UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934​​

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

For the quarterly period ended SeptemberJune 30, 20202021

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

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

For the transition period from ________ to ________

Commission file number 001-39332

VERIFYME, INC.

(Exact Name of Registrant as Specified in Its Charter)

Nevada

 

VERIFYME, INC.23-3023677

(Exact Name of Registrant as Specified in Its Charter)

Nevada23-3023677

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

Clinton Square, 75 S. Clinton Ave, Suite 510

Rochester, NY

14604

(Address of Principal Executive Offices)

(Zip Code)

(585) 736-9400

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal year, if Changed Since Last Report)

 

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

Title of each class

Trading Symbol(s)

Name of each exchange on which

Registered

Common Stock, par value $0.001 per share

VRME

VRME

The Nasdaq Capital Market

Warrants to Purchase Common Stock

VRMEW

VRMEW

The Nasdaq Capital Market

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

Large accelerated filer

o

☐

Accelerated filer

o

☐

Non-accelerated filer

x

☒

Smaller reporting company

x

☒

Emerging growth company

o

☐

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☐ No x

☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 5,600,7037,343,932 shares of common stock outstanding at November 11, 2020.August 9, 2021.

2

2

Table of Contents


PART I - FINANCIAL INFORMATION

ITEM 1.

Financial Statements

4

Balance Sheets (Unaudited)

4

Statements of Operations (Unaudited)

5

Statements of Cash Flows (Unaudited)

6

Statements of Stockholders’Stockholders' Equity (Deficit) (Unaudited)

7

Notes to Financial Statements (Unaudited)

9

ITEM 2.Management's Discussion and Analysis of Financial Condition and Results of Operations2116
ITEM 3.Quantitative and Qualitative Disclosures about Market Risk2823
ITEM 4.Controls and Procedures2924
   
PART II - OTHER INFORMATION
ITEM 1.Legal Proceedings3025
ITEM 1A.Risk Factors3025
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds3125
ITEM 3.Defaults Upon Senior Securities3126
ITEM 4.Mine Safety Disclosures3226
ITEM 5.Other Information3226
ITEM 6.Exhibits3326
SIGNATURES3427

 

3
Table of Contents

 

FINANCIAL STATEMENTS

ITEM 1.

VerifyMe, Inc.

Balance Sheets

(In thousands, except share data)

  As of 
  September 30, 2020  December 31, 2019 
  (Unaudited)    
       
ASSETS        
         
CURRENT ASSETS        
Cash and cash equivalents $8,975,614  $252,766 
Accounts Receivable  103,067   81,113 
Deposits on Equipment  -   51,494 
Prepaid expenses and other current assets  81,801   31,801 
Inventory  48,347   30,158 
TOTAL CURRENT ASSETS  9,208,829   447,332 
         
PROPERTY AND EQUIPMENT        
Equipment for lease, net of accumulated amortization of        
$34,304 and $0 as of September 30, 2020 and December 31, 2019, respectively  216,789   177,021 
         
INTANGIBLE ASSETS        
Patents and Trademarks, net of accumulated amortization of        
$312,956 and $292,588 as of September 30, 2020 and December 31, 2019, respectively  250,190   218,570 
Capitalized Software Costs, net of accumulated amortization of        
$15,034 and $0 as of September 30, 2020 and December 31, 2019, respectively  85,197   100,231 
TOTAL ASSETS $9,761,005  $943,154 
         
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)        
         
CURRENT LIABILITIES        
Convertible Debt, net of unamortized debt discount $-  $297,997 
Derivative Liability  -   171,499 
Accounts payable and other accrued expenses  542,795   422,297 
Accrued Payroll  -   119,041 
TOTAL CURRENT LIABILITIES  542,795   1,010,834 
         
LONG-TERM LIABILITIES        
Term Note $72,400  $- 
         
TOTAL LIABILITIES $615,195  $1,010,834 
         
STOCKHOLDERS' EQUITY (DEFICIT)        
Series A Convertible Preferred Stock, $.001 par value, 37,564,767 shares        
authorized; 0 shares issued and outstanding as of September 30, 2020 and        
0 shares issued and outstanding as of December 31, 2019  -   - 
         
Series B Convertible Preferred Stock, $.001 par value; 85 shares        
  authorized; 0.85 shares issued and outstanding as of September 30, 2020 and  -   - 
December 31, 2019, respectively        
         
Common stock, $.001 par value; 675,000,000 authorized; 5,584,540 and
2,239,120 issued, 5,577,529 and 2,232,112 shares outstanding as of September
30, 2020 and December 31, 2019, respectively		  5,578   2,232 
         
Additional paid in capital  75,753,019   61,814,826 
         
Treasury stock as cost; 7,011 shares at September 30, 2020 and December 31, 2019  (113,389)  (113,389)
         
Accumulated deficit  (66,499,398)  (61,771,349)
         
STOCKHOLDERS' EQUITY (DEFICIT)  9,145,810   (67,680)
         
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,761,005  $943,154 

As of

June 30, 2021

December 31, 2020

(Unaudited)

ASSETS

 

CURRENT ASSETS

Cash and cash equivalents

$

11,362

$

7,939

Accounts Receivable

143

31

Due from related parties

2,952

0-

Prepaid expenses and other current assets

120

177

Inventory

54

54

TOTAL CURRENT ASSETS

14,631

8,201

 

INVESTMENTS

Equity Investment

11

0-

 

PROPERTY AND EQUIPMENT

Equipment for lease, net of accumulated amortization of $77 and $50 as of June 30, 2021 and December 31, 2020

218

200

 

INTANGIBLE ASSETS

Patents and Trademarks, net of accumulated amortization of $337 and $320 as of June 30, 2021 and December 31, 2020, respectively

332

293

Capitalized Software Costs, net of accumulated amortization of $32 and $20 as of June 30, 2021 and December 31, 2020, respectively

146

80

TOTAL ASSETS

$

15,338

$

8,774

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

CURRENT LIABILITIES

Accounts payable and other accrued expenses

$

423

$

383

TOTAL CURRENT LIABILITIES

423

383

 

LONG-TERM LIABILITIES

Term Note

$

0-

$

72

 

TOTAL LIABILITIES

$

423

$

455

 

STOCKHOLDERS' EQUITY

Series A Convertible Preferred Stock, $.001 par value, 37,564,767 shares authorized; 0 shares issued and outstanding as of June 30, 2021 and 0 shares issued and outstanding as of December 31, 2020

0-

0-

 

Series B Convertible Preferred Stock, $.001 par value; 85 shares authorized; 0.85 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively

0-

0-

 

Common stock, $.001 par value; 675,000,000 authorized; 7,435,005 and 5,603,888 issued, 7,360,478 and 5,596,877 shares outstanding as of June 30, 2021 and December 31, 2020, respectively

7

6

 

Additional paid in capital

85,495

76,099

 

Treasury stock as cost; 74,527 and 7,011 shares at June 30, 2021 and December 31, 2020, respectively

(341

)

(113

)

 

Accumulated deficit

(70,246

)

(67,673

)

 

STOCKHOLDERS' EQUITY

14,915

8,319

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

15,338

$

8,774

 

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

VerifyMe, Inc.

Statements of Operations

(Unaudited)

(In thousands, except per share data)

  Three months ended  Nine months ended 
  September 30, 2020  September 30, 2019  September 30, 2020  September 30, 2019 
             
             
NET REVENUE                
Sales $100,697  $56,225  $267,799  $143,158 
                 
COST OF SALES  18,621   8,471   48,595   30,323 
                 
GROSS PROFIT  82,076   47,754   219,204   112,835 
                 
OPERATING EXPENSES                
General and administrative (a)  572,044   350,851   1,603,837   1,001,728 
Legal and accounting  85,793   41,977   175,518   172,676 
Payroll expenses (a)  108,037   167,807   411,562   374,382 
Research and development  6,804   804   7,206   7,055 
Sales and marketing (a)  292,470   148,416   414,819   400,717 
Total Operating expenses  1,065,148   709,855   2,612,942   1,956,558 
                 
LOSS BEFORE OTHER EXPENSE, NET  (983,072)  (662,101)  (2,393,738)  (1,843,723)
                 
                 
OTHER (EXPENSE) INCOME                
Interest income (expenses), net  243   (8,338)  (2,053,807)  (5,678)
Change in fair value of embedded derivative  -   (36,109)  -   (36,109)
Loss on Extinguishment of debt  -   -   (280,504)  - 
TOTAL OTHER (EXPENSE) INCOME, NET  243   (44,447)  (2,334,311)  (41,787)
NET LOSS $(982,829) $(706,548) $(4,728,049) $(1,885,510)
        ��        
LOSS PER SHARE                
BASIC $(0.18) $(0.36) $(1.38) $(0.96)
DILUTED $(0.18) $(0.36) $(1.38) $(0.96)
                 
WEIGHTED AVERAGE COMMON
SHARE OUTSTANDING		                
BASIC  5,488,111   1,962,755   3,436,805   1,964,183 
DILUTED  5,488,111   1,962,755   3,436,805   1,964,183 

Three months ended

Six months ended

June 30, 2021

June 30, 2020

June 30, 2021

June 30, 2020

 

NET REVENUE

Sales

$

124

$

75

$

312

$

167

 

COST OF SALES

26

13

69

30

 

GROSS PROFIT

98

62

243

137

 

OPERATING EXPENSES

General and administrative (a)

895

432

1,684

970

Legal and accounting

88

68

214

137

Payroll expenses (a)

234

225

427

319

Research and development

12

0-

17

0-

Sales and marketing (a)

297

79

544

122

Total Operating expenses

1,526

804

2,886

1,548

 

LOSS BEFORE OTHER INCOME (EXPENSE)

(1,428

)

(742

)

(2,643

)

(1,411

)

 

OTHER INCOME (EXPENSE), NET

Interest income (expenses), net

0-

(1,911

)

0-

(2,054

)

Loss on extinguishment of debt

0-

0-

0-

(280

)

Payroll Protection Program Debt Forgiveness

70

0-

70

0-

TOTAL OTHER INCOME (EXPENSE), NET

70

(1,911

)

70

(2,334

)

 

NET LOSS

$

(1,358

)

$

(2,653

)

$

(2,573

)

$

(3,745

)

 

LOSS PER SHARE

BASIC

$

(0.18

)

$

(1.04

)

$

(0.37

)

$

(1.56

)

DILUTED

$

(0.18

)

$

(1.04

)

$

(0.37

)

$

(1.56

)

 

WEIGHTED AVERAGE COMMON SHARE OUTSTANDING

BASIC

7,391,864

2,549,844

6,991,690

2,394,948

DILUTED

7,391,864

2,549,844

6,991,690

2,394,948

 

(a)

(a)

Includes share-based compensation of $311,523$569 and $999,447$1,007 for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively, and $322,641$365 and $671,649$688 for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively.

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

5
Table of Contents

VerifyMe, Inc.

Statements of Cash Flows

(Unaudited)

  Nine Months Ended 
  September 30, 2020  September 30, 2019 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net loss $(4,728,049) $(1,885,510)
Adjustments to reconcile net loss to net cash used in        
operating activities:        
Stock based compensation  61,888   103,167 
Fair value of options in exchange for services  642,774   399,828 
Fair value of restricted stock awards issued in exchange for services  240,950   168,654 
Fair value of warrants in exchange for services  53,835   - 
Loss on Extinguishment of Debt  280,504   - 
Amortization of debt discount  1,992,000   8,696 
Common stock issued for interest expense  60,802   - 
Change in Fair Value of Embedded Derivative  -   36,109 
Amortization and depreciation  69,706   17,297 
Changes in operating assets and liabilities:        
Accounts Receivable  (21,954)  (21,042)
Deposits on Equipment  -   (163,090)
Inventory  (18,189)  4,020 
Prepaid expenses and other current assets  (50,000)  (4,200)
Accounts payable and accrued expenses  120,498   (19,048)
Net cash used in operating activities  (1,295,235)  (1,355,119)
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Purchase of Patents  (51,988)  (36,953)
Purchase of Equipment for lease  (22,578)  - 
Capitalized Software Costs  -   (71,425)
Net cash used in investing activities  (74,566)  (108,378)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Proceeds from public offering of securities, net of costs  9,023,046   - 
Proceeds from issuance of notes payable  72,400   - 
Repayment of bridge financing and early redemption fee  (750,000)  - 
Proceeds from convertible debt, net of costs  1,747,203   461,307 
         
Net cash provided by financing activities  10,092,649   461,307 
         
NET INCREASE (DECREASE)  IN CASH AND        
CASH EQUIVALENTS  8,722,848   (1,002,190)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD  252,766   1,673,201 
         
CASH AND CASH EQUIVALENTS - END OF PERIOD $8,975,614  $671,011 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION        
Cash paid during the period for:        
Interest $1,250  $- 
Income taxes $-  $- 
         
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES		        
Series A Convertible Preferred Stock converted to common stock $-  $122 
Common Stock issued in relation to conversion of 2020 Debentures
and warrant cancellation		 $1,992,000  $- 
Relative fair value of common stock issued in connection with 2020
Debentures		 $34,412  $- 
Relative fair value of warrants issued in connection with 2020
Debentures		 $1,063,239  $- 
Recognition of embedded derivative liability $-  $171,425 
Beneficial conversion feature in connection with 2020 Debentures $649,552  $- 
Common stock issued in relation to Convertible Debt $-  $70,100 
Common stock cancelled $19  $- 
Cashless Exercise of Warrants $-  $2 
Common stock issued to settle accrued payroll $119,041  $- 

 

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

VerifyMe, Inc.

StatementStatements of Stockholders' Equity (Deficit)Cash Flows

(Unaudited)

(In thousands)

  Series A  Series B                   
  Convertible  Convertible                   
  Preferred  Preferred  Common             
  Stock  Stock  Stock  Additional          
  Number of     Number of     Number of     Paid-In  Treasury  Accumulated    
  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Stock  Deficit  Total 
Balance at June 30, 2019  -   -   0.85   -   2,186,435   2,187   61,294,125   (113,389)  (60,442,512)  740,411 
Fair value of stock option  -   -   -   -   -   -   150,040   -   -   150,040 
Restricted Stock awards and Restricted
Stock Units		  -   -   -   -   (2,400)  (3)  84,437   -   -   84,434 
Common stock issued for services  -   -   -   -   14,000   14   88,153   -   -   88,167 
Common stock issued in relation to
Bridge Financing		  -   -   -   -   20,000   20   70,080   -   -   70,100 
Net loss  -   -   -   -   -   -   -   -   (706,548)  (706,548)
Balance at September 30, 2019  -   -   0.85   -   2,218,035   2,218   61,686,835   (113,389)  (61,149,060)  426,604 

  Series A  Series B                   
  Convertible  Convertible                   
  Preferred  Preferred  Common             
  Stock  Stock  Stock  Additional          
  Number of     Number of     Number of     Paid-In  Treasury  Accumulated    
  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Stock  Deficit  Total 
                               
Balance at June 30, 2020  -   -   0.85   -   5,343,380   5,343   75,441,731   (113,389)  (65,516,569)  9,817,116 
Fair value of stock options  -   -   -   -   -   -   157,304   -   -   157,304 
Restricted stock awards  -   -   -   -   230,000   230   141,782   -   -   142,012 
Common stock issued for services  -   -   -   -   3,261   4   12,203   -   -   12,207 
Common stock issued in relation to public
offering of securities		  -   -   -   -   888   1   (1)  -   -   - 
Net loss  -   -   -   -       -   -   -   (982,829)  (982,829)
Balance at September 30, 2020  -   -   0.85   -   5,577,529   5,578   75,753,019   (113,389)  (66,499,398)  9,145,810 

Six Months Ended

June 30, 2021

June 30, 2020

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss

$

(2,573

)

$

(3,745

)

Adjustments to reconcile net loss to net cash used in operating activities:

Stock based compensation

23

50

Fair value of options in exchange for services

85

485

Fair value of restricted stock awards issued in exchange for services

565

99

Fair value of restricted stock units issued in exchange for services

277

0-

Payroll Protection Program Debt Forgiveness

(70

)

0-

Fair value of warrants in exchange for services

0-

54

Loss on Extinguishment of Debt

0-

280

Amortization of debt discount

0-

1,992

Common stock issued for interest expense

0-

61

Amortization and depreciation

55

47

Changes in operating assets and liabilities:

Accounts Receivable

(112

)

35

Due from related parties

(15

)

0-

Inventory

1

(4

)

Prepaid expenses and other current assets

57

(15

)

Accounts payable and accrued expenses

39

(38

)

Net cash used in operating activities

(1,668

)

(699

)

 

CASH FLOWS FROM INVESTING ACTIVITIES

Due from related parties – deposit and reimbursable expenses on investment

(2,937

)

0-

Purchase of Patents

(55

)

(29

)

Purchase of Equipment for lease

(45

)

(22

)

Purchase of equity investment

(11

)

0-

Capitalized Software Costs

(77

)

0-

Net cash used in investing activities

(3,125

)

(51

)

 

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from public offering of securities

8,447

9,023

Proceeds from issuance of notes payable

0-

72

Repayments of notes payable

(3

)

0-

Repayment of bridge financing and early redemption fee

0-

(750

)

Proceeds from convertible debt, net of costs

0-

1,747

Increase in treasury shares (share repurchase program)

(228

)

0-

 

Net cash provided by financing activities

8,216

10,092

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

3,423

9,342

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD

7,939

253

 

CASH AND CASH EQUIVALENTS - END OF PERIOD

$

11,362

$

9,595

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid during the period for:

Interest

$

0-

$

1

Income taxes

$

0-

$

0-

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

 

Common Stock issued in relation to conversion of 2020 Debentures and warrant cancellation

$

0-

$

1,992

Relative fair value of common stock issued in connection with 2020 Debentures

$

0-

$

34

Relative fair value of warrants issued in connection with 2020 Debentures

$

0-

$

1,063

Beneficial conversion feature in connection with 2020 Debentures

$

0-

$

650

Common stock issued to settle accrued payroll

$

0-

$

119

 

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

VerifyMe, Inc.

