VerifyMe, Inc. - Annual Report: 2018 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2018

OR

For the transition period from                      to                     

Commission File Number 0-31927

VERIFYME, INC.

(Exact Name of Registrant as Specified in Its Charter)

 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

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.

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.

VERIFYME, INC.

FORM 10-K ANNUAL REPORT

Year Ended December 31, 2018

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.

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.

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.

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.

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:

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:

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:

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.

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.

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™ 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.

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.

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:

 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.

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:

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.

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:

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.

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:

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.

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.

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

Documents of Value

Homeland Security

Military

Product Diversion Tracking

Financial Services and Products

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.

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:

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.

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.

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.

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.

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.  

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.

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

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.

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.

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.

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.

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.

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:

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:

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.

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.

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.

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

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.

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

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:

(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.

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.

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.

Summary Compensation Table

 (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.

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

Director Compensation for the Fiscal Year ended 2018

(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.

Equity compensation plan information as of December 31, 2018

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.

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.

* indicates less than 1%

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. 

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:

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:

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.

———————

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.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

+            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.

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.

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:

INDEX TO

FINANCIAL STATEMENTS

CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

VerifyMe, Inc.

Opinion on the Financial Statements

We have audited the accompanying 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

VerifyMe, Inc.

Balance Sheets

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

VerifyMe, Inc.

Statements of Operations

(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.

VerifyMe, Inc.

Statements of Cash Flows

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

VerifyMe, Inc.

Statement of Stockholders' Equity (Deficit)