VerifyMe, Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES. (a) Evaluation of Disclosure Controls and Procedures Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Our disclosure controls and procedures are designed to ensure information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. The Company’s Chief Executive Officer, our principal executive officer, and Chief Financial Officer, our principal financial officer, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the year ended December 31, 2022. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2022, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. 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, 2022, using criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our management has concluded that our internal controls over financial reporting was effective as of December 31, 2022 29 Table of Contents (b) Changes in Internal Control over Financial Reporting 2022 Remediation Activities During the fiscal year ended December 31, 2022, we implemented remediation actions to address a material weakness due to a lack of segregation of duties identified in our annual report on Form 10-K for our fiscal year ended December 31, 2021. Specifically, we defined key controls in accordance with the five components and seventeen principles of the COSO 2013 Framework. In addition to the VP of Finance and Financial Controller hired in 2021, we hired an HR Manager in September 2022 to further enhance our segregation of duties controls. Through our control testing of the applicable controls over a sufficient period of time during the year ended December 31, 2022, management has concluded that these controls are operating effectively and that as of December 31, 2022, we no longer have a material weakness due to a lack of segregation of duties. Except as set forth above, there were no other changes in internal control over financial reporting during the fiscal year ended December 31, 2022, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. (c) PeriShip Acquisition On April 22, 2022, we acquired, through PeriShip Global, the business and certain assets of PeriShip, LLC, a value-added service provider for time and temperature sensitive parcel management. For additional information regarding the acquisition, refer to Note 4 to the Audited Consolidated Financial Statements appended to this Report and incorporated by reference into Item 8 in this Annual Report on Form 10-K and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 in this Annual Report on Form 10-K. Based on the recent completion of this acquisition and, pursuant to the Securities and Exchange Commission’s guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment for a period not to exceed one year from the date of acquisition, the scope of our assessment of the effectiveness of internal control over financial reporting as of December 31, 2022 does not include PeriShip Global. We plan to include PeriShip Global within the timeframe set forth by the SEC’s guidance. 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. ITEM 9B. OTHER INFORMATION. None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not Applicable. 30 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 2023 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, 2022, 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 2023 annual meeting of stockholders under the headings “Executive Compensation” and “Director Compensation,” which proxy statement will be filed within 120 days after the December 31, 2022, 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 2023 annual meeting of 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, 2022, 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, 2022. Equity Compensation Plan Information as of December 31, 2022 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 (1) 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 157,000 (2) $5.68 1,292,225 (3) Equity compensation plans not approved by security holders 180,471 (4) 4.19 - Total 337,471 4.63 1,292,225 (1) 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. (2) 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”) (3) Includes 877,511 shares remaining available for issuance under the 2020 Plan and 44,770 shares remaining for issuance under the 2013 Plan and 369,944 shares remaining available for issuance under the 2021 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. 31 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 2023 annual meeting of stockholders under the heading “Certain Relationships and Related Person Transactions,” which proxy statement will be filed within 120 days after the December 31, 2022, 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 2023 annual meeting of 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, 2022, 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 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) 4.2 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) 4.3 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) 4.4 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) 4.5 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) 4.6 Form of Pre-Funded Warrant (incorporated herein by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 18, 2022) 4.7 Form of Common Warrant (incorporated herein by reference from Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on April 18, 2022) 4.8* 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) 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# 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) 10.5# 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) 10.6# Employment Agreement between PeriShip Global, LLC and Curt Kole, dated April 22, 2022 (incorporated herein by reference from Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on April 26, 2022) 10.7# Employment Agreement between PeriShip Global, LLC and Fred Volk III, dated April 22, 2022 (incorporated herein by reference from Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on April 26, 2022) 10.8# Employment Agreement between PeriShip Global, LLC and Jack Wang, dated April 22, 2022 (incorporated herein by reference from Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on April 26, 2022) 32 Table of Contents 10.9# LaserLock Technologies, Inc. 2013 Omnibus Equity Compensation Plan (incorporated herein by reference from the Company’s Definitive Proxy Statement filed on November 19, 2013) 10.10# 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) 10.10.1# 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) 10.11# 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) 10.12# VerifyMe, Inc. 2021 Stock Purchase Plan (incorporated herein by reference from Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed on April 28, 2021) 10.13# 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) 10.14# 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) 10.15# 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) 10.16# 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) 10.17# 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) 10.18# 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) 10.19# 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) 10.20# 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) 10.21# 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) 10.22# 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) 10.23# 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) 10.24# 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) 10.25# 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) 10.26# 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) 10.27# 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) 10.28# 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) 10.29# 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) 33 Table of Contents 10.30# Form of Restricted Stock Unit Award Agreement (Subsidiary Employees) (incorporated herein by reference from Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on April 26, 2022) 10.31 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) 10.32 Form of Securities Purchase Agreement, dated April 12, 2022 (incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 18, 2022) 10.33 Form of Registration Rights Agreement, dated April 12, 2022 (incorporated herein by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 18, 2022) 10.34 Form of Lock-Up Agreement, dated April 12, 2022 (incorporated herein by reference from Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 18, 2022) 10.35 Asset Purchase Agreement, dated April 22, 2022 (incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 26, 2022) 10.36 Promissory Note payable by PeriShip Global, LLC to PeriShip, LLC, dated April 22, 2022 (incorporated herein by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 26, 2022) 10.37 Guaranty, dated April 22, 2022 (incorporated herein by reference from Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 26, 2022) 10.38 Transition Services Agreement, dated April 22, 2022 (incorporated herein by reference from Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on April 26, 2022) 10.39 Lease Agreement between PeriShip Global and Mordo, LLC, dated April 22, 2022 (incorporated herein by reference from Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on April 26, 2022) 10.40 Lease Guarantee between VerifyMe, Inc. and Mordo, LLC, dated April 22, 2022 (incorporated herein by reference from Exhibit 10.10 to the Company’s Current Report on Form 8-K filed on April 26, 2022) 10.41 Professional Services Agreement between PeriShip Global (as successor to PeriShip, LLC) and FedEx Corporate Services, Inc. dated June 1, 2019 (incorporated herein by reference to Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q filed on August 15, 2022) 10.42 Form of FedEx Transportation Services Agreement Pricing Agreement between PeriShip Global (as successor to PeriShip, LLC) and Federal Express Corporation, et al (incorporated herein by reference to Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q filed on August 15, 2022) 10.43 Amendment to Professional Services Agreement with FedEx Corporate Services, Inc. dated August 25, 2022 (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 10, 2022) 10.44 Loan Agreement between PeriShip Global LLC and PNC Bank, National Association, effective September 15, 2022 (incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 27, 2022) 10.45 Term Note between PeriShip Global LLC and PNC Bank, National Association, effective September 15, 2022 (incorporated herein by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 27, 2022) 10.46 Revolving Line of Credit Note between PeriShip Global LLC and PNC Bank, National Association, effective September 15, 2022 (incorporated herein by reference from Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on September 27, 2022) 10.47 Guaranty and Suretyship Agreement between VerifyMe, Inc., and PNC Bank, National Association, effective September 15, 2022 (incorporated herein by reference from Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on September 27, 2022) 10.48 Security Agreement between PeriShip Global LLC and PNC Bank, National Association, effective September 15, 2022 (incorporated herein by reference from Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on September 27, 2022) 10.49 Security Agreement between VerifyMe, Inc. and PNC Bank, National Association, effective September 15, 2022 (incorporated herein by reference from Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on September 27, 2022) 10.50 Asset Purchase Agreement, effective February 28, 2023 (incorporated herein by reference3 from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 2, 2023) 21.1* Subsidiaries of VerifyMe, Inc. 