Statement of Stockholders' Equity (Deficit)

(Unaudited)

(In thousands, except share data)

 

  Series A  Series B                   
  Convertible  Convertible                   
  Preferred  Preferred  Common             
  Stock  Stock  Stock  Additional          
  Number of     Number of     Number of     Paid-In  Treasury  Accumulated    
  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Stock  Deficit  Total 
Balance at December 31, 2018  304,778   305   0.85   -   2,044,063   2,044   60,944,955   (113,389)  (59,263,550)  1,570,365
Conversion of Series A Convertible
Preferred Stock		  (304,778)  (305)  -   -   121,911   122   183   -   -   - 
Cashless Exercise of Warrants  -   -   -   -   1,435   1   (1)  -   -   - 
Fair value of stock option  -   -   -   -   -   -   399,828   -   -   399,828 
Restricted Stock awards and Restricted
Stock Units		  -   -   -   -   15,200   15   168,639   -   -   168,654 
Common stock issued for services  -   -   -   -   15,426   16   103,151   -   -   103,167 
Common stock issued in relation to
Bridge Financing		  -   -   -   -   20,000   20   70,080   -   -   70,100 
Net loss  -   -   -   -   -   -   -   -   (1,885,510)  (1,885,510)
Balance at September 30, 2019  -   -   0.85   -   2,218,035   2,218   61,686,835   (113,389)  (61,149,060)  426,604 
                                         

  Series A  Series B                   
  Convertible  Convertible                   
  Preferred  Preferred  Common             
  Stock  Stock  Stock  Additional          
  Number of     Number of     Number of     Paid-In  Treasury  Accumulated    
  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Stock  Deficit  Total 
                               
Balance at December 31, 2019  -   -   0.85   -   2,232,112   2,232   61,814,826   (113,389)  (61,771,349)  (67,680)
Fair value of stock options  -   -   -   -   -   -   642,774   -   -   642,774 
Restricted stock awards  -   -   -   -   267,500   268   359,723   -   -   359,991 
Fair value of warrants issued for services  -   -   -   -   -   -   53,835   -   -   53,835 
Common stock issued for services  -   -   -   -   6,596   7   29,381   -   -   29,388 
Common stock in relation to conversion of
2020 Debentures, interest expense and
cancellation of warrants		  -   -   -   -   19,208   19   66,893   -   -   66,912 
Beneficial conversion feature in
connection with 2020 Debentures		      -       -   -   -   649,552   -       649,552 
Warrants issued in connection with 2020
Debentures		  -   -   -   -   -   -   1,063,239   -   -   1,063,239 
Common stock in relation to conversion of
2020 Debentures, interest expense and
cancellation of warrants		  -   -   -   -   816,713   816   2,051,986   -   -   2,052,802 
Common stock issued in relation to public
offering of securities		  -   -   -   -   

2,254,801

   

2,255

   9,020,791   -   -   9,023,046 
Cancellation of common stock      -       -   (19,401)  (19)  19   -   -   - 
Net loss  -   -   -   -   -   -   -   -   (4,728,049)  (4,728,049)
Balance at September 30, 2020  -   -   0.85   -   5,577,529   5,578   75,753,019   (113,389)  (66,499,398)  9,145,810 

Series A

Convertible

Preferred

Stock

 

 

Series B

Convertible

Preferred

Stock

Common

Stock

Additional

Paid-In

Capital

Treasury

Stock

Number of

Shares

 

 

Amount

 

 

Number of

Shares

Amount

Number of

Shares

Amount

Number of

Shares

Amount

Accumulated

Deficit

Total

Balance at March 31,  2020

 

0-

0-

0.85

0-

2,252,653

2

63,884

7,011

(113

)

(62,863

)

910

Fair value of stock options

 

-

-

-

-

-

-

268

-

-

-

268

Restricted stock awards

 

-

-

-

-

37,500

-

153

-

-

-

153

Fair value of warrants issued for services

 

-

-

-

-

-

-

54

-

-

-

54

Common stock issued for services

 

-

-

-

-

2,002

-

10

-

-

-

10

Common Stock in relation to conversion of 2020 Debentures, interest expense and cancellation of warrants

 

-

-

-

-

816,713

1

2,052

-

-

-

2,053

Common stock issued in relation to public offering of securities

 

-

-

-

-

2,253,913

2

9,021

-

-

-

9,023

Cancellation of Common Stock

 

-

-

-

-

(19,401

)

-

-

-

-

-

-

Net loss

-

-

-

-

-

-

-

-

-

(2,653

)

(2,653

)

Balance at June 30,  2020

 

0-

0-

0.85

0-

5,343,380

5

75,442

7,011

(113

)

(65,516

)

9,818

Series A

Convertible

Preferred

Stock

 

 

Series B

Convertible

Preferred

Stock

Common

Stock

Additional

Paid-In

Capital

Treasury

Stock

Number of

Shares

 

 

Amount

 

 

Number of

Shares

Amount

Number of

Shares

Amount

Number of

Shares

Amount

Accumulated

Deficit

Total

Balance at March 31,  2021

 

0-

0-

0.85

0-

7,359,042

7

84,983

7,011

(113

)

(68,888

)

15,989

Restricted stock awards, net of shares withheld for employee tax

 

-

-

-

-

65,691

-

350

-

-

-

350

Restricted Stock Units

 

-

-

-

-

-

-

149

-

-

-

149

Common stock issued for services

 

-

-

-

-

3,261

-

13

-

-

-

13

Repurchase of Common Stock

 

-

-

-

-

(67,516

)

-

-

67,516

(228

)

-

(228

)

Net loss

-

-

-

-

-

-

-

-

-

(1,358

)

(1,358

)

Balance at June 30,  2021

 

0-

0-

0.85

0-

7,360,478

7

85,495

74,527

(341

)

(70,246

)

14,915

 

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

VerifyMe, Inc.

Statement of Stockholders' Equity (Deficit)

(Unaudited)

(In thousands, except share data)

Series A

Convertible

Preferred

Stock

 

 

Series B

Convertible

Preferred

Stock

Common

Stock

Additional

Paid-In

Capital

Treasury

Stock

Number of

Shares

 

 

Amount

 

 

Number of

Shares

Amount

Number of

Shares

Amount

Number of

Shares

Amount

Accumulated

Deficit

Total

Balance at December 31, 2019

0-

0-

0.85

0-

2,232,112

2

61,815

7,011

(113

)

(61,771

)

(67

)

Fair value of stock  options

-

-

-

-

-

-

485

-

-

-

485

Restricted stock awards

-

-

-

-

37,500

-

218

-

-

-

218

Fair value of warrants issued for services

-

-

-

-

-

54

-

-

-

54

Common stock issued for services

-

-

-

-

3,335

-

18

-

-

-

18

Common stock issued in connection with 2020 Debentures

-

-

-

-

19,208

-

66

-

-

-

66

Beneficial conversion feature in connection with 2020 Debentures

-

-

-

-

-

-

650

650

Warrants issued in connection with 2020 Debentures

-

-

-

-

-

-

1,063

-

-

-

1,063

Common Stock in relation to Conversion of 2020 Debentures and interest expense and cancellation of warrants

-

-

-

-

816,713

1

2,052

-

-

-

2,053

Common stock issued in relation to public offering of securities

-

-

-

-

2,253,913

2

9,021

-

-

-

9,023

Cancellation of Common Stock

-

-

-

-

(19,401

)

-

-

-

-

-

-

Net loss

-

-

-

-

-

-

-

-

-

(3,745

)

(3,745

)

Balance at June 30,  2020

0-

0-

0.85

0-

5,343,380

5

75,442

7,011

(113

)

(65,516

)

9,818

Series A

Convertible

Preferred

Stock

 

 

Series B

Convertible

Preferred

Stock

Common

Stock

Additional

Paid-In

Capital

Treasury

Stock

Number of

Shares

 

 

Amount

 

 

Number of

Shares

Amount

Number of

Shares

Amount

Number of

Shares

Amount

Accumulated

Deficit

Total

Balance at December 31, 2020

0-

0-

0.85

0-

5,596,877

6

76,099

7,011

(113

)

(67,673

)

8,319

Fair value of stock options

-

-

-

-

-

-

85

-

-

-

85

Restricted stock awards, net of shares withheld for employee tax

-

-

-

-

75,691

-

565

-

-

-

565

Restricted Stock Units

-

-

-

-

-

-

277

-

-

-

277

Common stock issued for services

-

-

-

-

5,426

-

23

-

-

-

23

Common stock in relation to public offering of securities

-

-

-

-

1,750,000

1

8,446

-

-

-

8,447

Repurchase of Common Stock

(67,516

)

0-

-

67,516

(228

)

-

(228

)

Net loss

-

-

-

-

-

-

-

-

-

(2,573

)

(2,573

)

Balance at June 30, 2021

0-

0-

0.85

0-

7,360,478

7

85,495

74,527

(341

)

(70,246

)

14,915

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

VerifyMe, Inc.

Notes to the Financial Statements (unaudited)

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of the Business

VerifyMe, Inc. (“VerifyMe,” or the “Company,” “we,” “us,” or “our”) was incorporated in the State of Nevada on November 10, 1999. The Company is based in Rochester, New York and its common stock, par value $0.001 per share, and warrants to purchase common stock are traded on The Nasdaq Capital Market (“Nasdaq”) under the trading symbols “VRME” and “VRMEW,” respectively.

The Company is a technology solutions provider specializing in brand protection and supply chain functions such as counterfeit prevention, authentication, serialization, consumer engagement, and track and trace features for labels, packaging and products. Until 2018, the Company primarily engaged in the research and development of its technologies. The Company began to commercialize its covert luminescent pigment, RainbowSecure®, in 2018 and also developed the patented VeriPAS™VeriPASTM software system in 2018, which covertly and overtly serializes products to remotely track a product’s “life cycle” for brand owners. WeIn April 2021 VerifyMe launched a rebranding and messaging campaign to more fully market all of their products and services to include a new website and marketing materials. RainbowSecure® has been renamed to VerifyInkTM and when coupled with Verify AuthenticateTM and VerifyMe Track & TraceTM product lines, we believe VeriPAS™ iswe provide the only invisible covert serialization and authentication solution deployed through variable digital printing on HP Indigo (a division of HP Inc.) printing systems with asystems. Our patented smartphone tracking and authentication system. VeriPAS™authenticator device, VerifyAuthenticatorTM is capable of fluorescing, decoding, and verifying invisible RainbowSecure®VerifyInkTM printed overt and covert codes in the field – designed to allowfield. This product allows investigators to authenticate product quickly and efficiently authenticate product throughout the distribution chain, including warehouses, ports of entry, retail locations, and product purchased over the Internet for inspection and investigative actions.internet. This technology is coupled with a secure cloud-based track and trace software engine whichthat allows brands and investigators to see where products originate and where they are deployed withmonitor the complete supply chain from product origination to the end user utilizing geo location mapping and intelligent programable alerts. Brand owners access the VeriPAS™ software over the Internet. BrandWhen coupled with overt serialization codes, brand owners can then set rules of engagement, gather rich business intelligence, establish marketing programs for customer engagement and control and monitor and protect their products’ “life cycle.” The Company hasWe have derived minimal revenue from the VeriPAS™our authentication and track and trace software system and hashave derived limited revenue from the sale of our RainbowSecure®VerifyInkTM and VerifyCodeTM technology.

The Company’s activities are subject to significant risks and uncertainties, including its ability to successfully commercialize its technologies and the need to secure additional funding for working capital and to further develop the Company’s intellectual property.

Reclassifications

Reverse Stock Split

OnCertain amounts presented for the three and six months ended June 17, 2020, the Company filed a Certificate of Amendment30, 2021 reflect reclassifications made to conform to the Company’s Amended and Restated Articles of Incorporation, as amended, with the Nevada Secretary of State to effect a 50-to-1 reverse stock split of the Company’s issued and outstanding common stock and treasury stock, effective on June 18, 2020 (the “Reverse Stock Split”). The Reverse Stock Split did not affect the total number of shares of common stock or preferred stock that the Company is authorized to issue.  The accompanying financial statements and notes to the financial statements give retroactive effect to the Reverse Stock Split for all periods presented, unless otherwise specified.presentation in our current reporting period.

Basis of Presentation

The accompanying unaudited 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 U.S. generally 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, 20192020 as filed with the Securities and Exchange Commission (the “SEC”) on March 9, 2020.25, 2021. The accompanying Interim 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 ninesix months ended SeptemberJune 30, 20202021 are not necessarily indicative of the results to be expected for the year ending December 31, 20202021 or for any future interim periods.

Equity Investments

Equity investments are reported at fair value with changes in unrecognized gains or losses included in other income on the statement of operations.

Revenue Recognition

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

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

·identify the contract with a customer;
·identify the performance obligations in the contract;
·determine the transaction price;

•

identify the contract with a customer;

9
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•

·allocate the transaction price to performance obligations in the contract; and
·recognize revenue as the performance obligations are

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 ninesix months ended SeptemberJune 30, 2020,2021, the Company’s revenues were primarily made up of revenue generated from printing labels utilizingand through our product authentication technology, as we expanded into the Company’s technology.

Sequencing

As of September 19, 2019, the Company adopted a sequencing policy whereby all equity-linked instruments issued prior to the closing of the $600,000 secured convertible debentures on September 19, 2019 may be classified as equity and all future equity-linked instruments may be classified as a derivative liability with the exception of instruments related to stock-based compensation issued to employees or directors. As of March 6, 2020, the Company redeemed the secured convertible debentures issued as of September 19, 2019 and as a result abandoned the sequencing policy previously adopted, so that all equity-linked instruments going forward may be classified as equity.

Convertible Debt

The Company recognizes the advantageous value of conversion rights attached to convertible debt. Such rights give the debt holder the ability to convert debt into common stock at a price per share that is less than the trading price to the public on the date of the debt. The beneficial value is calculated as the intrinsic value (the market price of the stock at the commitment date in excess of the conversion rate) of the beneficial conversion feature of the debt, and is recorded as a discount to the related debt and an addition to additional paid in capital. The discount is amortized over the remaining outstanding period of related debt using the interest method. As of June 22, 2020, all convertible debt of the Company had been converted and the unamortized debt discount was fully amortized and included in interest expensepersonal protective equipment industry in the accompanying Statementsfirst quarter of Operations.2021.

