☒~~QUARTERLY 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~~

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

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.

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 ☐ oNo ☒x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: ~~7,343,932~~7,297,270 shares of common stock outstanding at ~~August 9,~~November 8, 2021.


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' Equity (Deficit) (Unaudited)		7
Notes to Financial Statements (Unaudited)		9

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1619
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	2326
ITEM 4.	Controls and Procedures	2426

PART II - OTHER INFORMATION
ITEM 1.	Legal Proceedings	2527
ITEM 1A.	Risk Factors	2527
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2528
ITEM 3.	Defaults Upon Senior Securities	2629
ITEM 4.	Mine Safety Disclosures	2629
ITEM 5.	Other Information	2629
ITEM 6.	Exhibits	2629
SIGNATURES		2730

Table of Contents

~~Table of Contents~~

FINANCIAL STATEMENTS

ITEM 1.

VerifyMe, Inc.

Balance Sheets

(In thousands, except share data)


	As of						As of
	June 30, 2021			December 31, 2020			September 30, 2021			December 31, 2020
	(Unaudited)						(Unaudited)
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	11,362		$	7,939		$	10,630		$	7,939
Accounts Receivable		143			31			319			31
Due from related parties		2,952			0-
Prepaid expenses and other current assets		120			177			111			177
Inventory		54			54			48			54
TOTAL CURRENT ASSETS		14,631			8,201			11,108			8,201

INVESTMENTS
Equity Investment		11			0-			10,806			-

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
Equipment for lease, net of accumulated amortization of $88 and $50 as of September 30, 2021 and December 31, 2020, respectively								207			200
Office Equipment, net of accumulated amortization of $1 and $0 as of September 30, 2021 and December 31, 2020, respectively								8			-

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
Patents and Trademarks, net of accumulated amortization of $345 and $320 as of September 30, 2021 and December 31, 2020, respectively								328			293
Capitalized Software Costs, net of accumulated amortization of $40 and $20 as of September 30, 2021 and December 31, 2020, respectively								143			80
TOTAL ASSETS	$	15,338		$	8,774		$	22,600		$	8,774

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and other accrued expenses	$	423		$	383		$	434		$	383
TOTAL CURRENT LIABILITIES		423			383			434			383

LONG-TERM LIABILITIES
NON-CURRENT LIABILITIES
Term Note	$	0-		$	72		$	-		$	72
Other Long Term Liabilities								9			-

TOTAL LIABILITIES	$	423		$	455		$	443		$	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 A Convertible Preferred Stock, $.001 par value, 37,564,767 shares
authorized; 0 shares issued and outstanding as of September 30, 2021 and
0 shares issued and outstanding as of December 31, 2020								-			-

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

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
Common stock, $.001 par value; 675,000,000 authorized; 7,440,546 and 5,603,888 issued, 7,296,183 and 5,596,877 shares outstanding as of September 30, 2021 and December 31, 2020, respectively								7			6

Additional paid in capital		85,495			76,099			85,784			76,099

Treasury stock as cost; 74,527 and 7,011 shares at June 30, 2021 and December 31, 2020, respectively		(341	)		(113	)
Treasury stock as cost; 144,363 and 7,011 shares as of September 30, 2021 and December 31, 2020, respectively								(577	)		(113	)

Accumulated deficit		(70,246	)		(67,673	)		(63,057	)		(67,673	)

STOCKHOLDERS' EQUITY		14,915			8,319			22,157			8,319

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	15,338		$	8,774		$	22,600		$	8,774

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

Table of Contents

~~Table of Contents~~

VerifyMe, Inc.

Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

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


	Three months ended						Nine months ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020


NET REVENUE
Sales	$	300		$	101		$	612		$	268

COST OF SALES		114			19			183			49

GROSS PROFIT		186			82			429			219

OPERATING EXPENSES
General and administrative (a)		636			550			2,320			1,520
Legal and accounting		74			98			288			235
Corporate payroll expenses (a)		194			117			621			436
Research and development		8			7			25			7
Sales and marketing (a)		299			293			843			415
Total Operating expenses		1,211			1,065			4,097			2,613

LOSS BEFORE OTHER INCOME (EXPENSE)		(1,025	)		(983	)		(3,668	)		(2,394	)

OTHER INCOME (EXPENSE), NET
Interest income (expenses), net		1			-			1			(2,054	)
Fair value gain on equity investment		8,214			-			8,214			-
Loss on extinguishment of debt		-			-			-			(280	)
Payroll Protection Program Debt Forgiveness		-			-			70			-
Income tax expense		(1	)		0			(1	)		0
TOTAL OTHER INCOME (EXPENSE), NET		8,214			-			8,284			(2,334	)

NET INCOME/(LOSS)	$	7,189		$	(983	)	$	4,616		$	(4,728	)

EARNINGS/(LOSS) PER SHARE
BASIC	$	0.99		$	(0.18	)	$	0.65		$	(1.38	)
DILUTED	$	0.95		$	(0.18	)	$	0.63		$	(1.38	)

WEIGHTED AVERAGE COMMON SHARE OUTSTANDING
BASIC		7,290,975			5,488,111			7,078,046			3,436,805
DILUTED		7,570,985			5,488,111			7,335,268			3,436,805


(a)	Includes share-based compensation of ~~$569~~$372 thousand and ~~$1,007~~$1,379 thousand for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, and ~~$365~~$311 thousand and ~~$688~~$1,000 thousand for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively.

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

Table of Contents

~~Table of Contents~~

VerifyMe, Inc.

Statements of Cash Flows

(Unaudited)

(In thousands)


	Six Months Ended						Nine Months Ended
	June 30, 2021			June 30, 2020			September 30, 2021			September 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:
Net income/(loss)							$	4,616		$	(4,728	)
Adjustments to reconcile net income/(loss) to net cash used in operating activities:
Stock based compensation		23			50			44			62
Fair value of options in exchange for services		85			485			85			643
Fair value of restricted stock awards issued in exchange for services		565			99			739			241
Fair value of restricted stock units issued in exchange for services		277			0-			511			-
Fair value of warrants in exchange for services								-			54
Payroll Protection Program Debt Forgiveness		(70	)		0-			(70	)		-
Fair value of warrants in exchange for services		0-			54
Fair value gain on equity investment								(8,214	)		-
Loss on Extinguishment of Debt		0-			280			-			281
Amortization of debt discount		0-			1,992			-			1,992
Common stock issued for interest expense		0-			61			-			61
Amortization and depreciation		55			47			84			70
Changes in operating assets and liabilities:
Accounts Receivable		(112	)		35			(288	)		(22	)
Due from related parties		(15	)		0-
Inventory		1			(4	)		5			(18	)
Prepaid expenses and other current assets		57			(15	)		66			(50	)
Accounts payable and accrued expenses		39			(38	)		54			120
Net cash used in operating activities		(1,668	)		(699	)		(2,368	)		(1,294	)

CASH FLOWS FROM INVESTING ACTIVITIES
Due from related parties – deposit and reimbursable expenses on investment		(2,937	)		0-
Purchase of Patents		(55	)		(29	)		(60	)		(52	)
Purchase of Equipment for lease		(45	)		(22	)		(45	)		(23	)
Purchase of equity investment		(11	)		0-			(2,593	)		-
Purchase of Office Equipment								(8	)		-
Capitalized Software Costs		(77	)		0-			(84	)		-
Net cash used in investing activities		(3,125	)		(51	)		(2,790	)		(75	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from public offering of securities		8,447			9,023			8,447			9,023
Proceeds from issuance of notes payable		0-			72			-			72
Repayments of notes payable		(3	)		0-			(3	)		-
Repayment of bridge financing and early redemption fee		0-			(750	)		-			(750	)
Proceeds from convertible debt, net of costs		0-			1,747			-			1,747
Increase in treasury shares (share repurchase program)		(228	)		0-

Tax withholding payments for employee stock-based compensation in exchange for shares surrendered								(131	)		-
Repurchase Shares								(464	)		-
Net cash provided by financing activities		8,216			10,092			7,849			10,092

NET INCREASE IN CASH AND CASH EQUIVALENTS		3,423			9,342			2,691			8,723
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		7,939			253			7,939			253

CASH AND CASH EQUIVALENTS - END OF PERIOD	$	11,362		$	9,595		$	10,630		$	8,976

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	0-		$	1		$	-		$	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		$	-		$	1,992
Relative fair value of common stock issued in connection with 2020 Debentures	$	0-		$	34		$	-		$	34
Relative fair value of warrants issued in connection with 2020 Debentures	$	0-		$	1,063		$	-		$	1,063
Beneficial conversion feature in connection with 2020 Debentures	$	0-		$	650		$	-		$	650
Common stock issued to settle accrued payroll	$	0-		$	119		$	-		$	119

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

Table of Contents

~~Table~~

VerifyMe, Inc.