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 34 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 104 Cover Page Interactive Data File * Filed or furnished herewith, as applicable # Denotes management compensation plan or contract ITEM 16. FORM 10-K SUMMARY Not applicable. 35 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/ Scott Greenberg Scott Greenberg Interim Chief Executive Officer and Executive Chairman Date: March 28, 2023 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/ Scott Greenberg Interim Chief Executive Officer,Executive Chairman and Director March 28, 2023 Scott Greenberg ( Principal Executive Officer ) /s/ Margaret Gezerlis Executive Vice President and Chief Financial Officer March 28, 2023 Margaret Gezerlis ( Principal Financial Officer and Principal Accounting Officer) /s/ Chris Gardner Director March 28, 2023 Chris Gardner /s/ Marshall Geller Director March 28, 2023 Marshall Geller /s/Howard Goldberg Director March 28, 2023 Howard Goldberg /s/ Arthur Laffer Director March 28, 2023 Arthur Laffer /s/ Adam Stedham Director March 28, 2023 Adam Stedham 36 Table of Contents INDEX TO FINANCIAL STATEMENTS CONTENTS PAGE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID 206 ) F-1 CONSOLIDATED BALANCE SHEETS F-2 CONSOLIDATED STATEMENTS OF OPERATIONS F-3 CONSOLIDATED COMPREHENSIVE INCOME(LOSS) F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS F-5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 37 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. and its subsidiary (collectively, the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, 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, 2022 and 2021, and the results of their operations and their 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 Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ MaloneBailey, LLP www.malonebailey.com We have served as the Company's auditor since 2018. Houston, Texas March 28, 2023 F- 1 Table of Contents VerifyMe, Inc. Consolidated Balance Sheets (In thousands, except share data) As of December 31, 2022 December 31, 2021 ASSETS CURRENT ASSETS Cash and cash equivalents, including restricted cash $ 3,411 $ 9,422 Accounts receivable, net of allowance for credit loss reserve, $ 37 and $ 0 as of December 31, 2022 and December 31, 2021, respectively 4,448 297 Unbilled revenue 1,185 - Prepaid expenses and other current assets 333 240 Inventory 81 52 TOTAL CURRENT ASSETS 9,458 10,011 INVESTMENTS Equity Investment $ - $ 10,964 PROPERTY AND EQUIPMENT, NET 292 204 RIGHT OF USE ASSET 469 - INTANGIBLE ASSETS, NET 6,412 509 GOODWILL 3,988 - DEFERRED IMPLEMENTATION COSTS 133 - TOTAL ASSETS $ 20,752 $ 21,688 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of debt $ 500 $ - Accounts payable 3,912 341 Other accrued expense 902 109 Lease liability- current 115 - TOTAL CURRENT LIABILITIES 5,429 450 LONG-TERM LIABILITIES Long-term lease liability $ 359 $ - Long-term derivative liability 3 71 Term note 1,375 - TOTAL LIABILITIES $ 7,166 $ 521 STOCKHOLDERS' EQUITY Series A Convertible Preferred Stock, $ .001 par value, 37,564,767 shares authorized; 0 shares issued and outstanding as of December 31, 2022; 0 shares issued and outstanding as of December 31, 2021 - - Series B Convertible Preferred Stock, $ .001 par value; 85 shares authorized; 0.85 shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively - - Common stock, $ 0.001 par value; 675,000,000 authorized; 9,341,002 and 7,420,633 issued, 8,951,035 and 7,196,677 shares outstanding as of December 31, 2022 and December 31, 2021, respectively 10 7 Additional paid in capital 92,987 86,059 Treasury stock as cost; 389,967 and 223,956 shares at December 31, 2022 and December 31, 2021, respectively ( 949 ) ( 838 ) Accumulated deficit ( 78,459 ) ( 64,061 ) Accumulated other comprehensive loss ( 3 ) - STOCKHOLDERS' EQUITY 13,586 21,167 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,752 $ 21,688 The accompanying notes are an integral part of these consolidated financial statements. F- 2 Table of Contents VerifyMe, Inc. Consolidated Statements of Operations (In thousands, except per share data) Years Ended December 31, 2022 December 31, 2021 NET REVENUE $ 19,576 $ 867 COST OF REVENUE 13,088 268 GROSS PROFIT 6,488 599 OPERATING EXPENSES General and administrative (a) 8,428 4,216 Research and development 89 51 Sales and marketing (a) 1,718 1,163 Total operating expenses 10,235 5,430 LOSS BEFORE OTHER INCOME (EXPENSE) ( 3,747 ) ( 4,831 ) OTHER INCOME (EXPENSE) Interest income (expenses), net ( 88 ) 2 Loss on equity investment ( 10,932 ) - Unrealized gain on equity investment 12 8,371 Other income, net 31 - Gain on extinguishment of debt 326 - Payroll protection program debt forgiveness - 70 TOTAL OTHER INCOME (EXPENSE), NET ( 10,651 ) 8,443 NET (LOSS)/ INCOME $ ( 14,398 ) $ 3,612 EARNINGS / (LOSS) PER SHARE BASIC ( 1.70 ) 0.51 DILUTED ( 1.70 ) 0.49 WEIGHTED AVERAGE COMMON SHARE OUTSTANDING BASIC 8,466,075 7,110,907 DILUTED 8,466,075 7,383,364 (a) Includes share-based compensation of $1,468 thousand for the year ended December 31, 2022, and $1,716 thousand for the year ended December 31, 2021. The accompanying notes are an integral part of these consolidated financial statements. F- 3 Table of Contents VerifyMe, Inc. Consolidated Statements of Comprehensive Income/(Loss) (In thousands) Year Ended December 31, 2022 December 31, 2021 NET (LOSS)/INCOME $ ( 14,398 ) $ 3,612 Change in fair value of interest rate, swap ( 3 ) - TOTAL COMPREHENSIVE (LOSS)/INCOME $ ( 14,401 ) $ 3,612 The accompanying notes are an integral part of these consolidated financial statements. F- 4 Table of Contents VerifyMe, Inc. Consolidated Statements of Cash Flows (In thousands) Years Ended December 31, 2022 December 31, 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net (Loss) Income $ ( 14,398 ) $ 3,612 Adjustments to reconcile net (loss) income to net cash used in operating activities: Allowance for bad debt 37 - Stock based compensation 145 151 Fair value of options in exchange for services - 85 Fair value of restricted stock awards issued in exchange for services 239 784 Fair value of restricted stock units issued in exchange for services 1,084 696 Payroll Protection Program Debt Forgiveness - ( 70 ) Loss on equity investment 10,932 - Unrealized gain on equity investment ( 12 ) ( 8,371 ) Gain on extinguishment of debt ( 326 ) - Amortization and depreciation 770 117 Changes in operating assets and liabilities: Accounts receivable ( 3,352 ) ( 354 ) Unbilled revenue ( 1,185 ) - Inventory ( 29 ) 2 Prepaid expenses and other current assets ( 77 ) 25 Accounts payable, other accrued expenses and net change in operating leases 3,621 69 Net cash used in operating activities ( 2,551 ) ( 3,254 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of patents $ ( 40 ) $ ( 95 ) Purchase of equipment for lease - ( 45 ) Purchase of equity investment - ( 2,593 ) Purchase of office equipment - ( 12 ) Acquisition of PeriShip ( 7,500 ) - Equity received from SPAC Equity Investment 32 - Deferred implementation costs ( 140 ) - Capitalized software costs ( 236 ) ( 106 ) Net cash used in investing activities ( 7,884 ) ( 2,851 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from public offering of securities $ 4,528 $ 8,447 Proceeds from issuance of notes payable 2,000 ( 3 ) Proceeds from exercise of pre-funded warrant 1 - Proceeds from SPP Plan 102 - Tax withholding payments for employee stock-based compensation in exchange for shares surrendered ( 34 ) ( 131 ) Increase in treasury shares (share repurchase program) ( 291 ) ( 725 ) Repayment of Debt ( 1,882 ) - Net cash provided by financing activities 4,424 7,588 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ( 6,011 ) 1,483 CASH AND CASH EQUIVALENTS INCLUDING RESTRICTED CASH – BEGINNING OF PERIOD 9,422 7,939 CASH AND CASH EQUIVALENTS INCLUDING RESTRICTED CASH - END OF PERIOD $ 3,411 $ 9,422 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 33 $ - Income taxes $ - $ - SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Initial recognition of right-of-use asset and lease liability during the period $ 552 $ - Change in fair value of interest rate, swap $ ( 3 ) $ - The accompanying notes are an integral part of these consolidated financial statements. F- 5 Table of Contents VerifyMe, Inc. Consolidated Statements of Stockholders' Equity (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, 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 Series A Series B Convertible Convertible Preferred Preferred Common Treasury Accumulated Stock Stock Stock Additional Stock Other Number of Number of Number of Paid-In Number of Comprehensive Accumulated Shares Amount Shares Amount Shares Amount Capital Shares