UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2018

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                      to                     

Commission File Number 0-31927

VERIFYME, INC.

(Exact Name of Registrant as Specified in Its Charter)

Nevada	23-3023677
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

 75 S. Clinton Avenue Rochester, NY  14604

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (585) 736-9400

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o or No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o or No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x or No  o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x    No o 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or, an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company”, in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company x
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o or No  x

The aggregate market value of the common stock held by non-affiliates of the registrant was $13,434,238 as of June 30, 2018 based on the price in which the common stock of the registrant was last sold as reported by the OTCQB. Shares of common stock held by each current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not a conclusive determination for other purposes.

The registrant had 103,963,166 shares of common stock outstanding as of the close of business on March 29, 2019.

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VERIFYME, INC.

FORM 10-K ANNUAL REPORT

Year Ended December 31, 2018

		Page
PART I
Item 1.	Business	4
Item 1A.	Risk Factors	21
Item 1B.	Unresolved Staff Comments	21
Item 2.	Properties	21
Item 3.	Legal Proceedings	21
Item 4.	Mine Safety Disclosures	21
PART II
Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities	22
Item 6.	Selected Financial Data	23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 8.	Financial Statements and Supplementary Data	34
Item 9.	Changes in and Disagreements With Accountants on Accounting Financial Disclosure Statements and Supplementary Data	34
Item 9A.	Controls and Procedures	34
Item 9B.	Other Information	35
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	36
Item 11.	Executive Compensation	40
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	44
Item 13.	Certain Relationships and Related Transactions, and Director Independence	45
Item 14.	Principal Accountant Fees and Services	46
PART IV
Item 15.	Exhibits and Financial Statement Schedules	48
Item 16.	Form 10-K Summary	49

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PART I

ITEM 1. BUSINESS. 

Overview

VerifyMe, Inc. (the “Company,” “VerifyMe,” “we,” “us,” or “our”) is a technology pioneer in the brand protection/anti-counterfeiting industry. The Company was formed as LaserLock Technologies, Inc., in Nevada on November 10, 1999. For the last three years the Company has been engaged in researching, developing, and monetizing products in the brand protection, authentication, serialization, track and trace and anti-counterfeiting industries. This broad market encompasses identifying and preventing counterfeiting of physical and material goods and products, prevent product diversion enable brand owners to monitor, control and protect their products life cycle, as well as authenticating people in digital transactions. We have the ability to deliver security solutions for identification and authentication of people and products in a variety of applications in the security fields of authentication, counterfeit prevention and product diversion. Our products can be used to print, secure and covertly serialize labels and packaging for brand owners, manage and issue secure credentials including national identifications, passports, driver licenses and access control credentials, as well as comprehensive authentication security software to securely process digital financial transactions, provide secure physical and logical access to facilities, computer networks, internet sites and mobile applications.

Our physical printing technologies we own enable businesses to reconstruct their overall approaches to security—from brand protection, product diversion and counterfeit identification to employee or customer monitoring. Potential applications of our technologies are available in different types of products and industries—e.g., banking, gaming, apparel, tobacco, cosmetics, food, beverages, plastics, metal, event and transportation tickets, manufactured goods, fabrics, parts, driver’s licenses, insurance cards, passports, computer software, and credit cards. We can generate sales through re-seller agreements of our technology and through direct sales of our technology to global brand owners, label and packaging printers.

Our physical printing technologies involve the utilization of invisible and/or color changing inks, which are compatible and printed with today’s digital and standard printing presses. The inks may be used with certain printing systems such as digital, offset, flexographic, silkscreen, gravure, inkjet and laser. The inks can be printed in both a static image and variable image utilizing digital printing presses and third party digital inkjet systems which are attached to traditional printing presses. Our invisible ink can be a fixed image, variable image or a serialized code, bar code or QR code. We have developed a product which attaches to a smart-phone that reads our invisible ink codes into sophisticated cloud based track and trace software. We also have a product that informs users that our invisible ink is present for authentication. Based upon our experience, we believe that the ink technologies may be incorporated into most existing manufacturing processes.

 The challenges associated with digital access control and identity theft are problems that are highly relevant in the world today. Consumers, citizens, employees, governments and employers demand comprehensive solutions that are reliable but not intrusive. The current widespread use of passwords and personal identification numbers, or PINs for authentication has proven to be unsecure and inadequate. Individuals increasingly expect anywhere-anytime experiences—whether they are making purchases, creating financial transactions, banking, crossing borders, accessing services or logging into online accounts or corporate resources. They expect those experiences to ensure the protection of their privacy and to provide uncompromising confidentiality. 

In February 2018, we entered into a reseller agreement with a global label manufacturer (the “GLM”). This particular label printer began printing our technology in July of 2018 and has major brand owners as clients which can utilize our technologies to protect their product labels and packaging from counterfeiting and product diversion. This label printer owns and operates printers and manufacturing equipment which can implement the Company’s technology. This reseller also has manufacturing facilities around the globe. 

In 2018, we entered into two other reseller agreements with print service providers (“PSP”). One of these PSPs is testing for a global consumer products company.

In March 2018 we entered into a strategic partnership with S-One Labels & Packaging, a division of S-One LP (“S-One”). S-One provides companies with product and sales channels, technical and marketing support, digital development support, and distribution channels through the other companies which have partnered with S-One. S-One will provide the Company with global sales, distribution, and promotion support for the Company’s products and will employ a representative that will be solely dedicated to promoting the Company’s products. Under the terms of the Company’s agreement with S-One, S-One will act as a sales and marketing contractor for the Company’s printed products and services on a global basis and will assist the Company in fulfilling the Company’s obligations under the Company’s signed current and future reseller agreements with global and domestic print providers and brand owners.

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Business Update

2018 can be categorized as a year of continued product development and early stage revenue generation. In order to penetrate the security printing market, the company had to modernize its invisible ink technology, called RainbowSecure™. The company had to create the ability to utilize RainbowSecure™ as an invisible code that contained data that could be read into sophisticated software that resides in the cloud. To accomplish this task, the company created a device that attaches to a smart phone. After several prototypes, this device was successfully tested in 2018 and is now being manufactured. The first units are expected to be received and ready for leasing to brand owners, inspectors and print service providers in April 2019.

In conjunction with the new smart phone reading device, we finalized our “VeriPAS” software which is based in the cloud and gives brand owners the ability to monitor, control and protect their products life cycle. This software resides in the cloud and brand owners access it over the internet. The software generates serialization codes which the brand owner purchases from VerifyMe. These codes are then printed on labels and packaging in both visible codes for consumers to engage and invisible codes known as RainbowSecure™ which trained brand inspectors review with our reading device.

The company signed 3 contracts with print service providers in 2018. This is the beginning of revenue generation. We feel revenue will ramp up in 2019 due to the manufacturing of our new smart phone reading devices which are scheduled for delivery in April 2019, the addition of our new VP of Business Development who was hired in late 2018, the completed training of our marketing and sales partner, S-One LP, and the installation of our products into the HP Experience Centers located in Tel Aviv, Israel, Singapore, Barcelona, Spain and Alpharetta, GA  where customers can perform tests and get hands on experience with the Company’s technologies.

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Physical Printing Security Technology

In September of 2017 we announced a five-year contract with the Indigo Division of HP Inc. (NYSE:HPQ) ("HP Indigo") a global printing technology leader.  HP Indigo is a leader in manufacturing digital printing presses.  These presses print both static and variable high-quality images such as personalized labels and packaging for major brand owners.  Our technology was tested and approved by HP Indigo for use on the HP Indigo 6000 series press models. It is currently being qualified for the larger HP Indigo 30,000 series.

This press is mainly used to print labels and packaging for major world-wide brand owners.  HP Indigo and VerifyMe incorporate VerifyMe's pigment products with HP Indigo's ElectroInk to be used for packaging, label authentication, anti-counterfeiting, anti-diversion and covert item level serialization for supply chain and distribution security.

This solution will be marketed as RainbowSecure™ powered by HP Indigo and sold globally by VerifyMe to HP Indigo customers. The solution includes a HP Indigo security ElectroInk as well as VerifyMe's readers and authentication tools that can be used in conjunction with the security ElectroInk. Both companies will provide support to HP Indigo customers that use the RainbowSecure™ solution on HP Indigo's digital printing presses.

The HP Security ElectroInk containing RainbowSecure™ is in an ink canister that is mounted into the digital Indigo printing press along with the other traditional ink stations.  Since the HP Indigo is a digital press, the VerifyMe RainbowSecure™ technology prints covert serialization numbers, codes or images either fixed or variable mainly on labels and packaging which are revealed when using VerifyMe’s hand-held authentication devices.

As an add-on track and trace feature of our RainbowSecure™ covert imaging, VerifyMe has contracted with Micro Focus International PLC (NYSE:MFGP), a global software developer to utilize their visible QR code system called Global Protected Authentication System (“GPAS”) which is printed on labels and packaging along with our covert RainbowSecure™ to store our hidden covert serial number in the cloud for product diversion investigators to authenticate with a proprietary app on a mobile device.  The Micro Focus “GPAS” Global Product Authentication Service allows customers to use their smartphone to scan a product’s QR code or send the code via a text message. Immediate results help verify whether the product is real or counterfeit. This helps save customers from potential physical harm and businesses from facing lawsuits, loss of revenue and brand erosion.  In addition to the anti-counterfeiting image, the Micro Focus Track and Trace software has a “Big Data” gathering system with real-time analytics which geographically locate and identify counterfeiting activity by using an easily configured rules engine.  VerifyMe’s covert or invisible RainbowSecure™ system works as an extra layer of protection for the GPAS system.  When a professional product investigator scans the Micro Focus visible QR code with a special app on a smart phone it brings him to the VerifyMe secure cloud application to see what the hidden serialization number printed by the HP Indigo is for that particular label or package.  The product investigator then uses the VerifyMe RainbowSecure™ reading device to compare the hidden serialization number against the cloud number to prove authenticity.

Under the contract with Micro Focus, VerifyMe has a re-seller agreement where VerifyMe sells the combined Micro Focus GPAS system with our RainbowSecure™ identifier under the name VeriPAS^tm.

Under the terms of the Company’s; agreement with the Label Manufacturer, the Label Manufacturer will be able to create and print labeling containing the VerifyMe RainbowSecure™ ink technology.

HP has their own QR code track and trace system called, “HP Link Technology”.  HP Link competes with the Micro Focus GPAS system.  VerifyMe is in continuing discussions to build a similar covert serialization number layer utilized in the Micro Focus GPAS system into HP Indigo’s Link system.

We believe that the physical printing technologies we own, coupled with our contract with HP Indigo we will enable brand owners to securely prevent counterfeiting, prevent product diversion and authenticate labels, packaging and products and alleviate the brand owner’s liability from counterfeit knockoffs which physically harm consumers. Our covert technologies give the brand owner the ability to control, monitor and protect their products life cycle. Also, our technologies allow the brand owner to prove that the product causing an issue is authentic or made by a counterfeiter.

In addition to packaging and labels our physical security printing technologies can be applied to authenticate important credentials such as driver’s licenses, plastics, metal, apparel, birth certificates, immigration documents, gaming, apparel, currency, event and transportation tickets, passports, computer software, and credit cards. With our new partnerships described in this annual report (the “Annual Report”), our goal is to generate revenue through licenses and royalties of our technology and through direct sales of our technology.

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Anti-Counterfeiting Technologies and Products

Recent developments in copying and printing technologies have made it easier to counterfeit a wide variety of documents and products.  We have broken the current state of counterfeiting into two types.  The first type is what we call “Traditional Counterfeiting” These include mainly paper type documents and instruments such as bank checks, birth certificates, credentials, identification documents, stock certificates, currency, lottery tickets, credit cards, driver’s licenses, event and transportation tickets, coupons, and travelers’ checks.  As you can see most of the Traditional Counterfeiting targets are mainly paper type instruments which can be traditionally copied, scanned, color copied, hand drawn, etc. by both professional and consumers alike.  The other type of counterfeiting we call “Modern Counterfeiting”.  Although Traditional Counterfeiting targets are extremely important and cause mainly financial harm, “Modern Counterfeiting” targets on the other hand are much more sophisticated.  Both organized crime, consumers, small and large businesses and even governments partake in Modern Counterfeiting.  Modern Counterfeiting consists of the actual counterfeiting of major brand owner’s products such as expensive luxury items like jewelry, purses, military items (sabotage), drug manufacturing, consumables like tobacco, alcohol, golf clubs and even food and beverages.  Not only is the packaging and labeling counterfeited, the actual products are counterfeited.  The modern counterfeiter has become the scourge of the earth.  There are even reports of whole companies being counterfeited.  People are getting sick and sometimes even killed with counterfeit cough syrup, watered down cancer drugs and even toothpaste containing poisonous substances.

Not only are consumers at risk, brand owners are also at risk.  Normally brand owners feel a financial impact when someone is selling or diverting their products by counterfeiters.  The financial impact seems to be the lesser of the risk factors.  The additional more impactful risk facing brand owners and drug manufacturers is the liability issue.  A brand owner may be called to a court room to prove that a product is authentic or counterfeit to avoid major liability exposure in the form of judgements and fines as well as the extremely severe negative marketing exposure for such issues.

Brand owners do not want their products published as the name of a product that injured or harmed a consumer.  Our covert RainbowSecure™ technology can be utilized by brand owners to authenticate products, labels and packaging in those circumstances.  We believe that losses and liability from such counterfeiting is increasing substantially with improvements in counterfeiting technology as well as the proliferation of highly skilled and well-funded counterfeiters.  It is therefore imperative that all brand owners, beverages, food and drug manufacturers utilize the best counterfeit prevention technologies available for their products.

We believe that our physical and material goods anti-counterfeit technologies may be useful to businesses desiring to authenticate a wide variety of materials and products. The best solution for brand owners and manufacturers is to layer as many technologies as they can to protect their products.  Our technologies include (1) a technology utilizing invisible ink taggant that can be revealed by use of a special calibrated laser light for authentication purposes, (2) an ink technology, which allows invisible codes to be printed and (3) a color changing technology that is activated by certain types of lights. All of those technologies cannot be copied or scanned by the counterfeiter.  We believe the useful life of our technologies on a label or package is at least 20 years.  Our technologies can be printed on labels and packaging and can also be applied to metals, plastics and textiles. Other possible variations of our laser-based technology involve multiple color responses from a common laser, visible marks of one color that turn another color with a second laser, or visible and invisible marks that turn into a multicolored image. These technologies provide users with the ability to authenticate products and detect counterfeit documents. Applications include the authentication of documents having intrinsic value, such as currency, checks, travelers’ checks, gift certificates and event tickets, and the authentication of product labeling and packaging. When applied to product labeling and packaging, our technologies can be used to detect counterfeit products with labels and/or in packaging that do not contain the authenticating marks invisibly printed on the packaging or labels of legitimate products, as well as to combat product diversion (i.e., the sale of legitimate products through unauthorized distribution channels or in unauthorized markets). We believe that our technologies also could be used in a manner that permits manufacturers and distributors to track the movement or pinpoint geographically where counterfeiting of products is occurring.  We can track and trace from production to ultimate consumption when coupled with our VeriPAS^tm proprietary software.

Due to a signed contract with HP Indigo and Micro Focus, VerifyMe RainbowSecure™ technology can now be printed variably on high-speed, high-quality labels and packaging.  Our technology cannot be seen by the human eye and requires special authentication equipment to see in labels and packaging which can be authenticated via a secure cloud process.  Brand owners can not only prove the authenticity of a product, but it can also prevent product diversion and enhance track and trace operations which generates business intelligence as to where counterfeiting is occurring around the globe.  These contracts give the Company the ability to secure, protect and identify the labels and packages of drugs, cosmetics, food, beverages and all other consumable products.  We are now working with HP Indigo to roll out the technology to their 6000 series Indigo owners.  HP has also informed the Company that they will be expanding the use of the technology in 2019 on the 4000 series of HP Indigo presses which are used for packaging substrates. In addition to the Micro Focus GPAS serialization, track and trace software system, the company is able to incorporate its RainbowSecure™ invisible codes with other serialization, track and trace software systems, such as HP’s LINK system. The company is negotiating with HP LINK for such combination of technologies. Micro Focus is also now marketing our combined track and trace solution. S-One will also provide VerifyMe with a global and sales and marketing infrastructure for this solution.

Physical and Material Goods Anti-Counterfeit Industry — Overview

The U.S. is projected to remain the largest single consumer of security services and products in the world. One of the most important new areas of expansion is in the area of authentication, which is the act of confirming that objects such as currency, passports, casino chips, credit cards, stock certificates, pharmaceuticals, stamps, identification cards, lottery tickets, and so forth, are real and not forgeries. With the advent of new technologies, including the color copier and other printing technologies and templates and the availability of the Internet, counterfeiters have had access to technologies which make it easier to produce counterfeit items. Counterfeiters are often located in foreign nations where counterfeiting is subject to little or no viable threat of prosecution.

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While some currency and credit cards have introduced holograms, seals, and embedded strips in order to add a level of protection, most such methodologies are expensive and, in some cases involve a time-consuming production process. In other instances, such as when printing cigarette tax stamps or hundreds of millions of pieces used in a popular restaurant chain’s contest game pieces, the authentication process must be extremely inexpensive and easy to use or it will not be cost effective. Currently many national currencies lack a sufficient layer of protection to deter counterfeiting and can easily be counterfeited. 

Two major trends

Major shifts are occurring in how counterfeit products enter the hands of consumers. First, many consumers are purchasing counterfeit products online.

According to “Research and Markets.com”, $1.2 trillion worth of counterfeit goods were bought and sold last year. Not surprisingly, much of it happened online.

A new study from Red Points, a brand-protection firm based in Barcelona, Spain, shines a light into this shadowy realm. Using data generated by its custom-built web crawlers that search for fake merchandise on behalf of its 200 clients, Red Points compiled a Top 10 list of sites where counterfeit goods are most frequently bought and sold.  In fact, six of the 10 sites on the list are headquartered in the Far East—China in particular, which has a long-standing reputation for counterfeit production and what you might call a relaxed attitude toward intellectual property.

The Red Points’ study also identified the most commonly counterfeited goods. As it turns out, the most knocked-off item isn’t a designer handbag, but sneakers.

Second, biometric technology is becoming increasingly popular which can tie individuals to their documents and transactions. VerifyMe has multi-factor technology using biometrics in their digital verification technology. Credit card manufactures are working on a fingerprint activated card.  Apple has added both fingerprint and face recognition capture technology for access and transactions. The Company’s entry into the biometrics technology business is further described under the section “Digital Technology”.

A report commissioned by the International Trademark Association and the International Chamber of Commerce, said the global economic value of counterfeiting and piracy could reach $2.3 trillion by 2022. The global value of the counterfeit market in 2015 stood at $1.7 trillion. A February 2017 report, by research firm Frontier Economics, said the wider social, investment and criminal enforcement costs could take the total to $4.2 trillion, leaving at risk about 5.4 million "legitimate jobs". A recent report by the U.N. Office on Drugs and Crime says, “counterfeit goods and fraudulent medicines pose a serious risk to public health and safety”.

While deaths and sickness have been reported from key foods such as baby milk powder in Asia, the full human toll as a result of fake mechanical, food and medicines is unclear.

The UNODC and the World Customs Organization estimate 75 percent of counterfeit products seized worldwide in 2010 were manufactured in East Asia, mostly in China.

Counterfeiting is a continuously evolving economic crime. It presents companies, governments and individuals with a unique set of problems and has become a sophisticated network of counterfeiting.  Counterfeiting devalues corporate reputations, hinders investment, and imposes costs upon many people every year.

The Size of the Market Opportunity

The global anti-counterfeit packaging market was estimated at $105.9 Billion in 2018 and is projected to reach $182.2 Billion by 2023, at a compound annual growth rate of 11.5%. The market size projected from 2018 to 2023 based on a report by marketsandmarkets.com.

Based on Technology, the label and packaging market has been segmented as follows:

· Coding & printing technology (Track and Trace)

· RFID

· Hologram

· Security labels

· Packaging design

· Others (digital mass sterilization, digital mass encryption, and surveillance technologies)

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The anti-counterfeiting industry is segmented into four general categories: (i) Optical technologies - use of light, i.e. holograms; (ii) Electronic - magnetic strips and smart cards; (iii) Biotechnologies - uses characteristics of biological proteins such as antibodies, enzymes and DNA; and (iv) Chemical technologies - includes photochromic (or light-reactive) and thermochromic (or heat-reactive) inks.

We operate in the chemical technologies and security ink sectors of the industry. Products in this industry change color when exposed to either heat or light and revert to their original color when exposed again. Generally, the effect is reversible as often as required. Inks have also been developed that are invisible to the human eye, but which can be read by bar-code scanners. These have been used in the fragrance and pharmaceutical industries to authenticate products. Other reactive inks change color when brought into contact with specific substances, such as ink from a felt-tipped pen.

The anticounterfeit packaging industry is segmented into the following:

· Coding

· Printing technology (Identifiers)

· Radio Frequency Identification (“RFID”)

· Hologram

· Security labels

· Packaging design

· Others (digital mass sterilization, digital mass encryption, and surveillance technologies)

We operate in the coding & printing technology, security labels segments in the anti-counterfeit packaging industry.

Recent developments in printing technologies have made it easier to counterfeit a wide variety of documents. Lottery tickets, gift certificates, event and transportation tickets and travelers’ checks are all susceptible to counterfeiting, and we believe that losses from such counterfeiting have increased substantially due to improvements in technology. Counterfeiting has long caused losses to manufacturers of brand name products, and we believe that these losses have increased as the counterfeiting of labeling and packaging has become easier.

The Organization for Economic Cooperation and Development based on its recently published study in 2016, estimates that global trade related counterfeiting accounts for 2.5% of world trade or approximately $461 billion. They also conclude that millions of consumers are risking their lives by using unsafe and ineffective counterfeit products unknowingly.

Identification Cards and Secure Documents

Governments are increasingly vulnerable to counterfeiting, terrorism and other security threats at least in part because currencies, identity and security cards and other official documents can be counterfeited with relative ease. For instance, Havocscope, a company that collects black market intelligence and identifies security threats, reports that the value of counterfeit identification and passports in the United States is approximately $100 million. Governments must also enforce the various anti-counterfeiting and anti-piracy regimes of their respective jurisdictions which becomes increasingly difficult with the continued expansion of global trade. To highlight the size of the problem, in April 2012 the European Parliament estimated that of the 6.5 million biometric passports in circulation in France, between 500,000 and one million are counterfeit, having been obtained using counterfeit documents. Our overt and covert ink pigment platform can provide secure, forensic, and cost-effective anti-counterfeiting, anti-piracy and identification solutions to local, state, and federal governments as well as the defense contractors and the other companies that do business with them. Our pigment solution cans be used for many types of identification and official documents, such as:

· Passports;

· Permanent resident, or “green” cards and visas;

· Drivers’ Licenses;

· Social Security cards;

· Military identification cards;

· National transportation cards;

· Security cards for access to sensitive physical locations; and

· other important identity cards, official documents and security-related cards.

Pharmaceuticals

The pharmaceutical industry faces major problems relative to counterfeit, diluted, or falsely labeled drugs that make their way through healthcare systems worldwide, posing a health threat to patients and a financial threat to producers and distributors. Counterfeit prescription pharmaceuticals are a growing trend, widely recognized as a public health risk and a serious concern to public health officials, private companies, and consumers. The National Association of Boards of Pharmacy estimates that counterfeit drugs account for 1–2% of all drugs sold in the United States. The World Health Organization (“WHO”) estimates the annual worldwide “take” from counterfeit drugs to be £13 billion (approximately $20 billion USD), a figure that is expected to double by the end of this decade. In some countries, counterfeit prescription drugs comprise as much as 70% of the drug supply and have been responsible for thousands of deaths, according to the WHO. Counterfeit pharmaceuticals are estimated to be a billion-dollar industry, though some estimate it to be much larger. In 2012, the WHO reported that in over 50% of cases, medicines purchased over the Internet from illegal sites that conceal their physical address have been found to be counterfeit. According to the WHO, counterfeiting can apply to both branded and generic products and counterfeit pharmaceuticals may include products with the correct ingredients but fake packaging, with the wrong ingredients, without active ingredients or with insufficient active ingredients.

