UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31,June 30, 2018
OR
 
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.1934
 
For the transition period from                      to                     
 
Commission File Numberfile number 000-31927
 
 
 
VERIFYME, INC.
(Exact Name of Registrant as Specified in Its Charter)
VERIFYME, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Nevada 23-3023677
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRSI.R.S. Employer
Identification No.)
  
Clinton Square, 75 S. Clinton Avenue Ave, Suite 510
Rochester, NY 
14604
(Address of Principal Executive Offices) 14604
 (Zip(Zip Code)
585) 736-9400
(Registrant’s Telephone Number, Including Area Code)
 
(585) 736-9400
(Registrant’s telephone number, including area code)
(Former Name, Former Address and Former Fiscal year, if Changed Since Last Report)
 
 
Indicate by check mark whether the registrantregistrant: (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 ☒ or     No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes ☒ or     No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer☐ Accelerated filer☐☐
    
Non-accelerated filer☐
☐   (Do not check if a smaller reporting company)
Smaller reporting company☒☒
Emerging growth company ☐  
Emerging Growth
Company
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐ or     No ☒
 
The registrant had 96,270,888,Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 101,673,206 shares of common stock outstanding as of the close of business on May 8,at July 31, 2018.
 
 
2
 
PART I - FINANCIAL INFORMATION
   
ITEM 1.
Financial Statements
4
Condensed Balance Sheets (Unaudited)
4
Condensed Statements of Operations (Unaudited)
5
Condensed Statement of Changes in Stockholders' Deficit (Unaudited)
Condensed Statements of Cash Flows (Unaudited)
6
Notes to Condensed Financial Statements (Unaudited)
7
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
16
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
2023
ITEM 4.
Controls and Procedures
2023
   
PART II - OTHER INFORMATION
ITEM 1.
Legal Proceedings
2023
ITEM 1A.
Risk Factors
2023
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
2023
ITEM
TIEM 3.
Defaults Upon Senior Securities
2023
ITEM 4.
Mine Safety Disclosures
2124
ITEM 5.
Other Information
2124
ITEM 6.
Exhibits
2124
SIGNATURES
2225
 
FINANCIAL STATEMENTS

ITEM 1.

VerifyMe, Inc.
Balance Sheets
 
  As of 
  June 30, 2018  December 31, 2017 
   (Unaudited)    
       
ASSETS      
       
CURRENT ASSETS      
Cash and cash equivalents $2,316,301  $693,001 
Accounts Receivable  5,667   - 
Prepaid expenses and other current assets  18,668   18,668 
Inventory  11,769   - 
TOTAL CURRENT ASSETS  2,352,405   711,669 
         
OTHER ASSETS        
Patents and Trademarks, net of accumulated amortization of        
$248,225 and $237,331 as of June 30, 2018 and December 31, 2017  181,438   191,507 
         
         
TOTAL ASSETS $2,533,843  $903,176 
         
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
        
         
CURRENT LIABILITIES        
Accounts payable and accrued expenses $440,556  $923,202 
Notes payable  50,000   50,000 
Common Stock payable  -   122,478 
TOTAL CURRENT LIABILITIES  490,556   1,095,680 
         
STOCKHOLDERS' EQUITY (DEFICIT)        
Series A Convertible Preferred Stock, $.001 par value, 37,564,767 shares        
 authorized; 304,778 shares issued and outstanding as of June 30, 2018 and        
324,778 shares issued and outstanding as of December 31, 2017  305   325 
Inventory        
Series B Convertible Preferred Stock, $.001 par value; 85 shares        
authorized; 0.85 shares issued and outstanding as of June 30, 2018 and        
0.92 shares issued and outstanding as of December 31, 2017  -   - 
         
Common stock of $.001 par value; 675,000,000 authorized; 101,165,202 and
53,873,872 issued, 100,814,662 and 53,523,332 shares outstanding as of June
30, 2018 and December 31, 2017
  101,165   53,522 
         
Additional paid in capital  60,305,122   56,198,126 
         
Treasury stock as cost (350,540 shares at June 30, 2018 and  December 31,
2017)
  (113,389)  (113,389)
         
Accumulated deficit  (58,249,916)  (56,331,088)
         
STOCKHOLDERS' EQUITY (DEFICIT)  2,043,287   (192,504)
         
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $2,533,843  $903,176 
VerifyMe, Inc.
Balance Sheets
  As of 
   March 31, 2018  December 31, 2017 
   (Unaudited)    
       
ASSETS      
       
CURRENT ASSETS      
Cash and cash equivalents $2,341,401  $693,001 
Prepaid expenses and other current assets  31,234   18,668 
Inventory  9,768   - 
TOTAL CURRENT ASSETS  2,382,403   711,669 
         
OTHER ASSETS        
Patents and Trademarks, net of accumulated amortization of        
$242,365 and $237,331 as of March 31, 2018 and December 31, 2017  187,298   191,507 
         
TOTAL ASSETS $2,569,701  $903,176 
         
LIABILITIES AND STOCKHOLDERS' DEFICIT        
         
CURRENT LIABILITIES        
Accounts payable and accrued expenses $513,191  $923,202 
Notes payable  50,000   50,000 
Common Stock payable  -   122,478 
TOTAL CURRENT LIABILITIES  563,191   1,095,680 
         
STOCKHOLDERS' EQUITY (DEFICIT)        
Series A Convertible Preferred Stock, $.001 par value, 37,564,767 shares        
authorized; 304,778 shares issued and outstanding as of March 31, 2018 and     
324,778 shares issued and outstanding as of December 31, 2017  305   325 
         
Series B Convertible Preferred Stock, $.001 par value; 85 shares        
  authorized; 0.85 shares issued and outstanding as of March 31, 2018 and        
  0.92 shares issued and outstanding as of December 31, 2017  -   - 
         
Common stock of $.001 par value; 675,000,000 authorized; 92,945,925 and
53,873,872 issued, 92,595,385 and 53,523,332 shares outstanding as of March
31, 2018 and December 31, 2017		  92,944   53,522 
         
Additional paid in capital  59,481,371   56,198,126 
         
Treasury stock as cost (350,540 shares at March 31, 2018 and  December 31,
2017)		  (113,389)  (113,389)
         
Accumulated deficit  (57,454,721)  (56,331,088)
         
STOCKHOLDERS' EQUITY (DEFICIT)  2,006,510   (192,504)
         
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $2,569,701  $903,176 

The accompanying notes are an integral part of these unaudited financial statements.
 