Amount Loss Deficit Total Balance at December 31, 2021 - - 0.85 - 7,196,677 7 86,059 223,956 ( 838 ) - ( 64,061 ) 21,167 Restricted stock awards, net of shares withheld for employee tax - - - - 29,688 - 205 - - - - 205 Restricted Stock Units - - - - - - 1,084 - - - - 1,084 Stock Purchase Plan - - - - - - 121 - - - - 121 Common stock issued in relation to Stock Purchase Plan - - - - 53,895 - ( 78 ) ( 53,895 ) 180 - - 102 Common stock issued in relation to private placement - - - - 880,208 2 4,526 - - - - 4,528 Common stock issued for services - - - - 30,000 - 96 - - - - 96 Common stock issued in relation to Acquisition - - - - 305,473 - 974 - - - - 974 Repurchase of Common Stock - - - - ( 219,906 ) - - 219,906 ( 291 ) - - ( 291 ) Exercise of Pre-funded Warrants - - - - 675,000 1 - - - - - 1 Accumulated other comprehensive loss - - - - - - - - - ( 3 ) - ( 3 ) Net loss - - - - - - - - - ( 14,398 ) ( 14,398 ) Balance at December 31, 2022 - - 0.85 - 8,951,035 10 92,987 389,967 ( 949 ) ( 3 ) ( 78,459 ) 13,586 The accompanying notes are an integral part of these consolidated financial statements. F- 6 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of the Business VerifyMe, Inc. (“VerifyMe”) was incorporated in the State of Nevada on November 10, 1999. VerifyMe, together with its subsidiaries, including PeriShip Global LLC (“PeriShip Global”) and Trust Codes Global Limited (“Trust Codes Global”), (together the “Company,” “we,” “us,” or “our”) is based in Lake Mary, Florida 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. VerifyMe, through PeriShip Global, is a software driven predictive analytics logistics provider of high-touch, end-to-end logistics management, which represents most of our current revenue stream. In addition, VerifyMe technologies provide product traceability, brand protections services, and consumer engagement solutions. Our operations are split into two segments: PeriShip Global Solutions and VerifyMe Solutions, which includes Trust Codes Global. Through our PeriShip Global Solutions segment we provide a value-added service for time and temperature sensitive parcel management driven by a proprietary software platform that provides predictive analytics from key metrics such as flight-tracking, weather, and traffic, all delivered to customers via a secure portal. The portal provides real-time visibility into shipment transit and last-mile events, with dynamic dashboards. All aspects of the of the shipping journey is managed by a dedicated call center. Using our proprietary logistics solution, we provide real-time information and analysis to mitigate supply chain flow interruption, delivering last-mile resolution for key markets, including the perishable healthcare and food industries. Through our VerifyMe Solutions segment, our technologies provide unit level traceability, brand protection, and consumer engagement solutions allowing brand owners to gather business intelligence, cross-sell products, monitor product diversion through the supply chain and build brand loyalty through interaction utilizing our unique dynamic codes which are read by consumers with their smart phones. The Company’s activities are subject to significant risks and uncertainties. See the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this report. Basis of Presentation The accompanying consolidated financial statements include the accounts of VerifyMe and its wholly owned subsidiary PeriShip Global. All significant intercompany balances and transactions have been eliminated upon consolidation. The consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Segment Reporting Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding the method by which to allocate resources and assess performance. The Company has two reportable segments, namely, (i) PeriShip Global Solutions and (ii) VerifyMe Solutions. See Note 16 Segment Reporting, for further discussion of the Company’s segment reporting structure. 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. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments , (“CECL”), which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This guidance was to be effective for reporting periods beginning after December 15, 2022, with early adoption permitted. The Company has elected to early adopt ASU 2016-13, as of January 1, 2022, and the impact has been disclosed on the face of the Consolidated Balance Sheets. The Company’s accounts receivable is currently the only financial instrument subject to the new CECL model. The Company has considered relevant internal and/or external information about past events, e.g., historical loss experience with similar assets, current conditions, and reasonable and supportable forecasts that affect the expected collectability of the reported amount of financial assets in determining the credit loss. F- 7 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements Fair Value of Financial Instruments The Company’s financial instruments consist of accounts receivable, unbilled revenue, accounts payable, notes payable and accrued expenses, equity investments, and long-term derivative liabilities. The carrying value of accounts receivable, unbilled revenue, accounts payable and accrued expenses approximate their fair value because of their short maturities. The Company believes the carrying amount of its notes payable approximates 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. The following table presents the Company’s financial instruments that are measured and recorded at fair value on the Company’s balance sheets on a recurring basis, and their level within the fair value hierarchy as of December 31, 2022 and December 31, 2021. Amounts in Thousands ('000) Schedule of fair value assets measured on recurring basis Short Term Investment Equity Investment Derivative Liability Derivative Liability (Level 1) (Level 3) (Level 2) (Level 3) Balance as of December 31, 2021 $ 88 10,964 - ( 71 ) Realized loss on fair value recognized in other (expense)/income - ( 10,932 ) - - Distribution from Sponsor Entity - ( 32 ) - - - - Unrealized gain on fair value recognized in other (expense)/income 12 - - - Realized gain on fair value recognized in share-based compensation - - 71 Change in fair value to interest rate, SWAP, recognized in other comprehensive loss ( 3 ) - - - Balance at December 31, 2022 $ 100 $ - $ ( 3 ) $ - Variable Interest Entity The Company determined that G3 VRM Acquisition Corp. (NASDAQ: GGGVU) (the “SPAC”, see Note 2 – Equity Investments), a Delaware corporation and special purpose acquisition company, was a variable interest entity (“VIE”) in which the Company had a variable interest but was 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 impacted 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 was not the primary beneficiary of the VIE and as such, did not consolidate the SPAC. The Company reassessed 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. The SPAC was unable to complete its initial business combination within 12 months from the closing of the IPO, and the Sponsor Entity made the decision not to fund the extension and did not deposit additional funds into the trust account. As a result, the SPAC was dissolved, and liquidated according to its charter. The SPAC redeemed 100% of the public shares for cash, the rights have expired worthless, and the founder shares and the private placement securities have become worthless. F- 8 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements 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 Investments) and its equity security under short term investment on the balance sheets, as it has determined the fair value best reflects the economic performance of the equity investment. Changes in unrealized gain on equity investment include unrealized gain of the fair value of the equity investments and loss on equity investment includes realized loss on equity investments on the accompanying Consolidated Statements of Operations. Goodwill Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations. Pursuant to ASC 350, the Company tests goodwill for impairment on an annual basis in the fourth quarter, or between annual tests, in certain circumstances. Under authoritative guidance, the Company first assessed qualitative factors to determine whether it was necessary to perform the quantitative goodwill impairment test. The assessment considers factors such as, but not limited to, macroeconomic conditions, data showing other companies in the industry and our share price. An entity is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Events or changes in circumstances which could trigger an impairment review include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity specific events and sustained decrease in share price. Business Combinations The Company applies the provisions of Accounting Standard Codification (“ASC”) Topic 805, Business Combinations, in the accounting for business acquisitions. ASC 805 requires the Company to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the identifiable assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately apply preliminary value to assets acquired and liabilities assumed at the acquisition date, where applicable, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments in the current period, rather than a revision to a prior period. Upon the conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the Consolidated Statements of Operations. Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets where applicable. Although the Company believes the assumptions and estimates made have been reasonable and appropriate, they are based in part on information obtained from management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results. Basic and Diluted Net 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. 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. As of December 31, 2022, the Company held $ 63 thousand subject to restrictions. F- 9 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements 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 $ 37 thousand and $ 0 for allowance for credit losses as of December 31, 2022, and 2021, 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 which are currently set at $ 250,000 per depositor. 