Statement of ~~Contents~~Stockholders' Equity (Deficit)

(Unaudited)

(In thousands, except share data)


	Series A				Series B
	Convertible				Convertible
	Preferred				Preferred				Common							Treasury
	Stock				Stock				Stock				Additional			Stock
	Number of				Number of				Number of				Paid-In			Number of					Accumulated
	Shares		Amount		Shares		Amount		Shares		Amount		Capital			Shares		Amount			Deficit			Total

Balance at June 30, 2020		-		-		0.85		-		5,343,380		5		75,442			7,011		(113	)		(65,516	)		9,818
Fair value of stock options		-		-		-		-		-		-		157			-		-			-			157
Restricted stock awards		-		-		-		-		230,000		-		142			-		-			-			142
Common stock issued for services		-		-		-		-		3,261		-		12			-		-			-			12
Common stock issued in relation to public offering of securities		-		-		-		-		888		1		(1	)		-		-			-			-
Net loss		-		-		-		-		-		-		-			-		-			(983	)		(983	)
Balance at September 30, 2020		-		-		0.85		-		5,577,529		6		75,752			7,011		(113	)		(66,499	)		9,146


	Series A				Series B
	Convertible				Convertible
	Preferred				Preferred				Common							Treasury
	Stock				Stock				Stock					Additional		Stock
	Number of				Number of				Number of					Paid-In		Number of					Accumulated
	Shares		Amount		Shares		Amount		Shares			Amount		Capital		Shares		Amount			Deficit			Total

Balance at June 30, 2021		-		-		0.85		-		7,360,478			7		85,495		74,527		(341	)		(70,246	)		14,915
Restricted stock awards, net of shares withheld for employee tax		-		-		-		-		(18,720	)		-		43		-		-			-			43
Restricted Stock Units		-		-		-		-		21,000			-		234		-		-			-			234
Common stock issued for services		-		-		-		-		3,261			-		12		-		-			-			12
Repurchase of Common Stock		-		-		-		-		(69,836	)		-		-		69,836		(236	)		-			(236	)
Net loss		-		-		-		-		-			-		-		-		-			7,189			7,189
Balance at September 30, 2021		-		-		0.85		-		7,296,183			7		85,784		144,363		(577	)		(63,057	)		22,157

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

Table of Contents

VerifyMe, Inc.

Statement of Stockholders' Equity (Deficit)

(Unaudited)

(In thousands, except share data)


	Preferred				Preferred				Common							Treasury
	Stock				Stock				Stock					Additional		Stock
	Number of				Number of				Number of					Paid-In		Number of					Accumulated
	Shares		Amount		Shares		Amount		Shares			Amount		Capital		Shares		Amount			Deficit			Total

Balance at December 31, 2019		-		-		0.85		-		2,232,112			2		61,815		7,011		(113	)		(61,771	)		(67	)
Fair value of stock options		-		-		-		-		-			-		642		-		-			-			642
Restricted stock awards		-		-		-		-		267,500			-		360		-		-			-			360
Fair value of warrants issued for services		-		-		-		-		-			-		54		-		-			-			54
Common stock issued for services		-		-		-		-		6,596			-		30		-		-			-			30
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		-		-		-		-		2,254,801			3		9,020		-		-			-			9,023	��
Cancellation of Common Stock		-		-		-		-		(19,401	)		-		-		-		-			-			-
Net loss		-		-		-		-		-			-		-		-		-			(4,728	)		(4,728	)
Balance at September 30, 2020		-		-		0.85		-		5,577,529			6		75,752		7,011		(113	)		(66,499	)		9,146

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				Series B
	Convertible				Convertible
	Preferred				Preferred				Common							Treasury
	Stock				Stock				Stock					Additional		Stock
	Number of				Number of				Number of					Paid-In		Number of					Accumulated
	Shares		Amount		Shares		Amount		Shares			Amount		Capital		Shares		Amount			Deficit			Total

Balance at December 31, 2020		-		-		0.85		-		5,596,877			6		76,099		7,011		(113	)		(67,673	)		8,319
Fair value of stock options		-		-		-		-		-			-		85		-		-			-			85
Restricted stock awards, net of shares withheld for employee tax		-		-		-		-		56,971			-		608		-		-			-			608
Restricted Stock Units		-		-		-		-		21,000			-		511		-		-			-			511
Common stock issued for services		-		-		-		-		8,687			-		35		-		-			-			35
Common stock issued in relation to public offering of securities		-		-		-		-		1,750,000			1		8,446		-		-			-			8,447
Repurchase of Common Stock										(137,352	)		-		-		137,352		(464	)		-			(464	)
Net gain		-		-		-		-		-			-		-		-		-			4,616			4,616
Balance at September 30, 2021		-		-		0.85		-		7,296,183			7		85,784		144,363		(577	)		(63,057	)		22,157

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

Table of Contents

~~Table of Contents~~

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.~~

~~Table of Contents~~

~~VerifyMe, Inc.~~

Notes to the Financial Statements (unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of the Business

VerifyMe, Inc. (“VerifyMe,” 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~~$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 products to connect brands with consumers. VerifyMe technologies give brand owners the ability to gather business intelligence while engaging directly with their consumers. VerifyMe technologies also provide 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~~^TM software system in 2018, which covertly and overtly serializes products to remotely track a product’s “life cycle” for brand owners. In 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 VerifyInk^TM ~~and when coupled with Verify Authenticate~~^TM ~~and VerifyMe Track & Trace~~^TM product lines, we believe we provide the only covert serialization and authentication solution on HP Indigo (a division of HP Inc.) printing systems. Our patented smartphone authenticator device, VerifyAuthenticator^TM ~~is capable of fluorescing, decoding, and verifying invisible VerifyInk~~^TM printed overt and covert codes in the field. This product allows investigators to authenticate product quickly and efficiently throughout the distribution chain, including warehouses, ports of entry, retail locations, and product purchased over the internet. This technology is coupled with a secure cloud-based track and trace software engine that allows brands and investigators to monitor the complete supply chain from product origination to the end user utilizing geo location mapping and intelligent programable alerts. When 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.” We have derived minimal revenue from our authentication and track and trace software system and have derived limited revenue from the sale of our VerifyInk^TM ~~and VerifyCode~~^TM ~~technology.~~

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

Reclassifications

Certain amounts presented for the three and ~~six~~nine months ended ~~June~~September 30, 2021 reflect reclassifications made to conform to the 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, 2020 as filed with the Securities and Exchange Commission (the “SEC”) on March 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 ~~six~~nine months ended ~~June~~September 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 or for any future interim periods.

~~Equity Investments~~

~~Equity~~Fair Value of Financial Instruments

The Company’s financial instruments consist of accounts receivable, accounts payable and accrued expenses, equity investments, and other long-term liabilities. The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value because of their short maturities.

The Company follows FASB ASC 820, “Fair Value Measurements and Disclosures,” and applies it to all assets and liabilities that are being measured and reported on a fair value basis. The statement requires that assets and liabilities carried at fair value ~~with changes~~will be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data

Level 3: Unobservable inputs that are not corroborated by market data

The level in the fair value within which a fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

Table of Contents

Variable Interest Entity

The Company has determined that G3 VRM Acquisition Corp., (the “SPAC”, see FN 2 – Equity Investment), is a variable interest entity (“VIE”) in which the Company has a variable interest but is not the primary beneficiary. Making the determination as to whether a VIE should be consolidated requires judgement in assessing if the Company is the primary beneficiary. To make this determination, the Company evaluated its power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the SPAC. The Company concluded that it is not the primary beneficiary of the VIE and as such, does not consolidate the SPAC. The Company reassess its evaluation of whether an entity is a VIE and if it continues to be a VIE, whether the Company is the primary beneficiary of the VIE, on an ongoing basis based on the current facts and circumstances surrounding the entity.

Equity Investments

When the Company does not have a controlling financial interest in an entity but can exert influence over the entity’s operations and financial policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing the fair value option available under applicable generally accepted accounting policies. The Company has elected the fair value option for its equity investment in the SPAC (see FN2 – Equity Investment) as it has determined the fair value best reflects the economic performance of the equity investment. Changes in unrecognized gains or losses of the fair value of the equity investment are included in ~~other income~~Other Income (Expense), Net on the ~~statement~~accompanying Statement of ~~operations.~~Operations.

~~Table of Contents~~

Revenue Recognition

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

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

•

~~identify the contract with a customer;~~

•

~~identify the performance obligations in the contract;~~

•

~~determine the transaction price;~~

•

~~allocate the transaction price to performance obligations in the contract; and~~

•

· identify the contract with a customer;
· identify the performance obligations in the contract;
· determine the transaction price;
· allocate the transaction price to performance obligations in the contract; and
· recognize revenue as the performance obligation is satisfied.

During the three and ~~six~~nine months ended ~~June~~September 30, 2021, the Company’s revenues ~~were~~ primarily ~~made up~~consisted of revenue generated from printing labels and through our product authentication technology, as ~~we expanded into the personal protective equipment industry in the first quarter of 2021.~~well as our customer engagement technology.

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 six months ended June 30, 2021 and 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 six months ended June 30, 2021, there were approximately 4,338,000 anti-dilutive shares consisting of 465,000 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 six months ended June 30, 2020, there were approximately 4,369,000 anti-dilutive shares consisting of 446,000 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.