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Based on this growing threat, many countries have started to address vulnerabilities in the supply chain by enacting legislation which, among other things, requires the implementation of a comprehensive system designed to combat counterfeit, diluted or falsely labelled pharmaceuticals.  These systems are often referred to as serialization, or in the United States as e-Pedigree (electronic pedigree).  One jurisdiction that has enacted such regulations is California, which passed legislation requiring all “dangerous drugs” (defined as all prescription drugs) that are distributed in California must be serialized and have an electronic pedigree by January 1, 2016 and with limited exceptions cannot be sold by a pharmacy without a pedigree after July 1, 2017.

ePedigree and FDA mandated serialization requirements were implemented in November 2018 and are now required in all aspects of the pharmaceutical supply chain, from the manufacturer to the packager, wholesaler, distributor and final dispensing entity. The ePedigree provides an “audit trail,” or documented evidence, to help to identify and catch counterfeiting and diversion. Serialization requires manufacturers, or third-party packagers in some virtual supply chains, to establish and apply to the smallest saleable unit package or immediate container a “unique identification number.” In some cases, drug makers are spending as much as 8-10% of a medicine pack’s total production cost only on solutions to protect it from duplication and counterfeiting, according to company executives. Our unique pigments embedded in the ink of a unique serialized barcode can provide a layered security foundation for a customer solution in this market.

The Federal Drug Administration (“FDA”) implemented Title II of the Drug Quality and Security Act, entitled the “Drug Supply Chain Security Act.” This regulation requires drug manufactures to add product identifiers, such as our RainbowSecure™ technology as well as our VeriPAS™ track and trace system, to certain prescription drug packages beginning in November 2018.. Some pharmaceutical companies are still evaluating the FDA outline. The FDA has not made clear what penalties will be implemented on pharmaceutical companies who do not participate in the identifier program. We expect all pharmaceutical companies will eventually comply with the legislation at some point in the future. We plan on selling directly to the pharmaceutical industry and their printers. We will also engage third party marketing and sales companies to present our solutions to the drug and pharmaceutical industry. The FDA intends to continue implementing the Drug Supply Chain Security Act to ensure that a full electronic identification system for prescription drugs is implemented by 2023.

Consumer Products

Counterfeit items are a significant and growing problem with all kinds of consumer-packaged goods, especially in the luxury retail and apparel industries.  Our unique ink pigments can be incorporated in dyes and used by manufacturers in these industries to combat counterfeiting and piracy of actual physical goods. Our pigments expressed as inks can also be used on packaging, as well to track products that have been lost in transit, whether misplaced or stolen.

Food and Beverage

Counterfeit food threats are becoming more common as supply chains become more global and as imaging and manufacturing technology become more accessible. Numerous reports of counterfeit foods have been reported, including long-grain rice labelled and sold as basmati rice, Spanish olive oil bottled and sold as Italian olive oil, and mixtures of industrial solvents and alcohol sold as vodka. Although many of these stories have emerged from the U.K. and Europe, the fake-food problem is also relevant in the United States.

The National Center for Food Protection and Defense estimates that Americans pay $10 billion to $15 billion annually for fake food — often due to product laundering, dilution and intentionally false labeling. We believe our pigments and authentication tools can help in the battle against counterfeit foods and beverages.

Printing and Packaging

Counterfeiting in packaging has greatly intensified in recent years, causing concerns for consumers and financial concern for businesses worldwide.  Billions of dollars per year are at stake for companies as they seek ways to ensure that the products sold with their logos and branding are authorized and authentic. The proliferation of counterfeiting requires brand owners and their converter/printer partners to work together to create a multi-layered protection plan so that their packaging and labels protect their brands and deter those trying to profit at their (and their reputation’s) expense.

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Counterfeiters have become so good at their unlawful activity that spotting the difference between legitimate and counterfeit products can be daunting. Counterfeiters have many ways to subvert legitimate brands. These may include taking an out-of-date product and selling it in packaging and labels that have been forged; sometimes, the packaging, labels and product itself are all counterfeited. Counterfeiters might also use legitimate packaging coupled with fake products. We believe our pigment security systems are a cost-effective solution for printer and packagers and are easily integrated into their existing manufacturing process.

The Opportunity

As counterfeiting continues to increase and losses to manufacturers and others continue to escalate, we believe that those entities will seek better technologies to minimize their exposure. These technologies, however, must also be cost-effective, easy to integrate, and highly resistant to counterfeiting themselves. We offer products in two related market segments. We offer security Ink taggants in the Anti-Counterfeiting/Authentication Industry and we offer a software product called VeriPAS^tm in the identifier/track and trace industry.

Track and Trace Solutions Market worth 3.93 Billion USD by 2023

According to a report prepared and published by Marketandmarkets.com, the track and trace solutions market is projected to reach USD 3.93 Billion by 2023 from USD 1.65 Billion in 2018, at a compound annual growth rate of 18.9%.

Our Solutions 

In the areas of authentication and serialization of physical goods, we offer clients the following products as anti-counterfeit systems:

· RainbowSecure™

· SecureLight™

· SecureLight+™

· Authentication tools

· VeriPAS^tm Global Product Identifier, Track and Trace System

RainbowSecure™ technology was our first technology to be patented. It combines an invisible ink with a proprietary tuned laser to enable counterfeit products to be exposed. It has been widely accepted in the gaming industry, where the technology has been used by casinos to protect their chips, dice, and playing cards from fraud.

In 2017, VerifyMe signed a five-year contract with HP Indigo to print this technology on packages and labels on their 6000 series digital Presses.  In January 2018, VerifyMe signed a contract with Micro Focus to use RainbowSecure™ in their Global Product Authentication, Track and Trace system (software). The technology also features a unique double layer of security which remains entirely covert at all times and provides licensees with additional protection. RainbowSecure™ is particularly well-suited to closed and controlled environments, such as casinos that want to verify transactions within a specific area, labels, packaging, textiles, plastics and metal products which need authentication.

SecureLight™ technology was developed as a result of our investment in new proprietary color changing inks that could penetrate broader markets and result in far greater revenues. During the past decade, we have refined our technologies and their applications, and now have what we believe to be the easiest, most cost effective and efficient authentication technologies available in the world today. Our technology, known as SecureLight™, takes advantage of the new ubiquitous energy efficient fluorescent lighting to change the color of ink, resulting in hundreds of new applications ranging from credit cards to driver’s licenses, passports, stock certificates, clothing labels, currency, ID cards, and tax stamps. The technologies can also be used to protect apparel, pharmaceuticals, and virtually any other physical product. In 2018 we received notice that patents involving this technology have been approved in various European nations.

SecureLight+™ technology combines the covert characteristics of RainbowSecure and the overt characteristics of SecureLight. This provides a solution which can be authenticated in two different ways - by proprietary tuned laser devices, and also by anyone with fluorescent lighting including end consumers. In 2018 we received notice that patents involving this technology have been approved in various European nations.

VeriPAS^tm Technology combines the covert identifier of RainbowSecure™ with the Micro Focus Track and Trace software which provides brand owners geographical business intelligence on counterfeiting as well as the ability to authenticate labels, packaging and products. The company is speaking with other Serialization, track and trace software providers and expects to add alternatives to clients beyond the Micro Focus GPAS system.

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Authentication tools have been developed which we can sell to customers in conjunction with pigments and are tuned to authenticate the unique frequency of each batch. This will allow for customers to instantly authenticate items with a customized beeper which will only positively identify a product bearing their unique anti-counterfeit solution. This authentication is provided in the form of an LED indicator, a camera device which reveals the hidden serialization numbers and codes on a viewing screen and audible beeping device when placed on a label, product or package containing the RainbowSecure™ technology.

Raw Material Suppliers

Our security pigments are manufactured from naturally occurring inorganic rare earth materials. The manufacturing process includes both chemical and mechanical elements. In many cases, we produce pigments that are unique to a customer or product line. This uniqueness can be achieved through a variety of techniques, including custom formulation or combination of our proprietary pigments and/or incorporation of other specialized taggants.

There are many manufacturers of these types of specialized pigments and we intend to maintain multiple simultaneous relationships to ensure ample sources of supply.

Distribution

We provide pigment mixing instructions for the specific uses of each client based on their existing equipment and processes. We maintain policies and procedures to monitor, track and log access to and disposition of all pigment. Our customers are also required to agree to and implement these policies and procedures.

Digital Authentication Technologies and Products

We believe accurate identification of human beings in electronic transactions, also known as Digital Identity Management, will continue to be a large and rapidly growing market. In today’s world the need for verification of the unique identity of human beings participating in those transactions has become more important as governments and banks are beginning to acknowledge these as valid financial transactions. In general, every electronic transaction has a least two actors – a subject and a relying party. The relying party has a business need to eliminate or reduce risk associated with the identification of the subject.

Electronic financial theft and electronic theft of private information make headlines almost every day. According to a 2018 Identity Fraud Study released by Javelin Strategy & Research $16.8 billion was stolen from 16.7 million U.S. consumers in 2017. The majority of this harm can be traced to weak authentication systems, such as Username/Password, yet these weak systems continue to be used in most of the world’s transactional systems. Cybersecurity is a growing threat requiring continuously evolving forms of electronic security.

Historically, stronger authentication solutions, such as biometric, two-factor and multi-factor solutions have been difficult to use and expensive to deploy and operate. The extraordinary proliferation of smart phones and tablets provide an infrastructure for disruptive solutions that leverage the mobile nature of these devices and the multi-sensor computing capabilities.

VerifyMe Authenticator is a digital identity management software platform that provides extensible authentication mechanisms that can be dynamically invoked to achieve a specified degree of identity assurance. The Authenticator platform incorporates a risk engine that associates individual risk parameters and scores with every unique authentication mechanism. The risk engine then generates aggregate risk scores based on the specific combination of individual authentication mechanisms used to confirm the identity of the human being.

We are now enhancing this product and getting it ready for deployment into the financial services industry.  We cannot assure you we will generate any revenues from these efforts.

Digital Authentication Technology

We believe that the digital technologies we own will enable businesses and consumers to reconstruct their overall approaches to security—from identity and authentication to the management of legacy passwords and PINs. We empower our customers to take advantage of the full capabilities of smart mobile devices and provide solutions that are both simple to use and deliver the highest level of security. These solutions can be applied to corporate networks, financial services, e-gov services, digital wallets, mobile payments, entertainment, subscription services, and social media.

The challenges associated with digital access control and identity theft are problems that are highly relevant in the world today. Consumers, citizens, employees, governments and employers demand comprehensive solutions that are timely, reliable but not intrusive. The current widespread use of passwords and personal identification numbers, or PINs for authentication has proven to be unsecure and inadequate. Individuals increasingly expect anywhere-anytime experiences—whether they are making purchases, crossing borders, accessing services or logging into online accounts or corporate resources. They expect those experiences to ensure the protection of their privacy and to provide uncompromising confidentiality.

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Verification is the front door of all access and transactions. The most fundamental action is to identify “who the person is and how you identify yourself”. We feel our VerifyMe digital authentication is the building block that answers that question. Our VerifyMe Verification technology ensures that users are who they say they are.  Our technology becomes their virtual credentials which are protected from fraud and theft.  There are literally hundreds of millions of identities stolen annually. It is absolutely crucial to know which users have the right to access particular information or transaction, and whether or not unauthorized users have been prevented from accessing those same critically important items.

In today’s world we have global workforces, customers, systems and data.  Unfortunately, we have the same global sophisticated cybercrime.   Therefore, vetting users and access also means asking important questions about authentication, such as which authentication method is most appropriate given a resource, channel or specific risk factor.

We believe that our digital verification technology meets user expectations for ease of use, privacy and overall experiences especially in financial and healthcare enterprises. For connected organizations, the authentication process is like the front door. To users, it’s important not only to smoothly reach the systems or data they need, but to know that their own account access and data is secured. Authentication is crucial, but it needs to be frictionless to avoid frustrating users whether they are customers, partners, or employees.

Passwords are no longer enough - In isolation, passwords are a brittle measure. It has been proven time and time again that even strong credentials can be stolen, cracked or coaxed from end users. Given today’s threat landscape, good security requires strong authentication practices, one of which is multi-factor authentication (“MFA”). Our MFA system requires no passwords at all.

By using multiple independent factors VerifyMe’s verification system significantly increases the effort that cybercriminals must exert to break in and access the protected transaction or data.  Also attempts that fail for lack of additional factors raises immediate red flags to end users and their financial or data system administrators.

Additionally, our multi-factor authentication (“MFA”) does not use tokens or complicated, tiered passwords. Passwords are replaced by our MFA technology. Passwords are lost, stolen, forgotten, constantly changed, etc. Our MFA removes the need for passwords. The person’s biometrics combined with other non-password factors become their password.

Our digital technologies involve the utilization of multiple authentication mechanisms, some of which we own. These mechanisms include biometric factors, knowledge factors, possession factors and location factors. Biometric factors include facial recognition with liveness detection, finger print and voice recognition. Knowledge factors include a personal gesture swipe and a safe and panic color choice. Possession factor includes devices that the user has in their possession such as a smartphone, smart watch, and other wearable computing devices. The location factor geo-locates the user during a secure login. We surround these authentication mechanisms with proprietary systems that improve the usability and the security of the solutions. Our solutions allow the assessment and quantification of risk using a sophisticated patented heuristic scoring mechanism. We have specialized systems that perform ‘liveness’ detection to insure the subject of authentication is in fact a live human being. We have software systems that introduce learning capabilities into our solutions to improve the ease of use and flexibility.

In summation we believe that by using a host of factors and our proprietary scoring system gives a 99% assurance that the person behind the transaction is the person they say they are.

The digital technologies we own will enable businesses and consumers to reconstruct their overall approaches to security—from identity and authentication to the management of legacy passwords and PINs. We empower our customers to take advantage of the full capabilities of smart mobile devices and provide solutions that are both simple to use and deliver the highest level of security.

Our digital multi-factor verification software solutions can be applied to:

· Cryptocurrencies

· Blockchain Authentication

· Corporate Networks

· Digital Drop Box Access

· Physical Access

· Banking

· Financial Transaction Services

· Medical Insurance

· Gaming

· Retail

· Notary

· Digital Wallets

· Legal

· Government (e-gov services)

· Military

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· Pharmaceutical

· Immigration

· Entertainment

· Social Media

· Mobile Payments

· Purchaser Authentication

· Notary Authentication

· Electronic Forms

· Voting Systems

· Subscription services

· Employee Time Systems

 Digital Authentication Industry Background

The growth in internet banking and internet commerce and the increasing use and reliance upon proprietary or confidential information that is remotely accessible by many users by businesses, government and educational institutions, has made information security a paramount concern. We believe that enterprises are seeking solutions that will continue to allow them to expand access to data and financial assets while maintaining network security.

A vendor in the user authentication market delivers on-premises software/hardware or a cloud-based service that makes real-time authentication decisions for users who utilize an arbitrary endpoint device (that is, not just Windows PCs or Macs) to access one or more applications, systems or services in a variety of use cases. Where appropriate to the authentication methods supported, a vendor in this market also delivers client-side software or hardware that end users utilize to make those real-time authentication decisions.

The market is mature, with several vendors offering products that have been continuously offered during the past three decades (although ownership has changed over that time). However, new methods and vendors continue to emerge, with the most rapid growth occurring within the past decade in response to the changing market needs for different trade-offs among trust, user experience and total cost of ownership. The greater adoption of user authentication over a wider variety of use cases, the impact of mobile, cloud and big data analytics, and the emergence of innovative methods continue to be disruptive.

While over 100 authentication vendors currently operate in the market, the vast majority deliver two-factor authentication solutions. Even the few vendors that market biometric solutions simply combine them with a password for two-factor security.

Internet and Enterprise Security.  With the advent of personal computers and distributed information systems in the form of wide area networks, intranets, local area networks and the Internet, as well as other direct electronic links, many organizations have implemented applications to enable their workforce and third parties, including vendors, suppliers and customers, to access and exchange data and perform electronic transactions. As a result of the increased number of users having direct and remote access to such enterprise applications, data and financial assets have become increasingly vulnerable to unauthorized access and misuse.

Individual User Security.  In addition to the need for enterprise-wide security, the proliferation of personal computers, personal digital assistants and mobile telephones in both the home and office settings, combined with widespread access to the Internet, have created significant opportunities for electronic commerce by individual users such as electronic bill payment, home banking and home shopping.

The continued reliance by most enterprises on passwords and PINs has resulted in daily identity theft and data breaches, with massive attacks being announced almost every week. The companies that have been attacked and compromised private data include top brands in finance, retail, entertainment, technology and governments.

Strong Authentication Market

A strong authentication market has emerged, initially led by two-factor authentication solutions. Two-factor authentication solutions combine a password with a second factor, which typically involves proving possession of some object, which may include a one-time password token that generates rotating secret codes, a telephone via a callback or a SMS message, or an email address via emailing a secret code.

The global MFA market was valued at $4.05 billion in 2015 and is predicted to reach more than $13.59 billion by 2022 as three-, four- and five-factor authentication systems gain prominence. Part of this growth can be attributed to the rise of biometric security services, such as fingerprint, retina and facial scanning. A recent report found that all authentication methods using more than two factors included some form of biometric scanning.

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Currently, 90% of the MFA market belongs to two-factor authentication. These “standard” methods include passwords, hardware tokens and PINs, although some systems do employ a secondary biometric scan. With a predicated compound annual growth rate of 19.67 percent over the next two years, however, it’s clear that the other 10 percent — and the biometric technology needed to support them — will play a large role. As it stands, three-factor authentication is mostly used in bank lockers and immigration, while four- and five-step methods only make an appearance in high-level government operations. Part of the problem is cost since it’s often prohibitive for a small business to roll out full facial recognition or install high-level fingerprint scanners.

Password Manager/Digital Wallet Market

Until companies figure out a better way to protect their data in the cloud, we believe that the best solution is to enforce higher security with password managers.  Password managers provide tools to encrypt text files that can store passwords that are not Web based, such as Windows and Outlook passwords, Lotus Notes passwords, administration passwords including local and domain accounts, BIOS passwords, encrypted hard drive passwords, cell phone and voicemail passwords and iPad and iPhone passwords.  Password managers promise greater security while improving the user experience.

The best password managers sync to the cloud across all dominant platforms and require multi-factor authentication. There are currently no password managers that utilize more than two-factor authentication and none that incorporate additional biometric mechanisms.

The Opportunity

As identity theft and data breaches continue to increase and losses to service providers and individuals continue to escalate, we see both enterprises and consumers seeking better solutions to protect their interests. These solutions must be cost effective, easy to integrate, and simple to use.

According to a market research report prepared by www.marketsandmarkets.com, the biometric system market size is expected to increase from USD 105.9 billion in 2018 to USD 182.2 billion by 2023, at a compound annual growth rate of 11.5% between 2018 and 2023. Any transaction or action which requires authentication of an individual is a potential opportunity for a strong multi-factor solution such as VerifyMe Authenticator. This is a very large market opportunity, within which we are focused on four specific segments:

· Subscription services market, where revenue is commonly lost due to multiple individuals sharing user credentials to access information and services;

· Online gaming market, where financial transactions are performed and geo-location is very important to maintaining compliance with state/country regulations;

· Financial services market, where there is a large financial risk to identity theft and fraud, including banking, purchases, mobile payments, and digital wallets

· Access control market, where the identity of individuals is key to allow access to buildings as well as digital access to data

· Social Media Market to identify people versus robots or imposters

Our Solution

VerifyMe Authenticator delivers an electronic authentication solution for identifying individual human beings. When subject attempts to access an internet resource and asserts an identity, VerifyMe Authenticator attempts to authenticate the asserted identity. It does this utilizing multiple strong authentication mechanisms, involving at least three independent factors. VerifyMe Authenticator can deliver identity assurance consistent with National Institute of Standards and Technology (NIST) Level 4 authentication requirements as specified in Special Publication 800-63-1.

VerifyMe Authenticator is based around mobile apps that incorporate a password manager and single sign on capability. In addition to facilitating strong authentication during the logon process to the enterprise resource or service, VerifyMe Authenticator also lets the user conveniently integrate and protect all of their legacy username and passwords.

Fast and Easy to Use

VerifyMe Authenticator replaces passwords and PINs with a quick, intuitive and user-friendly interface. Our customers can authenticate end users in multiple ways (multi-factor) in the same timeframe as a conventional password login. The service is platform agnostic (available for IOS, Android, Mac and PC), and scalable for use on wearable personal devices.

Support for Any Authentication Method

VerifyMe Authenticator has the ability to authenticate individuals using facial recognition, fingerprint, voice scanning, retina scanning, swipe pattern recognition, location detection and approved IP detection. We believe that Authenticator can provide the highest levels of confidence, security and account protection to a businesses’ customers, all within seconds. VerifyMe Authenticator are not limited to specific authentication factors. Our platform can support any available authentication mechanism, including those that require policy-driven mechanisms.  We are continuing to add new authentication mechanisms, including mechanisms suitable for wearable devices and new biometrics.

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Multi-Factor Confidence Scores

Depending on the desired level of confidence, different online and mobile application accounts can require varying quality scores. As the desired level of security increases, so does the required quality score to complete a sign-in transaction. As the quality score increases, additional authentication factors are added to the sign-in process.

Secure Platform, Easy to Integrate

VerifyMe Authenticator can be delivered either as managed service from our secure cloud or as licensed software which can be operated with existing infrastructure.  VerifyMe Authenticator also features the following benefits:

· Available to be white-labeled and integrated into existing digital platforms;

· Non-Stop, audited, monitored, private cloud service;

· Three independent, fault tolerant, redundant data centers;

· Global load balancing and traffic management;

· High level commercial API’s can be integrated in hours; and

· Complete audit information, including fresh biometrics.

The three factors VerifyMe Authenticator utilize include, but are not limited to, the following:

Factor 1 – Something you have – a possession device – typically this is a registered mobile device, which we can authenticate either via SMS or email round robin protocol.

Factor 2 – Something you know – a knowledge factor – we currently utilize a color gesture swipe. This requires the subject to confirm their secret color and appropriately connect dots on a matrix consistent with their registered gesture pattern.

Factor 3 – Something you are – we utilize facial recognition to authenticate images captured in real-time using the registered devices built in camera, with images that were stored in the subject’s profile during registration.

Our platform can be distinguished from competitors in that it is not limited to any of the above authentication mechanisms; VerifyMe Authenticator currently supports many more authentication mechanisms and we intend to continue expanding this list.  For example, our platform is not limited to facial recognition as a biometric mechanism. It currently supports voice, fingerprint and other mechanisms.

In addition, VerifyMe Authenticator includes a risk-scoring engine that is able to enforce complex, customer specific authentication policies and shield them from the underlying complexity of evaluating multiple, independent authentication mechanisms. This risk engine allows us to constantly add new authentication mechanisms as they emerge. We see the emerging market of wearable devices as providing new authentication mechanisms that will be very simple and reliable for the end-user. Because our risk engine insulates the enterprise from the complexity of having to interface with all these different platforms, they are available to benefit from and insure their customers can utilize these devices to their full potential.

VerifyMe Authenticator is platform agnostic (available for IOS, Android, Mac, Linux and Windows) and scalable for use on wearable personal devices. The digital platform is an enterprise solution, which combines multiple independent authentication factors and can also determine geo-location utilizing a number of mechanisms including GPS, cell tower triangulation and IP/WIFI address. Because the service utilizes biometrics and liveness detection, it eliminates the possibility that users might share their authentication credentials, or that user accounts can be accessed by other individuals. The combination of biometrics and geo-location provides extremely strong transactional evidence, making it nearly impossible for an end-user to refute having been part of a transaction.

The VerifyMe Authenticator technology has essentially been completed and the first commercial units have been ordered and are expected to be received in April 2019. The company spent approximately $24,000 on hosting of our MFA software and $0.3 million on software and hardware development. We had no sales in 2018 in relation to our MFA technologies due to further refinement to address new smart phone capabilities. Our MFA can now work of both Apple IOS and Android phone systems. In 2018 we developed APPs which are used in conjunction with the MFA technology. These APPS are now fully functional except we expect to enhance and upgrade the visual appearance and functionality of the APP to enhance a customer’s experience.

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MFA Marketing and Sales:

We have presented the technology to approximately 10 different inquires we have had. To date we have had zero sales.

Several of the inquires informed us they wanted to merge their digital company into our company to make use of MFA.  Since these opportunities are almost all early development stage start-ups we did not pursue these opportunities since it would have been a lengthy process with significant capital requirements. The Company is seeking business partners with revenue and proven business models.

The following types of companies have approached us on our MFA technology and are in various early stages of the sales process:

1. Company specializing in technology to replace passwords with codes

2. Digital Forms company who wanted to use our MFA to sign Electronic Forms

3. Notary Company to use our MFA to Electronically Authenticating people for Notary Services

4. Background Check Company using MFA to authenticate resumes and background history

5. Banking technology service bureau space explored offering MFA to its small banks that do not have internal data processing facilities. 