 
VerifyMe, Inc.
VerifyMe, Inc.
Statements of Operations
(Unaudited)
 
 Three months ended  Three Months ended  Six Months Ended 
 March 31, 2018  March 31, 2017  June 30, 2018  June 30, 2017  June 30, 2018  June 30, 2017 
            
            
NET REVENUE            
Sales $6,799  $-  $6,799  $- 
                
COST OF SALES  2,000   -   2,000     
              - 
GROSS PROFIT  4,799   -   4,799   - 
                      
OPERATING EXPENSES                      
General and administrative (a)  495,574   142,061   525,760   482,384   1,021,334   628,831 
Legal and accounting  133,704   9,044   163,770   82,162   297,474   91,206 
Payroll expenses (a)  92,051   22,810   99,803   20,252   191,854   43,062 
Research and development  12,196   8,669   16,233   8,641   28,429   17,310 
Sales and marketing  8,042   5,921   25   -   8,067   1,535 
Total Operating expenses  741,567   188,505   805,591   593,439   1,547,158   781,944 
                        
LOSS BEFORE OTHER INCOME (EXPENSE)  (741,567)  (188,505)  (800,792)  (593,439)  (1,542,359)  (781,944)
                        
OTHER (EXPENSE) INCOME                        
Interest expenses, net  (791)  (66,544)
Interest (expense) income, net  1,074   (145,772)  283   (212,316)
Settlement agreement with shareholders  (779,000)  -   -   -   (779,000)  - 
Gain on accounts payable forgiveness  397,725   -   4,523   -   402,248   - 
Change in fair value of warrants  -   (28,256)  -   130,000   -   101,744 
Change in fair value of embedded derivative liability  -   (21,282)  -   100,702   -   79,420 
  (382,066)  (116,082)  5,597   84,930   (376,469)  (31,152)
          -             
NET LOSS $(1,123,633) $(304,587)  (795,195)  (508,509)  (1,918,828)  (813,096)
                        
Less: Deemed dividend on convertible preferred shares  -   (144,219)  -   (144,219)
                
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(795,195) $(652,728) $(1,918,828) $(957,315)
                
LOSS PER SHARE                        
BASIC $(0.01) $(0.04) $(0.01) $(0.05) $(0.02) $(0.09)
DILUTED $(0.01) $(0.04) $(0.01) $(0.05) $(0.02) $(0.09)
                        
WEIGHTED AVERAGE COMMON SHARE OUTSTANDINGWEIGHTED AVERAGE COMMON SHARE OUTSTANDING                 
BASIC  76,278,102   8,397,976   95,910,130   12,598,466   86,488,400   10,220,611 
DILUTED  76,278,102   8,397,976   95,910,130   12,598,466   86,488,400   10,220,611 

(a)Includes share related payments of $289,903 and $51,597 for the three months ended March 31, 2018 and 2017, respectively.
(a)  Includes non-cash share-based compensation of $215,810 and $505,713 for the three and six months ended June 30, 2018 and $284,373 and $335,970 for the three and six months ended June 30, 2017.

The accompanying notes are an integral part of these unaudited financial statements.
 
 
VerifyMe, Inc.
Statements of Cash Flows
(Unaudited)
 
 Three Months Ended  Six Months Ended 
 March 31, 2018  March 31, 2017  June 30, 2018  June 30, 2017 
CASH FLOWS FROM OPERATING ACTIVITIES            
Net loss $(1,123,633) $(304,587) $(1,918,828) $(813,096)
Adjustments to reconcile net loss to net cash used in                
operating activities:                
Stock based compensation  32,644   -   44,119   - 
Fair value of options and warrants issued in exchange for services  205,969   51,597   226,188   335,970 
Fair value of restricted stock and restricted stock units issued in exchange for
services		  51,290   -   
235,406
   - 
Gain on accounts payable forgiveness  (397,725)  -   (402,248)  - 
Share-based payment for settlement agreement with shareholders  279,000   -   279,000   - 
Accretion of discount on notes payable  -   64,529   -   204,516 
Change in fair value of warrant liability  -   28,256   -   (101,744)
Change in fair value of embedded derivative liability  -   21,282   -   (79,420)
Amortization and depreciation  5,034   (2,212)  10,894   6,331 
Changes in operating assets and liabilities:              - 
Accounts Receivable  (5,667)  - 
Inventory  (9,768)  1,535   (11,769)  300 
Prepaid expenses and other current assets  (12,566)  300 
Prepaid expenses  -   (14,904)
Accounts payable and accrued expenses  (12,286)  (5,122)  
(80,398
)  180,598 
Net cash used in operating activities  (982,041)  (144,422)  (1,623,303)  (281,449)
                
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchase of Patents  (825)  -   (825)  - 
      - 
Net cash used in investing activities  (825)  -   (825)  - 
                
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from issuance of related party notes payable  -   145,000 
Proceeds from exercise of warrants  1,476,489   -   2,093,217   281,000 
Proceeds from sale of common stock  1,154,777   -   1,154,211   531,250 
Stock issuance costs  -   (15,128)
Net cash provided by financing activities  2,631,266   145,000   3,247,428   797,122 
                
NET INCREASE IN CASH AND                
CASH EQUIVALENTS  1,648,400   578   1,623,300   515,673 
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD  693,001   22,644   693,001   22,644 
                
CASH AND CASH EQUIVALENTS - END OF PERIOD $2,341,401  $23,222  $2,316,301  $538,317 
                
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                
Cash paid during the year for:                
Interest $-  $-  $-  $- 
Income taxes $-  $-  $-  $- 
                
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES                
                
Series A Convertible Preferred Stock converted to common stock $400  $660  $400  $1,060 
Series B Convertible Preferred Stock converted to common stock $599  $-  $599  $- 
Series C Convertible Preferred Stock converted to common stock $-  $12,014 
Series D Convertible Preferred Stock converted to common stock $-  $1,810 
Cashless Exercise of Stock Options $4,028  $-  $4,028  $- 
Common Stock and Warrants Issued for Common Stock Payable $122,478  $-  $122,478  $- 
Deemed divided distribution on issuance of common stock for conversion of Series C and Series D $-  $525,630 
Revaluation of embedded derivative liability upon conversion of Series C Convertible Preferred Stock $-  $137,625 
Revaluation of embedded derivative liability upon conversion of Series D Convertible Preferred Stock $-  $11,673 
Revaluation of warrant liability upon conversion of Series C Convertible Preferred Stock $-  $189,008 
Revaluation of warrant liability upon conversion of Series D Convertible Preferred Stock $-  $43,105 
Warrants issued as discount to notes payable $-  $119,651  $-  $113,585 
Conversion of accounts payable and accrued expenses to common stock $-  $80,750 
Conversion of notes payable and accrued expenses to common stock $-  $396,101 

The accompanying notes are an integral part of these unaudited financial statements.
 
 
VerifyMe, Inc.
Notes to the Financial Statements

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of the Business


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

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

The accompanying unaudited condensed interim financial statements (the “Interim Statements”) have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by generally accepted accounting principlesGenerally Accepted Accounting Principles (“GAAP”) for complete financial statements are not included herein. The Interim Statements should be read in conjunction with the financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the Securities and Exchange Commission (the “SEC”) on April 16, 2018.  The accompanying interim financial statements are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The interim results for the three and six months ended March 31,June 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any future interim periods.