Basic and Diluted Net Income per Share of Common Stock

The Company follows Financial Accounting Standards Board (“FASB”) ASC 260, “Earnings Per Share,” when reporting earnings per share resulting in the presentation of basic and diluted earnings per share. Because the Company reported a net loss for each of the periods 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 each of the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, 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 ninesix months ended SeptemberJune 30, 2020,2021, there were approximately 4,397,0004,338,000 anti-dilutive shares consisting of 474,000465,000 shares issuable upon exercise of options, 3,779,000 shares issuable upon exercise of warrants, and 144,000 shares issuable upon conversion of preferred stock. For the three and ninesix months ended SeptemberJune 30, 2019,2020, there were approximately 1,073,0004,369,000 anti-dilutive shares consisting of 402,000446,000 shares issuable upon exercise of options, 439,0003,779,000 shares issuable upon exercise of warrants, and 144,000 shares issuable upon conversion of preferred stock and 88,000 shares issuable upon conversion of convertible debentures.stock.

Liquidity

NOTE 2 – EQUITY INVESTMENT

On August 27, 2014, FASB issued Accounting Standards Update (“ASU”February 26, 2021, the Company formed VMEA Holdings Inc. (the “Sponsor Entity”) 2014-05, Disclosure, a Delaware corporation and wholly owned subsidiary of Uncertainties about an Entity’s abilitythe Company, that owns G3 VRM Acquisition Corp. (the “SPAC”), a Delaware corporation and special purpose acquisition company being co-sponsored by the Company. On April 12, 2021, the Sponsor Entity converted to Continuea Delaware limited liability company, changed its name to “G3 VRM Holdings LLC” and a co-sponsor was added as a Going Concern (“ASU 2014-05”), which requires managementmember of the Sponsor Entity resulting in an equity interest of 44.40% attributed to assessthe Company. On April 14, 2021, the SPAC, filed a company’s abilityRegistration Statement on Form S-1 with the SEC in connection with a proposed initial public offering of units (the “Units”) by the SPAC. Each Unit consists of one share of common stock, $0.0001 par value, and one right to continue asreceive one-tenth (1/10) of a going concern within one year from financialshare of common stock upon the consummation of an initial business combination. The Units were sold at an offering price of $10.00 per Unit. The SPAC granted the underwriters a 45-day option to purchase up to 1,500,000 additional Units to cover over-allotments, if any. On June 30, 2021, the registration statement issuancerelating to the initial public offering (“IPO”) of the SPAC was declared effective by the SEC and to provide related footnote disclosures in certain circumstances.

The accompanying financial statements and notes have been prepared assuming the Company will continue asentered into a going concern. DuringPrivate Placement Unit Purchase Agreement with the year ended December 31, 2019Sponsor Entity and Maxim Partners LLC obligating the co-sponsors through the Sponsor Entity to purchase up to an aggregate of 547,500 Units (or 600,000 Units if the underwriters exercise the over-allotment in full) in the SPAC (the “Private Placement”).

As a result of ceasing to have a controlling financial interest in G3 VRM Holdings LLC on April 12, 2021, the Company suffered from recurring losses from operationsaccounted for the Sponsor Entity as an equity investment and negative cash flows from operations,has elected the fair value option resulting in a needcarrying value of $11 thousand and 0no gain or loss recognized for among other things, capital resources. the six months ended June 30, 2021. Upon effectiveness of the IPO registration statement on June 30, 2021, the Company and the co-sponsor each transferred $2,713 thousand, for an aggregate of $5,425 thousand, to the Sponsor Entity pursuant to the Private Placement agreement to be transferred to the SPAC upon closing of the IPO, including up to $225 thousand each, or an aggregate of $450 thousand, subject to the underwriters’ over-allotment option.

On July 6, 2021, the SPAC consummated the IPO of 10,626,000 units (the “Units”), including 626,000 Units pursuant to the partial exercise of the underwriter’s over-allotment option, generating gross proceeds of $106,260 thousand. As co-sponsor, VerifyMe indirectly, through G3 VRM Holding LLC, beneficially owns approximately 9.42% of the outstanding shares G3 VRM Acquisition, upon consummation of the IPO, which are subject to forfeiture upon certain conditions and restrictions on transfer.

As of December 31, 2019,July 6, 2021, a total of $107,854 thousand of the net proceeds from the IPO and the Private Placement were deposited in a trust account established for the benefit of the SPAC’s public shareholders. Simultaneously with the closing of the IPO, the SPAC consummated the Private Placement of an aggregate of 569,410 units with the Sponsor Entity purchasing 516,280 units and Maxim Partners LLC purchasing 53,130 units, generating total proceeds of $5,694 thousand. Of this amount, the Company is the indirect beneficial owner of 229,228 units purchased for a total of $2,581 thousand. As of June 30, 2021, this amount, plus the $132 thousand transferred to cover the unexercised portion of the over-allotment option, was deemed to be a deposit until the consummation of the IPO, including the over-allotment, and was classified as Due from related parties in the accompanying Balance Sheets (See Note 3 – Related Parties). The classification is based upon the reasoning that had cashthe IPO not been consummated, the Sponsor Entity would have wound down its operations and returned the monies to its investors.

NOTE 3 – RELATED PARTIES

As of June 30, 2021, the Company has related party receivables consisting of: (i) $2,713 thousand receivable from the Sponsor Entity, which includes the deposit relating to the SPAC Private Placement and disclosed that its abilityfunds covering the exercise of the underwriter's overallotment option; (ii) $208 thousand receivable from the SPAC for expenses covered prior to continue as a going concern was predicated onthe consummation of the IPO; (iii) $16 thousand receivable from the Company’s ability to raise capitalco-sponsor of the Sponsor Entity, see Note 2 Equity Investment for details; and to sustain adequate working capital to finance its operations. During the nine months ended September 30, 2020, the Company participated in(iv) $15 thousand deposit refundable from an underwritten public offering and raised approximately $10.0 million in gross proceeds, and $9,023,046 in net proceeds after deducting discounts and commissions and other offering expenses. The Company met and exceeded those predications thus mitigating any substantial doubt aboutaffiliate of the Company’s ability to continue as a going concern as defined by ASU 2014-05 and its ability to satisfy the estimated liquidity needs for the twelve months from the issuanceco-sponsor of the financial statements.

Recently Adopted Accounting Pronouncements

Effective January 1, 2019,Sponsor Entity for consulting services provided that were unrelated to the Company adopted ASU No. 2018-07, Compensation – Stock Based Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. The adoption of ASU 2018-07 did not have a material impact on the Company’s financial statements.SPAC or co-sponsorship.

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Effective January 1, 2019, the Company adopted ASU No. 2016-02 – “Leases (Topic 842)” and the series of related Accounting Standards Updates that followed (collectively referred to as “Topic 842”) using the modified retrospective approach. The adoption of Topic 842 did not have a material impact on the Company’s financial statements.

NOTE 24 – PROPERTY AND EQUIPMENT

Equipment for Lease

During the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, the Company capitalized $74,042$45 thousand and $73 thousand (including a $51,494$51 thousand deposit made in fiscal 2019) and $0, respectively, in connection with the certification and production of the VerifyMe BeeperVerifyChecker™ and the VeriPAS™ Smartphone Authenticator VerifyAuthenticatorTM technology. The Company depreciates equipment for lease over its useful life of five years. Depreciation expense for equipmentEquipment for lease was $11,434$16 thousand and $34,304$27 thousand for the three and ninesix months ended SeptemberJune 30, 2021, respectfully, and $12 thousand and $23 thousand for the three and six month ended June 30, 2020, respectively, and $0 for each of the three and nine months ended September 30, 2019, andis included in generalGeneral and administrative expense in the accompanying Statements of Operations.

NOTE 35 – INTANGIBLE ASSETS

Patents and Trademarks

As of September 2020, ourJune 30, 2021, the current patent and trademark portfolios consistedconsist of eleven12 granted U.S. patents and one1 granted European patent validated in four4 countries four pending U.S.(France, Germany, United Kingdom, and three foreign patent applications, six registered U.S. trademarks, six registered foreign registrations, including one each in Colombia, Europe, Japan, Mexico, and Singapore, and threeItaly), 5 pending U.S. and foreign patent applications, 6 registered U.S. trademarks, 2 EU trademark registrations, 1 Colombian trademark registration, 1 Australian trademark registration, 1 Japanese trademark registration, 1 Mexican trademark registration, 1 Singaporean trademark registration, and 17 pending US and foreign trademark applications. In January 2020, the Company received a Notice of Allowance for the U.S. Patent Application for the dual code authentication process relating to the Company’s invisible QR code and smartphone reading system “Device and Method for Authentication.” The Company’s registeredOur issued patents expire between the years 20212022 and 2037.2039. Costs associated with the registrationprosecution and legal defense of the patents have been capitalized and are amortized on a straight-line basis over the estimated lives of the patents which were determined to be 17 to 19 years. During the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, the Company capitalized $51,988$55 thousand and $36,953,$29 thousand, respectively, of patent and trademarks costs. Amortization expense for patents and trademarks was $6,733$9 thousand and $ 5,662$7 thousand for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, and $20,368$16 thousand and $17,297$14 thousand for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively.

Capitalized Software

Costs incurred in connection with the development of software related to our proprietary digital products are accounted for in accordance with FASB ASC 985 “Costs of Software to Be Sold, Leased or Marketed.” Costs incurred prior to the establishment of technological feasibility are charged to research and development expense. Software development costs are capitalized after a product is determined to be technologically feasible and is in the process of being developed for market. Amortization of capitalized software costs begins once the product is available to the market. Capitalized software costs are amortized over the estimated life of the related product, generally five years, using the straight-line method. The Company will evaluate its software assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. DuringThe Company capitalized $77 thousand and $0 for the ninesix months ended SeptemberJune 30, 2021 and 2020, and 2019, the Company capitalized $0 and $71,425, respectively, related to software costs.respectively. Amortization expense for capitalized software was $5,011$7 thousand and $0$5 thousand for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, and $15,034$12 thousand and $0$10 thousand for the ninesix months ended SeptemberJune 30, 2021 and 2020, and 2019, respectively, included in general and administrative expense in the accompanying Statements of Operations.

NOTE 4 – CONVERTIBLE PREFERRED STOCK

The Company is authorized to issue Series A Convertible Preferred Stock, par value of $0.001 per share (the “Series A”) and Series B Convertible Preferred Stock, par value of $0.001 per share (the “Series B”). As of September 30, 2020, there were no shares of Series A outstanding and 0.85 of a share of Series B outstanding convertible into 144,444 shares of common stock. During the nine months ended September 30, 2020 and 2019, 0 and 304,778 shares of Series A, respectively, were converted into 0 and 121,911 shares of the Company’s common stock, respectively. Each share of Series A and Series B has limited voting rights, is entitled to participate with the common stock on liquidation and holders of Series A and Series B are subject to beneficial ownership limitations.

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NOTE 5 – CONVERTIBLE DEBT

On September 19, 2019, the Company completed the closing of $600,000 of secured convertible debentures (the “2019 Debentures”) for gross proceeds of $540,000 after original issue discounts. As of September 18, 2019 (the “Effective Date”), the Company entered into two substantially identical securities purchase agreements (the “Securities Purchase Agreements”) with two purchasers (the “Purchasers”), which provided for the issuance of up to an aggregate of $1.2 million in principal amount of the 2019 Debentures (the “Bridge Financing”) of which the first tranche of $600,000 was issued. The Securities Purchase Agreements provided for the issuance of the 2019 Debentures due one year from the dates of issuance in two $600,000 tranches: the first tranche as described above, and the second tranche, at the discretion of the Purchasers and us, to occur any time after November 17, 2019. If, at any time after November 17, 2019, the Purchasers elected not to consummate the closing of the second tranche, then the Company was entitled to raise up to $600,000 from additional investors (including the Company’s affiliates) who would have a security interest on a pari passu basis with the Purchasers in the first tranche, so long as such investors agreed not to convert the securities received until the Purchasers in the first tranche had completely converted the 2019 Debentures or been fully repaid. In connection with the 2019 Debentures, each of the Purchasers received commitment fees of $5,000 and 500,000 restricted shares (the “Commitment Shares”) of our common stock. The placement agent for the 2019 Debentures received a cash fee of 8% of the gross proceeds received at the closing and was entitled to receive warrants convertible into shares of common stock until May 2020 when the placement agent waived its right to receive the warrants.

The 2019 Debentures contained provisions that entitled each Purchaser, at any time, to convert all or any portion of the outstanding principal amount of its 2019 Debenture(s) plus any accrued interest into restricted shares of common stock. If we consummated a public offering within 180 calendar days of the Effective Date, then the conversion price would be the lesser of (a) $7.50 or (b) 70% multiplied by the price per share of the common stock we issued in the public offering (the “QPI Discounted Price”), subject to further adjustment as provided in the 2019 Debentures as well as subject in each case to equitable adjustments resulting from any stock splits, stock dividends, recapitalizations or similar events. Further, if the Company consummated a public offering of common stock which resulted in us receiving gross proceeds of at least $5 million within 180 calendar days of the Effective Date then we would have been obligated to repay the outstanding amounts owed under the 2019 Debentures, to the extent they were not converted and including the applicable redemption premium then in effect, within three days of consummation of such an offering. 

If any portion of the 2019 Debentures was outstanding on the 181st calendar day after the Effective Date, then the conversion price would equal the lesser of (a) $7.50, (b) the QPI Discounted Price, or (c) 70% of the lowest volume-weighted average price (as reported by Bloomberg LP) of the common stock on any trading day during the 20 trading days immediately preceding the date of conversion of the 2019 Debentures (provided, further, that if either we are not DWAC operational at the time of conversion, the common stock is traded on the OTC Pink at the time of conversion, or the conversion price was less than $0.50 per share, then 70% would automatically adjust to 60%).

So long as no event of default had occurred and was continuing under the 2019 Debentures, the Company could at our option call for redemption all or part of the 2019 Debentures prior to the maturity date, upon not more than two calendar days written notice, for an amount equal to: (i) if the redemption date was 90 calendar days or less from the date of issuance of the 2019 Debentures, 110% of the sum of the principal amount; (ii) if the redemption date was greater than or equal to 91 calendar days from the date of issuance of the 2019 Debentures and less than or equal to 150 calendar days from the date of issuance of the 2019 Debentures, 120% of the sum of the principal amount; (iii) if the redemption date was greater than or equal to 151 calendar days from the date of issuance of the 2019 Debentures and less than or equal to 180 calendar days from the date of issuance of the 2019 Debentures, 125% of the sum of the principal amount; and (iv) if either (1) the 2019 Debentures were in default but the holder consents to the redemption notwithstanding such default or (2) the redemption date was greater than or equal to 181 calendar days from the date of issuance of the 2019 Debentures, 130% of the sum of the principal amount.

The 2019 Debentures included an adjustment provision that, subject to certain exceptions, would reduce, at the Purchaser’s option, the conversion price if we issued common stock or common stock equivalents (including in variable rate transactions) at a price lower than the then-current conversion price of the 2019 Debentures. Any reverse stock split of our outstanding shares would also have resulted in an adjustment of the conversion price of the 2019 Debentures.  