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 proactive end-to-end logistics management products are accounted for in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350 “Hosting Arrangements and Internally Used Software.” 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. Capitalized software development costs are amortized over the estimated life of the related product, generally six 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. 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. 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 Consolidated 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. F- 10 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements 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 Accounting Standards Codification (“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; · 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, 2022, over 90% of the Company’s revenues primarily consisted of revenue related to our logistics management for time and temperature sensitive packages generated by our subsidiary PeriShip Global. During the year ended December 31, 2021, the Company’s revenue primarily consisted of VerifyInk TM and labels with our VerifyMe traceability solutions. 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 2003 remain subject to examination by major tax jurisdictions due the carryforward of unutilized NOLs. Stock-Based Compensation We account for stock-based compensation under the provisions of FASB ASC 718, “Compensation—Stock Compensation”, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes model. The assumptions used in the Black-Scholes option pricing model include risk-free interest rates, expected volatility and expected life of the stock options. Changes in these assumptions can materially affect estimates of fair value stock-based compensation, and the compensation expense recorded in future periods. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods using the straight-line method. We recognize forfeitures as they occur with a reduction in compensation expense in the period of forfeiture. For performance restricted stock units with stock price appreciation targets (see Note 10 – Stock Options, Restricted Stock and Warrants), we applied a lattice approach that incorporated a Monte Carlo simulation, which involved random iterations that took different future price paths over the RSU’s contractual life based on the appropriate probability distributions (which are based on commonly applied Black Scholes inputs). The fair value was determined by taking the average of the grant date fair values under each Monte Carlo simulation trial. We recognize compensation expense on a straight-line basis over the performance period and there is no ongoing adjustment or reversal based on actual achievement during the period. F- 11 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements We account for stock-based compensation awards to non-employees in accordance with ASU No. 2018-07, Compensation – Stock Based Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Non-employee equity-based payments are recorded as an expense over the service period, as if we had paid cash for the services. At the end of each financial reporting period, prior to vesting or prior to the completion of the services, the fair value of the equity-based payments will be re-measured, and the non-cash expense recognized during the period will be adjusted accordingly. Since the fair value of equity-based payments granted to non-employees is subject to change in the future, the amount of the future expense will include fair value re-measurements until the equity-based payments are fully vested or the service completed. Advertising Costs Advertising costs are expensed as incurred. Advertising costs were $ 60 thousand and $ 51 thousand for the years ended December 31, 2022, and 2021, respectively, and are included in Sales and Marketing on the Consolidated Statements 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, 2022, and 2021 were $ 89 thousand and $ 51 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. Because the Company reported a net loss for the year ended December 31, 2022, common stock equivalents, including preferred stock, stock options and warrants were anti-dilutive; therefore, the amounts reported for basic and diluted loss per share were the same. NOTE 2 – EQUITY INVESTMENTS On February 26, 2021, the Company formed VMEA Holdings Inc. (the “Sponsor Entity”), a Delaware corporation that was the founder of G3 VRM Acquisition Corp. (the “SPAC”) that was 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. 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 consisted 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 was 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 owned approximately 9.42 % of the outstanding shares of the SPAC, which shares were 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. F- 12 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements The SPAC was unable to complete its initial business combination within 12 months from the closing of the IPO and the Sponsor Entity decided not to fund the extension and did not deposit additional funds into the trust account. As a result, the SPAC was dissolved and liquidated in accordance with its charter. The SPAC redeemed 100% of the public shares for cash on July 19, 2022, the rights expired worthless, and the founder shares and private placement securities became worthless. The SPAC was dissolved on July 29, 2022, and no distributions were made to the Sponsors. In December 2022, it was determined that the costs to dissolve the SPAC were ultimately less than the remaining assets of the SPAC and the SPAC made a distribution to the Company of $32 thousand. The fair value of the equity investment was $ 0 million as of December 31, 2022 and $ 11.0 million as of December 31, 2021. The fair value of the equity investment was classified as Level 3 in the fair value hierarchy as the calculation was 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. The Company recognized a loss on equity investments of $ 10,932 thousand for the year ended December 31, 2022, included in the Loss on equity investments in the accompanying Consolidated Statements of Operations. In December 2021, the Company acquired 8,841 shares of 10 % Cumulative Convertible Series D Preferred Stock at a price of $ 10.00 per share as payment for a customer’s outstanding AR balance of $88,410. This instrument is considered an equity security within the scope of Topic 321 since the issuing entity has the option but no contractual obligation to redeem the preferred stock, and the Company can convert the preferred shares to common stock. For the year ended December 31, 2022, a fair value gain of $ 12 thousand, was recognized and included in Loss on equity investments, in the accompanying Consolidated Statements of Operations. The fair value of the equity investment was $ 100 thousand as of December 31, 2022, and $ 88 thousand as of December 31, 2021, and included in Prepaid expenses and other current assets on the accompanying Consolidated Balance Sheets. The fair value of the equity investment is classified as Level 1 in the fair value hierarchy as the calculation is dependent upon the quoted market price of the entity. NOTE 3 – REVENUE Revenue by Category The following table presents our revenue disaggregated by various categories (dollars in thousands). Schedule of disaggregation of revenue VerifyMe PeriShip Global Consolidated Revenue Year Ended December 31, Year Ended December 31, Year Ended December 31, 2022 2021 2022 2021 2022 2021 Proactive services $ - - $ 15,202 - $ 15,202 $ - Premium services - - 2,988 - 2,988 - Brand protection services 1,386 867 - - 1,386 867 $ 1,386 $ 867 $ 18,190 $ - $ 19,576 $ 867 Contract Balances The timing of revenue recognition, billings and cash collections results in unbilled revenue (contract assets) and deferred revenue (contract liabilities) on the consolidated balance sheets. Amounts charged to our clients become billable according to the contract terms, which usually consider the delivery completion. Unbilled amounts will generally be billed and collected within 30 days but typically no longer than 60 days. When we advance bill clients prior to the work being performed, generally, such amounts will be earned and recognized in revenue within the 30 days. These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. Changes in the contract asset and liability balances during the year ended December 31, 2022, were not materially impacted by any other factors. Applying the practical expedient in ASC Topic 606, we recognize the incremental costs of obtaining contracts (i.e. sales commissions) as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. As of December 31, 2022, we did not have any capitalized sales commissions. F- 13 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements NOTE 4 – BUSINESS COMBINATION PeriShip LLC On April 22, 2022, we acquired, through PeriShip Global, the business and certain assets of PeriShip, LLC (“PeriShip”), a value-added service provider for time and temperature sensitive parcel management. PeriShip Global provides shipping logistics services utilizing proprietary predictive analytics software and supporting call center services. Using our proprietary software platform, we provide real-time information and analysis to mitigate supply chain flow interruption, delivering last-mile resolution for key markets, including the perishable healthcare and food industries. The purchase price was $ 10.5 million which consisted of $ 7.5 million in cash paid at closing, a promissory note of $ 2.0 million with a fixed interest rate of 6 % per annum on the unpaid principal balance, to be paid in three installments on the sixth, fifteenth, and eighteenth month anniversaries of the closing, and 305,473 shares of common stock of the Company, representing $1.0 million in stock consideration. The goodwill recognized is due to the expected synergies from combining the operations of the acquire with the Company. All of the goodwill recorded for financial statement purposes is deductible for tax