily order many types of serialization codes for their products, labels and packages. Once the codes are applied to their products, brand owners can then monitor, control and protect their products during the product’s complete life cycle through the supply chain. Our customers use our patented invisible ink, VerifyInk TM which is combined with a proprietary reader to easily identify counterfeit products. Product investigators may then use our patented VerifyAuthenticator TM technology, a device used with a smartphone and the VerifyMe app, to authenticate and decode VerifyInk TM codes. The user attaches this device to their smartphone, which reveals the hidden VerifyInk TM images that are then sent to our web portal in the cloud for authentication and data submission. We also have another device that does not require use the of a smartphone, our VerifyChecker™ which is a handheld device that is tuned to authenticate the unique frequency of our VerifyInk TM invisible ink. The VerifyChecker™ is designed for use by customers who desire instant authentication on items without the need for an internet connection. It is perfect for field investigators, CBP officials, or as validation in practice such as scanning event tickets at an entry gate. The device functionality was upgraded in September 2021 by adding wireless connectivity to a mobile phone enabling authentication attempts to be recorded in the cloud with geo-location, inspector’s names, and time and date stamp. To date, we have derived limited recurring revenues from two global brand owners who use VerifyMe Authenticate. VerifyMe Track & Trace™ supply chain serialization, track and trace technology utilize overt dynamic codes (QR codes or other barcode symbology), such as our VerifyCode™, which is tied to our cloud-based authentication and track and trace system. This technology provides brand owners business intelligence on counterfeiting and diversion using distribution channel scans throughout the supply chain coupled with consumer scan data. All this data is consolidated on a system that allows brands to customize rules and parameters and establish sophisticated alert systems allowing brands to be proactive, rather than reactive, in thwarting illicit activity. Invisible codes can be added using VerifyInk TM to increase brand protection security and provide inspectors a means to authenticate counterfeit or diverted product if the visible codes have been defaced or removed. Using information from a smartphone, our VerifyCode TM technology, can provide authentication and data submission information. A customer or end-user can scan codes printed on labels and packaging and send it to the cloud where our software can verify authenticity of the product, as well as track and trace the product from production through delivery. To date, we have derived limited revenues from the use of this technology in the personal protective equipment industry and in the cannabis industry. VerifyMe® Online™ includes, through our collaboration with a strategic partner, a brand clearance and protection leader, technologies and services that better enable customers to effectively tackle counterfeit websites, domains and e-commerce platforms, and social media sites offering or promoting counterfeit products. To date, we have not derived revenue from this technology. To optimize our security for our customers, we are seeking to add a blockchain architecture version to our brand protection platform which currently uses a centralized cloud-based data architecture. Our plan is to develop the ability to connect physical products to NFTs in the blockchain. VerifyMe has a patented dual-code technology that we believe will facilitate this process for clients requesting this service. We are exploring opportunities to gain the skillsets needed either through mergers and acquisitions or through strategic partnerships with blockchain specialists that will help us create this product. Partnerships 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 that physically harm consumers. Our covert technologies give brand owners the ability to control, monitor and protect their products life cycle. In cases where the brand owner may be subject to liability brought forth by counterfeit products, our tools allow the brand owner to prove whether the product causing an issue is authentic or counterfeit. Combined with our customer engagement product lines, we offer a unique and comprehensive brand protection and promotion solution that can be tailored to any brand’s specifications. 4 Table of Contents At present, our strategic partner, HP Indigo has the ability, with their Indigo 6000 series, to print our technology on a variable basis. HP Indigo has produced flexible packaging pouch samples, shrink sleeves samples, and tax stamp samples with our covert VerifyInk TM . In May 2019, we entered into a strategic partnership with INX, the third largest producer of inks in North America allowing us to successfully print our covert VerifyInk™ on garments, metal and plastic objects, and INX is now co-marketing the new security ink to its global clients. We are continuing to work with our partners and INX international to develop inkjet ink for various print head, drop on demand and continuous inkjet, that can be used independently or mounted to printing presses and finishing equipment. We have successfully developed VerifyInk™ for drop on demand inkjet printing and are carrying on with the development of a continuous inkjet solution. The specially formulated inks will enable these printing presses to print our VerifyInk TM invisible ink technology, which includes our variable VerifyCode™ serialization, track and trace technology. We believe VerifyInk TM 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 that need authentication. 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, election ballots, 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 proprietary brand protection 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 consumer facing visible codes and 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. · Pharmaceuticals/nutraceuticals – We believe counterfeit prescription pharmaceuticals and nutraceuticals are a growing problem, 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 consumer facing visible codes and 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. · 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. In addition, in each of these markets, our SaaS software allows brand owners and consumers to track the products and will alert the consumer or brand owner of counterfeit or product diversion with 24-7 monitoring. As each product has a unique code, this allows consumers and brand owners to authenticate the product in real time and link directly to the brand owner’s website for additional product information, discounts, and more. 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. 5 Table of Contents Manufacturing and Distribution We rely on third-party strategic partners to manufacture and distribute our VerifyInk TM 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 VerifyChecker™ and VerifyAuthenticator TM Smartphone Authenticator devices, as well as our VerifyLabel™ 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. Our current patent and trademark portfolios consist of eleven granted US patents and one granted European patent validated in four countries, seven 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, two UK trademark registrations, and nineteen pending US and foreign trademark applications. We have attempted to achieve sufficient flexibility in our products and technologies to provide cost-effective solutions. We intend to generate revenues through our custom suite of products, providing consumer engagement, authentication, track and trace and web brand monitoring. We are developing the ability to link digital NFTs to physical products using our patented dual-code technology, as part of our authentication 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 2022 and 2039. 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 $51 thousand and $19 thousand during the years ended December 31, 2021, and 2020, respectively, on research and development. We are now researching the development of a complimentary blockchain version of our brand protection cloud-based platform into a de-centralized blockchain smart contract network such as Etherum, Cardano, VeChain, Solana, Polygon or other De-Fi blockchains to increase security and allow for the linking of digital NFTs to physical products. We are in early stages of scoping this 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. Traditional QR codes are an open-source technology and are being used in various financial scams and the loading of viruses into devices who scan the codes. VerifyMe is researching the development of a proprietary code that runs in a closed secure cloud-based environment that scammers and virus threats cannot compromise or penetrate. These proprietary codes are intended to replace QR codes for clients seeking additional security for their products. 6 Table of Contents 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. 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. VerifyLabel™ 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 Online™ 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. We believe standard optical security features such as holograms and Yellow UV Ink are still heavily used but are easily compromised and as a result have lost their effectiveness. Brand owners have advised us that counterfeiters are able to replicate or circumvent holograms and UV Ink technologies. We therefore recommend that holograms and UV Inks should only be used as decoys for more effective technologies such as VerifyInk™ Our product line has a standard optical feature known as VerifyInk TM Security Ink Taggant. The differentiator between our standard ink taggant feature and existing products is that our VerifyInk TM 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 VerifyInk TM 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 VerifyInk TM 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 VerfiyMe™ brand authentication portal. 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 VerifyInk TM and visible brand protection technologies. HP Indigo’s salespeople 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 VerifyInk TM 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. 7 Table of Contents 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, South Africa, United Arab Emirates, 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. In addition, we have cross-selling agreements with some of our strategic partners. 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 VerifyChecker™ , and VerifyAuthenticator TM Smartphone Authenticators, to demonstrate the technology to customers who visit the centers. Customers can perform tests and receive hands on experience with our technologies. 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 launched in mid-April 2021. In addition to the website, a new social media advertising program was 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 and believe we are now well positioned to grow our revenue. 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. 8 Table of Contents 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 brand protection 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. 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. 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. Competition is building in the consumer engagement market as more companies enter the space but are using mainly NFC technology imbedded into apparel. In addition to this technology, we have the ability to print labels on more applications including fabrics and metals. 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, 2021, five customers accounted for 95% of total sales. During the year ended December 31, 2020, two customers accounted for 92% 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, 2021, and 2020, the Company purchased 100% of pigment from one vendor. Additionally, during the years ended December 31, 2021, and 2020, the Company purchased 100% of canisters from one vendor. As of December 31, 2021, three customers accounted for 91% of total accounts receivable. As of December 31, 2020, two customers accounted for 96% of total accounts receivable. Employees and External Sales Force As of March 7, 2022, we had seven full-time employees, one part-time employee, and several paid consultants. 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, South Africa, United Arab Emirates, 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. 9 Table of Contents 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. ITEM 1A. RISK FACTORS Any investment in our securities involves a high degree of risk. You should consider carefully the risks and uncertainties described below and all information contained in this Report, before you decide whether to purchase our securities. If any of the following risks or uncertainties actually occur, our business, financial condition, results of operations and prospects would likely suffer, possibly materially. In addition, the trading price of our common stock could decline due to any of these risks or uncertainties, and you may lose part or all of your investment. Risks Relating to the COVID-19 Pandemic Our business, results of operations and financial condition may be adversely impacted by the coronavirus (“COVID-19”) pandemic . The COVID-19 pandemic has negatively affected the U.S. and global economy, resulted in significant travel restrictions, including mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how it will impact our customers, employees, suppliers and sales network. To date, the COVID-19 pandemic has limited our attendance at trade shows and other in-person events that would allow us to expand our customer base and increase global awareness. Furthermore, while we capitalized on new market developments created by the COVID-19 pandemic, our operations were affected by delays in orders and postponement of sales negotiations. The extent to which our operations may continue to be impacted by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including the duration and spread of the outbreak, the effectiveness of vaccines and speed of distribution of any. Even after the COVID-19 pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting economic recession or depression. Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to and volatility in the financial markets remain unknown. The impact of the COVID-19 pandemic may also exacerbate other risks discussed in this section, any of which could have a material effect on us. The COVID-19 pandemic has resulted in prohibitions of non-essential activities, disruption and shutdown of businesses, travel restrictions, and the cancellation and postponement of conferences and in-person meetings, which could negatively impact our sales and results of operations . After an approximately one-year COVID-19 related hiatus we begun attending sales conferences and other in-person sales, events in September of 2021. Such events are not at full capacity due to the ongoing pandemic, and we cannot predict if we will need to suspend these activities again. Our employees travel frequently to establish and maintain relationships with our customers and partners and attend sales-conferences. Currently, there are still many work and travel restrictions related to the ongoing pandemic, requiring some activities to be conducted remotely which might be less effective than in-person meetings. We do not yet know the extent of the negative impact on our ability to attract, serve, or retain customers. We continue to monitor the situation and as restrictions start easing and safety measures are heightened globally, we will continue to allow limited travel for key in-person business meetings. The overall travel strictions could negatively impact our marketing and business development efforts and create operational or other challenges, any of which could harm our business, financial condition and results of operations. The COVID-19 pandemic may decrease demand for our products and any such decrease in demand would adversely affect our revenues and results of operations . We are unsure what actions our customers may take in response to the COVID-19 pandemic. Health concerns, as well as political or governmental developments in response to COVID-19, could result in economic, social or labor instability or prolonged contractions in the industries in which our customers or partners operate, which could reduce the amount of packaging they print, which would reduce out sales. Furthermore, existing and potential customers may choose to reduce or delay spending in response to the COVID-19 pandemic, or attempt to renegotiate contracts and obtain concessions, which may materially and negatively impact our operating results, financial condition and prospects. We have a small management team and if any of our employees or management suffer COVID-19 related illnesses, our business operations may be materially and adversely affected . The COVID-19 pandemic could disrupt our operations due to absenteeism by infected or ill members of management or other employees because of our limited staffing. COVID-19 related illness could also impact members of our Board of Directors resulting in absenteeism from meetings of the directors or committees of directors and making it more difficult to convene the quorums of the full Board of Directors or its committees needed to conduct meetings for the management of our affairs. 