6. Group working with a foreign government to establish a bank in the cloud is interested in offering our MFA for bank transactions. 

7. Crypto Coin Consulting company inquiring for use of our MFA for Crypto client transactions

8. Pharmaceutical – Medical Insurance Authentication for Prescriptions.

Our Technology

Intellectual property is important to our business. The current patent and trademark portfolios consist of 10 granted US patents and 1 granted European patent validated in 4 countries, 3 pending US and foreign patent applications, 1 registered US trademark, and 13 pending US and foreign trademark applications.

 In addition, 7 patent applications were abandoned.  The company plans on is considering the filing for reinstatement on some of the abandoned patent applications.

Our patents expire between the years 2019 and 2033. 

We have attempted to achieve sufficient flexibility in our products and technologies so as to provide cost-effective solutions to a wide variety of counterfeiting problems. We intend to generate revenues primarily by selling pigment to manufacturers who incorporate our technologies into their manufacturing processes and their products as well as through licensing fees where we are providing unique or custom solutions.

Our Intellectual Property

Intellectual property is important to our business.  While some of our granted patents are commercially ready, we believe that others may have commercial application in the future but will require additional capital and/or a strategic partner in order to reach the potential markets. All of our patents are related to the inventions described above. Our patents expire between the years 2019 and 2033.

It is cost prohibitive to register patents in every country.  We continue to develop new anti-counterfeiting technologies and we apply for patent protection for these technologies in countries with the most market potential and strong patent enforcement tools.  When a new product or process is developed, we may seek to preserve the economic benefit of the product or process by applying for a patent in each jurisdiction in which the product or process is likely to be exploited. 

The issuance of a patent is considered prima facie evidence of validity.  The granting of a patent does not prevent a third party from seeking a judicial determination that the patent is invalid. Such challenges to the validity of a patent are not uncommon and can be successful. There can be no assurance that a challenge will not be filed to one or more of our patents, if granted, and that if filed, such a challenge will not be successful.

We believe that the physical technologies we own will enable businesses and consumers to reconstruct their overall approaches to security—from counterfeit identification to employee or customer monitoring. In addition to packaging and labels our physical security printing technologies can be applied to authenticate important credentials such as driver’s licenses, plastics, metal, apparel, birth certificates, immigration documents, gaming, apparel, currency, event and transportation tickets, passports, computer software, and credit cards. We can generate revenue through licenses and royalties of our technology and through direct sales of our technology.

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Research and Development

We have been involved in research and development since our inception and intend to continue our research and development activities, funds permitting. Until January 1, 2013, our research and development focused on pigment technologies. Since January 1, 2013, we have allocated research and development efforts between digital and pigment technologies. We hope to expand our technology into new areas of implementation and to develop unique customer applications. We spent approximately $0.2 million and $0.1 million on research and development during the years ended December 31, 2018 and 2017, respectively.

Our Revenue Model

To date, we have not generated material revenue. VerifyMe has three potential revenue streams.

RainbowSecure™ We believe that our recent contract with HP Indigo will create demand for our RainbowSecure™ and VeriPAS^TM products.  Working with HP Indigo and S-One Labels and Packaging, we are creating a co-marketing programs to effectively reaches all 6000 series HP Indigo owners.   We also will reach out to brand owners and make them aware of our physical security solutions which can provide brand owners counterfeit prevention protection. We intend to generate revenues primarily by collecting license fees based on usage fees generated from HP Indigo 6000 series users as well as non-digital press technology usage.  Our revenue is derived utilizing a royalty rate based on the volume of a particular label or package printed with our RainbowSecure™ technology e.g. a royalty on each impression. We also have revenue that will be generated with the sales of authentication devices from manufacturers who incorporate our technologies into their manufacturing processes and user authentication protocols, as well as through the sale of pigments to be incorporated in inks and dyes and the sale of authentication tools.

Our VeriPAS^tm technology product is an identifier, track and trace system which generates revenue from a contracted usage fee per impression rate based on the number of codes which are purchased for application on labels and packages printed with the technology.

Our VerifyMe Digital Authentication technology is a software system.  The revenue to be generated from this product will be in the form of a contracted per transaction fee and or a monthly service fee.

Sales and Marketing Strategy:

Physical Security Technology Marketing Strategy

Due to our signed five-year contract with HP Indigo, we plan on marketing directly with HP Indigo 6000 series owners as well as the label and packaging printing industry including both traditional and digital printers and users to address their clients’ needs for our covert serialization. Those printers will market and resell our technologies to both current and future brand owner clients.

Currently the only HP Indigo model approved for the use of our technology is the HP Indigo 6000.  It is currently being expanded to include the larger HP Indigo 30,000.

In addition to the printing industry we will be marketing directly to all brand owners who utilize labels and packaging for their products. Brand owners can be licensed directly by VerifyMe and direct their personal printer to print their labels and packaging with the VerifyMe printing technologies.  The brand owner will therefore pay their royalties directly to VerifyMe based on the number of labels and packages units that their printer applied the technology to.

In addition, VerifyMe will engage third parties to market, sell and support our physical security technologies on a global basis for a contracted fee based on their sales.  Our targeted third parties will already have a successful track record in supporting HP Indigo owners as well as traditional printing clients.

As discussed above, in March 2018 we entered into a strategic partnership with S-One. S-One provides VerifyMe with global sales, distribution, and promotion support for the Company’s products and will employ a representative that will be solely dedicated to promoting the Company’s products. Under the terms of the Company’s agreement with S-One, S-One acts as a sales and marketing contractor for the Company’s printed products and services on a global basis and assists the Company in fulfilling the Company’s obligations under the Company’s signed current and future reseller agreements with various global and domestic print providers and brand owners.

The FDA is implemented the identifier track and trace portion of the Title II of the Drug Quality and Security Act in November 2018, entitled the “Drug Supply Chain Security Act.” This regulation requires drug manufactures to add product identifiers, such as our RainbowSecure™ technology as well as our VeriPAStm track and trace system, to certain prescription drug packages beginning in November 2018. Re-packagers must begin adding product identifiers in November 2018. We will also engage third party marketing and sales companies to present our solutions to the drug and pharmaceutical industry. The FDA intends to continue implementing the Drug Supply Chain Security Act to ensure that a full electronic identification system for prescription drugs is implemented by 2023.

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Another marketing out-reach is that our track and trace partner, Micro Focus is contracted to cross sell our technologies as part of their Global Product Authentication System called “GPAS”.  We are also contracted with Micro Focus to re-sell their GPAS product with our RainbowSecure™ technology under our own trademarked name, VeriPAS^TM which stands for VerifyMe Global Product Authentication System.

An additional marketing strategy is to incorporate our technology into the high-speed inkjet hardware that traditional Flexo and Commercial Printers use to add a variable data feature for their clients.

Some of the major brand segments that need our type of label, packaging and serialization identifier products are:

Consumer Product Security

· Pharmaceuticals

· Food

· Beverages

· Luxury goods

· Cosmetics

· Alcohol

· Auto parts

· Aviation parts

· Any other label/ packaging requirements

Documents of Value

· Currency

· Stock certificates and bonds

· Event tickets

· Lottery tickets

Homeland Security

· Passports

· ID cards

· Driver’s licenses

· Visas

· Container seals

· Pallet security

Military

· Uniforms

· Weapons

· Ammunition

Product Diversion Tracking

· Pharmaceuticals

· Apparel/licensed merchandise

· Cosmetics and fragrances

· Watches and jewelry

Financial Services and Products

· Consumer login credentials

· Online transaction approval

· Credit cards

· Bank checks

· Financial documents/promissory notes

We plan for our sales and marketing strategy to include an outreach program and sales programs that tailor the product to the governmental body or merchant, as well as key partnerships with authorities and merchants whose products or audiences can be complementary to our own. In particular, we will focus on building relationship with key partners who can deliver our products to their existing and prospective customers in target markets - i.e., printer/packagers, plastic card manufacturers and financial services intermediaries.

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Digital VerifyMe Authenticator Technology Marketing Strategy

Our VerifyMe Authenticator Digital software technology will be marketed directly to potential clients through the use of demonstrations and trade shows.

Our initial targeted market segment is the financial services industry.  This includes both the traditional banking and crypto financial transaction industries.  Our second targeted market segment will be the healthcare industry.  The third targeted market is the gaming industry.   The fourth target market segment we will market to will be governments.  Governments can be both foreign and domestic as well as federal, state and local levels.

All of these market outreaches will be made directly by the Company and we are also going to use third party marketing vendors who specialize in software sales.

Competition

The market for protection from counterfeiting, diversion, theft and forgery is a mature more than 25-year old industry dominated by a number of large, well-established companies, particularly in the area of traditional overt security technologies where repeating static produced images are commonly used. This is due to the fact that security printing for currency production began in Europe over a century ago and has resulted in the establishment of old-line security printers which have branched out into brand and product protection as well. In North America, brand protection products, such as tamper-resistant packaging, security labels, and anti-theft devices are readily available and utilized on a widespread basis. In recent years, however, demand has increased for more sophisticated overt and covert security technologies with a strong desire for technologies that can provide variable images and data. Competitors can be segregated into the following groups: (i) Security Ink Manufacturers. These are generally well-established companies such as SICPA and Sun Chemical, whose core business is manufacturing and selling printing inks; (ii) System Integrators. These companies have often evolved from other sectors in the printing industry, mainly security printing manufacturers, technology providers, or packaging and label manufacturers. These companies offer a range of security solutions, enabling them to provide a complete suite of solutions tailored to the customer’s specific needs and requirements. The companies in this space include 3M, DuPont, Opsec, Honeywell, and Avery Dennison; (iii) System Consultancy Groups. These companies offer a range of technologies from several different providers and tailor specific solutions to end-users; (iv) Traditional Authentication Technology Providers. These purveyors include companies like American Banknote Holographics, Crown Roll Leaf and Digimarc, which provide holograms and digital watermarking, respectively; (v) Product Diversion Tracking Providers. Applied DNA Sciences Next-Generation Technology Providers LLC falls into this group, along with several companies such as Applied DNA Sciences, Authentix, DNA Technologies, and Identif, Kodak Traceless, which provide on-product and in-product tagging technologies; (vi) Traditional Security Printers. This group includes traditional security printers such as Thomas de la Rue, Canadian Banknote, and Banknote Corporation or America, and Portals, whose core products are printing the world’s currencies; and (vii) Biometric Solution Providers. These companies offer biometric authentication capabilities to be integrated with existing mobile device authentication, such as OT-Morpho and ImageWare Systems.

To compete effectively, we are seeking to establish key relationships with major digital solution equipment and distribution providers such as we have done with HP Indigo.  While leveraging these relationships, we still expect that we will need to expend significant resources in technology and marketing. Many of our competitors have substantially greater financial, human and other resources than we have. As a result, we may not have sufficient resources to develop and market our services to the market effectively.

We expect competition with our products and services to continue and intensify in the future. We believe competition in our principal markets is primarily driven by:

· product performance, features and liability;

· price; new laws and regulations;

· product innovation and timing of new product introductions;

· ability to develop, maintain and protect proprietary products and technologies;

· sales and distribution capabilities;

· technical support and service;

· brand loyalty;

· applications support; and

· breadth of product line.

If a competitor develops superior technology or cost-effective alternatives to our products, our business, financial condition and results of operations could be significantly harmed.

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Major Customers/Vendors

During the years ended December 31, 2018 and 2017, between one and four customers accounted for 100% of total sales.  Generally, a substantial percentage of the Company's sales has been made to a small number of customers and is typically on an open account basis.

In 2018, the Company announced two re-seller contracts for its RainbowSecure™ technology.  One of these contracts was with a global billion dollar label printer.  The Company also signed a similar contract for its RainbowSecure™ technology with a leading RFID technology label group.  Both of these customers have clients in the consumer products industry.

On September 6, 2017, we announced a five-year contract with HP to supply HP Indigo Digital press ink canisters containing our technology pigment for use by HP Indigo digital press owners who print our security feature on labels and packages for their brand owners. In 2018, our customers used our technology to print product labels using HP RainbowSecure technology.

On January 17, 2018 we announced a cross re-selling agreement with Micro Focus, a public global software developer.  Micro Focus will be offering our technology to their track and trace clients requiring an identifier to accompany Micro Focuses Track and Trace system.  VerifyMe also can sell GPAS which is printed on labels and packaging along with our covert to store our hidden covert serial number in the cloud for product diversion investigators to authenticate with a proprietary app on a mobile device.

In March 2018 we entered into a strategic partnership with S-One. S-One provides companies with product and sales channels, technical and marketing support, digital development support, and distribution channels through the other companies which have partnered with S-One. S-One will provide the VerifyMe with global sales, distribution, and promotion support for the Company’s products and will employ a representative that will be solely dedicated to promoting the Company’s products. Under the terms of the Company’s agreement with S-One, S-One will act as a sales and marketing contractor for the Company’s printed products and services on a global basis and will assist the Company in fulfilling the Company’s obligations under the Company’s signed current and future reseller agreements with various global and domestic print providers and brand owners.

During the years ended December 31, 2018 and 2017, we purchased 100% of our pigment from one vendor.

VerifyMe utilizes multiple vendors including the pigment vendor for engineered RainbowSecure™ authentication devices.

Facilities

Our principal offices are located at 75 S. Clinton Avenue, Suite 1525 Rochester, NY  14604.

We believe that our office is suitable and adequate for our current needs.

We do not own or operate, and have no plans to establish, any manufacturing facilities.

Employees

As of March 31, 2019, we had two full-time employees, our Chief Executive Officer and our Vice President of Sales, one part-time employee, our Chief Financial Officer, and two outside contractors, including our Chief Operating Officer and our Chairman.

ITEM 1A. RISK FACTORS

Not applicable for smaller reporting companies.  

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

Our principal offices are currently located at 75 S. Clinton Avenue, Suite 1525, Rochester, NY 14604 which we rent on a non-contractual basis for approximately $1,000 per month.

ITEM 3. LEGAL PROCEEDINGS.

From time-to-time, the Company may be a party to, or otherwise involved in, legal proceedings arising in the normal course of business. As of the date of this Annual Report the Company is not aware of any proceedings, threatened or pending, against it which, if determined adversely, would have a material effect on its business, results of operations, cash flows or financial position.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock is quoted on the OTCQB under the trading symbol “VRME”.  

Common Shareholders

As of March 25, 2019, our shares of common stock were held by approximately 1,460 shareholders of record.

Recent Sales of Unregistered Securities

We have previously disclosed all sales of securities without registration under the Securities Act of 1933 except for the following:

On November 2, 2018, an investor cashlessly exercised 11,678 warrants and was issued 6,998 shares of the Company’s common stock.

On November 12, 2018, the Company issued Mr. Keith Cutri 500,000 five-year options to purchase shares of the Company’s common stock at $0.38 per share subject to execution of the Company’s standard stock option agreement.

On November 15, 2018, the Company issued Ms. Margaret Gezerlis 100,000 five-year options to purchase shares of the Company’s common stock at $0.321 per share subject to execution of the Company’s standard stock option agreement.

On January 24, 2019 the Company issued an investor 143,000 shares of the Company’s common stock relating to investments made in the Company.

In January 2019, the Company issued 400,000 shares upon conversion of 20,000 shares of Series A Convertible Preferred Stock.

In March 2019, the Company issued a total 960,000 shares to four directors of the Company.

In March 2019, the Company issued 400,000 shares upon conversion 20,000 shares of Series A Convertible Preferred Stock.

Equity compensation plan information

During 2013, the Board adopted, and our shareholders approved, a new comprehensive incentive compensation plan (the “2013 Plan”) which served as the successor incentive compensation plan to a 2003 Stock Option Plan covering (i) 20,000,000 new shares of our common stock, plus (ii) the number of shares of our common stock subject to outstanding grants under the 2003 Plan as of the date of the 2013 Annual Meeting, plus (iii) the number of shares of our common stock remaining available for issuance under the 2003 Plan.

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The 2013 Plan covers 22,013,530 outstanding options and no longer will be used for future grants.

On November 14, 2017, the Company adopted the Company’s 2017 Equity Incentive Plan (the “2017 Plan”) which provides for the issuance of awards covering 13 million shares of common stock under the 2017 Plan. Awards granted under the 2017 Plan may be Incentive Stock Option, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock or Restricted Stock Units which are awarded to all employees, consultants and directors of the Company.

Except for the grant to Keith Cutri, all of the sales of common stock and options were to accredited investors and exempt from registration under Section 4(a)(2) of the Securities Act of 1933 and Rule 506 thereunder. Mr. Cutri’s grant was exempt under Section 4(a)(2).

Equity compensation plan information as of December 31, 2018

See Item 11 to this Annual Report.

 ITEM 6. SELECTED FINANCIAL DATA.

Not applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Management’s Discussion and Analysis of Financial Condition and Results of Operation and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and except as required by law, we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors. The following should be read in conjunction with our annual financial statements contained elsewhere in this Annual Report.

Overview

VerifyMe, Inc. is a technology pioneer in the brand protection/anti-counterfeiting industry. For the last three years the Company has been engaged in researching, developing, and monetizing products in the brand protection, authentication, serialization, track and trace and anti-counterfeiting industries. This broad market encompasses identifying and preventing counterfeiting of physical and material goods and products, prevent product diversion, enable brand owners to monitor, control and protect their products life cycle, as well as authenticating people in digital transactions. We have the ability to deliver security solutions for identification and authentication of people and products in a variety of applications in the security fields of authentication, counterfeit prevention and product diversion. Our products can be used to print, secure and covertly serialize labels and packaging for brand owners, manage and issue secure credentials including national identifications, passports, driver licenses and access control credentials, as well as comprehensive authentication security software to securely process digital financial transactions, provide secure physical and logical access to facilities, computer networks, internet sites and mobile applications.

Brand owners, government agencies, professional associations, and others all share in the challenge of responding to counterfeit goods and product protection issues. Counterfeit goods span across multiple industries including currency, passports, ID cards, pharmaceuticals, apparel, accessories, music, software, food, beverages, tobacco, automobile and airplane parts, consumer goods, toys and electronics. Described by the U.S. Federal Bureau of Investigation, “counterfeiting” has been labeled as the crime of the twenty-first century. According to the "Global Brand Counterfeiting Report, 2018" written by “Research and Markets” the amount of total counterfeiting globally has reached to $1.2 Trillion USD.

We believe that the physical technologies we own will enable businesses and consumers to reconstruct their overall approaches to security—from counterfeit identification to employee or customer monitoring. Potential applications of our technologies are available in different types of products and industries—e.g., gaming, apparel, tobacco, cosmetics, pharmaceuticals, event and transportation tickets, driver’s licenses, insurance cards, passports, computer software, and credit cards. We generate sales through re-seller agreements of our technology or through direct sales of our technology.

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Our physical technologies involve the utilization of invisible and color changing inks, which are compatible with today’s printing presses. The inks may be used with certain printing systems such as offset, flexographic, silkscreen, gravure, and laser. Based upon our experience, we believe that the ink technologies may be incorporated into existing manufacturing processes. We believe that some of our patents may have non-security applications, and we are attempting to commercialize these opportunities.

Our digital technologies involve the utilization of multiple authentication mechanisms, some of which we own and some of which we license.  These mechanisms include biometric factors, knowledge factors, possession factors and location factors.   Biometric factors include facial recognition with liveness detection, finger print and voice recognition.  Knowledge factors include a personal gesture swipe and a safe and panic color choice.  Possession factor includes devices that the user has in their possession such as a smartphone, smart watch, and other wearable computing devices.  The location factor geo-locates the user during a secure login.  We surround these authentication mechanisms with proprietary systems that improve the usability and the security of the solutions. Our solutions allow the assessment and quantification of risk using a sophisticated heuristic scoring mechanism.  We have specialized systems that perform ‘liveness’ detection to insure the subject of authentication is in fact a live human being. We have systems that introduce learning capabilities into our solutions to improve the ease of use and flexibility.

 Results of Operations

Comparison of the Years Ended December 31, 2018 and 2017

The following discussion analyzes our results of operations for the years ended December 31, 2018 and 2017. The following information should be considered together with our financial statements for such periods and the accompanying notes thereto.

Revenue/Net Loss

We have not generated material revenue since our inception. For the years ended December 31, 2018 and 2017, we generated revenues of $74,844 and $0, respectively. Our net loss was $2,932,462 for the year ended December 31, 2018, a decrease of $452,878 from a net loss of $3,385,340 for the year ended December 31, 2017.  Net loss included non-cash charges of $1,107,203 for the year ended December 31, 2018, in comparison to non-cash charges of $1,800,181 for the year ended December 31, 2017. The increase in our net loss excluding non-cash charges, was primarily a result of a settlement agreement with two shareholders which resulted in a cash payment of $500,000 and a non-cash charge of $279,000 related to common stock issuance. The remaining increases related to increase in research and development and sales and marketing expenses related to activities that we expect will expand our operations.

Cost of Sales

For the years ended December 31, 2018 and 2017, we incurred proprietary technology costs of sales of $28,802 and $0. Cost of sales was lower for the year ended December 31, 2017, since we had no sales during the year.

General and Administrative Expenses

General and administrative expenses were $1,585,329 for the year ended December 31, 2018 compared to $1,689,883 for the year ended December 31, 2017, a decrease of $104,554. The decrease is attributable primarily to a decrease in non-cash stock-based compensation for consultants.

Legal and Accounting

Legal and accounting fees increased $170,252 to $416,772 for the year ended December 31, 2018 from $246,520 for the year ended December 31, 2017. In the beginning of 2017 we had released our then attorneys and hired our current attorneys in the second quarter of 2017. Thus, charges in 2018 for legal feels include a full year, in comparison to half year charges in 2017.

Payroll Expenses

Payroll expenses decreased to $316,837 for the year ended December 31, 2018 from $767,257 for the year ended December 31, 2017, a decrease of $450,420. The majority of the decrease was the result of lower non-cash charges related to stock-based compensation.

Research and Development

Research and development expenses increased $59,611 to $187,655 for the year ended December 31, 2018 from $128,044 for the year ended December 31, 2017.  

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Sales and Marketing

Sales and marketing expenses for the year ended December 31, 2018 were $135,290 as compared to $3,800 for the year ended December 31, 2017, an increase of $131,490. The increase was related to the hiring of our VP of Sales, and expenses for travel and costs related to various trade shows and other sales and marketing activities.

Interest Expense

During the year ended December 31, 2018, we incurred interest income of $6,664, as compared to a net interest expense of $218,316 for the year ended December 31, 2017, a variance of $224,980.  The variance is related to the settlement of notes payable in the second quarter of 2017.

Gain on derecognition of note payable and accrued interest

Gain on derecognition of note payable and accrued interest was $83,667 and $0 for the year ended December 31, 2018 and 2017, respectively. The release related to a note payable that had matured in 2011. We were not able to contact the holder, nor had the holder reached out us.

Gain on Accounts Payable Forgiveness

Gain on Accounts Payable Forgiveness was $352,008 and $0 for the year ended December 31, 2018 and 2017, respectively and consisted of primarily a settlement reached with our previous attorneys.

Settlement agreement with shareholders

In the first half of 2018 we made a strategic decision to end a future revenue sharing program resulting in settlement expenses of $779,000.

Loss on Settlement of Related Party Notes Payable

During the year ended December 31, 2017, we settled related party notes payable outstanding as of June 30, 2017, by issuing common stock and warrants to issue common stock exercisable at $0.15.  The fair value of the warrants resulted in a non-cash loss on settlement of related party notes payable of $0 and $331,912 for the years ended December 31, 2018 and 2017, respectively.

Non-GAAP – Financial Measures

The following discussion and analysis includes both financial measures in accordance with GAAP, as well as a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternatives to net income, operating income, and cash flow from operating activities, liquidity or any other financial measures. They may not be indicative of the historical operating results of VerifyMe nor are they intended to be predictive of potential future results. Investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP.

Our management uses and relies on Adjusted EBITDA, which is a non-GAAP financial measure. We believe that both management and shareholders benefit from referring to the following non-GAAP financial measure in planning, forecasting and analyzing future periods. Our management uses this non-GAAP financial measure in evaluating its financial and operational decision making and as a means to evaluate period-to-period comparison. Our management recognizes that the non-GAAP financial measure has inherent limitations because of the described excluded items.

The Company defines Adjusted EBITDA as earnings (or loss) from operations before the items in the table below including non-recurring charges. Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and analysts to evaluate and assess our core operating results from period-to-period after removing the impact of items of a non-operational nature that affect comparability.

