VerifyMe, Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES. Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures 25 Table of Contents Our principal executive officer and our principal financial officer evaluated our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended, (“Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of such date as the result of the material weaknesses in our internal control over financial reporting identified in this Report . Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management, including our principal executive and principal financial officers, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021, using criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management has concluded that our internal control over financial reporting was not effective as of December 31, 2021, based on a finding of a material weakness related to a lack of segregation of duties. Remediation Plan to Address the Material Weakness in Internal Control over Financial Reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of the material weaknesses identified above, our internal control over financial reporting was not effective as of December 31, 2021. Management has been implementing measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. To date, the Company has hired a Senior VP of Finance, and a Financial Controller. We have designed key internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act and have implemented policies and procedures in accordance with our established controls. The Company believes that these actions will remediate the material weakness. We are committed to continuing to improve our internal control processes and will continue to review, optimize and enhance our financial reporting controls and procedures. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. The Company expects that the remediation of this material weakness will be completed prior to the end of fiscal year 2022. To address the material weaknesses identified, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented. Auditor’s Report on Internal Control Over Financial Reporting This Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this Report. 26 Table of Contents Changes in Internal Control Over Financial Reporting Other than the remediation efforts noted above, there were no other changes in our internal control over financial reporting identified in connection with this evaluation that occurred during the period covered by this Report, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION. None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not Applicable. 27 Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this Item 10 is incorporated herein by reference from our proxy statement for our 2022 annual meeting of stockholders under the headings “Questions and Answers About these Proxy Materials and Voting,” “Proposal One: Election of Directors,” “Corporate Governance,” “Management and Executive Officers” and, if necessary, “Delinquent Section 16(a) Reports,” which proxy statement will be filed within 120 days after the December 31, 2021, fiscal year end. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is incorporated herein by reference from our proxy statement for our 2022 annual meeting for stockholders under the headings “Executive Compensation” and “Director Compensation,” which proxy statement will be filed within 120 days after the December 31, 2021, fiscal year end. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Except for the information regarding securities authorized for issuance under equity compensation plans (which is set forth below), the information required by this Item 12 is incorporated herein by reference from our proxy statement for our 2022 annual meeting for stockholders under the heading “Security Ownership of Management and Certain Beneficial Owners,” which proxy statement will be filed within 120 days after the December 31, 2021, fiscal year end. The following table summarizes the number of shares subject to currently outstanding equity awards, their weighted-average exercise price, and the number of shares available for future grants under our equity compensation plans as of December 31, 2021. Equity Compensation Plan Information as of December 31, 2021 Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted average exercise price of outstanding options, warrants and rights (2) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders 257,000 (1) $4.83 815,280 (3) Equity compensation plans not approved by security holders 208,471 (4) 3.20 - Total 465,471 4.38 815,280 (1) Represents shares of common stock issuable upon exercise of stock options granted under the 2017 Equity Incentive Plan (the “2017 Plan”) and the 2013 Omnibus Equity Compensation Plan, as amended (the “2013 Plan”) (2) Represents the weighted-average exercise price of outstanding stock options. The weighted-average exercise price does not take into account the shares issuable upon vesting of outstanding restricted stock units under the 2020 Equity Incentive Plan (the “2020 Plan”) or 2013 Plan, which do not have an exercise price. (3) Includes 789,230 shares remaining available for issuance under the 2020 Plan and 26,050 shares remaining for issuance under the 2013 Plan. (4) Includes individual grants to employees and consultants for services rendered to the Company which were not made under the Company’s existing equity incentive plans. 28 Table of Contents ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item 13 is incorporated herein by reference from our proxy statement for our 2022 annual meeting for stockholders under the heading “Certain Relationships and Related Person Transactions,” which proxy statement will be filed within 120 days after the December 31, 2021, fiscal year end. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item 14 is incorporated herein by reference from our proxy statement for our 2022 annual meeting for stockholders under the numbered proposal with the heading “Ratification of the Appointment of our Independent Registered Public Accounting Firm,” which proxy statement will be filed within 120 days after the December 31, 2021, fiscal year end. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. Exhibit No. Description 3.1 Certificate of Amendment to Amended and Restated Articles of Incorporation (incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 22, 2020) 3.2 Second Amended Certificate of Designation for Series A Convertible Preferred Stock (incorporated herein by reference from Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on June 18, 2015) 3.3 Certificate of Designation for Series B Convertible Preferred Stock (incorporated herein by reference from Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on June 18, 2015) 3.4 Certificate of Withdrawal of Certificate of Designation for Series C and Series D Convertible Preferred Stock (incorporated herein by reference from Exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018) 3.5 Amended and Restated Bylaws of VerifyMe, Inc., as amended through July 24, 2020 (incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 29, 2020) 4.1 Form of Warrant for the Purchase of Common Stock (incorporated herein by reference from Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017) 4.2 Form of Warrant for the Purchase of Shares of Common Stock (incorporated herein by reference from Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on March 3, 2020) 4.3 Form of Common Stock Purchase Warrant (incorporated herein by reference from Exhibit 4.3 to the Company’s Registration Statement on Form S-1/A (File No. 333-234155) filed on May 22, 2020) 4.4 Form of Warrant for the Purchase of Shares of Common Stock (incorporated herein by reference from Exhibit 4.6 to the Company’s Registration Statement on Form S-1/A (File No. 333-234155) filed on June 2, 2020) 4.5 Warrant Agent Agreement dated June 22, 2020 between the Company and West Coast Stock Transfer, Inc. (incorporated herein by reference from Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on June 22, 2020) 4.6 Form of Representative’s Warrant (incorporated herein by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 22, 2020) 4.7* Description of Securities 10.1# Form of Indemnification Agreement (incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 18, 2021) 10.2# Employment Agreement with Patrick White, dated February 15, 2022 (incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K file on February 22, 2022) 29 Table of Contents 10.3# Employment Agreement with Margaret Gezerlis, dated February 15, 2022 (incorporated herein by reference from Exhibit 10.3 to the Company’s Current Report on Form 8-K file on February 22, 2022) 10.4# Independent Contractor Consulting Agreement, dated April 15, 2021, with Norman Gardner (incorporated herein by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021) 10.5# Employment Agreement with Keith Goldstein, dated February 15, 2022 (incorporated herein by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K file on February 22, 2022) 10.6# Employment Agreement with Nancy Meyers, dated February 15, 2022 (incorporated herein by reference from Exhibit 10.4 to the Company’s Current Report on Form 8-K file on February 22, 2022) 10.7# LaserLock Technologies, Inc. 2013 Omnibus Equity Compensation Plan (incorporated herein by reference from the Company’s Definitive Proxy Statement filed on November 19, 2013) 10.8# 2017 Equity Incentive Plan (incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 20, 2017) 10.8.1# Amendment to the 2017 Equity Incentive Plan (incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 29, 2019) 10.9# 2020 Equity Incentive Plan (incorporated herein by reference from Exhibit 4.4 to the Company’s Registration Statement on Form S-8 (File No. 333-249520) filed on October 16, 2020) 10.10# Non-Qualified Stock Option Agreement dated August 2017 between the Company and Patrick White (incorporated herein by reference from Exhibit 10.14 to the Company’s Registration Statement on Form S-1 (File No. 333-234155) filed on October 10, 2019) 10.11# Non-Qualified Stock Option Agreement dated April 17, 2018 between the Company and Patrick White (incorporated herein by reference from Exhibit 10.13 to the Company’s Registration Statement on Form S-1 (File No. 333-234155) filed on October 10, 2019) 10.12# Amendment to Non-Qualified Stock Option Agreement dated April 16, 2020 to that Non-Qualified Stock Option Agreement dated August 2017 and that Non-Qualified Stock Option Agreement dated April 17, 2018 between the Company and Patrick White (incorporated herein by reference from Exhibit 10.12 to the Company’s Registration Statement on Form S-1 (File No. 333-237950) filed on May 1, 2020) 10.13# Incentive Stock Option Agreement dated August 14, 2019 between the Company and Patrick White (incorporated herein by reference from Exhibit 10.15 to the Company’s Registration Statement on Form S-1 (File No. 333-234155) filed on October 10, 2019) 10.14# Incentive Stock Option Agreement dated March 11, 2019 between the Company and Margaret Gezerlis (incorporated herein by reference from Exhibit 10.16 to the Company’s Registration Statement on Form S-1 (File No. 333-234155) filed on October 10, 2019) 30 Table of Contents 10.15# Incentive Stock Option Agreement dated January 7, 2020 between the Company and Margaret Gezerlis (incorporated herein by reference from Exhibit 10.15 to the Company’s Registration Statement on Form S-1 (File No. 333-237950) filed on May 1, 2020) 10.16# Non-Qualified Stock Option Agreement dated January 2018 between the Company and Norman Gardner (incorporated herein by reference from Exhibit 10.17 to the Company’s Registration Statement on Form S-1 (File No. 333-234155) filed on October 10, 2019) 10.16.1# Amendment to Non-Qualified Stock Option Agreement dated April 16, 2020 to that Non-Qualified Stock Option Agreement dated January 2018 between the Company and Norman Gardner (incorporated herein by reference from Exhibit 10.17 to the Company’s Registration Statement on Form S-1 (File No. 333-237950) filed on May 1, 2020) 10.17# Form of Restricted Stock Agreement (incorporated herein by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018) 