10 Table of Contents Risks Relating to Our Business Our investment in G3 VRM Acquisition Corp. (the “SPAC”) could be lost if the SPAC is unable to consummate a business combination or if its business combination proves unsuccessful. On July 6, 2021, we acted as the sponsor for the initial public offering of G3 VRM Acquisition Corp, a special purpose acquisition company, or SPAC, through a contribution into the SPAC’s sponsor, G3 VRM Holdings LLC, or the Sponsor Entity. The Sponsor Entity holds founder shares equal to 20% of the shares underlying the Units issued in the SPAC IPO (less 210,000 founder shares issued to the officers and certain directors of the SPAC), plus 516,280 shares underlying private placement units purchase by the Sponsor Entity in connection with the SPAC’s IPO. Our investment in the SPAC through the Sponsor Entity equaled approximately $2,593 thousand, and our ownership in the Sponsor Entity is 44.4%. The Sponsor Entity and all holders of founder shares and private placement securities have agreed to waive any right to distributions under the trust established for the benefit of the SPAC’s public shareholders. Accordingly, if the SPAC is unable to complete its initial business combination within 12 months from the closing of the IPO (or 15 or 18 months from the closing of the IPO, if we and the co-sponsor extend the period of time to consummate a business combination by depositing additional funds into the trust account as described in more detail in IPO prospectus), the SPAC will redeem 100% of the public shares for cash, the rights will expire worthless, and the founder shares and the private placement securities will be worthless. Even if the SPAC is able to complete a business combination within the allotted time, if the combined company is unable to maintain adequate results from operations, then our investment in the SPAC could lose value and may ultimately become worthless. There can be no assurance that the SPAC will complete a business combination within the allotted time or that any such business combination will be successful. As a company with significant revenues deriving from clients in the cannabis industry, we face many unique and evolving risks. We currently derive significant revenues from clients in the cannabis industry from use of our track and trace and customer engagement technologies. As such, any risks related to the cannabis industry may adversely impact our clients, and potential clients, which may in turn, impact the demand for our products and services. Specific risks impacting the cannabis industry include, but are not limited, to the following: United States federal law prohibits Marijuana Under the Controlled Substances Act (“CSA”), marijuana is a Schedule-I controlled substance making it illegal under federal law to grow, cultivate, distribute, sell or possess marijuana for any purpose or to assist or conspire with those who do so. Although the use of marijuana is legal in certain states under state law, since federal law supersedes state law, strict enforcement of federal law would likely result in adverse effects on our clients’ operations, which would in turn, adversely impact our revenues. Banking regulations could limit access to banking services and expose us to risk Funds received from our clients in the cannabis industry, operating legally under state law, may subject us to a variety of federal laws and regulations involving money laundering, financial record keeping and proceeds of crime, since the funds are considered illegal under the CSA and as such banks and other financial institutions providing services to us risk violation of anti money laundering statutes and other applicable statutes. Furthermore, banks often refuse to provide banking services to businesses involved in the cannabis industry due to the federal and state laws and regulations governing financial institutions. The difficulty and potential inability to open bank accounts that our clients in the cannabis industry deal with, makes it difficult to conduct business and as such could affect our ability to collect revenues earned. Furthermore, our clients in this industry are more susceptible to theft, and potentially lack the ability to insure themselves against theft. We may experience similar difficulties in obtaining banking and financial services because of the activities of our clients in the cannabis industry. The legality of cannabis could be reversed in one or more states The voters or legislatures of states in which marijuana has already been legalized could potentially repeal applicable laws that permit the operation of both medical and retail marijuana businesses. These actions might force businesses, including those that are our clients, to cease operations in one or more states entirely. Additionally, these actions could negatively impact us and lead to a decrease of our revenue through the loss of current and potential customers. Recent and changing interpretations of the law regarding medical and recreational use of marijuana State laws and regulations surrounding medical and recreational use of marijuana are fairly recent and constantly changing resulting in a potential challenge to maintain compliance. As such, violations of these laws, or allegations of such violations, could be disruptive to our clients’ business and in return cause a disruption in our operations. Future modifications of state and local laws surrounding marijuana, may limit operations of our clients’ business in this industry, which could negatively impact our revenues. Dependence on client licensing Our clients in the cannabis industry must obtain various licenses from various local and state licensing agencies. As such, there is a risk that our existing clients will not be able to retain their licenses going forward, should they violate applicable rules and regulations, or should renewal become more stringent. If our customers are not able to maintain or renew their licenses, this would adversely impact our operations. 11 Table of Contents Insurance Risk Insurance companies may limit policies to only cover claims legal under federal law. As such our clients in the cannabis industry may not be properly insured. Any claims against our clients may have a negative impact on our ability to collect revenues from our clients in the cannabis sector. Global supply-chain delays and shortages may adversely impact our customers or potential customers Global supply-chain delays and shortages, which are out of our control, are currently affecting a wide variety of businesses globally including one of our customers. Supply-chain delays shortages may affect our customers or potential customers which would adversely affect our operations. We are an early commercialization stage company with a history of losses and we may never achieve or maintain profitability . As an early commercialization stage enterprise, we do not currently have sufficient revenues to generate cash flows to cover operating expenses. Since our inception, we have incurred operating losses in each year due to costs incurred in connection with research and development activities and general and administrative expenses associated with our operations. We expect to continue to incur substantial expenditures to develop and market our services and could continue to incur operating losses and negative operating cash flow. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Our ability to generate profits will depend, in part, on our expenses and our ability to generate revenue. Our prior losses and any future losses have had and may continue to have an adverse effect on our working capital. If we fail to generate revenue and become profitable, or if we are unable to fund our continuing losses, our shareholders could lose all or part of their investments. Because our name and brand could be confused with brands that have similar names, we may be adversely affected by any confusion or negative publicity related to others that use a name similar to VerifyMe in their brand names . We have trademarked the VerifyMe TM brand in the United States and have pending applications with respect to our brand internationally. However, our name and brand has been and could be in the future confused with brands that have similar names, including but not limited to Verified.Me, a service offered to Canadians by SecureKey Technologies Inc. and www.verifyme.ng, a website offering verification services in Nigeria. We have a pending application for the VerifyMe name in Canada but can make no assurances regarding its approval. We have also attempted to contact the operators of the Nigeria website to resolve the confusion caused there but to date have been unsuccessful in our efforts. Further, we have registered certain trademarks and service marks in the United States and foreign jurisdictions. We are aware of names and marks similar to our service marks being used from time to time by other persons. Although we oppose any such infringement, further or unknown unauthorized uses or other misappropriation of our trademarks or service marks may diminish the value of our brands and adversely affect our business. Because our competitors in the anti-counterfeiting industry have much greater financial resources than we do and more functional technology offerings than we currently have, we may not be able to successfully compete with them . The market for protection from counterfeiting, diversion, theft and forgery is a mature industry dominated by a number of large, well-established companies, as described in Item 1, “Business Competition”. To compete effectively, we will need to expend significant resources in technology and marketing. Each of our competitors has substantially greater financial, human and other resources than we do and may develop superior technology or more cost-effective alternatives to our products and services. We may not have sufficient resources to develop and market our services effectively, or at all. If we cannot continue to develop or market competitive, cost-effective products and services, we may not be able to compete effectively, which will harm our operating results. If our technologies do not work as anticipated once we achieve meaningful sales, we will not be successful . Our business depends on our ability to market and sell our ink technology. Without material sales and acceptance from customers with respect to our technologies, we will not be successful. Further, we made a significant investment in our new authenticators, and if customers do not find them useful or decline to lease them, our business may suffer. We can provide no assurances that the market will accept our products or that we will achieve any meaningful sales. If our technology cannot be used successfully to prevent counterfeiting, we may not be able to generate material revenue . Our market is characterized by new and evolving technologies. Counterfeiting is constantly evolving in order to create items which appear to be legitimate and evade regulations which would seize counterfeit items and penalize counterfeiters. In order to stay competitive, our technologies will need to be sufficiently complex so that they cannot be reproduced or copied by counterfeiters. If we are unable to develop and integrate effective anti-counterfeiting technologies to address the increasingly sophisticated technological needs of our customers in a timely and cost-effective manner, we may not be successful in preventing counterfeiting and we may not be able to generate material revenue. 12 Table of Contents If the market does not accept or embrace our technologies or product offering, our business may fail . Our technologies and the products we are offering have not been tested in the market on a large-scale basis. As a result, we can only speculate as to the market acceptance of these products and services. No assurance can be given that the market will accept any of our technologies, products and services. If the public fails to accept our technologies, products and services to the degree necessary to generate sufficient revenues, our business may fail. Because our current and target customers are large companies, their internal policies and resistance to change may impair our ability to successfully commercialize our products . Our ability to become successful and generate positive cash flow will be dependent upon the extent of commercialization of products using our technology. Commercialization of new technology products often has a very long lead time. This problem is exacerbated when customers are large entities. Our current and target customers are large entities. These factors may adversely affect our ability to commercialize our technologies, or any products or services related to our technologies. Further, we cannot assure you that commercialization will result in profitability. Our reliance on HP Indigo to qualify additional HP Indigo digital printing presses adversely affects our ability to sell our products and generate revenue . In 2017, we signed a five-year contract with HP Indigo, a division of HP Inc., to print our VerifyInk TM technology on packages and labels on their 6000 series digital presses. In 2020, VerifyInk TM technology was qualified on HP Indigo’s 6900 series printing presses. In addition, we successfully trialed production on their 7900 press series. Notwithstanding, HP Indigo has yet to qualify more HP Indigo digital printing presses that include our technology which hinders our ability to sell our products. We believe that without further qualified HP Indigo presses, our ability to sell to a large part of the label and packaging print manufacturing market is impeded, and as a result our business and revenues are adversely affected. Severe price competition from similar ink technologies may hinder our ability to sell our products . Currently an ultraviolet ink is being sold and supported by HP, Inc. for their HP Indigo digital presses that competes with our product. This ink has been in the security ink industry for many years and is therefore a wide-spread uncontrolled security product that sells for an extremely low cost. The same ultraviolet ink has some similar properties as our VerifyInk TM ink technology, but the cost is so low it is being selected by some clients based on price which limits our ability to sell VerifyInk TM . Ultraviolet ink is also readily available in many forms and locations, including Amazon.com. This wide-spread availability of ink technologies that are similar to ours limits our ability to market and sell VerifyInk TM . Our success depends on the efforts, abilities and continued service of Patrick White, our Chief Executive Officer, and if we are unable to continue to retain the services of Mr. White, we may not be able to continue our operations . Our success depends to a significant extent upon the continued service of Patrick White, our Chief Executive Officer. On February 15, 2022, we entered into an employment agreement with Mr. White. Mr. White’s employment agreement does not have a defined term. The loss of Mr. White’s services and any negative market or industry perception arising from such loss could significantly harm our business, future prospects and the price of our common stock. Because we are relying on our small management team, we lack business development resources which may hurt our ability to increase revenue . We have a small management team that is focused on sales. Because we have only a few people dedicated to business development, we lack the resources to grow beyond certain levels. We cannot assure you that we will generate cash flow from operations or from financings which will enable us to grow our revenues. If we are unable to hire an experienced sales team, or our partners are not successful, we may not be able to generate material revenue . Presently our personnel consists of seven full-time employees, one part-time employee and several outside consultants. We have several outside partners and a licensed global label manufacturer (the “GLM”) who are working on sales of our products. Our agreement with the GLM allows it to market our technologies to current and new clients. Our strategic partner agreements are individualized. We have two cross-selling agreements that provide that the partners are able to sell and mark-up certain of our technologies and we can sell and mark-up certain of the strategic partners’ products. Another strategic partner is selling our products globally as well as providing marketing support, warehousing, shipping services, help desk services and billing for a fixed percentage of our sales. Our potential customers are large companies with long sales cycles. Accordingly, we may be required to hire salespersons to bolster our current sales efforts. If the efforts of our management team, the GLM, strategic partners, and any salespersons we hire are unsuccessful, we may be unable to generate material revenue and those outside sales channels may end their relationship with us, thus ending their sales and services and materially harming our financial condition and results of operations. None of our strategic partners have sold our products under the cross-selling arrangements, to date. Our future growth will depend upon the success of our strategic partners who integrate our solutions into their product offerings . We rely on strategic partnerships with larger companies which integrate our technologies into their product offerings. This distribution strategy leaves us largely dependent upon the success of our partners. If any of our strategic partners who include our technology in their products cease to do so, or we fail to obtain other partners who will incorporate, embed, integrate or bundle our technology, or these partners are unsuccessful in their efforts, expanding deployment of our technology, our business and future growth would be materially and adversely affected. 13 Table of Contents If we cannot manage our growth effectively, we may not become profitable . Businesses which grow rapidly often have difficulty managing their growth. Our staff presently consists of seven full-time employees, one part-time employee and several consultants. If we continue to grow as rapidly as we anticipate, we will need to expand our management by recruiting and employing experienced executives and key employees capable of providing the necessary support. We cannot assure you that our management will be able to manage our growth effectively or successfully. Our failure to meet these challenges could harm our financial condition and ability to become profitable. Because a small number of customers account for all of our revenue, the loss of any of these customers would have a material adverse impact on our operating results and cash flows . We derive our revenue from a limited number of customers and our revenue in 2021 grew to $867 thousand compared to $343 thousand in 2020 and $245 thousand 2019. Our principal revenue has been generated from five customers in 2021 compared to two customers in both 2020 and 2019. Certain of our agreements with customers have short terms or can be terminated on short notice. Any termination of a business relationship with, or a significant sustained reduction in business received from, one of these customers could have a material adverse effect on our operating results and cash flows. We must materially increase the number of our customers and be able to have our customers increase the number of products for which they use our service and if we cannot, it will adversely impact our financial condition and our business. We will need to expand our sales, marketing and support organizations and our distribution arrangements to increase market acceptance of our products and services . We currently have a limited number of sales, marketing, customer service and support personnel and may need to increase our staff, or further outsource our sales process, to generate a greater volume of sales and to support any new customers or the expanding needs of existing customers. The employment market for sales, marketing, customer service and support personnel in our industry is very competitive, and we may not be able to hire the kind and number of sales, marketing, customer service and support personnel we are targeting. Our inability to hire or outsource qualified sales, marketing, customer service and support personnel may harm our business, operating results and financial condition. We may not be able to sufficiently build out our distribution network or enter into arrangements with qualified sales personnel on acceptable terms or at all. If we are not able to develop greater distribution capacity, we may not be able to generate sufficient revenue to continue our operations. If we fail to protect or enforce our intellectual property rights, or if the costs involved in protecting and defending these rights are prohibitively high, our business and operating results may suffer . Our patent rights, trade secrets, copyrights, trademarks, domain names and other product rights are critical to our success. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We may enter into confidentiality and invention assignment agreements with our employees and confidentiality agreements with parties with whom we conduct business to limit access to, and disclosure and use of, our proprietary information. However, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others. As management deems appropriate, we will pursue the registration of our domain names, trademarks, and service marks in the U.S. and in certain locations outside the U.S. We will seek to protect our trademarks, patents and domain names in an increasing number of jurisdictions, a process that is expensive and time-consuming and may not be successful or which we may not pursue in every location. It may be expensive and cost prohibitive to file patents worldwide and we may be financially required to file patents in select countries where we see the greatest potential for our technologies. We may, over time, increase our investment in protecting our innovations through increased patent filings that are expensive and time-consuming and may not result in issued patents that can be effectively enforced. If we are required to sue third parties who we allege are violating our intellectual property rights, or if we are sued for violating a third party’s patents or other intellectual property rights, we may incur substantial expenses, and we could incur substantial damages, including amounts we cannot afford to pay . Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights claimed by others. Patent and intellectual property litigation is extremely expensive and beyond our ability to pay. While third parties do, under certain circumstances, finance litigation for companies that file suit, we cannot assure you that we could find a third party to finance any claim we choose to pursue. Moreover, third parties frequently refuse to finance companies that are sued. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs, adverse publicity or diversion of management and technical resources, any of which could adversely affect our business and operating results. If we fail to maintain, protect and enforce our intellectual property rights, our business and operating results may be harmed. From time-to-time, we may face allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including from our competitors and inactive entities. Patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict. As the result of any court judgment or settlement, we may be obligated to cancel the launch of a new feature or product, stop offering certain features or products, pay royalties or significant settlement costs, purchase licenses or modify our products and features. If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired . As a public company, we are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002 (“SOX”). We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming and costly, and place significant strain on our personnel, systems, and resources. 14 Table of Contents SOX requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. Our management concluded that our disclosure controls and procedures were not effective as of December 31, 2021, as the result of the material weaknesses in our internal control over financial reporting identified in Item 9A of this Report. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. While we have begun to implement a remediation plan to address this material weakness, including hiring a Senior VP of Finance and a Financial Controller in 2021, we have not yet been able to remediate the material weakness related to our internal control over financial reporting as of December 31, 2021. Additional material weaknesses in our disclosure controls and internal control over financial reporting may be identified in the future. Any failure to maintain existing or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. If we are unable to effectively remediate material weaknesses in a timely manner, investors could lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price. Because we do business outside of the United States, we may be exposed to liabilities under the Foreign Corrupt Practices Act, violations of which could have a material adverse effect on our business . We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We have operations and agreements with third parties and make sales in jurisdictions which may be subject to corruption. These activities create the risk of unauthorized payments or offers of payments by one of the employees, consultants or agents of our Company, because these parties are not always subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents or distributors of our company may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. If our or our third-party vendors’ computer systems are hacked, or we experience any other cybersecurity incident, we may face a disruption to our operations, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could negatively impact our business, results of operations or financial condition . We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities. Additionally, we collect and store certain data, including proprietary business information, and may have access to confidential or personal information in certain of our businesses that is subject to privacy and security laws and regulations. Furthermore, in the operation of our business we also use third-party vendors that are subject to their own cybersecurity threats. While our standard vendor terms and conditions include provisions requiring the use of appropriate security measures to prevent unauthorized use or disclosure of our data, as well as other safeguards, a breach may still occur. In addition, if we select a vendor that uses cloud storage of information as part of their service or product offerings our proprietary information could be misappropriated by third parties despite our attempts to validate the security of such services. These technology networks and systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components; power outages; telecommunications or system failures; terrorist attacks; natural disasters; employee error or malfeasance; server or cloud provider breaches; and computer viruses or cyberattacks. Cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology networks and systems to more sophisticated and targeted measures, known as advanced persistent threats, directed at us, our products, customers and/or our third-party service providers. It is possible a security breach could result in theft of trade secrets or other intellectual property or disclosure of confidential customer, supplier or employee information. Should we be unable to prevent security breaches or other damage to our information technology systems, disruptions could have an adverse effect on our operations, as well as expose us to costly litigation, liability or penalties under privacy laws, increased cybersecurity protection costs, reputational damage and product failure. 15 Table of Contents Evolving regulations concerning data privacy may result in increased regulation and different industry standards, which could prevent us from providing our current products to our users, or require us to modify our products, thereby harming our business. The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the Internet and mobile platforms have recently come under increased public scrutiny, and civil claims alleging liability for the breach of data privacy have been asserted against companies. The U.S. government, including the Federal Trade Commission and the Department of Commerce, has announced that it is reviewing the need for greater regulation for the collection of information concerning consumer behavior on the Internet, including regulation aimed at restricting certain targeted advertising practices. Many jurisdictions have already taken steps to restrict and penalize companies that collect and utilize information from their users and the general public. For example, in May 2018 the European Union made sweeping reforms to its existing data protection legal framework by enacting the General Data Protection Regulation (the “GDPR”), which resulted in a greater compliance burden for many companies with users in Europe. The GDPR includes operational requirements for companies that receive or process personal data of residents of the European Union that are broader and more stringent than those previously in place in the European Union and in most other jurisdictions around the world. The GDPR also imposes significant penalties for non-compliance, including fines of up to €20 million or 4% of total worldwide revenue. Additionally, we may be subject to increasingly complex and expansive data privacy regulations within the United States. For example, California enacted the California Consumer Privacy Act (the “CCPA”), which became effective in 2020. The CCPA requires covered companies to provide California consumers with disclosures and expands the rights afforded consumers regarding their data. Fines for noncompliance of the CCPA can be as high as $8 thousand per violation. Since the CCPA was enacted, Nevada and Maine have enacted similar legislation designed to protect the personal information of consumers and penalize companies that fail to comply, and other states have proposed similar legislation. The costs of compliance with, and other burdens imposed by, the GDPR, CCPA, and similar laws may limit the use and adoption of our products and services and/or require us to incur substantial compliance costs, which could have a material adverse impact on our business. We rely on the services of third-party data center hosting facilities. Interruptions or delays in those services could impair the delivery of our service and harm our business. VerifyMe Engage™, VerifyMe Authenticate™, VerifyMe Track & Trace™, and VerifyMe Online™ utilize cloud computing technology. It is hosted pursuant to agreements on technology platforms by third-party service providers. We do not control the operation of these providers or their facilities, and the facilities are vulnerable to damage, interruption or misconduct. Unanticipated problems at these facilities could result in lengthy interruptions in our services. If the services of one or more of these providers are terminated, disrupted, interrupted or suspended for any reason, we could experience disruption in our ability to provide our services, which may harm our business and reputation. Further, any damage to, or failure of, the cloud services we use could result in interruptions in our services. Interruptions in our service may damage our reputation, reduce our revenue, cause customers to terminate their agreements and adversely affect our ability to attract new customers. While we believe our strong partnerships reduce our risk, our business would be harmed if our customers and potential customers believe our services are unreliable. Additionally, if our service providers fail to meet their obligations, provide poor, inaccurate or untimely service, or we are unable to make alternative arrangements for these services, we may fail, in turn, to provide our services or to meet our obligations to our users, and our business, financial condition and operating results could be materially and adversely affected. Fluctuations in the price of raw materials, changes in the availability of key suppliers, or catastrophic events may increase the cost of our products and services. Our security pigments are manufactured from naturally occurring inorganic rare earth materials. The cost of these raw materials is a key element in the cost of our products. Our inability to offset material price inflation could adversely affect our results of operations. We rely on one supplier to procure our raw materials, and it is difficult to predict what effects shortages or price increases for the raw materials we use to make our products may have in the future. Our ability to manage inventory and meet delivery requirements may be constrained by our supplier’s inability to scale production and adjust delivery during times of volatile demand. Our inability to fill our supply needs would jeopardize our ability to fulfill obligations under current contracts or enter new contracts to sell our products, which would, in turn, result in reduced sales and profits, contract penalties or terminations, and damage to customer relationships. Our ability to become profitable is largely dependent upon our ability to develop new technologies and introduce new products that achieve market acceptance in increasingly competitive markets. Our ability to become profitable depends upon a number of factors, including our ability to (i) identify and evolve with emerging technological and broader industry trends, (ii) develop and maintain competitive products, (iii) defend our market share against an ever-expanding number of competitors including many new and non-traditional competitors, (iv) enhance our products by adding innovative features that differentiate our products from those of our competitors and prevent commoditization of our products, (v) develop, manufacture and bring compelling new products to market quickly and cost-effectively, (vi) monitor disruptive technologies and business models, (vii) achieve sufficient return on investment for new products introduced based on capital expenditures and research and development spending, (viii) respond to changes in overall trends related to end market demand, (ix) leverage our strategic partnerships to develop and commercialize new and existing products and (x) attract, develop and retain individuals with the requisite skill, expertise and understanding of customers’ needs to develop new technologies and introduce new products and sell our current products. The failure of our technologies or products to gain market acceptance due to more attractive offerings by our competitors or the failure to address any of the above factors could significantly reduce our revenues and adversely affect our competitive standing and prospects. 16 Table of Contents The expenses or losses associated with lack of widespread market acceptance of our solutions may harm our business, operating results and financial condition . Rapid technological changes and frequent new product introductions are typical in the markets we serve. Our future success will depend in part on continuous, timely development and introduction of new products that address evolving market requirements. To the extent we fail to introduce new and innovative products, we may lose any market share we have to our competitors, which may be difficult or impossible to regain. Any inability, for technological or other reasons, to successfully develop and introduce new products could harm our business. Additionally, we may experience delays in the development and introduction of products, we may be unable keep pace with the rapid rate of change in anti-counterfeiting and security products’ research, and any new products acquired or developed by us may not meet the requirements of the marketplace or achieve market acceptance. If we are unable to develop new products to meet market demands, our business could be materially adversely affected. Risks Relating to our Common Stock Upon exercise of our outstanding options or warrants, conversion of our Series B Convertible Preferred Stock and vesting of our restricted stock units, we will be obligated to issue a substantial number of additional shares of common stock which will dilute our present shareholders . We are obligated to issue additional shares of our common stock in connection with our outstanding options, warrants and shares of our Series B Convertible Preferred Stock. As of December 31, 2021, there were options, warrants, shares of Series B Convertible Stock outstanding, and restricted stock units convertible into 465,471, 3,779,243, 144,444 and 187,010 shares of common stock, respectively. The exercise, conversion or exchange of warrants or convertible securities, including for other securities, will cause us to issue additional shares of our common stock and will dilute the percentage ownership of our shareholders. In addition, we have in the past, and may in the future, exchange outstanding securities for other securities on terms that are dilutive to the securities held by other shareholders not participating in such exchange. Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline . Sales of large blocks of our common stock over a short time in the fall of 2019 had a significant adverse effect on our common stock price. Further sales could depress the price of our common stock. The existence of these shares and shares of common stock issuable upon conversion of outstanding shares of Series B Convertible Preferred Stock, warrants and options create a circumstance commonly referred to as an “overhang” which can act as a depressant to our common stock price. The existence of an overhang, whether or not sales have occurred or are occurring, also could make our ability to raise additional financing through the sale of equity or equity-linked securities more difficult in the future at a time and price that we deem reasonable or appropriate. If our existing shareholders and investors seek to sell a substantial number of shares of our common stock, such selling efforts may cause significant declines in the market price of our common stock. Our common stock may be affected by limited trading volume and price fluctuations, which could adversely impact the value of our common stock . Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to periodically enter the market in the belief that we will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our common stock will be stable or appreciate over time. Because we may issue preferred stock without the approval of our shareholders and have other anti-takeover defenses, it may be more difficult for a third party to acquire us and could depress our stock price . In general, our Board of Directors may issue, without a vote of our shareholders, one or more additional series of preferred stock that have more than one vote per share, although the Company’s ability to designate and issue preferred stock is currently restricted by covenants under our agreements with prior investors. Without these restrictions, our Board of Directors could issue preferred stock to investors who support us and our management and give effective control of our business to our management. Additionally, issuance of preferred stock could block an acquisition resulting in both a drop in our stock price and a decline in interest of our common stock. This could make it more difficult for shareholders to sell their common stock. This could also cause the market price of our common stock shares to drop significantly, even if our business is performing well. Because we do not intend to pay cash dividends on our shares of common stock, any returns will be limited to the value of our shares . We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to shareholders will therefore be limited to the increase, if any, of our share price. 