The Company’s activities are subject to significant risks and uncertainties, including the need to secure additional funding to further develop the Company’s patents.
 
Basis of Presentation
 
The accompanying financial statements are presented in accordance with accountingGAAP.

Revenue Recognition

The Company accounts for revenues according to ASC Topic 606, “Revenue from Contracts with Customers” which establishes principles generally acceptedfor reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers.
The Company applies the following five steps in order to determine the United Statesappropriate amount of America.revenue to be recognized as it fulfills its obligations under each of its agreements:
·identify the contract with a customer;
·identify the performance obligations in the contract;
·determine the transaction price;
·allocate the transaction price to performance obligations in the contract; and
·recognize revenue as the performance obligation is satisfied.

During the three and six months ended June 30, 2018, the Company’s revenues were primarily made up of canisters sold that will allow our customer to print labels with the Company’s technology.
Basic and Diluted Net Income per Share of Common Stock

The Company follows FASB ASC 260, “Earnings Per Share,” when reporting Earnings Per Share resulting in the presentation of basic and diluted earnings per share.  Because the Company reported a net loss for each of the yearsperiods presented, common stock equivalents, including preferred stock, stock options and warrants were anti-dilutive; therefore, the amounts reported for basic and diluted loss per share were the same.
 
For the three months and six months ended March 31,June 30, 2018 and 2017, there were shares potentially issuable, that could dilute basic earnings per share in the future that were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive to the Company’s losses during the years presented.
 
For the three and six months ended March 31,June 30, 2018 there were approximately 63,471,00042,703,000 anti-dilutive shares consisting of 32,143,000 relating to warrants, 18,014,000 relating to options, 11,375,000 relating to warrants and 13,314,000 relating to preferred share agreements.  For the three and six months ended March 31,June 30, 2017 there were approximately 37,613,00060,570,000 anti-dilutive shares consisting of 16,466,00018,733,000 relating to options, 27,128,000 relating to warrants, 3,958,000 relating to options and 17,189,00014,709,000 relating to preferred share agreements.
Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the FASBAs of June 30, 2018, there are no recently issued ASU No. 2016-02, Leases (“ASU 2016-02”). In January 2018, the FASB issued ASU 2018-01,accounting standards not yet adopted which provides additional implementation guidance on the previously issued ASU 2016-02. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1)would have a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The Company does not plan to elect early adoption for this pronouncement.  The Company is currently evaluating the impact of adoption of ASU 2016-02 and does not expect any material impacteffect on the Company’s financial statements.statements through 2018.
 
VerifyMe, Inc.
Notes to the Financial Statements
NOTE 2 – PATENTS AND TRADEMARKS
     
The current granted patent portfolio consists of 1112 granted patents.U.S. patents and two pending patents applications. The Company has recently received notice that one of its core printing technology patents has been granted in the European Union and will issue in approximately eight designated countries. Management has also conducted a review of its intellectual patent portfolio and determined that several of the applications, even if issued, were not central to the pursuit of the Company’s anti-counterfeiting and diversion business and thus not cost effective and would not continue to be pursued. Accordingly, costs associated with the registration and legal defense of these patents have been capitalized and are amortized on a straight-line basis over the estimated lives of the patents which were determined to be 17 to 19 years. During the threesix months ended March 31,June 30, 2018 and 2017, the Company capitalized $825 and $0 of patent costs and trademarks. Amortization expense for patents and trademarks was $5,034$5,860 and $(2,212)$8,543 for the three months ended March 31,June 30, 2018 and 2017 and 10,894 and 6,331 for the six months ended June 30, 2018 and 2017.
 
NOTE 3 – INCOME TAXES
Income tax expense was $0 for the three and nine months ended March 31, 2018 and 2017.

As of January 1, 2018, the Company had no unrecognized tax benefits, and accordingly, the Company did not recognize interest or penalties during 2018 related to unrecognized tax benefits. There has been no change in unrecognized tax benefits during the three months ended March 31, 2018, and there was no accrual for uncertain tax positions as of March 31, 2018.  Tax years from 2013 through 2017 remain subject to examination by major tax jurisdictions.

There is no income tax benefit for the losses for the three months ended March 31, 2018 and 2017, since management has determined that the realization of the net tax deferred asset is not assured and has created a valuation allowance for the entire amount of such benefits. 
NOTE 4– NOTES PAYABLE

Notes payable consist of the following as of March 31,June 30, 2018 and December 31, 2017:
  June 30,  December 31, 
  2018  2017 
Series A notes payable; interest at 8% per annum; principal and accrued interest due at maturity in
October 2011 (past due)
  50,000   50,000 
Net  50,000   50,000 
         
Less: Current portion  (50,000)  (50,000)
  $-  $- 
  
March 31,
2018
  
December 31,
2017
 
Series A notes payable; interest at 8% per annum; principal and
accrued interest due at maturity in October 2011 (past due)
 $50,000  $50,000 
Net  50,000   50,000 
Less: current portion  (50,000)  (50,000)
Balance $-  $- 
 

At March 31,June 30, 2018 and December 31, 2017 accrued interest on notes payable was $34,667$35,667 and $33,667.
 
On October 28, 2009 the Company issued an unsecured note payable for $50,000. The note and accrued interest at 8% per annum were due in full in October 2011.  The holder has never demanded payment.
VerifyMe, Inc.
Notes to the Financial Statements

As of December 31, 2017, 1,749,683 shares of common stock and 1,749,683 of warrants issuable upon conversion for $120,000 principal and $2,478 accrued interest had not yet been issued in relation to the conversion of related party note payable held by a member of the Board, and as such the amount has been recorded as Common Stock payable included on the Balance Sheets as of December 31, 2017. During the threesix months ended March 31,June 30, 2018, those shares of common stock and warrants were issued and delivered.

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

Interest expense including accretion of debt discount for the three and six months ended March 31,June 30, 2018 and 2017 was $1,000 and $66,544.$1,000.  Interest expense including accretion of debt discount for the three and six months ended June 30, 2017 was $143,971 and $204,516.  

NOTE 54 – CONVERTIBLE PREFERRED STOCK
 
The Company has outstanding Series A Preferred Stock (the “Series A”) and Series B Preferred Stock (the “Series B”). As of March 31,June 30, 2018, there were 37,564,767 authorized and 304,778 outstanding shares of Series A and 85 authorized and 0.85 outstanding shares of Series B. Each share of Series A and B has limited voting rights, is entitled to participate with the common stock on liquidation and holders of Series A and B have beneficial ownership limitations.
  