10.18# Restricted Stock Agreement dated April 16, 2020 between the Company and Patrick White (incorporated herein by reference from Exhibit 10.19 to the Company’s Registration Statement on Form S-1 (File No. 333-237950) filed on May 1, 2020) 10.19# Form of Director Non-Qualified Stock Option Agreement (immediate vesting) (incorporated herein by reference from Exhibit 10.20 to the Company’s Registration Statement on Form S-1 (File No. 333-237950) filed on May 1, 2020) 10.20# Form of Director Non-Qualified Stock Option Agreement (quarterly vesting) (incorporated herein by reference from Exhibit 10.21 to the Company’s Registration Statement on Form S-1 (File No. 333-237950) filed on May 1, 2020) 10.21# Form of Restricted Stock Agreement pursuant to the 2013 Omnibus Equity Compensation Plan (incorporated herein by reference from Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020) 10.22# Form of Restricted Stock Agreement pursuant to the 2017 Equity Incentive Plan (incorporated herein by reference from Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020) 10.23# Form of Restricted Stock Unit Agreement (immediate vesting) pursuant to the 2020 Equity Incentive Plan (incorporated herein by reference from Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020) 10.24# Form of Restricted Stock Award Agreement (Employees) pursuant to the 2020 Equity Incentive Plan (incorporated herein by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021) 10.25# Form of Restricted Stock Award Agreement (Non-employees) pursuant to the 2020 Equity Incentive Plan (incorporated herein by reference from Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021) 10.26# Form of Restricted Stock Unit Award Agreement (Employees) pursuant to the 2020 Equity Incentive Plan (incorporated herein by reference from Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021) 10.27# Form of Restricted Stock Unit Award Agreement (Non-employees) pursuant to the 2020 Equity Incentive Plan (incorporated herein by reference from Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021) 10.28 Form of Senior Secured Convertible Debenture (incorporated herein by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 3, 2020) 10.29 Securities Purchase Agreement dated February 26, 2020 (incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 3, 2020) 10.30 Security Agreement dated February 26, 2020 (incorporated herein by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 3, 2020) 10.31 Letter Agreement dated February 28, 2020 between the Company and Bruce Evans (incorporated herein by reference from Exhibit 10.25 to the Company’s Registration Statement on Form S-1 (File No. 333-237950) filed on May 1, 2020) 10.32 Agreement dated as of June 15, 2020 (incorporated herein by reference from Exhibit 10.28 to the Company’s Registration Statement on Form S-1 (File No. 333-234155) filed on June 15, 2020) 31.1* Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1* Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 31 Table of Contents 101.INS* XBRL Instance Document 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* XBRL Taxonomy Extension Label Linkbase Document 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document * Filed or furnished herewith, as applicable # Denotes management compensation plan or contract ITEM 16. FORM 10-K SUMMARY Not applicable. 32 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. VerifyMe, Inc. By: /s/ Patrick White Patrick White Chief Executive Officer and Director Date: March 14, 2022 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date /s/ Patrick White Chief Executive Officer and Director March 14, 2022 Patrick White ( Principal Executive Officer ) /s/ Margaret Gezerlis Executive Vice President and Chief Financial Officer March 14, 2022 Margaret Gezerlis ( Principal Financial Officer and Principal Accounting Officer) /s/ Scott Greenberg Chairman of the Board March 14, 2022 Scott Greenberg /s/ Chris Gardner Director March 14, 2022 Chris Gardner /s/ Marshall Geller Director March 14, 2022 Marshall Geller /s/Howard Goldberg Director March 14, 2022 Howard Goldberg /s/ Arthur Laffer Director March 14, 2022 Arthur Laffer 33 Table of Contents INDEX TO FINANCIAL STATEMENTS CONTENTS PAGE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID 206 ) F-1 BALANCE SHEETS F-3 STATEMENTS OF OPERATIONS F-4 STATEMENTS OF CASH FLOWS F-5 STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) F-6 NOTES TO FINANCIAL STATEMENTS F-7 34 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of VerifyMe, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of VerifyMe, Inc. ( the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Determination of the Fair Value of the Equity Investment and Derivative Liability As disclosed in Notes 2 and 12 to the financial statements, as of December 31, 2021, the Company accounts for its equity investment in the G3 VRM Acquisition Corp. (the “SPAC”) under the fair value option. The Company’s investment in the SPAC was $10,964 thousand as of December 31, 2021. The Company also granted two directors restricted stock units in the SPAC (“SPAC RSUs”), vesting upon the initial business combination of the SPAC, subject to continuous service to the Company through the vesting date. The Company accounts for the SPAC RSUs under ASC 815 – Derivatives and Hedging, with $71 thousand expense included in stock-based compensation for the year ended December 31, 2021. In determining the fair value of the Company’s equity investment in the SPAC and derivative liability associated with the SPAC RSUs under Monte-Carlo simulation, management has made various judgments, estimates and assumptions, some of which are classified in Level 3 of the fair value hierarchy. The principal considerations for our determination that performing procedures relating to the fair value of the equity investment and derivative liability is a critical audit matter included: (i) significant judgment by management when determining the fair value of the equity investment and derivative liability; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate management’s assessment of significant inputs and assumptions; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. F- 1 Table of Contents Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included: (i) testing management’s process for developing the fair value estimates; (ii) evaluating the appropriateness of Monte-Carlo simulation; (iii) testing the completeness and accuracy of underlying data used in the fair value measurement; (iv) evaluating whether the judgments and assumptions used by management were reasonable considering the consistency with external market and industry data; and (v) engaging auditor’s specialist to assist in evaluating the reasonableness of the significant inputs and assumptions used by management. /s/ MaloneBailey, LLP www.malonebailey.com We have served as the Company's auditor since 2018. Houston, Texas March 14, 2022 F- 2 Table of Contents VerifyMe, Inc. Balance Sheets (In thousands, except share data) As of December 31, 2021 December 31, 2020 ASSETS CURRENT ASSETS Cash and cash equivalents $ 9,422 $ 7,939 Accounts Receivable 297 31 Prepaid expenses and other current assets 240 177 Inventory 52 54 TOTAL CURRENT ASSETS 10,011 8,201 INVESTMENTS Equity Investment 10,964 - PROPERTY AND EQUIPMENT Equipment for lease, net of accumulated amortization of $ 102 and $ 50 as of December 31, 2021 and December 31, 2020, respectively 193 200 Office Equipment, net of accumulated amortization of $ 1 and $ 0 as of December 31, 2021 and December 31, 2020, respectively 11 - INTANGIBLE ASSETS Patents and Trademarks, net of accumulated amortization of $ 354 and $ 320 as of December 31, 2021 and December 31, 2020, respectively 353 293 Capitalized Software Costs, net of accumulated amortization of $ 50 and $ 20 as of December 31, 2021 and December 31, 2020, respectively 156 80 TOTAL ASSETS $ 21,688 $ 8,774 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other accrued expenses 450 383 TOTAL CURRENT LIABILITIES 450 383 LONG-TERM LIABILITIES Term Note $ - $ 72 Long Term Derivative Liability 71 - TOTAL LIABILITIES $ 521 $ 455 STOCKHOLDERS' EQUITY Series A Convertible Preferred Stock, $ .001 par value, 37,564,767 shares authorized; 0 shares issued and outstanding as of December 31, 2021 and 0 shares issued and outstanding as of December 31, 2020 - - Series B Convertible Preferred Stock, $ .001 par value; 85 shares authorized; 0.85 shares issued and outstanding as of December 31, 2021 and - - December 31, 2020, respectively Common stock, $ .001 par value; 675,000,000 authorized; 7,420,633 and 5,603,888 issued, 7,196,677 and 5,596,877 shares outstanding as of December 31, 2021 and December 31, 2020, respectively 7 6 Additional paid in capital 86,059 76,099 Treasury stock as cost; 223,956 and 7,011 shares at December 31, 2021 and December 31, 2020, respectively ( 838 ) ( 113 ) Accumulated deficit ( 64,061 ) ( 67,673 ) STOCKHOLDERS' EQUITY 21,167 8,319 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,688 $ 8,774 The accompanying notes are an integral part of these financial statements. F- 3 Table of Contents VerifyMe, Inc. Statements of Operations (In thousands, except per share data) Year Ended December 31, 2021 December 31, 2020 NET REVENUE Sales $ 867 $ 343 COST OF SALES 268 62 GROSS PROFIT 599 281 OPERATING EXPENSES General and administrative (a) 2,995 2,072 Legal and accounting 362 403 Corporate Payroll expenses (a) 859 704 Research and development 51 19 Sales and marketing (a) 1,163 651 Total Operating expenses 5,430 3,849 LOSS BEFORE OTHER (EXPENSE), NET ( 4,831 ) ( 3,568 ) OTHER INCOME (EXPENSE), NET Interest income (expenses), net 2 ( 2,053 ) Fair value gain on equity investment 8,371 - Loss on extinguishment of debt - ( 281 ) Payroll Protection Program Debt Forgiveness 70 - TOTAL OTHER INCOME (EXPENSE), NET 8,443 ( 2,334 ) NET INCOME/(LOSS) $ 3,612 $ ( 5,902 ) EARNINGS/(LOSS) PER SHARE BASIC $ 0.51 $ ( 1.48 ) DILUTED $ 0.49 $ ( 1.48 ) WEIGHTED AVERAGE COMMON SHARE OUTSTANDING BASIC 7,110,907 3,980,202 DILUTED 7,383,364 3,980,202 (a) Includes share-based compensation of $ 1,716 for the year ended December 31, 2021, and $ 1,345 for the year ended December 31, 2020. The accompanying notes are an integral part of these financial statements. F- 4 Table of Contents VerifyMe, Inc. Statements of Cash Flows (In thousands) Twelve Months Ended December 31, 2021 December 31, 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 3,612 $ ( 5,902 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Stock based compensation 151 76 Fair value of options in exchange for services 85 704 Fair value of restricted stock awards issued in exchange for services 784 461 Fair value of restricted stock units issued in exchange for services 696 53 Payroll Protection Program Debt Forgiveness ( 70 ) - Fair value of warrants in exchange for services - 51 Fair value gain on equity investment ( 8,371 ) - Loss on Extinguishment of Debt - 281 Amortization of debt discount - 1,992 Common stock issued for interest expense - 61 Amortization and depreciation 117 98 Changes in operating assets and liabilities: Accounts Receivable ( 354 ) 50 Inventory 2 ( 24 ) Prepaid expenses and other current assets 25 ( 145 ) Accounts payable and accrued expenses 69 ( 37 ) Net cash used in operating activities ( 3,254 ) ( 2,281 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Patents ( 95 ) ( 103 ) Purchase of Equipment for lease ( 45 ) ( 22 ) Purchase of equity investment ( 2,593 ) - Purchase of Office Equipment ( 12 ) - Capitalized Software Costs ( 106 ) - Net cash used in investing activities ( 2,851 ) ( 125 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from public offering of securities 8,447 9,023 Proceeds from issuance of notes payable - 72 Repayments of notes payable ( 3 ) - Repayment of bridge financing and early redemption fee - ( 750 ) Proceeds from convertible debt, net of costs - 1,747 Tax withholding payments for employee stock-based compensation in exchange for shares surrendered ( 131 ) - Repurchase Shares ( 725 ) - Net cash provided by financing activities 7,588 10,092 NET INCREASE IN CASH AND CASH EQUIVALENTS 1,483 7,686 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 7,939 253 