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Item 9A. Controls and Procedures

2022-03-14 compared with 2021-03-25 · 1192 added, 1141 removed, 364 unchanged (87% of the section changed)

Management’s Report on Internal

Control Over Financial Reporting

CONTROLS AND PROCEDURES.

Regarding the Effectiveness of Disclosure Controls and Procedures

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.

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, 2020 using criteria established in Internal Control —

Integrated Framework (2013) issued

by the Committee of Sponsoring Organizations of the Treadway Commission.

Our management has concluded that our internal control

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

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

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, 2020.

The Company plans to initiate a program

to address the above weakness.

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

process of hiring a corporate financial controller.

We have started to identify key internal controls over financial reporting

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

and procedures.

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

The Company has an internal policy

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

We have established controls related to corporate

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

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

Furthermore, the Board has adopted a Code of Business

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

Chief Financial Officer.

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

The Code of Ethics provides written

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

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

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

for adherence to the Code of Ethics.

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

Governance.”

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.

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,

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

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

results of operations and cash flows for the periods presented.

Auditor’s Report on Internal Control Over Financial

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.

Management’s report was not subject to attestation

by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s

report in this Report.

Changes in Internal Control Over Financial

There were no changes in our internal control

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

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

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.

OTHER INFORMATION.

EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

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

“Proposal One:

Election of Directors,”

“Corporate Governance,”

“Management and Executive Officers”

and, if necessary,

“Delinquent Section 16(a) Reports,”

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

fiscal year end.

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

stockholders under the headings “Executive Compensation”

and “Director Compensation,”

which proxy statement

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

DISCLOSURE REGARDING FOREIGN

JURISDICTIONS THAT PREVENT INSPECTIONS.

Not Applicable.

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.

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.

SECURITY OWNERSHIP

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Except for the information regarding securities

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

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

Ownership of Management and Certain Beneficial Owners,”

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

31, 2020 fiscal year end.

The following table summarizes the number

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

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

Equity Compensation Plan Information

as of December 31, 2020

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

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

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outstanding options,

warrants and other rights

warrants and rights

Weighted average

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outstanding options,

warrants and other rights

warrants and rights

Number of securities

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security holders

1,071,961 (3)

Equity compensation

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by security holders

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

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

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

remaining for issuance under the 2013 Plan.

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

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

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,

AND DIRECTOR INDEPENDENCE

The information required by this Item 13

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

Relationships and Related Person Transactions,”

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

2020 fiscal year end.

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.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

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.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item 14

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

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

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

FINANCIAL STATEMENT SCHEDULES.

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

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

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

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

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

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

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

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

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.

EXHIBITS AND FINANCIAL

STATEMENT SCHEDULES.

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)

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)

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

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

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

333-234155) filed on May 22, 2020)

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

333-234155) filed on June 2, 2020)

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

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

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

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

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

Description of Securities

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

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

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

333-234155) filed on October 10, 2019)

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

333-237950) filed on May 21, 2020)

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

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

333-234155) filed on October 10, 2019)

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

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

333-237950) filed on May 21, 2020)

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

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

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

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)

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)

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)

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)

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)

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)

LaserLock Technologies, Inc.

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

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

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

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

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

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

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

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

333-249520) filed on October 16, 2020)

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

333-234155) filed on October 10, 2019)

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

333-234155) filed on October 10, 2019)

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

333-237950) filed on May 1, 2020)

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

333-234155) filed on October 10, 2019)

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

333-234155) filed on October 10, 2019)

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

333-237950) filed on May 1, 2020)

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

333-234155) filed on October 10, 2019)

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

333-237950) filed on May 1, 2020)

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

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

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)

333-237950) filed on May 1, 2020)

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

333-237950) filed on May 1, 2020)

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

333-237950) filed on May 1, 2020)

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

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

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

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

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

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

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

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

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)

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)

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)

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)

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

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

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

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

333-237950) filed on May 1, 2020)

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

333-234155) filed on June 15, 2020)

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XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith

* Filed or furnished herewith, as applicable

# Denotes management compensation plan or contract

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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:

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

on the dates indicated:

/s/ Patrick White

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/s/ Margaret Gezerlis

Chief Financial Officer

Executive Vice President and Chief Financial Officer

March 14, 2022

2 unchanged sentences

Principal Accounting Officer)

/s/ Norman Gardner

/s/ Scott Greenberg

Chairman of the Board

March 14, 2022

Norman Gardner

Scott Greenberg

/s/ Chris Gardner

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Howard Goldberg

/s/ Scott Greenberg

March 25, 2021

Scott Greenberg

/s/ Arthur Laffer

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

(PCAOB ID 206 )

BALANCE SHEETS

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NOTES TO FINANCIAL STATEMENTS

REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

VerifyMe, Inc.

Opinion on the Financial

We have audited the accompanying balance

sheets of VerifyMe, Inc.

(the “Company”) as of December 31, 2020 and 2019, and the related 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, 2020 and 2019, 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.

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")

of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our

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.

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rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with

the standards of 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.

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

The critical audit matters are matters

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

audit committee and that:

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

our especially challenging, subjective, or complex judgments.

We determined that there are no critical audit matters.

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

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

(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.

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

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.

Addressing the matter involved performing

procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements.

These procedures

(i) testing management’s process for developing the fair value estimates;

(ii) evaluating the appropriateness of Monte-Carlo

(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;

(v) engaging auditor’s specialist to assist in evaluating the reasonableness of the significant inputs and assumptions used by management.

/s/ MaloneBailey, LLP

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Houston, Texas

March 14, 2022

VerifyMe, Inc.