17 Table of Contents There can be no assurance that we will be able to comply with the continued listing standards of the Nasdaq Capital Market, a failure of which could result in a de-listing of our common stock and certain warrants . The Nasdaq Capital Market requires that the trading price of its listed stocks remain above one dollar in order for the stock to remain listed. If a listed stock trades below one dollar for more than 30 consecutive trading days, then it is subject to delisting from the Nasdaq Capital Market. In addition, to maintain a listing on the Nasdaq Capital Market, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, and certain corporate governance requirements. If we are unable to satisfy these requirements or standards, we could be subject to delisting, which would have a negative effect on the price of our common stock and warrants and would impair your ability to sell or purchase our common stock or warrants when you wish to do so. In the event of a delisting, we would expect to take actions to restore our compliance with the listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock or warrants to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the minimum bid price requirement, or prevent future non-compliance with the listing requirements. Provisions of our publicly traded warrants could discourage an acquisition of us by a third party . In addition to certain provisions of our amended and restated articles of incorporation, as amended, and our amended and restated by-laws, certain provisions of our outstanding warrants could make it more difficult or expensive for a third party to acquire us. The warrants prohibit us from engaging in certain transactions constituting “fundamental transactions” unless, among other things, the surviving entity assumes our obligations under the warrants. These and other provisions of the warrants could prevent or deter a third party from acquiring us even where the acquisition could be beneficial to you. ITEM 1B. UNRESOLVED STAFF COMMENTS. None. ITEM 2. PROPERTIES. We do not lease or own any property which are material to our business or results of operations. ITEM 3. LEGAL PROCEEDINGS. From time-to-time, we may be a party to, or otherwise involved in, legal proceedings arising in the ordinary course of business. As of the date of this Report, we are not aware of any proceedings, threatened or pending, against us which, if determined adversely, would have a material effect on our business, results of operations, cash flows or financial position. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable. 18 Table of Contents PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Our common stock, par value $0.001 per share, and warrants to purchase common stock are traded on The Nasdaq Capital Market under the trading symbols “VRME” and “VRMEW,” respectively. Common Shareholders As of March 7, 2022, we had approximately 1,435 shareholders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of shareholders, this number is not indicative of the total number of shareholders represented by these shareholders of record. Dividends We have never declared or paid a cash dividend. At this time, we do not anticipate paying dividends in the foreseeable future. The declaration and payment of dividends is subject to the discretion of Board and will depend upon our earnings (if any), our financial condition, and our capital requirements. Nevada law permits a corporation to pay dividends out of earnings or surplus. Accordingly, we cannot pay dividends as a matter of law. Recent Sales of Unregistered Securities In October 2021, the Company issued 1,087 shares of restricted common stock in relation to investor relation services. These securities described above were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), as set forth in Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder relative to transactions by an issuer not involving any public offering, to the extent an exemption from registration was required. The recipients of the securities described in the transactions above acquired the securities for their own account for investment purposes only and not with a view to, or for sale in connection with, any distribution thereof. Use of Proceeds On June 17, 2020, our Registration Statement on Form S-1 (File No. 333-234155), as amended (the “Registration Statement”) relating to an underwritten public offering of an aggregate of 2,173,913 units consisting of one share of the Company’s common stock and a warrant to purchase one share of common stock at an exercise price equal to $4.60 per share of common stock was declared effective by the SEC. The cash proceeds from the offering were $9,023 thousand, net of underwriting discounts and commissions of approximately $800 thousand and fees and expenses of approximately $450 thousand. There has been no material change in the expected use of the net proceeds from the offering, as described in our final prospectus filed with the SEC on June 19, 2020, pursuant to Rule 424(b)(4). As of December 31, 2020, this offering has terminated. Share Repurchase Plan The following table provides information about our share repurchase activity for the three months ended December 31, 2021 ISSUER PURCHASES OF EQUITY SECURITIES Period Total Number of Shares (or Units) Purchased Average Price Paid per Share (or Units) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) (In thousands) 10/01/2021-10/31/2021 - - - $ 1,036 11/01/2021-11/30/2021 20,000 $ 3.32 20,000 $ 970 12/01/2021-12/31/2021 59,593 $ 3.27 59,593 $ 775 Total 79,593 $ 3.28 79,593 $ 775 (1) Purchases made pursuant to the Company’s share repurchase program announced on November 17, 2020, pursuant to which the Company is authorized to purchase up to $1.5 million worth of shares of its common stock. Under the repurchase program, shares of the Company’s common stock may be repurchased from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing and the actual number of shares repurchased depend on a variety of factors, including legal requirements, price and economic and market conditions. The repurchase program may be suspended or discontinued at any time until it expires on August 16, 2021. On August 12, 2021, the Company’s Board of Directors extended the share repurchase program to expire on August 16, 2022. All other terms and conditions remained the same. 19 Table of Contents ITEM 6. [RESERVED] ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Management’s Discussion and Analysis of Financial Condition and Results of Operation and other parts of this Report contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Report are based on information available to us on the date hereof, and except as required by law, we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors. The following should be read in conjunction with our annual financial statements contained elsewhere in this Report. Overview VerifyMe, Inc. (“VerifyMe,” the “Company,” “we” “us” or “our”) is a technology solutions provider specializing in products to connect brands with consumers. VerifyMe technologies give brand owners the ability to gather business intelligence while engaging directly with their consumers. VerifyMe technologies also provide brand protection and supply chain functions such as counterfeit prevention, authentication, serialization, and track and trace features for labels, packaging and products. We are a Nevada corporation formed in 1999. We began to commercialize our covert luminescent pigment VerifyInk TM in 2018. Prior to 2021 we completed the initial development stage of our other current technologies and in 2021 we began to commercialize as a Brand Protection Solutions provider. Our brand protection technologies include consumer engagement capabilities, the custom printing of tamper proof secure labels, and utilization of invisible and visible images printed with our proprietary special composition inks comprised of a rare earth mineral. These inks are compatible and printed with modern digital and standard printing systems such as digital, offset, flexographic, silkscreen, gravure, inkjet and toner-based laser printers. The inks can be used to print both static labels on standard printing systems and variable labels utilizing digital printing systems that include variable images, serialized codes, dynamic bar codes and dynamic QR codes that allow brand owners to engage directly with customers. We have developed and patented a dual-code technology that we believe can connect digital NFTs to physical products. We have developed and patented a device that attaches to a smartphone that brand inspectors or law enforcement can use to read our invisible ink codes into our cloud-based track and trace software that contains our patented verification technology along with algorithms that analyze the label, package or product’s authenticity and diversion activity. We also have a device that informs users that our proprietary invisible ink is present, which can be used for authentication without the need for internet connectivity. VerifyMe has a custom suite of products that offer clients the brand protection security, anti-counterfeiting, protection from product diversion, consumer engagement and a robust serialization, track and trace system. These products are combined with “software as a service” or “SAAS” which is stored in the cloud and accessed through the internet. · VerifyMe Engage™ for consumer engagement · VerifyMe Authenticate™ for product authentication · VerifyMe Track & Trace™ for product supply chain control · VerifyMe Online™ for on-line (web) brand monitoring VerifyMe Engage™ services provide the ability for the brand owner to gather business intelligence and engage with the consumer using our authentication test as the initial contact with the consumer. For example, consumers can simply use their smart phone camera to scan our visible unique codes and/or RFID/NFC chips included on products, labels and packages. Once the consumer scans the code, an instant authenticity check is made using algorithms stored in the cloud to determine the products authenticity on multiple factors. This allows brands to understand where their products are being scanned, whether they are legitimate, and form an immediate bridge for communication with the consumer. After a product is authenticated, the brand owner can then engage with the consumer by, for example offering a gift or future discounts providing marketing materials, videos, product information and specifications, contest entries or cross selling other products through the consumer engagement software. This service allows to the brand owner to gather real-time actionable information on their customer base. To date, we have derived limited revenue from VerifyMe Engage customers in the cannabis industry. 20 Table of Contents VerifyMe Authenticate™ services provide an assortment of tools through our patented products allowing brand owners to instantly authenticate a product, label or package as genuine and or determine if a product has been fraudulently diverted and where such diversion occurred in the supply chain. Brand owners can use our cloud-based web portal to easily order many types of serialization codes for their products, labels and packages. Once the codes are applied to their products, brand owners can then monitor, control and protect their products during the product’s complete life cycle through the supply chain. Our customers use our patented invisible ink, VerifyInk TM which is combined with a proprietary reader to easily identify counterfeit products. Product investigators may then use our patented VerifyAuthenticator TM technology, a device used with a smartphone and the VerifyMe app, to authenticate and decode VerifyInk TM codes. The user attaches this device to their smartphone, which reveals the hidden VerifyInk TM images that are then sent to our web portal in the cloud for authentication and data submission. We also have another device that does not require use the of a smartphone, our VerifyChecker™ which is a handheld device that is tuned to authenticate the unique frequency of our VerifyInk TM invisible ink. The VerifyChecker™ is designed for use by customers who desire instant authentication on items without the need for an internet connection. It is perfect for field investigators, CBP officials, or as validation in practice such as scanning event tickets at an entry gate. The device functionality was upgraded in September 2021 by adding wireless connectivity to a mobile phone enabling authentication attempts to be recorded in the cloud with geo-location, inspector’s names, and time and date stamp. To date, we have derived limited recurring revenues from two global brand owners who use VerifyMe Authenticate. VerifyMe Track & Trace™ supply chain serialization, track and trace technology utilize overt dynamic codes (QR codes or other barcode symbology), such as our VerifyCode™, which are tied to our cloud-based authentication and track and trace system. This technology provides brand owners business intelligence on counterfeiting and diversion using distribution channel scans throughout the supply chain coupled with consumer scan data. All this data is consolidated on a system that allows brands to customize rules and parameters and establish sophisticated alert systems allowing brands to be proactive, rather than reactive, in thwarting illicit activity. Invisible codes can be added using VerifyInk TM to increase brand protection security and provide inspectors a means to authenticate counterfeit or diverted product if the visible codes have been defaced or removed. Using information from a smartphone, our VerifyCode TM technology, can provide authentication and data submission information. A customer or end-user can scan codes printed on labels and packaging and send it to the cloud where our software can verify authenticity of the product, as well as track and trace the product from production through delivery. To date, we have derived limited revenues from the use of this technology in the personal protective equipment industry and in the cannabis industry. VerifyMe® Online™ includes, through our collaboration with a strategic partner, a brand clearance and protection leader, technologies and services that better enable customers to effectively tackle counterfeit websites, domains and e-commerce platforms, and social media sites offering or promoting counterfeit products. To date, we have not derived revenue from this technology. To optimize our security for our customers, we are seeking to add a blockchain architecture version to our brand protection platform which currently uses a centralized cloud-based data architecture. Our plan is to develop the ability to connect physical products to NFTs in the blockchain. VerifyMe has a patented dual-code technology that we believe will facilitate this process for clients requesting this service. We are exploring opportunities to gain the skillsets needed either through mergers and acquisitions or through strategic partnerships with blockchain specialists that will help us create this product. 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 that physically harm consumers. Our covert technologies give brand owners the ability to control, monitor and protect their products life cycle. In cases where the brand owner may be subject to liability brought forth by counterfeit products, our tools allow the brand owner to prove whether the product causing an issue is authentic or counterfeit. Combined with our customer engagement product lines, we offer a unique and comprehensive brand protection and promotion solution that can be tailored to any brand’s specifications. At present, our strategic partner, HP Indigo has the ability, with their Indigo 6000 series, to print our technology on a variable basis. HP Indigo has produced flexible packaging pouch samples, shrink sleeves samples, and tax stamp samples with our covert VerifyInk TM . In May 2019, we entered into a strategic partnership with INX, the third largest producer of inks in North America allowing us to successfully print our covert VerifyInk™ on garments, metal and plastic objects, and INX is now co-marketing the new security ink to its global clients. We are continuing to work with our partners and INX international to develop inkjet ink for various print head, drop on demand and continuous inkjet, that can be used independently or mounted to printing presses and finishing equipment. We have successfully developed VerifyInk™ for drop on demand inkjet printing and are carrying on with the development of a continuous inkjet solution. The specially formulated inks will enable these printing presses to print our VerifyInk TM invisible ink technology, which includes our variable VerifyCode™ serialization, track and trace technology. We believe VerifyInk TM 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 that need authentication. 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, election ballots, 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 proprietary brand protection software. 21 Table of Contents COVID-19 The COVID-19 pandemic disrupted businesses and affected production and sales across a range of industries, as well as caused volatility in the financial markets, which negatively impacted our results of operations for the year ended December 31, 2021. The full extent of the impact of the COVID-19 pandemic on our customer demand, sales and financial performance will depend on certain developments, including, among other things, the continued duration and spread of the outbreak, the effectiveness of vaccines against new variants, the availability of vaccines and vaccination rates, and the impact on our customers and employees, all of which are uncertain and cannot be predicted. Please see Item 1A, “Risk Factors- Risks Relating to the COVID-19 Pandemic” in this Report for additional information regarding certain risks associated with the pandemic. The COVID-19 pandemic has caused an increase in demand for safety products such as masks and gloves, COVID-19 test kits, medications and vaccines to treat the virus, which we believe has further caused an increase in counterfeit products. Our suite of technology solutions for global manufacturers, distributors and sellers are designed to allow consumers to prove authenticity and we have proactively reached out to global manufacturers who are seeking to provide their customers authenticity in their products. We believe we have a dynamic management and sales team in place with the ability to seamlessly work remotely to minimize any operational disruption. After an approximate one-year COVD-19 related hiatus we begun attending sales conferences and other in-person sales initiatives in September 2021. Although we have been attending in-person sales events, such events are not at full capacity due to the ongoing pandemic. Since we have recently begun face to face sales presentations and trade shows we are experiencing a small increase in travel related costs versus the 12 months preceding September 2021. We expect these travel related costs to grow which should be offset by increased sales activity. VerifyMe has continued to be aggressive in regard to sales and marketing efforts as we have completed a new website which is generating new leads and we have expanded our sales force. We have also started our first social media advertising campaign. New leads are being generated due to these actions. We continue to work with our sales representatives to look for alternative ways to communicate effectively and promote sales both with our customers and potential customers. Further, we anticipate that as a result of the continued COVID-19 pandemic, our customers may still require that their programs be cancelled, delayed or reduced. We will continue to work in partnership with our customers to continually assess any potential impacts and opportunities to mitigate risk. SPAC Investment On July 6, 2021, we co-sponsored the initial public offering of G3 VRM Acquisition Corp, a special purpose acquisition company, or “SPAC,” through a contribution into G3 VRM Holdings LLC, or the “Sponsor Entity.” The closing of the IPO of 10,626,000 Units, including 626,000 Units pursuant to the partial exercise of the underwriter’s over-allotment, generated gross proceeds of $106,260,000. G3 VRM commenced trading on NASDAQ under the symbol “GGGVU” and is targeting businesses with enterprise values of approximately $250 million to $500 million within the technology and business services industry. VerifyMe, indirectly through the Sponsor Entity beneficially owns approximately 9.42% of the common stock of the SPAC. If the SPAC is unable to complete its initial business combination within 12 months from the closing of the IPO (or 15 or 18 months from the closing of the IPO, should we and the co-sponsor extend the period of time to consummate a business combination by depositing additional funds into the trust account as described in more detail in IPO prospectus), our founder shares and private placement securities will be worthless. Even if the SPAC is able to complete a business combination within the allotted time, if the combined company is unable to maintain adequate results from operations, then our investment in the SPAC could lose value and may ultimately become worthless. There can be no assurance that the SPAC will complete a business combination within the allotted time or that any such business combination will be successful. As of December 31, 2021, we have accounted for the Sponsor Entity as an equity investment and have elected the fair value option resulting in a fair value gain of $8,371 thousand included in Other Income (Expense), Net in the accompanying Statement of Operations. We believe our sponsorship of the SPAC will allow us to pursue an equity interest in larger companies and add value without diluting the equity interests of our shareholders. Results of Operations Comparison of the Years Ended December 31, 2021, and 2020 The following discussion analyzes our results of operations for the years ended December 31, 2021, and 2020. The following information should be considered together with our financial statements for such periods and the accompanying notes thereto. 