NOTE 2 – EQUITY INVESTMENT

On February 26, 2021, the Company formed VMEA Holdings Inc. (the “Sponsor Entity”), a Delaware corporation and wholly owned subsidiary of the Company, that owns G3 VRM Acquisition Corp. (NASDAQ: GGGVU) (the “SPAC”), a Delaware corporation and special purpose acquisition company being co-sponsored by the Company. The SPAC was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. While it may pursue an initial business combination target in any business, industry or geographical location, it intends to focus its search on target businesses with enterprise values of approximately $250 million to $500 million within the technology and business services industry.

On April 12, 2021, the Sponsor Entity converted to a Delaware limited liability company, changed its name to “G3 VRM Holdings LLC” and a co-sponsor was added as a member of the Sponsor Entity resulting in an equity interest of ~~44.40%~~44.40% attributed to the Company.

Table of Contents

On ~~April 14,~~July 6, 2021, the SPAC ~~filed a Registration Statement on Form S-1 with~~consummated the ~~SEC in connection with a proposed initial public offering~~IPO of 10,626,000 units (the “Units”) by, including 626,000 Units pursuant to the ~~SPAC.~~partial exercise of the underwriter’s over-allotment option, generating gross proceeds of $106,260 thousand. Each Unit consists of one share of SPAC common stock, $0.0001 par value, and one right to receive one-tenth (1/10) of a share of SPAC common stock upon the consummation of an initial business combination. ~~The Units were sold at an offering price of $10.00 per Unit. The SPAC granted~~Simultaneously with 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 relating to the initial public offering (“IPO”)closing of the IPO, the SPAC ~~was declared effective by~~consummated the ~~SEC and the Company entered into a~~ Private Placement ~~Unit Purchase Agreement~~of an aggregate of 569,410 Units with the Sponsor Entity purchasing 516,280 Units and Maxim Partners LLC ~~obligating~~purchasing 53,130 Units, generating total proceeds of $5,694 thousand. Of this amount, the ~~co-sponsors~~Company is the indirect beneficial owner of 229,228 Units purchased by the Sponsor Entity for a total of $2,581 thousand. Upon consummation of the IPO, VerifyMe, as co-sponsor, indirectly through the Sponsor Entity, ~~to purchase up to an aggregate~~beneficially owns approximately 9.42% of ~~547,500 Units (or 600,000 Units if~~ the ~~underwriters exercise the over-allotment in full) in~~outstanding shares of the SPAC, ~~(the “Private Placement”).~~which shares are subject to forfeiture upon certain conditions and restrictions on transfer.

As a result of ceasing to have a controlling financial interest in ~~G3 VRM Holdings LLC~~the Sponsor Entity on April 12, 2021, the Company accounted for the Sponsor Entity as an equity investment and has elected the fair value option resulting in a ~~carrying~~fair value gain of $8,214 thousand for the nine months ended September 30, 2021 included in Fair value gain on equity investment, in the accompanying Statement of Operations. The fair value of ~~$11 thousand~~the equity investment is classified as Level 3 in the fair value hierarchy as the calculation is dependent upon company specific adjustments to the observable trading price of the SPAC’s public units and ~~0no gain or loss recognized for~~shares, and related risk of forfeiture should no business combination occur.

If the ~~six~~SPAC is unable to complete its initial business combination within 12 months ~~ended June 30, 2021. Upon effectiveness~~from the closing of the IPO ~~registration statement on June 30, 2021,~~(or 15 or 18 months from the closing of the IPO, should the Company and the co-sponsor ~~each transferred $2,713 thousand,~~extend the period of time to consummate a business combination by depositing additional funds into the trust account as described in more detail in IPO prospectus), the SPAC will redeem 100% of the public shares for ~~an aggregate~~cash, the rights will expire worthless, and the founder shares and the private placement securities will be worthless. Even if the SPAC is able to complete a business combination within the allotted time, if the combined company is unable to maintain adequate results from operations, then our investment in the SPAC could lose value and may ultimately become worthless. There can be no assurance that the SPAC will complete a business combination within the allotted time or that any such business combination will be successful.

The following table presents summary financial information 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 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 isEntity. Such summary information has been provided herein based upon the ~~reasoning that had~~individual significance of the ~~IPO not been consummated, the Sponsor Entity would have wound down its operations and returned the monies to its investors.~~

~~Table of Contents~~

~~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~~equity investment to the ~~SPAC Private Placement and funds covering the exercise~~financial information of the underwriter's overallotment option; (ii) $208 thousand receivable from the SPAC for expenses covered prior to the consummation of the IPO; (iii) $16 thousand receivable from the Company’s co-sponsor of the Sponsor Entity, see Note 2 Equity Investment for details; and (iv) $15 thousand deposit refundable from an affiliate of the Company’s co-sponsor of the Sponsor Entity for consulting services provided that were unrelated to the SPAC or co-sponsorship.Company.


	Amounts in Thousands ('000)
		September 30, 2021			December 31, 2020
Current Assets	$	1,371		$	-
Non-current assets		107,855			-
Current Liabilities		3,719			-
Mezzanine Equity		107,854			-
Stockholders' Deficit		(2,347	)		-


	Amounts in Thousands ('000)
		Nine Months Ended September,
		2021		2020
Operating Loss		(274	)	-
Net Loss		(273	)	-

NOTE 43 – PROPERTY AND EQUIPMENT

Equipment for Lease

During the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, the Company capitalized ~~$45~~$45 thousand and ~~$73~~$74 thousand (including a ~~$51~~$51 thousand deposit made in fiscal 2019) respectively, in connection with the certification and production of the VerifyChecker™ and the ~~VerifyAuthenticator~~Verify Authenticator^TMtechnology. The Company depreciates equipment for lease over its useful life of five ~~years.~~ years. Depreciation expense for Equipment for lease was ~~$16~~$11 thousand and ~~$27~~$38 thousand for the three and ~~six~~nine months ended ~~June~~ September 30, 2021, respectfully, and ~~$12~~$11 thousand and ~~$23~~$34 thousand for the three and ~~six~~nine month ended ~~June~~ September 30, 2020, respectively, and is included in ~~General~~general and administrative expense in the accompanying Statements of Operations.

Table of Contents

Office Equipment

During the nine months ended September 30, 2021 and 2020, the Company capitalized $8 thousand and $0 thousand respectively, in office equipment. The Company depreciates the office equipment over its useful life of three years. The depreciation expense for office equipment was $1 thousand for the three and nine months ended September 30, 2021 and $0 thousand for the three and nine months ended September 30, 2020 respectively, and is included in general and administrative expense in the accompanying Statement of Operations.

NOTE 54 – INTANGIBLE ASSETS

Patents and Trademarks

As of ~~June~~September 30, 2021, the current patent and trademark portfolios consist of 12 elevengranted U.S. patents and 1one granted European patent validated in 4four countries (France, Germany, United Kingdom, and Italy), 5five pending U.S. and foreign patent applications, 6six registered U.S. trademarks, 2two EU trademark registrations, 1one Colombian trademark registration, 1one Australian trademark registration, 1one Japanese trademark registration, 1one Mexican trademark registration, 1one Singaporean trademark registration, and 17seventeen pending US and foreign trademark applications. Our issued patents expire between the years 2022 and ~~2039.~~2039. Costs associated with the prosecution 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 ~~six~~nine months ended ~~June~~ September 30, 2021 and 2020, the Company capitalized ~~$55~~$60 thousand and ~~$29~~$52 thousand, respectively, of patent and trademarks costs. Amortization expense for patents and trademarks was $9$9 thousand and $7$7 thousand for the three months ended ~~June~~ September 30, 2021 and 2020, respectively, and ~~$16~~$25 thousand and ~~$14~~$20 thousand for the ~~six~~nine months ended ~~June~~ September 30, 2021 and 2020, ~~respectively.~~respectively and included in general and administrative expense in the accompanying Statement of Operations.

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. The Company capitalized ~~$77~~$84 thousand and $0$0 thousand for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, respectively. Amortization expense for capitalized software was $7$8 thousand and $5$5 thousand for the three months ended ~~June~~ September 30, 2021 and 2020, respectively, and ~~$12~~$20 thousand and ~~$10~~$15 thousand for the ~~six~~nine months ended ~~June~~ September 30, 2021 and 2020, respectively, included in general and administrative expense in the accompanying Statements of Operations.

NOTE 65 – TERM NOTE

On May 17, 2020, the Company entered into a paycheck protection program term note for ~~$72~~$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%~~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 of the SBA Loan, the Company used 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 December 31, 2020, the amount outstanding on the SBA Loan was ~~$72~~$72 thousand classified as Long-Term Liabilities and included in the accompanying Balance Sheets.

~~Table of Contents~~

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~~Other Income (Expense), Net in the accompanying Statements of Operations. The forgiveness recognized during the ~~six~~nine months ended ~~June~~September 30, 2021, included principal of ~~$69~~$69 thousand, and interest payable of $1$1 thousand. The remaining loan balance of $3$3 thousand was paid in full ~~as of~~in June ~~30,~~ 2021.