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Accounts Receivable

Deposits on Equipment

Prepaid expenses and other current assets

TOTAL CURRENT ASSETS

Equity Investment

PROPERTY AND EQUIPMENT

Equipment for lease, net of accumulated amortization of

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

$ 102 and $ 50 as of December 31, 2021 and December 31, 2020, respectively

Office Equipment, net of accumulated amortization of

$ 1 and $ 0 as of December 31, 2021 and December 31, 2020, respectively

INTANGIBLE ASSETS

Patents and Trademarks, net of accumulated amortization of

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

2019, respectively

$ 354 and $ 320 as of December 31, 2021 and December 31, 2020, respectively

Capitalized Software Costs, net of accumulated amortization of

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

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

$ 50 and $ 20 as of December 31, 2021 and December 31, 2020, respectively

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

Convertible Debt, net of unamortized debt discount

Derivative Liability

Accounts payable and other accrued expenses

Accrued Payroll

TOTAL CURRENT LIABILITIES

LONG-TERM LIABILITIES

Long Term Derivative Liability

TOTAL LIABILITIES

STOCKHOLDERS' EQUITY (DEFICIT)

STOCKHOLDERS' EQUITY

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

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7,196,677 and 5,596,877 shares outstanding as of December 31, 2021 and December 31, 2020,

2019, respectively

Additional paid in capital

Treasury stock as cost (7,011 shares at December 31, 2020 and December 31,

Treasury stock as cost;

223,956 and 7,011 shares at December 31, 2021 and December 31,

2020, respectively

Accumulated deficit

STOCKHOLDERS' EQUITY (DEFICIT)

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

The accompanying notes are an integral part of these financial

STOCKHOLDERS' EQUITY

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of

these financial statements.

VerifyMe, Inc.

Statements of Operations

(In thousands, except share data)

(In thousands, except per share data)

December 31, 2021

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Legal and accounting

Payroll expenses (a)

Corporate Payroll expenses (a)

Research and development

2 unchanged sentences

LOSS BEFORE OTHER (EXPENSE), NET

OTHER (EXPENSE) INCOME

Interest expenses, net

Change in fair value of embedded derivative

OTHER INCOME (EXPENSE), NET

Interest income (expenses), net

Fair value gain on equity investment

Loss on extinguishment of debt

TOTAL OTHER EXPENSE, NET

LOSS PER SHARE

Payroll Protection Program Debt Forgiveness

TOTAL OTHER INCOME (EXPENSE), NET

NET INCOME/(LOSS)

EARNINGS/(LOSS) PER SHARE

WEIGHTED AVERAGE COMMON SHARE OUTSTANDING

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

twelve months ended December 31, 2019.

The accompanying notes are an integral part

of these financial statements.

(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.

VerifyMe, Inc.

5 unchanged sentences

CASH FLOWS FROM OPERATING ACTIVITIES

Adjustments to reconcile net loss to net cash used in

Net income (loss)

Adjustments to reconcile net income (loss) to net cash used in

operating activities:

2 unchanged sentences

Fair value of restricted stock awards issued in exchange for services

Fair value of restricted stock units issued in exchange for

Fair value of restricted stock units issued in exchange for services

Payroll Protection Program Debt Forgiveness

Fair value of warrants in exchange for services

Fair value gain on equity investment

Loss on Extinguishment of Debt

1 unchanged sentence

Common stock issued for interest expense

Change in Fair Value of Embedded Derivative

Amortization and depreciation

5 unchanged sentences

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of Patents and Trademarks

Purchase of Patents

Purchase of Equipment for lease

Deposits on Equipment

Purchase of equity investment

Purchase of Office Equipment

Capitalized Software Costs

3 unchanged sentences

Proceeds from issuance of notes payable

Repayments of notes payable

Repayment of bridge financing and early redemption fee

Proceeds from convertible debt, net of costs

Tax withholding payments for employee stock-based compensation

in exchange for shares surrendered

Repurchase Shares

Net cash provided by financing activities

NET INCREASE (DECREASE) IN CASH AND

NET INCREASE IN CASH AND

CASH EQUIVALENTS

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Relative fair value of warrants issued in connection with 2020 Debentures

Recognition of embedded derivative liability recorded as debt discount

Beneficial conversion feature in connection with 2020 Debentures

Common stock issued to settle accrued payroll

Common Stock issued in relation to convertible debt

Reclass on deposit for equipment held for lease

The accompanying notes are an integral part

of these financial statements.

The accompanying notes are an integral part of

these financial statements.

VerifyMe, Inc.

2 unchanged sentences

Balance at December 31, 2019

Conversion of Series A Convertible Preferred

Cashless Exercise of Warrants

Fair value of stock option

Restricted Stock Awards

Common stock issued for services

Common stock issued in relation to Bridge Financing

Balance at December

Balance at December 31, 2019

Fair value of stock options

3 unchanged sentences

Common stock issued for services

Common stock in relation to conversion of 2020

interest expense and cancellation of warrants

Beneficial conversion feature in connection

with 2020 Debentures

Common stock issued in connection with 2020 Debentures

Beneficial conversion feature in connection with 2020

Warrants issued in connection with 2020 Debentures

Common Stock in relation to conversion of 2020

Common Stock in relation to conversion of 2020 Debentures

interest expense and cancellation of warrants

3 unchanged sentences

Balance at December 31, 2020

The accompanying notes are an integral part

of these financial statements.

Balance at December 31, 2020

Fair value of stock options

Restricted stock awards, net of shares withheld for

Restricted Stock Units

Stock Purchase Plan

Common stock issued for services

Common stock issued in relation to public offering

Repurchase of Common Stock

Balance at December 31, 2021

The accompanying notes are an integral part of

these financial statements.

VerifyMe, Inc.

3 unchanged sentences

VerifyMe, Inc.

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

on November 10, 1999.

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

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

and “VRMEW,” respectively.

The Company is a technology solutions provider specializing

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

and trace features for labels, packaging and products.

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

of its technologies.

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

the patented VeriPAS™

software system in 2018, which covertly and overtly serializes products to remotely track a product’s

“life cycle”

for brand owners.

We believe VeriPAS™

is the only invisible covert serialization and authentication

solution deployed through variable digital printing on HP Indigo (a division of HP Inc.) printing systems with a smartphone tracking

and authentication system.

VeriPAS™

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

in the field –

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

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

This technology is coupled with a secure cloud-based track and trace software engine which allows brands and investigators

to monitor the complete supply chain from product origination to the end user utilizing geo location mapping and intelligent programable

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

engagement and control and monitor and protect their products’

“life cycle.”