Series A Convertible Preferred Stock
 
During the threesix months ended March 31,June 30, 2018, 20,000 shares of Series A Convertible Preferred Stock were converted into 400,000 shares of the Company’s commonCommon Stock.
 
Series B Convertible Preferred Stock

During the threesix months ended March 31,June 30, 2018, 0.07 shares of Series B Convertible Preferred Stock were converted into 599,362 shares of the Company’s commonCommon Stock.

VerifyMe, Inc.
Notes to the Financial Statements
NOTE 65 – STOCKHOLDERS’ EQUITY
 
For the three and six months ended June 30, 2018 the Company expensed $248 and $8,625 relative to restricted stock units.  The Company did not have any expenses related to restricted stock units for the three and six months ended June 30, 2017.
For
During the six months ended, 37,500 restricted stock units were vested in relation to a consulting service agreement and a total of $8,625 was expensed.
During the six months ended June 30, 2018, the Company granted a total of 600,000 restricted stock awards to two directors of the Company, each receiving 300,000 shares of restricted common stock, for joining the Board of Directors. On April 25, 2018 the Company approved the immediate vesting of all of the Company’s outstanding restricted common stock issued in 2017 and 2018 to non-employee directors of the Company.
During the three months ended March 31,June 30, 2018, and 2017, the Company expensed $8,376granted a total of 1,425,000 shares of restricted common stock to the directors and $0 relativethe Chief Executive Officer of the Company for their services and 150,000 shares to restricted stock units.one attorney, vesting quarterly over a one-year period.

For the three and six months ended March 31,June 30, 2018, and 2017, the Company expensed $42,914$183,866 and $0 $226,781 relative to restricted stock awards.  During the quarter ended March 31, 2018, thecommon stock.  The Company granted 300,000did not have any expenses related to restricted stock awards to a director offor the company for their services, vesting equally over a one year period.three and six months ended June 30, 2017.

On September 8, 2017, the Company entered into a consulting agreement stipulating partial payment in restricted common stock.  During the quarterthree and six months ended March 31,June 30, 2018, 120,00049,500 and 169,500 shares have been issued in relation to this agreement.  These shares were valued at the closing price of the Company’s common stock as they became due for a total expense of $32,644$44,119 for the threesix months ended March 31,June 30, 2018.
 
In 2017 the Company authorized a private placement with a maximum offering amount of $2,100,000 allowing investors to purchase units consisting of 715,000 shares of common stock and 715,000 five-year warrants exercisable at $0.15 per share.  In January 2018 the Company’s Board of Directors increased the size of the private placement by an additional amount beyond the $2,100,000 limit. ForDuring the threesix months ended March 31,June 30, 2018 the Company has raised gross proceeds of $1,154,777$1,154,211 for the purchase of 16,513,311 shares of common stock and 16,513,311 warrants. Of these amounts, gross proceeds of $530,777 for the purchase of 7,590,1117,589,545 shares of common stock and 7,590,111 warrants related to directors of and relatives of the directors of the Company.

In January 2018, the Chairman of the Board of Directors, made a cashless exercise of 5,000,000 options related to services in 2017, whereby the Chairman disposed of 972,222 shares to the Company as part of his exercise, amounting to an issuance of 4,027,778 shares, see Note 7.6.
  
On January 30, 2018, the Company authorized a 30-day offer, beginning on February 20, 2018, to the holders of the Company’s outstanding warrants exercisable at $0.15 to exercise their warrants at $0.10.$0.10 per share.  This authorization was since extended until the latter of 30 days after the receipt of all Investment Letters, as defined below, in connection with the Settlement Shares, as defined below, or June 30, 2018.  For the threesix months ended March 31,June 30, 2018, 14,607,583 20,764,860 shares of warrants were exercised and a total of 14,607,58320,764,860 shares of common stock were issued for gross proceeds of $1,460,758.$2,076,486. Included in the above amounts are gross proceeds of $1,089,098$1,205,458 from directors which resulted in 10,890,98312,054,576 warrants converted into the issuance of 10,890,98312,054,576 common stock. The offer to exercise $0.15 warrants at $0.10 per share expired on June 30, 2018 and the Company did not extend the offer.

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

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

The Company is currently in the process of collecting letters (the “Investment Letters”), mailed by Mr. Klapper to the investors in Mr. Klapper’s funds, in order to insure that the transfer of the securities under Section 4(a)(1½) of the Securities Act of 1933 is valid.
VerifyMe, Inc.
Notes to the Financial Statements
The Settlement Shares were issued pursuant to a Stock Purchase Agreement entered into in connection with the closing of the Settlement Agreement. The Company also entered into a Registration Rights Agreement with certain parties named therein with respect to the Settlement Shares and certain other shares of the Company’s common stock specified in the Registration Rights Agreement and the Settlement Agreement.
In January 2018, the Company issued 1,749,683 shares of common stock and 1,749,683 shares of warrants with an exercise price of $0.15 to Mr. Klapper relating to the Note payable conversion that took place in June 2017. See Note 4.
 
On March 28, 2018, the Company accelerated the vesting of 150,000 shares of restricted common stock owned by Mr.  Klapper.
 
In April 2018, the former Chief Executive Officer of the Company exercised his warrants at an exercise price of $0.01 for gross proceeds of $1,000 resulting in an issuance of 100,000 shares.
NOTE 7–6– STOCK OPTIONS, RESTRICTED STOCK AND WARRANTS
 

During 2013, the Company adopted a new incentive compensation plan (the “2013 Plan”). Under the 2013 Plan, the Company is authorized to grant awards of stock options, restricted stock, restricted stock units and other stock-based awards of up to an aggregate of 20,000,000 shares of common stock.  The 2013 Plan is intended to permit stock options granted to employees under the 2013 Plan to qualify as Incentive Stock Options.  All options granted under the 2013 Plan, which are not intended to qualify as Incentive Stock Options are deemed to be Non-Statutory Stock Options.  

On November 14, 2017, the Executive Committee of the Company’s Board of Directors (the “Executive Committee”) adopted the 2017 Equity Incentive Plan (the “Plan”) which covers the potential issuance of 13 million shares of common stock. The Plan provides that directors, officers, employees, and consultants of the Company will be eligible to receive equity incentives under the Plan at the discretion of the Board or the Board’s Compensation Committee. The Board’s Compensation Committee may adopt rules and regulations to carry out the terms of the Plan. The Plan terminates on November 14, 2027 unless sooner terminated.
 
The Plan is administered by a committee of the Board (“Compensation Committee”) which determines the persons to whom awards will be granted, the number of awards to be granted and the specific terms of each grant, including the vesting thereof, subject to the provisions of the Plan.