NOTE 76 – STOCKHOLDERS’ EQUITY

The Company expensed ~~$407~~$117 thousand and ~~$622~~$739 thousand related to restricted stock awards for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively. For the three and ~~six~~nine months ended ~~June~~September 30, 2020, the Company expensed ~~$23~~$142 thousand and ~~$99~~$241 thousand, respectively, related to restricted stock awards.

During the ~~six~~nine months ended ~~June~~ September 30, 2021, the Company issued ~~5,426~~8,687 shares of restricted common stock in relation to investor relation services with a stock-based compensation expense of ~~$23~~$35 thousand.

Table of Contents

On September 17, 2021 the Company approved restricted stock units for three non-employee directors for an aggregate of 63,000 restricted stock units with a fair value of $217 thousand. One-third of the units vested upon approval, one-third vest on September 17, 2022, and the remaining one-third vest on September 17, 2023, subject to the non-employee director’s continued service on the Board of Directors.

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~~$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~~$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~~$234 thousand and ~~$277~~$511 thousand related to restricted stock units for the three and ~~six~~nine months ended ~~June~~ September 30, 2021. There was ~~00no~~no expense related to restricted stock units for the ~~six~~three and nine months ended ~~June~~ September 30, 2020.

In August 2021, upon vesting of the restricted stock awards held by our Chief Executive Officer, the Company withheld and retired 18,720 shares of common stock in order to satisfy his U.S. payroll tax withholding obligations.

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~~$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.~~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~~Gardner’s death or termination other than for cause.

On April 15, 2021, the board of directors granted the ~~Company's~~Company’s Chief Financial Officer, an award of 5,000 shares of restricted stock with a fair value equal to ~~$21~~$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~~$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~~The Company applied FASB ASC 718, “Compensation—Stock Compensation,” modification accounting and expensed a change in fair value of ~~$75~~$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~~$5.30 per share, less underwriting discounts and commissions. The public offering closed on February 12, 2021 resulting in gross proceeds of ~~$8.7~~$8.7 million and net proceeds of ~~$8.1~~$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.

12On 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, $133 thousand was expensed related to these services.

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~~Table of Contents~~

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 Units 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 Stock (each a “Warrant” and collectively, the “Warrants”) at an exercise price equal to ~~$4.60~~ $4.60 per share of Common Stock. The public offering price was $4.60 per Unit and the underwriters agreed to purchase 2,173,913 Units 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 and/or Warrants for 326,087 shares of Common Stock to cover over-allotments, if any. The Offering closed on June 22, 2020 resulting in gross proceeds of ~~$10.0~~ $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 and 325,987 Warrants for gross proceeds of ~~$232,759.~~$233 thousand. The net proceeds in relation to the Offering and including the over-allotment option were $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~~$125 thousand 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 Units purchased in the Offering, 17,800 Units 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 Stock (the “Representative’s Warrants”). The Representative’s warrants are exercisable at ~~$5.06~~$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.

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~~$1,992 thousand and interest expense of ~~$60,802~~$61 thousand and issued 179,200 shares of common stock related to the cancellation of the 2020 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.~~its Chief Executive Officer, Patrick White, a restricted stock award of 37,500 restricted shares of the Company’s common stock in lieu of ~~$150,000~~$150 thousand in deferred salary. Of this amount, ~~$119,041~~$119 thousand 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~~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 6, 2020, the Company completed the offering of senior secured convertible debentures (the “2020 Debentures”) and warrants and raised ~~$1,992,000~~$1,992 thousand in gross proceeds from the sale of the 2020 Debentures and warrants. In connection to the 2020 Debentures, the Company issued 19,208 restricted shares of common stock during the three and ~~six~~nine months ended ~~June~~September 30, 2020.

Non-Qualified Stock Purchase Plan

On June 10, 2021, the stockholders of the Company approved a non-qualified stock purchase plan (the “2021 Plan”). The 2021 Plan provides eligible participants, including employees, directors and consultants of the Company, the opportunity to purchase shares of the Company’s common stock thereby increasing their interest in the Company’s continued success. The maximum numbers of common stock reserved and available for issuance under the 2021 Plan will be 500,000 shares. The purchase price of shares of common stock acquired pursuant to the exercise of an option will be the lesser of 85% of the fair market value of a share (a) on the enrollment date, and (b) on the exercise date. The 2021 Plan is not intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”). As of September 30, 2021, eight participants have elected to participate in the 2021 Plan and unless a participant withdraws from an offering, his or her option for the purchase of shares of common stock will be automatically exercised on February 28, 2022, the exercise date of the offering.

Shares Held in Treasury

As of ~~June~~September 30, 2021 and December 31, 2020, the Company had ~~74,527~~144,363 and 7,011 shares, respectively, held in treasury with a value of approximately ~~$341~~$577 thousand and ~~$113~~$113 thousand, respectively.

In November 2020, the Company’s Board of Directors approved a share repurchase program for up to $1.5 million of the Company’s common stock until August 16, 2021. ~~Under this program, 67,516 shares were repurchased in the open market during the six months ended June 30, 2021.~~ On August 12, 2021, the ~~Company~~Company’s Board of Directors extended ~~its~~the share repurchase program to expire on August 16, 2022. All other terms and conditions remained the same. During the three months ended September 30, 2021 the Company repurchased 69,836 shares of common stock at an average price of $3.38 for approximately $236 thousand pursuant to the Share Repurchase Plan. During the nine months ended September 30, 2021 the Company repurchased 137,352 shares of common stock at an average price of $3.38 for approximately $464 thousand pursuant to the Share Repurchase Plan.

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NOTE 87 – 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”) that covered the potential issuance of 260,000 shares of common stock. The 2017 Plan provided that directors, officers, employees, and consultants of the Company were eligible to receive equity incentives under the 2017 Plan at the discretion of the Board or the Board’s Compensation Committee.

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

~~Table of Contents~~

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 thousand, and the options in excess of $100 thousand shall be deemed to be non-qualified stock options, including prices, duration, transferability and limitations on exercise. The maximum number of shares of common stock that may be issued under the 2020 Plan pursuant to incentive stock options may not exceed, in the aggregate, ~~1,000,000.~~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~~nine months ended ~~June~~September 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.

Schedule of stock option activity

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

	Options Outstanding
					Weighted -
					Average
					Remaining		Aggregate
			Weighted-		Contractual		Intrinsic
	Number of		Average		Term		Value
	Shares		Exercise Price		(in years)		(in thousands)⁽¹⁾
Balance as of December 31, 2020		473,771	$	4.48

Granted		-		-

Forfeited/Cancelled/Expired		(8,300)		9.72

Balance as of September 30, 2021		465,471	$	4.38

Exercisable as of September 30, 2021		465,471	$	4.38		3.4		$56


(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 ~~six~~nine months ended ~~June~~ September 30, ~~2021:~~2021:

~~Table~~Schedule of ~~Contents~~summary for the activities of unvested stock options

	Unvested Options

	Weighted - Average
	Number of Unvested			Grant Date
	Options			Exercise Price
Balance as of December 31, 2020		10,000		$	9.75

Vested		(10,000	)		9.75

Balance as of September 30, 2021		-		$	-

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 three and ~~six~~nine months ended ~~June~~September 30, 2021 the Company expensed $0$0 and ~~$85~~$85 thousand, respectively, with respect to stock options. During the three and ~~six~~nine months ended ~~June~~September 30, 2020 the Company expensed ~~$268~~$158 thousand and ~~$485~~$643 thousand, respectively.

As of ~~June~~September 30, 2021, there was $0$0 unrecognized compensation cost related to outstanding stock options.

The following table summarizes the activities for the Company’s warrants for the ~~three~~nine months ended ~~June~~ September 30, ~~2021:~~2021:

Schedule of warrant activity

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-

	Warrants Outstanding
	Number of Shares		Weighted- Average Exercise Price		Weighted - Average Remaining Contractual Term in years)		Aggregate Intrinsic Value (in thousands)⁽¹⁾
Balance as of December 31, 2020		3,779,243	$	5.89

Granted		-		-

Balance as of September 30, 2021		3,779,243	$	5.89		3.3

Exercisable as of September 30, 2021		3,779,243	$	5.89		3.3	$	-


(1)	The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock price of ~~$4.22~~$3.40 for our common stock on ~~June~~September 30, 2021.

NOTE 8—INCOME TAXES

During the three and nine months ended September 30, 2021 the Company had $1 thousand, respectively, in income tax expense and $0 for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021, the Company had approximately $43.4 million in net operating loss carry forwards for federal income tax purposes which expire at various dates through 2037. Generally, these can be carried forward and applied against future taxable income at the tax rate applicable at that time. We are currently using an effective income tax rate of 21% for our projected available net operating loss carry-forward. However, as a result of potential stock offerings and stock issuances, as well as the possibility of the Company not realizing its business plan objectives and having future taxable income to offset, the Company’s use of these NOLs may be limited under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended. The Company is in the process of evaluating the implications of Section 382 on its ability to utilize some or all of its NOLs.