We have included a reconciliation of our non-GAAP financial measure to the most comparable financial measure calculated in accordance with GAAP. We believe that providing the non-GAAP financial measure, together with the reconciliation to GAAP, helps investors make comparisons between us  and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measure and the corresponding GAAP measure provided by each company under applicable SEC rules.

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The following table presents a reconciliation of Adjusted EBITDA to net income (loss) allocable to common shareholders, a Non-GAAP financial measure:

	Year Ended
ADJUSTED EBITDA (Non-GAAP)	2018			2017
Net loss	$	(2,932,462	)	$	(3,385,340	)
Interest income (expenses), net		(6,664	)		218,316
Amortization and depreciation		20,963			43,095
Total EBITDA (Non-GAAP)		(2,918,163	)		(3,123,929	)
Adjustments:
Stock based compensation		44,120			139,808
Fair value of options and warrants issued in exchange for services		329,193			1,295,741
Fair value of restricted stock and restricted stock units issued in exchange for services		454,890			66,825
Common stock and warrants issued for services		-			297,807
Share-based payment for settlement agreement with shareholders		279,000			-
Cash payment for settlement agreement with shareholders		500,000			-
Total Adjusted EBITDA (Non-GAAP)	$	(1,310,960	)	$	(1,323,748	)

Liquidity and Capital Resources

Net cash used in operating activities increased by $1,440,796 to $2,376,714 for the year ended December 31, 2018 as compared to $935,918 for the year ended December 31, 2017.  The increase resulted primarily from a settlement payout with shareholders of $500,000 and from operational changes discussed previously.

Net cash used in investing activities was $108,735 for the year ended December 31, 2018, compared to $2,650 for the year ended December 31, 2017.  Increase investing activities relates to the purchase of patents which is vital for our business, and for software costs related to the development of our products.

Net cash provided by financing activities increased by $1,856,724 to $3,465,649 for the year ended December 31, 2018 from $1,608,925 for the year ended December 31, 2017.  Cash provided by financing activities during the year ended December 31, 2018, and 2017 consisted primarily of the private placement and our warrant discount program authorized in the year ended December 31, 2018.

Since our inception, we have focused on developing and implementing our business plan. Our business plans are dependent on our ability to raise capital through private placements of our common stock and/or preferred stock, through the possible exercise of outstanding options and warrants, through debt financing and/or through future public offering of our securities. As of March 31, 2019, we had cash resources of approximately $1,055,000, a decrease from our December 31, 2018 cash balance, primarily due to the manufacturing and deployment of authenticators and beepers which account for $0.2 million of the spend. Our existing cash resources are not sufficient to sustain our operations during the next twelve months unless we have material increase in revenue.

Going Concern

Since our inception, we have focused on developing and implementing our business plan. Our business plans are dependent on our ability to raise capital through private placements of our common stock and/or preferred stock, through the possible exercise of outstanding options and warrants, through debt financing and/or through future public offering of our securities.  While we have met our working capital needs since 2017 with funds supplied by and through our directors and former directors, we cannot assure you they will continue funding us if we need additional capital, or if they do, how dilutive the financing will be.Further, our principal investments during this period came from two former directors (and associates). See “Risk Factors.” 

In order to continue as a going concern, develop a reliable source of revenues, and achieve a profitable level of operations the Company will need, among other things, additional capital resources. Management's plans to continue as a going concern include raising additional capital through increased sales of product and by sale of common shares. Our business plans are dependent on our ability to raise capital through private placements of our common stock and/or preferred stock, through the possible exercise of outstanding options and warrants, through debt financing and/or through future public offering of our securities. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. Our existing cash resources are sufficient to sustain our operations during the next six months, however we may need to raise additional funds in the future in order to expand our business or if sales do not meet our internal budget.

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Off-Balance Sheet Arrangements

As of December 31, 2018, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Critical Accounting Policies

Our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of these policies is included in Note 1 of the Notes to our financial statements included elsewhere herein. We have identified below the accounting policies that are of importance in the presentation of our financial position, results of operations and cash flows and which require the application of significant judgment by management.

Stock-based Compensation

We account for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), 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 value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method.

We account for stock-based compensation awards to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees (“ASC 505-50”). Under ASC 505-50, we determine the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received, or the fair value of the equity instruments issued, whichever is more reliably measurable.

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. Any stock options issued to non-employees are recorded as an expense and additional paid-in capital in shareholders’ equity over the applicable service periods using variable accounting through the vesting dates based on the fair value of the options at the end of each period.

Recently Issued Accounting Pronouncements

Recently issued accounting pronouncements are discussed in Note 1 of the Notes to Financial Statements contained elsewhere in this Annual Report.

Cautionary Note Regarding Forward Looking Statements

This Annual Report includes forward-looking statements including statements regarding liquidity, future capital-raising activity, future revenues, the potential markets for our products and services, pharmaceutical industry compliance with FDA rules, the delivery and implementation of our Authenticators, our future plans with HP Indigo, our marketing strategy and the development of anti-counterfeiting technologies. All statements other than statements of historical facts contained in this Annual Report, including statements regarding our future financial position, anticipated future revenues, liquidity, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in “Risk Factors” elsewhere in this Annual Report. Other sections of this Annual Report may include additional factors which could adversely affect our business and financial performance. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any risk factor, or combination of risk factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in this Annual Report, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Annual Report.

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following Risk Factors before deciding whether to invest in our Company. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition. If any of the events discussed in the Risk Factors below occur, our business, consolidated financial condition, results of operations or prospects could be materially and adversely affected. In such case, the value and marketability of the common stock could decline.

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Risks Relating to Our Business

Our ability to continue as a going concern is in doubt absent obtaining adequate new debt or equity financing and achieving sufficient sales levels.

We anticipate that we will continue to lose money for the foreseeable future. Our continued existence is dependent upon generating sufficient working capital and obtaining adequate new debt or equity financing. Because of our continuing losses, we may have to continue to reduce our expenditures, without improvements in our cash flow from operations or new financing. Working capital limitations continue to impinge on our day-to-day operations thus contributing to continued operating losses. The report of our independent auditors dated April 1, 2019 on our financial statements for the year ended December 31, 2018 includes an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern. 

We have a history of losses and can make no assurance that we will be able to generate a profit or cash flow from operations in the future.

We have incurred net losses, including a net loss of $2,932,462 for the year ended December 31, 2018. We expect to continue to incur substantial expenditures to develop and market our services and could continue to incur losses and negative operating cash flow. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Our ability to generate profits will depend, in part, on our expenses and our ability to generate revenue. Our prior losses and any future losses have had and may continue to have an adverse effect on our shareholders’ equity and working capital.

In order to remain operational, we expect that we may have to raise capital in 2019. If we fail to raise the capital or we raise it on oppressive terms, investors will be materially and adversely affected.

Based upon our current budget and forecasted expenditures, we may need to complete a financing in 2019. The Company has signed three new contracts in the past twelve months which are expected to generate revenues. Whether we have sufficient cash to support our current operations for 12 months will depend upon future sales and the collections from customers. In the past, we relied upon two former directors to provide significant financing. At least one of these former directors has expressed hostility to our management and is not likely not provide further financing. However, certain of our Board members have expressed a willingness to either directly provide capital or refer investment banking sources. We do not have any agreements or oral understandings from potential investors including these Board members or broker-dealers for any future financing. We cannot assure you that we will be able to obtain any financing or if we do, the terms of any financing. We may only be able to raise debt on very unfair terms combined with dilutive warrants. Further if we are able to raise capital through the issuance of equity, it may be on very dilutive terms combined with dilutive warrants. In either of these events, investors will be materially and adversely affected.

If two of our principal shareholders act together, they may be able to control our Company and might be able to act to the detriment of many of our other shareholders.

Mr. Laurence J. Blickman, a former director, through an affiliated trust and other indirect holdings, holds a number of shares of common stock and warrants to purchase common stock which make him the beneficial owner of over 14% of the Company’s common stock. Mr. Blickman may be able to exert a significant amount of control over all matters requiring shareholder approval, including significant corporate transactions. He recently resigned as a director after continuing disagreements with the Company’s management and a majority of its directors. The Company is uncertain as to his future plans. Mr. Blickman claims he is not a member of any “group.”

Mr. Carl Berg, is the beneficial owner of over 9% of our outstanding common stock. Mr. Berg has advised the Company that while he has often invested with Mr. Blickman, any comments about acting together are not based upon any communications, arrangements or understandings with Mr. Blickman. Mr. Berg also said he did not resign from the Board of directors as a result of Mr. Blickman’s disagreements or any other disagreement with the Company and advised the Company that he is not a member of any “group”.

Our competitors in the anti-counterfeiting industry have much greater financial resources than we do and more functional technology offerings than we currently have. Therefore, we may not be able to successfully compete with them.

The market for protection from counterfeiting, diversion, theft and forgery is a mature 25-year-old industry dominated by a number of large, well-established companies, as described under “Competition,” above. To compete effectively, we will need to expend significant resources in technology and marketing. Each of our competitors has substantially greater financial, human and other resources than we have. As a result, we may not have sufficient resources to develop and market our services effectively, if at all. Further, as described below, our primary digital technology is not currently fully functional. If we cannot bring this product to functionality, we may not be able to compete in the key digital sector, which will harm our operating results.

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If our technologies do not work as anticipated once we achieve meaningful sales, we will not be successful.

While we believe that we have world class technologies and major businesses have tested our ink technology in trials, our ink business is just on the verge of market acceptance and without material sales and feedback from customers, we will not be successful. Further, we made a significant investment in our new authenticators. If customers do not find them useful or decline to lease them, our business may suffer.

If our technology cannot be used to successfully prevent counterfeiting, we may not be able to generate material revenue.

Our market is characterized by new and evolving technologies. Counterfeiting is constantly evolving in order to create items which appear to be legitimate and evade regulations which would seize counterfeit items and penalize counterfeiters. In order to stay competitive our technologies will need to be sufficiently complex so that they cannot be reproduced or copied by counterfeiters. If we are unable to develop and integrate effective anti-counterfeiting technologies to address the increasingly sophisticated technological needs of our customers in a timely and cost-effective manner, we may not be successful in preventing counterfeiting and we may not be able to generate material revenue.

Our success depends on the efforts, abilities and continued service of Patrick White, our President and CEO, and if we are unable to continue to retain the services of Mr. White, we may not be able to continue our operations.

Our success depends to a significant extent upon the continued service of Patrick White, our Chief Executive Officer.  On August 15, 2017, we entered into a two-year employment agreement with Mr. White. Loss of the services of Mr. White and any negative market or industry perception arising from the loss of such services could significantly harm our business, future prospects and the price of our common stock. We do not maintain key-person insurance on the life of Mr. White.

Because we are relying on our small management team, we lack business development resources which may hurt our ability to increase revenue.

We have a small management team that is focused on sales. In addition, our Chairman who is not involved in sales handles operational matters, legal compliance, board relationships and shareholder relations. Because we have only three people dedicated to business development, we lack the resources to grow beyond certain levels. We cannot assure you that we will generate cash flow from operations or from a financing which will enable us to grow our revenues.

If we are unable to hire an experienced sales team, or our partners are not successful, we may not be able to generate material revenue.

Presently our personnel consist of two fulltime employees, one part-time employee and two contractors.  Our agreement with the Label Manufacturer includes sales support. Our potential customers are large companies which do not impulsively enter into large contracts.  Accordingly, we may be required to hire sales persons.  If our management team, the Label Manufacturer and any sales persons we hired are unsuccessful, we may be unable to generate material revenue.

If we cannot manage our growth effectively, we may not become profitable.

Businesses which grow rapidly often have difficulty managing their growth. Our staff presently consists of three employee and two contractors. If we continue to grow as rapidly as we anticipate, we will need to expand our management by recruiting and employing experienced executives and key employees capable of providing the necessary support. We cannot assure you that our management will be able to manage our growth effectively or successfully. Our failure to meet these challenges could cause us to lose money, and your investment could be lost.

Because a small number of customers account for all of our revenue, the loss of any of these customers would have a material adverse impact on our operating results and cash flows.

We derive our revenue from a limited number of customers. Our revenue in 2018 was nominal. Any termination of a business relationship with, or a significant sustained reduction in business received from, one of these customers could have a material adverse effect on our operating results and cash flows. We must materially increase the number of customers and be able to have our customer increase the number of products for which they use our service.

Our future growth will depend upon the success of our strategic partners who integrate our solutions into their product offerings.

We rely on strategic partnerships with larger companies which integrate our technologies into their product offerings. This distribution strategy leaves us largely dependent upon the success of our partners. In 2017, we signed a five-year contract with HP Indigo to print RainbowSecure™ technology on packages and labels on their 6000 series digital presses.  In January 2018, we signed a contract with Micro Focus to use RainbowSecure™ in their Global Product Authentication, Track and Trace system (software). If our strategic partners who include our technology in their products cease to do so, or we fail to obtain other partners who will incorporate, embed, integrate or bundle our technology, or these partners are unsuccessful in their efforts, expanding deployment of our technology our business and future growth would be materially and adversely affected.

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If we fail to protect or enforce our intellectual property rights, or if the costs involved in protecting and defending these rights are prohibitively high, our business and operating results may suffer.

Our patent rights, trade secrets, copyrights, trademarks, domain names and other product rights are critical to our success. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We may enter into confidentiality and invention assignment agreements with our employees and contractors and confidentiality agreements with parties with whom we conduct business to limit access to, and disclosure and use of, our proprietary information. However, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others. It may be expensive and cost prohibitive to file patents worldwide and we may be financially required to file patents in select countries where we see the greatest potential for our technologies.

As management deems appropriate, we will pursue the registration of our domain names, trademarks, and service marks in the United States and in certain locations outside the United States as we grow and launch our products. We will seek to protect our trademarks, patents and domain names in an increasing number of jurisdictions, a process that is expensive and time-consuming and may not be successful or which we may not pursue in every location. We may, over time, increase our investment in protecting our innovations through increased patent filings that are expensive and time-consuming and may not result in issued patents that can be effectively enforced. The Leahy-Smith America Invents Act (the “Leahy-Smith Act”) was adopted in September 2011. The Leahy-Smith Act includes several significant changes to United States patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. One of the key provisions of this law, changing the U.S. patent registry from a “first to invent” to a “first inventor to file” system, has only been effective since March 2013, and the effects of this change on small businesses like ours are not yet clear. It remains possible that the Leahy-Smith Act and its implementation will increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents, all of which could harm our business.

If we are required to sue third parties who we allege are violating our intellectual property rights, or if we are sued for violating a third party’s patents or other intellectual property rights, we may incur substantial expenses, and we could incur substantial damages, including amounts we cannot afford to pay.

Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights claimed by others. Patent and intellectual property litigation is extremely expensive and beyond our ability to pay.  While third parties do, under certain circumstances, finance litigation for companies that file suit, we cannot assure you we could find a third party to finance any claim we choose to pursue.  Moreover, third parties do not finance companies that are sued.  Any litigation of this nature, regardless of outcome or merit, could result in substantial costs, adverse publicity or diversion of management and technical resources, any of which could adversely affect our business and operating results. If we fail to maintain, protect and enhance our intellectual property rights, our business and operating results may be harmed.

From time-to-time, we may face allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including from our competitors and inactive entities. Patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict. As the result of any court judgment or settlement we may be obligated to cancel the launch of a new feature or product, stop offering certain features or products, pay royalties or significant settlement costs, purchase licenses or modify our products and features while we develop substitutes. 

Evolving regulations concerning data privacy may result in increased regulation and different industry standards, which could prevent us from providing our current products to our users, or require us to modify our products, thereby harming our business.

The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the Internet and mobile platforms have recently come under increased public scrutiny, and civil claims alleging liability for the breach of data privacy have been asserted against companies. The U.S. government, including the Federal Trade Commission and the Department of Commerce, has announced that it is reviewing the need for greater regulation for the collection of information concerning consumer behavior on the Internet, including regulation aimed at restricting certain targeted advertising practices. In addition, the European Union recently made sweeping reforms to its existing data protection legal framework, which resulted in a greater compliance burden for many companies with users in Europe. Various government and consumer agencies have also called for new regulation and changes in industry practices. In addition, our business could be adversely affected if laws or regulations are adopted, interpreted, or implemented in a manner that is inconsistent with our current business practices and that require changes to these practices, the design of our website, products, features or our privacy policy. Such changes may require us to modify our products and features, possibly in a material manner, and may limit our ability to develop new products and features that make use of the data that our users voluntarily share with us or that We are, and will continue to be, dependent on certain third party vendors for the supply of raw materials and key services, and any disruptions in the supply of these materials or services could adversely affect our results of operations.

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Because we are, and will continue to be, dependent on certain third-party vendors for key services, we are vulnerable to disruptions in the supply of these services which are beyond our control, and which could harm our operations.

We are relying upon our business partners to assist us including the Label Manufacturer and S-One. These partners are larger companies and may not necessarily have the same goals as employees although they have key relationships, management, and staff support and greater financial resources than we do. We currently depend on a single vendor of pigment for the inks we sell, and we may continue to be dependent on a small number of third party suppliers in the future including services relating to our electronic technology. We cannot be certain that any of these providers will be willing or able to meet our evolving needs. If our partners, vendors, or service providers fail to meet their obligations, provide poor, inaccurate or untimely service, or we are unable to make alternative arraignments for the supply of these services, we may fail, in turn, to provide our services or to meet our obligations to our users and our business, financial condition and operating results could be materially and adversely affected.

Risks Relating to Our Common Stock

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired. 

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming and costly, and place significant strain on our personnel, systems, and resources.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the Securities and Exchange Commission (the “SEC”) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. 

Our management concluded that our disclosure controls and procedures were not effective as of December 31, 2018 as the result of the material weaknesses in our internal control over financial reporting identified in this Annual Report. Other weaknesses in our disclosure controls and internal control over financial reporting may be identified in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. We have not yet been able to remediate the material weakness related to our internal control over financial reporting.

Additional material weaknesses in our internal control over financial reporting may be identified in the future.  Any failure to maintain existing or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. If we are unable to effectively remediate material weaknesses in a timely manner, investors could lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

If the SEC investigates us and the SEC sues us due to our inability to remediate, or a delay in remediating, identified material weaknesses in our internal control over financial reporting, it may have a material adverse effect on our business and financial condition.

Recently the SEC sued four public companies alleging in part that they had violated Section 13(b) of the Exchange Act resulting from their failure to remediate material weaknesses in their internal control over financial reporting over an extensive period of time. Three of these companies had remediated their material weaknesses. We have identified and disclosed material weaknesses in internal control over financial reporting beginning with the year ended December 31, 2016. While we are taking steps to remediate any material weaknesses we have not yet fully remediated our internal control failures. If the SEC Staff investigates us and following that investigation a lawsuit is filed alleging that we had not remediated our material weaknesses for a number of consecutive annual reporting periods, we will face the following risks:

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· It will divert our management’s attention from our core business;

· We will incur substantial legal fees in connection with both the investigation and the lawsuit if it is filed;

· If we are sued, we may be required to pay a civil monetary penalty in addition to other remedies the SEC or a court may impose;

· Any public disclosure may cause investors to sell our stock which may result in a material decline  in our stock price that will cause investors to lose money; and

· Our existing shareholders will experience more dilution as we are required to raise capital at a lower price per share.

As a result of our recent financings we are obligated to issue a substantial number of additional shares of common stock, which will dilute our present shareholders.

From June 2017 to January 2018, we engaged in a series of private placement transactions issuing $2,683,211 worth of common stock and warrants to accredited investors. This transaction caused us to issue a total of 38,378,011 shares of common stock and 38,378,011 warrants exercisable at $0.15 to investors. During the first half of 2018 the Company extended holders of the Company’s $0.15 warrants the option to exercise their warrants at $0.10 per share. In the future, we may grant additional options, warrants and convertible securities. The exercise, conversion or exchange of options, warrants or convertible securities, including for other securities, will dilute the percentage ownership of our shareholders. The dilutive effect of the exercise or conversion of these securities may adversely affect our ability to obtain additional capital. The holders of these securities may be expected to exercise or convert such options, warrants and convertible securities at a time when we would be able to obtain additional equity capital on terms more favorable than such securities or when our common stock is trading at a price higher than the exercise or conversion price of the securities. The exercise or conversion of outstanding warrants, options and convertible securities will have a dilutive effect on the securities held by our shareholders. We have in the past, and may in the future, exchange outstanding securities for other securities on terms that are dilutive to the securities held by other shareholders not participating in such exchange.

Because our common stock is subject to the “penny stock” rules, brokers cannot generally solicit the purchase of our common stock, which adversely affects its liquidity and market price.

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock on the OTCQB is presently less than $5.00 per share and therefore we are considered a “penny stock” according to SEC rules. Further, we do not expect our stock price to rise above $5.00 in the immediate future. The “penny stock” designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules limit the ability of broker-dealers to solicit purchases of our common stock and therefore reduce the liquidity of the public market for our shares.

Moreover, as a result of apparent regulatory pressure from the SEC and the Financial Industry Regulatory Authority, a growing number of broker-dealers decline to permit investors to purchase and sell or otherwise make it difficult to sell shares of penny stocks. The “penny stock” designation may continue to have a depressive effect upon our common stock price.

Due to factors beyond our control, our stock price may be volatile.

Any of the following factors could affect the market price of our common stock:

· The loss of one or more members of our management team;

· Our failure to generate material revenues;

· Regulatory changes including new laws and rules which adversely affect companies in our line of business;

· Our public disclosure of the terms of any financing which we consummate in the future;

· Our failure to become profitable;

· Our failure to raise working capital;

· Any acquisitions we may consummate;

· Announcements by us or our competitors of significant contracts, new services, acquisitions, commercial relationships, joint ventures or capital commitments;

· Cancellation of key contracts;

· A proxy contest a former director may launch;

· Our failure to meet financial forecasts we or broker-dealers publicly disclose;

· The sale of large numbers of shares of common stock by former directors and their associates;

· Short selling activities; or

· Changes in market valuations of similar companies.

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In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise be used to benefit our business.

Our common stock may be affected by limited trading volume and price fluctuations, which could adversely impact the value of our common stock.

Until recently, there has been limited trading in our common stock and there can be no assurance that an active trading market in our common stock will either develop or be maintained. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to periodically enter the market in the belief that we will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our common stock will be stable or appreciate over time.

Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

If our shareholders sell substantial amounts of our outstanding common stock, preferred stock, convertible notes issuable upon the exercise of outstanding warrants or other convertible securities, it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. The shares of our restricted common stock will be freely tradable upon the earlier of: (i) effectiveness of any registration statement covering such shares and (ii) the date on which such shares may be sold without registration pursuant to Rule 144 (or other applicable exemption) under the Securities Act.

Because we may issue preferred stock without the approval of our shareholders and have other anti-takeover defenses, it may be more difficult for a third party to acquire us and could depress our stock price.

In general, our Board may issue, without a vote of our shareholders, one or more additional series of preferred stock that have more than one vote per share, although the Company’s ability to designate and issue preferred stock is currently restricted by covenants under our agreements with prior investors. Without these restrictions, our Board could issue preferred stock to investors who support us and our management and give effective control of our business to our management. Additionally, issuance of preferred stock could block an acquisition resulting in both a drop in our stock price and a decline in interest of our common stock. This could make it more difficult for shareholders to sell their common stock. This could also cause the market price of our common stock shares to drop significantly, even if our business is performing well.

If our common stock becomes subject to a “chill” imposed by the Depository Trust Company, or DTC, your ability to sell your shares may be limited.

The DTC acts as a depository or nominee for street name shares that investors deposit with their brokers. DTC in the last several years has increasingly imposed a chill or freeze on the deposit, withdrawal and transfer of common stock of issuers whose common stock trades on the tiers of the OTC Markets. Depending on the type of restriction, a chill or freeze can prevent shareholders from buying or selling shares and prevent companies from raising money. A chill or freeze may remain imposed on a security for a few days or an extended period of time (in at least one instance a number of years). While we have no reason to believe a chill or freeze will be imposed against our common stock again in the future, if it were your ability to sell your shares would be limited. In such event, your investment will be adversely affected.

Because we cannot raise capital from conventional bank financing, shareholders will be diluted in the future as a result of the issuance of additional securities.

To meet our working capital needs, we expect to issue additional shares of common stock or securities convertible, exchangeable or exercisable into common stock from time to time, which could result in substantial dilution to investors. Investors should anticipate being substantially diluted based upon the current condition of the capital and credit markets and their impact on small companies.

Because we may not be able to attract the attention of major brokerage firms, it could have a material impact upon the price of our common stock.