In connection with Incentive Stock Options, the exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of the grant (or 110% of the fair market value in the case of a grantee holding more than 10% of the outstanding stock of the Company). The aggregate fair market value (determined at the time of the grant) of stock for which an employee may exercise
 
Incentive Stock Options under all plans of the Company shall not exceed $1,000,000 per calendar year. If any employee shall have the right to exercise any options in excess of $100,000 during any calendar year, the options in excess of $100,000 shall be deemed to be Non-Statutory Stock Options, including prices, duration, transferability and limitations on exercise.
 
The Company issued Non-Statutory Stock Options pursuant to contractual agreements with non-employees. Options granted under the agreements are expensed when the related service or product is provided.
 
Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value represent management’s best estimates and involve inherent uncertainties and judgments.

During the three and six months ended June 30, 2018 the Company expensed $20,219 and $226,188 with respect to options.  For the three and six months ended March 31, 2018 and March 31,June 30, 2017, the Company expensed $205,969$284,373 and $51,597$335,970 with respect to the options.
 
The following table presents the weighted-average assumptions used to estimate the fair value of the stock options granted during the threesix months ended March 31, 2018:
VerifyMe, Inc.
Notes to the Financial Statements
The following table presents the weighted-average assumptions used to estimate the fair value of the stock options granted during the three months ended March 31,June 30, 2018:

    
Risk Free Interest Rate  2.39%
Expected Volatility  201.48%
Expected Life (in years)  5.0 
Dividend Yield  0%
Weighted average estimated fair value of    
options during the period $0.18 


  Options Outstanding 
      Weighted -   
      Average   
      Remaining Aggregate 
    Weighted- Contractual Intrinsic 
  Number of Average Term Value 
  Shares Exercise Price (in years)  (1) 
Balance as of December 31, 2017  22,013,529  $0.11      
              
Granted  1,000,000   0.21      
Exercised  (5,000,000)  0.07      
Balance June 30, 2018  18,013,529  $0.13      
              
Exercisable at June 30, 2018  15,513,529  $0.14  4.4 $1,838,287 
              
 
  Options Outstanding 
       Weighted -    
        Average    
        Remaining  Aggregate 
     Weighted-  Contractual  Intrinsic 
  Number of  Average  Term  Value 
  Shares  Exercise Price  (in years)  (1) 
            
Balance as of December 31, 2017  22,013,529  $0.11       
               
Granted  1,000,000   0.21       
Exercised  (5,000,000)  0.07     �� 
Balance March 31, 2018  18,013,529  $0.13       
               
Exercisable at March 31, 2018  15,513,529  $0.14   4.6  $2,795,335 
                 
(1)
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for options that were in-the-money at each respective period.  As of March 31,June 30, 2018, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $2,795,335.
$1,838,287.

In the quartersix months ended March 31,June 30, 2018, the Company amended the consulting agreement held with its Chief Operating Officer and granted 1,000,000 stock options with an exercise price of $0.2102 with 500,000 stock options vesting immediately and the remaining 500,000 stock options vesting on February 28, 2019 subject to continuing to provide consulting services.

In January 2018, the Chairman of the Board made a cashless exercise of 5,000,000 options related to services in 2017, whereby the Chairman disposed of 972,222 shares to the Company as part of his exercise, amounting to an issuance of 4,027,778 shares, see Note 6.
 
 
VerifyMe, Inc.
Notes to the Financial Statements
 
The following table summarizes the activities for the Company’s unvested stock options for the threesix months ended March 31,June 30, 2018:
 
Unvested Options  Unvested Options 
  Weighted -    Weighted - 
  Average    Average 
  Grant    Grant 
Number of Unvested Date Exercise Price  Number of Unvested Date Exercise Price 
Options    Options   
Balance December 31, 2017  2,666,666  $0.06   2,666,666 $0.06 
               
Granted  1,000,000   0.21   1,000,000  0.21 
               
Vested  (1,166,666)  0.11   (1,166,666)  0.11 
               
Balance March 31, 2018  2,500,000  $0.10 
Balance June 30, 2018  2,500,000 $0.10 
 
 
VerifyMe, Inc.
Notes to the Financial Statements
 
The following table summarizes the activities for the Company’s warrants for the threesix months ended March 31,June 30, 2018:
 
 Warrants Outstanding  Warrants Outstanding 
 
Number of
Shares
  
Weighted-
Average
Exercise
Price
 
Weighted -
Average
Remaining
Contractual
Term
in years)
  
Aggregate
Intrinsic
Value
(in 000's)
(1)
  
Number of
Shares
  
Weighted-
Average
Exercise
Price
 
Weighted -
Average
Remaining
Contractual
Term
in years)
  
Aggregate
Intrinsic
Value
(in 000's)
(1)
 
                              
Balance, December 31, 2017  32,292,580  $0.30          32,292,580  $0.30      
Granted  18,262,994  0.15          18,262,994   0.15      
Exercised  (14,712,459)  0.10          
(20,969,737
)  0.10       
Expired  (627,451)  0.07       
Cancelled/Forfeited  (4,950,000)  0.40          (4,950,000)  0.40       
                                   
Balance, March 31, 2018  30,893,116  $0.22  4.4    
Balance, June 30, 2018  24,008,386  $
0.25
   
4.2
     
                                       
Exercisable at March 31, 2018  30,893,116  $0.22  4.4  $5,515 
Exercisable at June 30, 2018  24,008,386  $
0.25
   
4.2
  $2,620 
 
(1)The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock price of $0.28$0.2101 for our common stock on March 31,June 30, 2018.
 
For the threesix months ended March 31,June 30, 2018, the Company has raised gross proceeds of $1,154,777$1,154,211 for the purchase of 16,513,311 shares of common stock and 16,513,311 warrants in relation to the private placement.  See Note 6.5.

In January 2018, the Company issued 1,749,683 shares of common stock and 1,749,683 shares of warrants with an exercise price of $0.15 to Mr. Klapper relating to the Note payable conversion that took place in June 2017.  Additionally, 3,700,000 warrants were forfeited. See Note 4.5.
 
For the threesix months ended March 31,June 30, 2018, 14,607,58320,764,860 shares of warrants were exercised and a total of 14,607,58320,764,860 shares of common stock issued for gross proceeds of $1,460,758$2,076,486 pursuant to the warrant discount program.  See Note 6.5.

In January 2018, a member of the Board exercised 104,876 warrants with an exercise price of $0.15 and a total of 104,876 shares of common stock were issued for gross proceeds of $15,731, see Note 6.5.

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

During the threesix months ended March 31,June 30, 2018 an additional 1,250,000 warrants were forfeited in relation to a note payable conversion occurring in the prior year.
 
All warrants were vested on the date of grant.
 
 
VerifyMe, Inc.
Notes to the Financial Statements
 
NOTE 8 – RELATED PARTIES
As of March 31, 2018 the Company had $566 due from related party included in Prepaid expenses and other current assets on the Balance Sheet. 

As of March 31, 2018 the Company had $30,000 due to related party included in Accounts payable and accrued expenses on the Balance Sheet.  This related to a fee to a Director for his services rendered in connection with procuring the Settlement Agreement described in Note 6.