In accordance with FASB ASC 740 “Income Taxes”, valuation allowances are provided against deferred tax assets, if based on the weight of available evidence, some or all of the deferred tax assets may or will not be realized. The Company has evaluated its ability to realize some or all of the deferred tax assets on its balance sheet and has established a valuation allowance of approximately $8.1 million at September 30, 2021. The Company did not utilize any NOL deductions for the nine months ended September 30, 2021.

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NOTE ~~9 –~~ 9—EARNINGS (LOSS) PER SHARE

Earnings (Loss) Per Share

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution of common stock equivalent shares that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

The dilutive common stock equivalent shares consist of preferred stock, stock options, warrants and restricted stock units computed under the treasury stock method, using the average market price during the period.

The following table sets forth the computation of basic and diluted earnings/(loss) per share (in thousands, except share and per share data):


	(Unaudited) Three Months Ended September 30,					(Unaudited) Nine Months Ended September 30,
	2021		2020			2021		2020
Numerator:

Net Income/(Loss)	$	7,189	$	(983	)	$	4,616	$	(4,728	)
Denominator:
Weighted average shares of common stock – basic		7,290,975		5,488,111			7,078,046		3,436,805

Effect of dilutive securities

Preferred Stock		144,444		-			144,444		-

Stock Options		32,795		-			58,618		-

Warrants		12		-			30		-
Stock Purchase Plan		2,687		-			896		-
Restricted Stock Units & Restricted Stock Awards		100,072		-			53,234		-
Weighted average shares of common stock – diluted		7,570,985		5,488,111			7,335,268		3,436,805

Net Earnings (Loss) per share

Basic	$	0.99	$	(0.18	)	$	0.65	$	(1.38	)

Diluted	$	0.95	$	(0.18	)	$	0.63	$	(1.38	)

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The following table represents the weighted average number of anti-dilutive instruments excluded from the computation of diluted earnings per share:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Anti-dilutive instruments excluded from computation of diluted net income per share:

Preferred Stock		-		144,444		-		144,444

Stock Options		91,471		473,771		94,621		473,771

Warrants		3,778,983		3,779,246		3,778,983		3,779,246

Restricted Stock Units		5,935		-		5,935		-

NOTE 10– CONCENTRATIONS

Revenue

For the three and ~~six~~nine months ended ~~June~~September 30, 2021, ~~three~~four and five customers represented ~~97%~~97% and ~~84%~~95% of revenues, respectively.

Accounts Receivable

As of ~~June~~September 30, 2021, ~~two~~four customers represented ~~94%~~90% of accounts receivable.

NOTE 1011 – SUBSEQUENT EVENTS

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

~~In 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 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, 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. 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 “our”) is a technology solutions provider specializing in products to connect brands with consumers. VerifyMe technologies give brand owners the ability to gather business intelligence while engaging directly with their consumers. VerifyMe technologies also provide brand protection and supply chain functions such as counterfeit prevention, authentication, serialization, ~~consumer engagement,~~and track and trace features for labels, packaging and products. ~~The Company was~~We are a Nevada corporation 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 that covertly and overtly serializes products to remotely tracktechnologies before ultimately becoming a product’s “life cycle” for brand owners. In 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 VerifyInk^TM and when coupled with VerifyMe Authenticate™ and VerifyMe Track & Trace™ we believe it provides the only covert serialization and authentication HP Indigo (a division of HP, Inc.) printing systems. Our patented smartphone authenticator device, VerifyAuthenticator^TM~~, is capable of fluorescing, decoding, and verifying invisible VerifyInk~~^TM printed codes in the field. This product allows investigators to authenticate product quickly and efficiently throughout the distribution chain, including warehouses, ports of entry, retail locations, and product purchased over the internet. This technology is coupled with a secure cloud-based track and trace software engine that allows brands and investigators to monitor the complete supply chain from product origination to the end user utilizing geolocation mapping and intelligent programable alerts. Brand owners access the VerifyMe Authenticate™ and VerifyMe Track & Trace™ software through a web portal over the 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, monitor and protect their products’ “life cycle.” We have derived minimal revenue from our authentication and track and trace software system and have derived limited revenue from the sale of our VerifyInk^TM~~, VerifyMe Authenticate™ and VerifyMe Track & Trace™ technology.~~Protection Solutions provider.

Our brand protection technologies involve the utilization of invisible and visible images, which are special composition inks ~~which~~comprised of a rare earth material that are compatible and printed with modern digital and standard printing presses. The visible 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 that ~~are~~can be attached to traditional printing ~~presses.~~presses and finishing equipment. Our invisible ink can be used into print fixed images, variable images, or serialized codes, static and dynamic bar codes orand QR codes. We have developed and patented a product that attaches to a smartphone that ~~reads~~brand inspectors can use to read our invisible ink codes into sophisticated cloud-based track and trace ~~software.~~software that contain our patented verification technology along with algorithms which analyze the label, package or product’s authenticity and diversion activity. 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~~VerifyMe has a custom suite of ~~authentication and serialization of physical goods, we~~products, as described below, that offer clients the ~~following~~ brand protection security, anti-counterfeiting, protection from product diversion, consumer engagement and ~~anti-counterfeit product lines:~~a robust serialization, track and trace system. These products are sold as a “software as a service” or “SAAS” which is stored in the cloud and accessed through the internet.

VerifyMe Engage™ for consumer engagement

VerifyMe Authenticate™ for product authentication

VerifyMe Track & Trace™ for product supply chain control

VerifyMe ~~Engage™ for consumer engagement~~

~~VerifyMe~~ Online™ for on-line (web) brand monitoring

~~These four productions lines~~VerifyMe Engage™ services provide the ability for the brand owner to gather business intelligence and engage with the consumer using our authentication test as the initial contact with the consumer. For example, consumers can simply use their smart phone camera to scan our visible unique codes and/or RFID/NFC chips printed on products, labels and packages. Once the consumer scans the code, an instant authenticity check is made using algorithms stored in the cloud to determine the products authenticity on multiple factors. This allows brands to understand where their products are ~~powered by one~~being scanned, whether they are legitimate, and form an immediate bridge for communication with the consumer. After this test is completed, the brand owner can then engage with the consumer and can offer a gift or ~~more of~~future discounts to the ~~following technologies:~~consumer in exchange for their personal information as well as providing marketing materials, videos, discount coupons, product specifications, contest entries or cross sell other products through the consumer engagement software. This service allows to the brand owner to gather real-time information on their customer base,. To date, we have derived limited revenue from VerifyMe Engage customers in the cannabis industry.

~~VerifyCode™~~

~~VerifyInk™~~

~~VerifyLabel™~~

~~VerifyChip™~~

~~VerifyMe Online™~~

VerifyMe Authenticate™ services provide an assortment of tools through our patented products allowing the brand owner to instantly authenticate a product, label or package as genuine and / or determine if a product has been fraudulently diverted and where such diversion occurred in the supply chain. Brand owners can use our cloud-based web portal to easily order many types of serialization codes for their products, labels and packages. Once the codes are applied to their products, brand owners can then monitor, control and protect their products during the products complete life cycle through the supply chain. Our customers use our patented invisible ink, VerifyInk^TM ~~technology was our first technology to be patented. It combines an invisible ink~~ which is combined with a proprietary ~~tuned laser~~reader to ~~enable~~easily identify counterfeit ~~products~~products. Product investigators may then use our patented VerifyAuthenticator^TM technology, a device used with a smartphone and the VerifyMe app, to ~~be exposed. In 2017, we signed a five-year contract with Indigo Division of HP Inc. (“HP Indigo”) to print this technology on packages~~authenticate and labels on their 6000 series presses. Our technology has been tested and approved by HP Indigo 6000 series presses and more recently was qualified on HP Indigo’s 6900 series presses. 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 ourdecode VerifyInk^TM ~~invisible ink technology. HP Indigo has showcased these samples at various global government~~codes. The user attaches this device to their smartphone, which upon use reveals the hidden VerifyInk^TM images on the smartphone screen that are then sent to our web portal in the cloud for authentication and ~~print service providers trade shows. Customers can~~data submission. We also have another device that does not require use the of a smartphone, our VerifyChecker™ which is a handheld beeping device ~~our VerifyChecker™,~~that is tuned to authenticate the unique frequency of our VerifyInk^TM invisible ink toand will broadcast ~~a beeping sound~~an audible alert to confirm the authenticity when placed on products, labels and packaging containing our VerifyInk^TM ~~ink.~~. The VerifyChecker™ ~~devices are being commercialized and leased~~is designed for use by customers who desire instant authentication on items. It is perfect for field investigators, CBP officials, or as validation in practice such as scanning event tickets at an entry gate. The device functionality was upgraded in September 2021 adding wireless connectivity to ~~customers, typically for one year. In December 2017, we signed~~ a ~~contract with a top tier a strategic partner to use VerifyInk~~^TM ~~in their cloud-based~~mobile phone enabling authentication and track and trace system. The technology also features a unique double layer of security that remains entirely covert at all times and provides licensees with additional protection. Under the contract with our strategic partner, we have a re-seller agreement where we sell their cloud-based authentication and track and trace system with our VerifyInk^TM ~~identifier under our own trademarked name, VerifyCode™. In May 2019, we entered into a strategic partnership with INX, the third largest producer of inks in North America, to co-develop inkjet inks~~attempts 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 VerifyInk^TM ~~ink. This secured garment survived the 50 wash and dry cycle test. We are now~~recorded in the ~~commercialization phase of this technology~~cloud with geo-location, inspector’s names, and ~~in conjunction with INX~~time and ~~Print craft Inc are broadly marketing to major brands. In February 2021, INX completed the development of a version of our VerifyInk~~^TM 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 VerifyInk^TM ~~invisible ink technology, which includes our variable VerifyCode™ serialization, track and trace technology. We believe VerifyInk~~^TM 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 that need authentication. Wedate stamp. To date, we have derived limited ~~revenue~~recurring revenues from ~~the sale of our VerifyInk~~^TM ~~technology.~~ VerifyMe Authenticate two global brand owners.