purposes. The acquired PeriShip business is included in the PeriShip Global Solutions segment and the results of its operations have been included in the consolidated financial statements beginning April 22, 2022. On September 22, 2022, the Company entered into an agreement with the owner of PeriShip, LLC to resolve certain disputes among the parties, reduce the principal and interest on the promissory note, repay the amended promissory note in full, and repurchased 61,000 shares of the Company’s common stock (see Note 9). The Company accounted for the agreement in accordance with Topic 250, through earnings, with the full amount included as a Gain on extinguishment of debt on the accompanying Consolidated Statements of Operations for a total of $ 326 thousand, for the year ended December 31, 2022. The following table summarizes the purchase price allocation for the acquisition (dollars in thousands). Schedule of business acquisitions Cash 7,500 Promissory note 2,000 Stock (issuance of 305,473 shares of common stock) (1) 974 Total purchase price 10,474 Amortization Period Purchase price allocation: Accounts receivable, net 836 Prepaid expenses 5 Developed Technology 3,143 6 years Trade Names/Trademarks 1,111 13 years Customer Relationships 1,839 10 years Non-Compete Agreement 191 5 years Property and Equipment, net 193 Goodwill 3,988 Accounts payable and other accrued expenses ( 832 ) 10,474 (1) Stock issued was calculated based on the 15 days prior to April 22, 2022, volume-weighted average price (“VWAP”) calculated at $3.2736. Unaudited Pro forma Financial Information The following unaudited proforma financial information presents the combined results of operations of the Company and gives effect to the acquisition discussed above for the years ended December 31, 2022, and 2021, as if the acquisition had occurred as of the beginning of the first period presented instead of on April 22, 2022. The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the acquisition had been completed on January 1, 2021, nor does it purport to project the results of operations of the combined company in future periods. The pro forma financial information does not give effect to any anticipated integration costs related to the acquired company during the periods presented. F- 14 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements The below table summarizes proforma financial information for the Company, and the acquired PeriShip business, assuming the acquisition date of PeriShip occurred on January 1, 2021 (dollars in thousands): Schedule of financial information Years Ended December 31, Description 2022 2021 Revenues $ 25,397 $ 29,500 Net Income (loss) $ ( 14,298 ) $ 5,465 NOTE 5 – INTANGIBLE ASSETS AND GOODWILL Goodwill Goodwill represents costs in excess of values assigned to the underlying net assets of acquired businesses. Intangible assets acquired are recorded at estimated fair value. Goodwill is deemed to have an indefinite life and is not amortized but is tested for impairment annually, and at any time when events suggest an impairment more likely than not has occurred. We test goodwill at the reporting unit level. ASC Topic 350, Intangibles - Goodwill and Other (ASC Topic 350), permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. Under ASC Topic 350, an entity is not required to perform a quantitative goodwill impairment test for a reporting unit if it is more likely than not that its fair value is greater than its carrying amount. A reporting unit is an operating segment, or one level below an operating segment, as defined by U.S. GAAP. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. The timing and frequency of our goodwill impairment tests are based on an ongoing assessment of events and circumstances that would indicate a possible impairment. We will continue to monitor our goodwill and intangible assets for impairment and conduct formal tests when impairment indicators are present. Each of our two reportable segments represents an operating segment under ASC Topic 280, Segment Reporting . We test our goodwill at the reporting unit level, or one level below an operating segment, under ASC Topic 350, Intangibles - Goodwill and Other . We determined that we have two reporting units for purposes of goodwill impairment testing, which represent our two reportable business segments, as discussed below. For the year ended December 31, 2021, there were no goodwill activities. Changes in the carrying amount of goodwill by reportable business segment for the year ended December 31, 2022, were as follows (in thousands): Schedule of goodwill by reportable business segment VerifyMe PeriShip Global Total Net book value at January 1, 2022 $ - $ - $ - 2022 Activity Acquisition - 3,988 3,988 Net book value at December 31, 2022 $ - $ 3,988 $ 3,988 Intangible Assets Subject to Amortization Our intangible assets include amounts recognized in connection with patents and trademarks, capitalized software and acquisitions, including customer relationships, tradenames, developed technology and non-compete agreements. Intangible assets are initially valued at fair market value using generally accepted valuation methods appropriate for the type of intangible asset. Amortization is recognized on a straight-line basis over the estimated useful life of the intangible assets. Intangible assets with definite lives are reviewed for impairment if indicators of impairment arise. Except for goodwill, we do not have any intangible assets with indefinite useful lives. F- 15 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements Intangible assets with finite lives are subject to amortization over their estimated useful lives. The primary assets included in this category and their respective balances were as follows (in thousands): Schedule of intangible assets subject to amortization December 31, 2022 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Patents and Trademarks $ 1,858 $ ( 445 ) $ 1,413 Capitalized Software 206 ( 91 ) 115 Customer Relationships 1,839 ( 133 ) 1,706 Developed Technology 3,143 ( 360 ) 2,783 Internally Used Software 236 ( 4 ) 232 Non-Compete Agreement 191 ( 28 ) 163 $ 7,473 $ ( 1,061 ) $ 6,412 December 31, 2021 Patents and Trademarks $ 707 $ ( 354 ) $ 353 Capitalized Software 206 ( 50 ) 156 $ 913 $ ( 404 ) $ 509 Amortization expense for intangible assets was $ 657 thousand and $ 64 thousand for the year ended December 31, 2022, and 2021, respectively. Patents and Trademarks As of December 31, 2022, 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), six pending U.S. and foreign patent applications, fifteen registered U.S. trademarks (of which seven trademarks were acquired through our wholly owned subsidiary, PeriShip Global), 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 twenty-one pending US and foreign trademark applications. The Company expects to record amortization expense of intangible assets over the next 5 years and thereafter as follows (in thousands): Schedule of Finite-Lived Intangible Assets, Future Amortization Expense Fiscal Year ending December 31, 2023 $ 1,057 2024 877 2025 857 2026 842 2027 836 Thereafter 1,943 Total $ 6,412 As of December 31, 2022, our intangible assets with definite lives had a weighted average remaining useful life of 8.4 years. We have no amortizable intangible assets with indefinite useful lives. F- 16 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements NOTE 6 – 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, 2022, and 2021 is as follows (in thousands) : Schedule of reconciliation of federal statutory tax rate Year Ended December 31, US 2022 2021 Income (loss) before income taxes $ ( 14,400 ) $ ( 3,612 ) Taxes under statutory US tax rates ( 3,024 ) 759 Increase (decrease) in taxes resulting from: Increase (decrease) in valuation allowance ( 1,188 ) ( 6,149 ) Change in State tax rate ( 57 ) - All other 5,045 5,204 State taxes ( 776 ) 186 Income tax expense $ - $ - The decrease in the Company's net valuation allowance was due primarily to a realized loss in our equity investment (See Note 2-Equity Investment), and to net operating losses which will expire unutilized due to limitations resulting from application of Section 382 of the Internal Revenue Code of 1986, as amended (“IRC”). 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, 2022 2021 US Net operating loss carryforwards $ 6,495 $ 5,208 Restricted Stock (RSA’s, RSU’s) 503 180 Stock Options 562 678 Stock Purchase Plan (SPP) 8 - Depreciation ( 71 ) ( 33 ) Intangibles 22 9 Acquisition Transaction Costs 110 - Capitalized Research and Development 17 - Unrealized Gain on Investment ( 1 ) ( 2,188 ) Bad Debt 9 - Dividend Income ( 2 ) - Gross deferred tax assets $ 7,652 $ 3,854 Less valuation allowance ( 7,652 ) ( 3,854 ) Total deferred tax assets $ - $ - Deferred tax liabilities: Total deferred tax liabilities - - Net deferred tax assets / (liabilities) $ - $ - Utilization of the net operating losses (NOL) carryforwards may be subject to a substantial annual limitation as required by Section 382 of the IRC, due to ownership change of the company that could occur in the future, as well as similar state provisions. In general, an “ownership change” as defined by Section 382 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. These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income. In 2022, the Company completed the IRC Section 382 analysis, and determined that an ownership change occurred sufficient to impose additional limitations on the use of NOL carryforwards. For the year ended December 31, 2022, Federal and state NOLs of $ 23.1 million and $ 0 , respectively, will expire unutilized due to the limitations of Section 382, leaving Federal and state NOL carryforwards of $24.4 million and $13.1 million, respectively that may be offset against future taxable income. Some of the Federal and state tax NOL carryforwards 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 26.6 % for our projected available net operating loss carry-forward. No tax benefit has been reported in the December 31, 2022, due to the uncertainty surrounding the realizability of the benefit. F- 17 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements 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 $ 7.7 million at December 31, 2022. The Company did not utilize any NOL deductions for the year ended December 31, 2022. 