As of December 31, 2017 the Company did not have any amounts due from or to related parties.
NOTE 9NOTE7 – DEBT FORGIVENESS
 
During the first quarter ofsix months ended June 30, 2018 the Company negotiated with certain vendors regarding balances outstanding for prior year services resulting in a Gain on accounts payable forgiveness included in the Income Statement for $397,725.
$402,248.
 
NOTE 108 – SUBSEQUENT EVENTS
 
OnIn January 30, 2018, the Company authorized a 30-day offer, beginning on February 20, 2018, to the holders of the Company’s outstanding warrants exercisable at $0.15 to exercise their warrants at $0.10.  This authorization was since extended until the latter of 30 days after the receipt of all Investment Letters in connection with the Settlement Shares, or June 30, 2018. See Note 6.
Since March 31, 2018 through May 8,On July 19, 2018 the Company hasauthorized certain holders whom have sent in their exercise notices an extension until July 27, 2018 to submit payment. As of July 27, 2018, the Company received gross proceeds of $292,496,$2,616 and has issued 26,163 shares.

On July 27, 2018 the Company cancelled 607,143 in relation to the reduced warrant exercise program and issued 2,924,963 shares of common stock.
private placement in 2017.

In April
On July 31, 2018, the former Chief Executive OfficerLaurence Blickman, one of the Companyour directors, exercised 1,439,524 warrants held by an entity under his warrantscontrol at an exercise price of $0.01$0.15 per share for gross proceedsa total price of $1,000 resulting in an issuance of 100,000 shares.

On April 25, 2018, the Company granted 300,000 shares of vested restricted stock to a new director.

On April 25, 2018, the Company accelerated the vesting of all restricted stock held by its directors to treat them the same as Paul Klapper.
$215,929.
 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
 
Overview

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

The 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 or PINs for authentication has been proven insecure 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.

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 estimate that we need to spend $150,000 to develop our digital patents. Our goal is to do that in 2018.the current year. Our goal is to enable 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.
 
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, cosmetics, accessories, music, software, food, beverages,wine, tobacco, automobile and airplane parts, consumer goods, toys and electronics. Described by the U.S. Federal Bureau of Investigation as the crime of the twenty-first century, product counterfeiting accounts for an estimated 2.5% of global trade or $461 billion and wreaks direcreates global health, safety and economic consequences onfor individuals, corporations, government and society.

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, luxury goods, tobacco, fragrances and cosmetics, pharmaceuticals, event and transportation tickets, driver’s licenses, insurance cards, passports, computer software, and credit cards. We generate sales through licenses 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.
 
We believe that our physical technologies will play a role in the supply chain management process.  Our invisible ink can be used as a unique identifier in a digital serialization application.
Serialization or Unique identification helps brand owners identify who manufactured the product, which wholesaler has sold the product  to retailers or hospitals and other pertinent information concerning the products supply chain.  The implementation of serialization and track and trace provides the ability to track and trace the lifecycle of products in the system end-to-end.  Our invisible ink is applied during the printing process of product labels and packaging and can be used as a unique invisible serialization identifying number or code on labels and packaging.   The invisibleness of our ink acts as an additional layer of security since the ink needs to be revealed with special equipment.

A track and trace system improves security by:

1.Knowing the life cycle of a product or prescription drug, from where it is manufactured, who is repackaging it, who is distributing, when it is prescribed and when it is sold
2.Meeting accurate regulatory and compliance requirement questions such as “What, Where, When and Who”
3.Locating prescription drug batches and precisely where they are distributed
4.Enabling the option to recall a particular batch or entire batches which are reported as having a product/batch failure or having not met standards
5.Identify if the prescribed drug is counterfeit, stolen, contaminated etc.
6.Know about the multi-container packaging item level details

Track and trace works in the following ways:

1.Generate and apply unique serialization number for manufactured drugs.
2.Capture unique serialization number and store in centralized database (distributed or non-distributed).
3.Update serialization data in EPCIS centralized database.
4.Wholesalers, Repackagers and Pharmacies can have the ability to validate the serialization when they perform transactions.
Each time a transaction for serialized drugs is carried out, the transaction drug history is updated in the e-pedigree system.
 
Results of Operations

Comparison of the Three Months Ended March 31,June 30, 2018 and 2017

The following discussion analyzes our results of operations for the three months ended March 31,June 30, 2018 and 2017. The following information should be considered together with our condensed financial statements for such period and the accompanying notes thereto.

Revenue

We generated revenue of $6,799 for the three months ended June 30, 2018. This compares to no revenue in 2017.We were engaged for an order for the printing of 10 million labels with VerifyMe’s authentication serialization technology for a large global brand owner. The $6,799 primarily represents canisters that were sold to allow our customer to print labels with our technology. It is expected that the technology usage revenue for the 10 million label order will be booked during the third and fourth quarters of 2018.  The revenue is recognized as the labels are printed.

General and Administrative Expenses

General and administrative expenses increased by $353,513$43,376 to $495,574$525,760 for the three months ended March 31,June 30, 2018 from $142,061$482,384 for the three months ended March 31,June 30, 2017. The increase resulted primarily to an increase in non-cash charges for the Chief Operating Officer of $200,000.related to restricted stock awards.

Legal and Accounting

Legal and accounting fees increased by $9,044$81,608 to $133,704$163,770 for the three months ended March 31,June 30, 2018 from $124,660 $82,162 for the three months ended March 31,June 30, 2017.  In the quarter ended March 31, 2017 we had released our then attorneys hence there were no charges related to legal fees.and hired our current attorneys in the second quarter of 2017.

Payroll Expenses

Payroll expenses were $92,051$99,803 for the three months ended March 31,June 30, 2018, an increase of $69,241$79,551 from $22,810$20,252 for the three months ended March 31,June 30, 2017.  The increase relates to non-cash compensation expense of $31,330 related primarily to restricted stock awards for the directors.our Chief Executive Officer.

Research and Development

Research and development expenses were $12,196$16,233 and $8,669$8,641 for the three months ended March 31,June 30, 2018 and 2017. 2017, respectively.

Sales and MarketingInterest Expense, net

Sales and marketing expensesDuring the three months ended June 30, 2018, the Company incurred interest income, net of $1,074 as compared to interest expense, net of $145,772 for the three months ended March 31, 2018 were $8,042 as compared to $5,921 for the three months ended March 31, 2017. The increase relates to increases in marketing expenses. 

Interest Expense, net

During the three months ended March 31, 2018, the Company incurred interest expense of $791 as compared to $66,544 for the three months ended March 31,June 30, 2017.  The decrease in interest expense is related to the settlement of notes payable in the second quarter of 2017.