The conversion option, the QPI put and the put that were exercisable upon certain financing events are embedded derivatives that are collectively bifurcated at fair value, with subsequent changes in fair value recognized in the Statement of Operations. The fair value estimate is a Level 3 measurement as defined by ASC Topic 820, Fair Value Measurements and Disclosures, as it is based on significant inputs not observable in the market. The Company estimated the fair value of the monthly payment provision using a Monte Carlo Simulation, with 10,000 trials, with the following key inputs:

September 30, 2020December 31, 2019
Stock price-$3.50 - $5.00
Terms (years)-0.72 – 1.00
Volatility-153.9% - 195.7%
Risk-free rate-1.60% - 1.87%
Probability of QPI-50%

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As of December 31, 2019, the Company’s warrants issuable to the Company’s placement agent in relation to the 2019 Debentures were treated as derivative liabilities and changes in the fair value were recognized in earnings. The Company estimated the fair value of these potentially issuable warrants using the Black-Scholes method and the following assumptions:

  September 30,
2020		  December 31,
2019		 
Closing trade price of Common Stock $          -  $3.50 
Intrinsic value of conversion option per share $ -  $3.50 

September 30,
2020		December 31,
2019
Annual Dividend Yield        -0.0%
Expected Life (Years)-5
Risk-Free Interest Rate-1.68%-1.69%
Expected Volatility-445.01%-453.08%

Expected volatility was based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods. The Company believes this method produced an estimate that was representative of the Company’s expectations of future volatility over the expected term of these warrants. The Company had no reason to believe future volatility over the expected remaining life of these warrants was likely to differ materially from historical volatility. The expected life was based on the expected remaining term of the warrants. The risk-free rate was based on the U.S. Treasury rate that corresponded to the expected term of the warrants.

The Company recorded a total of $401,957 debt discount upon the closing of the 2019 Debentures, including $171,425 fair value of the embedded derivative liability, $70,100 fair value of the common stock issued, $78,693 of direct transaction costs incurred, $21,739 related to warrants issuable to the placement agent, and $60,000 original issue discount. The debt discount is amortized to interest expense over the term of the loan. Amortization of the debt discount associated with the 2019 Debentures was $99,954 for the year ended December 31, 2019 and was included in interest expense in the Statements of Operations.

The 2019 Debentures were fully redeemed on February 26, 2020 for a face value of $600,000 and an early redemption fee of $150,000 resulting in a $280,504 loss on extinguishment of debt included in the Statement of Operations.

The following table summarizes the 2019 Debentures outstanding as of September 30, 2020 and December 31, 2019: 

  September 30, 2020  December 31, 2019 
Convertible Debentures, due September 18, 2020:         
Principal value $           -  $600,000 
Unamortized debt discount  -   (302,003)
Carrying value of convertible notes  -   297,997 
Total short-term carrying value of Convertible Debentures $-  $297,997 

Embedded Derivative Liability:   
Fair value of derivative liability, December 31, 2019 $171,499 
Gain on extinguishment of debt  (171,499)
Fair value of derivative liability, September 30, 2020 $- 

On March 6, 2020, the Company completed the offering of $1,992,000 of senior secured convertible debentures (the “2020 Debentures”) and raised $1,992,000 in gross proceeds from the sale of the 2020 Debentures and 2020 Warrants (defined below). Of this amount, $330,000 was received from four directors and an entity in which one officer of the Company is a majority owner and co-manager. The Company received $1,747,203 after deducting direct transaction costs. The Company used $750,000 of the net proceeds to redeem the existing 2019 Debentures prior to maturity, with a face value of $600,000 and an early redemption fee of $150,000. The 2020 Debentures were due eighteen months following issuance as follows; $932,000 on August 26, 2021, $910,000 on August 28, 2021 and $150,000 on September 6, 2021.

The Company’s capital structure after the closing had no outstanding variably-priced convertible instruments on its Balance Sheets. The 2020 Debentures were secured by a blanket lien on all assets of the Company until such time the 2020 Debentures were paid in full or converted in full.

The 2020 Debentures were automatically convertible into shares of the Company’s common stock upon the earliest to occur of (i) the commencement of trading of the common stock on the Nasdaq, New York Stock Exchange or NYSE American (an “Uplist”) at the Uplist Conversion Price (defined below); or (ii) at any time the minimum bid price of the common stock exceeded $25.00 per share for twenty (20) consecutive trading days and the average trading volume during the 10 trading days prior to the conversion was at least 2,000 shares and the shares were registered under an effective registration statement or the shares were salable under Rule 144 (“Rule 144”) of the Securities Act of 1933, as amended. The “Uplist Conversion Price” was the lesser of $4.00 or a 30% discount to the public offering price a share of common stock was offered to the public in a securities offering resulting in the listing of the common stock on the Nasdaq, New York Stock Exchange or NYSE American.

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The 2020 Debentures were convertible, at any time, at the option of the holder, into shares of common stock, at a fixed conversion price equal to $4.00 per share.

The embedded conversion feature was not determined to be a derivative that required bifurcation pursuant to FASB ASC 815, “Derivatives and Hedging” (“ASC 815”), but was determined to be a beneficial conversion feature that required recognition within equity on the commitment date. The beneficial conversion feature was recognized at its intrinsic value on the commitment date, limited to the proceeds allocated to the convertible debt. As such, the Company recorded $649,552 within additional paid-in-capital on the Balance Sheets for the beneficial conversion feature identified. The debt discount arising from recognition of the beneficial conversion feature was amortized as interest expense over the term of the convertible debt.

In connection with the issuance of the 2020 Debentures, the Company also issued warrants (“2020 Warrants”) to purchase 498,000 shares of common stock. Each 2020 Warrant had a three-year (3) term and was immediately exercisable at an exercise price of $7.50 per share. If at any time after six months following the issuance date and prior to the expiration date the Company failed to maintain an effective registration statement (the “Registration Statement”) with the SEC covering the resale of the shares of common stock underlying the 2020 Warrants, the 2020 Warrants could have been exercised by means of a “cashless exercise,” until such time as there was an effective Registration Statement. Each 2020 Warrant contained customary adjustment provisions in the event of a stock split, reverse stock split or recapitalization. 2020 Warrants for 82,500 shares were issued to four directors and an entity in which one officer of the Company is a majority owner. The 2020 Warrants were determined to meet equity classification pursuant to FASB ASC 480, “Distinguish by Liabilities from Equity” and ASC 815. As such, the relative fair value of the 2020 Warrants was recorded as additional paid-in-capital on the Balance Sheets, which was determined to be $1,063,239, on the issuance date. The debt discount arising from recognition of the 2020 Warrants was amortized as interest expense over the term of the convertible debt.

On June 22, 2020, the Company cancelled the 2020 Warrants for twenty-three of the twenty-five warrant holders and issued to the holders of the cancelled 2020 Warrants an aggregate of 179,200 shares of common Stock. Of this amount, 33,000 shares of common stock were issued to four directors and an entity in which one officer of the Company is a majority owner and co-manager. 2020 Warrants to purchase an aggregate of 81,700 shares of common stock at an exercise price of $4.59 per share remain outstanding. Also, on such date, the 2020 Debentures were automatically converted into an aggregate of 637,513 shares of common stock and warrants to purchase 573,479 shares of common stock. Of this amount, 105,567 shares of common stock and warrants to purchase 105,567 shares of common stock were issued to four directors and an entity in which one officer of the Company is a majority owner and co-manager. See Note 8 – Stock Options, Restricted Stock and Warrants. 

In connection with the 2020 Debentures, the Company entered into an agreement with a non-exclusive financial advisor and placement agent for a term of twelve months commencing in January 2020. Upon execution of the agreement, the Company issued 5,000 fully vested restricted shares of the Company’s common stock and recorded $32,500 included in general and administrative expense in the accompanying Statements of Operations. On March 6, 2020, in connection with this agreement a cash compensation of $152,960 was made by the Company and an additional 12,285 shares of the Company’s common stock were issued. These amounts were included in the debt discount for the 2020 Debentures noted above.

In February 2020, the Company entered into an agreement with a non-exclusive financial advisor and placement agent terminating the later of April 30, 2020 or upon closing a successful private placement. The agreement automatically extended for periods of thirty days until terminated in writing. The Company agreed to pay 10% of the gross proceeds raised by the financial advisor and placement agent and agreed to issue an amount of restricted shares equal to 4% of the total securities sold in the private placement divided by the last reported closing price of the stock on the closing date of the private placement. On March 6, 2020, in connection with this agreement cash compensation of $25,000 was paid by the Company and 1,923 shares of the Company’s common stock were issued. These amounts were included in the debt discount for the 2020 Debentures noted above.

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The Company recorded a total of $1,992,000 debt discount upon the closing of the 2020 Debentures, including the $649,552 intrinsic value of the beneficial conversion option, $34,412 relative fair value of the common stock issued to the placement agents, $244,797 of direct transaction costs incurred and $1,063,239 related to the 2020 Warrants. The debt discount was amortized to interest expense over the term of the loan.

On June 22, 2020, upon the Company’s consummation of the public offering (See Note 7 – Stockholders’ Equity) and the Company’s commencement of trading on Nasdaq, the 2020 Debentures were automatically converted at $3.22, the QPI Discounted Price. As a result, the unamortized debt discount was fully amortized and included in interest expense in the accompanying Statements of Operations. Amortization of the debt discount associated with the 2020 Debentures was $0 and $1,992,000 for the three and nine months ended September 30, 2020, respectively, and was included in interest expense in the accompanying Statements of Operations. Interest expense for the three and nine months ended September 30, 2020 was $0 and $60,802, respectively.

On January 30, 2020 the Company issued an unsecured promissory note payable to a stockholder of the Company with a face value of $75,000 and an interest rate of 10% per annum payable in full on March 30, 2020, subject to the Company’s right to extend payment until May 29, 2020. On February 28, 2020, the holder of the $75,000 promissory note which was to become due in March 2020 purchased $80,000 of the 2020 Debentures and 2020 Warrants, which was paid by exchanging the promissory note and paying an additional $5,000. This is included in the $1,992,000 gross proceeds raised. Interest expense in relation to the unsecured promissory note of $0 and $1,250 was recorded for the three and nine months ended September 30, 2020, respectively.

NOTE 6 – TERM NOTE

On May 17, 2020, the Company entered into a paycheck protection program term note for $72,400$72 thousand (the “SBA Loan”) with PNC Bank, N.A. under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) pursuant to the Paycheck Protection Program (the “PPP”), which is administered by the U.S. Small Business Administration. The SBA Loan is scheduled to mature on May 17, 2022, bears interest at a rate of 1.00% per annum and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. Pursuant to the CARES Act and the PPP, all or a portion of the principal amount of the SBA Loan is subject to forgiveness so long as, over the eight-week period following the receipt by the Company of the proceeds of the SBA Loan, the Company usesused those proceeds for payroll costs, payment on rent obligations, utility costs, and costs of certain employee benefits as per Section 1106 of the CARES Act. As of September 30,December 31, 2020, the amount outstanding on the SBA Loan was $72,400$72 thousand classified as Long-Term Liabilities and included in the accompanying Balance Sheets.

The Company applied for and was notified in June 2021 that $69 thousand in eligible payroll expenditures as described in the CARES Act, has been forgiven. Loan forgiveness is reflected in other income in the accompanying Statements of Operations. The forgiveness recognized during the six months ended June 30, 2021, included principal of $69 thousand, and interest payable of $1 thousand. The remaining loan balance of $3 thousand was paid in full as of June 30, 2021.

NOTE 7 – STOCKHOLDERS’ EQUITY

The Company expensed $142,012$407 thousand and $240,950 in costs$622 thousand related to restricted stock awards for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively. For the three and ninesix months ended SeptemberJune 30, 2019,2020, the Company expensed $84,434$23 thousand and $168,654,$99 thousand, respectively, relativerelated to restricted stock awards.

During the six months ended June 30, 2021, the Company issued 5,426 shares of restricted common stock.stock in relation to investor relation services with a stock-based compensation expense of $23 thousand.

Effective January 1, 2021, the Company approved restricted stock units or restricted stock awards, for each non-employee director, with a grant date fair value equal to $100 thousand. If the non-employee director serves as a Board committee chair or Lead Independent director, he or she will also receive and an additional award of restricted stock units or restricted stock award with a grant date fair value equal to $25 thousand. These awards will vest in full on the earlier of the one-year anniversary of the date of grant subject to the non-employee director’s continued service on the Board of Directors. In January 2021, a total of 145,010 restricted stock units were issued to five non-employee directors for a fair value of $625 thousand, vesting one year from the date of issuance.

The Company expensed $149 thousand and $277 thousand related to restricted stock units for the three and six months ended June 30, 2021. There was 00no expense related to restricted stock units for the six months ended June 30, 2020.

On April 16, 2021, upon vesting of the restricted stock awards held by our Chief Executive Officer, the Company withheld and retired 12,843 shares of common stock in order to satisfy his U.S. payroll tax withholding obligations.

Effective April 15, 2021, Norman Gardner, our former Chairman of the board of directors retired from the board of directors. Mr. Gardner was awarded 69,284 shares of restricted stock for a fair value of $300 thousand, half of which vest immediately and the balance vesting in equal installments on June 30, 2022 and June 30, 2023 pursuant to a two-year independent contractor consulting agreement with the Company. Mr. Gardner agreed to cancel options to purchase 8,300 shares that were scheduled to expire on December 21, 2026. Additionally, the Company accelerated the vesting of 40,000 restricted shares held by Mr. Gardner that were scheduled to vest in August 2021. Payments and vesting of restricted stock awards under the agreement will be accelerated upon Mr. Gardner's death or termination other than for cause.

On April 15, 2021, the board of directors granted the Company's Chief Financial Officer, an award of 5,000 shares of restricted stock with a fair value equal to $21 thousand, half of which vested on April 15, 2021, and half of which vests on April 15, 2022. The Company withheld and retired 750 shares of common stock in order to satisfy her U.S. payroll tax withholding obligations.

In April 2021, the Company granted an employee, an award of 5,000 shares of restricted stock with a fair value of $21 thousand, vesting annually over a two-year period from the date of grant.

Effective March 1, 2021, the Company amended and restated the Consulting Agreement it has with its Chief Operating Officer. The amended and restated agreement provides among other things, an annual fee of $214,400, a commission of 2% on all gross sales above $500 thousand, the issuance of 10,000 restricted stock awards and the extension of the expiration date for options previously granted to him to the five-year anniversary of the agreement’s effective date. As a result, 80,000 options previously granted to the Company’s Chief Operating Officer now expire on March 1, 2026. The Company applied FASB ASC 718, “Compensation—Stock Compensation,” modification accounting and expensed a change in fair value of $75 thousand.

On February 9, 2021, the Company entered into an underwriting agreement with Maxim Group LLC (“Maxim”), as the representative of several underwriters pursuant to which the Company agreed to issue and sell to the underwriters in an underwritten public offering an aggregate of 1,650,000 shares of common stock, of the Company at a public offering price of $5.30 per share, less underwriting discounts and commissions. The public offering closed on February 12, 2021 resulting in gross proceeds of $8.7 million and net proceeds of $8.1 million, less underwriting discounts and commissions and other offering expenses.

In connection with the public offering that closed on February 12, 2021, the Company granted Maxim a 45-day option to purchase up to 247,500 shares of common stock to cover over-allotments, if any. On February 19, 2021 Maxim partially exercised its over-allotment option to purchase 100,000 shares of common stock for gross proceeds of $530 thousand and net proceeds of $493 thousand, less underwriting discounts and commissions. The total net proceeds from the public offering including partial exercise of the overallotment option, were $8,447 thousand.

On June 17, 2020, the Company entered into an Underwriting Agreement (the “Underwriting Agreement”) with Maxim Group LLC, as representative of the underwriters (the “Representative”), for an underwritten public offering (the “Offering”) of an aggregate of 2,173,913 unitsUnits consisting of one share (each a “Share” and collectively, the “Shares”) of the Company’s common stock, and a warrant to purchase one share of common stockCommon Stock (each a “Warrant” and collectively, the “Warrants”) at an exercise price equal to $4.60 per share of common stock.Common Stock. The public offering price was $4.60 per unitUnit and the underwriters agreed to purchase 2,173,913 unitsUnits at an 8.0% discount to the public offering price. The Company granted the Representative a 45-day option to purchase up to 326,087 shares of common stockShares and/or warrants to purchase up toWarrants for 326,087 shares of common stockCommon Stock to cover over-allotments, if any. The Offering closed on June 22, 2020 resulting in gross proceeds of $10.0 million, before deducting underwriting discounts and commissions and other offering expenses. Also, on June 22, 2020, the Representative partially exercised its over-allotment option to purchase 50,000 shares of common stockShares and 325,987 warrantsWarrants for gross proceeds of $232,597.$232,759. The net proceeds in relation to the Offering and including the over-allotment option were $9,023,046. The$9,023 thousand. Additionally, the Company issued 30,000 shares of common stock for consulting services related to the Offering, with a fair value of $124,800 accounted for in Additional Paid in Capital and included in the accompanying Statement of Balance Sheets. Additionally, the Company issued 888 shares of common stock, with a fair value of $3,614, to its non-exclusive financial advisor and placement agent as commission for units purchased by an investor in the Offering.