We have derived minimal revenue

from our VeriPAS™

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

The Company’s activities are subject to significant risks

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

intellectual property.

the “Company,” “we,” “us,” or “our”) was incorporated in the State of Nevada on November 10,

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.

of Presentation

The accompanying

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

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.

The preparation of financial statements in conformity

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 and accrued expenses, secured convertible debentures, embedded derivative liability

and warrant liability.

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’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:

Quoted market prices in active

markets for identical assets or liabilities

Observable market-based inputs

or unobservable inputs that are corroborated by market data

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

The statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following

three categories:

Quoted market prices in active markets

for identical assets or liabilities

Observable market-based inputs or unobservable

inputs that are corroborated by market data

Unobservable inputs that are not corroborated by market

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.

VerifyMe, Inc.

Notes to the Financial Statements

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.

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

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.

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, 2020 and 2019, respectively.

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

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

1 unchanged sentence

The Company’s cash and cash equivalents

are held at one financial institution.

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

(FDIC) coverage limits.

The Company has not experienced any losses from maintaining cash accounts in excess of federally insured

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.

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 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 VerifyMe Beeper and the VeriPAS™ Smartphone

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.

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

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

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

the equipment which was determined to be 5 years.

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

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

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

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

process of being developed for market.

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

to the market which started in January 2020.

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

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

The Company will evaluate its software assets for impairment

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

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

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

The Company recorded $20 thousand and $0 amortization

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

Long-Lived Assets

The Company evaluates the recoverability

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

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.

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

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.

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, 2020 and

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

During the year, four directors and an entity

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

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

Convertible Debt and Note 8 –

Stockholder’s Equity, respectively.

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 convertible debt,

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 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

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.

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.

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

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.

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

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

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.

As of September 19, 2019, the Company adopted

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

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

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

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

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

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

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

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;

VerifyMe, Inc.

Notes to the Financial Statements

· determine the transaction price;

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· recognize revenue as the performance obligation is satisfied.

During the year ended December 31, 2020, the Company’s

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

VerifyMe, Inc.

Notes to the Financial Statements

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.

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.

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

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

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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

The Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes model.

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.

of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date.

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

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

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

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

This update supersedes

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

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.

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

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

in Sales and Marketing on the Statement of Operations.

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, 2020 and 2019

were $19 thousand and $5 thousand , respectively.

Basic and Diluted Net Income per

Share of Common Stock

The Company follows FASB ASC 260, “Earnings

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

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

and warrants were anti-dilutive;

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

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.

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.

VerifyMe, Inc.

Notes to the Financial Statements

For the years ended December 31, 2020 and

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

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

during the years presented.

For the year ended December

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

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

For the year ended December 31, 2019 there

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

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

On August 27, 2014, FASB issued Accounting

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

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

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

The accompanying financial statements and

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

During the year ended December 31, 2019 the Company

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

capital resources.

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

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

its operations.

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

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

other offering expenses.

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

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

twelve months from the issuance of the financial statements.

NOTE 2 – EQUIPMENT FOR LEASE

During the years

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

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

Smartphone Authenticator technology.

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

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

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

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

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

in the accompanying Statements of Operations.

– PATENTS AND TRADEMARKS

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

patents and one granted

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

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

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

and four pending U.S.

and foreign trademark applications.

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

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

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

10,614,350 in April

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

Patent Application titled “Device and method

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

10,783,734 in September 2020.

The Company’s

issued patents expire between the years 2021 and 2038.

Costs associated with the registration, prosecution and legal defense of

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

determined to be 17 to 19 years.

During the years ended December 31, 2020

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

Amortization and

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

respectively.

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)

Current Assets

Non-current assets

Current Liabilities

Non-current liabilities

Stockholders' Equity

Amounts in Thousands ('000)

Year Ended December,

Operating Loss

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

The Company depreciates equipment for lease over its useful life of five years .

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

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

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, 2020 and 2019 is as follows

(in thousands) :

The reconciliation of income tax expense computed

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,

Income before income taxes

Income (loss) before income taxes

Taxes under statutory US tax rates

2 unchanged sentences

Income tax expense

The increase in the Company's net increase in the valuation

allowance was caused by continued net operating losses from ongoing operations.

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):

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

Net operating loss

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Reserves and accruals

Unrealized Gain on Equity Investment

Gross deferred tax assets

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Net deferred tax assets / (liabilities)

As of December 31, 2020, the Company had federal

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

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

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

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

Utilization of the net operating losses

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

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

These ownership

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

In general, an

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

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

stockholders.

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

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

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, 2020 and December 31, 2019, respectively.

The Company’s practice is to recognize

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

The Company had no accrual for interest and penalties

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

December 31, 2020 and 2019.

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

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

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

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.

VerifyMe, Inc.

Notes to the Financial Statements

The Company is subject to taxation in the

United States and various state jurisdictions.

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

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

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

NOTE 6- CONVERTIBLE DEBT

December 31, 2020

December 31, 2019

Convertible Debentures, due September 18, 2020:

Principal value

Debt discount

Amortization of Debt Discount

Carrying value of convertible notes

Total short-term carrying value of Convertible Debentures

Embedded Derivative Liability:

Fair value of derivative liability, December 31, 2019

Change in fair value of derivative liability

Gain on extinguishment of Debt

Fair value of derivative liability, December 31, 2020

On September 19, 2019, we completed

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

after original issue discounts.

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

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

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

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

The Securities Purchase Agreements provided for

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

the first tranche as

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

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

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

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

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

In connection with the Bridge Financing,

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

of our common stock.

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

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

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

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

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

If the Company consummated

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

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

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

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

Further, if the Company consummated a public offering

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

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

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

If any portion of the

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

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

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

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

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

adjust to 60%).

So long as no event of

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

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

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

principal amount;

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

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

principal amount;

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

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

the principal amount;

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

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

130% of the sum of the principal amount.

VerifyMe, Inc.

Notes to the Financial Statements

The 2019 Debentures included

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

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

conversion price of the 2019 Debentures.

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

of the conversion price of the 2019 Debentures.