It is not likely that securities analysts of major brokerage firms will provide research coverage for our common stock since these firms cannot recommend the purchase of our common stock under the penny stock rules referenced in an earlier risk factor. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It may also make it more difficult for us to attract new investors at times when we require additional capital.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report beginning on page F-1 located immediately after the signature page.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

As disclosed in the Company’s Form 8-K filed on December 1, 2017, the Audit Committee of the Company approved the dismissal of Morison Cogen LLP (“Former Auditor”) as the Company’s independent registered public accountant on November 27, 2017.

During the Company’s two most recent fiscal years, and through the date of their dismissal: (i) there were no disagreements (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) between the Company and the Former Auditor on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of the Former Auditor would have caused the Former Auditor to make reference to the subject matter of the disagreement in connection with its reports on the Company’s consolidated financial statements for such years, and (ii) there were no “reportable events” (as that term is defined in Item 304(a)(1)(v) of Regulation S-K). A copy of the Former Auditor’s letter, dated November 27, 2017, is attached as Exhibit 16.1 to this Form 10-K.

ITEM 9A. CONTROLS AND PROCEDURES.

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 Securities Exchange Act of 1934 as amended. 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 conducted an evaluation of the effectiveness of our internal controls over financial reporting as of December 31, 2018 using criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management has concluded that our internal controls over financial reporting were not effective as of December 31, 2018 based on a finding of a material weakness related to a lack of segregation of duties, resulting from staff reductions in accordance with cost containment measures. If we are able to obtain additional funding in the future, we intend to hire sufficient staff to enable an appropriate level of segregation of duties and to provide appropriate controls surrounding the financial reporting function.

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permits us to provide only management’s report in this Annual Report.

Disclosure Controls and Procedures

As of December 31, 2018, our management carried out the evaluation of the effectiveness of our disclosure controls and procedures required by Rule 13a-15(e) under the Exchange Act with the participation of our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2018, our disclosure controls and procedures were ineffective 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.

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Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting identified in connection with this evaluation that occurred during our fiscal quarter ended December 31, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.

None.

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PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table represents the Company’s current directors and their current position on the Board, if any:

Directors

Name	Age	Position
Norman Gardner	76	Chairman and Director
Marshall Geller	80	Director
Howard Goldberg	73	Director
Eugene Robin	35	Director
Arthur Laffer	78	Director
Patrick White	65	Director

Director Biographies 

Norman Gardner- Mr. Gardner, the Company’s founder, was appointed as Chairman of the Board on January 28, 2017. Mr. Gardner was previously a director and Vice-Chairman of the Company from the Company’s inception in November 1999 until January 1, 2013.  Mr. Gardner was appointed to the Company’s Board for his experience with the Company in the past and his familiarity with the Company’s products. Mr. Gardner served as Chief Executive Officer of the Company from November 1999 until January 1, 2013, and from January 28, 2017 until August 9, 2017. Mr. Gardner has been a consultant to the Company since June 2017 and was previously a consultant to the Company from January 2013 until January 2017.

Marshall Geller - Mr. Geller has served as a director of the Company since July 12, 2017. Mr. Geller was appointed to the Company’s Board for his experience as a managing partner of a private equity fund his many years of experience and expertise as an investor in and adviser to companies in various sectors as well as his experience with serving on the board of directors of other companies. Mr. Geller has been a director and a member of the audit committee of GP Strategies Corp. since 2002, and a director of Wright Investors’ Service Holdings Inc. from January 2015 until October 4, 2018. Mr. Geller was a founder of St. Cloud Capital, a Los Angeles based private equity fund, and Senior Investment Advisor from December 2001 until September 2017. He has spent more than 50 years in corporate finance and investment banking, including 21 years as a Senior Managing Partner of Bear, Stearns & Co., with oversight of all operations in Los Angeles, San Francisco, Chicago, Hong Kong and the Far East. Mr. Geller is currently on the Board of Directors of COR Capital LLC, UCLA Health System and is on the Board of Governors of Cedars Sinai Medical Center, Los Angeles. Mr. Geller also serves on the Dean's Advisory Council for the College of Business & Economics at California State University, Los Angeles. Previously Mr. Geller was a director of Guidance Software, Inc., National Holdings Corporation and California Pizza Kitchen.

Howard Goldberg - Mr. Goldberg has served as a director of the Company since July 12, 2017. Mr. Goldberg was appointed to the Board for his experience with being a director of other public companies and his legal expertise. Mr. Goldberg served as a director of Winthrop Realty Trust from 2003 until August 2016 when it converted to a trust called Winthrop Realty Liquidating Trust. Thereafter he served as a trustee of that Trust. Mr. Goldberg was a director of New York REIT, Inc. from March 2017 until October 26, 2018, when it converted to a limited liability company called New York REIT LLC. Since that date Mr. Goldberg has been a manager of New York REIT LLC. He has been retired since 1994 after a long career as a lawyer. He provided consulting services to the Company through December 31, 2017.

Eugene Robin – Mr. Eugene Robins has served as a director of the Company since March 5, 2019. Mr. Robin is currently a principal of Cove Street Capital (“CSC”), a registered investment adviser. Mr. Robin has been employed at CSC since its founding in 2011, becoming a principal in 2014, and serves as the Senior Analyst on both the Small Cap Value and Micro Cap Value strategies of CSC. Mr. Robin was appointed to the Board for his investment analysis experience as well as his software and security background.

Arthur Laffer - Dr. Laffer has served as a director of the Company since March 23, 2019. Dr. Laffer is the founder and chairman of Laffer Associates, an institutional economic research and consulting firm, as well as Laffer Investments, an institutional investment management firm utilizing diverse investment strategies. Dr. Laffer has served as a director of EVO Transportation & Energy Services since August 2018, GEE Group since January 2015, and NexPoint Residential Trust since May 2015. Dr. Laffer’s economic acumen and influence in triggering a world-wide tax-cutting movement in the 1980s have earned him the distinction in many publications as “The Father of Supply-Side Economics.” Dr. Laffer was a member of President Reagan’s Economic Policy Advisory Board for both of his two terms (1981-1989). Dr. Laffer was a member of the Executive Committee of the Reagan/Bush Finance Committee in 1984 and was a founding member of the Reagan Executive Advisory Committee for the presidential race of 1980. Dr. Laffer also advised Prime Minister Margaret Thatcher on fiscal policy in the UK during the 1980s. In the early 1970s, Dr. Laffer was the first to hold the title of Chief Economist at the Office of Management and Budget under Mr. Shultz. Additionally, Dr. Laffer served as Charles B. Thornton Professor of Business Economics at the University of Southern California and as Associate Professor of Business Economics at the University of Chicago. Dr. Laffer is the author or co-author of a number of books, including The End of Prosperity: How Higher Taxes Will Doom the Economy—If We Let it Happen, which was a nominee for the F.A. Hayek book award in 2009, Return to Prosperity: How America Can Regain Its Economic Superpower Status, Eureka! How to Fix California, New York Times Best Seller An Inquiry into the Nature and Causes of the Wealth of States, and its sequel Wealth of States: More Ways to Enhance Freedom, Opportunity and Growth and Trumponomics: Inside the America First Plan to Revive Our Economy. The Board believes Dr. Laffer is qualified to serve on the Board because of his expertise in economics and his experience as a director of multiple companies.

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Patrick White - Mr. White has served as a director of the Company since July 12, 2017. Mr. White was previously a business consultant to Document Security Systems, Inc. from 2012 to 2015 and has been a director of U-Vend, Inc. since 2009. Mr. White was a Financial Adviser for the Monroe County Government from April 2016 until May 2017. Mr. White worked as an independent consultant from March 2015 until March 2016 and as a Consultant for Document Security Systems, Inc. from 2012 until March 2015. Mr. White was a consultant to the Company from June 1, 2017 through August 14, 2017, when he was appointed Chief Executive Officer. Mr. White was appointed to the Board for his knowledge of our business and public company experience.

Executive Officers

Name	Age	Position
Patrick White	65	Chief Executive Officer and President
Margaret Gezerlis	38	Chief Financial Officer
Keith Goldstein	50	Chief Operating Officer

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Patrick White - See above for Mr. Patrick White’s biography.

Margaret Gezerlis - Ms. Gezerlis has been the Company’s Chief Financial Officer since May 2018. In November 2018 Ms. Gezerlis became an employee of the Company. Ms. Gezerlis was an employee of the CFO Squad LLC from February 2018 until November 2018 where she worked as an independent contractor for the Company. Previously, Ms. Gezerlis was a Financial Reporting Manager at Bankrate.com from March 2017 until February 2018. Prior to her position at Bankrate.com, Ms. Gezerlis held positions at Westport Fuel Systems from March 2014 to November 2016 and Workiva from June 2012 to March 2014. Ms. Gezerlis holds an international accounting qualification from the Association of Chartered Certified Accountants.

Keith Goldstein – Mr. Goldstein has served as the Chief Operating Officer of the Company since September 2017. Mr. Goldstein was also Chief Executive Officer of Infinacom from March 2018, until February 2019. He was previously Chief Executive Officer of ABCorp North America from September 1998, until April 2017.

Family Relationships

There are no family relationships among the Company’s directors and/or executive officers.

Board responsibilities

The Board oversees, counsels, and directs management in regard to the long-term interests of the Company and its shareholders. The Board’s responsibilities include establishing broad corporate policies and reviewing the overall performance of the Company. The Board is not involved in the operating details on a day-to-day basis.

Board committees and charters

The Board and its committees meet throughout the year and act by written consent from time to time as appropriate. The Board delegates various responsibilities and authority to its Board committees.  On September 5, 2017, the Board established three committees: the Audit Committee, the Compensation Committee, and the Governance and Nominating Committee. In June 2018 the Company established the Finance and Uplisting Committee.

The following table identifies the current committee members:

Name	Audit	Compensation	Governance and Nominating	Finance and Uplisting
Marshall Geller	X	X	X	X
Howard Goldberg	X (1)	X (1)	X	X (1)
Eugene Robin	X

(1) - Mr. Goldberg is an ex-officio member of all of the Company’s Committees as a result of his status as the Company’s lead independent director.

Director Independence

With the exception of Mr. White and Mr. Gardner, our Board determined that all of our present directors are independent in accordance with standards under the Nasdaq Listing Rules.

Our Board determined that as a result of being a consultant to the Company, Mr. Gardner is not an independent director and, because he is an employee, Mr. White is not an independent director under the Nasdaq Listing Rules.

Our Board has determined that Eugene Robin and Howard Goldberg are independent under the Nasdaq Listing Rules’ independence standards for Audit Committee members. Our Board has also determined that Marshall Geller and Howard Goldberg are independent under the Nasdaq Listing Rules independence standards for Compensation Committee members. Our Board has also determined that Marshall Geller and Howard Goldberg are independent under the Nasdaq Listing Rules independence standards for Governance and Nominating committee members. Our Board has also determined that Marshall Geller and Howard Goldberg are independent under the Nasdaq Listing Rules independence standards for Finance and Uplisting committee members.

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Committees of the Board of Directors

Audit Committee

Until the recent resignation of Laurence Blickman as a director and Chairman of the Audit Committee, this Committee held frequent calls without the auditors to permit Mr. Blickman and Harvey Eisen, another former director, to monitor all Company expenditures. The Audit Committee, which currently consists of Eugene Robin (current Audit Committee Chairman) Howard Goldberg and Marshall Geller, will monitor the integrity of the financial statements of the Company, monitor the independent registered public accounting firm’s (the “Auditors”) qualifications and independence, monitor the performance of the Company’s internal audit function and the Auditors, and monitor the compliance by the Company with legal and regulatory requirements. It will also meet with our Auditors to review the results of their audit and review of our annual and interim consolidated financial statements. The Audit Committee meets at least on a quarterly basis to discuss with management the annual audited financial statements and quarterly financial statements. It also provides advice on general corporate matters. The Audit Committee held nine meetings in 2018.

Audit Committee Financial Expert

Our Board of Directors has determined that Mr. Eugene Robin, an independent director, is qualified as an Audit Committee Financial Expert, as that term is defined by the rules of the SEC and in compliance with the Sarbanes-Oxley Act of 2002.

Compensation Committee

The function of the Compensation Committee, which currently consists of Marshall Geller and Howard Goldberg, is to review VerifyMe’s compensation of our executive officers and make recommendations to the Company regarding compensation. The Compensation Committee has the power to set performance targets for determining periodic bonuses payable to executive officers and may review and make recommendations with respect to shareholder proposals related to compensation matters. Additionally, the Compensation Committee is responsible for administering the Company’s Equity Incentive Plans. The Compensation Committee held no meetings in 2018.

Governance and Nominating Committee

The Governance and Nominating Committee, which consists of Marshall Geller and Howard Goldberg, is required to review the management of the Company and make recommendations to the Board concerning the Company’s corporate governance and nominate members of the Board. The Governance and Nominating Committee held no meetings in 2018.

Finance and Uplisting Committee

The Finance and Uplisting Committee, which consists of Marshall Geller and Howard Goldberg, is required to review the business of the Company and make recommendations to the Board concerning the Company’s prospects regarding uplisting to a national securities exchange. The Finance and Uplisting Committee held one meeting in 2018.

Number of meetings of the Board for fiscal year 2018

For 2018, the Board had four meetings and executed seven unanimous written consents. There were no directors who attended fewer than 75 percent of the total meetings or committee meetings of the Board for 2018. Further, prior to the election of directors in June 2018, the Company had an Executive Committee which had the power to act on all matters requiring Board approval. The Executive Committee had five meetings and executed 15 unanimous written consents in 2018.

Board Diversity

While we do not have a formal policy on diversity, the Board considers diversity to include the skill set, background, reputation, type and length of business experience of the Board members as well as a particular director’s contributions to that mix.  The Board believes that diversity brings a variety of ideas, judgments and considerations that benefit the Company and its shareholders.  Although there are many other factors, the Board seeks individuals with experience on operating and growing businesses.

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Board Leadership Structure

Mr. Norman Gardner serves as the Chairman of the Board and actively interfaces with management, the Board and counsel on a daily basis.  We believe that this Board leadership structure is the most appropriate for the Company.

Board Risk Oversight

The Company’s risk management function is overseen by the Board. The Company’s management keeps the Board apprised of material risks and provides its directors access to all information necessary for them to understand and evaluate how these risks interrelate, how they affect us, and how management addresses those risks. Mr. Norman Gardner works closely together with the other members of the Board once material risks are identified on how to best address such risks. If the identified risk poses an actual or potential conflict with management, the Company’s independent directors may conduct the assessment. Presently, the primary risk affecting us is the Company’s ability to generate revenue.

Code of Ethics

The Board has adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that applies to all of the Company’s employees, including the Company’s Chief Executive Officer and Chief Financial Officer. Although not required, the Code of Ethics also applies to the Company’s directors. The Code of Ethics provides written standards that we believe are reasonably designed to deter wrongdoing and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, full, fair, accurate, timely and understandable disclosure and compliance with laws, rules and regulations and the prompt reporting of illegal or unethical behavior. The Code of Ethics is available on the Company’s website at http://www.verifyme.com/code-conduct and the Company will provide a copy, without charge, to anyone that requests one in writing to VerifyMe, Inc., Clinton Square, 75 S. Clinton Ave, Suite 510 Rochester, NY 14604 Attention: Corporate Secretary.

Section 16(a) beneficial ownership reporting compliance

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers, and persons who own more than 10% of the Company’s common stock to file initial reports of ownership and changes in ownership of the Company’s common stock and other equity securities with the SEC. These individuals are required by the regulations of the SEC to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of the copies of the forms furnished to us, we believe that the following Company current and former officers, directors and 10% beneficial owners failed to comply with Section 16(a) as of the end of fiscal year 2018: Laurence Blickman (one transaction); Marshall Geller (one transaction ).

Communication with the Company’s Board

Although VerifyMe does not have a formal policy regarding communications with the Board, shareholders may communicate with the Board by writing to us at VerifyMe, Inc., Clinton Square, 75 S. Clinton Ave, Suite 510 Rochester, NY 14604 Attention: Corporate Secretary. Shareholders who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.

Risk Assessment Regarding Compensation Policies and Practices as they Relate to Risk Management

Our compensation program for employees does not create incentives for excessive risk taking by our employees or involve risks that are reasonably likely to have a material adverse effect on us. Our compensation has the following risk-limiting characteristics:

Our base pay programs consist of competitive salary rates that represent a reasonable portion of total compensation and provide a reliable level of income on a regular basis, which decreases incentive on the part of our executives to take unnecessary or imprudent risks;

A portion of executive incentive compensation opportunity is tied to long-term incentive compensation that emphasizes sustained performance over time. This reduces any incentive to take risks that might increase short-term compensation at the expense of longer term company results;

Awards are not tied to formulas that could focus executives on specific short-term outcomes;

Equity awards may be recovered by us should a restatement of earnings occur upon which incentive compensation awards were based, or in the event of other wrongdoing by the recipient; and

Equity awards, generally, have multi-year vesting which aligns the long-term interests of our executives with those of our shareholders and, again, discourages the taking of short-term risk at the expense of long-term performance.

ITEM 11. EXECUTIVE COMPENSATION.

The following information is related to the compensation paid, distributed or accrued by us for the years ended December 31, 2018 and 2017 to our Named Executive Officers. Our Chairman, Mr. Norman Gardner, is a consultant who assists the Company with managing the Board and interfacing with the Chief Executive Officer. Mr. Gardner is not a Named Executive Officer due to the fact that he is not an officer, however, he would be a Named Executive Officer is he were considered an officer of the Company.

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Summary Compensation Table

Name and					Option		All Other		Total
Principal			Salary		Awards		Compensation		Compensation
Position	Year		($)		($)(1)		($)		($)
Patrick White (2)		2018		200,000		48,466		14,400		262,866
CEO		2017		75,291		240,631		25,000		340,922
Keith Goldstein (3)		2018		145,000		271,745		14,400		431,145
COO		2017		41,000		318,818		1,000		359,818

 (1) Represents the grant date fair value of the option award, calculated in accordance with FASB Accounting Standard Codification 718, “Compensation – Stock Compensation,” or ASC 718. The assumptions used in calculating the grant date fair value of the option awards are set forth in Note 1 of the Financial Statements to our Form 10-K for the year ended December 31, 2018.

 (2) - Mr. White was appointed Chief Executive Officer on August 15, 2017.

(3) - Mr. Goldstein was appointed Chief Operating Officer on September 1, 2017. The sum of salary represents consulting fees.

Named Executive Officer Employment and Compensation Agreements

Patrick White entered into a two-year Employment Agreement with the Company in August 2017. Under that Employment Agreement, Mr. White receives annual compensation of $200,000 per year of which $50,000 is being deferred until the earlier of: (i) the Company receiving positive cash flow from operations; (ii) approval by the Board’s Compensation Committee; or (iii) August 9, 2019. Mr. White received a grant of 5,000,000 five-year stock options exercisable at $0.07 per share of which 3,000,000 vested upon execution of the Company’s standard Stock Option Agreement and the remaining 2,000,000 vest annually, in equal increments over a two year period. Mr. White received an additional grant of 2,000,000 five-year vested stock options exercisable at $0.07 per share. In the event of termination of Mr. White’s Employment Agreement without cause, Mr. White is entitled to receive any unpaid salary and expenses, a payment equal to 12 months of his salary at the rate in effect on the date of such termination, and a continuation of benefits for a period of six-months. Additionally, in the event of termination, all options granted to Mr. White shall immediately vest and he shall be entitled to exercise those options for a period of one-year from the date of termination.

On September 1, 2017, the Company entered into a six-month Consulting Agreement with Mr. Goldstein under which Mr. Goldstein served as the Company’s Chief Operating Officer and received a monthly salary of $10,000 per month plus 4% of any sales made by Mr. Goldstein on behalf of the Company. Mr. Goldstein was granted 2,000,000 five-year options to purchase shares of the Company’s common stock, vesting in equal monthly increments over the initial six-month term, subject to execution of the Company’s standard stock option agreement. Mr. Goldstein’ Consulting Agreement may be terminated at any time for cause. If Mr. Goldstein’s Consulting Agreement is terminated without cause Mr. Goldstein is entitled to (i) any unpaid salary and (ii) any unpaid and accrued expenses. Mr. Goldstein’s Consulting Agreement contains non-compete provisions prohibiting Mr. Goldstein from competing with the Company during the term of the Consulting Agreement and for one year after termination. On March 1, 2018, the Company amended Mr. Goldstein’s Consulting Agreement (the “Goldstein Amendment”) for a one-year term which expired on February 28, 2019, under which Mr. Goldstein received a monthly salary of $12,500 per month. The Goldstein Amendment provides Mr. Goldstein with an additional 1,000,000 five-year options to purchase shares of the Company’s common stock with half of the options vesting upon execution of the Goldstein Amendment and half of the option vesting on February 28, 2019, subject to execution of the Company’s standard stock option agreement. In February 2019 the Company agreed to renew Mr. Goldstein’s Employment Agreement on a month-to-month basis on the terms of the Goldstein Amendment, pending Board approval of a new Employment Agreement.

Other Consulting Agreement

On June 29, 2017, the Company entered into a Consulting Agreement with Norman Gardner. Under the terms of the Consulting Agreement Norman Gardner will receive a monthly consulting fee of $12,500 over a three-year term beginning June 30, 2017. The Consulting Agreement provides that the Company will reimburse Mr. Gardner for up to $1,000 a month for health insurance and other medical expenses and will provide Mr. Gardner with a grant of 10,000,000 stock options exercisable at $0.07 per share which are fully vested and exercisable over a five-year term. In the event of termination without cause, Mr. Gardner is entitled to receive any unpaid salary and expenses, a payment equal to 12 months of his consulting fee, and a continuation of benefits for a period of six-months. The Consulting Agreement further provides for 12 months of severance and health insurance reimbursement if it is terminated without cause and 18 months of severance and health insurance reimbursement upon a change of control if Mr. Gardner terminates the Agreement within one year of the change of control.

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Outstanding equity awards at fiscal year-end

The table below sets forth the outstanding equity awards for the Company’s Named Executive Officers as of the end of our fiscal year ended December 31, 2018.

The table in the “Director Compensation” below sets forth the outstanding equity awards for the Company’s Directors as of the end of our fiscal year ended December 31, 2018.

Outstanding Equity Awards at Fiscal Year-End

Name	Option awards
	Number of securities underlying unexercised options  (#) exercisable	Number of securities  underlying  unexercised  options  (#) unexercisable	Equity  incentive  plan awards: Number of  securities  underlying  unexercised  unearned  options  (#)	Option  exercise price  ($)	Option expiration date
(a)	(b)	(c)	(d)	(e)	(f)
Patrick White	6,000,000	1,000,000	618,219	0.07	5/16/2020
Keith Goldstein	2,500,000	500,000	166,667	0.10	10/31/2022

Director Compensation for the Fiscal Year ended 2018

			Stock		Other		Total
Name and Principal			Awards		Compensation		Compensation
Position	Year		($)		($)		($)
Norman Gardner		2018		16,240		162,000		178,240
Carl Berg (2)		2018		81,318		-		81,318
Laurence Blickman (2)		2018		31,585		30,000		61,585
Harvey Eisen (2)		2018		108,236		-		108,236
Marshall Geller		2018		28,337		-		28,337
Howard Goldberg		2018		36,457		-		36,457
Lawrence G. Schafran (2)		2018		6,143		-		6,143
Patrick White		2018		16,240		-		16,240

(1) Represents grants of restricted common stock in June 2018, vesting quarterly over a one-year period, subject to continued service as a director and the portion vesting in 2018 for restricted common stock granted in August 2017. See the “Related Person Transactions” section above for a description of the accelerated vesting of the restricted common stock.

(2) Former director.

Our non-employee directors are eligible to receive options, restricted stock and other equity linked grants under our equity incentive plans.

 Equity compensation plan information

During 2013, the Board adopted, and our shareholders approved, a new comprehensive incentive compensation plan (the “2013 Plan”) which served as the successor incentive compensation plan to a 2003 Stock Option Plan covering (i) 20,000,000 new shares of our common stock, plus (ii) the number of shares of our common stock subject to outstanding grants under the 2003 Plan as of the date of the 2013 Annual Meeting, plus (iii) the number of shares of our common stock remaining available for issuance under the 2003 Plan.

The 2013 Plan covers 22,013,530 outstanding options and no longer will be used for future grants.

On November 14, 2017, the Board adopted and in 2018 our shareholders ratified the Company’s 2017 Equity Incentive Plan (the “Plan”) which provides for the issuance of awards covering 13,000,000 shares of common stock under the Plan. Awards granted under the Plan may be Incentive Stock Option, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock or Restricted Stock Units which are awarded to all employees, consultants and directors of the Company.