Of the 2,173,913 unitsUnits purchased in the Offering, 17,800 unitsUnits were purchased by two directors of the Company.

Pursuant to the Underwriting Agreement, the Company agreed to issue to the Representative, as a portion of the underwriting compensation payable to the Representative, warrants to purchase up to a total of 173,913 shares of common stockCommon Stock (the “Representative’s Warrants”). The Representative’s Warrantswarrants are exercisable at $5.06 per share, are initially exercisable 180 days after the effective date of the Offering and have a term of three years from their initial exercise date. See Note 8 – Stock Options, Restricted Stock and Warrants.

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In connection to the closing of the Offering and the related automatic conversion of the 2020 Debentures (as defined below) the Company issued 637,513 shares of common stock related to the principal amount outstanding of $1,992,000 and interest expense of $60,802 and issued 179,200 shares of common stock related to the cancellation of the 2020 Warrants (see Note 5 – Convertible Debt).  

In connection to the 2020 Debentures (see Note 5 – Convertible Debt) the Company issued 19,208 restricted shares of common stock to the placement agents in connection with the private placement.

On August 5, 2020, the Company issued restricted stock awards for an aggregate of 230,000 shares of restricted common stock to the Company’s directors in consideration of their years of service to the Company that vest in full one-year from the date of grant, subject to the respective director’s continued service as member of the Board of Directors on the vesting date. During the nine months ended September 30, 2020, $132,682 was expensed related to these services.

Warrants.

In May 2020, the Company rescinded and cancelled an aggregate of 19,401 shares of common stock that the Company had approved for issuance but were not yet issued and outstanding shares.

On April 16, 2020, the Company granted Mr. White a restricted stock award of 37,500 restricted shares of the Company’s common stock in lieu of $150,000 in deferred salary. Of this amount, $119,041 was accrued in prior years, and the remaining amount was expensed in payroll expenses included in the accompanying Statement of Operations. The restricted stock award vests in full one-year from the date of grant, subject to Mr. White’s continued services as an officer and employee of the Company on the vesting date.

On March 15, 2019, we engaged an advisor to provide consulting services under an Investor Relations and Advisory Agreement (the “Agreement”). Pursuant to the Agreement, we agreed to pay in advance of services a monthly fee of $5,000 in shares of restricted common stock to the consulting firm for consulting services. The number of shares to be issued will be calculated based on the closing price of our common shares on the first day of each month or the preceding day, if the first were to fall on a weekend or holiday. However, if the stock were to trade below $4.60 per share, the calculation would be based on $4.60. The shares shall not have registration rights, and the shares may be sold subject to Rule 144. During the nine months ended September 30,6, 2020, the Company issued 6,596 sharescompleted the offering of restricted common stock for a total expense of $29,388 related to these services. During the nine months ended September 30, 2019, the Company issued 3,426 shares of restricted common stock for a total expense of $26,167 related to these services.

On May 29, 2019, a former director completed a cashless exercise of 4,000senior secured convertible debentures (the “2020 Debentures”) and warrants and was issued 1,435 sharesraised $1,992,000 in gross proceeds from the sale of the Company’s common stock. See Note 8 – Stock Options, Restricted Stock2020 Debentures and Warrants.

Duringwarrants. In connection to the nine months ended September 30, 2019,2020 Debentures, the Company issued 12,000 shares of restricted common stock for a total expense of $77,000 related to consulting services.

On September 19, 2019, in connection with the Bridge Financing, the Company issued a total of 20,00019,208 restricted shares of common stock during the three and six months ended June 30, 2020.

Shares Held in Treasury

As of June 30, 2021 and December 31, 2020, the Company had 74,527 and 7,011 shares, respectively, held in treasury with a fair value of $70,100. See Note 5 – Convertible Debt.

During the nine months ended September 30, 2019, the Company granted a total of 24,000 restricted stock awards to five directors of the Company for their services. The restricted stock awards vested in equal quarterly installments over a one-year period. On February 27, 2019, three directors resigned fromapproximately $341 thousand and $113 thousand, respectively. In November 2020, the Company’s Board of Directors effective March 1, 2019. This resulted inapproved a cancellation of 6,400 shares relatedshare repurchase program for up to the portion$1.5 million of the unvested restrictedCompany’s common stock awards these directors had received.until August 16, 2021. Under this program, 67,516 shares were repurchased in the open market during the six months ended June 30, 2021. On September 18, 2019 a director resigned fromAugust 12, 2021, the Company’s Board of Directors, effective immediately, resulting in a cancellation of 2,400 relatedCompany extended its share repurchase program to expire on August 16, 2022. All other terms and conditions remained the portion of unvested restricted stock awards this director had received.same.

NOTE 8 – STOCK OPTIONS, RESTRICTED STOCK AND WARRANTS

During 2013, the Company adopted the 2013 Omnibus Equity Compensation Plan (the “2013 Plan”). Under the 2013 Plan, the Company is authorized to grant awards of stock options, restricted stock, restricted stock units and other stock-based awards up to an aggregate of 400,000 shares of common stock. The 2013 Plan is intended to permit certain stock options granted to employees under the 2013 Plan to qualify as incentive stock options. All options granted under the 2013 Plan, which are not intended to qualify as incentive stock options are deemed to be non-qualified stock options.

On November 14, 2017, the Executive Committee of the Company’s Board of Directors adopted the 2017 Equity Incentive Plan (the “2017 Plan”) whichthat covered the potential issuance of 260,000 shares of common stock. The 2017 Plan provided that directors, officers, employees, and consultants of the Company were eligible to receive equity incentives under the 2017 Plan at the discretion of the Board or the Board’s Compensation Committee.

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On August 10, 2020, the Company’s Board of Directors adopted the 2020 Equity Incentive Plan (the “2020 Plan”), subject to stockholder approval, which coversauthorizes the potential issuance of up to 1,069,110 shares of common stock. On September 30, 2020, the Company’s stockholders approved the 2020 Plan, and upon such approval the 2020 Plan became effective and the 2017 Plan was terminated. Shares of common stock underlying existing awards under the 2017 Plan may become available for issuance pursuant to the terms of the 2020 Plan under certain circumstances. Employees and non-employee directors of the Company or its affiliates, and other individuals who perform services for the Company or any of its affiliates, are eligible to receive awards under the 2020 Plan at the discretion of the Board of Directors or the Board’s Compensation Committee.

The 2020 Plan is administered by the Compensation Committee which determines the persons to whom awards will be granted, the number of awards to be granted and the specific terms of each grant, including the vesting thereof, subject to the provisions of the plan.

In connection with incentive stock options, the exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of the grant (or 110% of the fair market value in the case of a grantee holding more than 10% of the outstanding stock of the Company). The aggregate fair market value (determined at the time of the grant) of stock with respect to which incentive stock options are exercisable for the first time by any individual during any calendar year (under all plans of the Company and its affiliates) shall not exceed $100,000,$100 thousand, and the options in excess of $100,000$100 thousand shall be deemed to be non-qualified stock options, including prices, duration, transferability and limitations on exercise. The maximum number of shares of common stock that may be issued under the 2020 Plan pursuant to incentive stock options may not exceed, in the aggregate, 1,000,000.

The Company has issued non-qualified stock options pursuant to contractual agreements with non-employees. Options granted under the agreements are expensed when the related service or product is provided.

On April 15, 2021, Norman Gardner agreed to cancel options to purchase 8,300 shares that expire on December 21, 2026 in connection with his retirement agreement.

No stock options were granted during the six months ended June 30, 2021.

Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value represent management’s best estimates and involve inherent uncertainties and judgements.

The following table presents the weighted-average assumptions used to estimate the fair value of the stock options granted during the nine months ended September 30, 2020:

Risk Free Interest Rate  1.77%
Expected Volatility  452.96%
Expected Life (in years)  4.4 
Dividend Yield  0%
Weighted average estimated fair value of    
options during the period $4.62 

  Options Outstanding 
        Weighted -    
        Average  Aggregate 
        Remaining  Intrinsic 
     Weighted-  Contractual  Value 
  Number of  Average  Term  (in 000’s) 
  Shares  Exercise Price  (in years)  (1) 
Balance as of December 31, 2019 358,271  $5.91       
             
Granted  133,000   3.85        
                
Forfeited/Cancelled/Expired  (17,500)  29.07        
                
Balance as of September 30, 2020  473,771   $4.48        
                
Exercisable as of September 30, 2020  436,771   $4.42   4.0  $49 

Options Outstanding

 

Weighted -

 

Average

Aggregate

 

Remaining

Intrinsic

 

Weighted-

Contractual

Value

 

Number of

Average

Term

(in 000’s)

 

Shares

Exercise Price

(in years)

(1)

 

Balance as of December 31, 2020

473,771

$

4.48

 

 

 

Granted

0-

0-

 

 

 

Forfeited/Cancelled/Expired

(8,300

)

9.72

 

 

 

Balance as of June 30, 2021

465,471

$

4.38

 

 

 

Exercisable as of June 30, 2021

465,471

$

4.38

4.38

$

329

 

 

(1)

(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.

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The following table summarizes the activities for the Company’s unvested stock options for the ninesix months ended SeptemberJune 30, 2020:2021:

   Unvested Options 
         
   Weighted - Average     
   Number of Unvested   Grant Date 
   Options   Exercise Price 
Balance as of December 31, 2019  20,000  $9.75 
         
Granted  133,000   3.85 
         
Vested  (116,000)  4.44 
         
Balance as of September 30, 2020  37,000  $5.19 

14

Effective January 2020, the Company awarded its Chief Financial Officer incentive stock options exercisable for 4,000 shares

Table of common stock with an exercise price of $3.505 vesting quarterly over a one-year period and expiring on January 7, 2025 with a fair value of $13,716.Contents

Effective January 2020, the Company awarded four directors non-qualified stock options exercisable for 40,000 shares in the aggregate, for services rendered to the Company in 2019 with an exercise price of $3.505 vesting immediately and expiring on January 7, 2025 with a fair value of $137,160.

Effective January 2020, the Company awarded five of its directors non-qualified stock options exercisable for 50,000 shares in the aggregate, for services to be rendered to the Company in 2020 with an exercise price of $3.505 vesting quarterly over a one-year period and expiring on January 7, 2025 with a fair value of $171,451. 

On April 16, 2020, the Company approved a three-year extension of the expiration date for certain options previously granted to Patrick White, the Company’s President and Chief Executive Officer and to Norman Gardner, the Company’s Chairman. As a result, 140,000 options previously granted to Mr. White now expire on August 15, 2025 and 90,000 options previously granted to Mr. Gardner now expire on June 28, 2025. All other terms with respect to the option grants remain the same. The Company applied FASB ASC 718, “Compensation—Stock Compensation,” modification accounting and calculated a change in fair value of $153,913.

On April 16, 2020, the Company awarded a director non-qualified stock options for 3,000 shares of common stock for services rendered to the Company with an exercise price of $4.025 vesting immediately and expiring on April 16, 2025, with a fair value of $11,811.

On May 27, 2020, the Company awarded two directors non-qualified stock options for an aggregate of 8,000 shares of common stock for services rendered to the Company with an exercise price of $5.295 vesting immediately and expiring on May 27, 2025, with a fair value of $41,435.

In August 2020, the Company issued options to purchase of 28,000 shares of common stock, that expire eighteen months from the date of grant and have an exercise price of $4.60, for services performed by two sales consultants, with a fair value of $96,000.

Unvested Options

 

 

 

Weighted - Average

 

Number of Unvested Options

Grant Date

Exercise Price

 

Balance as of December 31, 2020

10,000

$

9.75

 

 

 

Vested

(10,000

)

9.75

 

 

 

Balance as of June 30, 2021

0-

$

0-

 

During the ninethree and six months ended SeptemberJune 30, 2020 and 2019,2021 the Company expensed $642,774$0 and $399,828,$85 thousand, respectively, with respect to stock options.

During the three and six months ended June 30, 2020 the Company expensed $268 and $485 thousand, respectively.

As of SeptemberJune 30, 2020,2021, there was $70,871$0 unrecognized compensation cost related to outstanding stock options expected to vest over the weighted average of 0.3 years.

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options.

The following table summarizes the activities for the Company’s warrants for the ninethree months ended SeptemberJune 30, 2020:2021:

  Warrants Outstanding 
   Number of
Shares		   

Weighted-

Average

Exercise

Price

   

Weighted -

Average

Remaining

Contractual

Term

in years)

   

Aggregate

Intrinsic

Value

(in 000's)
(1)

 
Balance as of December 31, 2019  445,252  $15.39         
                 
Granted  3,787,991   4.97         
                 
Cancelled/Forfeited  (454,000)  7.50         
                 
Balance as of September 30, 2020  3,779,243  $5.89   4.1     
                 
Exercisable as of September 30, 2020  3,605,330  $5.93   4.3  $- 

Warrants Outstanding

Number of

Shares

Weighted-

Average

Exercise

Price

Weighted -

Average

Remaining

Contractual

Term in years)

Aggregate

Intrinsic

Value

(in 000's) (1)

 

Balance as of December 31, 2020

3,779,243

$

5.89

 

 

 

Granted

0-

0-

 

 

 

Balance as of June 30, 2021

3,779,243

$

5.89

3.5

 

 

 

Exercisable as of June 30, 2021

3,779,243

$

5.89

3.5

$

0-

 

 

(1)

(1)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock price of $3.22$4.22 for our common stock on SeptemberJune 30, 2020.2021.

The Company issued three-year 2020 Warrants to purchase 498,000 shares of common stock to the purchasers of the 2020 Debentures (see Note 5 – Convertible Debt). The 2020 Warrants have an exercise price of $7.50 per share, and may be exercised cashlessly if the Company fails to maintain an effective registration statement at any time beginning six months after issuance. Of this amount, 2020 Warrants to purchase 82,500 shares were issued to four directors and an entity in which one officer of the Company is a majority owner and co-manager.

On June 22, 2020, 2020 Warrants to purchase 448,000 shares of common stock were cancelled (including 2020 Warrants for 82,500 shares that had been issued to four directors and an entity in which one officer of the Company is a majority owner and co-manager) and warrants to purchase 573,479 shares of common stock were issued upon closing of the Offering and conversion of the 2020 Debentures, with an exercise price of $4.60 and an expiration term of five years. Of this amount, warrants to purchase 105,567 of shares of common stock were issued to four directors and an entity in which one officer of the Company is a majority owner and co-manager.

As a result of the Offering, the per share exercise price for the outstanding but unexercised 2020 Warrants to purchase shares of common stock related to the two warrant holders who did not cancel their 2020 Warrants, has been adjusted from $7.50 to $4.59 and the number of shares of common stock underlying the outstanding but unexercised 2020 Warrants increased from an aggregate of 50,000 to 81,700 shares of common stock.

On May 27, 2020, the Company awarded four non-employees warrants to purchase an aggregate of 11,000 shares of common stock for services rendered to the Company with an exercise price of $5.295 vesting immediately and expiring on May 27, 2023, with a fair value of $53,835.

On June 18, 2020, in connection with the Offering, the Representative provided a partial exercise notice of the over-allotment option to purchase 50,000 additional shares of common stock and additional warrants to purchase 325,987 shares of common stock.

On June 22, 2020, in connection with the Offering, the Company issued warrants to purchase 2,499,900 shares of common stock, with a five-year term and an exercise price of $4.60, including the additional warrants pursuant to the over-allotment option exercise noted above.