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, 2022, and December 31, 2021, 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 no t recognized interest and/or penalties in the Statements of Operations for the years ended December 31, 2022, and 2021. The Company is subject to taxation in the United States and various state jurisdictions. The Company’s tax years from 2003 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, 2022, or December 31, 2021. NOTE 7— DEBT On April 22, 2022, the Company issued a $ 2.0 million unsecured promissory note through our subsidiary PeriShip Global as part of the acquisition of the PeriShip business. The note had a fixed interest rate of 6 % per annum on the unpaid principal balance, to be paid in three installments on the sixth, fifteenth, and eighteenth month anniversaries of the closing. On September 22, 2022, the Company entered into an agreement with the note holder whereby the Company repaid the outstanding principal balance and accrued interest outstanding on the note and redeemed 61,000 shares of its common stock from the holder of the note, for a total of $1.8 million, at which point the guarantee agreement entered into by the Company in connection therewith was automatically terminated and has no further effect. The Company accounted for the early extinguishment of debt in accordance with ASC 405-20 - Extinguishment of Liabilities , and recognized a gain included in Gain on extinguishment of debt on the accompanying Consolidated Statements of Operations of $ 326 thousand for the year ended December 31, 2022. Contemporaneously, the Company entered into a new debt facility with PNC Bank, National Association (the “PNC Facility”). The PNC Facility includes a $1 million revolving line of credit (the “RLOC”) with a term of one-year, expiring in September 2023. The RLOC has no scheduled payments of principal until maturity, and bears interest per annum at a rate equal to the sum of Daily SOFR plus 2.85% with monthly interest payments. The PNC Facility also includes a four-year term note (the “Term Note”) for $2 million which matures in September of 2026 and requires equal quarterly payments of principal and interest. The Term Note incurs interest per annum at a rate equal to the sum of Daily SOFR plus 3.1%. The RLOC and Term Note are guaranteed by the Company and secured by the assets of PeriShip Global and the Company. The PNC Facility includes a number of affirmative and restrictive covenants applicable to PeriShip Global, including, among others, a financial covenant to maintain a fixed charge coverage ratio of at least 1.10 to 1.00 at the end of each fiscal year, affirmative covenants regarding delivery of financial statements, payment of taxes, and establishing primary depository accounts with PNC Bank, and restrictive covenants regarding dispositions of property, acquisitions, incurrence of additional indebtedness or liens, investments and transactions with affiliates. PeriShip Global is also restricted from paying dividends or making other distributions or payments on its capital stock if an event of default (as defined in the PNC Facility) has occurred or would occur upon such declaration of dividend. PeriShip Global was in compliance with all affirmative and restrictive covenants under the PNC Facility at December 31, 2022. Effective October 17, 2022, the Company entered into an interest rate swap agreement, with a notional amount of $ 1,958 thousand, effectively fixing the interest rate on the Company’s outstanding debt at 7.602 % . The Company has designated the intertest rate swap, expiring September 2026, as a cash flow hedge and have applied hedge accounting. The fair value of the derivative liability associated with the interest rate swap was $3 thousand as of December 31, 2022, and is included in Long-term Derivative Liability on the Consolidated Balance Sheets. As of December 31, 2022, our short-term debt outstanding under the Term Note was $ 0.5 million and total long-term debt outstanding under the Term Note was $ 1.4 million. No amounts were drawn on the RLOC as of December 31, 2022. F- 18 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements 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 was scheduled to mature on May 17, 2022 , and bore 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. 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 Consolidated 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, 2022, and 2021, 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 $ 239 thousand and $ 784 thousand related to restricted stock awards for the years ended December 31, 2022, and December 31, 2021, respectively. The Company expensed $ 1,084 thousand and $ 696 thousand related to restricted stock units for the years ended December 31, 2022, and December 31, 2021, respectively. During the year ended December 31, 2022, and 2021, the Company issued 30,000 and 9,774 shares of common stock in relation to services with a stock-based compensation expense of $ 96 thousand and $ 39 thousand, respectively. On August 11, 2022, we received an exercise notice to exercise 675,000 pre-funded warrants with an exercise price of $ 0.001 per share. Upon receipt of $ 675 the Company issued 675,000 shares of its common stock. On April 22, 2022, 305,473 shares of common stock were issued in relation to the acquisition of the PeriShip business, see Note 4 – Business Combinations, for details. On April 15, 2022, the Company withheld and retired 750 shares of common stock in order to satisfy U.S. payroll tax withholding obligations on restricted stock awards held by our Chief Financial Officer. On April 12, 2022, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with a selling stockholder and certain directors, providing for the issuance and sale to purchasers therein of an aggregate of 880,208 shares of our common stock, pre-funded warrants to purchase up to 675,000 shares of our common stock, and warrants to purchase up to 1,555,208 shares of our common stock, for gross proceeds to us of approximately $5.0 million and net proceeds of $4.6 million. The pre-funded warrant is exercisable immediately and shall terminate when fully exercised and has an exercise price of $0.001 per share. The pre-funded warrant was exercised in full on August 11, 2022. The warrants will be exercisable for a period of five years commencing six months from the date of issuance and have an exercise price of $3.215 per share. Both the pre-funded warrants and warrants contain price adjustment provisions which may, under certain circumstances, reduce the applicable exercise price. The transaction closed on April 14, 2022. On March 29, 2022, the Company withheld and retired 8,870 shares of common stock in order to satisfy U.S. payroll tax withholding obligations on restricted stock awards held by our Chief Executive Officer. 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. In relation to the non-qualified stock purchase plan the Company expensed $ 122 thousand and $ 40 thousand for the years ended December 31, 2022 and December 31, 2021, respectively. F- 19 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements Shares Held in Treasury As of December 31, 2022, and December 31, 2021, the Company had 389,967 and 223,956 shares, respectively, held in treasury with a value of approximately $ 949 thousand and $ 838 thousand, respectively. 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 from treasury with a purchase price of $ 2.69 per share. On August 31, 2022, four participants exercised their option under the Company’s non-qualified stock purchase plan, and as a result, 28,895 shares were issued from treasury with a purchase price of $ 1.20 per share. On September 22, 2022, the Company paid $1.8 million of the $2.0 million principal amount promissory note issued to the seller in connection with the PeriShip acquisition, inclusive of the Company redeeming 61,000 shares of its common stock from the seller, pursuant to an agreement with the seller, see Note 4. Shares Repurchase Program 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. Effective July 1, 2022, the Company’s Board of Directors terminated the existing share repurchase program and approved a new share repurchase program to replace the existing program due to expire on August 16, 2022, to allow the Company to spend up to $ 1.5 million to repurchase shares of its common stock, so long as the price does not exceed $5.00 until July 1, 2023. During year ended December 31, 2022, the Company repurchased 158,906 shares of common stock under the Company’s current 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”) which covered the potential issuance of 260,000 shares of common stock. The 2017 Plan provided that directors, officers, employees, and consultants of the Company were eligible to receive equity incentives under the 2017 Plan at the discretion of the Board or the Board’s Compensation Committee. On August 10, 2020, the Company’s Board of Directors adopted the 2020 Equity Incentive Plan (the “2020 Plan”), subject to stockholder approval, which 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. F- 20 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements 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. Stock Options Schedule of stock options 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, 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 Granted - - Forfeited/Cancelled/Expired ( 128,000 ) 3.74 Balance as of December 31, 2022 337,471 4.63 Exercisable as of December 31, 2022 337,471 $ 4.63 2.4 $ - (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, 2022, and 2021, the Company had no unvested stock options. F- 21 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements The following table summarizes the activities for the Company’s unvested stock options for the year ended December 31, 2022, and 2021: Schedule of Unvested Options Unvested Options Weighted - Average Number of Grant Unvested Options Date Exercise Price Balance at December 31, 2020 10,000 $ 9.75 Granted - - Vested ( 10,000 ) 9.75 Balance at December 31, 2021 - - Granted - - Vested - - Balance at December 31, 2022 - $ - During the year ended December 31, 2022, and 2021, the Company expensed $ 0 thousand and $ 85 thousand with respect to options. As of December 31, 2022, and 2021, there was $ 0 unrecognized compensation cost related to outstanding stock options. Restricted Stock Awards and Restricted Stock Units The following table summarizes the unvested restricted stock awards as of December 31, 2022 and 2021: Schedule of unvested restricted stock awards Unvested Restricted Stock Awards Weighted - Average Number of Grant Award Shares Date Fair Value Balance at December 31, 2020 267,500 3,80 Granted 89,284 4,32 Vested ( 312,142 ) 3.87 Balance at December 31, 2021 44,642 4.31 Granted 39,308 3.18 Vested ( 42,142 ) 4.32 Balance at December 31, 2022 41,808 $ 3.24 As of December 31, 2022, and 2021, total unrecognized share-based compensation cost related to unvested restricted stock awards was $ 2 thousand and $ 115 thousand respectively, which is expected to be recognized over a weighted-average period of 0.02 years as of December 31, 2022. F- 22 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements The following table summarizes the unvested restricted stock units as of December 31, 2022 and 2021: Schedule of unvested restricted stock units Unvested Restricted Stock Units Weighted - Average Number of Grant Unit Shares Date Fair Value Unvested at December 31, 2020 - - Granted 208,010 4.05 Vested ( 21,000 ) 3.44 Unvested at December 31, 2021 187,010 4.11 Granted 418,041 2.14 Vested ( 191,425 ) 4.07 Balance at December 31, 2022 $ 413,626 $ 2.14 As of December 31, 2022, and 2021, total unrecognized share-based compensation cost related to unvested restricted stock units was $ 284 thousand and $ 146 thousand respectively, which is expected to be recognized over a weighted-average period of 1.02 years as of December 31, 2022. For RSUs with stock price appreciation targets, we applied a lattice approach that incorporated a Monte Carlo simulation, which involved random iterations that took different future price paths over the RSU’s contractual life based on the appropriate probability distributions (which are based on commonly applied Black Scholes inputs). The fair value of each grant was determined by taking the average of the grant date fair values under each Monte Carlo simulation trial. We recognize compensation expense on a straight-line basis over the derived service period and there is no ongoing adjustment or reversal based on actual achievement during the period. The following table summarizes the unvested performance restricted stock units as of December 31, 2022. There were no performance restricted stock units prior to the year 2022.: Schedule of unvested performance restricted stock units Unvested Performance Restricted Stock Units Weighted - Average Number of Grant Unit Shares Date Fair Value Unvested at December 31, 2021 - - Granted 432,326 2.95 Vested - - Balance at December 31, 2022 $ 432,326 $ 2.95 As of December 31, 2022, total unrecognized share-based compensation cost related to unvested restricted stock units was $ 947 thousand, which is expected to be recognized over a weighted-average period of 2.23 years. F- 23 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements Warrants The following table summarizes the activities for the Company’s warrants for the year ended December 31, 2022 and 2021: Schedule of warrants outstanding Warrants Outstanding (Excluding Pre-Funded Warrants) Number of Warrant Shares Weighted- Average Exercise Price Weighted - Average Remaining Contractual Term in years) Aggregate Intrinsic Value (in thousands) (1) Balance at December 31, 2020 3,779,243 $ 5.89 Granted - - Expired - - Balance at December 31, 2021 3,779,243 5.89 Granted 1,590,150 3.22 Expired ( 265,938 ) 19.21 Balance at December 31, 2022 5,103,455 $ 4.34 3.0 Exercisable at December 31, 2022 5,103,455 $ 4.34 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 $1.16 for our common stock on December 31, 2022. For the year ended December 31, 2022, and 2021, the Company granted 34,942 warrants and 0 warrants to warrant holders pursuant to anti-dilution provisions, 1,555,208 warrants and 0 warrants in conjunction with the Securities Purchase Agreement, respectively (see Note 9 – Stockholders’ Equity). As the fair value of the warrants granted would have had a net zero impact to equity (increasing additional paid in capital and offering costs for the same amount), the Company did not break out or complete a separate valuation of the warrants granted in association with either capital raise. Pre-funded Warrants On April 14, 2022, in connection with our Securities Purchase Agreement (see Note 9 – Stockholders’ Equity), the Company issued 675,000 pre-funded warrants to purchase up to an aggregate of 675,000 shares of common stock at a purchase price of $3.214 per pre-funded warrant, which represented the per share public offering price for the common stock less the $0.001 per share exercise price for each pre-funded warrant. In August 2022, 675,000 pre-funded warrants with an exercise price of $ 0.001 per share were exercised, and 675,000 shares of the Company’s common stock were issued. No pre-funded warrants are outstanding as of December 31, 2022. F- 24 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements 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): Schedule of basic and diluted earnings/(loss) per share Years Ended December 31, 2022 2021 Numerator: Net Income/(Loss) $ ( 14,398 ) $ 3,612 Denominator: Weighted average shares of common stock – basic 8,466,075 7,110,907 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 8,466,075 7,383,364 (Loss)/Earnings per share Basic $ ( 1.70 ) $ 0.51 Diluted $ ( 1.70 ) $ 0.49 F- 25 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements The following table represents the weighted average number of anti-dilutive instruments excluded from the computation of diluted (loss)/earnings per share: Schedule of anti-dilutiv e earnings per share Years Ended December 31, 2022 2021 Anti-dilutive instruments excluded from computation of diluted net income/(loss) per share: Preferred Stock 144,444 - Stock Options 337,471 177,334 Warrants 5,103,455 3,779,048 Stock purchase plan 57,245 - Restricted Stock Units and Restricted Stock Awards 887,760 13,196 NOTE 12— LONG TERM DERIVATIVE LIABILITY On April 7, 2022, the Company granted two directors 11,250 restricted stock units each (“SPAC RSUs”) with respect to the common stock, $0.0001 par value per share, of G3 VRM Acquisition Corp. The SPAC RSUs were to vest upon the initial business combination of the SPAC (see Note 2 – Equity Investments) subject to continuous service to the Company through the vesting date. Each vested SPAC RSU represented the right to receive the value of one share of stock in G3 VRM Acquisition Corp., which would have been paid to the director as soon as practicable after the fifteen-month anniversary of the vesting date. On September 17, 2021, the Company granted two directors SPAC RSUs with respect to the common stock, $ 0.0001 par value per share, of G3 VRM Acquisition Corp. The SPAC RSUs were to vest upon the initial business combination of the SPAC (see Note 2 – Equity Investments) subject to continuous service to the Company through the vesting date. Each vested SPAC RSU represented the right to receive the value of one share of stock in G3 VRM Acquisition Corp., which was to 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. As the underlying awards were not the Company’s stock but an unrelated, publicly traded entity’s shares, the Company accounted 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 Consolidated Statements of Operations. In June 2022, the Sponsor Entity decided not to fund the extension for the time that the SPAC had to complete its initial business combination. As a result, the SPAC was dissolved and liquidated in accordance with its charter and under ASC 815, and the derivative instrument was terminated. As a result, the SPAC RSUs were forfeited. For the year ended December 31, 2022, the Company has recorded the effect of termination to reduce the fair value and recorded a credit to share-based compensation expense of $71 thousand in relation to these awards. The fair value of the derivative liability was $ 0 as of December 31, 2022, and $ 71 thousand as of December 31, 2021. Effective October 17, 2022, the Company entered into an interest rate swap agreement (see Note 7 – Debt for details). The fair value of the derivative liability associated with the interest rate swap was $3 thousand as of December 31, 2022, and $0 as of December 31, 2021. F- 26 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements NOTE 13 – EMPLOYEE BENEFIT PLAN We offer the VRME Retirement Savings Plan (the “Plan”) to our employees. Eligible employees can elect to participate in the Plan, as soon as administratively feasible after enrollment. The Plan permits pre-tax contributions to the Plan by participants pursuant to Section 401(k) of the Internal Revenue Code (IRC). We make matching contributions at our discretion. In 2022 and 2021 we contributed a value of approximately $ 103 thousand and $ 10 thousand respectively and is recognized as compensation expense in the consolidated statements of operations for matching contributions to the Plan. NOTE 14 – LEASES The Company accounts for its leases under Accounting Standard Codification (“ASC”) Topic 842, Leases. The Company determines at its inception whether an arrangement that provides us control over the use of an asset is a lease. We recognize at lease commencement a right-of-use (ROU) asset and lease liability based on the present value of the future lease payments over the lease term. We have elected not to recognize a ROU asset and lease liability for leases with terms of 12 months or less. Our current long-term lease includes an option to extend the term of the lease prior to the end of the initial term. It is not reasonably certain that we will exercise the option and have not included the impact of the option in the lease term for purposes of determining total future lease payments. As our lease agreement does not explicitly state the discount rate implicit in the lease, we use our promissory note