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Equity compensation plan information as of December 31, 2018

	(a)	(b)	(c)
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	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	40,854,362	$0.23	11,400,000
Total*	40,854,362	$0.23	11,400,000

Restricted Stock. Does not include 240,000 shares of common stock granted to each of our four independent directors in March 2019.

* As of December 31, 2018, under the 2013 Plan and the 2017 Plan.

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ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

During the time he was a director of the Company, Laurence Blickman often told certain other directors and the Company’s counsel that if management and the Board did not make certain changes he requested, two other directors including Carl Berg, another principal shareholder and former director, would act together as shareholders and directors and seek to make changes to the management and direction of the Company. The Company’s counsel advised Mr. Blickman that if he was correct about Mr. Berg, they needed to amend their Schedule 13Ds and disclose the existence of this group. No amendments were made. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – “Risk Factors.” Mr. Blickman and Mr. Berg were provided this footnote prior to the filing of this Report. Each of Mr. Berg and Mr. Blickman have advised that they are not a “group”. The numbers in the table below do not aggregate the holdings of Messrs. Blickman and Berg, nor those of Mr. Harvey Eisen, the third former director. If they are deemed to be a group, they would beneficially own approximately 24% of our outstanding common stock.

Voting securities and principal holders thereof

The following table sets forth the number of shares of VerifyMe common stock beneficially owned as of March 29, 2019, by (i) those persons known by VerifyMe to be owners of more than 5% of its common stock, (ii) each director, (iii) the Named Executive Officers (as disclosed in the Summary Compensation Table), and (iv) VerifyMe’ executive officers and directors as a group. Unless otherwise specified in the notes to this table, the address for each person is: VerifyMe, Inc., Clinton Square, 75 S. Clinton Ave, Suite 510 Rochester, NY 14604 Attention: Corporate Secretary.

Title of Class	Beneficial Owner	Amount of Beneficial Ownership (1)		Percent Beneficially Owned (1)
Named Executive  Officers:
Common Stock	Patrick White (2)		6,150,000		5.04	%
Common Stock	Keith Goldstein (3)		3,000,000		2.46	%
Non-Officer Directors:
Common Stock	Norman Gardner (4)		8,964,469		7.35	%
Common Stock	Marshall Geller (5)		7,895,000		6.47	%
Common Stock	Howard Goldberg (6)		4,306,755		3.53	%
Common Stock	Arthur Laffer (7)		240,000		*
Common Stock	Eugene Robin (8)		240,000		*
Common Stock	All directors and executive officers as a group (8 persons)		30,846,224		25.28	%
5% Shareholders:
Common Stock	Carl Berg (9)		11,837,500		9.70	%
Common Stock	Laurence Blickman (10)		17,650,761		14.47	%

* indicates less than 1%

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(1) Based on 122,001,195 shares of common stock issued and outstanding as of March 29, 2019 adjusted for stock options vested or vesting within 60 days and conversion of outstanding warrants into shares of common stock. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days whether upon the exercise of options, warrants or conversion of notes. Unless otherwise indicated in the footnotes to this table, VerifyMe believes that each of the shareholders named in the table has sole voting and investment power with respect to the shares of common stock indicated as beneficially owned by them. This table does not include any unvested stock options except for those vesting within 60 days. As for the 5% shareholders, the Company is relying upon Reports filed by each 5% shareholder with the SEC.

(2) Patrick White - Mr. White has been the Company’s Chief Executive Officer since August 15, 2017. Consists of 150,000 shares of common stock and 6,000,000 shares of common stock underlying stock options exercisable at $0.07 per share held by Mr. White directly.

(3) Keith Goldstein - Consists of 2,000,000 shares of common stock underlying stock options exercisable at $0.04 per share and 1,000,000 shares of common stock underlying stock options exercisable at $0.2102 per share held by POC Advisory Group LLC, an entity that Mr. Goldstein controls.

(4) Norman Gardner - Mr. Gardner was previously the Company’s Chief Executive Officer from February 1, 2017 until August 15, 2017.  Consists of 4,049,469 shares of common stock, 165,000 shares of common stock underlying stock options exercisable at $0.11 per share, 250,000 shares of common stock underlying stock options exercisable at $0.25 per share, and 4,500,000 stock options exercisable at $0.07 per share held directly by Mr. Gardner. Does not include Mr. Gardner’s minority ownership of an entity that holds the Company’s Series A Convertible Preferred Stock which currently equates to 44,820 shares.

(5) Marshall Geller - Consists of 445,000 shares of common stock held individually; 2,475,000 shares of common stock underlying warrants exercisable at $0.15 per share and 4,975,000 shares of common stock held by the Marshall & Patricia Geller Living Trust which are beneficially owned by Mr. Geller.

(6) Howard Goldberg - Consists of 1,884,500 shares of common stock underlying warrants exercisable at $0.15 and 2,422,255 shares of common stock held by Mr. Goldberg.

(7) Arthur Laffer – Consists of 240,000 shares of common stock held individually.

(8) Eugene Robin - Consists of 240,000 shares of common stock held individually.

(9) Carl Berg - Consists of 397,500 shares of common stock held directly by Mr. Berg and 11,440,000 shares of common stock held by Berg & Berg Enterprises, LLC (“BB”), which are beneficially owned by Mr. Berg, the managing member and primary owner of BB. The address for Mr. Berg and BB is 10050 Bandley Dr., Cupertino CA, 95014.

(10) Laurence Blickman - Consists of 3,529 warrants to purchase common stock at $5.00 per share and 17,647,232 shares of common stock beneficially owned by Mr. Blickman individually or by affiliates. The address for Mr. Blickman is 233 Alameda de las Pulgas, Atherton, CA 94027.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

In addition to Employment and Consulting Agreements disclosed elsewhere in this report, we engaged in a number of transactions with our executive officers and directors.

In January 2018, the Company issued 1,749,683 shares to Paul Klapper, a former member of the Board, relating to a note payable conversion that took place in June 2017 prior to the time he became a director.

In February 2018 the Company authorized the transfer of 500,000 stock options from Norman Gardner to Lawrence Schafran, a former director of the Company.

On February 19, 2018, the Company authorized a warrant reduction program (the “Program”) permitting warrant holders of the Company’s outstanding $0.15 warrants to exercise their warrants for $0.10 (the “Reduced Price”) under the terms of the Program. The Company received total gross proceeds of approximately $2,079,345 from the exercise of warrants under the Program at the Reduced Price. Included in the above amounts are gross proceeds of $1,205,458 from then directors of the Company including $572,000 from Carl Berg, $110,000 from Marshall Geller, $71,500 from Harvey Eisen, and $451,958 from Laurence Blickman.

In March 2018, the Company entered into a Confidential Settlement Agreement (the “Settlement Agreement”) with Paul Klapper, who was at the time a member of the Company’s Board, and certain other parties named in the Settlement Agreement. Pursuant to the terms of the Settlement Agreement, the Company (i) paid a total of $500,000 (the “Settlement Amount”) to a fund controlled by Paul Klapper and an additional party and (ii) issued a total of 1,000,000 shares of the Company’s common stock to  the fund and the third party (the “Settlement Shares”). The Settlement Agreement provides for the cancellation of certain revenue sharing agreements, as of March 31, 2018, between the Company and Mr. Klapper (or an affiliate) and the third party, and terminates the Company’s obligation to issue Mr. Klapper or affiliates warrants to purchase 3,700,000 shares of the Company’s common stock at an exercise price of $0.40 per share.  As a condition of entering into the Settlement Agreement, the Company accelerated the vesting of 150,000 shares of restricted common stock held by Mr. Klapper which were part of the 300,000 share August 2017 grant.  Mr. Klapper joined the Board on July 14, 2017 and resigned as of March 31, 2018. 

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On April 25, 2018, the Company approved the payment of $30,000 to Mr. Laurence Blickman for the services he rendered in connection with negotiating and resolving the transactions pertaining to the Settlement Agreement. On the same date the Company granted 300,000 shares of restricted common stock to Harvey Eisen in connection with his service as a member of the Board. On the same date the Company approved the immediate vesting of all of the Company’s outstanding restricted common stock issued in 2017 and 2018 to non-employee directors of the Company and Company approved a new grant of 150,000 shares of vested restricted common stock to the estate of Claudio Ballard, a former director of the Company. The 150,000 previously unvested shares of restricted common stock granted to Claudio Ballard were forfeited upon his death and the Board approved the grant of 150,000 restricted common stock to the estate of Claudio Ballard.

On June 27, 2018, the Company authorized a grant of restricted common stock, vesting quarterly over a one-year period, to the Company’s then directors wherein the directors received the following number of shares:

Laurence Blickman	235,000
Marshall Geller	205,000
Patrick White	150,000
Howard Goldberg	280,000
Harvey Eisen	210,000
Carl Berg	195,000
Norman Gardner	150,000

In 2017 the Company authorized a private placement with a maximum offering amount of $2,100,000 (the “Offering”) allowing investors to purchase units consisting of 715,000 shares of common stock and 715,000 five-year warrants exercisable at $0.15 per share. As previously discussed in the Company’s filing on January 25, 2018, on Form 8-K, in January 2018 the Company approved an increase in the offering. The following directors or former directors of the Company purchased the following securities in connection with the Offering:

· Carl Berg - $400,000 for 5,720,000 shares and 5,720,000 warrants;

· Laurence Blickman $291,777 for 4,172,411 shares and 4,172,411 warrants;

· Harvey Eisen - $50,000 for 715,000 shares and 715,000 warrants;

· Marshall Geller -  $250,000 for 3,575,000 shares and 3,575,000 warrants;

· Howard Goldberg - $115,000 for 1,644,500 shares and 1,644,500 warrants ;

· Larry Schafran - $115,000 for 1,644,500 shares and 1,644,500 warrants (including shares issued to a member of Schafran’s household);

· Paul Klapper - $26,000 for 371,800 shares and 371,800 warrants.

In connection with the conversion of the Company’s Series D Convertible Preferred Stock and warrants the Company issued a total of 2,482,145 shares of common stock to entities owned by Laurence Blickman.

In August 2017, the Company granted Laurence Blickman, Marshall Geller, Howard Goldberg, Claudio Ballard, Lawrence Schafran, and Paul Klapper each 300,000 shares of restricted common stock vesting quarterly over one-year period subject to continued service as of each applicable vesting date (the “August Grant”). In February 2018, Carl Berg was appointed to the Board and granted 300,000 shares of restricted common stock vesting quarterly over one-year period subject to continued service as of each applicable vesting date (the “February Grant”). Effective April 23, 2018, the Board approved the immediate vesting of all restricted stock grants made in the August Grant (except Mr. Klapper) and the February Grant.

In August 2017, the Company issued Norman Gardner 10,000,000 stock options, exercisable at $0.07 per share, in accordance with the terms of his Consulting Agreement. In January 2018, Norman Gardner made a cashless exercise of options related to services in 2017, amounting to an issuance of 4,027,778 shares

On October 19, 2017, the Company issued 464,775 shares of common stock to Paul Klapper, a former director, in connection with a $25,000 loan made to the Company on October 9, 2014, by an entity he controls.

See Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for a summary of March 2019 Restricted Stock grants to independent directors.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

All of the services provided and fees charged by MaloneBailey, LLP, our principal accountant, were approved by our Audit Committee. The following table shows the fees paid to MaloneBailey, LLP for the fiscal year ended December 31, 2018.

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	Year Ended December 31, 2018 ($)		Year Ended December 31, 2017 ($)
Audit Fees – MaloneBailey (1)		44,000		38,000
Audit Related Fees (2)		-		4,000
Tax Fees		5,000		-
All Other Fees		3,000		59,500
Total		52,000		101,500

———————

(1)	Audit fees – these fees relate to services rendered for the audits of our annual financial statements, for the review of our quarterly financial statements, and for services that are normally provided by the auditor in connection with statutory and regulatory filings or engagements.
(2)	Audit related fees – these fees relate to audit related consulting.

Audit Committee’s Pre-Approval Policy

The Audit Committee pre-approves all audit and permissible non-audit services on a case-by-case basis. In its review of non-audit services, the Audit Committee considers whether the engagement could compromise the independence of our independent registered public accounting firm, and whether the reasons of efficiency or convenience is in our best interest to engage our independent registered public accounting firm to perform the services. All of the services provided and fees charged by MaloneBailey, LLP were approved by our Audit Committee.

 47

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

					Filed or
		Incorporated by Reference			Furnished
Exhibit No.	Exhibit Description	Form	Date	Number	Herewith
3.1(i)	Articles of Incorporation, as amended	10-Q	August 19, 2015	3.1
3.2(ii)	Amended and Restated Bylaws of VerifyMe, Inc.	8-K	August 15, 2017	3.1
4.1	Second Amended Certificate of Designation for Series A Preferred Stock	8-K	June 18, 2015	3.2
4.2	Certificate of Designation for Series B Preferred Stock	8-K	June 18, 2015	3.3
4.3	Certificate of Withdrawal of Certificate of Designation for Series C and D Convertible Preferred Stock	10-Q	May 15, 2018	4.5
10.1	Form of Securities Purchase Agreement, dated as of November 15, 2016+	10-K	April 12, 2017	10.15
10.2	Form of Warrant for Purchase of Common Stock	10-K	April 12, 2017	4.2
10.3	2017 Equity Incentive Plan	8-K	November 20, 2017	10.1
10.4	Securities Exchange Agreement +	8-K	May 31, 2017	10.1
10.5	Form of Promissory Note dated January 24, 2017	10-Q	May 15, 2017	10.1
10.6	Form of Warrant dated January 24, 2017	10-Q	May 15, 2017	10.2
10.7	Form of Option Agreement dated January 31, 2017	10-Q	May 15, 2017	10.3
10.8	Form of Option Agreement dated February 6, 2017	10-Q	May 15, 2017	10.4
10.9	Form of Option Agreement dated February 6, 2017	10-Q	May 15, 2017	10.5
10.10	Form of Promissory Note dated February 13, 2017	10-Q	May 15, 2017	10.6
10.11	Form of Warrant dated February 13, 2017	10-Q	May 15, 2017	10.7
10.12	Form of Promissory Note dated March 28, 2017	10-Q	May 15, 2017	10.8
10.13	Form of Warrant dated March 28, 2017	10-Q	May 15, 2017	10.9
10.14	Form of Secured Promissory Note dated April 26, 2017	8-K	May 1, 2017	10.1
10.15	Form of Security Agreement	8-K	May 1, 2017	10.2
10.17	Form of Employment Agreement for Patrick White dated 8/9/17 *	10-K	April 16, 2018	10.17
10.18	Form of Compensation Agreement with Howard Goldberg dated 10/6/17*	10-K	April 16, 2018	10.18
10.19	Form of Consulting Agreement, as amended with Keith Goldstein dated 09/1/17 *	10-K	April 16, 2018	10.19
10.20	Form of Consulting Agreement with Norman Gardner dated 6/29/17 *	10-K	April 16, 2018	10.20
10.21	Form of Consulting Agreement for Jay Cardwell*	10-K/A	April 17, 2018	10.21
10.28	Form of Securities Purchase Agreement dated June 30, 2017	10-K	April 16, 2018	10.28
10.29	Form of Warrant dated June 30, 2017	10-K	April 16, 2018	10.29
10.30	Confidential Settlement Agreement, dated March 31, 2018, among VerifyMe, Inc., Paul F. Klapper, Stephen J. Silver, PFK Development Group, Ltd. and the other parties named therein +	10-K	April 16, 2018	10.30
10.31	Stock Purchase Agreement, dated March 31, 2018, among VerifyMe, Inc. and the parties named therein +	10-K	April 16, 2018	10.31
10.32	Registration Rights Agreement, dated March 31, 2018, among VerifyMe, Inc. and the parties named therein	10-K	April 16, 2018	10.32
10.33	Restricted Stock Agreement	10-Q	August 10, 2018	10.1
10.34	CFO Consulting Agreement for Margaret Gezerlis*	10-Q	November 14, 2018	10.1
16.1	Former Auditor Letter	8-K	December 1, 2017	16.1
31.1	Certification of Principal Executive Officer (302)				Filed
31.2	Certification of Principal Financial Officer (302)				Filed
32.1	Certification of Principal Executive and Principal Financial Officer (906)				Furnished**
101.INS	XBRL Instance Document				Filed
101.SCH	XBRL Taxonomy Extension Schema Document				Filed
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document				Filed
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document				Filed
101.LAB	XBRL Taxonomy Extension Label Linkbase Document				Filed
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document				Filed

 48

* Management contract or compensatory plan or arrangement.

** This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

+            Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplemental to the Securities and Exchange Commission staff upon request.

Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to VerifyMe, Inc., at the address on the cover page of this report, Attention: Corporate Secretary.

ITEM 16. FORM 10-K SUMMARY

Not applicable.

 49

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

VerifyMe, Inc.
By:	/s/ Patrick White
	Patrick White Chief Executive Officer
	Date: April 1, 2019

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Signature	Title	Date
/s/ Patrick White	Chief Executive Officer	April 1, 2019
Patrick White	(Principal Executive Officer)
Signature	Title	Date
/s/ Margaret Gezerlis	Chief Financial Officer	April 1, 2019
Margaret Gezerlis	(Principal Financial Accounting Officer)

Signature	Title	Date
/s/ Norman Gardner	Chairman of the Board	April 1, 2019
Norman Gardner
Signature	Title	Date
/s/ Marshall Geller	Director	April 1, 2019
Marshall Geller
Signature	Title	Date
/s/ Howard Goldberg	Director	April 1, 2019
Howard Goldberg
Signature	Title	Date
/s/ Eugene Robin	Director	April 1, 2019
Eugene Robin

 50

INDEX TO

FINANCIAL STATEMENTS

CONTENTS

	PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-1
BALANCE SHEETS	F-2
STATEMENTS OF OPERATIONS	F-3
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT	F-6
STATEMENTS OF CASH FLOWS	F-4
NOTES TO FINANCIAL STATEMENTS	F-7 to F-28

 51

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 balance sheets of VerifyMe, Inc. (the “Company”) as of December 31, 2018 and 2017, and the related statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern Matter

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has negative cash flows from operations that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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.

/s/ MaloneBailey, LLP

www.malonebailey.com

We have served as the Company's auditor since 2018.

Houston, Texas

April 1, 2019

F-1

VerifyMe, Inc.

Balance Sheets

	As of
	December 31, 2018			December 31, 2017
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,673,201		$	693,001
Accounts Receivable		30,373			-
Prepaid expenses and other current assets		25,781			18,668
Inventory		41,982			-
TOTAL CURRENT ASSETS		1,771,337			711,669
OTHER ASSETS
Patents and Trademarks, net of accumulated amortization of
$258,294 and $237,331 as of December 31, 2018 and December 31, 2017		209,049			191,507
Capitalized Software Costs		70,231			-
TOTAL ASSETS	$	2,050,617		$	903,176
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and other accrued expenses	$	411,211		$	923,202
Accrued Payroll	$	69,041		$	-
Notes payable		-			50,000
Common Stock payable		-			122,478
TOTAL CURRENT LIABILITIES		480,252			1,095,680
STOCKHOLDERS' EQUITY (DEFICIT)
Series A Convertible Preferred Stock, $.001 par value, 37,564,767 shares
authorized; 304,778 shares issued and outstanding as of December 31, 2018 and
324,778 shares issued and outstanding as of December 31, 2017		305			325
Series B Convertible Preferred Stock, $.001 par value; 85 shares
authorized; 0.85 shares issued and outstanding as of December 31, 2018 and
0.92 shares issued and outstanding as of December 31, 2017		-			-
Common stock of $.001 par value; 675,000,000 authorized; 102,553,706 and 53,873,872 issued, 102,203,166 and 53,523,332 shares outstanding as of December 31, 2018 and December 31, 2017		102,203			53,522
Additional paid in capital		60,844,796			56,198,126
Treasury stock as cost (350,540 shares at December 31, 2018 and  December 31, 2017)		(113,389	)		(113,389	)
Accumulated deficit		(59,263,550	)		(56,331,088	)
STOCKHOLDERS' EQUITY (DEFICIT)		1,570,365			(192,504	)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$	2,050,617		$	903,176

The accompanying notes are an integral part of these financial statements.

F-2

VerifyMe, Inc.

Statements of Operations

	Year Ended
	December 31, 2018			December 31, 2017
NET REVENUE
Sales	$	74,884		$	-
COST OF SALES		28,802			-
GROSS PROFIT		46,082			-
OPERATING EXPENSES
General and administrative (a)		1,585,329			1,689,883
Legal and accounting		416,772			246,520
Payroll expenses (a)		316,837			767,257
Research and development		187,655			128,044
Sales and marketing		135,290			3,800
Total Operating expenses		2,641,883			2,835,504
LOSS BEFORE OTHER INCOME (EXPENSE)		(2,595,801	)		(2,835,504	)
OTHER (EXPENSE) INCOME
Interest income (expenses), net		6,664			(218,316	)
Gain on derecognition of note payable and accrued interest		83,667			-
Settlement agreement with shareholders		(779,000	)		-
Gain on accounts payable forgiveness		352,008			-
Loss on settlement of related party notes payable		-			(331,912	)
Other income		-			392
		(336,661	)		(549,836	)
NET LOSS	$	(2,932,462	)	$	(3,385,340	)
Less: Deemed dividend on convertible preferred shares		-			(596,878	)
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(2,932,462	)	$	(3,982,218	)
LOSS PER SHARE
BASIC	$	(0.03	)	$	(0.14	)
DILUTED	$	(0.03	)	$	(0.14	)
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING
BASIC		93,851,170			28,244,361
DILUTED		93,851,170			28,244,361

(a)  Includes share-based compensation of $828,203 and $1,800,181 for the years ended December 31, 2018 and 2017, respectively.

The accompanying notes are an integral part of these financial statements.

F-3

VerifyMe, Inc.

Statements of Cash Flows

	Year Ended
	December 31, 2018			December 31, 2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(2,932,462	)	$	(3,385,340	)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock based compensation		44,120			139,808
Fair value of options and warrants issued in exchange for services		329,193			1,295,741
Fair value of restricted stock and restricted stock units issued in exchange for services		454,890			66,825
Common stock and warrants issued for services		-			297,807
Gain on accounts payable forgiveness		(352,008	)		-
Share-based payment for settlement agreement with shareholders		279,000			-
Gain on derecognition of note payable and accrued interest		(83,667	)		-
Amortization of debt discount		-			174,517
Interest rolled into principal		-			30,000
Loss on conversion of related party notes payable and accrued interest		-			331,912
Amortization and depreciation		20,963			43,095
Changes in operating assets and liabilities:
Accounts Receivable		(30,373	)		-
Inventory		(41,982	)		17,093
Prepaid expenses and other current assets		(7,113	)		(9,243	)
Accounts payable and accrued expenses		(57,275	)		61,867
Net cash used in operating activities		(2,376,714	)		(935,918	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Patents		(38,505	)		(2,650	)
Capitalized Software Costs		(70,231	)		-
Net cash used in investing activities		(108,736	)		(2,650	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of warrants		2,312,005			-
Proceeds from issuance of related party notes payable		-			281,000
Proceeds from sale of common stock		1,153,645			1,327,925
Net cash provided by financing activities		3,465,650			1,608,925
NET INCREASE  IN CASH AND
CASH EQUIVALENTS		980,200			670,357
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		693,001			22,644
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	1,673,201		$	693,001
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest	$	-		$	-
Income taxes	$	-		$	-
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Cumulative effect of adoption of ASU 2017-11	$	-		$	623,462
Series A Convertible Preferred Stock converted to common stock	$	400		$	1,460
Series B Convertible Preferred Stock converted to common stock	$	599		$	-
Series C Convertible Preferred Stock converted to common stock	$	-		$	4,768
Series D Convertible Preferred Stock converted to common stock	$	-		$	496
Cashless Exercise of Stock Options	$	4,028		$	-

F-4

Cashless Exercise of Warrants	$	183	$	-
Common Stock and Warrants Issued for Common Stock Payable	$	122,478	$	-
Deemed divided distribution on issuance of common stock for conversion of Series C and Series D	$	-	$	596,878
Warrants issued as discount to notes payable	$	-	$	113,586
Conversion Preferred C - warrants into common stock	$	-	$	6,175
Conversion Preferred D - warrants into common stock	$	-	$	1,986
Conversion of related party notes payable and accrued interest into common stock	$	-	$	273,623
Common stock payable for conversion of related party notes payable and accrued interest	$	-	$	122,478
Sale of common stock - past issuances	$	-	$	503

The accompanying notes are an integral part of these financial statements.

F-5

VerifyMe, Inc.