CASH AND CASH EQUIVALENTS - END OF PERIOD $ 9,422 $ 7,939 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ - $ - Income taxes $ - $ - SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Common Stock issued in relation to conversion of 2020 Debentures and warrant cancellation $ - $ 1,992 Relative fair value of common stock issued in connection with 2020 Debentures $ - $ 34 Relative fair value of warrants issued in connection with 2020 Debentures $ - $ 1,063 Beneficial conversion feature in connection with 2020 Debentures $ - $ 650 Common stock issued to settle accrued payroll $ - $ 119 Reclass on deposit for equipment held for lease $ - $ 51 The accompanying notes are an integral part of these financial statements. F- 5 Table of Contents VerifyMe, Inc. Statements of Stockholders' Equity (Deficit) (In thousands, except share data) Series A Series B Convertible Convertible Preferred Preferred Common Treasury Stock Stock Stock Additional Stock Number of Number of Number of Paid-In Number of Accumulated Shares Amount Shares Amount Shares Amount Capital Shares Amount Deficit Total Balance at December 31, 2019 - - 0.85 - 2,232,112 2 61,815 7,011 ( 113 ) ( 61,771 ) ( 67 ) Fair value of stock options - - - - - - 704 - - - 704 Restricted stock awards - - - - 267,500 1 580 - - - 581 Restricted Stock Units - - - - 15,000 - 53 - - - 53 Fair value of warrants issued for services - - - - - - 51 - - - 51 Common stock issued for services - - - - 10,944 - 43 - - - 43 Common stock issued in connection with 2020 Debentures - - - - 19,208 - 67 - - - 67 Beneficial conversion feature in connection with 2020 Debentures - - - - - - 650 - - - 650 Warrants issued in connection with 2020 Debentures - - - - - - 1,063 - - - 1,063 Common Stock in relation to conversion of 2020 Debentures and interest expense and cancellation of warrants - - - - 816,713 1 2,052 - - - 2,053 Common stock issued in relation to public offering of securities - - - - 2,254,801 2 9,021 - - - 9,023 Cancellation of Common Stock - - - - ( 19,401 ) - - - - - - Net loss - - - - - - - - - ( 5,902 ) ( 5,902 ) Balance at December 31, 2020 - - 0.85 - 5,596,877 6 76,099 7,011 ( 113 ) ( 67,673 ) 8,319 Series A Convertible Series B Convertible Preferred Preferred Common Treasury Stock Stock Stock Additional Stock Number of Number of Number of Paid-In Number of Accumulated Shares Amount Shares Amount Shares Amount Capital Shares Amount Deficit Total Balance at December 31, 2020 - - 0.85 - 5,596,877 6 76,099 7,011 ( 113 ) ( 67,673 ) 8,319 Fair value of stock options - - - - - - 85 - - - 85 Restricted stock awards, net of shares withheld for employee tax - - - - 56,971 - 654 - - - 654 Restricted Stock Units - - - - - - 696 - - - 696 Stock Purchase Plan - - - - - - 40 - - - 40 Common stock issued for services - - - - 9,774 - 39 - - - 39 Common stock issued in relation to public offering of securities - - - - 1,750,000 1 8,446 - - - 8,447 Repurchase of Common Stock ( 216,945 ) - - 216,945 ( 725 ) - ( 725 ) Net income - - - - - - - - - 3,612 3,612 Balance at December 31, 2021 - - 0.85 - 7,196,677 7 86,059 223,956 ( 838 ) ( 64,061 ) 21,167 The accompanying notes are an integral part of these financial statements. F- 6 Table of Contents VerifyMe, Inc. Notes to the Financial Statements NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of the Business VerifyMe, Inc. (“VerifyMe,” the “Company,” “we,” “us,” or “our”) was incorporated in the State of Nevada on November 10, 1999. The Company is based in Rochester, New York and its common stock, par value $ 0.001 per share, and warrants to purchase common stock are traded on The Nasdaq Capital Market (“Nasdaq”) under the trading symbols “VRME” and “VRMEW,” respectively. The Company is a technology solutions provider specializing in products to connect brands with consumers. VerifyMe technologies give brand owners the ability to gather business intelligence while engaging directly with their consumers. VerifyMe technologies also provide brand protection and supply chain functions such as counterfeit prevention, authentication, serialization, and track and trace features for labels, packaging and products. We began to commercialize our covert luminescent pigment VerifyInk TM in 2018. Prior to 2021 we completed the initial development stage of our other current technologies and in 2021 we began to commercialize as a Brand Protection Solutions provider. The Company’s activities are subject to significant risks and uncertainties, including its ability to successfully commercialize its technologies and the need to further develop the Company’s intellectual property. Reverse Stock Split On June 17, 2020, the Company filed a Certificate of Amendment to the Company’s Amended and Restated Articles of Incorporation, as amended, with the Nevada Secretary of State to effect a 50-to-1 reverse stock split of the Company’s issued and outstanding common stock and treasury stock, effective on June 18, 2020 (the “Reverse Stock Split”). The Reverse Stock Split did not affect the total number of shares of common stock or preferred stock that the Company is authorized to issue. The accompanying financial statements and notes to the financial statements give retroactive effect to the Reverse Stock Split for all periods presented, unless otherwise specified. Basis of Presentation The accompanying financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Fair Value of Financial Instruments The Company’s financial instruments consist of accounts receivable, accounts payable, notes payable and accrued expenses, equity investments, and long-term derivative liabilities. The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value because of their short maturities. The Company believes the carrying amount of its notes payable approximate fair value based on rates and other terms currently available to the Company for similar debt instruments. The Company follows FASB ASC 820, “Fair Value Measurements and Disclosures,” and applies it to all assets and liabilities that are being measured and reported on a fair value basis. The statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories: Level 1: Quoted market prices in active markets for identical assets or liabilities Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data Level 3: Unobservable inputs that are not corroborated by market data The level in the fair value within which a fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. F- 7 Table of Contents VerifyMe, Inc. Notes to the Financial Statements Variable Interest Entity The Company has determined that G3 VRM Acquisition Corp., (the “SPAC”, see Note 2 – Equity Investment), is a variable interest entity (“VIE”) in which the Company has a variable interest but is not the primary beneficiary. Making the determination as to whether a VIE should be consolidated requires judgement in assessing if the Company is the primary beneficiary. To make this determination, the Company evaluated its power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the SPAC. The Company concluded that it is not the primary beneficiary of the VIE and as such, does not consolidate the SPAC. The Company reassess its evaluation of whether an entity is a VIE and if it continues to be a VIE, whether the Company is the primary beneficiary of the VIE, on an ongoing basis based on the current facts and circumstances surrounding the entity. Equity Investments When the Company does not have a controlling financial interest in an entity but can exert influence over the entity’s operations and financial policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing the fair value option available under applicable generally accepted accounting policies. The Company has elected the fair value option for its equity investment in the SPAC (see Note 2 – Equity Investment) as it has determined the fair value best reflects the economic performance of the equity investment. Changes in unrecognized gains or losses of the fair value of the equity investment are included in Other Income (Expense), Net on the accompanying Statement of Operations. Cash and Cash Equivalents For purposes of reporting cash flows, the Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and certificates of deposit and commercial paper with original maturities of 90 days or less to be cash or cash equivalents. Accounts Receivable Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. Bad debts expense or write offs of receivables are determined on the basis of loss experience, known and inherent risks in the receivable portfolio and current economic conditions. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, such allowances may be required. The Company recognized $ 0 and $ 0 for allowance for doubtful accounts as of December 31, 2021, and 2020, respectively. Concentration of Credit Risk Involving Cash and Cash Equivalents The Company’s cash and cash equivalents are held at various financial institutions. At times, the Company’s deposits may exceed Federal Deposit Insurance Corporation (FDIC) coverage limits. The Company has not experienced any losses from maintaining cash accounts in excess of federally insured limits. Inventory Inventory principally consists of canisters and pigments and is stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Equipment for Lease Equipment for lease principally consists of costs associated with the development, certification and production of the VerifyChecker™ and the VerifyAuthenticator TM Smartphone Authenticator technology. These technologies are leased to customers typically for a period of one year in length with automatically renewable leases cancellable by either party by written notice provided 90 days in advance . We examined the effect of Accounting Standards Update (“ASU”) No. 2016-02- “Lease (Topic 842)” and determined the impact is not material. Our policy is to capitalize the costs related to this equipment and depreciate on a straight-line basis over the estimated lives of the equipment which was determined to be 5 years . Capitalized Software Costs incurred in connection with the development of software related to our proprietary digital products are accounted for in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("ASC") 985 “Costs of Software to Be Sold, Leased or Marketed.” Costs incurred prior to the establishment of technological feasibility are charged to research and development expense. Software development costs are capitalized after a product is determined to be technologically feasible and is in the process of being developed for market. Amortization of capitalized software development costs begins once the product is available to the market which started in January 2020. Capitalized software development costs are amortized over the estimated life of the related product, generally five years, using the straight-line method . The Company will evaluate its software assets for impairment whenever events or change in circumstances indicate that the carrying amount of such assets may not be recoverable. F- 8 Table of Contents VerifyMe, Inc. Notes to the Financial Statements Long-Lived Assets The Company evaluates the recoverability of its long-lived assets in accordance with ASC 360 “Property, Plant, and Equipment.” The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets are measured by a comparison of the carrying amount of an asset to future cash flows expected to be generated by the asset, undiscounted and without interest or independent appraisals. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Related Parties Related parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Companies are also considered to be related if they are subject to common control or common significant influence. During the year ended December 31, 2021, and December 31, 2020, the Company did not incur any charges related to related parties. During 2020, four directors and an entity in which one officer of the Company is a majority owner, participated in our 2020 Debenture offering, and two directors purchased securities in the Company’s June 2020 underwritten public offering, see Note 6 – Convertible Debt and Note 9 – Stockholder’s Equity, respectively. Derivative Instruments The Company evaluates its equity investments, long-term derivative liabilities, preferred stock, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, “Distinguish by Liabilities from Equity” (FASB ASC 480), and FASB ASC 815, “Derivatives and Hedging” (“FASB ASC 815”). The result of this accounting treatment is that the fair value of the embedded derivative, if required to be bifurcated, is marked-to-market at each balance sheet date and recorded as a liability. The change in fair value is recorded in the Statement of Operations as a component of other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified as liabilities at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date. Reclassifications Certain accounts in the prior year financial statements have been reclassified for comparative purposes to conform to the presentation in the current year financial statements. These reclassifications had no effect on the previously reported net income (loss). Revenue Recognition The Company accounts for revenues according to ASC Topic 606, “ Revenue from Contracts with Customers” which establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements: · identify the contract with a customer; · identify the performance obligations in the contract; F- 9 Table of Contents VerifyMe, Inc. Notes to the Financial Statements · determine the transaction price; · allocate the transaction price to performance obligations in the contract; and · recognize revenue as the performance obligation is satisfied. During the year ended December 31, 2020, the Company’s revenues were primarily generated from our VerifyInk TM . During the year 2021 we expanded our product solutions and increased our sales to include printing labels with the Company’s technology. Income Taxes The Company follows FASB ASC 740, “Income Taxes,” when accounting for income taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for temporary differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Tax years from 2017 through 2020 remain subject to examination by major tax jurisdictions. Stock-based Compensation The Company accounts for stock-based compensation under the provisions of FASB ASC 718, “Compensation—Stock Compensation”, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. The Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. The Company accounts for stock-based compensation awards to non-employees in accordance with ASU No. 2018-07, Compensation – Stock Based Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Non-employee equity-based payments are recorded as an expense over the service period, as if the Company had paid cash for the services. At the end of each financial reporting period, prior to vesting or prior to the completion of the services, the fair value of the equity-based payments will be re-measured, and the non-cash expense recognized during the period will be adjusted accordingly. Since the fair value of equity-based payments granted to non-employees is subject to change in the future, the amount of the future expense will include fair value re-measurements until the equity-based payments are fully vested or the service completed. Advertising Costs Advertising costs are expensed as incurred. Advertising costs were $ 51 thousand and $ 3 thousand for the years ended December 31, 2021, and 2020, respectively, and are included in Sales and Marketing on the Statement of Operations. Research and Development Costs In accordance with FASB ASC 730, research and development costs are expensed when incurred. Research and development costs for the years ended December 31, 2021, and 2020 were $ 51 thousand and $ 19 thousand, respectively. Basic and Diluted Earnings (Loss) per Share of Common Stock The Company follows Financial Accounting Standards Board (“FASB”) ASC 260, “Earnings Per Share,” when reporting earnings per share resulting in the presentation of basic and diluted earnings per share. NOTE 2 – EQUITY INVESTMENT On February 26, 2021, the Company formed VMEA Holdings Inc. (the “Sponsor Entity”), a Delaware corporation and wholly owned subsidiary of the Company, that owns G3 VRM Acquisition Corp. (NASDAQ: GGGVU) (the “SPAC”), a Delaware corporation and special purpose acquisition company being co-sponsored by the Company. The SPAC was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. While it may pursue an initial business combination target in any business, industry or geographical location, it intends to focus its search on target businesses with enterprise values of approximately $250 million to $500 million within the technology and business services industry. F- 10 Table of Contents VerifyMe, Inc. Notes to the Financial Statements On April 12, 2021, the Sponsor Entity converted to a Delaware limited liability company, changed its name to “G3 VRM Holdings LLC” and a co-sponsor was added as a member of the Sponsor Entity resulting in an equity interest of 44.40 % attributed to the Company. On July 6, 2021, the SPAC consummated the IPO of 10,626,000 units (the “Units”), including 626,000 Units pursuant to the partial exercise of the underwriter’s over-allotment option, generating gross proceeds of $ 106,260 thousand. Each Unit consists of one share of SPAC common stock, $0.0001 par value, and one right to receive one-tenth (1/10) of a share of SPAC common stock upon the consummation of an initial business combination. Simultaneously with the closing of the IPO, the SPAC consummated the Private Placement of an aggregate of 569,410 Units with the Sponsor Entity purchasing 516,280 Units and Maxim Partners LLC purchasing 53,130 Units, generating total proceeds of $ 5,694 thousand. Of this amount, the Company is the indirect beneficial owner of 229,228 Units purchased by the Sponsor Entity for a total of $ 2,581 thousand. Upon consummation of the IPO, VerifyMe, as co-sponsor, indirectly through the Sponsor Entity, beneficially owns approximately 9.42 % of the outstanding shares of the SPAC, which shares are subject to forfeiture upon certain conditions and restrictions on transfer. As a result of ceasing to have a controlling financial interest in the Sponsor Entity on April 12, 2021, the Company accounted for the Sponsor Entity as an equity investment and has elected the fair value option resulting in a fair value gain of $ 8,371 thousand for the year ended December 31, 2021, included in Fair value gain on equity investment, in the accompanying Statement of Operations. The fair value of the equity investment is classified as Level 3 in the fair value hierarchy as the calculation is dependent upon company specific adjustments to the observable trading price of the SPAC’s public units and shares, and related risk of forfeiture should no business combination occur. If the SPAC is unable to complete its initial business combination within 12 months from the closing of the IPO (or 15 or 18 months from the closing of the IPO, should the Company and the co-sponsor extend the period of time to consummate a business combination by depositing additional funds into the trust account as described in more detail in IPO prospectus), the SPAC will redeem 100% of the public shares for cash, the rights will expire worthless, and the founder shares and the private placement securities will be worthless. Even if the SPAC is able to complete a business combination within the allotted time, if the combined company is unable to maintain adequate results from operations, then our investment in the SPAC could lose value and may ultimately become worthless. There can be no assurance that the SPAC will complete a business combination within the allotted time or that any such business combination will be successful. The following table presents summary financial information of the Sponsor Entity. Such summary information has been provided herein based upon the individual significance of the equity investment to the financial information of the Company . Amounts in Thousands ('000) December 31, 2021 December 31, 2020 Current Assets $ 1,186 $ - Non-current assets 107,857 - Current Liabilities 11 - Non-current liabilities 3,719 - Stockholders' Equity 105,313 - Amounts in Thousands ('000) Year Ended December, 2021 2020 Operating Loss $ ( 470 ) $ - Net Loss $ (467 ) $ - F- 11 Table of Contents VerifyMe, Inc. Notes to the Financial Statements NOTE 3 – PROPERTY AND EQUIPMENT Equipment for Lease During the years ended December 31, 2021, and 2020, the Company capitalized $ 45 thousand and $ 73 thousand (including a $ 51 thousand deposit made in fiscal year 2019), respectively, in connection with the certification and production of the VerifyChecker™ and the VerifyAuthenticator TM technology. The Company depreciates equipment for lease over its useful life of five years . Depreciation expense for equipment for lease for the years ended December 31, 2021, and 2020, was $ 52 thousand and $ 50 thousand, respectively, and is included in general and administrative expense in the accompanying Statements of Operations. Office Equipment During the year ended December 31, 2021, and 2020, the Company capitalized $ 12 thousand and $ 0 thousand respectively, in office equipment. The Company depreciates the office equipment over its useful life of three years . The depreciation expense for office equipment for the years ended December 31, 2021, and 2020, was $ 1 thousand and $ 0 , respectively, and is included in general and administrative expense in the accompanying Statement of Operations NOTE 4 – INTANGIBLE ASSETS Patents and Trademarks As of December 31, 2021, the current patent and trademark portfolios consist of eleven granted U.S. patents and one granted European patent validated in four countries (France, Germany, United Kingdom, and Italy), seven pending U.S. and foreign patent applications, six registered U.S. trademarks, two EU trademark registrations, one Colombian trademark registration, one Australian trademark registration, one Japanese trademark registration, one Mexican trademark registration, one Singaporean trademark registration, two UK trademark registrations, and nineteen pending US and foreign trademark applications. Our issued patents expire between the years 2022 and 2039 . Costs associated with the prosecution and legal defense of the patents have been capitalized and are amortized on a straight-line basis over the estimated lives of the patents which were determined to be 17 to 19 years. During the year ended December 31, 2021, and 2020, the Company capitalized $ 95 thousand and $ 103 thousand, respectively, of patent and trademarks costs. Amortization expense for patents and trademarks was $ 34 thousand and $ 28 thousand for the year ended December 31, 2021, and 2020, respectively, and included in general and administrative expense in the accompanying Statement of Operations. Capitalized Software Costs incurred in connection with the development of software related to our proprietary digital products are accounted for in accordance with FASB ASC 985 “Costs of Software to Be Sold, Leased or Marketed.” Costs incurred prior to the establishment of technological feasibility are charged to research and development expense. Software development costs are capitalized after a product is determined to be technologically feasible and is in the process of being developed for market. Amortization of capitalized software costs begins once the product is available to the market. Capitalized software costs are amortized over the estimated life of the related product, generally five years, using the straight-line method. The Company will evaluate its software assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company capitalized $ 106 thousand and $ 0 for the year ended December 31, 2021, and 2020, respectively . Amortization expense for capitalized software was $ 30 thousand and $ 20 thousand for the year ended December 31, 2021, and 2020, respectively, and included in general and administrative expense in the accompanying Statements of Operations. NOTE 5 – INCOME TAXES The reconciliation of income tax expense computed at the U.S. federal statutory rate to the income tax provision for the years ended December 31, 2021, and 2020 is as follows (in thousands) : Schedule of reconciliation of federal statutory tax rate Year Ended December 31, US 2021 2020 Income (loss) before income taxes $ 3,612 $ ( 5,902 ) Taxes under statutory US tax rates 759 ( 1,239 ) Increase (decrease) in taxes resulting from: Increase (decrease) in valuation allowance ( 1,164 ) 731 All other 222 707 State taxes 183 ( 199 ) Income tax expense $ - $ - F- 12 Table of Contents VerifyMe, Inc. Notes to the Financial Statements The decrease in the Company's net valuation allowance was due to the unrealized gain in our equity investment (see Note 2 – Equity Investment). Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities consist of the following (in thousands): Schedule of deferred tax assets and liabilities December 31, 2021 2020 US Net operating loss $ 10,194 $ 9,230 Share based compensation 858 782 Reserves and accruals ( 24 ) ( 9 ) Unrealized Gain on Equity Investment ( 2,188 ) - Gross deferred tax assets $ 8,840 $ 10,003 Less valuation allowance ( 8,840 ) ( 10,003 ) Total deferred tax assets $ - $ - Deferred tax liabilities: Total deferred tax liabilities - - Net deferred tax assets / (liabilities) $ - $ - The Company completed a study to identify any limitations under Internal Revenue Code of 1986, as amended (“IRC”) Section 382 and determined that as of December 31, 2021, the Company had federal and state net operating loss carry forwards of $ 20.1 million and $ 17.4 million , respectively that may be offset against future taxable income. Some of the federal tax carry forwards will expire at various dates through 2037. Generally, these can be carried forward and applied against future taxable income at the tax rate applicable at that time. We are currently using an effective income tax rate of 21% for our projected available net operating loss carry-forward. No tax benefit has been reported in the December 31, 2021, due to the uncertainty surrounding the realizability of the benefit. Utilization of the net operating losses (NOL) carryforwards may be subject to a substantial annual limitation due to ownership change limitations that could occur in the future, as required by Section 382 of the IRC, as well as similar state provisions. These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income. In general, an “ownership change” as defined by Section 382 of the IRC results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders . In accordance with FASB ASC 740 “Income Taxes”, valuation allowances are provided against deferred tax assets, if based on the weight of available evidence, some or all of the deferred tax assets may or will not be realized. The Company has evaluated its ability to realize some or all of the deferred tax assets on its balance sheet and has established a valuation allowance of approximately $ 8.8 million at December 31, 2021. The Company did not utilize any NOL deductions for the year ended December 31, 2021. The Company applied the "more-likely-than-not" recognition threshold to all tax positions taken or expected to be taken in a tax return, which resulted in no unrecognized tax benefits as of December 31, 2021, and December 31, 2020, respectively. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest and penalties on the balance sheets and has not recognized interest and/or penalties in the Statements of Operations loss for the years ended December 31, 2021, and 2020. The Company is subject to taxation in the United States and various state jurisdictions. The Company’s tax years from inception are subject to examination by the United States and state taxing authorities due to the carryforward of unutilized NOLs. There are no taxes payable as of December 31, 2021, or December 31, 2020. F- 13 Table of Contents VerifyMe, Inc. Notes to the Financial Statements NOTE 6- CONVERTIBLE DEBT On March 6, 2020, the Company completed the offering of $ 1,992 thousand of senior secured convertible debentures (the “2020 Debentures”) and raised $ 1,992 thousand in gross proceeds from the sale of the 2020 Debentures and 2020 Warrants (defined below). Of this amount, $ 330 thousand was received from four directors and an entity in which one officer of the Company is a majority owner and co-manager. The Company received $1,747 thousand after deducting direct transaction costs. The Company used $750 thousand of the net proceeds to redeem the existing 2019 Debentures prior to maturity, with a face value of $ 600 thousand and an early redemption fee of $150 thousand. The 2020 Debentures were due eighteen months following issuance as follows; $ 932 thousand on August 26, 2021, $ 910 thousand on August 28, 2021, and $ 150 thousand on September 6, 2021. The Company’s capital structure after the closing had no outstanding variably priced convertible instruments on its Balance Sheets. The 2020 Debentures were secured by a blanket lien on all assets of the Company until such time the 2020 Debentures were paid in full or converted in full. The 2020 Debentures were automatically convertible into shares of the Company’s common stock upon the earliest to occur of (i) the commencement of trading of the common stock on the Nasdaq, New York Stock Exchange or NYSE American (an “Uplist”) at the Uplist Conversion Price (defined below); or (ii) at any time the minimum bid price of the common stock exceeded $25.00 per share for twenty (20) consecutive trading days and the average trading volume during the 10 trading days prior to the conversion was at least 2,000 shares and the shares were registered under an effective registration statement or the shares were salable under Rule 144 (“Rule 144”) of the Securities Act of 1933, as amended. The “Uplist Conversion Price” was the lesser of $4.00 or a 30% discount to the public offering price a share of common stock was offered to the public in a securities offering resulting in the listing of the common stock on the Nasdaq, New York Stock Exchange or NYSE American. The 2020 Debentures were convertible, at any time, at the option of the holder, into shares of common stock, at a fixed conversion price equal to $4.00 per share. The embedded conversion feature was not determined to be a derivative that required bifurcation pursuant to FASB ASC 815, “Derivatives and Hedging” (“ASC 815”) but was determined to be a beneficial conversion feature that required recognition within equity on the commitment date. The beneficial conversion feature was recognized at its intrinsic value on the commitment date, limited to the proceeds allocated to the convertible debt. As such, the Company recorded $ 650 thousand within additional paid-in-capital on the Balance Sheets for the beneficial conversion feature identified. The debt discount arising from recognition of the beneficial conversion feature was amortized as interest expense over the term of the convertible debt. In connection with the issuance of the 2020 Debentures, the Company also issued warrants (“2020 Warrants”) to purchase 498,000 shares of common stock. Each 2020 Warrant had a three-year (3) term and was immediately exercisable at an exercise price of $ 7.50 per share. If at any time after six months following the issuance date and prior to the expiration date the Company failed to maintain an effective registration statement (the “Registration Statement”) with the SEC covering the resale of the shares of common stock underlying the 2020 Warrants, the 2020 Warrants could have been exercised by means of a “cashless exercise,” until such time as there was an effective Registration Statement. Each 2020 Warrant contained customary adjustment provisions in the event of a stock split, reverse stock split or recapitalization. 2020 Warrants for 82,500 shares were issued to four directors and an entity in which one officer of the Company is a majority owner. The 2020 Warrants were determined to meet equity classification pursuant to FASB ASC 480, “Distinguish by Liabilities from Equity” and ASC 815. As such, the relative fair value of the 2020 Warrants was recorded as additional paid in capital on the Balance Sheets, which was determined to be $ 1,063 thousand, on the issuance date. The debt discount arising from recognition of the 2020 Warrants was amortized as interest expense over the term of the convertible debt. On June 22, 2020, the Company cancelled the 2020 Warrants for twenty-three of the twenty-five warrant holders and issued to the holders of the cancelled 2020 Warrants an aggregate of 179,200 shares of common stock. Of this amount, 33,000 shares of common stock were issued to four directors and an entity in which one officer of the Company is a majority owner and co-manager. 2020 Warrants to purchase an aggregate of 81,700 shares of common stock at an exercise price of $4.59 per share remain outstanding. Also, on such date, the 2020 Debentures were automatically converted into an aggregate of 637,513 shares of common stock and warrants to purchase 573,479 shares of common stock. Of this amount, 105,567 shares of common stock and warrants to purchase 105,567 shares of common stock were issued to four directors and an entity in which one officer of the Company is a majority owner and co-manager. See Note 10 – Stock Options, Restricted Stock and Warrants. In connection with the 2020 Debentures, the Company entered into an agreement with a non-exclusive financial advisor and placement agent for a term of twelve months commencing in January 2020. Upon execution of the agreement, the Company issued 5,000 fully vested restricted shares of the Company’s common stock and recorded $33 thousand included in general and administrative expense in the accompanying Statements of Operations. On March 6, 2020, in connection with this agreement a cash compensation of $ 153 thousand was made by the Company and an additional 12,285 shares of the Company’s common stock were issued. These amounts were included in the debt discount for the 2020 Debentures noted above. F- 14 Table of Contents VerifyMe, Inc. Notes to the Financial Statements In February 2020, the Company entered into an agreement with a non-exclusive financial advisor and placement agent terminating the later of April 30, 2020, or upon closing a successful private placement. The agreement automatically extended for periods of thirty days until terminated in writing. The Company agreed to pay 10% of the gross proceeds raised by the financial advisor and placement agent and agreed to issue an amount of restricted shares equal to 4% of the total securities sold in the private placement divided by the last reported closing price of the stock on the closing date of the private placement. On March 6, 2020, in connection with this agreement cash compensation of $ 25 thousand was paid by the Company and 1,923 shares of the Company’s common stock were issued. These amounts were included in the debt discount for the 2020 Debentures noted above. The Company recorded a total of $ 1,992 thousand debt discount upon the closing of the 2020 Debentures, including the $ 650 thousand intrinsic value of the beneficial conversion option, $ 34 thousand relative fair value of the common stock issued to the placement agents, $ 245 thousand of direct transaction costs incurred and $ 1,063 thousand related to the 2020 Warrants. The debt discount was amortized to interest expense over the term of the loan. On June 22, 2020, upon the Company’s consummation of the public offering (See Note 9 – Stockholders’ Equity) and the Company’s commencement of trading on Nasdaq, the 2020 Debentures were automatically converted at $3.22, the QPI Discounted Price. As a result, the unamortized debt discount was fully amortized and included in interest expense in the accompanying Statements of Operations. Amortization of the debt discount associated with the 2020 Debentures was $ 1,992 thousand for the year ended December 31, 2020 and was included in interest expense in the accompanying Statements of Operations. On January 30, 2020, the Company issued an unsecured promissory note payable to a stockholder of the Company with a face value of $ 75 thousand and an interest rate of 10 % per annum payable in full on March 30, 2020, subject to the Company’s right to extend payment until May 29, 2020. On February 28, 2020, the holder of the $ 75 thousand promissory note which was to become due in March 2020 purchased $ 80 thousand of the 2020 Debentures and 2020 Warrants, which was paid by exchanging the promissory note and paying an