In connection with the Offering, on June 22, 2020 the Company issued warrants to the Representative to purchase up to a total of 173,913 shares of common stock. The Representative’s Warrants are exercisable during the three-year period commencing 180 days from June 22, 2020. The Representative’s Warrants are exercisable at a per share price equal to $5.06 per share with a fair value of $522,515 netted in Additional Paid-In Capital included in the accompanying Balance Sheets.

NOTE 9 – CONCENTRATIONS

Revenue

For the three and six months ended SeptemberJune 30, 2020,2021, three customers represented 99%97% and 84% of revenues. For the nine months ended Septemberrevenues, respectively.

Accounts Receivable

As of June 30, 2020,2021, two customers represented an aggregate of 93% of revenues.

Accounts Receivable

As of September 30, 2020, two customers represented 89%94% of accounts receivable.

NOTE 10 – SUBSEQUENT EVENTS

On October 12, 2020, pursuant to the 2020 Plan, the Company granted to eachIn August 2021, upon vesting of the Company’s Chief Financial Officer, acting Chief Operating Officer, and Chief Technology Officer 5,000 restricted stock units that vested immediately and converted into shares of the Company’s common stock.

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On October 12, 2020, the Company and each of Patrick White, the Company’s President,awards held by our Chief Executive Officer, and member of the Board, and Norman Gardner, the Company’s Chairman, entered into amendments to their respective employment and consulting agreement. The amendments increased Mr. White’s annual base salary to $280,000 and Mr. Gardner’s annual consulting fee to $175,000, effective immediately. In addition, pursuant to the amendments, the term of the employment agreement and consulting agreement will be extended for a period of not less than 18 months from and after a Change of Control (as the term is defined in the agreements), and their respective surviving spouse or estate will be entitled to certain payments upon his death following a Change of Control. All other material terms of the agreements remained the same.

On October 26, 2020, the Company entered into an amendmentwithheld and retired 18,720 shares of common stock in order to a settlement agreement entered into on September 29, 2020, with our former Chief Executive Officer providing for a lump sum payment of $85,000 in full satisfaction of all claims made. This amount has been recorded as of September 30, 2020 under Accounts Payable and Other Accrued Expenses, included in the accompanying Balance Sheets.

satisfy his U.S. payroll tax withholding obligations.

In October 2020,August 2021, the Company issued 1,087 shares of restricted common stock in relation to investor relation services.

In November 2020,July 2021, the Company issued 1,087 shares of restricted common stock in relation to investor relation services.

On August 12, 2021, the Company extended its share repurchase program to expire on August 16, 2022. All other terms and conditions remained the same.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 

 

The information in this Management’s Discussion and Analysis should be read in conjunction with the accompanying unaudited condensed financial statements and notes.

 

Cautionary Note Regarding Forward-Looking Statements

This report includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts contained in this report, including among others, our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements.

 

Our actual results and financial condition may differ materially from those express or implied in such forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

  

·the ongoing coronavirus (“COVID-19”) pandemic;
·our relatively new business model and lack of significant revenues;
·our ability to prosecute, maintain or enforce our intellectual property rights;
·disputes or other developments relating to proprietary rights and claims of infringement;
·the accuracy of our estimates regarding expenses, future revenues and capital requirements;
·the implementation of our business model and strategic plans for our business and technology;
·the successful development of our sales and marketing capabilities;
·the potential markets for our products and our ability to serve those markets;
·the rate and degree of market acceptance of our products and any future products;
·our ability to retain key management personnel;
·regulatory developments and our compliance with applicable laws; and
·our liquidity.

 

For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this report, our Annual Report on Form 10-K for the fiscal year ended December 31, 2019,2020, and our other filings with the Securities and Exchange Commission (the “SEC”). All forward-looking statements in this report are made only as of the date hereof or as indicated and represent our views as of the date of this report or as indicated.report. 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, except as required by law.

 

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Overview

 

VerifyMe, Inc. (“VerifyMe,” the “Company,” “we” “us” or “us”“our”) is a technology solutions provider specializing in brand protection and supply chain functions such as counterfeit prevention, authentication, serialization, consumer engagement, track and trace features for labels, packaging and products. The Company was formed in Nevada on November 10, 1999. Until 2018, we were primarily engaged in the research and development of our technologies. We began to commercialize our covert luminescent pigment, RainbowSecure®, in 2018, and we also developed the patented VeriPAS™ software system in 2018 whichthat covertly and overtly serializes products to remotely track a product’s “life cycle” for brand owners. WeIn April 2021 VerifyMe launched a rebranding and messaging campaign to more fully market all of our products and services to include a new website and marketing materials. RainbowSecure® has been renamed to VerifyInkTM and when coupled with VerifyMe Authenticate™ and VerifyMe Track & Trace™ we believe VeriPAS™ isit provides the only invisible covert serialization and authentication solution deployed through variable digital printing on HP Indigo (a division of HP, Inc.) printing systems with asystems. Our patented smartphone tracking and authentication system. VeriPAS™authenticator device, VerifyAuthenticatorTM, is capable of fluorescing, decoding, and verifying invisible RainbowSecure®VerifyInkTM printed codes in the field – designed to allowfield. This product allows investigators to authenticate product quickly and efficiently authenticate product throughout the distribution chain, including warehouses, ports of entry, retail locations, and product purchased over the Internet for inspection and investigative actions.internet. This technology is coupled with a secure cloud-based track and trace software engine whichthat allows brands and investigators to see where products originate and where they are deployed with geo locationmonitor the complete supply chain from product origination to the end user utilizing geolocation mapping and intelligent programable alerts. Brand owners access the VeriPAS™VerifyMe Authenticate™ and VerifyMe Track & Trace™ software through a web portal over the Internet.internet. Brand owners can then set rules of engagement, and when coupled with overt serialized codes, gather rich business intelligence, establish marketing programs for customer engagement and control, and monitor and protect their products’ “life cycle.” We have derived minimal revenue from our VeriPAS™authentication and track and trace software system and have derived limited revenue from the sale of our RainbowSecure®VerifyInkTM, VerifyMe Authenticate™ and VerifyMe Track & Trace™ technology.

 

Our brand protection technologies involve the utilization of invisible and/or color changingand visible inks, which are compatible and printed with modern digital and standard printing presses. The inks may be used with certain printing systems such as digital, offset, flexographic, silkscreen, gravure, inkjet and toner-based laser printers. The inks can be used to print both static and variable images utilizing digital printing presses and third-party digital inkjet systems whichthat are attached to traditional printing presses. Our invisible ink can be used in fixed images, variable images or serialized codes, bar codes or QR codes. We have developed and patented a product whichthat attaches to a smartphone 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.

 

In the areas of authentication and serialization of physical goods, we offer clients the following brand protection security and anti-counterfeit technologies:product lines:

 

RainbowSecure®
•·VeriPASTM serialization, track and trace technologyVerifyMe Authenticate™ for product authentication
VeriPAS™ Smartphone Authenticator
VerifyMe Beeper
VerifyMe® as Authentic® Label
•·VerifyMe® WebTMVerifyMe Track & Trace™ for product supply chain control
·VerifyMe Engage™ for consumer engagement
·VerifyMe Online™ for on-line (web) brand monitoring

 

These four productions lines are powered by one or more of the following technologies:

22·VerifyCode™
Table of Contents·VerifyInk™

·VerifyLabel™
·VerifyChip™
·VerifyMe Online™

 

RainbowSecureVerifyInkTM®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. In 2017, we signed a five-year contract with Indigo Division of HP IndigoInc. (“HP Indigo”) to print this technology on packages and labels on their 6000 series presses.  Our technology has been tested and approved by HP Indigo 6000 series presses and more recently we have successfully run pilot production on the 7800 press which runswas qualified on HP Indigo’s newer6900 series 4 platform, and will open up sheet-feedpresses. In addition, we successfully trialed production on their 7900 press series used for sheet-fed products like folded cartons and plastic cards. HP Indigo informed us that other press models will be qualified once clients formally request in writing the need for qualification for current unqualified models. In addition, HP Indigo is producing sample secure government products such as tax stamp samples for governments with our VerifyInkTM invisible ink technology. HP Indigo has showcased these samples at various global government and print service providers trade shows. Customers can use a handheld beeping device, our VerifyMe Beepers,VerifyChecker™, tuned to authenticate the unique frequency of our RainbowSecure®VerifyInkTM invisible ink, to broadcast a beeping sound to confirm the authenticity when placed on products, labels and packaging containing our RainbowSecure®VerifyInkTM ink. VerifyMe BeepersVerifyChecker™ devices are being commercialized and leased to customers, typically for one year. In December 2017, we signed a contract with Micro Focus International PLC (“Micro Focus”)a top tier a strategic partner to use RainbowSecure®VerifyInkTM in their Global Product Authentication, Trackcloud-based authentication and Trace (GPAS) system (software).track and trace system. The technology also features a unique double layer of security whichthat remains entirely covert at all times and provides licensees with additional protection. Under the contract with Micro Focus,our strategic partner, we have a re-seller agreement where we sell the combined Micro Focus GPAStheir cloud-based authentication and track and trace system with our RainbowSecure®VerifyInkTM identifier under our own trademarked name, VeriPAS™VerifyCode™. In May 2019, we entered into a strategic partnership with INX, International Ink Company, the third largest producer of inks in North America, to co-develop inkjet inks to be used for inkjet printing in combination with high speed, high volume label and packaging printing presses. In 2020, INX, in conjunction with Print craft Inc., successfully-tested an appeal garment containing our VerifyInkTM ink. This secured garment survived the 50 wash and dry cycle test. We are now in the commercialization phase of this technology and in conjunction with INX and Print craft Inc are broadly marketing to major brands. In February 2021, INX completed the development of a version of our VerifyInkTM security ink for metal and plastic objects and INX is now co-marketing the new security ink to its global clients. The specially formulated inks will enable these printing presses to print our RainbowSecure®VerifyInkTM invisible ink technology, which includes our variable VeriPAS™VerifyCode™ serialization, track and trace technology. We believe RainbowSecure®VerifyInkTM is particularly well-suited to closed and controlled environments that want to verify transactions within a specific area, as well as labels, packaging, textiles, plastics and metal products whichthat need authentication. We have derived limited revenue from the sale of our RainbowSecure®VerifyInkTM technology.  

 

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VeriPASVerifyMe Track & Trace™ ™supply chain serialization, track and trace technology combines the covert identifier of RainbowSecure®VerifyInkTM printed as a dynamic code and an overt dynamic code, VerifyCode™, with the Micro Focus Trackour strategic partner’s cloud-based authentication and Trace software whichtrack and trace system that provides brand owners geographical business intelligence on counterfeiting and diversion as well as the ability to authenticate labels, packaging and products. Using information from a smartphone screen, our VeriPASVerifyCodeTM technology, can provide authentication and data submission information. A customer or end-user can scan information from a product label or QR code and send it to the cloud where our VeriPASTMVerifyMe Authenticate™ and VerifyMe Track & Trace™  software can verify authenticity of the product, as well as track and trace the product from production through delivery. Certain clients are in the testing stage with this product. Revenue for this product was received for the first time in 2020 and a reorder was received in the first quarter of 2021. To date, we have recognized minimal revenue from our VeriPAS™ software.this technology.

 

VeriPAS™ Smartphone AuthenticatorVerifyAuthenticatorTM technology is a piece of patented hardware with a built-in lightingillumination system and software that scans invisible RainbowSecure®VerifyInkTM codes. Product investigators attach their smartphone to this device whichthat then reveals the hidden RainbowSecure®VerifyInkTM images on the smartphone screen whichthat are then sent to the VeriPASTMVerifyMe Authenticate™ and VerifyMe Track & Trace™  software in the cloud for authentication and data submission. These devices have been commercialized and are being leased to customers. Leases are typically one year in length.length and are auto-renewable. Revenue from this product is at an initial stage and minimal at this time.

 

VerifyMe Beeper VerifyMeChecker™technology is an authentication tool whichthat we are marketing to customers in conjunction with our RainbowSecure® ink pigment.VerifyInkTM. The VerifyMe BeeperVerifyChecker™ is a handheld beeping device that is tuned to authenticate the unique frequency of our RainbowSecure®VerifyInkTM invisible ink and will broadcast a beeping sound to confirm the authenticity when placed on products, labels and packaging containing our RainbowSecure® ink.VerifyInkTM . The VerifyMe BeeperVerifyChecker™ is designed for use by customers who desire instant authentication on items, such as event tickets at an entry gate. Our customized beeperchecker will only positively identify a product bearing our unique anti-counterfeit solution. This technology is being commercialized and leased to customers, typically for one year. year auto-renewable terms. We are in the process of upgrading the functionality of this device so that it wirelessly connects to a mobile phone allowing authentication attempts to be recorded in the cloud by geo-location, inspectors names, and with time and date stamp. We expect to be able to commercialize this update in Q3 2021.

 

VerifyMe® as AuthenticVerifyLabel™ ® labels are dual-purpose pre-printed labels with a visible serialized QR code for consumer scanning purposes, and an invisible serialized IR code for inspector scanning, authentication and tracking purposes.  This label can be either a standard label or designed with tamper evident features. It was developed to provide covert brand protection for on-linee-commerce retailers while enablingto enable consumer product authentication, promotion, engagement and education through the visible serialized QR code. This technology has been successfully launched with tamper evident features and is being tested by prospective customers.used in personal protective equipment and in the cannabis sector, without the covert component.

 

VerifyMe® WebOnline™TM includes, through our collaboration with Corsearch, Inc.,a strategic partner, a brand clearance and protection leader, technologies and services that better enable customers to effectively tackle counterfeit websites, domains and e-commerce platforms offering counterfeit products. To date, we have not derived revenue from this technology.

 

We believe that our brand protection security technologies, coupled with our contract with HP Indigo, can be used to 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 products whichthat physically harm consumers. Our covert technologies give brand owners the ability to control, monitor and protect their products life cycle. Also, our technologies allow brand owners to prove whether the product causing an issue is authentic or counterfeit.

 

Our digital technologies are contained in a web portal known as VerifyMe Authenticate™ and VerifyMe Track & Trace™, utilizing our strategic partner’s centralized cloud- based authentication and track and trace system platform. Utilizing our strategic partner’s software team, we have embedded our patented invisible code system into their cloud-based authentication track and trace platform that allows inspectors to utilize our smartphone attachment to read unique invisible, serial codes, visible barcodes, NFC, RFID and for every label, package and or product into the VerifyMe Authenticate™ and VerifyMe Track & Trace™, cloud-based software portal. GPS locations of the scans of inspectors and end users are captured for the brand owner to monitor. Our cloud- based authentication and track and trace platform is agnostic to the type of input codes used so the solution can be deployed with our covert VerifyCodesTM, overt VerifyCodesTM printed in any barcode symbology, NFC, RFID and can be integrated into SAP.

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In addition, we have the ability to wirelessly broadcast signals from our VerifyCheckerTM device when our VerifyInkTM is found on a product or label. This signal then triggers a GPS location to be recorded in the cloud-based VerifyMe Authenticate™ and VerifyMe Track & Trace™ software application. Together, the handheld light sensor device (VerifyCheckerTM) and the smartphone attachment authenticator (VerifyAuthenticatorTM) provide the brand owner the ability to monitor their inspector team activities thru the VerifyMe Authenticate™ and VerifyMe Track & Trace™ web portal.

Business Intelligence and Consumer Engagement

A key feature of our digital technologies is the ability for the brand owner to gather rich business intelligence and engage with the consumer using our authentication test as the initial contact with the consumer. For example, consumers can simply scan a visible unique code generated by the VerifyCode™ web portal that is printed on labels and packages using their smartphone camera. Once the consumer scans the code, an instant authenticity check is made using algorithms stored in the cloud to determine the products authenticity on a multiple of factors. Once this test is completed, the brand owner can then engage with the consumer by providing marketing materials, videos, discount coupons, product specifications, or cross sell other products with this consumer engagement software we provide to the brand owner in the cloud-based VerifyCode™ software.