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VerifyMe Track & Trace™ supply chain serialization, track and trace technology ~~combines the VerifyInk~~^TM ~~printed as a dynamic code and an~~utilizes overt dynamic ~~code,~~codes (QR codes or other barcode symbology), such as our VerifyCode™, ~~with~~which is tied to our ~~strategic partner’s~~ cloud-based authentication and track and trace ~~system that~~system. This technology provides brand owners ~~geographical~~ business intelligence on counterfeiting and diversion ~~as well as~~through the ~~ability~~use of distribution channel scans through the supply chain coupled with consumer scan data all tied to a back end system that allows brands to customize rules and parameters and sophisticated alert systems allowing brands to be proactive, rather than reactive, in thwarting illicit activity. Invisible codes can be added using VerifyInk^TM to increase brand protection security and provide inspectors a means to authenticate ~~labels, packaging and products.~~counterfeit or diverted product if the visible codes have been defaced or removed. Using information from a smartphone screen, our VerifyCode^TM technology, can provide authentication and data submission information. A customer or end-user can scan ~~information from a product label or QR code~~codes printed on labels and packaging and send it to the cloud where our ~~VerifyMe 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~~derived limited revenues from the use of this ~~technology.~~

~~VerifyAuthenticator~~^TMtechnology ~~is a piece of patented hardware with a built-in illumination system and software that scans invisible VerifyInk~~^TM ~~codes. Product investigators attach their smartphone to this device that then reveals the hidden VerifyInk~~^TM ~~images on the smartphone screen that are then sent to VerifyMe 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 and are auto-renewable. Revenue from this product is at an initial stage and minimal at this time.

~~VerifyMeChecker™~~ ~~technology is an authentication tool that we are marketing to customers in conjunction with our VerifyInk~~^TM~~. The VerifyChecker™ is a handheld beeping device that is tuned to authenticate the unique frequency of our VerifyInk~~^TM ~~invisible ink and will broadcast a beeping sound to confirm the authenticity when placed on products, labels and packaging containing our VerifyInk~~^TM . The VerifyChecker™ is designed for use by customers who desire instant authentication on items, such as event tickets at an entry gate. Our customized checker 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 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.

~~VerifyLabel™~~ labels are dual-purpose pre-printed labels with a visible serialized QR code for consumer scanning purposes, and an invisible serialized 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 e-commerce retailers to 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 used in personal protective equipment industry and in the cannabis ~~sector, without the covert component.~~industry. While we consider revenues limited to date, we expect recurring orders from our current customer base as well as an expansion into other industries.

VerifyMe® Online™includes, through our collaboration with 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, and social media sites offering or promoting 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 that physically harm consumers. Our covert technologies give brand owners the ability to control, monitor and protect their products life cycle. ~~Also,~~In cases where the brand owner may be subject to liability brought forth by counterfeit products, our ~~technologies~~tools allow the brand ~~owners~~owner to prove whether the product causing an issue is authentic or counterfeit. Combined with our customer engagement product lines, we offer a unique and comprehensive brand protection and promotion solution that can be tailored to any brand’s specifications.

~~Our digital technologies are contained in a web portal known as VerifyMe Authenticate™ and VerifyMe Track & Trace™, utilizing~~At present, our strategic ~~partner’s centralized cloud- based authentication~~partner, HP Indigo has the ability, with their Indigo 6000 series, to print our technology on a variable basis. HP Indigo has produced flexible packaging pouch samples, shrink sleeves samples, and tax stamp samples with our covert VerifyInk^TM. In May 2019, we entered into a strategic partnership with INX, the third largest producer of inks in North America allowing us to successfully print our covert VerifyInk™on garments, metal and plastic objects, and INX is now co-marketing the new security ink to its global clients. We are continuing to work with our partners and INX international to develop inkjet ink for various print head, drop on demand and continuous inkjet, that can be used independently or mounted to printing presses and finishing equipment. We have successfully developed VerifyInk™for drop on demand inkjet printing and are carrying on with the development of a continuous inkjet solution. The specially formulated inks will enable these printing presses to print our VerifyInk^TM invisible ink technology, which includes our variable VerifyCode™ serialization, 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 VerifyCodes^TM~~, overt VerifyCodes~~^TM ~~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 VerifyChecker~~^TM ~~device when our~~technology. We believe VerifyInk^TM is ~~found on~~particularly well-suited to closed and controlled environments that want to verify transactions within a ~~product or label. This signal then triggers a GPS location to be recorded in the cloud-based VerifyMe Authenticate™~~specific area, as well as labels, packaging, textiles, plastics and ~~VerifyMe Track & Trace™ software application. Together, the handheld light sensor device (VerifyChecker~~^TM~~) and the smartphone attachment authenticator (VerifyAuthenticator~~^TM~~) provide the brand owner the ability to monitor their inspector team activities thru the VerifyMe Authenticate™ and VerifyMe Track & Trace™ web portal.~~metal products that need authentication.

~~Business Intelligence~~To optimize our security for our customers, we are seeking to migrate our brand protection platform from a current centralized cloud-based data architecture to a blockchain (fractured data) architecture. We are exploring opportunities to gain the skillsets needed either through mergers and ~~Consumer Engagement~~acquisitions or through strategic partnerships with blockchain specialists that will help us create this product.

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

The COVID-19 pandemic disrupted businesses and affected production and sales across a range of industries, as well as caused volatility in the financial markets, which negatively impacted our results of operations for the first ~~half~~nine months 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. Please see Item 1A, “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 Report for additional information regarding certain risks associated with the pandemic.

The COVID-19 pandemic has caused an 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.

After an approximately one-year COVD-19 related hiatus we have recently begun attending sales conferences and other in-person sales initiatives. Although we have been attending in-person sales events, such events are not at full capacity due to the ongoing pandemic. Since we have recently 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 continued to be aggressive in regards to sales and marketing efforts as we have completed a new website which is generating new leads and we have expanded our sales force. We also have started our first social media 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.

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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 approximately 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~~(less 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 Corp. upon consummation of the IPO; which are subject to forfeiture upon certain conditions and restrictions on transfer.

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, should we and the co-sponsor extend the period of time to consummate a business combination by depositing additional funds into the trust account as described in more detail in IPO prospectus), our founder shares and private placement securities will be worthless. Even if the SPAC is able to complete a business combination within the allotted time, if the combined company is unable to maintain adequate results from operations, then our investment in the SPAC could lose value and may ultimately become worthless. There can be no assurance that the SPAC will complete a business combination within the allotted time or that any such business combination will be successful.

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As of ~~June~~September 30, 2021, we have accounted for the Sponsor Entity as an equity investment ~~with~~and have elected the fair value option resulting in a ~~carrying~~fair value gain of ~~$11 thousand. Upon effectiveness~~$8,214 thousand included in Other Income (Expense), Net in the accompanying Statement 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.Operations.

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 ~~June~~September 30, 2021 and 2020

The following discussion analyzes our results of operations for the three months ended ~~June~~September 30, 2021 and 2020.

Revenue

Revenue for the three months ended ~~June~~September 30, 2021 was ~~$124~~$300 thousand, a ~~65%~~197% increase as compared to ~~$75~~$101 thousand for the three months ended ~~June~~September 30, 2020. The increase in revenue primarily related to increased use of our security printing, ~~and~~ authentication serialization ~~technology.~~technology from recurring customers and an order with a new cannabis customer using our unique smart phone readable codes, allowing customers to authenticate their product and engage with the brand in a new and innovative way.

Gross Profit

Gross profit for the three months ended ~~June~~September 30, 2021 was ~~$98~~$186 thousand, compared to ~~$62~~$82 thousand for the three months ended ~~June~~September 30, 2020. The resulting gross margin was ~~79%~~62% for the three months ended ~~June~~September 30, 2021, compared to ~~83%~~81% for the three months ended ~~June~~September 30, 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.~~technology and customer engagement products. 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 ~~$463~~$86 thousand to ~~$895~~$636 thousand for the three months ended ~~June~~September 30, 2021 from ~~$432~~$550 thousand for the three months ended ~~June~~September 30, 2020. The increase primarily related to increases in non-cash stock-based compensation of ~~$251~~$137 thousand, offset by a net decrease in public company related expenses and ~~increased costs associated with being a Nasdaq listed company of approximately $115 thousand, of which $47 thousand related to our annual meeting of shareholders.~~consulting fees.