22 Table of Contents Revenue Revenue for the year ended December 31, 2021, was $867 thousand, a 153% increase compared to $343 thousand, for the year ended December 31, 2020. The increase in revenue primarily related to increased security printing with our authentication serialization technology for two large global brand owners, as well as a new application of our technology, in the personal protective equipment space and new orders with two cannabis companies using our unique smart phone readable codes which will allow them to connect directly with their customer base. Gross Profit Gross profit for the years ended December 31, 2021, and 2020, was $599 thousand and $281 thousand, respectively. The resulting gross margin was 69.1% for the year ended December 31, 2021, compared to 81.9% for the year ended December 31, 2020. The decrease in our gross profit margin relates to a shift in product mix, with an increase in the use of our secure track and trace serialization technology and customer engagement products. We believe our high gross profit margins demonstrate our business model’s ability to generate profitable growth. General and Administrative Expenses General and administrative expenses were $2,995 thousand for the year ended December 31, 2021, compared to $2,072 thousand for the year ended December 31, 2020, an increase of $923 thousand. The increase primarily related to increases in non-cash stock-based compensation of $550 thousand and an increase of costs associated with exploratory costs related to our search of strategic partnerships, mergers and acquisitions of $180 thousand. Legal and Accounting Legal and accounting fees decreased to $362 thousand for the year ended December 31, 2021, from $403 thousand for the year ended December 31, 2020. The decrease relates to savings in legal fees that were higher in 2020 related to our securities offerings. Corporate Payroll Expenses Payroll expenses increased to $859 thousand for the year ended December 31, 2021, from $704 thousand for the year ended December 31, 2020, an increase of $155 thousand. The increase related to an increase in the executive compensation and an increase in the number of our employees. Research and Development Research and development expenses increased by $32 thousand to $51 thousand for the year ended December 31, 2021, from $19 thousand for the year ended December 31, 2020. The increase is due to continued development costs associated with commercializing our product lines. We plan to increase research and development in future periods, particularly in the switch from a cloud-based centralized network to an Ethereum decentralized block-chain platform for our supply chain monitoring, and authentication platform. In 2021, we also developed the ability to read VerifyInk TM covert codes at a distance in ambient light on any product. Sales and Marketing Sales and marketing expenses for the year ended December 31, 2021, were $1,163 thousand compared to $651 thousand for the year ended December 31, 2020, an increase of $512 thousand. The increase primarily related to an expansion of our sales team and marketing outreach in 2021. We expanded our sales team to address growing domestic and international opportunities resulting in increased compensation expense of approximately $350 thousand and $130 thousand for marketing programs. Operating Loss Operating loss for the year ended December 31, 2021, was $4,831 thousand, an increase of $1,263 thousand, compared to $3,568 thousand for the year ended December 31, 2020. The increase in loss primarily related to an increase in non-cash stock-based compensation of approximately $370 thousand, an increase in employee headcount, increase in executive salaries, an increase relating to our sales and marketing outreach to meet our growing number of opportunities, and increased costs associated with being a Nasdaq listed company. Net Income (Loss) Our net income for the year ended December 31, 2021, was $3,612, an increase of $9,514 thousand compared to $5,902 thousand net loss for the year ended December 31, 2020. The increase was primarily due to the fair value gain of $8,371 thousand on our equity investment in the SPAC during 2021 and the amortization of debt discount related to our 2020 senior secured convertible debentures (the “2020 Debentures”) included in interest expense, and loss on extinguishment of debt related to our 2019 senior secured convertible debentures (the “2019 Debentures”) in 2020 . The resulting net income per diluted share for the twelve months ended December 31, 2021, was $0.49 per diluted share, compared to $1.48 loss per diluted share for the twelve months ended December 31, 2020. 23 Table of Contents Liquidity and Capital Resources Our operations used $3,254 thousand of cash during the year ended December 31, 2021, compared to $2,281 thousand during the year end December 31, 2020, relating primarily to an increase in employee headcount, an expansion of our sales team and marketing outreach efforts. Net cash used in investing activities was $2,851 thousand for the year ended December 31, 2021, compared to $125 thousand for the year ended December 31, 2020. The increase relates primarily to our investment in the SPAC of $2,593 thousand. Net cash provided by financing activities decreased by $2,504 thousand to $7,588 thousand for the year ended December 31, 2021, from $10,092 thousand for the year ended December 31, 2020. On February 12, 2021, as part of our public offering of an aggregate 1,750,000 shares of common stock, we generated aggregate gross proceeds of $9.3 million and net proceeds of $8.4 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. In the first quarter of 2020, we raised $1,992 thousand in gross proceeds from the 2020 Debentures for net proceeds of $1,747 thousand. In the second quarter of 2020, as part of our public offering, we raised approximately $10,000 thousand in gross proceeds and received net proceeds of $9,023 thousand, including the exercise of the over-allotment option resulting in gross proceeds of approximately $232 thousand. Absent any acquisitions, we believe that our cash and cash equivalents will fund our operations through 2025. In November 2020, we announced a share repurchase program to spend up to $1.5 million to repurchase shares of our common stock until August 16, 2021. On August 12, 2021, this program was extended to expire on August 16, 2022. All other terms and conditions remained the same. To date, 216,945 shares have been purchased for a total of $725 thousand and a remaining $775 may be purchased under the program. While we expect revenues to increase, we expect continued negative cash flows as we incur increased costs associated with expanding our business. We expect to grow our business organically and through key acquisitions that will help accelerate the growth of our business. We expect to continue to fund our operations primarily through utilization of our current financial resources, future revenue, and through the issuance of debt or equity. Critical Accounting Policies and Estimates Our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows and which require the application of significant judgment by management. We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial position, results of operations or cash flows. Variable Interest Entity We determined that we have a variable interest in a VIE through our indirect ownership of the SPAC. As such, we used judgment to determine whether we are the primary beneficiary of the VIE and would need to consolidate as a result. To make this determination, we evaluated our power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the SPAC. We concluded that we are not the primary beneficiary, and as such account for it as an equity investment. The facts and circumstances surrounding our determination of whether the SPAC is a VIE and the entity that is the primary beneficiary are analyzed on an ongoing basis based on the current facts and circumstances surrounding the entity, including at every reporting period. Equity Investments We have accounted for our beneficial ownership in the SPAC as an equity investment as we have determined that we exert a significant influence in the entity’s operations and accounting policies. Furthermore, we have elected the fair value option under applicable US GAAP as we believe the fair value best reflects the economic performance of the equity investment. We perform a qualitative assessment at each reporting date to determine if there was a change in fair value. The assessment considers factors such as, but not limited to, discussions with management, data showing other companies in the industry, plus adjustment to reflect company circumstances. 24 Table of Contents Derivative Liability We have accounted for our two directors restricted stock units in the SPAC (“SPAC RSUs”) as a long-term derivative liability as the underlying awards are not the Company’s stock but an unrelated, publicly traded entity’s shares. We perform an assessment at each reporting date to determine if there was a change in fair value using a Monte Carlo Simulation. The assessment considers factors such as, but not limited to, discussions with management, data showing other companies in the industry, plus adjustment to reflect company circumstances. Revenue Recognition Our revenue transactions include sales of our ink canisters, software, licensing, pre-printed labels, integrated solutions and leasing of our equipment. We recognize revenue based on the principals established in ASC Topic 606, “Revenue from Contracts with Customers.” Revenue recognition is made when our performance obligation is satisfied. Our terms vary based on the solutions we offer and are examined on a case-by-case basis. For licensing of our VerifyInk TM technology we depend on the integrity of our clients’ reporting. Stock-based Compensation We account for stock-based compensation under the provisions of FASB ASC 718, “Compensation—Stock Compensation”, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes model. The assumptions used in the Black-Scholes option pricing model include risk-free interest rates, expected volatility and expected life of the stock options. Changes in these assumptions can materially affect estimates of fair value stock-based compensation, and the compensation expense recorded in future periods. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. We account for stock-based compensation awards to non-employees in accordance with 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. All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Non-employee equity-based payments are recorded as an expense over the service period, as if we had paid cash for the services. At the end of each financial reporting period, prior to vesting or prior to the completion of the services, the fair value of the equity-based payments will be re-measured, and the non-cash expense recognized during the period will be adjusted accordingly. Since the fair value of equity-based payments granted to non-employees is subject to change in the future, the amount of the future expense will include fair value re-measurements until the equity-based payments are fully vested or the service completed. Recently Adopted Accounting Pronouncements Recently adopted accounting pronouncements are discussed in Note 1 – Summary of Significant Accounting Policies in the notes accompanying the financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable for smaller reporting companies. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements required to be filed pursuant to this Item 8 are appended to this Report beginning on page F-1 located immediately after the signature page and incorporated by reference in this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures 25 Table of Contents Our principal executive officer and our principal financial officer evaluated our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended, (“Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of such date as the result of the material weaknesses in our internal control over financial reporting identified in this Report . Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 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, 2021, 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, 2021, based on a finding of a material weakness related to a lack of segregation of duties. 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, 2021. Management has been implementing measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. To date, the Company has hired a Senior VP of Finance, and a Financial Controller. We have designed key internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act and have implemented policies and procedures in accordance with our established controls. The Company believes that these actions will remediate the material weakness. We are committed to continuing to improve our internal control processes and will continue to review, optimize and enhance our financial reporting controls and procedures. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. The Company expects that the remediation of this material weakness will be completed prior to the end of fiscal year 2022. 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. Accordingly, 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 Reporting 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. 26 Table of Contents Changes in Internal Control Over Financial Reporting Other than the remediation efforts noted above, there were no other 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. ITEM 9B. OTHER INFORMATION. None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not Applicable. 27 Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this Item 10 is incorporated herein by reference from our proxy statement for our 2022 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, 2021, fiscal year end. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is incorporated herein by reference from our proxy statement for our 2022 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, 2021, fiscal year end. ITEM 12. 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 2022 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, 2021, 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, 2021. Equity Compensation Plan Information as of December 31, 2021 Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted average exercise price of outstanding options, warrants and rights (2) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders 257,000 (1) $4.83 815,280 (3) Equity compensation plans not approved by security holders 208,471 (4) 3.20 - Total 465,471 4.38 815,280 (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 Plan”) (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 789,230 shares remaining available for issuance under the 2020 Plan and 26,050 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. 28 Table of Contents ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item 13 is incorporated herein by reference from our proxy statement for our 2022 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, 2021, fiscal year end. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item 14 is incorporated herein by reference from our proxy statement for our 2022 annual meeting for stockholders under the numbered proposal with the heading “Ratification of the Appointment of our Independent Registered Public Accounting Firm,” which proxy statement will be filed within 120 days after the December 31, 2021, fiscal year end. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. Exhibit No. Description 3.1 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) 3.2 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) 3.3 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) 3.4 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) 3.5 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) 4.1 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) 4.2 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) 4.3 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) 4.4 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) 4.5 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) 4.6 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) 4.7* Description of Securities 10.1# 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) 10.2# Employment Agreement with Patrick White, dated February 15, 2022 (incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K file on February 22, 2022) 29 Table of Contents 10.3# Employment Agreement with Margaret Gezerlis, dated February 15, 2022 (incorporated herein by reference from Exhibit 10.3 to the Company’s Current Report on Form 8-K file on February 22, 2022) 10.4# Independent Contractor Consulting Agreement, dated April 15, 2021, with Norman Gardner (incorporated herein by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021) 10.5# Employment Agreement with Keith Goldstein, dated February 15, 2022 (incorporated herein by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K file on February 22, 2022) 10.6# Employment Agreement with Nancy Meyers, dated February 15, 2022 (incorporated herein by reference from Exhibit 10.4 to the Company’s Current Report on Form 8-K file on February 22, 2022) 10.7# LaserLock Technologies, Inc. 2013 Omnibus Equity Compensation Plan (incorporated herein by reference from the Company’s Definitive Proxy Statement filed on November 19, 2013) 10.8# 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) 10.8.1# 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) 10.9# 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) 10.10# 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) 10.11# 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) 10.12# 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) 10.13# 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) 10.14# 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) 30 Table of Contents 10.15# 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) 10.16# 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) 10.16.1# 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) 10.17# 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) 10.18# 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) 10.19# 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) 10.20# 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) 10.21# 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) 10.22# 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) 10.23# 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) 10.24# Form of Restricted Stock Award Agreement (Employees) pursuant to the 2020 Equity Incentive Plan (incorporated herein by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021) 10.25# Form of Restricted Stock Award Agreement (Non-employees) pursuant to the 2020 Equity Incentive Plan (incorporated herein by reference from Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021) 10.26# Form of Restricted Stock Unit Award Agreement (Employees) pursuant to the 2020 Equity Incentive Plan (incorporated herein by reference from Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021) 10.27# Form of Restricted Stock Unit Award Agreement (Non-employees) pursuant to the 2020 Equity Incentive Plan (incorporated herein by reference from Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021) 10.28 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) 10.29 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) 10.30 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) 10.31 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) 10.32 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) 31.1* Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1* Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 31 Table of Contents 101.INS* XBRL Instance Document 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* XBRL Taxonomy Extension Label Linkbase Document 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document * Filed or furnished herewith, as applicable # Denotes management compensation plan or contract ITEM 16. FORM 10-K SUMMARY Not applicable. 32 Table of Contents SIGNATURES 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. VerifyMe, Inc. By: /s/ Patrick White Patrick White Chief Executive Officer and Director Date: March 14, 2022 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: Signature Title Date /s/ Patrick White Chief Executive Officer and Director March 14, 2022 Patrick White ( Principal Executive Officer ) /s/ Margaret Gezerlis Executive Vice President and Chief Financial Officer March 14, 2022 Margaret Gezerlis ( Principal Financial Officer and Principal Accounting Officer) /s/ Scott Greenberg Chairman of the Board March 14, 2022 Scott Greenberg /s/ Chris Gardner Director March 14, 2022 Chris Gardner /s/ Marshall Geller Director March 14, 2022 Marshall Geller /s/Howard Goldberg Director March 14, 2022 Howard Goldberg /s/ Arthur Laffer Director March 14, 2022 Arthur Laffer 33 Table of Contents INDEX TO FINANCIAL STATEMENTS CONTENTS PAGE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID 206 ) F-1 BALANCE SHEETS F-3 STATEMENTS OF OPERATIONS F-4 STATEMENTS OF CASH FLOWS F-5 STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) F-6 NOTES TO FINANCIAL STATEMENTS F-7 34 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of VerifyMe, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of VerifyMe, Inc. ( the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below 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. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Determination of the Fair Value of the Equity Investment and Derivative Liability As disclosed in Notes 2 and 12 to the financial statements, as of December 31, 2021, the Company accounts for its equity investment in the G3 VRM Acquisition Corp. (the “SPAC”) under the fair value option. The Company’s investment in the SPAC was $10,964 thousand as of December 31, 2021. The Company also granted two directors restricted stock units in the SPAC (“SPAC RSUs”), vesting upon the initial business combination of the SPAC, subject to continuous service to the Company through the vesting date. The Company accounts for the SPAC RSUs under ASC 815 – Derivatives and Hedging, with $71 thousand expense included in stock-based compensation for the year ended December 31, 2021. In determining the fair value of the Company’s equity investment in the SPAC and derivative liability associated with the SPAC RSUs under Monte-Carlo simulation, management has made various judgments, estimates and assumptions, some of which are classified in Level 3 of the fair value hierarchy. The principal considerations for our determination that performing procedures relating to the fair value of the equity investment and derivative liability is a critical audit matter included: (i) significant judgment by management when determining the fair value of the equity investment and derivative liability; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate management’s assessment of significant inputs and assumptions; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. F- 1 Table of Contents Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included: (i) testing management’s process for developing the fair value estimates; (ii) evaluating the appropriateness of Monte-Carlo simulation; (iii) testing the completeness and accuracy of underlying data used in the fair value measurement; (iv) evaluating whether the judgments and assumptions used by management were reasonable considering the consistency with external market and industry data; and (v) engaging auditor’s specialist to assist in evaluating the reasonableness of the significant inputs and assumptions used by management. /s/ MaloneBailey, LLP www.malonebailey.com We have served as the Company's auditor since 2018. Houston, Texas March 14, 2022 F- 2 Table of Contents VerifyMe, Inc. Balance Sheets (In thousands, except share data) As of December 31, 2021 December 31, 2020 ASSETS CURRENT ASSETS Cash and cash equivalents $ 9,422 $ 7,939 Accounts Receivable 297 31 Prepaid expenses and other current assets 240 177 Inventory 52 54 TOTAL CURRENT ASSETS 10,011 8,201 INVESTMENTS Equity Investment 10,964 - PROPERTY AND EQUIPMENT Equipment for lease, net of accumulated amortization of $ 102 and $ 50 as of December 31, 2021 and December 31, 2020, respectively 193 200 Office Equipment, net of accumulated amortization of $ 1 and $ 0 as of December 31, 2021 and December 31, 2020, respectively 11 - INTANGIBLE ASSETS Patents and Trademarks, net of accumulated amortization of $ 354 and $ 320 as of December 31, 2021 and December 31, 2020, respectively 353 293 Capitalized Software Costs, net of accumulated amortization of $ 50 and $ 20 as of December 31, 2021 and December 31, 2020, respectively 156 80 TOTAL ASSETS $ 21,688 $ 8,774 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other accrued expenses 450 383 TOTAL CURRENT LIABILITIES 450 383 LONG-TERM LIABILITIES Term Note $ - $ 72 Long Term Derivative Liability 71 - TOTAL LIABILITIES $ 521 $ 455 STOCKHOLDERS' EQUITY Series A Convertible Preferred Stock, $ .001 par value, 37,564,767 shares authorized; 0 shares issued and outstanding as of December 31, 2021 and 0 shares issued and outstanding as of December 31, 2020 - - Series B Convertible Preferred Stock, $ .001 par value; 85 shares authorized; 0.85 shares issued and outstanding as of December 31, 2021 and - - December 31, 2020, respectively Common stock, $ .001 par value; 675,000,000 authorized; 7,420,633 and 5,603,888 issued, 7,196,677 and 5,596,877 shares outstanding as of December 31, 2021 and December 31, 2020, respectively 7 6 Additional paid in capital 86,059 76,099 Treasury stock as cost; 223,956 and 7,011 shares at December 31, 2021 and December 31, 2020, respectively ( 838 ) ( 113 ) Accumulated deficit ( 64,061 ) ( 67,673 ) STOCKHOLDERS' EQUITY 21,167 8,319 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,688 $ 8,774 The accompanying notes are an integral part of these financial statements. F- 3 Table of Contents VerifyMe, Inc. Statements of Operations (In thousands, except per share data) Year Ended December 31, 2021 December 31, 2020 NET REVENUE Sales $ 867 $ 343 COST OF SALES 268 62 GROSS PROFIT 599 281 OPERATING EXPENSES General and administrative (a) 2,995 2,072 Legal and accounting 362 403 Corporate Payroll expenses (a) 859 704 Research and development 51 19 Sales and marketing (a) 1,163 651 Total Operating expenses 5,430 3,849 LOSS BEFORE OTHER (EXPENSE), NET ( 4,831 ) ( 3,568 ) OTHER INCOME (EXPENSE), NET Interest income (expenses), net 2 ( 2,053 ) Fair value gain on equity investment 8,371 - Loss on extinguishment of debt - ( 281 ) Payroll Protection Program Debt Forgiveness 70 - TOTAL OTHER INCOME (EXPENSE), NET 8,443 ( 2,334 ) NET INCOME/(LOSS) $ 3,612 $ ( 5,902 ) EARNINGS/(LOSS) PER SHARE BASIC $ 0.51 $ ( 1.48 ) DILUTED $ 0.49 $ ( 1.48 ) WEIGHTED AVERAGE COMMON SHARE OUTSTANDING BASIC 7,110,907 3,980,202 DILUTED 7,383,364 3,980,202 (a) Includes share-based compensation of $ 1,716 for the year ended December 31, 2021, and $ 1,345 for the year ended December 31, 2020. The accompanying notes are an integral part of these financial statements. F- 4 Table of Contents VerifyMe, Inc. Statements of Cash Flows (In thousands) Twelve Months Ended December 31, 2021 December 31, 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 3,612 $ ( 5,902 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Stock based compensation 151 76 Fair value of options in exchange for services 85 704 Fair value of restricted stock awards issued in exchange for services 784 461 Fair value of restricted stock units issued in exchange for services 696 53 Payroll Protection Program Debt Forgiveness ( 70 ) - Fair value of warrants in exchange for services - 51 Fair value gain on equity investment ( 8,371 ) - Loss on Extinguishment of Debt - 281 Amortization of debt discount - 1,992 Common stock issued for interest expense - 61 Amortization and depreciation 117 98 Changes in operating assets and liabilities: Accounts Receivable ( 354 ) 50 Inventory 2 ( 24 ) Prepaid expenses and other current assets 25 ( 145 ) Accounts payable and accrued expenses 69 ( 37 ) Net cash used in operating activities ( 3,254 ) ( 2,281 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Patents ( 95 ) ( 103 ) Purchase of Equipment for lease ( 45 ) ( 22 ) Purchase of equity investment ( 2,593 ) - Purchase of Office Equipment ( 12 ) - Capitalized Software Costs ( 106 ) - Net cash used in investing activities ( 2,851 ) ( 125 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from public offering of securities 8,447 9,023 Proceeds from issuance of notes payable - 72 Repayments of notes payable ( 3 ) - Repayment of bridge financing and early redemption fee - ( 750 ) Proceeds from convertible debt, net of costs - 1,747 Tax withholding payments for employee stock-based compensation in exchange for shares surrendered ( 131 ) - Repurchase Shares ( 725 ) - Net cash provided by financing activities 7,588 10,092 NET INCREASE IN CASH AND CASH EQUIVALENTS 1,483 7,686 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 7,939 253 CASH AND CASH EQUIVALENTS - END OF PERIOD $ 9,422 $ 7,939 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ - $ - Income taxes $ - $ - SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Common Stock issued in relation to conversion of 2020 Debentures and warrant cancellation $ - $ 1,992 Relative fair value of common stock issued in connection with 2020 Debentures $ - $ 34 Relative fair value of warrants issued in connection with 2020 Debentures $ - $ 1,063 Beneficial conversion feature in connection with 2020 Debentures $ - $ 650 Common stock issued to settle accrued payroll $ - $ 119 Reclass on deposit for equipment held for lease $ - $ 51 The accompanying notes are an integral part of these financial statements. F- 5 Table of Contents VerifyMe, Inc. Statements of Stockholders' Equity (Deficit) (In thousands, except share data) Series A Series B Convertible Convertible Preferred Preferred Common Treasury Stock Stock Stock Additional Stock Number of Number of Number of Paid-In Number of Accumulated Shares Amount Shares Amount Shares Amount Capital Shares Amount Deficit Total Balance at December 31, 2019 - - 0.85 - 2,232,112 2 61,815 7,011 ( 113 ) ( 61,771 ) ( 67 ) Fair value of stock options - - - - - - 704 - - - 704 Restricted stock awards - - - - 267,500 1 580 - - - 581 Restricted Stock Units - - - - 15,000 - 53 - - - 53 Fair value of warrants issued for services - - - - - - 51 - - - 51 Common stock issued for services - - - - 10,944 - 43 - - - 43 Common stock issued in connection with 2020 Debentures - - - - 19,208 - 67 - - - 67 Beneficial conversion feature in connection with 2020 Debentures - - - - - - 650 - - - 650 Warrants issued in connection with 2020 Debentures - - - - - - 1,063 - - - 1,063 Common Stock in relation to conversion of 2020 Debentures and interest expense and cancellation of warrants - - - - 816,713 1 2,052 - - - 2,053 Common stock issued in relation to public offering of securities - - - - 2,254,801 2 9,021 - - - 9,023 Cancellation of Common Stock - - - - ( 19,401 ) - - - - - - Net loss - - - - - - - - - ( 5,902 ) ( 5,902 ) Balance at December 31, 2020 - - 0.85 - 5,596,877 6 76,099 7,011 ( 113 ) ( 67,673 ) 8,319 Series A Convertible Series B Convertible Preferred Preferred Common Treasury Stock Stock Stock Additional Stock Number of Number of Number of Paid-In Number of Accumulated Shares Amount Shares Amount Shares Amount Capital Shares Amount Deficit Total Balance at December 31, 2020 - - 0.85 - 5,596,877 6 76,099 7,011 ( 113 ) ( 67,673 ) 8,319 Fair value of stock options - - - - - - 85 - - - 85 Restricted stock awards, net of shares withheld for employee tax - - - - 56,971 - 654 - - - 654 Restricted Stock Units - - - - - - 696 - - - 696 Stock Purchase Plan - - - - - - 40 - - - 40 Common stock issued for services - - - - 9,774 - 39 - - - 39 Common stock issued in relation to public offering of securities - - - - 1,750,000 1 8,446 - - - 8,447 Repurchase of Common Stock ( 216,945 ) - - 216,945 ( 725 ) - ( 725 ) Net income - - - - - - - - - 3,612 3,612 Balance at December 31, 2021 - - 0.85 - 7,196,677 7 86,059 223,956 ( 838 ) ( 64,061 ) 21,167 The accompanying notes are an integral part of these financial statements. F- 6 Table of Contents VerifyMe, Inc. Notes to the Financial Statements NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of the Business VerifyMe, Inc. (“VerifyMe,” 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 products to connect brands with consumers. VerifyMe technologies give brand owners the ability to gather business intelligence while engaging directly with their consumers. VerifyMe technologies also provide brand protection and supply chain functions such as counterfeit prevention, authentication, serialization, and track and trace features for labels, packaging and products. We began to commercialize our covert luminescent pigment VerifyInk TM in 2018. Prior to 2021 we completed the initial development stage of our other current technologies and in 2021 we began to commercialize as a Brand Protection Solutions provider. The Company’s activities are subject to significant risks and uncertainties, including its ability to successfully commercialize its technologies and the need 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. Basis of Presentation The accompanying financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Fair Value of Financial Instruments The Company’s financial instruments consist of accounts receivable, accounts payable, notes payable and accrued expenses, equity investments, and long-term derivative liabilities. The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value because of their short maturities. The Company believes the carrying amount of its notes payable approximate fair value based on rates and other terms currently available to the Company for similar debt instruments. 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. The statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories: Level 1: Quoted market prices in active markets for identical assets or liabilities Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data Level 3: Unobservable inputs that are not corroborated by market data The level in the fair value within which a fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. F- 7 Table of Contents VerifyMe, Inc. Notes to the Financial Statements Variable Interest Entity The Company has determined that G3 VRM Acquisition Corp., (the “SPAC”, see Note 2 – Equity Investment), is a variable interest entity (“VIE”) in which the Company has a variable interest but is not the primary beneficiary. Making the determination as to whether a VIE should be consolidated requires judgement in assessing if the Company is the primary beneficiary. To make this determination, the Company evaluated its power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the SPAC. The Company concluded that it is not the primary beneficiary of the VIE and as such, does not consolidate the SPAC. The Company reassess its evaluation of whether an entity is a VIE and if it continues to be a VIE, whether the Company is the primary beneficiary of the VIE, on an ongoing basis based on the current facts and circumstances surrounding the entity. Equity Investments When the Company does not have a controlling financial interest in an entity but can exert influence over the entity’s operations and financial policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing the fair value option available under applicable generally accepted accounting policies. The Company has elected the fair value option for its equity investment in the SPAC (see Note 2 – Equity Investment) as it has determined the fair value best reflects the economic performance of the equity investment. Changes in unrecognized gains or losses of the fair value of the equity investment are included in Other Income (Expense), Net on the accompanying Statement of Operations. Cash and Cash Equivalents For purposes of reporting cash flows, the Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and certificates of deposit and commercial paper with original maturities of 90 days or less to be cash or cash equivalents. Accounts Receivable Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. Bad debts expense or write offs of receivables are determined on the basis of loss experience, known and inherent risks in the receivable portfolio 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. The Company recognized $ 0 and $ 0 for allowance for doubtful accounts as of December 31, 2021, and 2020, respectively. Concentration of Credit Risk Involving Cash and Cash Equivalents The Company’s cash and cash equivalents are held at various financial institutions. At times, the Company’s deposits may exceed Federal Deposit Insurance Corporation (FDIC) coverage limits. The Company has not experienced any losses from maintaining cash accounts in excess of federally insured limits. Inventory Inventory principally consists of canisters and pigments and is stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Equipment for Lease Equipment for lease principally consists of costs associated with the development, certification and production of the VerifyChecker™ and the VerifyAuthenticator TM Smartphone Authenticator technology. These technologies are leased to customers typically for a period of one year in length with automatically renewable leases cancellable by either party by written notice provided 90 days in advance . We examined the effect of Accounting Standards Update (“ASU”) No. 2016-02- “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 . 