 

COVID-19 Pandemic

 

The COVID-19 pandemic continues to disruptdisrupted businesses and affectaffected production and sales across a range of industries, as well as causecaused volatility in the financial markets.markets, which negatively impacted our results of operations for the first half of 2021. The full extent of the impact of the COVID-19 pandemic on our customer demand, sales and financial performance will depend on certain developments, including, among other things, the continued duration and spread of the outbreak, the effectiveness of vaccines against new variants, the availability of vaccines and vaccination rates, , and the impact on our customers and employees, all of which are uncertain and cannot be predicted. The COVID-19 pandemic has negatively impacted and could further negatively impact our sales and results of operations. Please see Part II—Item 1A. Risk Factors1A, “Risk Factors- Risks Relating to the COVID-19 Pandemic” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and our other filings with the SEC in this reportReport for additional information regarding certain risks associated with the pandemic.

 

The COVID-19 pandemic has caused a major spikean increase in demand for safety products such as masks and gloves, COVID-19 test kits, medications and vaccines to treat the virus, which we believe has further caused an increase in counterfeit products. Our suite of technology solutions for global manufacturers, distributors and sellers are designed to allow consumers to prove authenticity and we have proactively reached out to global manufacturers who are seeking to provide their customers authenticity in their products. We believe we have a dynamic management and sales team in place with the ability to seamlessly work remotely to minimize any operational disruption.

 

In connection with the COVID-19 pandemic,After an approximately one-year COVD-19 related hiatus we have recently begun attending sales conferences and other in-person sales eventsinitiatives. Since we have been curtailed. Thisrecently begun face to face sales presentations and trade shows we are experiencing a small increase in travel related costs versus the previous 12 months. We expect these travel related costs to grow which should be offset by increased sales activity. VerifyMe has resultedcontinued to be aggressive in regards to sales and marketing efforts as we have completed a reduction of our sales-related transportation costsnew website which is generating new leads and limited our in-person sales efforts. However, during these challenging times, we have expanded our sales and marketing team and made changes toforce. We also have started our first social media branding strategy.advertising campaign. New leads are being generated due to these actions. We continue to work with our sales representatives to look for alternative ways to communicate effectively and promote sales both with our customers and potential customers.

 

Further, we anticipate that as a result of the continued COVID-19 pandemic, our customers may still require that their programs be cancelled, delayed or reduced. We will continue to work in partnership with our customers to continually assess any potential impacts and opportunities to mitigate risk.

 

SPAC Investment

On July 6, 2021, we acted as the co-sponsor for the initial public offering of G3 VRM Acquisition Corp, a special purpose acquisition company, or SPAC, through a contribution into G3 VRM Holdings LLC, or the Sponsor Entity. The Sponsor Entity holds founder shares equal to 20% of the shares underlying the Units issued in the SPAC IPO (2,446,500 founder shares, net of up to 218,500 founder shares subject to forfeiture depending on the extent to which the underwriters’ over-allotment option is exercised, and 210,000 founder shares transferred to the officers and certain directors of the SPAC), plus 516,280 shares underlying Private Placement units purchase by the Sponsor Entity in connection with the SPAC’s IPO. The closing of the IPO of 10,626,000 Units, including 626,000 Units pursuant to the partial exercise of the underwriter’s over-allotment, generated gross proceeds of $106,260 thousand. As co-sponsor, we indirectly, through the Sponsor Entity, beneficially own approximately 9.42% of the outstanding shares of G3 VRM Acquisition upon consummation of the IPO; which are subject to forfeiture upon certain conditions and restrictions on transfer.

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As of June 30, 2021, we have accounted for the Sponsor Entity as an equity investment with a carrying value of $11 thousand. Upon effectiveness of the IPO registration statement on June 30, 2021, we and the co-sponsor each transferred $2,713 thousand, for an aggregate of $5,425 thousand, to the Sponsor Entity pursuant to the Private Placement agreement to be transferred to the SPAC upon closing of the IPO, including up to $225 thousand each, or an aggregate of $450 thousand, subject to the underwriters’ over-allotment option.

We believe our sponsorship of the SPAC will allow us to pursue an equity interest in larger companies and add value without diluting the equity interests of our shareholders.

Results of Operations

 

Comparison of the three months ended SeptemberJune 30, 20202021 and 20192020

 

The following discussion analyzes our results of operations for the three months ended SeptemberJune 30, 20202021 and 2019.2020.

 

Revenue

 

Revenue for the three months ended SeptemberJune 30, 20202021 was $100,697, an 79%$124 thousand, a 65% increase as compared to $56,225$75 thousand for the three months ended SeptemberJune 30, 2019. 2020. The increase in revenue primarily related to an increase inincreased use of our security printing with ourand authentication serialization technology for two large global brand owners.technology.

 

Gross Profit

 

Gross profit for the three months ended SeptemberJune 30, 20202021 was $82,076,$98 thousand, compared to $47,754$62 thousand for the three months ended SeptemberJune 30, 2019.2020. The resulting gross margin was 82%79% for the three months ended SeptemberJune 30, 2020,2021, compared to 85%83% for the three months ended SeptemberJune 30, 2019.2020. The decrease in our gross profit margin relates to a shift in product mix, with an increase in the use of our secure track and trace serialization technology. We believe our high gross profit margins demonstrate our business model’s ability to generate profitable growth.

 

General and Administrative Expenses

 

General and administrative expenses increased by $221,193$463 thousand to $572,044$895 thousand for the three months ended SeptemberJune 30, 20202021 from $350,851$432 thousand for the three months ended SeptemberJune 30, 2019.2020.  The increase primarily related to increases in publicnon-cash stock-based compensation of $251 thousand, and increased costs associated with being a Nasdaq listed company of approximately $115 thousand, of which $47 thousand related costs, including investor relations and filing fees, and an increaseto our annual meeting of amortization and depreciation expense.shareholders.

 

Legal and Accounting

 

Legal and accounting fees increased by $43,816$20 thousand to $85,793$88 thousand for the three months ended SeptemberJune 30, 20202021 from $41,977$68 thousand for the three months ended SeptemberJune 30, 2019.2020. The increase relatedrelates primarily to an increasethe expansion of our accounting department, partially offset by savings in legal fees.fees during the period.

 

Payroll Expenses

 

Payroll expenses were $108,037$234 thousand for the three months ended SeptemberJune 30, 2020, a decrease2021, an increase of $59,770$9 thousand from $167,807$225 thousand, for the three months ended SeptemberJune 30, 2019.2020. The decreaseincrease related primarily to increases in salaries and number of employees, offset by a decrease in non-cash stock-basedstock based compensation of approximately $67,000 offset by an increase in salary for our Chief Financial Officer effective January 1, 2020.$50 thousand.

 

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Research and Development

 

Research and development expenses were $6,804$12 thousand and $804$0 for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. The increase is primarily due to testing for new applications of our technology.continued development costs associated with commercialized product lines.

 

Sales and Marketing

 

Sales and marketing expenses were $292,470$297 thousand and $148,416$79 thousand for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. The increase primarily related to thean expansion of our sales team and marketing outreach. We expanded our sales team which increased costs by approximately $110,000, charges related to our social media branding strategy of $31,000,address growing domestic and an increase in non-cash stock-based compensation of approximately $18,000, offset by lower costs due to a decrease in trade shows primarily as a result of the COVID-19 pandemic.international opportunities. 

 

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Operating Loss

 

Operating loss for the three months ended SeptemberJune 30, 20202021 was $983,072,$1,428 thousand, an increase in loss of $320,971$686 thousand compared to $662,101$742 thousand for the three months ended SeptemberJune 30, 2019.2020. The increase in loss primarily related to the expansion of our sales team and marketing team in addition tooutreach totaling an increase in public company related costs.

of approximately $215 thousand, and an increase of stock-based compensation of $204 thousand.

Net Loss

 

Our net loss increaseddecreased by $276,281$1,295 thousand to $982,829$1,358 thousand for the three months ended SeptemberJune 30, 20202021 from $706,548$2,653 thousand for the three months ended SeptemberJune 30, 2019.2020. The decrease was primarily due to amortization of debt discount related to our convertible debentures included in interest expense in the second quarter of 2020. The resulting loss per share for the three months ended SeptemberJune 30, 20202021 was $0.18 per diluted share, compared to $0.36$1.04 per diluted share for the three months ended SeptemberJune 30, 2019.2020.

 

Comparison of the NineSix Months Ended SeptemberJune 30, 20202021 and 20192020

 

The following discussion analyzes our results of operations for the ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.

 

Revenue

 

We generated revenue of $267,799$312 thousand for the ninesix months ended SeptemberJune 30, 2020,2021, an 87% increase of 87% compared to $143,158$167 thousand for the ninesix months ended SeptemberJune 30, 2019.2020. The increase in revenue primarily related to an increase in security printing with our authentication serialization technology for two large global brand owners.owners as well as a new application of our technology, in the personal protective equipment space.

 

Gross Profit

 

Gross profit for the ninesix months ended SeptemberJune 30, 20202021 was $219,204,$243 thousand, compared to $112,835$137 thousand for the ninesix months ended SeptemberJune 30, 2019.2020. The resulting gross margin was 78% for the six months ended June 30, 2021, compared to 82% for the ninesix months ended SeptemberJune 30, 2020, compared2020. The decrease in our gross profit margin relates to 79% fora shift in product mix, with an increase in the nine months ended September 30, 2019.use of our secure track and trace serialization technology. We believe our high gross profit margins demonstrate our business model’s ability to generate profitable growth.

 

General and Administrative Expenses

 

General and administrative expenses increased by $602,109$714 thousand to $1,603,837$1,684 thousand for the ninesix months ended SeptemberJune 30, 20202021 from $1,001,728$970 thousand for the ninesix months ended SeptemberJune 30, 2019.2020. The increase resulted primarily from an increaserelated to increases in non-cash charges related to stock-based compensation an increase in publicof $314 thousand, and increased cost associated with being a Nasdaq listed company related costs, including for investor relations and filing fees, and an increase of amortization and depreciation expense.

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approximately $184 thousand.

 

Legal and Accounting

 

Legal and accounting fees increased by $77 thousand to $214 thousand for the ninesix months ended SeptemberJune 30, 2020 were $175,518, compared to $172,6762021 from $137 thousand for the ninesix months ended SeptemberJune 30, 2019. 2020. The increase relates primarily to the expansion of our accounting department, partially offset by savings in legal fees.

 

Payroll Expenses

 

Payroll expenses were $411,562$427 thousand for the ninesix months ended SeptemberJune 30, 2020,2021, an increase of $37,180$108 thousand from $374,382$319 thousand for the ninesix months ended SeptemberJune 30, 2019.2020.  The increase related primarily to an increase in salarythe executive compensation and an increase in the number of our Chief Financial Officer effective January 1, 2020.employees.

  

Research and Development

 

Research and development expenses were $7,206$17 thousand and $7,055$0 for the ninesix months ended SeptemberJune 30, 2021 and 2020, and 2019, respectively. These expenses remained generally flat because, consistentThe increase is due continued development costs associated with our transition to a strategy of commercializing our technology, we conducted only modest research and development relating mostly to testing for new applications of our technology in each period.commercialized product lines.

 

Sales and Marketing

 

Sales and marketing expenses were $414,819$544 thousand and $400,717$122 thousand for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. The increase in sales and marketingprimarily related to thean expansion of our sales team and marketing department offset byoutreach in 2021. We expanded our decreased participation in trade shows that have been cancelled duesales team to the COVID-19 pandemicaddress growing domestic and a decrease of stock-based compensation expense.international opportunities. 

 

Operating Loss

 

Operating loss for the ninesix months ended SeptemberJune 30, 20202021 was $2,393,738$2,643 thousand an increase in loss of $550,015$1,232 thousand compared to $1,843,723$1,411 thousand for the ninesix months ended SeptemberJune 30, 2019.2020. The increase in loss primarily related to an increase in public company related costs, includingnon-cash stock-based compensation, an increase in employee headcount, and sales and marketing outreach to meet our growing number of opportunities, and increased costs associated with ourbeing a Nasdaq listing, an expansion of our sales and marketing department, and an increase in non-cash stock-based compensation that was partially offset by increases in revenue. Operatinglisted company. In addition, operating loss for the ninesix months ended SeptemberJune 30, 20202021 included approximately $999,000$1,007 thousand of non-cash stock-based compensation compared to approximately $672,000$688 thousand of non-cash stock-based compensation for the ninesix months ended SeptemberJune 30, 2019.2020.

 

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Net Loss

 

Our net loss for the ninesix months ended SeptemberJune 30, 20202021 was $4,728,049 an increase$2,573 thousand a decrease in net loss of $2,842,539$1,172 thousand compared to $1,885,510$3,745 thousand for the ninesix months ended SeptemberJune 30, 2019.2020. The increasedecrease in net loss primarily was due to amortization of debt discount related to our convertible debentures included in interest expense.expense the six months ended June 30, 2020. The resulting loss per share for the ninesix months ended SeptemberJune 30, 20202021 was $1.38$0.37 per diluted share, compared to $0.96$1.56 per diluted share for the ninesix months ended SeptemberJune 30, 2019.2020.

 

Liquidity and Capital Resources

 

Our operations used $1,295,235$1,668 thousand of cash during the ninesix months ended SeptemberJune 30, 20202021 compared to $1,355,119$699 thousand during the comparable period in 2019,2020, relating primarily due to an increase in revenues and timing of paymentemployee headcount, an expansion of our accounts payable.sales team and marketing outreach efforts and an increase in expenses related to operating as a Nasdaq listed company.

 

Cash used in investing activities was $74,566$3,125 thousand during the ninesix months ended SeptemberJune 30, 20202021 compared to $108,378$51 thousand during the ninesix months ended SeptemberJune 30, 2019, which was attributed2020. The increase relates primarily to lower capitalized software costs offset by an increasethe deposit for units in costs related to our patentsthe SPAC of $2,713 thousand, reimbursable expenses for the nine months ended September 30, 2020.SPAC of $208 thousand, (see Note 3 – Related Parties in the accompanying notes to the financial statements).

 

Cash provided by financing activities during the ninesix months ended SeptemberJune 30, 20202021, was $10,092,649$8,216 thousand compared to $461,307$10,092 thousand during the ninesix months ended SeptemberJune 30, 2019.  During the nine months ended September 30, 2020, we redeemed the convertible debt issued to two investors in September 2019 for a total of $750,000. In the first quarter of 2020, we raised $1,992,000 in gross proceeds from the 2020 Debentures for net proceeds of $1,747,203. In the second quarter of 2020,2020.  On February 12, 2021, as part of our public offering of an aggregate 1,750,000 shares of common stock, we raised approximately $10,000,000 ingenerated aggregate gross proceeds of $9.3 million and received net proceeds of $9,023,046,$8.4 million, less underwriting discounts and commissions and other offering expenses, including the partial exercise of the over-allotment option resulting in gross proceeds of approximately $232,759.$530 thousand. We believe that our cash and cash equivalents, together with the net proceeds from this offering, will fund our operations through 2025.

 

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On May 17,In November 2020, we entered intoannounced a paycheck protectionshare repurchase program term note for $72,400 (the “SBA Loan”) with PNC Bank, N.A. under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) pursuant to the Paycheck Protection Program (the “PPP”), which is administered by the U.S. Small Business Administration. The SBA Loan is scheduledspend up to mature$1.5 million to repurchase shares of our common stock until August 16, 2021. On August 12, 2021, we extended this program to expire on May 17, 2022, bears interest at a rate of 1.00% per annum and is subject to theAugust 16, 2022. All other terms and conditions applicable to loans administered byremained the U.S. Small Business Administration under the CARES Act. Pursuant to the CARES Act and the PPP, all orsame. To date, 67,516 shares have been purchased for a portiontotal of the principal amount of the SBA Loan is subject to forgiveness so long as, over the eight-week period following the receipt by the Company of the proceeds of the SBA Loan, the Company uses those proceeds for payroll costs, payment on rent obligations, utility costs, and costs of certain employee benefits as per Section 1106 of the CARES Act. As of September 30, 2020, the amount outstanding on the SBA Loan was $72,400 classified as Long-Term Liabilities and included in the accompanying Balance Sheets.$228 thousand.

