Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - VerifyMe, Inc.ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - VerifyMe, Inc.ex31_2.htm
EX-10.21 - EXHIBIT 10.21 - VerifyMe, Inc.ex10_21.htm
EX-31.1 - EXHIBIT 31.1 - VerifyMe, Inc.ex31_1.htm
EX-10.32 - EXHIBIT 10.32 - VerifyMe, Inc.ex10_32.htm
EX-10.31 - EXHIBIT 10.31 - VerifyMe, Inc.ex10_31.htm
EX-10.30 - EXHIBIT 10.30 - VerifyMe, Inc.ex10_30.htm
EX-10.29 - EXHIBIT 10.29 - VerifyMe, Inc.ex10_29.htm
EX-10.28 - EXHIBIT 10.28 - VerifyMe, Inc.ex10_28.htm
EX-10.20 - EXHIBIT 10.20 - VerifyMe, Inc.ex10_20.htm
EX-10.19 - EXHIBIT 10.19 - VerifyMe, Inc.ex10_19.htm
EX-10.18 - EXHIBIT 10.18 - VerifyMe, Inc.ex10_18.htm
EX-10.17 - EXHIBIT 10.17 - VerifyMe, Inc.ex10_17.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
 
FORM 10-K
 
 
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the fiscal year ended December 31, 2017
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the transition period from                      to                     
 
Commission File Number 0-31927
 
 
 
VERIFYME, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
 
Nevada
 
23-3023677
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 75 S. Clinton Avenue Rochester, NY  14604
(Address of Principal Executive Offices) (Zip Code)
 
Registrant’s telephone number, including area code: (585) 736-9400
 
Securities registered pursuant to Section 12(b) of the Act:
 
None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, $0.001 par value
 
1

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   or No  
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   or No  
 
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   or No  
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   or No  
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
       
Emerging Growth
Company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   or No  
 
The aggregate market value of the common stock held by non-affiliates of the registrant was $1,941,452 as of June 30, 2017 based on the price in which the common stock of the registrant was last sold as reported by the OTCQB. Shares of common stock held by each current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not a conclusive determination for other purposes.
 
The registrant had 84,896,325 shares of common stock outstanding as of the close of business on April 12, 2018.
   

 
2

 
DOCUMENTS INCORPORATED BY REFERENCE
 
NONE
 
 
 
 
VERIFYME, INC.
 
FORM 10-K ANNUAL REPORT
Year Ended December 31, 2017

 
 
 
 
Page
 
PART I
 
 
 
 
Item 1.
 
4
  
Item 1A.
 
24
  
Item 1B.
 
24
  
Item 2.
 
24
  
Item 3.
 
24
  
Item 4.
 
24
  
 
 
 
PART II
 
 
 
 
Item 5.
 
25
  
Item 6.
 
26
  
Item 7.
 
27
  
Item 7A.
 
38
  
Item 8.
 
38
  
Item 9.
 
39
  
Item 9A.
 
39
  
Item 9B.
 
40
  
 
 
 
PART III
 
 
 
 
Item 10.
 
40
  
Item 11.
 
40
  
Item 12.
 
40
  
Item 13.
 
40
  
Item 14.
 
40
  
 
 
 
PART IV
 
 
 
 
Item 15.
 
40
  
Item 16.
  41  
PART I
 
 
ITEM 1. BUSINESS.
 
Overview

 VerifyMe, Inc. (the “Company,” “VerifyMe,” “we,” “us,” or “our”) is a technology pioneer in the brand protection/anti-counterfeiting industry. The Company was formed as LaserLock Technologies, Inc., in Nevada on November 10, 1999.  For the last three years the Company has been engaged in researching, developing, and monetizing products in the brand protection and anti-counterfeiting industry. This broad market encompasses identifying and preventing counterfeiting of physical and material goods and products, as well as identifying counterfeiting in digital transactions. We have the ability to deliver security solutions for identification and authentication of people, products and packaging in a variety of applications in the security field for both digital and physical transactions. Our products can be used to print, secure and covertly serialize labels and packaging for brand owners, manage and issue secure credentials, including national identifications, passports, driver licenses and access control credentials, as well as comprehensive authentication security software to securely process digital financial transactions, provide secure physical and logical access to facilities, computer networks, internet sites and mobile applications.
 