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Legal and Accounting

Legal and accounting fees ~~increased~~decreased by ~~$20~~$24 thousand to ~~$88~~$74 thousand for the three months ended ~~June~~September 30, 2021 from ~~$68~~$98 thousand for the three months ended ~~June~~September 30, 2020. The ~~increase~~decrease relates primarily to ~~the expansion of our accounting department, partially offset by~~ savings in legal fees during the period.

Corporate Payroll Expenses

~~Payroll~~Corporate payroll expenses were ~~$234~~$194 thousand for the three months ended ~~June~~September 30, 2021, an increase of $9$77 thousand from ~~$225~~$117 thousand, for the three months ended ~~June~~September 30, 2020. The increase related primarily to increases in salaries and number of employees ~~offset by a decrease~~of $60 thousand and increases in stock based compensation expense of ~~$50~~$17 thousand.

Research and Development

Research and development expenses were ~~$12~~$8 thousand and $0$7 thousand for the three months ended ~~June~~September 30, 2021 and 2020, respectively. ~~The increase is due to continued development costs associated with commercialized product lines.~~

Sales and Marketing

Sales and marketing expenses were ~~$297~~$299 thousand and ~~$79~~$293 thousand for the three months ended ~~June~~September 30, 2021 and 2020, respectively. ~~The increase primarily related to an expansion of our sales team and marketing outreach. We expanded our sales team to address growing domestic and international opportunities.~~

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Operating Loss

Operating loss for the three months ended ~~June~~September 30, 2021 was ~~$1,428~~$1,025 thousand, an increase in loss of ~~$686~~$42 thousand compared to ~~$742~~$983 thousand for the three months ended ~~June~~September 30, 2020. The increase in loss primarily related to ~~the expansion of our sales team and marketing outreach totaling an increase of approximately $215 thousand, and an~~a net increase of stock-based compensation of ~~$204 thousand.~~$60 thousand and a $60 thousand increase in payroll expenses due to increase in the number of employees and higher salaries; partially offset by the increase of $104 thousand in gross profit.

Net ~~Loss~~Income

Our net ~~loss decreased~~income increased by ~~$1,295~~$8,172 thousand to ~~$1,358~~$7,189 thousand for the three months ended ~~June~~September 30, 2021 from ~~$2,653~~a net loss of $983 thousand for the three months ended ~~June~~September 30, 2020. The ~~decrease~~increase was primarily due to ~~amortization~~the fair value gain of ~~debt discount related to~~$8,214 thousand on our ~~convertible debentures included in interest expense~~equity investment in the ~~second quarter of 2020.~~SPAC. The resulting ~~loss~~gain per share for the three months ended ~~June~~September 30, 2021 was ~~$0.18~~$0.95 per diluted share, compared to ~~$1.04~~$0.18 loss per diluted share for the three months ended ~~June~~September 30, 2020.

Comparison of the ~~Six~~Nine Months Ended ~~June~~September 30, 2021 and 2020

The following discussion analyzes our results of operations for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020.

Revenue

We generated revenue of ~~$312~~$612 thousand for the ~~six~~nine months ended ~~June~~September 30, 2021, an ~~87%~~128% increase compared to ~~$167~~$268 thousand for the ~~six~~nine months ended ~~June~~September 30, 2020. The revenue primarily related to security printing with our authentication serialization technology for two large global brand owners as well as a new application of our technology, in the personal protective equipment ~~space.~~space and a new order with a cannabis company using our unique smart phone readable codes which allow it to connect directly with its customer base.

Gross Profit

Gross profit for the ~~six~~nine months ended ~~June~~September 30, 2021 was ~~$243~~$429 thousand, compared to ~~$137~~$219 thousand for the ~~six~~nine months ended ~~June~~September 30, 2020. The resulting gross margin was ~~78%~~70% for the ~~six~~nine months ended ~~June~~September 30, 2021, compared to ~~82%~~81% for the ~~six~~nine months ended ~~June~~September 30, 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.~~technology and customer engagement products. 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 ~~$714~~$800 thousand to ~~$1,684~~$2,320 thousand for the ~~six~~nine months ended ~~June~~September 30, 2021 from ~~$970~~$1,520 thousand for the ~~six~~nine months ended ~~June~~September 30, 2020. The increase primarily related to increases in non-cash stock-based compensation of ~~$314~~$451 thousand, ~~and~~ increased cost associated with being a Nasdaq listed company of approximately ~~$184~~$113 thousand, and an increase of costs associated with exploratory costs related to our search of strategic partnerships, mergers and acquisitions of $165 thousand.

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Legal and Accounting

Legal and accounting fees increased by ~~$77~~$53 thousand to ~~$214~~$288 thousand for the ~~six~~nine months ended ~~June~~September 30, 2021 from ~~$137~~$235 thousand for the ~~six~~nine months ended ~~June~~September 30, 2020. The increase relates primarily to the expansion of our accounting department, partially offset by savings in legal fees.

Corporate Payroll Expenses

~~Payroll~~Corporate payroll expenses were ~~$427~~$621 thousand for the ~~six~~nine months ended ~~June~~September 30, 2021, an increase of ~~$108~~$185 thousand from ~~$319~~$436 thousand for the ~~six~~nine months ended ~~June~~September 30, 2020. The increase related to an increase in the executive compensation and an increase in the number of our employees.

Research and Development

Research and development expenses were ~~$17~~$25 thousand and $0$7 thousand for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, respectively. The increase is due to continued development costs associated with commercialized product lines.

Sales and Marketing

Sales and marketing expenses were ~~$544~~$843 thousand and ~~$122~~$415 thousand for the ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, respectively. The increase primarily related to an expansion of our sales team and marketing outreach in 2021. We expanded our sales team to address growing domestic and international opportunities.

Operating Loss

Operating loss for the ~~six~~nine months ended ~~June~~September 30, 2021 was ~~$2,643~~$3,668 thousand an increase in loss of ~~$1,232~~$1,274 thousand compared to ~~$1,411~~$2,394 thousand for the ~~six~~nine months ended ~~June~~September 30, 2020. The increase in loss primarily related to an increase in non-cash stock-based compensation of approximately $380 thousand, an increase in employee headcount, ~~and~~increase in executive salaries, an increase relating to our sales and marketing outreach to meet our growing number of opportunities, and increased costs associated with being a Nasdaq listed company. In addition, operating loss for the six months ended June 30, 2021 included approximately $1,007 thousand of stock-based compensation compared to approximately $688 thousand of stock-based compensation for the six months ended June 30, 2020.

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Net ~~Loss~~Income

Our net income for the nine months ended September 30, 2021 was $4,616 thousand an increase of $9,344 thousand compared to $4,728 thousand net loss for the ~~six~~nine months ended ~~June 30, 2021 was $2,573 thousand a decrease in net loss of $1,172 thousand compared to $3,745 thousand for the six months ended June~~September 30, 2020. The ~~decrease in net loss~~increase was primarily ~~was~~ due to ~~amortization~~the fair value gain of ~~debt discount related to~~$8,214 thousand on our ~~convertible debentures included~~equity investment in ~~interest expense~~ the ~~six months ended June 30, 2020.~~SPAC. The resulting ~~loss~~net income per share for the ~~six~~nine months ended ~~June~~September 30, 2021 was ~~$0.37~~$0.63 per diluted share, compared to ~~$1.56~~$1.38 loss per diluted share for the ~~six~~nine months ended ~~June~~September 30, 2020.

Liquidity and Capital Resources

Our operations used ~~$1,668~~$2,368 thousand of cash during the ~~six~~nine months ended ~~June~~September 30, 2021 compared to ~~$699~~$1,294 thousand during the comparable period in 2020, relating primarily to an increase in employee headcount, an expansion of our 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 ~~$3,125~~$2,790 thousand during the ~~six~~nine months ended ~~June~~September 30, 2021 compared to ~~$51~~$75 thousand during the ~~six~~nine months ended ~~June~~September 30, 2020. The increase relates primarily to ~~the deposit for units~~our investment in the SPAC of ~~$2,713 thousand, reimbursable expenses for the SPAC of $208 thousand, (see Note 3 – Related Parties in the accompanying notes to the financial statements).~~$2,593 thousand.

Cash provided by financing activities during the ~~six~~nine months ended ~~June~~September 30, 2021, was ~~$8,216~~$7,849 thousand compared to $10,092 thousand during the ~~six~~nine months ended ~~June~~September 30, 2020. On February 12, 2021, as part of our public offering of an aggregate 1,750,000 shares of common stock, we generated aggregate gross proceeds of $9.3 million and net proceeds of $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 $530 thousand. We believe that our cash and cash equivalents, together with the net proceeds from this offering, will fund our operations through 2025.