The conversion option, the QPI put and

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

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

The fair value estimate is a Level 3 measurement

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

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

with the following key inputs:

December 31, 2020

December 31, 2019

$3.50 - $5.00

Terms (years)

153.9% - 195.7%

Risk-free rate

1.60% - 1.87%

Probability of QPI

As of December 31, 2020, the Company’s

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

and changes in the fair value were recognized in earnings.

These common stock purchase warrants did not trade on an active

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

Closing trade price of Common Stock

Intrinsic value of conversion option per share

Annual Dividend Yield

Expected Life (Years)

Risk-Free Interest Rate

Expected Volatility

445.01%-453.08%

Expected volatility was based primarily

on historical volatility.

Historical volatility was computed using daily pricing observations for recent periods.

The Company believes

this method produced an estimate that was representative of the Company’s expectations of future volatility over the expected

term of these warrants.

The Company had no reason to believe future volatility over the expected remaining life of these warrants

was likely to differ materially from historical volatility.

The expected life was based on the remaining contractual

term of the warrants.

The risk-free rate was based on the U.S.

Treasury rate that corresponded to the expected term of the warrants.

The Company recorded a total of $402 thousand

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

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

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

The debt discount is amortized to interest

expense over the term of the loan.

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

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

The 2019 Debentures were fully redeemed

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

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

VerifyMe, Inc.

Notes to the Financial Statements

On March 6, 2020, the Company completed

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

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

Of this amount, $330 thousand

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

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

The Company used $750 thousand of the net proceeds to redeem

the existing 2019 Debentures prior to maturity, with a face value of $600 thousand and an early redemption fee of $150 thousand.

2020 Debentures were due eighteen months following issuance as follows;

$932 thousand on August 26, 2021, $910 thousand on August

28, 2021 and $150 thousand on September 6, 2021.

The Company’s capital structure after

the closing had no outstanding variably-priced convertible instruments on its Balance Sheets.

The 2020 Debentures were secured

by a blanket lien on all assets of the Company until such time the 2020 Debentures were paid in full or converted in full.

The 2020 Debentures were automatically

convertible into shares of the Company’s common stock upon the earliest to occur of (i) the commencement of trading of the

common stock on the Nasdaq, New York Stock Exchange or NYSE American (an “Uplist”) at the Uplist Conversion Price (defined

or (ii) at any time the minimum bid price of the common stock exceeded $25.00 per share for twenty (20) consecutive trading

days and the average trading volume during the 10 trading days prior to the conversion was at least 2,000 shares and the shares

were registered under an effective registration statement or the shares were salable under Rule 144 (“Rule 144”) of

the Securities Act of 1933, as amended.

The “Uplist Conversion Price” was the lesser of $4.00 or a 30% discount to

the public offering price a share of common stock was offered to the public in a securities offering resulting in the listing of

the common stock on the Nasdaq, New York Stock Exchange or NYSE American.

The 2020 Debentures were convertible, at

any time, at the option of the holder, into shares of common stock, at a fixed conversion price equal to $4.00 per share.

The embedded conversion feature was not

determined to be a derivative that required bifurcation pursuant to FASB ASC 815, “Derivatives and Hedging” (“ASC

815”), but was determined to be a beneficial conversion feature that required recognition within equity on the commitment

The beneficial conversion feature was recognized at its intrinsic value on the commitment date, limited to the proceeds allocated

to the convertible debt.

As such, the Company recorded $650 thousand within additional paid-in-capital on the Balance Sheets for

the beneficial conversion feature identified.

The debt discount arising from recognition of the beneficial conversion feature was

amortized as interest expense over the term of the convertible debt.

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);

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.

“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.

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

4 unchanged sentences

statement (the “Registration Statement”) with the SEC covering the resale of the shares of common stock underlying

the 2020 Warrants, the 2020 Warrants could have been exercised by means of a “cashless exercise,” until such time as

there was an effective Registration Statement.

Each 2020 Warrant contained customary adjustment provisions in the event of a stock

split, reverse stock split or recapitalization.

2020 Warrants for 82,500 shares were issued to four directors and an entity in

which one officer of the Company is a majority owner.

The 2020 Warrants were determined to meet

equity classification pursuant to FASB ASC 480, “Distinguish by Liabilities from Equity” and ASC 815.

relative fair value of the 2020 Warrants was recorded as additional paid in capital on the Balance Sheets, which was determined

to be $1,063 thousand , on the issuance date.

The debt discount arising from recognition of the 2020 Warrants was amortized as

interest expense over the term of the convertible debt.

On June 22, 2020, the Company cancelled

the 2020 Warrants for twenty-three of the twenty-five warrant holders and issued to the holders of the cancelled 2020 Warrants

an aggregate of 179,200 shares of common Stock.

Of this amount, 33,000 shares of common stock were issued to four directors and

an entity in which one officer of the Company is a majority owner and co-manager.

2020 Warrants to purchase an aggregate of 81,700

shares of common stock at an exercise price of $4.59 per share remain outstanding.

Also, on such date, the 2020 Debentures were

automatically converted into an aggregate of 637,513 shares of common stock and warrants to purchase 573,479 shares of common stock.

Of this amount, 105,567 shares of common stock and warrants to purchase 105,567 shares of common stock were issued to four directors

and an entity in which one officer of the Company is a majority owner and co-manager.

See Note 9 – Stock Options, Restricted

Stock and Warrants.

In connection with the 2020 Debentures,

the Company entered into an agreement with a non-exclusive financial advisor and placement agent for a term of twelve months commencing

in January 2020.

Upon execution of the agreement, the Company issued 5,000 fully vested restricted shares of the Company’s

common stock and recorded $33 thousand included in general and administrative expense in the accompanying Statements of Operations.

On March 6, 2020, in connection with this agreement a cash compensation of $153 thousand was made by the Company and an additional

12,285 shares of the Company’s common stock were issued.

These amounts were included in the debt discount for the 2020 Debentures

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

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.

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.

In February 2020, the Company entered into an

agreement with a non-exclusive financial advisor and placement agent terminating the later of April 30, 2020, or upon closing a successful

private placement.