borrowing rate to calculate the present value of future payments. In addition to the base rent, real estate leases typically contain provisions for common-area maintenance and other similar services, which are considered non-lease components for accounting purposes. For our real estate leases, we apply a practical expedient to include these non-lease components in calculating the ROU asset and lease liability. For all other types of leases, non-lease components are excluded from our ROU assets and lease liabilities and expensed as incurred. We have operating leases for office facilities. We do not have any finance leases. Lease expense is included in General & Administrative Expenses on the accompanying Consolidated Statements of Operations. The components of lease expense were as follows (in thousands): Schedule of components of lease expense Years ended December 31, 2022 2021 Operating lease cost $ 85 $ - Short-term lease cost 18 14 Total lease costs $ 103 $ 14 Supplemental information related to leases was as follows (dollars in thousands): Schedule of supplemental information related to leases December 31, 2022 December 31, 2021 Operating Lease right-of-use asset $ 469 $ - Current portion of operating lease liabilities $ 115 $ - Non-current portion of operating lease liabilities $ 359 $ - Total operating lease liabilities $ 474 $ - Cash paid for amounts included in the measurement of operating lease liabilities $ 80 $ - Right-of-use assets obtained in exchange for operating lease liabilities $ 552 $ - Weighted-average remaining lease term for operating leases (years) 4.3 Weighted average discount rate for operating leases 6.0 % F- 27 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements The following is a reconciliation of future undiscounted cash flows to the operating lease liabilities on our consolidated balance sheets as of December 31, 2022 (in thousands): Schedule of operating lease liabilities maturities Year ended December 31, 2023 $ 122 2024 126 2025 130 2026 134 Thereafter 45 Total future lease payments 557 Less: imputed interest ( 83 ) Present value of future lease payments 474 Less: current portion of lease liabilities ( 115 ) Long-term lease liabilities $ 359 NOTE 15 – CONCENTRATIONS During the year ended December 31, 2022, one customer represented 13 % of revenues and five customers represented 95 % of revenues for the year ended December 31, 2021. As of December 31, 2022, two customers made up 23 % of accounts receivable. As of December 31, 2021, three customers accounted for 91 % of total accounts receivable. During the year ended December 31, 2022, one vendor accounted for 99 % of transportation costs, in our PeriShip Global Solutions segment. NOTE 16 – SEGMENT REPORTING As of December 31, 2022, we operated through two reportable business segments: (i) PeriShip Global Solutions and (ii) VerifyMe Solutions. PeriShip Global Solutions: This segment offers a value-added service provider for time and temperature sensitive parcel management. Through logistics management from a sophisticated IT platform with proprietary databases, package and flight-tracking software, weather, traffic, and flight status monitoring systems, as well as dynamic dashboards with real-time visibility into shipment transit and last-mile events that are managed by a call center Using our proprietary IT platform, we provide real-time information and analysis to mitigate supply chain flow interruption, delivering last-mile resolution for key markets, including the perishable healthcare and food industries. VerifyMe Solutions . This segment specializes in solutions that connect brands with consumers through their products. Consumers can authenticate products with their smart phone prior to usage, and brand owners have the ability to gather business intelligence while engaging directly with their consumers. Our VerifyMe Solutions also provide brand protection and supply chain functions such as counterfeit prevention. We do not allocate the following items to the segments: general and administrative expenses, research and development expense, sales and marketing expenses, and other income (expense). F- 28 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements The following table sets forth the revenue and operating results attributable to each reportable segment and includes a reconciliation of segment revenue to consolidated revenue and operating results to consolidated loss before income tax expense (in thousands): Schedule of segment reporting information Years Ended December 31, 2022 2021 Revenue PeriShip Global Solutions $ 18,190 $ - VerifyMe Solutions 1,386 867 Total Revenue $ 19,576 $ 867 Gross Profit PeriShip Global Solutions $ 5,505 $ - VerifyMe Solutions 983 599 Total Gross Profit 6,488 599 General and administrative 8,428 4,216 Research and development 89 51 Sales and marketing 1,718 1,163 LOSS BEFORE OTHER (EXPENSE) INCOME ( 3,747 ) ( 4,831 ) OTHER (EXPENSE) INCOME ( 10,651 ) 8,443 NET (LOSS) INCOME $ ( 14,398 ) $ 3,612 Additional information relating to our business segments is as follows (in thousands): Identifiable assets: Years Ended December 31, 2022 2021 PeriShip Global Solutions $ 17,302 $ - VerifyMe Solutions 3,450 21,688 Total Assets $ 20,752 $ 21,688 NOTE 17 – SUBSEQUENT EVENTS On March 1, 2023, the Company entered into an Asset Purchase Agreement (the “APA”) effective as of February 28, 2023 (the “Effective Date”) by and among the Company, Trust Codes Global, Trust Codes Limited, a New Zealand limited liability company that specializes in unique item level codes for brand protection, data intelligence and consumer engagement technology with an expertise in the food and agriculture industry (“Trust Codes” or “Seller”) and Signum Holdings Limited (“Seller’s Parent”). Pursuant to the terms of the APA Trust Codes Global agreed to purchase from Trust Codes and Trust Codes agreed to sell to Trust Codes Global substantially all of the assets of Trust Codes and certain specified liabilities (the “Transaction”). The Transaction closed simultaneously with the execution of the APA on March 1 , 2023 (the “Closing”). The total consideration paid to the Seller at Closing in connection with the Transaction was approximately $ 1,000,000 , which consisted of approximately $ 350,000 in cash (the “Cash Consideration”); and the issuance of 353,492 shares of restricted common stock of the Company at $ 1.84 per share (the “Stock Consideration”) (representing $ 650,000 in Stock Consideration). The total consideration due under the Transaction is subject to certain post-Closing adjustments, which shall be accounted for in the first cash earnout payment, discussed below, if applicable. F- 29 Table of Contents VerifyMe, Inc. Notes to the Consolidated Financial Statements Under the APA, during the five-year period ending on the fifth anniversary of the Effective Date, Trust Codes Global shall pay the Seller quarterly cash earnout payments equal to 18% of the gross margin earned on existing customers and the Company shall issue to the Seller annual equity earnout payments of restricted shares of the Company’s common stock equal to 20% of gross margin earned on new customers during the applicable 12 month period divided by the VWAP for the 30-day period ending on the last day of the 12-month period, inclusive. If the value of equity earnout shares issued exceeds $3.1 million at any time during the earnout period, then any subsequent amount of equity earnout shall be reduced to 10% of gross margin earned on new customers received during the applicable 12-month period. In certain circumstance Trust Codes Global may pay cash in lieu of the Company issuing restricted common stock for the equity earnout. The APA is structured to comply with the shareholder approval requirements of the Nasdaq listing rules and contains a blocker provision which prevents the Seller from receiving any equity earnout shares should such earnout shares, in connection with the Stock Consideration, cause the Seller to beneficially own more than 19.99% of the voting securities of the Company. The APA contains customary confidentiality and indemnification provisions and customary representations, warranties and covenants by the parties for transactions of this type and also contains a five-year non-compete and non-solicitation provision applicable to the Seller, Seller’s Parent, and each of their affiliates, in favor of the Company and Trust Codes Global. On February 28, 2023, fourteen participants exercised their option under the Company’s non-qualified stock purchase plan, and as a result, 57,245 shares were issued with an exercise price of $ 1.19 . Effective March 15, 2023, the Company’s Chief Executive Officer, Patrick White, resigned as an officer and director of the Company. Scott Greenberg, the Company’s executive chairman of the Board, was appointed as Interim Chief Executive Officer. In connection with his resignation, Mr. White will receive payments totaling $159 thousand. In addition the Company awarded him 111,364 restricted stock units, with a grant date value equal to 70% of his annual base salary, each such unit representing the contingent right to receive one share of the Company’s common stock, par value $0.001 per share, subject to the terms of the Company’s 2020 Plan. These restricted stock units, except as otherwise provided in the award agreement, vest within three years in equal tranches provided the Company’s stock price exceeds $2.75 and $3.75 per share for twenty consecutive trading days. In connection with the grant of the restricted stock units Mr. White forfeited his outstanding award of restricted stock units granted pursuant to a Restricted Stock Unit Award Agreement dated February 26, 2022. In connection with his appointment as Interim Chief Executive Officer, Mr. Greenberg was awarded 56,819 restricted stock units, with a grant date value equal to $ 100,000 , each such unit representing the contingent right to receive one share of the Common Stock, subject to the terms of the 2020 Plan. These restricted stock units, except as otherwise provided in the award agreement, vest within three years in equal tranches provided the Company’s stock price exceeds $2.75 and $3.75 per share for twenty consecutive trading days. F-30