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 (“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 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 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. F- 8 Table of Contents VerifyMe, Inc. Notes to the Financial Statements 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 assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets are measured by a comparison of the carrying amount of an asset to future cash flows expected to be generated by the asset, undiscounted and without interest or independent appraisals. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Related Parties Related parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Companies are also considered to be related if they are subject to common control or common significant influence. During the year ended December 31, 2021, and December 31, 2020, the Company did not incur any charges related to related parties. During 2020, 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 6 – Convertible Debt and Note 9 – Stockholder’s Equity, respectively. Derivative Instruments The Company evaluates its equity investments, long-term derivative liabilities, 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”). The result of this accounting treatment is that the fair value of the embedded derivative, if required to be bifurcated, is marked-to-market at each balance sheet date and recorded as a liability. The change in fair value is recorded in the Statement of Operations as a component of other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified as liabilities at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date. Reclassifications Certain accounts in the prior year financial statements have been reclassified for comparative purposes to conform to the presentation in the current year financial statements. These reclassifications had no effect on the previously reported net income (loss). 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 applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements: · identify the contract with a customer; · identify the performance obligations in the contract; F- 9 Table of Contents VerifyMe, Inc. Notes to the Financial Statements · determine the transaction price; · allocate the transaction price to performance obligations in the contract; and · recognize revenue as the performance obligation is satisfied. During the year ended December 31, 2020, the Company’s revenues were primarily generated from our VerifyInk TM . During the year 2021 we expanded our product solutions and increased our sales to include printing labels with the Company’s technology. Income Taxes 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. Deferred income tax assets and liabilities are computed annually for temporary differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Tax years from 2017 through 2020 remain subject to examination by major tax jurisdictions. 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 date. The Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. The Company accounts for stock-based compensation awards to non-employees in accordance with 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. All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Non-employee equity-based payments are recorded as an expense over the service period, as if the Company had paid cash for the services. At the end of each financial reporting period, prior to vesting or prior to the completion of the services, the fair value of the equity-based payments will be re-measured, and the non-cash expense recognized during the period will be adjusted accordingly. Since the fair value of equity-based payments granted to non-employees is subject to change in the future, the amount of the future expense will include fair value re-measurements until the equity-based payments are fully vested or the service completed. Advertising Costs Advertising costs are expensed as incurred. Advertising costs were $ 51 thousand and $ 3 thousand for the years ended December 31, 2021, and 2020, respectively, and are included in Sales and Marketing on the Statement of Operations. Research and Development Costs In accordance with FASB ASC 730, research and development costs are expensed when incurred. Research and development costs for the years ended December 31, 2021, and 2020 were $ 51 thousand and $ 19 thousand, respectively. Basic and Diluted Earnings (Loss) per Share of Common Stock The Company follows Financial Accounting Standards Board (“FASB”) ASC 260, “Earnings Per Share,” when reporting earnings per share resulting in the presentation of basic and diluted earnings per share. NOTE 2 – EQUITY INVESTMENT On February 26, 2021, the Company formed VMEA Holdings Inc. (the “Sponsor Entity”), a Delaware corporation and wholly owned subsidiary of the Company, that owns G3 VRM Acquisition Corp. (NASDAQ: GGGVU) (the “SPAC”), a Delaware corporation and special purpose acquisition company being co-sponsored by the Company. The SPAC was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. While it may pursue an initial business combination target in any business, industry or geographical location, it intends to focus its search on target businesses with enterprise values of approximately $250 million to $500 million within the technology and business services industry. F- 10 Table of Contents VerifyMe, Inc. Notes to the Financial Statements On April 12, 2021, the Sponsor Entity converted to a Delaware limited liability company, changed its name to “G3 VRM Holdings LLC” and a co-sponsor was added as a member of the Sponsor Entity resulting in an equity interest of 44.40 % attributed to the Company. On July 6, 2021, the SPAC consummated the IPO of 10,626,000 units (the “Units”), including 626,000 Units pursuant to the partial exercise of the underwriter’s over-allotment option, generating gross proceeds of $ 106,260 thousand. Each Unit consists of one share of SPAC common stock, $0.0001 par value, and one right to receive one-tenth (1/10) of a share of SPAC common stock upon the consummation of an initial business combination. Simultaneously with the closing of the IPO, the SPAC consummated the Private Placement of an aggregate of 569,410 Units with the Sponsor Entity purchasing 516,280 Units and Maxim Partners LLC purchasing 53,130 Units, generating total proceeds of $ 5,694 thousand. Of this amount, the Company is the indirect beneficial owner of 229,228 Units purchased by the Sponsor Entity for a total of $ 2,581 thousand. Upon consummation of the IPO, VerifyMe, as co-sponsor, indirectly through the Sponsor Entity, beneficially owns approximately 9.42 % of the outstanding shares of the SPAC, which shares are subject to forfeiture upon certain conditions and restrictions on transfer. As a result of ceasing to have a controlling financial interest in the Sponsor Entity on April 12, 2021, the Company accounted for the Sponsor Entity as an equity investment and has elected the fair value option resulting in a fair value gain of $ 8,371 thousand for the year ended December 31, 2021, included in Fair value gain on equity investment, in the accompanying Statement of Operations. The fair value of the equity investment is classified as Level 3 in the fair value hierarchy as the calculation is dependent upon company specific adjustments to the observable trading price of the SPAC’s public units and shares, and related risk of forfeiture should no business combination occur. If the SPAC is unable to complete its initial business combination within 12 months from the closing of the IPO (or 15 or 18 months from the closing of the IPO, should the Company and the co-sponsor extend the period of time to consummate a business combination by depositing additional funds into the trust account as described in more detail in IPO prospectus), the SPAC will redeem 100% of the public shares for cash, the rights will expire worthless, and the founder shares and the private placement securities will be worthless. Even if the SPAC is able to complete a business combination within the allotted time, if the combined company is unable to maintain adequate results from operations, then our investment in the SPAC could lose value and may ultimately become worthless. There can be no assurance that the SPAC will complete a business combination within the allotted time or that any such business combination will be successful. The following table presents summary financial information of the Sponsor Entity. Such summary information has been provided herein based upon the individual significance of the equity investment to the financial information of the Company . Amounts in Thousands ('000) December 31, 2021 December 31, 2020 Current Assets $ 1,186 $ - Non-current assets 107,857 - Current Liabilities 11 - Non-current liabilities 3,719 - Stockholders' Equity 105,313 - Amounts in Thousands ('000) Year Ended December, 2021 2020 Operating Loss $ ( 470 ) $ - Net Loss $ (467 ) $ - F- 11 Table of Contents VerifyMe, Inc. Notes to the Financial Statements NOTE 3 – PROPERTY AND EQUIPMENT Equipment for Lease During the years ended December 31, 2021, and 2020, the Company capitalized $ 45 thousand and $ 73 thousand (including a $ 51 thousand deposit made in fiscal year 2019), respectively, in connection with the certification and production of the VerifyChecker™ and the VerifyAuthenticator TM technology. The Company depreciates equipment for lease over its useful life of five years . Depreciation expense for equipment for lease for the years ended December 31, 2021, and 2020, was $ 52 thousand and $ 50 thousand, respectively, and is included in general and administrative expense in the accompanying Statements of Operations. Office Equipment During the year ended December 31, 2021, and 2020, the Company capitalized $ 12 thousand and $ 0 thousand respectively, in office equipment. The Company depreciates the office equipment over its useful life of three years . The depreciation expense for office equipment for the years ended December 31, 2021, and 2020, was $ 1 thousand and $ 0 , respectively, and is included in general and administrative expense in the accompanying Statement of Operations NOTE 4 – INTANGIBLE ASSETS Patents and Trademarks As of December 31, 2021, the current patent and trademark portfolios consist of eleven granted U.S. patents and one granted European patent validated in four countries (France, Germany, United Kingdom, and Italy), seven pending U.S. and foreign patent applications, six registered U.S. 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, two UK trademark registrations, and nineteen pending US and foreign trademark applications. Our issued patents expire between the years 2022 and 2039 . Costs associated with the 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 year ended December 31, 2021, and 2020, the Company capitalized $ 95 thousand and $ 103 thousand, respectively, of patent and trademarks costs. Amortization expense for patents and trademarks was $ 34 thousand and $ 28 thousand for the year ended December 31, 2021, and 2020, respectively, and included in general and administrative expense in the accompanying Statement of Operations. Capitalized Software Costs incurred in connection with the development of software related to our proprietary digital products are accounted for in accordance with FASB 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 costs begins once the product is available to the market. Capitalized software 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 changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company capitalized $ 106 thousand and $ 0 for the year ended December 31, 2021, and 2020, respectively . Amortization expense for capitalized software was $ 30 thousand and $ 20 thousand for the year ended December 31, 2021, and 2020, respectively, and included in general and administrative expense in the accompanying Statements of Operations. NOTE 5 – 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, 2021, and 2020 is as follows (in thousands) : Schedule of reconciliation of federal statutory tax rate Year Ended December 31, US 2021 2020 Income (loss) before income taxes $ 3,612 $ ( 5,902 ) Taxes under statutory US tax rates 759 ( 1,239 ) Increase (decrease) in taxes resulting from: Increase (decrease) in valuation allowance ( 1,164 ) 731 All other 222 707 State taxes 183 ( 199 ) Income tax expense $ - $ - F- 12 Table of Contents VerifyMe, Inc. Notes to the Financial Statements The decrease in the Company's net valuation allowance was due to the unrealized gain in our equity investment (see Note 2 – Equity Investment). Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities consist of the following (in thousands): Schedule of deferred tax assets and liabilities December 31, 2021 2020 US Net operating loss $ 10,194 $ 9,230 Share based compensation 858 782 Reserves and accruals ( 24 ) ( 9 ) Unrealized Gain on Equity Investment ( 2,188 ) - Gross deferred tax assets $ 8,840 $ 10,003 Less valuation allowance ( 8,840 ) ( 10,003 ) Total deferred tax assets $ - $ - Deferred tax liabilities: Total deferred tax liabilities - - Net deferred tax assets / (liabilities) $ - $ - The Company completed a study to identify any limitations under Internal Revenue Code of 1986, as amended (“IRC”) Section 382 and determined that as of December 31, 2021, the Company had federal and state net operating loss carry forwards of $ 20.1 million and $ 17.4 million , respectively that may be offset against future taxable income. Some of the federal tax carry forwards will expire at various dates through 2037. Generally, these can be carried forward and applied against future taxable income at the tax rate applicable at that time. We are currently using an effective income tax rate of 21% for our projected available net operating loss carry-forward. No tax benefit has been reported in the December 31, 2021, due to the uncertainty surrounding the realizability of the benefit. Utilization of the net operating losses (NOL) carryforwards may be subject to a substantial annual limitation due to ownership change limitations 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 . In accordance with FASB ASC 740 “Income Taxes”, valuation allowances are provided against deferred tax assets, if based on the weight of available evidence, some or all of the deferred tax assets may or will not be realized. The Company has evaluated its ability to realize some or all of the deferred tax assets on its balance sheet and has established a valuation allowance of approximately $ 8.8 million at December 31, 2021. The Company did not utilize any NOL deductions for the year ended December 31, 2021. The Company applied the "more-likely-than-not" recognition threshold to all tax positions taken or expected to be taken in a tax return, which resulted in no unrecognized tax benefits as of December 31, 2021, and December 31, 2020, 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 loss for the years ended December 31, 2021, and 2020. 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. There are no taxes payable as of December 31, 2021, or December 31, 2020. F- 13 Table of Contents VerifyMe, Inc. Notes to the Financial Statements NOTE 6- CONVERTIBLE DEBT 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. The Company 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. The 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 below); 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 date. 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. Each 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. As such, the 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 10 – 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 noted above. F- 14 Table of Contents 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. The 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 of the loan. On June 22, 2020, upon the Company’s consummation of the public offering (See Note 9 – 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. On 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. The Company did not issue any convertible debt during the year ended December 31, 2021. As of December 31, 2021, the Company has no outstanding balance under convertible debt. NOTE 7 – 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 by the U.S. Small Business Administration under the CARES Act. Pursuant to the CARES Act and the PPP, all or a portion of the principal amount of the SBA Loan is subject to forgiveness so long as, over the eight-week period following the receipt of the SBA Loan, the Company used 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. The Company applied for and was notified in June 2021 that $69 thousand in eligible payroll expenditures as described in the CARES Act, has been forgiven. Loan forgiveness is reflected in Other Income (Expense), Net in the accompanying Statements of Operations. The forgiveness recognized during the year ended December 31, 2021, included principal of $ 69 thousand, and interest payable of $ 1 thousand. The remaining loan balance of $ 3 thousand was paid in full in June 2021. NOTE 8 – CONVERTIBLE PREFERRED STOCK 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, 2021, and 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. 