The agreement automatically extended for periods of thirty days until terminated in writing.

Company agreed to pay 10% of the gross proceeds raised by the financial advisor and placement agent and agreed to issue an amount

of restricted shares equal to 4% of the total securities sold in the private placement divided by the last reported closing price

of the stock on the closing date of the private placement.

On March 6, 2020, in connection with this agreement cash compensation

of $25 thousand was paid by the Company and 1,923 shares of the Company’s common stock were issued.

These amounts were included

in the debt discount for the 2020 Debentures noted above.

The Company recorded a total of $1,992

thousand debt discount upon the closing of the 2020 Debentures, including the $650 thousand intrinsic value of the beneficial conversion

option, $34 thousand relative fair value of the common stock issued to the placement agents, $245 thousand of direct transaction

costs incurred and $1,063 thousand related to the 2020 Warrants.

The debt discount was amortized to interest expense over the term

On June 22, 2020, upon the Company’s

consummation of the public offering (See Note 8 – Stockholders’ Equity) and the Company’s commencement of trading

on Nasdaq, the 2020 Debentures were automatically converted at $3.22, the QPI Discounted Price.

As a result, the unamortized debt

discount was fully amortized and included in interest expense in the accompanying Statements of Operations.

Amortization of the

debt discount associated with the 2020 Debentures was $1,992 thousand for the year ended December 31, 2020, and was included in

interest expense in the accompanying Statements of Operations.

On January 30, 2020 the Company issued

an unsecured promissory note payable to a stockholder of the Company with a face value of $75 thousand and an interest rate of

10% per annum payable in full on March 30, 2020, subject to the Company’s right to extend payment until May 29, 2020.

February 28, 2020, the holder of the $75 thousand promissory note which was to become due in March 2020 purchased $80 thousand

of the 2020 Debentures and 2020 Warrants, which was paid by exchanging the promissory note and paying

an additional $5 thousand .

This is included in the $1,992 thousand gross

proceeds raised.

Interest expense in relation to the unsecured promissory note of $1 thousand was

recorded for the year ended December 31, 2020.

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

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

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.

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

The SBA Loan is scheduled to mature

on May 17, 2022 , bears interest at a rate of 1.00 % per annum and is subject to the terms and conditions applicable to loans administered

Small Business Administration under the CARES Act.

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

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

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

costs of certain employee benefits as per Section 1106 of the CARES Act.

As of December 31, 2020, the amount outstanding on the

SBA Loan was $72 thousand classified as Long-Term Liabilities and included in the accompanying Balance Sheets.

NOTE 7 – CONVERTIBLE PREFERRED

The Company is authorized to issue Series

A Convertible Preferred Stock, par value of $0.001 per share (the “Series A”) and Series B Convertible Preferred Stock,

par value of $0.001 per share (the “Series B”).

As of December 31, 2020, there were no shares of Series A outstanding

and 0.85 of a share of Series B outstanding convertible into 144,444 shares of common stock.

During the years ended December 31,

2020 and 2019, 0 and 304,778 shares of Series A, respectively, were converted into 0 and 121,911 shares of the Company’s

common stock, respectively.

Each share of Series A and Series B has limited voting rights, is entitled to participate with the

common stock on liquidation and holders of Series A and Series B are subject to beneficial ownership limitations.

NOTE 8 – STOCKHOLDERS’

For the years ended December 31, 2020 and

2019, the Company expensed $53 thousand and $0, respectively, relative to restricted stock units.

For the years ended December 31, 2020 and

2019, the Company expensed $461 thousand and $239 thousand, respectively, relative to restricted stock awards.

October 12, 2020, pursuant to the 2020 Plan (See Note 9 – Stock Options, Restricted Stock and Warrants), the Company granted

to each of the Company’s Chief Financial Officer, acting Chief Operating Officer, and Chief Technology Officer 5,000 restricted

stock units that vested immediately and converted into shares of the Company’s common stock, with a total fair value of $53

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.

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.

– 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.

VerifyMe, Inc.

Notes to the Financial Statements

On June 17, 2020, the Company entered into

an Underwriting Agreement (the “Underwriting Agreement”) with Maxim Group LLC, as representative of the underwriters

(the “Representative”), for an underwritten public offering (the “Offering”) of an aggregate

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

at an exercise price equal to $4.60 per share of common stock.

The public offering price was $4.60 per unit and the underwriters

agreed to purchase 2,173,913 units at an 8.0% discount to the public offering price.

The Company granted the Representative a 45-day

option to purchase up to 326,087 shares of common stock and/or warrants to purchase up to 326,087 shares of common stock to cover

over-allotments, if any.

The Offering closed on June 22, 2020 resulting in gross proceeds of $10.0 million, before deducting

underwriting discounts and commissions and other offering expenses.

Also, on June 22, 2020, the Representative partially exercised

its over-allotment option to purchase 50,000 shares of common stock and 325,987 warrants for gross proceeds of $233 thousand .

The net proceeds in relation to the Offering and including the over-allotment option were $9,023 thousand .

The Company issued 30,000 shares of common stock for consulting services related to the Offering, with a fair value of $125 thousand

accounted for in additional paid in capital and included in the accompanying Balance Sheets.

Additionally, the Company issued 888 shares of common stock, with a fair value of $4 thousand ,

to its non-exclusive financial advisor and placement agent as commission for units purchased by an investor in the Offering.

Of the 2,173,913 units purchased in the

Offering, 17,800 units were purchased by two directors of the Company.

Pursuant to the Underwriting Agreement,

the Company agreed to issue to the Representative, as a portion of the underwriting compensation payable to the Representative,

warrants to purchase up to a total of 173,913 shares of common stock (the “Representative’s Warrants”).

The Representative’s

Warrants are exercisable at $5.06 per share, are initially exercisable 180 days after the effective date of the Offering and have

a term of three years from their initial exercise date.

See Note 9 – Stock Options, Restricted Stock and Warrants.