Change in Fair Value of Warrants

During the three months ended March 31,June 30, 2018, the Company did not have any unrealized gain or loss for the change in Fair Value of Warrants as compared to a lossgain of $28,256$130,000 for the three months ended March 31, 2017.June 30, 2018.  As of June 30, 2017, warrants with derivative liabilities were exchanged for common stock. 

Change in Fair Value of Embedded Derivative Liability

During the three months ended March 31,June 30, 2018, the Company did not have any unrealized gain or loss for the change in the fair value of the embedded derivative liability as compared to a lossgain of $21,282$100,702 for the three months ended March 31,June 30, 2017. 

Net Loss

Our net loss increaseddecreased to $1,123,633$795,195 from $304,587.
$652,728.
 
Comparison of the Six Months Ended June 30, 2018 and 2017

The following discussion analyzes our results of operations for the six months ended June 30, 2018 and 2017. The following information should be considered together with our financial statements for such period and the accompanying notes thereto.

Revenue

Wegenerated revenue of $6,799 for the three months ended June 30, 2018. We were engaged for an order for the printing of 10 million labels with VerifyMe’s authentication serialization technology for a large global brand owner. The $6,799 primarily represents canisters that were sold to allow our customer to print labels with our technology.  It is expected that the technology usage revenue for the 10 million label order will be booked during the third and fourth quarters of 2018.  The revenue is recognized  as the labels are printed.

General and Administrative Expenses

General and administrative expenses increased by $392,503 to $1,021,334 for the six months ended June 30, 2018 from $628,831 for the six months ended June 30, 2017. The increase resulted primarily to an increase in non-cash charges related to restricted stock awards and options to consultants and our directors for $200,000.  Additionally, our Chief Executive Officer received wages in the second half of 2017, resulting in an increase of $90,000 in the six months ended June 30, 2018 compared to the six months ended June 30, 2017.  The remaining increases related primarily to consulting expenses for our Chief Operating Officer offset by a decrease in accounting fees.

Legal and Accounting

Legal and accounting fees increased by $206,268 to $297,474 for the six months ended June 30, 2018 from $91,206 for the six months ended June 30, 2017.  In the quarter ended March 31, 2017 we had released our then attorneys and hired our current attorneys in the second quarter of 2017.

Payroll Expenses

Payroll expenses were $191,854 for the six months ended June 30, 2018, an increase of $148,792 from $43,062 for the six months ended June 30, 2017.  The increase relates to compensation for our Chief Executive Officer.
  
Research and Development

Research and development expenses were $28,429 and $17,310 for the six months ended June 30, 2018 and 2017, respectively. 

Interest Expense, net

During the six months ended June 30, 2018, the Company incurred interest income, net of $283 as compared to interest expense, net of $212,316 for the six months ended June 30, 2017.  The decrease in interest expense is related to the settlement of notes payable in the second quarter of 2017.

Change in Fair Value of Warrants

During the six months ended June 30, 2018, the Company did not have any unrealized gain or loss for the change in Fair Value of Warrants as compared to a gain of $101,744 for the six months ended June 30, 2017.  As of June 30, 2017, warrants with derivative liabilities were exchanged for common stock. 

Change in Fair Value of Embedded Derivative Liability

During the six months ended June 30, 2018, the Company did not have any unrealized gain or loss for the change in the fair value of the embedded derivative liability as compared to a gain of $79,420 for the six months ended June 30, 2017. 

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.

Net Loss

Our net loss increased to $1,918,828 from $957,315 for the six months ended June 30, 2018 and 2017, respectively.
Non-GAAP – Financial Measures

The following discussion and analysis includes both financial measures in accordance with Generally Accepted Accounting Principles, or GAAP, as well as non-GAAP financial measures. 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 AGI 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 EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. We believe that both management and shareholders benefit from referring to the following non-GAAP financial measures in planning, forecasting and analyzing future periods. Our management uses these non-GAAP financial measures 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 measures have 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 measures to the most comparable financial measure calculated in accordance with GAAP. We believe that providing the non-GAAP financial measures, together with the reconciliation to GAAP, helps investors make comparisons between VerifyMe, Inc.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 EBITDA and Adjusted EBITDA to net income (loss) allocable to common shareholders, a GAAP financial measure:

       
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
ADJUSTED EBITDA (Non-GAAP) 2018  2017  2018  2017 
             
Net loss $(795,195) $(652,728) $(1,918,828) $(957,315)
                 
Interest expenses, net  (1,074)  145,772   (283)  212,316 
Amortization and depreciation  5,860   8,543   10,894   6,331 
Total EBITDA (Non-GAAP)  (790,409)  (498,413)  (1,908,217)  (738,668)
                 
Adjustments:                
                 
Stock based compensation  
11,475
   -   
44,119
   - 
Fair value of options and warrants issued in exchange
for services
  20,219   284,373   226,188   335,970 
Fair value of restricted stock and restricted stock units
issued in exchange for services
  184,116   -   
235,406
   - 
Change in fair value of warrants  -   (130,000)  -   (101,744)
Change in fair value of embedded derivative liability  -   (100,702)  -   (79,420)
Share-based payment for settlement agreement with
shareholders
  -   -   279,000   - 
Cash payment for settlement agreement with
shareholders
  -   -   500,000   - 
                 
Total Adjusted EBITDA (Non-GAAP) $(574,599) $(444,742) $
(623,504
) $(583,862)
 
  
Three Months Ended
March 31,
 
 2018  2017 
       
Net loss $(1,123,633) $(304,587)
         
Interest expenses, net  791   66,544 
Amortization and depreciation  5,034   (2,212)
Total EBITDA (Non-GAAP)  (1,117,808)  (240,255)
         
Adjustments:        
         
Stock based compensation  32,644   - 
Fair value of options and warrants issued in exchange for services  205,969   51,597 
Fair value of restricted stock and restricted stock units issued in exchange for services  51,290   - 
Share-based payment for settlement agreement with shareholders  279,000   - 
Cash payment for settlement agreement with shareholders  500,000   - 
         
Total Adjusted EBITDA(Loss) $(48,905) $(188,658)

20
 
Liquidity and Capital Resources

Our operations used $982,041 $1,623,303 of cash during the threesix months ended March 31,June 30, 2018 compared to $144,422$281,449 during the comparable period in 2017 primarily due to a $500,000 payment made related to the Settlement Agreement.Agreement and due to changes in operations occurring in the first half of 2017.
 
During the quarter endedIn March 31, 2018, we made a financial strategic decision to end a future revenue sharing program, so that we could benefit entirely from future revenues.  To do this, we paid out cash in relation to the Settlement Agreement mentioned in Note 6 to the financial statements, of $500,000.  Management believes that the potential future savings that will be incurred by this transaction significantly outweigh the costs.
 
Cash provided by (used) or used in investing activities was not material in either quarter. 
 