additional $ 5 thousand . This is included in the $ 1,992 thousand gross proceeds raised. Interest expense in relation to the unsecured promissory note of $ 1 thousand was recorded for the year ended December 31, 2020. The Company did not issue any convertible debt during the year ended December 31, 2021. As of December 31, 2021, the Company has no outstanding balance under convertible debt. NOTE 7 – TERM NOTE On May 17, 2020, the Company entered into a paycheck protection program term note for $ 72 thousand (the “SBA Loan”) with PNC Bank, N.A. under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) pursuant to the Paycheck Protection Program (the “PPP”), which is administered by the U.S. Small Business Administration. The SBA Loan is scheduled to mature on May 17, 2022 , bears interest at a rate of 1.00 % per annum and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. Pursuant to the CARES Act and the PPP, all or a portion of the principal amount of the SBA Loan is subject to forgiveness so long as, over the eight-week period following the receipt of the SBA Loan, the Company used those proceeds for payroll costs, payment on rent obligations, utility costs, and costs of certain employee benefits as per Section 1106 of the CARES Act. As of December 31, 2020, the amount outstanding on the SBA Loan was $ 72 thousand classified as Long-Term Liabilities and included in the accompanying Balance Sheets. The Company applied for and was notified in June 2021 that $69 thousand in eligible payroll expenditures as described in the CARES Act, has been forgiven. Loan forgiveness is reflected in Other Income (Expense), Net in the accompanying Statements of Operations. The forgiveness recognized during the year ended December 31, 2021, included principal of $ 69 thousand, and interest payable of $ 1 thousand. The remaining loan balance of $ 3 thousand was paid in full in June 2021. NOTE 8 – CONVERTIBLE PREFERRED STOCK The Company is authorized to issue Series A Convertible Preferred Stock, par value of $ 0.001 per share (the “Series A”) and Series B Convertible Preferred Stock, par value of $ 0.001 per share (the “Series B”). As of December 31, 2021, and 2020, there were no shares of Series A outstanding and 0.85 of a share of Series B outstanding convertible into 144,444 shares of common stock. Each share of Series A and Series B has limited voting rights, is entitled to participate with the common stock on liquidation and holders of Series A and Series B are subject to beneficial ownership limitations. NOTE 9 – STOCKHOLDERS’ EQUITY The Company expensed $ 696 thousand and $ 53 thousand related to restricted stock units for the years ended December 31, 2021, and December 31, 2020, respectively. F- 15 Table of Contents VerifyMe, Inc. Notes to the Financial Statements The Company expensed $ 784 thousand and $ 461 thousand related to restricted stock awards for the years ended December 31, 2021, and December 31, 2020, respectively. During the year ended December 31 , 2021, the Company issued 9,774 shares of restricted common stock in relation to investor relation services with a stock-based compensation expense of $ 39 thousand. On September 17, 2021, the Company approved restricted stock units for three non-employee directors for an aggregate of 63,000 restricted stock units with a fair value of $ 217 thousand. One-third of the units vested upon approval, one-third vest on September 17, 2022, and the remaining one-third vest on September 17, 2023, subject to the non-employee director’s continued service on the Board of Directors. The vested shares will be issued to each Director following their separation from service with the Company. Effective January 1, 2021, the Company approved restricted stock units or restricted stock awards, for each non-employee director, with a grant date fair value equal to $ 100 thousand. If the non-employee director serves as a Board committee chair or Lead Independent director, he will also receive and an additional award of restricted stock units or restricted stock award with a grant date fair value equal to $ 25 thousand. These awards will vest in full on the earlier of the one-year anniversary of the date of grant subject to the non-employee director’s continued service on the Board of Directors and become payable upon separation of the non-employee director’s service as a director. In January 2021, a total of 145,010 restricted stock units were issued to five non-employee directors for a fair value of $625 thousand, vesting one year from the date of issuance. In August 2021, upon vesting of the restricted stock awards held by our Chief Executive Officer, the Company withheld and retired 18,720 shares of common stock in order to satisfy his U.S. payroll tax withholding obligations. On April 16, 2021, upon vesting of the restricted stock awards held by our Chief Executive Officer, the Company withheld and retired 12,843 shares of common stock in order to satisfy his U.S. payroll tax withholding obligations. Effective April 15, 2021, Norman Gardner, our former Chairman of the board of directors retired from the board of directors. Mr. Gardner was awarded 69,284 shares of restricted stock for a fair value of $ 300 thousand, half of which vest immediately and the balance vesting in equal installments on June 30, 2022, and June 30, 2023, pursuant to a two-year independent contractor consulting agreement with the Company. Mr. Gardner agreed to cancel options to purchase 8,300 shares that were scheduled to expire on December 21, 2026. Additionally, the Company accelerated the vesting of 40,000 restricted shares held by Mr. Gardner that were scheduled to vest in August 2021. The payments and vesting of restricted stock awards were accelerated upon Mr. Gardner’s death pursuant to the agreement. On April 15, 2021, the board of directors granted the Company’s Chief Financial Officer, an award of 5,000 shares of restricted stock with a fair value equal to $ 21 thousand, half of which vested on April 15, 2021, and half of which vests on April 15, 2022. The Company withheld and retired 750 shares of common stock in order to satisfy her U.S. payroll tax withholding obligations. In April 2021, the Company granted an employee an award of 5,000 shares of restricted stock with a fair value of $ 21 thousand, vesting annually over a two-year period from the date of grant. Effective March 1, 2021, the Company amended and restated the Consulting Agreement it has with its Chief Operating Officer. The amended and restated agreement provides among other things, an annual fee of $214,400, a commission of 2% on all gross sales above $500 thousand, the issuance of 10,000 restricted stock awards and the extension of the expiration date for options previously granted to him to the five-year anniversary of the agreement’s effective date. As a result, 80,000 options previously granted to the Company’s Chief Operating Officer now expire on March 1, 2026. T he Company applied FASB ASC 718, “Compensation—Stock Compensation,” modification accounting and expensed a change in fair value of $ 75 thousand. On February 9, 2021, the Company entered into an underwriting agreement with Maxim Group LLC (“Maxim”), as the representative of several underwriters pursuant to which the Company agreed to issue and sell to the underwriters in an underwritten public offering an aggregate of 1,650,000 shares of common stock of the Company at a public offering price of $5.30 per share, less underwriting discounts and commissions. The public offering closed on February 12, 2021, resulting in gross proceeds of $ 8.7 million and net proceeds of $ 8.1 million , less underwriting discounts and commissions and other offering expenses. In connection with the public offering that closed on February 12, 2021, the Company granted Maxim a 45-day option to purchase up to 247,500 shares of common stock to cover over-allotments, if any. On February 19, 2021, Maxim partially exercised its over-allotment option to purchase 100,000 shares of common stock for gross proceeds of $530 thousand and net proceeds of $493 thousand, less underwriting discounts and commissions. The total net proceeds from the public offering including partial exercise of the overallotment option, were $8,447 thousand. F- 16 Table of Contents VerifyMe, Inc. Notes to the Financial Statements On October 12, 2020, pursuant to the 2020 Plan (See Note 10 – Stock Options, Restricted Stock and Warrants), the Company granted to each of the Company’s Chief Financial Officer, acting Chief Operating Officer, and Chief Technology Officer 5,000 restricted stock units that vested immediately and converted into shares of the Company’s common stock, with a total fair value of $53 thousand. On August 5, 2020, the Company issued restricted stock awards for an aggregate of 230,000 shares of restricted common stock to the Company’s directors in consideration of their years of service to the Company that vest in full one-year from the date of grant, subject to the respective director’s continued service as member of the Board of Directors on the vesting date. During the years ended December 31, 2021, and 2020, $514 thousand and $351 thousand, respectively, was expensed related to these services. On June 17, 2020, the Company entered into an Underwriting Agreement (the “Underwriting Agreement”) with Maxim Group LLC, as representative of the underwriters (the “Representative”), for an underwritten public offering (the “Offering”) of an aggregate of 2,173,913 Units consisting of one share (each a “Share” and collectively, the “Shares”) of the Company’s common stock, and a warrant to purchase one share of Common Stock (each a “Warrant” and collectively, the “Warrants”) at an exercise price equal to $ 4.60 per share of Common Stock. The public offering price was $4.60 per Unit and the underwriters agreed to purchase 2,173,913 Units at an 8.0% discount to the public offering price. The Company granted the Representative a 45-day option to purchase up to 326,087 Shares and/or Warrants for 326,087 shares of Common Stock to cover over-allotments, if any. The Offering closed on June 22, 2020, resulting in gross proceeds of $ 10.0 million , before deducting underwriting discounts and commissions and other offering expenses. Also, on June 22, 2020, the Representative partially exercised its over-allotment option to purchase 50,000 Shares and 325,987 Warrants for gross proceeds of $233 thousand. The net proceeds in relation to the Offering and including the over-allotment option were $9,023 thousand. Additionally, the Company issued 30,000 shares of common stock for consulting services related to the Offering, with a fair value of $125 thousand accounted for in Additional Paid in Capital and included in the accompanying Statement of Balance Sheets. Additionally, the Company issued 888 shares of common stock, with a fair value of $ 4 thousand, to its non-exclusive financial advisor and placement agent as commission for units purchased by an investor in the Offering. Of the 2,173,913 Units purchased in the Offering, 17,800 Units were purchased by two directors of the Company. Pursuant to the Underwriting Agreement, the Company agreed to issue to the Representative, as a portion of the underwriting compensation payable to the Representative, warrants to purchase up to a total of 173,913 shares of Common Stock (the “Representative’s Warrants”). The Representative’s warrants are exercisable at $ 5.06 per share, are initially exercisable 180 days after the effective date of the Offering and have a term of three years from their initial exercise date. In connection to the closing of the Offering and the related automatic conversion of the 2020 Debentures (as defined below) the Company issued 637,513 shares of common stock related to the principal amount outstanding of $1,992 thousand and interest expense of $61 thousand and issued 179,200 shares of common stock related to the cancellation of the 2020 Warrants. In May 2020, the Company rescinded and cancelled an aggregate of 19,401 shares of common stock that the Company had approved for issuance but were not yet issued and outstanding shares. On April 16, 2020, the Company granted its Chief Executive Officer, Patrick White, a restricted stock award of 