In connection to the closing of the Offering

and the related automatic conversion of the 2020 Debentures the Company issued 637,513 shares of common stock related to the principal

amount outstanding of $1,992 thousand and interest expense of $61 thousand and issued 179,200 shares of common stock related to

the cancellation of the 2020 Warrants (see Note 5 – Convertible Debt).

In connection to the 2020 Debentures (see

Note 5 – Convertible Debt) the Company issued 19,208 restricted shares of common stock to the placement agents in connection

with the private placement.

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.

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.

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

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

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

payroll tax withholding obligations.

Effective April 15, 2021, Norman Gardner, our

former Chairman of the board of directors retired from the board of directors.

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.

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

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.

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.

total net proceeds from the public offering including partial exercise of the overallotment option, were $8,447 thousand.

VerifyMe, Inc.

Notes to the Financial Statements

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 year ended December 31, 2020, $351 thousand

was expensed related to these services.

In May 2020, the Company rescinded and

cancelled an aggregate of 19,401 shares of common stock that the Company had approved for issuance but were not yet issued and

outstanding shares.

On April 16, 2020, the Company granted

White a restricted stock award of 37,500 restricted shares of the Company’s common stock in lieu of $150 thousand in

deferred salary.

Of this amount, $119 thousand was accrued in prior years, and the remaining amount was expensed in payroll expenses

included in the accompanying Statement of Operations.

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,

1 unchanged sentence

White’s continued services as an officer and employee of the Company on the vesting date.

During the year ended December 31, 2019,

the Company granted a total of 24,000 restricted stock awards to five directors of the Company for their services.

The restricted

stock awards vest in equal quarterly installments over a one-year period.

On February 27, 2019, three directors resigned from the

Company’s Board of Directors, effective March 1, 2019.

This resulted in a cancellation of 6,400 shares related to the portion

of the unvested restricted stock awards these directors had received.

On September 18, 2019 a director resigned from the Company’s

Board of Directors, effective immediately, resulting in a cancellation of 2,400 related to the portion of unvested restricted stock

awards this director had received.

In December 2019, the Company issued 4,800 shares of restricted common stock to a director,

for joining the Board of Directors.

On March 15, 2019, we engaged an advisor

to provide consulting services under an Investor Relations and Advisory Agreement (the “Agreement”).

Pursuant to the

Agreement, we agreed to pay in advance of services a monthly fee of $5 thousand in shares of restricted common stock to the consulting

firm for consulting services.

The number of shares to be issued will be calculated based on the closing price of our common shares

on the first day of each month or the preceding day, if the first were to fall on a weekend or holiday.

However, if the stock were

to trade below $4.60 per share, the calculation would be based on $4.60.

The shares shall not have registration rights, and the

shares may be sold subject to Rule 144.

During the year ended December 31, 2020, the Company issued 10,944 of restricted common

stock for a total expense of $43 thousand related to these services.

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

5,855 shares of restricted common stock for a total expense of $36 thousand related to these services.

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.

VerifyMe, Inc.

Notes to the Financial Statements

Effective July 31, 2019, the Company engaged

an advisor to provide consulting services to the Company’s Board of Directors.

The Company issued 4,000 shares of restricted

common stock during the year ended December 31, 2019 in related to this to this engagement for a value of $19 thousand.

Effective July 15, 2019, the Company engaged an advisor for sales and marketing purposes.

During the year ended December 31, 2019,

the Company issued 13,600 shares of restricted common stock for a value of $83 thousand.

On May 29, 2019, a former director completed

a cashless exercise of 4,000 warrants and was issued 1,435 shares of the Company’s common stock.

See Note 9– Stock

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.

August 12, 2021, the Company’s Board of Directors extended the share repurchase program to expire on August 16, 2022.

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

On September 19, 2019, in connection

with the Bridge Financing, the Company issued a total of 20,000 restricted shares of common stock with a fair value of $70 thousand.

See Note 5 – Convertible Debt.

STOCK OPTIONS, RESTRICTED STOCK AND WARRANTS

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

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”) which covered the

potential issuance of 260,000 shares of common stock.

The 2017 Plan provided that directors, officers, employees, and consultants

of the Company were eligible to receive equity incentives under the 2017 Plan at the discretion of the Board or the Board’s

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

covers the potential issuance of up to 1,069,110 shares of common stock.

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).

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).

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

$100 thousand , and the options in excess of $100 thousand shall be deemed to be non-qualified stock options, including prices,

duration, transferability and limitations on exercise.

The maximum number of shares of common stock that may be issued under the

2020 Plan pursuant to incentive stock options may not exceed, in the aggregate, 1,000,000.

The Company issued non-qualified stock

options pursuant to contractual agreements with non-employees.

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.

VerifyMe, Inc.

Notes to the Financial Statements

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

The assumptions used in calculating the fair value represent management’s best estimates and involve inherent uncertainties

and judgements.

Non-Qualified Stock

The following table presents the weighted-average

assumptions used to estimate the fair value of the stock options granted during the years ended December 31, 2020 and 2019:

assumptions used to estimate the fair value of the stock options granted during the years ended December 31, 2020.

No options were granted

Schedule of weighted-average assumptions

Risk Free Interest Rate

3 unchanged sentences

Weighted average estimated fair value of options during the period

The following table summarizes the activities for the Company’s

stock options for the year ended December 31, 2020 and 2019:

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

Value (in 000’)

Exercise Price

(in thousands) (1)

Balance as of December 31, 2019

Forfeited/Cancelled

Forfeited/Cancelled/Expired

Balance as of December 31, 2020

Forfeited/cancelled

Forfeited/Cancelled/Expired

Balance as of December 31, 2021

Vested and Exercisable as of December 31, 2020

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the

underlying awards and the quoted price of the Company’s common stock for options that were in-the-money at each respective

During the years ended December 31, 2020 and 2019, the aggregate intrinsic value of options exercised under the Company’s

stock option plans was $97 thousand and $60 thousand , respectively.

VerifyMe, Inc.

Notes to the Financial Statements

Exercisable as of December 31, 2021

(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

4 unchanged sentences

Balance December 31, 2021

Effective January 2020, the Company awarded

its Chief Financial Officer incentive stock options exercisable for 4,000 shares of common stock with an exercise price of $3.505

vesting quarterly over a one-year period and expiring on January 7, 2025 with a fair value of $14 thousand.