 

The accompanying financial statements and notes have been prepared assumingWhile we will continue as a going concern. During the year ended December 31, 2019expect revenues to increase, we suffered from recurring losses from operations andexpect continued negative cash flows from operations, resulting in substantial doubt aboutas we incur increased costs associated with expanding our abilitybusiness. We expect to continue as a going concern and a need for, among other things, capital resources. As of December 31, 2019, we had cash of $252,766 and disclosed that our ability to continue as a going concern was predicated on our ability to raise capital and to sustain adequate working capital to finance our operations. During the nine months ended September 30, 2020, we raised working capital to financefund our operations sufficient to mitigate any substantial doubt aboutprimarily through utilization of our ability to continue as a going concern which is more fully described in Note 1 – Summarycurrent financial resources, future revenue, and through the issuance of Significant Accounting Policies in the notes accompanying the financial statements.debt or equity.

 

Off-Balance Sheet Arrangements

 

None.

 

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Critical Accounting Policies and Estimates

 

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. We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial position, results of operations or cash flows.

 

Revenue Recognition

Our revenue transactions include sales of our ink canisters, software, licensing, pre-printed labels, integrated solutions and leasing of our equipment. We account for revenues according torecognize revenue based on the principals established in ASC Topic 606, “Revenue from Contracts with Customers” which established principles for reporting information aboutCustomers.” Revenue recognition is made when our performance obligation is satisfied. Our terms vary based on the nature, amount, timingsolutions we offer and uncertaintyare examined on a case-by-case basis. For licensing of revenue and cash flows arising fromour VerifyInkTM technology we depend on the entity's contracts to provide goods or services to customers.integrity of our clients’ reporting.

 

We apply the following five steps in order to determine the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements:

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·determine the transaction price;
·allocate the transaction price to performance obligations in the contract; and
·recognize revenue as the performance obligations are satisfied.

 

We primarily generate revenue from the sale of printing labels with the Company’s technology. We only apply the five-step model to

agreements when it is probable that we will collect the consideration we are entitled to in exchange for the services or products we

transfer to customers. If collectability is not probable, the performance obligation or sale is deferred and not recognized until

collection is probable or payment is received.

Stock-based Compensation

 

We account for stock-based compensation under the provisions of FASB ASC 718, “Compensation—Stock Compensation,”Compensation”, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees directors and non-employeesdirectors 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 assumptions used in the Black-Scholes option pricing model include risk-free interest rates, expected volatility and expected life of the stock options. Changes in these assumptions can materially affect estimates of fair value stock-based compensation, and the compensation expense recorded in future periods. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method.

 

We account for stock-based compensation awards to non-employees in accordance with ASU No. 2018-07, Compensation – Stock Based Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees.

  

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

Recently Adopted Accounting Pronouncements

 

Recently adopted accounting pronouncements are discussed in Note 1 – Summary of Significant Accounting Policies in the notes toaccompanying the financial statements contained in this report.statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable to smaller reporting companies.Applicable.

 

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ITEM 4. CONTROLS AND PROCEDURES.

 

(a) Evaluation of Disclosure Controls and Procedures. Procedures

Our disclosure controls and procedures are designed to ensure information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the three months ended SeptemberJune 30, 2020,2021, 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 SeptemberJune 30, 2020,2021, 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. We have an inherit material weakness in controls due to the inability to segregatea lack of segregation of duties, becauseresulting from limited staffing in our accounting department. As of May 10, 2021, we are thinly staffed. Based on our financial condition, there are limitations to the level of remediation possible. We have hired a Corporate Financial Controller in an accounting firmeffort to perform certain accounting functions in order to improve controlsaddress this inherit weakness and procedures related to financial reporting.as part of our remediation efforts.

 

(b) Changes in Internal Control Over Financial Reporting. There has beeninternal control over financial reporting

Other than the remediation efforts underway, as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, there were no changechanges in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Qended June 30, 2021 that has materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

 

To address the material weaknesses identified, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

None. 

 

ITEM 1A. RISK FACTORS.

 

For a discussion of the Company’s potential risks or uncertainties, please see “Part I—Item 1A—Risk Factors” and “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20192020 filed with the Securities and Exchange Commission,SEC, and “Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein. Other than as described below, thereThere have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.2020, except as noted below.

 

Our investment in G3 VRM Acquisition Corp. (the “SPAC”) could be lost if the SPAC is unable to consummate a business resultscombination or if its business combination proves unsuccessful.

On July 6, 2021, we acted as the sponsor for the initial public offering of operations and financial condition may be adversely impacted byG3 VRM Acquisition Corp, a special purpose acquisition company, or SPAC, through a contribution into the coronavirus (“COVID-19”) pandemic.SPAC’s sponsor, G3 VRM Holdings LLC, or the Sponsor Entity. The COVID-19 pandemic has negatively affected the U.S. and global economy, resulted in significant travel restrictions, including mandated closures and ordersSponsor Entity holds founder shares equal to “shelter-in-place,” and created significant disruption20% of the financial markets. We are closely monitoringshares underlying the impactUnits issued in the SPAC IPO (2,446,500 founder shares, net of the COVID-19 pandemicup to 218,500 founder shares subject to forfeiture depending on all aspects of our business, including how it will impact our customers, employees, suppliers and sales network. While the COVID-19 pandemic did not have a material adverse effect on our reported results for the nine months ended September 30, 2020, we are unable to predict the ultimate impact that it may have on our business, future results of operations, financial position or cash flows. The extent to which our operations may be impactedthe underwriters’ over-allotment option is exercised, and 210,000 founder shares issued to the officers and certain directors of the SPAC), plus 516,280 shares underlying private placement units purchase by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and actions by government authorities to contain the outbreak or treat its impact. Even after the COVID-19 pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting economic recession or depression. Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to and volatility in the financial markets remain unknown.

The impact of the COVID-19 pandemic may also exacerbate other risks discussed in Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, any of which could have a material effect on us. This situation is changing rapidly and additional impacts may arise that we are not aware of currently.

The COVID-19 pandemic has resulted in prohibitions of non-essential activities, disruption and shutdown of businesses, travel restrictions, and the cancellation and postponement of conferences and in-person meetings, which could negatively impact our sales and results of operations. In response to the COVID-19 pandemic, we have suspended all non-essential travel for our employees, are canceling or postponing attendance at events, are discouraging employee attendance at industry events and limiting in-person work-related meetings. Our employees travel frequently to establish and maintain relationships with our customers and partners, and attend sales-conferences, many of which have been cancelled or postponed. Currently, as a result of the work and travel restrictions related to the ongoing pandemic, substantially all of our sales and services activities are being conducted remotely which might be less effective than in-person meetings. We do not yet know the extent of the negative impact on our ability to attract, serve, or retain customers. Although we continue to monitor the situation and may adjust our current policies as more information and guidance become available, temporarily suspending travel and limitations on doing business in-person could negatively impact our marketing and business development efforts and create operational or other challenges, any of which could harm our business, financial condition and results of operations.

The COVID-19 pandemic may decrease demand for our products and any such decrease in demand would adversely affect our revenues and results of operations. We are unsure what actions our customers may take in response to the COVID-19 pandemic. Health concerns, as well as political or governmental developments in response to COVID-19, could result in economic, social or labor instability or prolonged contractions in the industries in which our customers or partners operate, which could reduce the amount of packaging they print, which would reduce out sales. Furthermore, existing and potential customers may choose to reduce or delay spending in response to the COVID-19 pandemic, or attempt to renegotiate contracts and obtain concessions, which may materially and negatively impact our operating results, financial condition and prospects.

The capital markets have experienced significant volatilitySponsor Entity in connection with the COVID-19 pandemic which may make it harder to access capitalSPAC’s IPO. Our investment in the SPAC through the Sponsor Entity equaled approximately $2,592 thousand, and negatively affect our ability to continue our operationsownership in the Sponsor Entity is 44.4%. The current economic conditions largely caused bySponsor Entity and all holders of founder shares and private placement securities have agreed to waive any right to distributions under the COVID-19 pandemic have had, and likely will continue to havetrust established for the foreseeable future,benefit of the SPAC’s public shareholders. Accordingly, if the SPAC is unable to complete its initial business combination within 12 months from the closing of the IPO (or 15 or 18 months from the closing of the IPO, if we and the co-sponsor extend the period of time to consummate a negative impact on our ability to accessbusiness combination by depositing additional funds into the capital markets,trust account as described in more detail in IPO prospectus), the SPAC will redeem 100% of the public shares for cash, the rights will expire worthless, and thus have a negative impact on our businessthe founder shares and liquidity. The financial markets are experiencing significant volatility, which along with declining markets for equities, could adversely affect our ability to raise capital when needed through the sale of our securities. If these market conditions persist when we need to raise capital, and we areprivate placement securities will be worthless. Even if the SPAC is able to sellcomplete a business combination within the allotted time, if the combined company is unable to maintain adequate results from operations, then our securities, itinvestment in the SPAC could lose value and may not be at a price or on terms that are favorable to us. We cannot predict the occurrence of future disruptions or how long the current conditions may continue.

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We have a small management team and if any of our employees or management suffer COVID-19 related illnesses, our business operations may be materially and adversely affected. The COVID-19 pandemic could disrupt our operations due to absenteeism by infected or ill members of management or other employees because of our limited staffing. COVID-19 related illness could also impact members of our Board of Directors resulting in absenteeism from meetings of the directors or committees of directors, and making it more difficult to convene the quorums of the full Board of Directors or its committees needed to conduct meetings for the management of our affairs.

ultimately become worthless. There can be no assurance that wethe SPAC will be able to comply withcomplete a business combination within the continued listing standards of the Nasdaq Capital Market, a failure of which could result in a de-listing of our common stock. The Nasdaq Capital Market requires that the trading price of its listed stocks remain above one dollar in order for the stock to remain listed. If a listed stock trades below one dollar for more than 30 consecutive trading days, then it is subject to delisting from the Nasdaq Capital Market. In addition, to maintain a listing on the Nasdaq Capital Market, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, and certain corporate governance requirements. If we are unable to satisfy these requirementsallotted time or standards, we could be subject to delisting, which would have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we would expect to take actions to restore our compliance with the listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the minimum bid price requirement, or prevent future non-compliance with the listing requirements.

Provisions of our publicly traded warrants could discourage an acquisition of us by a third party. In addition to certain provisions of our amended and restated articles of incorporation and our amended and restated by-laws, certain provisions of our outstanding warrants could make it more difficult or expensive for a third party to acquire us. The warrants prohibit us from engaging in certain transactions constituting “fundamental transactions” unless, among other things, the surviving entity assumes our obligations under the warrants. These and other provisions of the warrants could prevent or deter a third party from acquiring us even where the acquisition couldbusiness combination will be beneficial to you.successful.

 

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

 

Unregistered SalesIn April 2021, the Company issued 2,174 shares of Equity Securitiesrestricted common stock in relation to investor relation services.

 

In July 2020,June 2021, the Company issued 1,087 shares of restricted common stock in relation to investor relation services.

On August 5, 2020, the Company issued restricted stock awards for an aggregate of 230,000 shares of restricted common stock to the Company’s directors in consideration of their years of service to the Company that vest in full one-year from the date of grant, subject to the director’s continued service as member of the Board of Directors on the vesting date.

On August 17, 2020, the Company issued non-qualified options to purchase an aggregate of 28,000 shares of common stock for services rendered to the Company by two sales consultants with an exercise price of $4.60 vesting immediately and expiring eighteen-months from the date of grant, with a fair value of $96,252.

In August 2020, the Company issued 1,087 shares of restricted common stock in relation to investor relation services.

In September 2020, the Company issued 1,087 shares of restricted common stock in relation to investor relation services..

 

These securities described above were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), as set forth in Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder relative to transactions by an issuer not involving any public offering, to the extent an exemption from registration was required. The recipients of the securities described in the transactions above acquired the securities for their own account for investment purposes only and not with a view to, or for sale in connection with, any distribution thereof.

 

Use of Proceeds

 

On June 17, 2020, our Registration Statement on Form S-1 (File No. 333-234155), as amended (the “Registration Statement”) relating to an underwritten public offering of an aggregate of 2,173,913 units consisting of one share of the Company’s common stock and a warrant to purchase one share of common stock at an exercise price equal to $4.60 per share of common stock was declared effective by the SEC. The cash proceeds from the offering were $9,023,046,$9,023 thousand, net of underwriting discounts and commissions of $800,000approximately $800 thousand and fees and expenses of $456,048.approximately $450 thousand. There has been no material change in the expected use of the net proceeds from the offering, as described in our final prospectus filed with the SEC on June 19, 2020 pursuant to Rule 424(b)(4). As of SeptemberJune 30, 2020,2021 this offering has terminated.

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Share Repurchase Plan

ISSUER PURCHASES OF EQUITY SECURITIES

Period  Total Number of Shares
(or Units)  Purchased		  Average Price Paid per
Share (or Units)		  Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs(1)		  Approximate Dollar Value of Shares that
May Yet Be Purchased Under the Plans
or Programs(1)
(In thousands)		 
04/01/2021-04/30/2021  -  -  -  - 
05/01/2021-05/31/2021  35,561  $3.30  35,561  $1,383 
06/01/2021-06/30/2021  31,955  $3.44  31,955  $1,273 
Total  67,516  $3.37  67,516  $1,273 

(1) Purchases made pursuant to the Company’s share repurchase program announced on November 17, 2020, pursuant to which the Company is authorized to purchase up to $1.5 million worth of shares of its common stock. Under the repurchase program, shares of the Company’s common stock may be repurchased from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing and the actual number of shares repurchased depend on a variety of factors, including legal requirements, price and economic and market conditions. The repurchase program may be suspended or discontinued at any time until it expires on August 16, 2021. On August 12, 2021, the Company extended its share repurchase program to expire on August 16, 2022. All other terms and conditions remained the same.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

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ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.The information included under the heading Share Repurchase Plan of Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of this form 10-Q, is incorporated by reference herein.

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ITEM 6: EXHIBITS

 

Exhibit No. Description
3.1

Amended and Restated Bylaws of VerifyMe, Inc., as amended through July 24, 2020 (incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 29, 2020)

10.1#*

Third Amendment to Employment Agreement for Patrick White dated October 12, 2020

10.2#*

Second Amendment to Consulting Agreement with Norman Gardner dated October 12, 2020

10.3#

VerifyMe, Inc. 2020 Equity Incentive Plan (incorporated herein by reference from Exhibit 4.4 to the Company’s Registration Statement on Form S-8 (File No. 333-249520) filed on October 16, 2020)

10.4#*

Form of Restricted Stock Agreement pursuant to the 2013 Omnibus Equity Compensation Plan

10.5#*

Form of Restricted Stock Agreement pursuant to the 2017 Equity Incentive Plan

10.6#*

10.1*		 Form of Restricted Stock UnitIndependent Contractor Consulting Agreement, (immediate vesting) pursuant to the 2020 Equity Incentive Plandated April 15, 2021, with Norman Gardner
31.1* 

Certification of Principal Executive Officer pursuantPursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2* 

Certification of Principal Financial Officer pursuantPursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1* 

Certification of Principal Executive Officer and Principal Financial Officer pursuantPursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS* XBRL Instance DocumentDocument. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH* Inline XBRL Taxonomy Extension Schema DocumentDocument.
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase DocumentDocument.
101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase DocumentDocument.
101.LAB*104* Cover Page Interactive Data File (formatted as Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Documentand contained in Exhibit 101).

 

*Filed or furnished

 *Filed herewith as applicable.

# Denotes management compensation plan or contract

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 VERIFYME, INC.
  
Date: November 12, 2020August 13, 2021By: /s/ Patrick White
 Patrick White
 

Chief Executive Officer

(Principal Executive Officer)

  
Date: November 12, 2020August 13, 2021By: /s/ Margaret Gezerlis
 Margaret Gezerlis
 

Chief Financial Officer

(Principal Financial Officer and Principal Accounting

Officer)

 

 

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