37,500 restricted shares of the Company’s common stock in lieu of $ 150 thousand in deferred salary. Of this amount, $119 thousand was accrued in prior years, and the remaining amount was expensed in payroll expenses included in the accompanying Statement of Operations. The restricted stock award vests in full one-year from the date of grant, subject to Mr. White’s continued services as an officer and employee of the Company on the vesting date. On March 6, 2020, the Company completed the offering of senior secured convertible debentures (the “2020 Debentures”) and warrants and raised $ 1,992 thousand in gross proceeds from the sale of the 2020 Debentures and warrants. In connection to the 2020 Debentures, the Company issued 19,208 restricted shares of common stock during the year ended December 31, 2020. Non-Qualified Stock Purchase Plan On June 10, 2021, the stockholders of the Company approved a non-qualified stock purchase plan (the “2021 Plan”). The 2021 Plan provides eligible participants, including employees, directors and consultants of the Company, the opportunity to purchase shares of the Company’s common stock thereby increasing their interest in the Company’s continued success. The maximum numbers of common stock reserved and available for issuance under the 2021 Plan is 500,000 shares. The purchase price of shares of common stock acquired pursuant to the exercise of an option will be the lesser of 85% of the fair market value of a share (a) on the enrollment date, and (b) on the exercise date. The 2021 Plan is not intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”). The Company applied FASB ASC 718, “Compensation-Stock Compensation” and estimated the fair value using the Black-Scholes model, as the plan is considered compensatory. During the year ended December 31, 2021, $40 thousand has been expensed in relation to the non-qualified stock purchase plan. F- 17 Table of Contents VerifyMe, Inc. Notes to the Financial Statements Shares Held in Treasury As of December 31, 2021, and December 31, 2020, the Company had 223,956 and 7,011 shares, respectively, held in treasury with a value of approximately $ 838 thousand and $ 113 thousand, respectively. In November 2020, the Company’s Board of Directors approved a share repurchase program for up to $1.5 million of the Company’s common stock until August 16, 2021. On August 12, 2021, the Company’s Board of Directors extended the share repurchase program to expire on August 16, 2022. All other terms and conditions remained the same. During the year ended December 31, 2021, the Company repurchased 216,945 shares of common stock at an average price of $3.34 for approximately $725 thousand pursuant to the Share Repurchase Plan. As of December 31, 2021, $775 thousand may be used to repurchase shares under the program. NOTE 10– STOCK OPTIONS, RESTRICTED STOCK AND WARRANTS During 2013, the Company adopted the 2013 Omnibus Equity Compensation Plan (the “2013 Plan”). Under the 2013 Plan, the Company is authorized to grant awards of stock options, restricted stock, restricted stock units and other stock-based awards up to an aggregate of 400,000 shares of common stock. The 2013 Plan is intended to permit certain stock options granted to employees under the 2013 Plan to qualify as incentive stock options. All options granted under the 2013 Plan, which are not intended to qualify as incentive stock options are deemed to be non-qualified stock options. On November 14, 2017, the Executive Committee of the Company’s Board of Directors adopted the 2017 Equity Incentive Plan (the “2017 Plan”) that covered the potential issuance of 260,000 shares of common stock. The 2017 Plan provided that directors, officers, employees, and consultants of the Company were eligible to receive equity incentives under the 2017 Plan at the discretion of the Board or the Board’s Compensation Committee. On August 10, 2020, the Company’s Board of Directors adopted the 2020 Equity Incentive Plan (the “2020 Plan”), subject to stockholder approval, which authorizes the potential issuance of up to 1,069,110 shares of common stock. On September 30, 2020, the Company’s stockholders approved the 2020 Plan, and upon such approval the 2020 Plan became effective and the 2017 Plan was terminated. Shares of common stock underlying existing awards under the 2017 Plan may become available for issuance pursuant to the terms of the 2020 Plan under certain circumstances. Employees and non-employee directors of the Company or its affiliates, and other individuals who perform services for the Company or any of its affiliates, are eligible to receive awards under the 2020 Plan at the discretion of the Board of Directors or the Board’s Compensation Committee. The 2020 Plan is administered by the Compensation Committee which determines the persons to whom awards will be granted, the number of awards to be granted and the specific terms of each grant, including the vesting thereof, subject to the provisions of the plan. In connection with incentive stock options, the exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of the grant (or 110% of the fair market value in the case of a grantee holding more than 10% of the outstanding stock of the Company). The aggregate fair market value (determined at the time of the grant) of stock with respect to which incentive stock options are exercisable for the first time by any individual during any calendar year (under all plans of the Company and its affiliates) shall not exceed $100 thousand, and the options in excess of $100 thousand shall be deemed to be non-qualified stock options, including prices, duration, transferability and limitations on exercise. The maximum number of shares of common stock that may be issued under the 2020 Plan pursuant to incentive stock options may not exceed, in the aggregate, 1,000,000 . The Company has issued non-qualified stock options pursuant to contractual agreements with non-employees. Options granted under the agreements are expensed when the related service or product is provided. Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value represent management’s best estimates and involve inherent uncertainties and judgements. Non-Qualified Stock Options The following table presents the weighted-average assumptions used to estimate the fair value of the stock options granted during the years ended December 31, 2020. No options were granted during 2021. Schedule of weighted-average assumptions 2020 Risk Free Interest Rate 1.77 % Expected Volatility 452.88 % Expected Life (in years) 5.0 Dividend Yield 0 % Weighted average estimated fair value of options during the period $ 4.61 F- 18 Table of Contents VerifyMe, Inc. Notes to the Financial Statements The following table summarizes the activities for the Company’s stock options for the year ended December 31, 2021, and 2020: Schedule of stock option activity Options Outstanding Weighted - Average Remaining Aggregate Weighted- Contractual Intrinsic Number of Average Term Value Shares Exercise Price (in years) (in thousands) (1) Balance as of December 31, 2019 358,271 5.91 Granted 133,000 3.85 Forfeited/Cancelled/Expired ( 17,500 ) 29.07 Balance as of December 31, 2020 473,771 $ 4.48 Granted - - Forfeited/Cancelled/Expired ( 8,300 ) 9.72 Balance as of December 31, 2021 465,471 $ 4.38 Exercisable as of December 31, 2021 465,471 $ 4.38 3.2 $ 47 (1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for options that were in-the-money at each respective period. As of December 31, 2021, and 2020, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $ 47 thousand and $ 97 thousand, respectively. The following table summarizes the activities for the Company’s unvested stock options for the year ended December 31, 2021, and 2020: Schedule of summary for the activities of unvested stock options Unvested Options Weighted - Average Number of Grant Unvested Options Date Exercise Price Balance December 31, 2019 20,000 $ 9.75 Granted 133,000 3.85 Vested ( 143,000 ) 4.27 Balance December 31, 2020 10,000 9.75 Granted - - Vested ( 10,000 ) 9.75 Balance December 31, 2021 - $ - F- 19 Table of Contents VerifyMe, Inc. Notes to the Financial Statements For the years ended December 31, 2021, and 2020, the Company expensed $ 85 thousand and $ 704 thousand, respectively, related to stock options. For the year ended December 31, 2021, $75 thousand relates to the extension of the expiration date for options previously granted (see Note 9 – Stockholder’s Equity) and $10 thousand for options granted in 2019 to our Chief Operating Officer. As of December 31, 2021, there was $0 unrecognized compensation cost related to outstanding stock options. As of December 31, 2020, there was $10 thousand unrecognized compensation cost related to outstanding stock options expected to vest over the weighted average of 0.1 years. On April 15, 2021, Norman Gardner agreed to cancel options to purchase 8,300 shares that expire on December 21, 2026 , in connection with his retirement agreement. Effective January 2020, the Company awarded its Chief Financial Officer incentive stock options exercisable for 4,000 shares of common stock with an exercise price of $ 3.505 vesting quarterly over a one-year period and expiring on January 7, 2025, with a fair value of $ 14 thousand. Effective January 2020, the Company awarded four directors non-qualified stock options exercisable for 40,000 shares in the aggregate, for services rendered to the Company in 2019 with an exercise price of $ 3.505 vesting immediately and expiring on January 7, 2025 , with a fair value of $ 137 thousand. Effective January 2020, the Company awarded five of its directors non-qualified stock options exercisable for 50,000 shares in the aggregate, for services to be rendered to the Company in 2020 with an exercise price of $ 3.505 vesting quarterly over a one-year period and expiring on January 7, 2025 , with a fair value of $ 171 thousand. On April 16, 2020, the Company approved a three-year extension of the expiration date for certain options previously granted to Patrick White, the Company’s Chief Executive Officer and to Norman Gardner, the Company’s former Chairman. As a result, 140,000 options previously granted to Mr. White now expire on August 15, 2025, and 90,000 options previously granted to Mr. Gardner now expire on June 28, 2025. All other terms with respect to the option grants remain the same. The Company applied FASB ASC 718, “Compensation—Stock Compensation,” modification accounting and calculated a change in fair value of $154 thousand. On April 16, 2020, the Company awarded a director non-qualified stock options for 3,000 shares of common stock for services rendered to the Company with an exercise price of $ 4.025 vesting immediately and expiring on April 16, 2025 , with a fair value of $ 12 thousand. On May 27, 2020, the Company awarded two directors non-qualified stock options for an aggregate of 8,000 shares of common stock for services rendered to the Company with an exercise price of $ 5.295 vesting immediately and expiring on May 27, 2025 , with a fair value of $ 41 thousand. In August 2020, the Company issued options to purchase of 28,000 shares of common stock, that expire eighteen months from the date of grant and have an exercise price of $4.60, for services performed by two sales consultants, with a fair value of $96 thousand. In August 2019, the Company entered into an amendment (the “Amendment”) to the Employment Agreement, dated August 15, 2017, with Patrick White, the Chief Executive Officer of the Company (the “Employment Agreement”), which Employment Agreement automatically renewed on July 16, 2019, effective on August 15, 2019. Pursuant to the Amendment, the term was reduced to one year and Mr. White agreed to defer receipt of sums due him to improve the Company’s liquidity. Mr. White was due to receive $100 thousand on August 15, 2019, representing deferred salary (the “Deferral Amount”) that he had previously agreed to defer over the two years of the initial term of his Employment Agreement. In the Amendment, Mr. White agreed to extend receipt of the Deferral Amount until August 15, 2020. In addition, he agreed to continue deferring 25% of his base salary over the one-year term until August 15, 2020. In connection