In November 2020, we announced a share repurchase program to spend up to $1.5 million to repurchase shares of our common stock until August 16, 2021. On August 12, 2021, ~~we extended~~ this program was extended to expire on August 16, 2022. All other terms and conditions remained the same. To date, ~~67,516~~137,352 shares have been purchased for a total of ~~$228~~$464 thousand.

While we expect revenues to increase, we expect continued negative cash flows as we incur increased costs associated with expanding our business. We expect to grow our business organically and through key acquisitions that will help accelerate the growth of our business. We expect to continue to fund our operations primarily through utilization of our current financial resources, future revenue, and through the issuance of debt or equity.

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Off-Balance Sheet Arrangements

None.

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.

Variable Interest Entities

We determined that we have a variable interest in a VIE through our indirect ownership of the SPAC. As such, we used judgment to determine whether we are the primary beneficiary of the VIE and would need to consolidate as a result. To make this determination, we evaluated our power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the SPAC. We concluded that we are not the primary beneficiary, and as such account for it as an equity investment. The facts and circumstances surrounding our determination of whether the SPAC is a VIE and the entity that is the primary beneficiary are analyzed on an ongoing basis based on the current facts and circumstances surrounding the entity, including at every reporting period.

Equity Method Investment

We have accounted for our beneficial ownership in the SPAC as an equity investment as we have determined that we exert a significant influence in the entity’s operations and accounting policies. Furthermore, we have elected the fair value option under applicable US GAAP as we believe the fair value best reflects the economic performance of the equity investment.

Revenue Recognition

Our revenue transactions include sales of our ink canisters, software, licensing, pre-printed labels, integrated solutions and leasing of our equipment. We recognize revenue based on the principals established in ASC Topic 606, “Revenue from Contracts with Customers.” Revenue recognition is made when our performance obligation is satisfied. Our terms vary based on the solutions we offer and are examined on a case-by-case basis. For licensing of our VerifyInk^TM technology we depend on the integrity of our clients’ reporting.

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Stock-based Compensation

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

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ITEM 4. CONTROLS AND PROCEDURES.

(a) Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to ensure information required to be disclosed by 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 ~~June~~September 30, 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 ~~June~~September 30, 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 a lack of segregation of duties, resulting from limited staffing in our accounting department. As of ~~May 10,~~September 30, 2021, we have hired a Vice President of Finance and a Corporate Financial Controller in an effort to address this inherit weakness and as part of our remediation efforts.

(b) Changes in internal 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~~we have hired a Vice President of Finance. There were no changes in our internal control over financial reporting during the quarter ended ~~June~~September 30, 2021 that materially affected, or are 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, 2020 filed with the SEC, and “Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein. There 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, 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 combination or if its business combination proves unsuccessful.

On July 6, 2021, we acted as the sponsor for the initial public offering of G3 VRM Acquisition Corp, a special purpose acquisition company, or SPAC, through a contribution into the SPAC’s sponsor, 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~~(less 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 Sponsor Entity in connection with the SPAC’s IPO. Our investment in the SPAC through the Sponsor Entity equaled approximately ~~$2,592~~$2,593 thousand, and our ownership in the Sponsor Entity is 44.4%. The Sponsor Entity and all holders of founder shares and private placement securities have agreed to waive any right to distributions under the trust established for the 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 business combination by depositing additional funds into the 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 the founder shares and the private placement securities will be worthless. Even if the SPAC is able to complete a business combination within the allotted time, if the combined company is unable to maintain adequate results from operations, then our investment in the SPAC could lose value and may ultimately become worthless. There can be no assurance that the SPAC will complete a business combination within the allotted time or that any such business combination will be successful.

As a company with significant revenues deriving from clients in the cannabis industry, we face many unique and evolving risks.

We currently derive material revenues from clients in the cannabis industry from use of our track and trace and customer engagement technologies. As such, any risks related to the cannabis industry may adversely impact our clients, and potential clients, which may in turn, impact the demand for our products and services. Specific risks impacting the cannabis industry include, but are not limited, to the following:

United States federal law prohibits Marijuana

Under the Controlled Substances Act (“CSA”), marijuana is a Schedule-I controlled substance making it illegal under federal law to grow, cultivate, distribute, sell or possess marijuana for any purpose or to assist or conspire with those who do so. Although the use of marijuana is legal in certain states under state law, since federal law supersedes state law, strict enforcement of federal law would likely result in adverse effects on our clients’ operations, which would in turn, adversely impact our revenues.

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Banking regulations could limit access to banking services and expose us to risk

Funds received from our clients in the cannabis industry, operating legally under state law, may subject us to a variety of federal laws and regulations involving money laundering, financial record keeping and proceeds of crime, since the funds are considered illegal under the CSA and as such banks and other financial institutions providing services to us risk violation of anti money laundering statutes and other applicable statutes. Furthermore, banks often refuse to provide banking services to businesses involved in the cannabis industry due to the federal and state laws and regulations governing financial institutions. The difficulty and potential inability to open bank accounts that our clients in the cannabis industry deal with, makes it difficult to conduct business and as such could affect our ability to collect revenues earned. Furthermore, our clients in this industry are more susceptible to theft, and potentially lack the ability to insure themselves against theft. We may experience similar difficulties in obtaining banking and financial services because of the activities of our clients in the cannabis industry.

The legality of cannabis could be reversed in one or more states

The voters or legislatures of states in which marijuana has already been legalized could potentially repeal applicable laws that permit the operation of both medical and retail marijuana businesses. These actions might force businesses, including those that are our clients, to cease operations in one or more states entirely. Additionally, these actions could negatively impact us and lead to a decrease of our revenue through the loss of current and potential customers.

Recent and changing interpretations of the law regarding medical and recreational use of marijuana

State laws and regulations surrounding medical and recreational use of marijuana are fairly recent and constantly changing resulting in a potential challenge to maintain compliance. As such, violations of these laws, or allegations of such violations, could be disruptive to our clients’ business and in return cause a disruption in our operations. Future modifications of state and local laws surrounding marijuana, may limit operations of our clients’ business in this industry, which could negatively impact our revenues.

Dependence on client licensing

Our clients in the cannabis industry must obtain various licenses from various local and state licensing agencies. As such, there is a risk that our existing clients will not be able to retain their licenses going forward, should they violate applicable rules and regulations, or should renewal become more stringent. If our customers are not able to maintain or renew their licenses, this would adversely impact our operations.

Insurance Risk

Insurance companies may limit policies to only cover claims legal under federal law. As such our clients in the cannabis industry may not be properly insured. Any claims against our clients may have a negative impact on our ability to collect revenues from our clients in the cannabis sector.

Global supply-chain delays and shortages may adversely impact our customers or potential customers

Global supply-chain delays and shortages, which are out of our control, are currently affecting a wide variety of businesses globally including one of our customers. Supply-chain delays shortages may affect our customers or potential customers which would adversely affect our operations.

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

In ~~April~~August 2021, the Company issued 2,174 shares of restricted common stock in relation to investor relation services.

In ~~June~~September 2021, 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.

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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 thousand, net of underwriting discounts and commissions of approximately $800 thousand and fees and expenses of 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 ~~June~~September 30, 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⁾⁽²⁾ Approximate Dollar Value of Shares that
May Yet Be Purchased Under the Plans
or Programs⁽¹⁾⁽²⁾
(In thousands)
07/01/2021-07/31/2021 - - - -
08/01/2021-08/31/2021 18,869 $3.45 18,869 $1,208
09/01/2021-09/30/2021 50,967 $3.36 50,967 $1,036
Total 69,836 $3.38 69,836 $1,036
~~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’s Board of Directors extended the share repurchase program to expire on August 16, 2022. All other terms and conditions remained the same.
(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.
(2) Excludes shares surrendered by employees to satisfy minimum tax withholding obligations on restricted stock awards which vested in the third quarter of 2021.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

The information included under the heading Share Repurchase Plan of Part II–Item 2. 2–Unregistered Sales of Equity Securities and Use of Proceeds of this form 10-Q, is incorporated by reference herein.

ITEM 6: EXHIBITS

Exhibit No. Description
10.1* ~~Independent Contractor Consulting Agreement, dated April 15, 2021, with Norman Gardner~~
31.1* Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1* Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS* XBRL Instance Document. 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 Document.
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document.
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 Document.
104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*Filed*Filed herewith
~~# 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: ~~August 13,~~November 10, 2021 By: /s/ Patrick White
Patrick White

Chief Executive Officer
(Principal Executive Officer)

Date: ~~August 13,~~November 10, 2021 By: /s/ Margaret Gezerlis
Margaret Gezerlis

Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)

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Nevada		23-3023677
(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)

Large accelerated filer	☐ o	Accelerated filer	☐ o

Non-accelerated filer	☒ x	Smaller reporting company	☒ x

Emerging growth company	☐ o


~~Nevada~~		~~23-3023677~~VERIFYME, INC.
(Exact Name of Registrant as Specified in Its Charter)