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 9 – STOCKHOLDERS’ EQUITY The Company expensed $ 696 thousand and $ 53 thousand related to restricted stock units for the years ended December 31, 2021, and December 31, 2020, respectively. F- 15 Table of Contents VerifyMe, Inc. Notes to the Financial Statements The Company expensed $ 784 thousand and $ 461 thousand related to restricted stock awards for the years ended December 31, 2021, and December 31, 2020, respectively. During the year ended December 31 , 2021, the Company issued 9,774 shares of restricted common stock in relation to investor relation services with a stock-based compensation expense of $ 39 thousand. On September 17, 2021, the Company approved restricted stock units for three non-employee directors for an aggregate of 63,000 restricted stock units with a fair value of $ 217 thousand. One-third of the units vested upon approval, one-third vest on September 17, 2022, and the remaining one-third vest on September 17, 2023, subject to the non-employee director’s continued service on the Board of Directors. The vested shares will be issued to each Director following their separation from service with the Company. Effective January 1, 2021, the Company approved restricted stock units or restricted stock awards, for each non-employee director, with a grant date fair value equal to $ 100 thousand. If the non-employee director serves as a Board committee chair or Lead Independent director, he 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 and become payable upon separation of the non-employee director’s service as a director. In January 2021, a total of 145,010 restricted stock units were issued to five non-employee directors for a fair value of $625 thousand, vesting one year from the date of issuance. In August 2021, upon vesting of the restricted stock awards held by our Chief Executive Officer, the Company withheld and retired 18,720 shares of common stock in order to satisfy his U.S. payroll tax withholding obligations. On April 16, 2021, upon vesting of the restricted stock awards held by our Chief Executive Officer, the Company withheld and retired 12,843 shares of common stock in order to satisfy his U.S. payroll tax withholding obligations. Effective April 15, 2021, Norman Gardner, our former Chairman of the board of directors retired from the board of directors. Mr. Gardner was awarded 69,284 shares of restricted stock for a fair value of $ 300 thousand, half of which vest immediately and the balance vesting in equal installments on June 30, 2022, and June 30, 2023, pursuant to a two-year independent contractor consulting agreement with the Company. Mr. Gardner agreed to cancel options to purchase 8,300 shares that were scheduled to expire on December 21, 2026. Additionally, the Company accelerated the vesting of 40,000 restricted shares held by Mr. Gardner that were scheduled to vest in August 2021. The payments and vesting of restricted stock awards were accelerated upon Mr. Gardner’s death pursuant to the agreement. On April 15, 2021, the board of directors granted the Company’s Chief Financial Officer, an award of 5,000 shares of restricted stock with a fair value equal to $ 21 thousand, half of which vested on April 15, 2021, and half of which vests on April 15, 2022. The Company withheld and retired 750 shares of common stock in order to satisfy her U.S. payroll tax withholding obligations. In April 2021, the Company granted an employee an award of 5,000 shares of restricted stock with a fair value of $ 21 thousand, vesting annually over a two-year period from the date of grant. 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 thousand, 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 1, 2026. T he Company applied FASB ASC 718, “Compensation—Stock Compensation,” modification accounting and expensed a change in fair value of $ 75 thousand. 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 $ 8.1 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. The total net proceeds from the public offering including partial exercise of the overallotment option, were $8,447 thousand. F- 16 Table of Contents VerifyMe, Inc. Notes to the Financial Statements On October 12, 2020, pursuant to the 2020 Plan (See Note 10 – 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 thousand. 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 years ended December 31, 2021, and 2020, $514 thousand and $351 thousand, respectively, was expensed related to these services. 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 (each a “Share” and collectively, the “Shares”) of the Company’s common stock, and a warrant to purchase one share of Common Stock (each a “Warrant” and collectively, the “Warrants”) 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 and/or Warrants for 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 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. Additionally, 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 Statement of 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. In connection to the closing of the Offering and the related automatic conversion of the 2020 Debentures (as defined below) 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. 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 its Chief Executive Officer, Patrick 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. On March 6, 2020, the Company completed the offering of senior secured convertible debentures (the “2020 Debentures”) and warrants and raised $ 1,992 thousand in gross proceeds from the sale of the 2020 Debentures and warrants. In connection to the 2020 Debentures, the Company issued 19,208 restricted shares of common stock during the year ended December 31, 2020. Non-Qualified Stock Purchase Plan On June 10, 2021, the stockholders of the Company approved a non-qualified stock purchase plan (the “2021 Plan”). The 2021 Plan provides eligible participants, including employees, directors and consultants of the Company, the opportunity to purchase shares of the Company’s common stock thereby increasing their interest in the Company’s continued success. The maximum numbers of common stock reserved and available for issuance under the 2021 Plan is 500,000 shares. The purchase price of shares of common stock acquired pursuant to the exercise of an option will be the lesser of 85% of the fair market value of a share (a) on the enrollment date, and (b) on the exercise date. The 2021 Plan is not intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”). The Company applied FASB ASC 718, “Compensation-Stock Compensation” and estimated the fair value using the Black-Scholes model, as the plan is considered compensatory. During the year ended December 31, 2021, $40 thousand has been expensed in relation to the non-qualified stock purchase plan. F- 17 Table of Contents VerifyMe, Inc. Notes to the Financial Statements Shares Held in Treasury As of December 31, 2021, and December 31, 2020, the Company had 223,956 and 7,011 shares, respectively, held in treasury with a value of approximately $ 838 thousand and $ 113 thousand, respectively. In November 2020, the Company’s Board of Directors approved a share repurchase program for up to $1.5 million of the Company’s common stock until August 16, 2021. On August 12, 2021, the Company’s Board of Directors extended the share repurchase program to expire on August 16, 2022. All other terms and conditions remained the same. During the year ended December 31, 2021, the Company repurchased 216,945 shares of common stock at an average price of $3.34 for approximately $725 thousand pursuant to the Share Repurchase Plan. As of December 31, 2021, $775 thousand may be used to repurchase shares under the program. NOTE 10– STOCK OPTIONS, RESTRICTED STOCK AND WARRANTS 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 “2017 Plan”) that 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 authorizes 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, the exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of the grant (or 110% of the fair market value in the case of a grantee holding more than 10% of the outstanding stock of the Company). The aggregate fair market value (determined at the time of the grant) of stock 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 has issued non-qualified stock options pursuant to contractual agreements with non-employees. Options granted under the agreements are expensed when the related service or product is provided. Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value represent management’s best estimates and involve inherent uncertainties and judgements. Non-Qualified Stock Options 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. No options were granted during 2021. Schedule of weighted-average assumptions 2020 Risk Free Interest Rate 1.77 % Expected Volatility 452.88 % Expected Life (in years) 5.0 Dividend Yield 0 % Weighted average estimated fair value of options during the period $ 4.61 F- 18 Table of Contents VerifyMe, Inc. Notes to the Financial Statements The following table summarizes the activities for the Company’s stock options for the year ended December 31, 2021, and 2020: Schedule of stock option activity Options Outstanding Weighted - Average Remaining Aggregate Weighted- Contractual Intrinsic Number of Average Term Value Shares Exercise Price (in years) (in thousands) (1) Balance as of December 31, 2019 358,271 5.91 Granted 133,000 3.85 Forfeited/Cancelled/Expired ( 17,500 ) 29.07 Balance as of December 31, 2020 473,771 $ 4.48 Granted - - Forfeited/Cancelled/Expired ( 8,300 ) 9.72 Balance as of December 31, 2021 465,471 $ 4.38 Exercisable as of December 31, 2021 465,471 $ 4.38 3.2 $ 47 (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. As of December 31, 2021, and 2020, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $ 47 thousand and $ 97 thousand, respectively. The following table summarizes the activities for the Company’s unvested stock options for the year ended December 31, 2021, and 2020: Schedule of summary for the activities of unvested stock options Unvested Options Weighted - Average Number of Grant Unvested Options Date Exercise Price Balance December 31, 2019 20,000 $ 9.75 Granted 133,000 3.85 Vested ( 143,000 ) 4.27 Balance December 31, 2020 10,000 9.75 Granted - - Vested ( 10,000 ) 9.75 Balance December 31, 2021 - $ - F- 19 Table of Contents VerifyMe, Inc. Notes to the Financial Statements For the years ended December 31, 2021, and 2020, the Company expensed $ 85 thousand and $ 704 thousand, respectively, related to stock options. For the year ended December 31, 2021, $75 thousand relates to the extension of the expiration date for options previously granted (see Note 9 – Stockholder’s Equity) and $10 thousand for options granted in 2019 to our Chief Operating Officer. As of December 31, 2021, there was $0 unrecognized compensation cost related to outstanding stock options. As of December 31, 2020, there was $10 thousand unrecognized compensation cost related to outstanding stock options expected to vest over the weighted average of 0.1 years. On April 15, 2021, Norman Gardner agreed to cancel options to purchase 8,300 shares that expire on December 21, 2026 , in connection with his retirement agreement. 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 Chief Executive Officer and to Norman Gardner, the Company’s former Chairman. As a result, 140,000 options previously granted to Mr. White now expire on August 15, 2025, and 90,000 options previously granted to Mr. Gardner now expire on June 28, 2025. All 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. 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, 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. Mr. 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. In the Amendment, Mr. White agreed to extend receipt of the Deferral Amount until August 15, 2020. In addition, he agreed to continue deferring 25% of his base salary over the one-year term until August 15, 2020. In connection with entering into the Amendment, the Company granted Mr. White 10,000 five-year fully vested incentive stock options under the Company’s 2017 Plan exercisable at $7.00 per share. F- 20 Table of Contents VerifyMe, Inc. Notes to the Financial Statements Restricted Stock Awards and Restricted Stock Units The following table summarizes the unvested restricted stock awards as of December 31, 2021, and 2020: Schedule of unvested restricted stock awards Restricted Stock Awards Weighted - Average Number of Grant Shares Date Fair Value Unvested at December 31, 2019 480,000 $ 0.19 Granted 267,500 3.80 Vested ( 480,000 ) 0.19 Unvested at December 31, 2020 267,500 3.80 Granted 89,284 4.32 Vested ( 312,142 ) 3.87 Balance December 31, 2021 44,642 $ 4.31 As of December 31, 2021, total unrecognized share-based compensation cost related to unvested restricted stock awards was $ 115 thousand, which is expected to be recognized over a weighted-average period of 0.9 years. As of December 31, 2020, total unrecognized stock-based compensation cost related to unvested restricted stock awards was $ 634 thousand, expected to be recognized over a weighted-average period of approximately 0.7 years. The following table summarizes the unvested restricted stock units as of December 31, 2021, and 2020: Schedule of unvested restricted stock units Restricted Stock Units Weighted - Average Number of Grant Shares Date Fair Value Unvested at December 31, 2019 $ - $ - Granted 15,000 3.55 Vested ( 15,000 ) 3.55 Unvested at December 31, 2020 - Granted 208,010 4.05 Vested ( 21,000 ) 3.44 Balance December 31, 2021 $ 187,010 $ 4.11 As of December 31, 2021, total unrecognized share-based compensation cost related to unvested restricted stock units was $ 146 thousand, which is expected to be recognized over a weighted-average period of 0.3 years. As of December 31, 2020, total unrecognized stock-based compensation cost related to unvested restricted stock units was $ 0 . F- 21 Table of Contents VerifyMe, Inc. Notes to the Financial Statements Warrants The following table summarizes the activities for the Company’s warrants for the years ended December 31, 2021, and 2020: Schedule of warrant activity Warrants Outstanding Number of Shares Weighted- Average Exercise Price Weighted - Average Remaining Contractual Term in years) Aggregate Intrinsic Value (in thousands) (1) Balance as of December 31, 2019 445,252 $ 15.39 Granted 3,787,991 4.97 Cancelled/Forfeited ( 454,000 ) 7.50 Balance as of December 31, 2020 3,779,243 $ 5.89 Granted - - Balance as of December 31, 2021 3,779,243 $ 5.89 3.0 Exercisable as of December 31, 2021 3,779,243 $ 5.89 3.0 $ - (1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock price of $ 3.175 for our common stock on December 31, 2021. All warrants were vested on the date of grant. No warrants were granted during the year ended December 31, 2021. The Company issued three -year 2020 Warrants to purchase 498,000 shares of common stock to the purchasers of the 2020 Debentures (see Note 6 – Convertible Debt). The 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. F- 22 Table of Contents VerifyMe, Inc. Notes to the Financial Statements 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. For the years ended December 31, 2021, and 2020, the Company expensed $0 and $51 thousand, respectively, related to warrants. NOTE 11— EARNINGS (LOSS) PER SHARE Basic earnings/(loss) per share (EPS) is computed by dividing net income/(loss) by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution of common stock equivalent shares that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The dilutive common stock equivalent shares consist of preferred stock, stock options, warrants, restricted stock awards and restricted stock units computed under the treasury stock method, using the average market price during the period. The following table sets forth the computation of basic and diluted earnings/(loss) per share (in thousands, except share and per share data) : Years Ended December 31, 2021 2020 Numerator: Net Income/(Loss) $ 3,612 $ ( 5,902 ) Denominator: Weighted average shares of common stock – basic 7,110,907 3,980,202 Effect of dilutive securities Preferred Stock 144,444 - Stock Options 48,212 - Warrants 23 - Stock Purchase Plan 2,362 - Restricted Stock Units & Restricted Stock Awards 77,416 - Weighted average shares of common stock – diluted 7,383,364 3,980,202 Net Earnings (Loss) per share Basic $ 0.51 $ ( 1.48 ) Diluted $ 0.49 $ ( 1.48 ) F- 23 Table of Contents VerifyMe, Inc. Notes to the Financial Statements The following table represents the weighted average number of anti-dilutive instruments excluded from the computation of diluted earnings/(loss) per share: Years Ended December 31, 2021 2020 Anti-dilutive instruments excluded from computation of diluted net income per share: Preferred Stock - 144,444 Stock Options 177,334 473,771 Warrants 3,779,048 3,779,243 Restricted Stock Units and Restricted Stock Awards 13,196 - NOTE 12— LONG TERM DERIVATIVE LIABILITY On September 17, 2021, the Company granted two directors restricted stock units (“SPAC RSUs”) with respect to the common stock, $ 0.0001 par value per share, of G3 VRM Acquisition Corp. The SPAC RSUs vest upon the initial business combination of the SPAC (see Note 2 – Equity Investment) subject to continuous service to the Company through the vesting date. Each vested SPAC RSU represents the right to receive the value of one share of stock in G3 VRM Acquisition Corp., which will be paid to the director as soon as practicable after the fifteen-month anniversary of the vesting date. The grant date fair value of the SPAC RSUs for each director was $ 98 thousand. The fair value of the equity instrument is classified as Level 3 in the fair value hierarchy as the calculation is dependent upon company specific adjustments to the observable trading price of the SPAC’s public shares, and related risk of forfeiture should no business combination occur. As the underlying awards are not the Company’s stock but an unrelated, publicly traded entity’s shares, the Company accounts for the awards under ASC 815 – Derivatives and Hedging, with the expense included in stock-based compensation under General and Administrative expenses in the accompanying Statement of Operations through the vesting date, and as a change in fair value in other income (expense) in the accompanying Statement of Operations after the vesting date, but before the settlement date. For the year ended December 31, 2021, the Company has expensed $ 71 thousand in relation to these awards. NOTE 13 – OPERATING LEASES For both years ended December 31, 2021, and 2020, total rent expense under leases amounted to $ 14 thousand. The current lease is for a period less than a year and falls outside of the scope of Lease (Topic 842). As of December 31, 2021, and 2020, the Company was not obligated under any non-cancelable operating leases. NOTE 14 – MAJOR CUSTOMERS/VENDORS During the year ended December 31, 2021, five customers accounted for 95% of total sales. During the year ended December 31, 2020, two customers accounted for 92% 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, 2021, and 2020, the Company purchased 100% of pigment from one vendor. Additionally, during the years ended December 31, 2021, and 2020, the Company purchased 100% of canisters from one vendor. As of December 31, 2021, three customers accounted for 91 % of total accounts receivable. As of December 31, 2020, two customers accounted for 96 % of total accounts receivable. NOTE 15 – 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 to $ 125 thousand. If the non-employee director serves as a Board committee chair or Lead Independent director, he will also receive 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 and become payable upon separation of the non-employee director’s service as a director. In January 2022, a total of 157,232 restricted stock units were issued to four non-employee directors for a fair value of $ 500 thousand, and 39,308 restricted stock awards were issued to one non-employee director for a fair value of $ 125 thousand, vesting one year from the date of issuance. F- 24 Table of Contents VerifyMe, Inc. Notes to the Financial Statements On February 16, 2022, the Company, as part of the development and implementation of the Company’s strategic initiatives, entered into employment agreements with its Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Technology Officer and Senior VP of Finance and Investor Relations, each with effect as of February 15, 2022. In accordance with the employment agreements, the Compensation Committee of the Board approved grants of restricted stock units to each of the executives with a grant date value as of February 16, 2022 equal to their respective base salary multiplied by their respective annual equity award eligibility percentage ranging from 50% to 70%. On February 28, 2022, five participants exercised their option under the Company’s non-qualified stock purchase plan, and as a result, 25,000 shares were issued with an exercise price of $ 2.69 . F-25