Statement of Stockholders' Equity (Deficit)

	Series A						Series B					Series C						Series D
	Convertible						Convertible					Convertible						Convertible
	Preferred						Preferred					Preferred						Preferred						Common
	Stock						Stock					Stock						Stock						Stock				Additional
	Number of						Number of					Number of						Number of						Number of				Paid-In			Treasury			Accumulated
	Shares			Amount			Shares			Amount		Shares			Amount			Shares			Amount			Shares		Amount		Capital			Stock			Deficit			Total
Balance at December 31, 2016		397,778			398			0.92					1,912,500			1,913			166,750			167			8,330,696		8,331		40,469,272			(113,389	)		(41,644,545	)		(1,277,853	)
Cumulative adjustment related to change in accounting principle (Note 1, Change in Accounting Principle)		-			-			-			-		-			-			-			-			-		-		11,924,665						(11,301,203)			623,462
Adjusted balance at January 1, 2017		397,778			398			0.92			-		1,912,500			1,913			166,750			167			8,330,696		8,331		52,393,937			(113,389	)		(52,945,748	)		(654,391	)
Conversion of Series A Convertible Preferred Stock		(73,000	)		(73	)		-			-		-			-			-			-			1,460,000		1,460		(1,387	)		-			-			-
Conversion of Series C Convertible Preferred Stock		-			-						-		(1,912,500	)		(1,913	)		-			-			4,767,858		4,768		(2,855	)		-			-			-
Conversion Preferred C - Warrants		-			-			-			-		-			-			-			-			6,175,000		6,175		(6,175	)								-
Conversion of Series D Convertible Preferred Stock		-			-			-			-		-			-			(166,750	)		(167	)		496,429		496		(329	)		-			-			-
Conversion Preferred D - Warrants		-			-			-			-		-			-			-			-			1,985,716		1,986		(1,986	)								-
Sale of common stock		-			-			-			-		-			-			-			-			19,451,575		19,452		1,340,798			-			-			1,360,250
Sale of common stock - Past issuances		-			-			-			-		-			-			-			-			503,432		503		(503	)								-
Stock Based Compensation		-			-			-			-		-			-			-			-			2,050,372		2,050		137,758									139,808
Stock issuance costs		-			-			-			-		-			-			-			-					-		(32,325	)		-			-			(32,325	)
Conversion of related party notes payable and accrued interest into common stock		-			-			-			-		-			-			-			-			4,402,079		4,402		601,133			-			-			605,535
Discount on warrants issued in conjunction with related party notes payable		-			-			-			-		-			-			-			-			-		-		113,586			-			-			113,586
Fair value of stock option		-			-			-			-		-			-			-			-			-		-		1,295,741			-			-			1,295,741
Restricted Stock awards		-			-			-			-		-			-			-			-			2,175,000		2,175		64,650			-			-			66,825
Deemed dividend distribution on issuance of common stock for conversion of Series C and Series D		-			-			-			-		-			-			-			-			-		-		(596,878	)								(596,878	)
Accretion of deemed dividend distribution on issuance of common stock for conversion of Series C and Series D		-			-			-			-		-			-			-			-			-		-		596,878									596,878
Common stock and warrants issued for services		-			-			-			-		-			-			-			-			1,725,175		1,724		296,083									297,807
Net loss		-			-			-			-		-			-			-			-			-		-		-			-			(3,385,340	)		(3,385,340	)
Balance at December 31, 2017		324,778			325			0.92			-		-			-			-			-			53,523,332		53,522		56,198,126			(113,389	)		(56,331,088	)		(192,504	)
Conversion of Series A Convertible Preferred Stock		(20,000	)		(20	)		-			-		-			-			-			-			400,000		400		(380	)		-			-			-
Conversion of Series B Convertible Preferred Stock		-			-			(0.07	)		-		-			-			-			-			599,362		599		(599	)		-			-			-
Sale of common stock		-			-			-			-		-			-			-			-			15,906,168		15,906		1,137,739			-			-			1,153,645
Settlement Agreement		-			-			-			-		-			-			-			-			1,000,000		1,000		278,000			-			-			279,000
Conversion of notes payable		-			-			-			-		-			-			-			-			1,749,683		1,750		120,728			-			-			122,478
Cash Exercise of Warrants		-			-			-			-		-			-			-			-			22,432,184		22,432		2,289,573			-			-			2,312,005
Cashless Exercise of Warrants		-			-			-			-		-			-			-			-			182,659		183		(183	)		-			-			-
Cashless Exercise of Stock Options		-			-			-			-		-			-			-			-			4,027,778		4,028		(4,028	)		-			-			-
Fair value of stock option		-			-			-			-		-			-			-			-			-		-		329,193			-			-			329,193
Restricted Stock awards and Restricted Stock Units		-			-			-			-		-			-			-			-			2,212,500		2,213		452,677			-			-			454,890
Common stock issued for services		-			-			-			-		-			-			-			-			169,500		170		43,950									44,120
Net loss		-			-			-			-		-			-			-			-			-		-		-			-			(2,932,462	)		(2,932,462	)
Balance at December 31, 2018		304,778			305			0.85			-		-			-			-			-			102,203,166		102,203		60,844,796			(113,389	)		(59,263,550	)		1,570,365

The accompanying notes are an integral part of these financial statements.

F-6

VerifyMe, Inc.

Notes to the Financial Statements

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

The Company was incorporated in the State of Nevada on November 10, 1999. The Company is based in Rochester, New York and its common stock, par value $0.001 per share, is traded on the over-the-counter market and quoted on the OTCQB.

The Company is a technology pioneer in the anti-counterfeiting industry. This broad market encompasses counterfeiting of physical and material goods and products, as well as counterfeiting of identity in digital transactions. The Company is able to deliver security solutions for identification and authentication of people, products and packaging in a variety of applications in the security field for physical transactions and owns digital patents which are in the same field. The products can be used to manage and issue secure credentials, including national IDs, passports, driver licenses and access control credentials, as well as comprehensive authentication security software to secure physical and logical access to facilities, computer networks, internet sites and mobile applications.

The Company’s activities are subject to significant risks and uncertainties, including the need to secure additional funding to further develop the Company’s patents.

Basis of Presentation

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

Change in Accounting Principle

In July 2017, the FASB issued ASU 2017-11. Part I relates to the accounting for certain financial instruments with down round features in Subtopic 815-40, which is considered in determining whether an equity-linked financial instrument qualifies for a scope exception from derivative accounting. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced based on the pricing of future equity offerings. An entity still is required to determine whether instruments would be classified in equity under the guidance in Subtopic 815-40 in determining whether they qualify for that scope exception. If they do qualify, freestanding instruments with down round features are no longer classified as liabilities. In the case where the exception from derivative accounting does not apply, warrants must be accounted for as a liability and recorded at fair value at the date of grant and re-valued at the end of each reporting period.

The Company’s warrants and embedded conversion feature on its preferred stock (see Notes 6 and 7) include anti-dilution provisions characterized as down round features and have previously been accounted for as liabilities, with the fair value of the liabilities remeasured at each reporting date and the change in liabilities recorded as other non-operating income or loss. The Company had recorded a “Warrant liability” and “Embedded derivative liability” of $623,462, in the aggregate, and gain on the change in fair value of warrants and embedded derivative liability of $11,301,203, in the aggregate, in its “Accumulated deficit” as reported in its Balance Sheets for the year ended December 31, 2016 relating to the warrant liability and embedded derivative liability.

The following table details the approximate fair value measurements within the fair value hierarchy of the Company’s derivative liabilities using Level 3 inputs:

	Total
Balance, January 1, 2016	$	1,802,375
Series C embedded derivative fair value, February 2016		1,235,000
Effect of conversion of Series C Preferred Stock on embedded derivative liability		(350,500	)
Series C warrant liability fair value, February 2016		1,767,576
Series D embedded derivative fair value, October 2016		42,521
Series D warrant liability fair value, October 2016		181,942
Change in fair value of derivative liabilities		(4,055,452	)
Balance, December 31, 2016		623,462
Cumulative adjustments related to change in accounting principle, January 1, 2017		(623,462	)
Balance, December 31, 2017	$	—

Except for the down round features in the warrants and embedded conversion feature, the warrants and embedded conversion feature would have been classified in equity under the guidance in Subtopic 815-40 and therefore qualify for the scope exception in ASU 2017-11. As permitted, the Company elected to adopt the accounting principles prescribed by ASU 2017-11 for the year ending December 31, 2017 and has recorded a cumulative-effect adjustment stemming from a change in accounting principle in its financial statements for the year ended December 31, 2017 measured retrospectively to the beginning of 2017. The cumulative effect adjustment appears at the beginning of 2017 in the Company’s Statement of Changes in Stockholders Deficit. The results of operations for the Company for year ended December 31, 2017 reflects application of the change in accounting principle from the beginning of 2017.

F-7

VerifyMe, Inc.

Notes to the Financial Statements

The following table details the impact stemming from the cumulative effect of the change in accounting principle on the Company’s Balance Sheets as of the beginning of 2017.

Balance Sheet Accounts Impacted by Warrants and Embedded Derivative Liability	As Previously Reported December 31, 2016			Cumulative Effect Adjustment at the Beginning of 2017			Reported after the Effect of a Change in Accounting Principle at the Beginning of 2017
Embedded derivative liability	$	228,718		$	(228,718	)	$	-
Warrant liability		394,744			(394,744	)		-
Additional paid in capital		40,469,272			11,924,665			52,393,937
Accumulated deficit		(41,644,545	)		(11,301,203	)		(52,945,748	)

Because the Company has retroactively applied the change in accounting principle discussed above to the beginning of 2017, the Company is no longer reporting warrant derivative gains or losses for the warrants and embedded conversion feature beginning in 2017.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Fair Value of Financial Instruments

The Company’s financial instruments consist of accounts receivable, accounts payable and accrued expenses, notes payable, embedded derivative liability and warrant liability. The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value because of their short maturities.  The Company believes the carrying amount of its notes payable approximate fair value based on rates and other terms currently available to the Company for similar debt instruments.

The Company 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

F-8

VerifyMe, Inc.

Notes to the Financial Statements

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.

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.

Concentration of Credit Risk Involving Cash and Cash Equivalents

The Company’s cash and cash equivalents are held at one financial institution. At times, the Company’s deposits may exceed Federal Deposit Insurance Corporation (FDIC) coverage limits. The Company has not experienced any losses from maintaining cash accounts in excess of federally insured limits.

Allowance for Doubtful Accounts

The Company considers allowances for doubtful accounts for estimated losses that may result from the inability of the Company’s customers to make required payments. 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.

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 market.

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, principally five to seven years. Maintenance and repairs of property are charged to operations, and major improvements are capitalized. Upon retirement, sale, or other disposition of property and equipment, the costs and accumulated depreciation are eliminated from the accounts, and any resulting gain or loss is included in operations.

Patents and Trademarks

The current patent and trademark portfolios consist of 10 granted US patents and 1 granted European patent validated in 4 countries, 3 pending US and foreign patent applications, 1 registered US trademark, and 13 pending US and foreign trademark applications. Costs associated with the registration and legal defense of the patents have been capitalized and are amortized on a straight-line basis over the estimated lives of the patents which were determined to be 17 to 19 years.

Long-Lived Assets

The Company evaluates the recoverability of its long-lived assets in accordance with ASC 360 “Property, Plant, and Equipment.” The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets are measured by a comparison of the carrying amount of an asset to future cash flows expected to be generated by the asset, undiscounted and without interest or independent appraisals. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the assets.

Related Parties

Related parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Companies are also considered to be related if they are subject to common control or common significant influence. During the year ended December 31, 2018, the Company incurred $30,000 related to consulting services performed by a Director of the Board included in General and administrative on the Statement of Operations. 

F-9

VerifyMe, Inc.

Notes to the Financial Statements

Capitalized Software

Costs incurred in connection with the development of software related to our proprietary digital products are accounted for in accordance with the Financial Accounting Standards Board Accounting Standards Codification ("ASC") 985 “Costs of Software to Be Sold, Leased or Marketed.” Costs incurred prior to the establishment of technological feasibility are charged to research and development expense. Software development costs are capitalized after a product is determined to be technologically feasible and is in the process of being developed for market. Amortization of capitalized software development costs begins once the product is available to the market. Capitalized software development costs are amortized over the estimated life of the related product, generally three 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. As of December 31, 2018, the Company capitalized $70,231. As of December 31, 2017, the Company had not capitalized any software development costs. The Company has not incurred a depreciation charge as the software was not available for use as of December 31, 2018. 

Notes Payable with detachable warrants

In accordance with FASB ASC 470-20, “Debt with Conversion and Other Options,” the proceeds of notes payable with detachable stock purchase warrants have been allocated between the two based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance.  The portion allocated to the warrants has been accounted for as a discount to the notes payable, and amortized over the term of the notes.

F-10

VerifyMe, Inc.

Notes to the Financial Statements

Revenue Recognition

The Company accounts for revenues according to ASC Topic 606, “Revenue from Contracts with Customers” which establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. 

The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:

· identify the contract with a customer;

· identify the performance obligations in the contract;

· 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, 2018, the Company’s revenues were primarily made up of revenue generated from printing labels with the Company’s technology.

Income Taxes

The Company follows FASB ASC 740, “Income Taxes,” when accounting for income taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for temporary differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Tax years from 2014 through 2017 remain subject to examination by major tax jurisdictions.

Stock-based Payments

The Company accounts for stock-based compensation under the provisions of FASB ASC 718, “Compensation—Stock Compensation”, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. The Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method.

The Company accounts for stock-based compensation awards to non-employees in accordance with FASB ASC 505-50, “Equity-Based Payments to Non-Employees” (“FASB ASC 505-50”). Under FASB ASC 505-50, the Company determines the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received, or the fair value of the equity instruments issued, whichever is more reliably measurable.

All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Non-employee equity-based payments are recorded as an expense over the service period, as if the Company had paid cash for the services. At the end of each financial reporting period, prior to vesting or prior to the completion of the services, the fair value of the equity-based payments will be re-measured and the non-cash expense recognized during the period will be adjusted accordingly. Since the fair value of equity-based payments granted to non-employees is subject to change in the future, the amount of the future expense will include fair value re-measurements until the equity-based payments are fully vested or the service completed.

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs were approximately $3,987 and $550 for the years ended December 31, 2018 and 2017 and are included in Sales and Marketing on the Statement of Operations.

F-11

VerifyMe, Inc.

Notes to the Financial Statements

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, 2018 and 2017 were $187,655 and $128,044.

Basic and Diluted Net Income per Share of Common Stock

The Company follows FASB ASC 260, “Earnings Per Share,” when reporting Earnings Per Share resulting in the presentation of basic and diluted earnings per share.  Because the Company reported a net loss for each of the years presented, common stock equivalents, including preferred stock, stock options and warrants were anti-dilutive; therefore, the amounts reported for basic and diluted loss per share were the same.

For the year ended December 31, 2018 and 2017, there were shares potentially issuable, that could dilute basic earnings per share in the future that were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive to the Company’s losses during the years presented.

For the year ended December 31, 2018 there were approximately 54,173,000 anti-dilutive shares consisting of 22,241,000 relating to warrants, 18,614,000 relating to options and 13,318,000 relating to preferred share agreements.  For the year ended December 31, 2017 there were approximately 68,612,000 anti-dilutive shares consisting of 32,292,000 relating to warrants, 22,013,000 relating to options and 14,307,000 relating to preferred share agreements. 

Segment Information

The Company is organized and operates as one operating segment wherein the Company’s patented technologies are utilized to address counterfeiting issues. In accordance with FASB ASC 280, “Segment Reporting” (“FASB ASC 280”), the chief operating decision-maker has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Since the Company operates in one segment and provides one group of similar products, all financial segment and product line information required by FASB ASC 280 can be found in the financial statements.

Recently Adopted Accounting Pronouncements

In July 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-11,“ Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part 1) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Non public Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception” (“ASU 2017-11”). Part I relates to the accounting or certain financial instruments with down round features in Subtopic 815-40, which is considered in determining whether an equity-linked financial instrument qualifies for a scope exception from derivative accounting. Down Round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced based on the pricing of future equity offerings. An entity still is required to determine whether instruments would be classified as equity under the guidance in Subtopic 815-40 in determining whether they qualify for that scope exception. If they do qualify, freestanding instruments with down round features are no longer classified as liabilities. ASU 2017-11 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted and may be applied on a retrospective basis, including in an interim period. The Company early adopted ASU 2017-11 during the interim period ended December 31, 2017 and retrospectively applied the adoption from January 1, 2017 (see Note 1, Change in Accounting Principle).

F-12

VerifyMe, Inc.

Notes to the Financial Statements

 In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation” (Topic 718): Scope of Modification Accounting. The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718 Compensation-Stock Compensation. An entity should account for the effects of a modification unless all the following are met: 1. The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. 2. The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. 3. The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The ASU is effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. The Company has adopted this guidance effective January 1, 2018, as required.

Going Concern

The Company has suffered recurring losses from operations and negative cash flows from operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. In order to continue as a going concern, develop a reliable source of revenues, and achieve a profitable level of operations the Company will need, among other things, additional capital resources. Management's plans to continue as a going concern include raising additional capital through increased sales of product and by sale of common shares. The Company’s business plans are dependent on the ability to raise capital through private placements of our common stock and/or preferred stock, through the possible exercise of outstanding options and warrants, through debt financing and/or through future public offering of our securities. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The Company’s existing cash resources are sufficient to sustain the Company’s operations during the next six months, however the Company may need to raise additional funds in the future in order to expand our business or if sales do not meet our internal budget.

NOTE 2 – PROPERTY AND EQUIPMENT

Equipment consists of the following:

	Year ended December 31,
	2018			2017
Software, furniture and fixtures	$	200,000		$	200,000
Equipment		3,223			3,223
Total		203,223			203,223
Less: accumulated depreciation		(203,223	)		(203,223	)
Balance	$	-		$	-

Depreciation of property and equipment was $0 and $0 for the years ended December 31, 2018 and 2017.

F-13

VerifyMe, Inc.

Notes to the Financial Statements 
 

NOTE 3 – PATENTS AND TRADEMARKS

During the years ended December 31, 2018 and 2017, the Company capitalized $38,505 and $2,650, respectively, for patent costs and trademarks. Amortization and impairment expense for patents and trademarks was $20,963 and $43,095 for the years ended December 31, 2018 and 2017.

NOTE 4 – 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, 2018 and 2017 is as follows (in thousands):

	Year Ended December 31
US	2018			2017
Income before income taxes	$	(2,932	)	$	(3,385	)
Taxes under statutory US tax rates		(616	)		(1,202	)
Increase (decrease) in taxes resulting from:
Increase (decrease) in valuation allowance		(92	)		1,346
Non-deductible changes in derivative liability and share based transactions		-			1
All other		857			-
State taxes		(149	)		(145	)
Income tax expense	$	-		$	-

The increase in the Company's net increase in the valuation allowance was caused by continued net operating losses from ongoing operations.

F-14

VerifyMe, Inc.

Notes to the Financial Statements

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:

	December 31,
	2018			2017
US
Net operating loss	$	8,316		$	7,035
Share based compensation		447			1,800
Reserves and accruals		(21	)		-
Gross deferred tax assets		8,742			8,835
Less valuation allowance		(8,742	)		(8,835	)
Total deferred tax assets		-			-
Deferred tax liabilities:
Total deferred tax liabilities		-			-
Net deferred tax assets / (liabilities)	$	-		$	-

As of December 31, 2018, the Company had federal and state net operating loss carry forwards of $36.9 million and $10.6 million, respectively that may be offset against future taxable income, subject to limitation under IRC Section 382, which begin to expire in 2019.  No tax benefit has been reported in the December 31, 2018 or 2017 financial statements due to the uncertainty surrounding the realizability of the benefit, based on a more likely than not criteria and in consideration of available positive and negative evidence.

Utilization of the net operating losses (NOL) carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code (IRC) of 1986, as amended (the Code), as well as similar state provisions. These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders. At the time of closing the books, the Company had not yet completed a study to determine the extent of the limitation.

The Company applied the "more-likely-than-not" recognition threshold to all tax positions taken or expected to be taken in a tax return, which resulted in no unrecognized tax benefits as of December 31, 2018 and December 31, 2017, respectively.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest and penalties on the balance sheets and has not recognized interest and/or penalties in the statements of operations and comprehensive loss for the years ended December 31, 2018 and 2017.

The Company is subject to taxation in the United States and various state jurisdictions. The Company’s tax years from inception are subject to examination by the United States and state taxing authorities due to the carryforward of unutilized NOLs.

F-15

VerifyMe, Inc.

Notes to the Financial Statements

On December 22, 2017, the United States enacted significant changes to the U.S. tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”).  The Tax Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the corporate tax rate from 35% to 21%.  The Tax Act reduced the U.S. corporate income tax rate reduction to 21% becomes effective January 1, 2018. The Company re-measured its deferred tax assets and liabilities as of December 31, 2017, applying the reduced corporate income tax rate and recorded a provisional decrease to the deferred tax assets and liabilities of  $6.2 million, with a corresponding adjustment to the valuation allowance.

There are no taxes payable as of December 31, 2018 or December 31, 2017.

NOTE 5– NOTES PAYABLE

Notes payable consists of the following as of December 31:

	Year ended December 31,
	2018		2017
Series A notes payable; interest at 8% per annum; principal and accrued interest due at maturity in October 2011 (past due)	$	-	$	50,000
Less: current portion		-		(50,000	)
Balance	$	-	$	-

At December 31, 2018 and 2017 accrued interest on notes payable was $0 and $33,667.

On October 28, 2009 the Company issued an unsecured note payable for $50,000. The note and accrued interest at 8% per annum were due in full in October 2011.  The holder has never demanded payment. Since the note matured on September 30, 2011, the holder cannot commence an action to enforce payment of the note as the statute of limitations for the note expired on September 30, 2017. Applying guidance from ASC Topic 405-20, liabilities should be derecognized only when the obligor is legally released from the obligation, which occurred for the Company upon expiration of the statute of limitations. The carrying value of the note payable of $50,000 and accrued interest of $33,667 was derecognized in the year ended December 31, 2018 and recorded as Gain on derecognition of note payable and accrued interest included on the Statement of Operations.

On January 24, 2017 and January 31, 2017, the Company issued notes payable to a director of the board in the amount of $20,000, in addition to warrants to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $0.40 per share and a term of five years. The notes bear interest at the rate of 10% per annum and are due on June 30, 2017. In accordance with FASB ASC 470-20, “Debt with Conversion and Other Options,” the proceeds of notes payable with detachable stock purchase warrants have been allocated between the two based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance.  The warrants were valued at $15,896 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants.  The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25, Recognition and were accreted over the term of the note payable for financial statement purposes. 

On February 13, 2017, the Company issued a note payable to a director of the board in the amount of $100,000 in addition to a warrant to purchase 5,000,000 shares of the Company’s common stock at an exercise price of $0.40 per share and a term of five years. The notes bear no interest and are due on June 30, 2017. In accordance with FASB ASC 470-20, “Debt with Conversion and Other Options,” the proceeds of notes payable with detachable stock purchase warrants have been allocated between the two based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance.  The warrants were valued at $76,390 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants.  The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25, Recognition and were accreted over the term of the note payable for financial statement purposes. 

F-16

VerifyMe, Inc.

Notes to the Financial Statements

On March 28, 2017, the Company issued a note payable to a director of the board in the amount of $25,000 in addition to a warrant to purchase 1,250,000 shares of the Company’s common stock at an exercise price of $0.40 per share and a term of five years. The notes bear no interest and are due on June 30, 2017. In accordance with FASB ASC 470-20, “Debt with Conversion and Other Options,” the proceeds of notes payable with detachable stock purchase warrants have been allocated between the two based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance.  The warrants were valued at $21,300 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants.  The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25, Recognition and were accreted over the term of the note payable for financial statement purposes. 

F-17

VerifyMe, Inc.

Notes to the Financial Statements

On April 13, 2017, the Company issued notes payable to a director of the board in the principal amount of $10,000 in exchange for a loan bearing no interest maturing June 30, 2017.

On April 26, 2017, the Company issued a secured promissory note (the “Note”) to a relative of director of the board in the principal amount of $30,000 in exchange for a loan bearing 10% interest maturing October 31, 2017. The Note is secured by a first lien on all assets of the Company in accordance with a security agreement entered into in connection with the Note. In the event the Company completes a financing of at least $750,000 prior to maturity of the Note, the principal of the Note will automatically convert into a number of shares of common stock of the Company equivalent to an investment of $60,000 under the terms of such financing. In the event of such a conversion or a voluntary prepayment by the Company, the Company will also pay six months of interest payments on the $60,000 principal of the Note.