Cash provided by financing activities during the threesix months ended March 31,June 30, 2018, was $2,631,266$3,247,428 compared to $145,000 $797,122 during March 31,the six months ended June 30, 2017.  During the threesix months ended March 31,June 30, 2018, the Company sold common stock for gross proceeds of $1,154,777.$1,154,211.  Additionally, the Company raised $1,476,489$2,093,217 from the exercise of warrants.
 
As of May 14, July 31, 2018, we had $2,504,056 $2,371,387 of cash which we expect will meet our liquidity and working capital needs for more than the next 12 months. Ultimately, we must not only generate revenue from our technologies but we must general positive cash flow from operations. If we do not, we will be required to raise more capital, which will likely be very dilutive or cease operating our current business.
  
Cautionary Note Regarding Forward-Looking Statements

This report includes forward-looking statements including statements regarding our product development and capabilities, and generation of revenue.

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.

The results anticipated by any or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements include our ability to close sales leads, begin meaningful marketing of our products, and begin generating revenue from our products. Further information on our risk factors is contained in our filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2017. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies

Our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows and which require the application of significant judgment by management.

Revenue Recognition

We account for revenues according to ASC Topic 606, “Revenue from Contracts with Customers” which establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers.
We apply the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:
·identify the contract with a customer;
·identify the performance obligations in the contract;
·determine the transaction price;
·allocate the transaction price to performance obligations in the contract; and
·recognize revenue as the performance obligation is satisfied.

Stock-based Compensation

We account for stock-based compensation under the provisions of FASB ASC 718, “Compensation—Stock Compensation,” which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes option pricing 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 505-50, “Equity-Based Payments to Non-Employees”. Under FASB 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 stockholders’ 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 condensed financial statements contained in this report.
 
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES.

(a) Evaluation of Disclosure Controls and Procedures. Our disclosure controls and procedures are designed to ensure information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of three months ended March 31,June 30, 2018, the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31,June 30, 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.

(b) Changes in Internal Controls. There has been no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



PART II - OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 1A. RISK FACTORS.

Not required.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On January 30, 2018, the Company authorized a 30-day offer, beginning on February 20, 2018, to the holders of the Company’s outstanding warrants exercisable at $0.15 to exercise their warrants at $0.10 per share.  This authorization was extended until June 30, 2018 and the Company did not extend the offer past June 30, 2018. As of the date of this report 20,764,860 warrants were exercised and a total of 20,764,860 shares of common stock were issued for gross proceeds to the Company of $2,076,486.
Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.
 
 
ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.
 
ITEM 6: EXHIBITS
 
 
EXHIBIT INDEX
 
   Incorporated by Reference 
Filed or
Furnished
Exhibit #Exhibit Description Form Date Number Herewith
3.1
Articles of Incorporation, as amended
 10-Q August 19, 2015 3.1  
3.2
Amended and Restated Bylaws of VerifyMe, Inc.
 8-K August 15, 2017 3.1  
4.1
Second Amended Certificate of Designation for Series A Preferred Stock
 8-K June 18, 2015 3.2  
4.2
Certificate of Designation for Series B Preferred Stock
 8-K June 18, 2015 3.3  
4.3
Certificate of Designation for Series C Preferred Stock
 8-K February 10, 2016 3.1  
4.4
Certificate of Designation for Series D Preferred Stock
  10-K April 12, 2017 3.9  
4.5
Certificate of Withdrawal of the Series C and Series D Certificate of Designations
       Filed
10.1
Form of Consulting Agreement for Jay Cardwell*
 10-K April 16, 2018 10.21  
10.2
Form of Securities Purchase Agreement dated June 30, 2017
 10-K April 16, 2018 10.28  
10.3
Form of Warrant dated June 30, 2017
 10-K April 16, 2018 10.29  
10.4
Confidential Settlement Agreement, dated March 31, 2018, among VerifyMe, Inc., Paul F. Klapper, Stephen J. Silver, PFK Development Group, Ltd. and the other parties named therein +
 10-K April 16, 2018 10.30  
10.5
Stock Purchase Agreement, dated March 31, 2018, among VerifyMe, Inc. and the parties named therein +
 10-K April 16, 2018 10.31  
10.6
Registration Rights Agreement, dated March 31, 2018, among VerifyMe, Inc. and the parties named therein
 10-K April 16, 2018 10.32  
10.19
Form of Consulting Agreement, as amended with Keith Goldstein dated 09/1/17, as amended *
 10-K April 16, 2018 10.19  
31.1  
Certification of Principal Executive Officer (302)
       Filed
31.2  
Certification of Principal Financial Officer (302)
       Filed
32.1  
Certification of Principal Executive and Principal Financial Officer (906)
       Furnished**
101.INSXBRL Instance Document       Filed
101.SCHXBRL Taxonomy Extension Schema Document       Filed
101.CALXBRL Taxonomy Extension Calculation Linkbase Document       Filed
101.DEFXBRL Taxonomy Extension Definition Linkbase Document       Filed
101.LABXBRL Taxonomy Extension Label Linkbase Document       Filed
101.PREXBRL Taxonomy Extension Presentation Linkbase Document       Filed
   Incorporated by Reference 
Filed or
Furnished
Exhibit #Exhibit Description Form Date Number Herewith
3.1
Articles of Incorporation, as amended
 10-Q August 19, 2015 3.1  
3.2
Amended and Restated Bylaws of VerifyMe, Inc.
 8-K August 15, 2017 3.1  
4.1
Second Amended Certificate of Designation for Series A Preferred Stock
 8-K June 18, 2015 3.2  
4.2
Certificate of Designation for Series B Preferred Stock
 8-K June 18, 2015 3.3  
10.1    Filed
31.1  
Certification of Principal Executive Officer (302)
Filed
31.2  
Certification of Principal Financial Officer (302)
Filed
32.1  
Certification of Principal Executive and Principal Financial Officer (906)
Furnished**
101.INSXBRL Instance DocumentFiled
101.SCHXBRL Taxonomy Extension Schema DocumentFiled
101.CALXBRL Taxonomy Extension Calculation Linkbase DocumentFiled
101.DEFXBRL Taxonomy Extension Definition Linkbase DocumentFiled
101.LABXBRL Taxonomy Extension Label Linkbase DocumentFiled
101.PREXBRL Taxonomy Extension Presentation Linkbase DocumentFiled
 

*Management contract or compensatory plan or arrangement.
**This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
 
+     Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the Securities and Exchange Commission staff upon request.
 
 
SIGNATURES



In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 VERIFYME, INC. 
   
Date: May 15, August 10, 2018
Date: May 15, 2018
By: /S/ Patrick White
Patrick White
Chief Executive Officer
Date: August 10, 2018By/S/ James CardwellMargaret Gezerlis
James Cardwell
Margaret Gezerlis
Chief Financial Officer 
 
 
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