Effective January 2020, the Company awarded

four directors non-qualified stock options exercisable for 40,000 shares in the aggregate, for services rendered to the Company

in 2019 with an exercise price of $3.505 vesting immediately and expiring on January 7, 2025 with a fair value of $137 thousand.

Effective January 2020, the Company awarded

five of its directors non-qualified stock options exercisable for 50,000 shares in the aggregate, for services to be rendered to

the Company in 2020 with an exercise price of $3.505 vesting quarterly over a one-year period and expiring on January 7, 2025 with

a fair value of $171 thousand.

On April 16, 2020, the Company approved

a three-year extension of the expiration date for certain options previously granted to Patrick White, the Company’s President

and Chief Executive Officer and to Norman Gardner, the Company’s Chairman.

As a result, 140,000 options previously granted

White now expire on August 15, 2025 and 90,000 options previously granted to Mr.

Gardner now expire on June 28, 2025.

other terms with respect to the option grants remain the same.

The Company applied FASB ASC 718, “Compensation—Stock

Compensation,” modification accounting and calculated a change in fair value of $154 thousand.

On April 16, 2020, the Company awarded

a director non-qualified stock options for 3,000 shares of common stock for services rendered to the Company with an exercise price

of $4.025 vesting immediately and expiring on April 16, 2025, with a fair value of $12 thousand.

On May 27, 2020, the Company awarded two

directors non-qualified stock options for an aggregate of 8,000 shares of common stock for services rendered to the Company with

an exercise price of $5.295 vesting immediately and expiring on May 27, 2025, with a fair value of $41 thousand.

In August 2020, the Company issued options

to purchase of 28,000 shares of common stock, that expire eighteen months from the date of grant and have an exercise price of

$4.60, for services performed by two sales consultants, with a fair value of $96 thousand.

During the year ended December 31, 2019,

the Company amended the Consulting Agreement it has with its Chief Operating Officer and granted him options to purchase 20,000

shares of common stock with an exercise price of $9.75 that vest annually in equal increments over a two-year period.

Additionally,

during the year ended December 31, 2019, the Company amended the Chief Operating Officer’s Consulting Agreement to provide,

among other things, for a monthly consulting fee of $15 thousand for services provided and to extend the term of the Consulting

Agreement to March 1, 2021.

VerifyMe, Inc.

Notes to the Financial Statements

In August 2019, the Company entered into

an amendment (the “Amendment”) to the Employment Agreement, dated August 15, 2017, with Patrick White, the Chief Executive

Officer of the Company (the “Employment Agreement”), which Employment Agreement automatically renewed on July 16, 2019,

effective on August 15, 2019.

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

Pursuant to the Amendment, the term was reduced to one year and Mr.

White agreed to defer receipt

of sums due him to improve the Company’s liquidity.

White was due to receive $100 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 defer receipt of sums due him to improve

the Company’s liquidity.

White was due to receive $100 thousand on August 15, 2019, representing deferred salary (the “Deferral

Amount”) that he had previously agreed to defer over the two years of the initial term of his Employment Agreement.

In the Amendment,

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.

During the year ended December 31, 2019,

the Company recorded the forfeiture of 44,000 options awarded to employees that are no longer with the Company and whose exercise

period has expired.

For the years ended December 31, 2020 and

2019, the Company expensed $704 thousand and $423 thousand, respectively, related to the options.

As of December 31, 2020, there was $10

thousand unrecognized compensation cost related to outstanding stock options expected to vest over the weighted average of 0.1

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.

10,000 five-year fully vested incentive stock options under the Company’s 2017 Plan exercisable at $7.00 per share.

VerifyMe, Inc.

Notes to the Financial Statements

Restricted Stock Awards and Restricted Stock

The following table summarizes the unvested restricted

stock awards as of December 31, 2021, and 2020:

Schedule of unvested restricted

Restricted Stock Awards

Date Fair Value

Unvested at December 31, 2019

Unvested at December 31, 2020

Balance December 31, 2021

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

Restricted Stock Units

Date Fair Value

Unvested at December 31, 2019

Unvested at December 31, 2020

Balance December 31, 2021

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

VerifyMe, Inc.

Notes to the Financial Statements

The following table summarizes the activities

for the Company’s warrants for the year ended December 31, 2020 and 2019:

Warrants Outstanding

for the Company’s warrants for the years ended December 31, 2021, and 2020:

Schedule of warrant activity

(in thousands) (1)

Balance as of December 31, 2019

1 unchanged sentence

Balance as of December 31, 2020

Cancelled/Forfeited

Balance as of December 31, 2021

Exercisable as of December 31, 2021

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the

underlying warrants and the closing stock price of $3.60 for our common stock on December 31, 2020.

(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.

VerifyMe, Inc.

Notes to the Financial Statements

All warrants were vested on the date of

The Company issued three-year 2020 Warrants

to purchase 498,000 shares of common stock to the purchasers of the 2020 Debentures (see Note 5 – Convertible Debt).

2020 Warrants have an exercise price of $7.50 per share, and may be exercised cashlessly if the Company fails to maintain an effective

registration statement at any time beginning six months after issuance.

Of this amount, 2020 Warrants to purchase 82,500 shares

were issued to four directors and an entity in which one officer of the Company is a majority owner and co-manager.

On June 22, 2020, 2020 Warrants to purchase

448,000 shares of common stock were cancelled (including 2020 Warrants for 82,500 shares that had been issued to four directors

and an entity in which one officer of the Company is a majority owner and co-manager) and warrants to purchase 573,479 shares of

common stock were issued upon closing of the Offering and conversion of the 2020 Debentures, with an exercise price of $4.60 and

an expiration term of five years.

Of this amount, warrants to purchase 105,567 of shares of common stock were issued to four directors

and an entity in which one officer of the Company is a majority owner and co-manager.