In May 2017, the Company issued notes payable to a director of the board in the principal amount of $60,000 in exchange for a loan bearing no interest maturing June 30, 2017.

In June 2017, the Company issued notes payable to a director of the board in the principal amount of $36,000 in exchange for a loan bearing no annual interest maturing June 30, 2017.

On June 30, 2017, all of these notes payable (including the Note) amounting to $360,000 and converting at $390,000 plus accrued interest of $6,101, except for the $50,000 note payable from 2009, were converted into 6,151,762 shares of the Company’s common stock and warrants to purchase 6,151,762 shares of the Company’s common stock at an exercise price of $0.15, with a term of five years.  As of December 31, 2017, from the 6,151,762 shares of common stock and 6,151,762 warrants to purchase shares of the Company, 4,402,079 shares of common stock and 4,402,079 shares of warrants had been issued to convert $270,000 principal (including the Note) and $3,623 accrued interest.

The fair value of the warrants issued in connection with the settlement of the notes payable were valued at $605,535 resulting in a Loss on settlement of related party notes payable of $331,912 included in the Statement of Operations.  An increase of $30,000 in the Note principal upon conversion was included in Interest expenses in the Statement of Operations.

As of December 31, 2017, 1,749,683 shares of common stock and 1,749,683 of warrants issuable upon conversion for $120,000 principal and $2,478 accrued interest had not yet been issued and as such the amount has been recorded as Common Stock payable included on the Balance Sheets. During the year ended December 31, 2018, those shares of common stock and warrants were issued and delivered.

Pursuant to ASC 470-50- 40 Modifications and Extinguishments, the Company assessed the nature of the transaction and based on its assessment concluded it is a capital transaction in essence, and as such accounted for it through Additional Paid-In Capital with no gain or loss recognized in the Income Statement during the period.

Interest expense including accretion of debt discount for the years ended December 31, 2018 and 2017 was $0 and $218,316.

NOTE 6 – CONVERTIBLE PREFERRED STOCK

The Company has outstanding Series A Preferred Stock (the “Series A”) and Series B Preferred Stock (the “Series B”). As of December 31, 2018, there were 37,564,767 authorized and 304,778 outstanding shares of Series A and 85 authorized and 0.85 outstanding shares of Series B. Each share of Series A and B has limited voting rights, is entitled to participate with the common stock on liquidation and holders of Series A and B have beneficial ownership limitations.

Series A Convertible Preferred Stock

During the year ended December 31, 2017, 73,000 shares of Series A Convertible Preferred Stock were converted into 1,460,000 shares of the Company’s Common Stock.

During the year ended December 31, 2018, 20,000 shares of Series A Convertible Preferred Stock were converted into 400,000 shares of the Company’s Common Stock.

Series B Convertible Preferred Stock

During the year ended December 31, 2017, there were no conversions of Series B Convertible Preferred Stock into shares of the Company’s common stock.

F-18

VerifyMe, Inc.

Notes to the Financial Statements

During the year ended December 31, 2018 0.07 shares of Series B Convertible Preferred Stock were converted into 599,362 shares of the Company’s Common Stock.

Series C Convertible Preferred Stock

The Series C Convertible Preferred Stock (the “Series C”) described below converted on June 30, 2017 and a Certificate of Withdrawal for the Series C Certificate of Designation was subsequently filed.

On May 30, 2017, the Company entered into Securities Exchange Agreements (the “Agreements”) with the holders of approximately 87% of the outstanding shares of the Company’s 0% Series C and the holders of 100% of the outstanding shares of the Company’s 0% Series D Convertible Preferred Stock (the “Series D”) and certain warrants to purchase the Company’s common stock held by the Series C and Series D holders. The effectiveness of the Agreements was contingent upon the Company raising at least $500,000 in a debt or equity financing transaction which closed on June 30, 2017. Pursuant to the Agreements, the holders exchanged each share of Series C for 2.857 shares of common stock and each warrant for two shares of common stock. The Agreements also eliminate a covenant in the Securities Purchase Agreements with the Series C and Series D investors which adversely affects the Company’s ability to issue securities and incur debt. 

On July 19, 2017, the Company authorized the withdrawal of the Certificates of Designation for Series C and Series D and on July 13, 2017, the Company ratified the authorization to issue shares of common stock to the holders of Series C and Series D.

On April 14, 2017, 375,000 shares of Series C were converted into 375,000 shares of the Company’s Common Stock.

On June 30, 2017, pursuant to the Agreement, 1,537,500 shares of Series C were converted into 4,392,858 shares of the Company’s Common Stock; 3,087,500 shares of warrants were converted into 6,175,000 shares of the Company’s Common Stock, out of which 230,000 shares was issued to a director of the Board. $473,604 deemed dividend to Series C holders and $473,604 accretion of deemed distribution to Series C holders was recorded in conjunction with the transaction. 

Series D Convertible Preferred Stock 

The Series D described below converted on June 30, 2017 and a Certificate of Withdrawal Series D Certificate of Designation was subsequently filed.

As noted, above, on May 30, 2017, the Company entered into Agreements with the holders of approximately 87% of the outstanding shares of the Company’s Series C and certain warrants to purchase the Company’s common stock held by the Series C holders. The Company had an oral agreement with the holder of the outstanding shares of the Company’s Series D to convert the Series D when the Series C converted. On July 13, 2017, the Company issued the Series D holder 2,482,145 shares of common stock upon conversion of the Series D and exchange of warrants issued with the Series D. 

On June 30, 2017, 166,750 shares of Series D were converted into 496,429 shares of the Company’s Common Stock; 667,000 shares of warrants were converted into 1,985,716 shares of the Company’s Common Stock. $123,274 deemed dividend to Series D holders and $123,274 accretion of deemed distribution to Series D holders was recorded in conjunction with the transaction. 

NOTE 7 – STOCKHOLDERS’ EQUITY

For the years ended December 31, 2018 and 2017, the Company expensed $8,625 and $6,750 relative to Restricted Stock Units.

For the years ended December 31, 2018 and 2017, the Company expensed $446,265 and $60,075 relative to Restricted Stock awards.

On September 8, 2017, the Company entered into a consulting agreement stipulating partial payment in restricted common stock.  As of December 31, 2017, 120,000 shares have been issued.  These shares were valued at the closing price of the Company’s common stock as they became due for a total of $12,000 for the year ended December 31, 2017. During the year ended December 31, 2018, the Company issued 49,500 shares and incurred $44,120 related to this agreement.

During the year ended December 31, 2017, the Company also issued 1,605,175 shares of common stock and 1,605,175 shares of warrants to two directors of the Board for services already rendered under consulting agreements. The 1,605,175 shares of warrants have an exercise price of $0.15 per share and a term of five years. The common stock and warrants were valued and expensed for $285,807.

F-19

VerifyMe, Inc.

Notes to the Financial Statements

On August 9, 2017, the Company granted 300,000 shares of restricted common stock to each of six non-employee directors and one attorney vesting quarterly over one year. The common stock was measured at fair value at the grant date and expensed based on the vesting schedule.  Common stock related to the Company’s attorney were revalued as of the year end.  During the year ended December 31, 2017, $60,075 compensation expense was recorded. During the year ended December 31, 2018, $111,105 compensation expense was recorded in relation to these awards. Of this amount $36,855 was related to the compensation of the six non-employee directors. As of December 31, 2018 and 2017, there is $0 and $84,105 unrecognized compensation cost related to these shares of restricted common stock.

F-20

VerifyMe, Inc.

Notes to the Financial Statements

During 2017, 19,451,575 shares of common stock and 19,451,575 shares of warrants to purchase common stock were issued for gross proceeds of $1,360,250 from the sale of units with each unit consisting of 715,000 shares of common stock and 715,00 five-year warrants exercisable at $0.15 per share.  Legal costs related to this offering amounted to $32,325 and were recorded in Additional Paid In Capital.  Net proceeds related to the sale of common stock were $1,327,925 for the year ended December 31, 2017.

In connection with the sale of common stock noted above, 8,712,275 shares were issued and 8,712,275 warrants to purchase common stock were issued for gross proceeds of $609,250 to directors of the Board and relatives of the directors of the Board.

During 2017, 75,000 Restricted Stock Units were vested in relation to a consulting service agreement and a total of $6,750 was expensed.

During 2017, 2,050,372 shares were issued as stock-based compensation with a total non-cash expense of $139,808.  Of this amount 371,800 shares were issued to a director of the Board, for a total non-cash expense of $22,308.

During 2017, 503,432 shares were issued for sale of common stock in prior years.  Of this amount, 479,901 were related to two members of the Board.

During the year ended December 31, 2018, 37,500 restricted stock units were vested in relation to a consulting service agreement and a total of $8,625 was expensed.

During the year ended December 31, 2018, the Company granted a total of 600,000 restricted stock awards to two directors of the Company, each receiving 300,000 shares of restricted common stock, for joining the Board of Directors. On April 25, 2018 the Company approved the immediate vesting of all of the Company’s outstanding restricted common stock issued in 2017 and 2018 to non-employee directors of the Company. During the year ended December 31, 2018, $160,500 compensation expense was recorded in relation to this issuance. As of December 31, 2018, there is $0 unrecognized compensation cost related to these shares of restricted common stock.

During the year ended December 31, 2018, the Company granted a total of 1,425,000 shares of restricted common stock to the directors and the Chief Executive Officer of the Company for their services and 150,000 shares to one attorney, vesting over a one-year period. During the year ended December 31, 2018, $174,660 compensation expense was recorded in relation to this issuance. As of December 31, 2018, there is $161,311 unrecognized compensation cost related to these shares of restricted common stock.

In January 2018, the Chairman of the Board of Directors, made a cashless exercise of 5,000,000 options related to services in 2017, whereby the Chairman disposed of 972,222 shares to the Company as part of his exercise, amounting to an issuance of 4,027,778 shares, see Note 8.

In relation to the 2017 private placement with a maximum offering amount of $2,100,000 allowing investors to purchase units consisting of 715,000 shares of common stock and 715,000 five-year warrants exercisable at $0.15 per share, the Company’s Board of Directors increased the size of the private placement by an additional amount beyond the $2,100,000 limit. During the year ended December 31, 2018 the Company raised gross proceeds of $1,153,645 for the purchase of 16,513,311 shares of common stock and 16,513,311 warrants. Of these amounts, gross proceeds of $530,777 for the purchase of 7,590,111 shares of common stock and 7,590,111 warrants related to current and then directors and relatives of the directors of the Company.

On January 30, 2018, the Company authorized a 30-day offer, beginning on February 20, 2018, to the holders of the Company’s outstanding warrants exercisable at $0.15 to exercise their warrants at $0.10 per share.  This authorization was extended until June 30, 2018.  The Company authorized certain holders, who had sent in their exercise notices prior to June 30, 2018, to submit payment before July 27, 2018 and exercise their warrants at $0.10 per share. For the year ended December 31, 2018, 20,787,784 warrants were exercised and a total of 20,787,784 shares of common stock were issued for gross proceeds of $2,079,345. Included in the above amounts are gross proceeds of $1,205,458 from current and then directors in exchange for exercise of 12,054,576 warrants and issuance of 12,054,576 shares of common stock.

In January 2018, a member of the Board exercised 104,876 warrants with an exercise price of $0.15 and a total of 104,876 shares of common stock were issued for gross proceeds of $15,731.

F-21

VerifyMe, Inc.

Notes to the Financial Statements

On March 31, 2018, the Company entered into a Confidential Settlement Agreement (the “Settlement Agreement”) with Paul Klapper, a member of the Company’s Board, Stephen Silver, PFK Development Group, Ltd. (“PFKD”) and certain other parties named in the Settlement Agreement. Pursuant to the terms of the Settlement Agreement, the Company (i) paid a total of $500,000 (the “Settlement Amount”) to PFKD and Mr. Silver and (ii) issued them each 500,000 shares of the Company’s common stock (the “Settlement Shares”). The shares were valued at $279,000 whereby $139,500 related to common stock issued to a related party and $139,500 related to common stock issued to a third party. The Settlement Agreement provides for cancellation as of March 31, 2018 of certain revenue sharing agreements between the Company and each of Mr. Klapper, Mr. Silver and PFKD, and terminates the Company’s obligation to issue warrants to purchase 3.7 million shares of the Company’s common stock at an exercise price of $0.40 per share. Mr. Klapper joined the Board of Directors on July 14, 2017 and resigned as of March 31, 2018.

F-22

VerifyMe, Inc.

Notes to the Financial Statements

In April 2018, the former Chief Executive Officer of the Company exercised his warrants at an exercise price of $0.01 for gross proceeds of $1,000 resulting in an issuance of 100,000 shares.

On July 27, 2018 the Company cancelled 607,143 shares as a result of an over-issuance of shares to an investor in connection with the Company’s 2017 exchange.

On July 31, 2018, a member of the Board exercised 1,439,524 warrants held by an entity under his control at an exercise price of $0.15 per share for a total price of $215,929.

NOTE 8 – STOCK OPTIONS, RESTRICTED STOCK AND WARRANTS

On December 17, 2003, the Company created the 2003 Stock Option Plan (the “2003 Plan”). Under the 2003 Plan, the Company is authorized to grant options to purchase up to 18,000,000 shares of common stock to the Company’s employees, officers, directors, consultants, and other agents and advisors.

During 2013, the Company adopted a new incentive 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 of up to an aggregate of 20,000,000 shares of common stock.  The 2013 Plan is intended to permit 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-Statutory Stock Options.  

On November 14, 2017, the Executive Committee of the Company’s Board of Directors adopted the 2017 Equity Incentive Plan (the “Plan”) which covers the potential issuance of 13 million shares of common stock. The Plan provides that directors, officers, employees, and consultants of the Company will be eligible to receive equity incentives under the Plan at the discretion of the Board or the Board’s Compensation Committee. The Board’s Compensation Committee may adopt rules and regulations to carry out the terms of the Plan. The Plan terminates on November 14, 2027 unless sooner terminated.

The 2017 Plan is administered by a committee of the Board (“Compensation Committee”) which determines the persons to whom awards will be granted, the number of awards to be granted and the specific terms of each grant, including the vesting thereof, subject to the provisions of the plan.

In connection with Incentive Stock Options, the exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of the grant (or 110% of the fair market value in the case of a grantee holding more than 10% of the outstanding stock of the Company). The aggregate fair market value (determined at the time of the grant) of stock for which an employee may exercise Incentive Stock Options under all plans of the Company shall not exceed $1,000,000 per calendar year. If any employee shall have the right to exercise any options in excess of $100,000 during any calendar year, the options in excess of $100,000 shall be deemed to be Non-Statutory Stock Options, including prices, duration, transferability and limitations on exercise.

The Company issued Non-Statutory 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 judgments.

The following table presents the weighted-average assumptions used to estimate the fair values of the stock options granted during the years ended December 31, 2018 and 2017:

	2018			2017
Risk Free Interest Rate		2.30	%		1.90	%
Expected Volatility		200.50	%		199.20	%
Expected Life (in years)		5.0			5.0
Dividend Yield		0	%		0	%
Weighted average estimated fair value of
options during the period	$	0.17		$	0.07

F-23

VerifyMe, Inc.

Notes to the Financial Statements

The following table summarizes the activities for the Company’s stock options for the year ended December 31, 2018 and 2017:

	Options Outstanding
						Weighted -
						Average
						Remaining		Aggregate
				Weighted-		Contractual		Intrinsic
	Number of			Average		Term		Value (in 000’)
	Shares			Exercise Price		(in years)		(1)
Balance as of December 31, 2016		3,282,647		$	0.52
Granted		19,950,000			0.07
Forfeited/cancelled		(1,219,117	)		0.48
Balance December 31, 2017		22,013,529		$	0.11
Granted		1,600,000		$	0.27
Exercised		(5,000,000	)	$	0.07
Balance December 31, 2018		18,613,529		$	0.14		3.9
Exercisable at December 31, 2018		16,596,863		$	0.13		3.9	$2,113

(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.  During the years ended December 31, 2018 and 2017, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $2,113,368 and $3,480,567, respectively.

The following table summarizes the activities for the Company’s unvested stock options for the year ended December 31, 2018 and 2017:

	Unvested Options
				Weighted -
				Average
				Grant
	Number of Unvested			Date Exercise Price
	Options
Balance December 31, 2016		-		$	-
Granted		19,950,000			0.07
Vested		(16,833,333	)		0.07
Cancelled/forfeited/expired		(450,000	)		0.08
Balance December 31, 2017		2,666,667		$	0.06
Granted		1,600,000			0.27
Vested		(2,250,001	)		0.10
Balance December 31, 2018		2,016,666		$	0.18

F-24

VerifyMe, Inc.

Notes to the Financial Statements

During the year ended December 31, 2017, 19,950,000 options were granted a weighted average exercise price of $0.07 with a term of five years.  Of the 19,950,000 options, 450,000 options were issued to a director with a three-month vesting period, 10,000,000 to the Chairman of the Board vesting immediately, 7,000,000 were issued to the Chief Executive Officer of which 5,000,000 vested immediately and 2,000,000 vest over a period of two years and 2,000,000 were issued to a director vesting over a six month period. In February 2017, the Company also issued 500,000 options to purchase common stock to a consultant which vested immediately. 

During the year ended December 31, 2017, 769,117 options were forfeited from employees no longer with the Company and 450,000 options were forfeited by a director of the Company.

During the year ended December 31, 2018, the Company amended the consulting agreement held with its Chief Operating Officer and granted him 1,000,000 stock options with an exercise price of $0.2102 with 500,000 stock options vesting immediately and the remaining 500,000 stock options vesting on February 28, 2019 subject to continuing to provide consulting services.

In January 2018, the Chairman of the Board made a cashless exercise of 5,000,000 options related to services in 2017, whereby the Chairman disposed of 972,222 shares to the Company as part of his exercise, amounting to an issuance of 4,027,778 shares, see Note 7.

In November 2018, 600,000 options were granted a weighted average exercise price of $0.37 with a term of five years.  Of the 600,000 options, 500,000 options were issued to an employee of the Company vesting monthly over a six-month period, 100,000 to the Chief Financial Officer vesting quarterly over a one-year period.

For the years ended December 31, 2018 and 2017, the Company expensed $329,193 and $1,295,741 with respect to the options.

As of December 31, 2018, there was $198,438 unrecognized compensation cost related to outstanding stock options expected to vest over the weighted average of 3.9 years.

F-25

VerifyMe, Inc.

Notes to the Financial Statements

The following table summarizes the activities for the Company’s warrants for the year ended December 31, 2018 and 2017:

	Warrants Outstanding
	Number of Shares			Weighted- Average Exercise Price		Weighted - Average Remaining Contractual Term in years)		Aggregate Intrinsic Value (in 000's) (1)
Balance, December 31, 2016		9,216,451		$	1.82
Issued		33,080,629			0.20
Cancelled/Forfeited		(10,004,500	)		0.40
Balance, December 31, 2017		32,292,580		$	0.30
Issued		18,727,769			0.15
Exercised		(22,809,908	)		0.11
Expired		(1,019,608	)		0.07
Cancelled/Forfeited		(4,950,000	)		0.40
Balance, December 31, 2018		22,240,833		$	0.31		3.70
Exercisable at December 31, 2018		22,240,833		$	0.31		3.70	$	1,858

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock price of $0.22 for our common stock on December 31, 2018.

All warrants were vested on the date of grant.

During the year ended December 31, 2017, holders of Series C Preferred Stock and 3,087,500 warrants exchanged these securities for 6,175,000 shares of common stock.  See Note 7.

During the year ended December 31, 2017, holders of Series D Preferred Stock and 667,000 warrants exchanged these securities for 1,985,716 shares of common stock.  See Note 7.

During the year ended December 31, 2017, the Company issued 19,451,575 warrants to purchase common stock with an exercise price of $0.15 in connection to the sale of units occurring during the year.  See Note 7.

During the year ended December 31, 2017, the Company issued 4,402,079 warrants to purchase common stock with an exercise price of $0.15 in connection with the settlement or related party note payables.  The fair value of the warrants accounted for in Additional Paid in Capital, for the year ended December 31, 2017, was $113,586. See Note 7.

F-26

VerifyMe, Inc.

Notes to the Financial Statements

During the year ended December 31, 2017, a director was issued and then cancelled 6,250,000 warrants to purchase common stock in connection with the settlement of the related party note payable.

During the year ended December 31, 2017, a director was issued 1,000,000 warrants to purchase common stock at an exercise price of $0.40 in connection with the issuance of notes payable.

During the year ended December 31, 2017, the Company issued 1,976,975 warrants to directors of the Board to purchase common stock at an exercise price of $0.15 in connection with services provided. See Note 7.

For the year ended December 31, 2018, the Company has received gross proceeds of $1,153,645 for the purchase of 16,513,311 shares of common stock and 16,513,311 warrants in relation to the private placement.  See Note 7.

In January 2018, the Company issued 1,749,683 shares of common stock and 1,749,683 warrants with an exercise price of $0.15 to Mr. Klapper relating to the Note payable conversion that took place in June 2017.  Additionally, 3,700,000 warrants were forfeited. See Note 5.

During the year ended December 31, 2018, in relation to the Settlement Agreement, the Company issued 464,775 warrants at an exercise price of $0.15 which were paid for in 2014 but had not been previously issued. See Note 7.

For the year ended December 31, 2018, 20,787,784 shares of warrants were exercised and a total of 20,787,784 shares of common stock were issued for gross proceeds of $2,079,345. See Note 7.

In January 2018, a member of the Board exercised 104,876 warrants with an exercise price of $0.15 and a total of 104,876 shares of common stock were issued for gross proceeds of $15,731, see Note 7.

In April 2018, the former Chief Executive Officer of the Company exercised 100,000 warrants at an exercise price of $0.01 for gross proceeds of $1,000 resulting in an issuance of 100,000 shares, see Note 7.

On July 31, 2018, a member of the Board exercised 1,439,524 warrants held by an entity under his control at an exercise price of $0.15 per share for a total price of $215,929. See note 7.

In August 2018, a warrant holder, made a cashless exercise of 366,047 warrants, whereby the warrant holder disposed of 190,386 shares to the Company as part of this exercise, amounting to an issuance of 175,661 shares.

In October 2018, a warrant holder, made a cashless exercise of 11,678 warrants, whereby the warrant holder disposed of 4,680 shares to the Company as part of this exercise, amounting to an issuance of 6,998 shares.

During the year ended December 31, 2018 an additional 1,250,000 warrants were forfeited in relation to a note payable conversion

occurring in the prior year.

NOTE 9 – DEBT FORGIVENESS

During the year ended December 31, 2018 the Company negotiated with certain vendors regarding balances outstanding for prior year services resulting in a Gain on accounts payable forgiveness included in the Statement of Operations for $352,008.

NOTE 10 – OPERATING LEASES

For the year ended December 31, 2018 and 2017, total rent expense under leases amounted to $12,395 and $12,674. At December 31, 2018, the Company was not obligated under any non-cancelable operating leases.

NOTE 11 – MAJOR CUSTOMERS/VENDORS

During the year ended December 31, 2018, four customers accounted for 100.0% of total sales.  During the year ended December 31, 2017 there were no sales. Generally, a substantial percentage of the Company's sales has been made to a small number of customers and is typically on an open account basis.

During the years ended December 31, 2018 and 2017, the Company purchased 100.0% of pigment from one vendor. Additionally, during the years ended December 31, 2018 and 2017, the Company purchased 100.0% of canisters from one vendor.

As of December 31, 2018, two customers accounted for 100% of total accounts receivable.

F-27

VerifyMe, Inc.

Notes to the Financial Statements

NOTE 12 – SUBSEQUENT EVENTS

In January 2019, 20,000 shares of Series A Convertible Preferred Stock were converted into 400,000 shares of the Company’s Common Stock.

On February 27, 2019 three Board Members provided their resignations as members of the Company’s Board of Directors, effective March 1, 2019.

On March 5, 2019 the Company appointed Mr. Eugene Robin to the Company’s Board of Directors.

On March 20, 2019 the Company granted three directors the option of each receiving 240,000 shares of restricted stock or 240,000 restricted units, either of which shall vest over a one-year period in equal increments from March 15, 2019. Each of the directors elected to receive restricted stock awards.

In March 2019, the Company appointed Dr. Arthur Laffer to its Board of Directors and granted 240,000 shares of restricted which shall vest over a one-year period in equal quarterly increments from March 15, 2019.

In March 2019, 20,000 shares of Series A Convertible Preferred Stock were converted into 400,000 shares of the Company’s Common Stock.

F-28