with entering into the Amendment, the Company granted Mr. White 10,000 five-year fully vested incentive stock options under the Company’s 2017 Plan exercisable at $7.00 per share. F- 20 Table of Contents VerifyMe, Inc. Notes to the Financial Statements Restricted Stock Awards and Restricted Stock Units The following table summarizes the unvested restricted stock awards as of December 31, 2021, and 2020: Schedule of unvested restricted stock awards Restricted Stock Awards Weighted - Average Number of Grant Shares Date Fair Value Unvested at December 31, 2019 480,000 $ 0.19 Granted 267,500 3.80 Vested ( 480,000 ) 0.19 Unvested at December 31, 2020 267,500 3.80 Granted 89,284 4.32 Vested ( 312,142 ) 3.87 Balance December 31, 2021 44,642 $ 4.31 As of December 31, 2021, total unrecognized share-based compensation cost related to unvested restricted stock awards was $ 115 thousand, which is expected to be recognized over a weighted-average period of 0.9 years. As of December 31, 2020, total unrecognized stock-based compensation cost related to unvested restricted stock awards was $ 634 thousand, expected to be recognized over a weighted-average period of approximately 0.7 years. The following table summarizes the unvested restricted stock units as of December 31, 2021, and 2020: Schedule of unvested restricted stock units Restricted Stock Units Weighted - Average Number of Grant Shares Date Fair Value Unvested at December 31, 2019 $ - $ - Granted 15,000 3.55 Vested ( 15,000 ) 3.55 Unvested at December 31, 2020 - Granted 208,010 4.05 Vested ( 21,000 ) 3.44 Balance December 31, 2021 $ 187,010 $ 4.11 As of December 31, 2021, total unrecognized share-based compensation cost related to unvested restricted stock units was $ 146 thousand, which is expected to be recognized over a weighted-average period of 0.3 years. As of December 31, 2020, total unrecognized stock-based compensation cost related to unvested restricted stock units was $ 0 . F- 21 Table of Contents VerifyMe, Inc. Notes to the Financial Statements Warrants The following table summarizes the activities for the Company’s warrants for the years ended December 31, 2021, and 2020: Schedule of warrant activity Warrants Outstanding Number of Shares Weighted- Average Exercise Price Weighted - Average Remaining Contractual Term in years) Aggregate Intrinsic Value (in thousands) (1) Balance as of December 31, 2019 445,252 $ 15.39 Granted 3,787,991 4.97 Cancelled/Forfeited ( 454,000 ) 7.50 Balance as of December 31, 2020 3,779,243 $ 5.89 Granted - - Balance as of December 31, 2021 3,779,243 $ 5.89 3.0 Exercisable as of December 31, 2021 3,779,243 $ 5.89 3.0 $ - (1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock price of $ 3.175 for our common stock on December 31, 2021. All warrants were vested on the date of grant. No warrants were granted during the year ended December 31, 2021. The Company issued three -year 2020 Warrants to purchase 498,000 shares of common stock to the purchasers of the 2020 Debentures (see Note 6 – Convertible Debt). The 2020 Warrants have an exercise price of $ 7.50 per share and may be exercised cashlessly if the Company fails to maintain an effective registration statement at any time beginning six months after issuance. Of this amount, 2020 Warrants to purchase 82,500 shares were issued to four directors and an entity in which one officer of the Company is a majority owner and co-manager. On June 22, 2020, 2020 Warrants to purchase 448,000 shares of common stock were cancelled (including 2020 Warrants for 82,500 shares that had been issued to four directors and an entity in which one officer of the Company is a majority owner and co-manager) and warrants to purchase 573,479 shares of common stock were issued upon closing of the Offering and conversion of the 2020 Debentures, with an exercise price of $ 4.60 and an expiration term of five years. Of this amount, warrants to purchase 105,567 of shares of common stock were issued to four directors and an entity in which one officer of the Company is a majority owner and co-manager. As a result of the Offering, the per share exercise price for the outstanding but unexercised 2020 Warrants to purchase shares of common stock related to the two warrant holders who did not cancel their 2020 Warrants, has been adjusted from $7.50 to $4.59 and the number of shares of common stock underlying the outstanding but unexercised 2020 Warrants increased from an aggregate of 50,000 to 81,700 shares of common stock. On May 27, 2020, the Company awarded four non-employees warrants to purchase an aggregate of 11,000 shares of common stock for services rendered to the Company with an exercise price of $ 5.295 vesting immediately and expiring on May 27, 2023 , with a fair value of $ 54 thousand. On June 18, 2020, in connection with the Offering, the Representative provided a partial exercise notice of the over-allotment option to purchase 50,000 additional shares of common stock and additional warrants to purchase 325,987 shares of common stock. F- 22 Table of Contents VerifyMe, Inc. Notes to the Financial Statements On June 22, 2020, in connection with the Offering, the Company issued warrants to purchase 2,499,900 shares of common stock, with a five -year term and an exercise price of $ 4.60 , including the additional warrants pursuant to the over-allotment option exercise noted above. In connection with the Offering, on June 22, 2020, the Company issued warrants to the Representative to purchase up to a total of 173,913 shares of common stock. The Representative’s Warrants are exercisable during the three-year period commencing 180 days from June 22, 2020. The Representative’s Warrants are exercisable at a per share price equal to $ 5.06 per share with a fair value of $ 523 thousand netted in additional paid in capital included in the accompanying Balance Sheets. For the years ended December 31, 2021, and 2020, the Company expensed $0 and $51 thousand, respectively, related to warrants. NOTE 11— EARNINGS (LOSS) PER SHARE Basic earnings/(loss) per share (EPS) is computed by dividing net income/(loss) by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution of common stock equivalent shares that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The dilutive common stock equivalent shares consist of preferred stock, stock options, warrants, restricted stock awards and restricted stock units computed under the treasury stock method, using the average market price during the period. The following table sets forth the computation of basic and diluted earnings/(loss) per share (in thousands, except share and per share data) : Years Ended December 31, 2021 2020 Numerator: Net Income/(Loss) $ 3,612 $ ( 5,902 ) Denominator: Weighted average shares of common stock – basic 7,110,907 3,980,202 Effect of dilutive securities Preferred Stock 144,444 - Stock Options 48,212 - Warrants 23 - Stock Purchase Plan 2,362 - Restricted Stock Units & Restricted Stock Awards 77,416 - Weighted average shares of common stock – diluted 7,383,364 3,980,202 Net Earnings (Loss) per share Basic $ 0.51 $ ( 1.48 ) Diluted $ 0.49 $ ( 1.48 ) F- 23 Table of Contents VerifyMe, Inc. Notes to the Financial Statements The following table represents the weighted average number of anti-dilutive instruments excluded from the computation of diluted earnings/(loss) per share: Years Ended December 31, 2021 2020 Anti-dilutive instruments excluded from computation of diluted net income per share: Preferred Stock - 144,444 Stock Options 177,334 473,771 Warrants 3,779,048 3,779,243 Restricted Stock Units and Restricted Stock Awards 13,196 - NOTE 12— LONG TERM DERIVATIVE LIABILITY On September 17, 2021, the Company granted two directors restricted stock units (“SPAC RSUs”) with respect to the common stock, $ 0.0001 par value per share, of G3 VRM Acquisition Corp. The SPAC RSUs vest upon the initial business combination of the SPAC (see Note 2 – Equity Investment) subject to continuous service to the Company through the vesting date. Each vested SPAC RSU represents the right to receive the value of one share of stock in G3 VRM Acquisition Corp., which will be paid to the director as soon as practicable after the fifteen-month anniversary of the vesting date. The grant date fair value of the SPAC RSUs for each director was $ 98 thousand. The fair value of the equity instrument is classified as Level 3 in the fair value hierarchy as the calculation is dependent upon company specific adjustments to the observable trading price of the SPAC’s public shares, and related risk of forfeiture should no business combination occur. As the underlying awards are not the Company’s stock but an unrelated, publicly traded entity’s shares, the Company accounts for the awards under ASC 815 – Derivatives and Hedging, with the expense included in stock-based compensation under General and Administrative expenses in the accompanying Statement of Operations through the vesting date, and as a change in fair value in other income (expense) in the accompanying Statement of Operations after the vesting date, but before the settlement date. For the year ended December 31, 2021, the Company has expensed $ 71 thousand in relation to these awards. NOTE 13 – OPERATING LEASES For both years ended December 31, 2021, and 2020, total rent expense under leases amounted to $ 14 thousand. The current lease is for a period less than a year and falls outside of the scope of Lease (Topic 842). As of December 31, 2021, and 2020, the Company was not obligated under any non-cancelable operating leases. NOTE 14 – MAJOR CUSTOMERS/VENDORS During the year ended December 31, 2021, five customers accounted for 95% of total sales. During the year ended December 31, 2020, two customers accounted for 92% of total sales. Generally, a substantial percentage of the Company's sales has been made to a small number of customers and is typically on an open account basis. During the years ended December 31, 2021, and 2020, the Company purchased 100% of pigment from one vendor. Additionally, during the years ended December 31, 2021, and 2020, the Company purchased 100% of canisters from one vendor. As of December 31, 2021, three customers accounted for 91 % of total accounts receivable. As of December 31, 2020, two customers accounted for 96 % of total accounts receivable. NOTE 15 – SUBSEQUENT EVENTS Effective January 1, 2022, the Company approved restricted stock units or restricted stock awards, for each non-employee director, with a grant date fair value equal to $ 125 thousand. If the non-employee director serves as a Board committee chair or Lead Independent director, he will also receive an additional award of restricted stock units or restricted stock award with a grant date fair value equal to $ 25 thousand. These awards will vest in full on the earlier of the one-year anniversary of the date of grant subject to the non-employee director’s continued service on the Board of Directors and become payable upon separation of the non-employee director’s service as a director. In January 2022, a total of 157,232 restricted stock units were issued to four non-employee directors for a fair value of $ 500 thousand, and 39,308 restricted stock awards were issued to one non-employee director for a fair value of $ 125 thousand, vesting one year from the date of issuance. F- 24 Table of Contents VerifyMe, Inc. Notes to the Financial Statements On February 16, 2022, the Company, as part of the development and implementation of the Company’s strategic initiatives, entered into employment agreements with its Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Technology Officer and Senior VP of Finance and Investor Relations, each with effect as of February 15, 2022. In accordance with the employment agreements, the Compensation Committee of the Board approved grants of restricted stock units to each of the executives with a grant date value as of February 16, 2022 equal to their respective base salary multiplied by their respective annual equity award eligibility percentage ranging from 50% to 70%. On February 28, 2022, five participants exercised their option under the Company’s non-qualified stock purchase plan, and as a result, 25,000 shares were issued with an exercise price of $ 2.69 . F-25