As a result of the Offering, the per share

exercise price for the outstanding but unexercised 2020 Warrants to purchase shares of common stock related to the two warrant

holders who did not cancel their 2020 Warrants, has been adjusted from $7.50 to $4.59 and the number of shares of common stock

underlying the outstanding but unexercised 2020 Warrants increased from an aggregate of 50,000 to 81,700 shares of common stock.

On May 27, 2020, the Company awarded four

non-employees warrants to purchase an aggregate of 11,000 shares of common stock for services rendered to the Company with an exercise

price of $5.295 vesting immediately and expiring on May 27, 2023, with a fair value of $54 thousand.

On June 18, 2020, in connection with the

Offering, the Representative provided a partial exercise notice of the over-allotment option to purchase 50,000 additional shares

of common stock and additional warrants to purchase 325,987 shares of common stock.

On June 22, 2020, in connection with the

Offering, the Company issued warrants to purchase 2,499,900 shares of common stock, with a five-year term and an exercise price

of $4.60, including the additional warrants pursuant to the over-allotment option exercise noted above.

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,

2 unchanged sentences

Warrants are exercisable during the three-year period commencing 180 days from June 22, 2020.

The Representative’s Warrants

are exercisable at a per share price equal to $5.06 per share with a fair value of $523 thousand netted in additional paid in capital

included in the accompanying Balance Sheets.

In connection with the Bridge Financing

in September 2019, the placement agent for the 2019 Debentures was entitled to receive warrants to purchase 6,000 shares of common

stock with an exercise price of $7.50 for a five- year term until May 2020 when the placement agent waived its right to receive

the warrants.

See Note 5 – Convertible Debt.

In May 2019, a former director made a cashless

exercise of 4,000 warrants, whereby the warrant holder disposed of 2,565 shares of common stock to the Company as part of this

exercise, amounting to an issuance of 1,435 shares of common stock.

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,

2019, the Company expensed $51 thousand and $0, respectively, related to warrants.

NOTE 10– FAIR VALUE OF FINANCIAL

Derivative Liabilities

For purposes of

determining whether certain instruments are derivatives for accounting treatment, the Company follows the accounting standard that

provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s

The standard applies to any freestanding financial instruments or embedded features that have the characteristics

of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.

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,

Net Income/(Loss)

Weighted average shares of common

stock – basic

Effect of dilutive securities

Preferred Stock

Stock Options

Stock Purchase Plan

Restricted Stock Units & Restricted Stock Awards

Weighted average shares of common

stock – diluted

Net Earnings (Loss) per share

VerifyMe, Inc.

Notes to the Financial Statements

Liabilities measured at fair value

on a recurring basis are summarized as follows (in thousands):

December 31, 2020

December 31, 2019

Embedded derivative liability

related to Debentures

Derivative liability related to

fair value of warrants

The Company has no assets that are measured

at fair value on a recurring basis.

There were no assets or liabilities measured at fair value on a non-recurring basis during

the year ended December 31, 2020.

The following table represents the weighted average

number of anti-dilutive instruments excluded from the computation of diluted earnings/(loss) per share:

Anti-dilutive instruments excluded from

computation of diluted net income per share:

Preferred Stock

Stock Options

Restricted Stock Units and Restricted Stock Awards

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 the year ended

December 31, 2020 and 2019, total rent expense under leases amounted to $14 thousand and $15 thousand, respectively.

lease is for a period less than a year and falls outside of the scope of Lease (Topic 842).

As of December 31, 2020, the Company

was not obligated under any non-cancelable 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, 2020,

two customers accounted for 92% of total sales.

During the year ended December 31, 2019, two customers accounted for

97% of total sales.

Generally, a substantial percentage of the Company's sales has been made to a small number of customers and

is typically on an open account basis.

During the years ended December 31, 2020 and 2019, the Company

purchased 100 % of pigment from one vendor.

Additionally, during the years ended December 31, 2020 and 2019, the Company purchased

100% of canisters from one vendor.

As of December 31, 2020, two customers accounted for 96% of

total accounts receivable.

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

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

If the non-employee director serves as a Board committee chair or Lead Independent director, he or she will also receive

and an additional award of restricted stock units or restricted stock award with a grant date fair value equal to $25 thousand.

These awards will vest in full on the earlier of the one-year anniversary of the date of grant subject to the non-employee director’s

continued service on the Board of Directors.

In January 2020, a total of 145,010 restricted stock units were issued to five non-employee

directors for a fair value of $625 thousand, vesting in one year from the date of issuance.

In February 2021, the Company issued 1,087

shares of restricted common stock in relation to investor relation services.

On February 9, 2021, the Company entered

into an underwriting agreement with Maxim Group LLC (“Maxim”), as the representative of several underwriters pursuant

to which the Company agreed to issue and sell to the underwriters in an underwritten public offering an aggregate of 1,650,000

shares of common stock, of the Company at a public offering price of $5.30 per share, less underwriting discounts and commissions.

The public offering closed on February 12, 2021 resulting in gross proceeds of $8.7 million and net proceeds of $8.0 million, less

underwriting discounts and commissions and other offering expenses.

In connection with the public offering

that closed on February 12, 2021, the Company granted Maxim a 45-day option to purchase up to 247,500 shares of common stock to

cover over-allotments, if any.

On February 19, 2021 Maxim partially exercised its over-allotment option to purchase 100,000

shares of common stock for gross proceeds of $530 thousand and net proceeds of $493 thousand, less underwriting discounts and commissions.

In March 2021, the Company issued 1,078

shares of restricted common stock in relation to investor relation services.

Effective March 1, 2021, the Company amended and restated the

Consulting Agreement it has with its Chief Operating Officer.

The amended and restated agreement provides among other things, an

annual fee of $214,400, a commission of 2% on all gross sales above $500,000, the issuance of 10,000 restricted stock awards and

the extension of the expiration date for options previously granted to him to the five-year anniversary of the agreement’s

effective date.

As a result, 80,000 options previously granted to the Company’s Chief Operating Officer now expire on March

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

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

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.

VerifyMe, Inc.

Notes to the Financial Statements

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%

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 .

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

What changed 10-K

Item 9A. Controls and Procedures