The challenges associated with digital access control and identity theft are problems that are highly relevant in the world today. Consumers, citizens, employees, governments and employers demand comprehensive solutions that are reliable but not intrusive. The current widespread use of passwords and personal identification numbers, or PINs for authentication has proven to be unsecure and inadequate. Individuals increasingly expect anywhere-anytime experiences—whether they are making purchases, creating financial transactions, banking, crossing borders, accessing services or logging into online accounts or corporate resources. They expect those experiences to ensure the protection of their privacy and to provide uncompromising confidentiality.
 
Our physical technologies we own enable businesses to reconstruct their overall approaches to security—from brand protection and counterfeit identification to employee or customer monitoring. Potential applications of our technologies are available in different types of products and industries—e.g., banking,  gaming, apparel, tobacco, fragrances, food, beverages, event and transportation tickets, driver’s licenses, insurance cards, passports, computer software, and credit cards. We can generate sales through licenses of our technology and through direct sales of our technology to global brand owners, label and packaging printers.
 
Our physical technologies involve the utilization of invisible and/or color changing inks, which are compatible and printed with today’s digital and standard printing presses. The inks may be used with certain printing systems such as digital, offset, flexographic, silkscreen, gravure, inkjet and laser. Based upon our experience, we believe that the ink technologies may be incorporated into most existing manufacturing processes.
 
In February 2018, we entered into a reseller agreement with a global label manufacturer (the “GLM”). This particular label printer has major brand owners as clients which can utilize our technologies to protect their product labels and packaging from counterfeiting and product diversion. This label printer owns and operates printers and manufacturing equipment which can implement the Company’s technology. This reseller also has manufacturing facilities around the globe.
 
In March 2018 we entered into a strategic partnership with S-One Labels & Packaging, a division of S-One Holdings Corporation (“S-One”). S-One provides companies with product and sales channels, technical and marketing support, digital development support, and distribution channels through the other companies which have partnered with S-One. S-One will provide the Company with global sales, distribution, and promotion support for the Company’s products and will employ a representative that will be solely dedicated to promoting the Company’s products. Under the terms of the Company’s agreement with S-One, S-One will act as a sales and marketing contractor for the Company’s printed products and services on a global basis and will assist the Company in fulfilling the Company’s obligations under the Company’s signed current and future reseller agreements with global and domestic print providers and brand owners.
 
 
Physical Security Technology
 
In September of 2017 we announced a five-year contract with the Indigo Division of HP Inc. (NYSE:HPQ) ("HP Indigo") a global printing technology leader.  HP Indigo is a leader in manufacturing digital printing presses.  These presses print both static and variable high-quality images such as personalized labels and packaging for major brand owners.  Our technology was tested and approved by HP Indigo for use on the HP Indigo 6000 series press models.

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

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

The HP Security ElectroInk containing RainbowSecure™ is in an ink canister that is mounted into the digital Indigo printing press along with the other traditional ink stations.  Since the HP Indigo is a digital press, the VerifyMe RainbowSecure™ technology prints covert serialization numbers, codes or images either fixed or variable mainly on labels and packaging which are revealed when using VerifyMe’s hand-held authentication devices.
 
As an add-on track and trace feature of our RainbowSecure™ covert imaging, VerifyMe has contracted with Micro Focus International PLC (NYSE:MFGP), a global software developer to utilize their visible QR code system called Global Protected Authentication System (“GPAS”) which is printed on labels and packaging along with our covert RainbowSecure™ to store our hidden covert serial number in the cloud for product diversion investigators to authenticate with a proprietary app on a mobile device.  The Micro Focus “GPAS” Global Product Authentication Service allows customers to use their smartphone to scan a product’s QR code or send the code via a text message. Immediate results help verify whether the product is real or counterfeit. This helps save customers from potential physical harm and businesses from facing lawsuits, loss of revenue and brand erosion.  In addition to the anti-counterfeiting image, the Micro Focus Track and Trace software has a “Big Data” gathering system with real-time analytics which geographically locate and identify counterfeiting activity by using an easily configured rules engine.  VerifyMe’s covert or invisible RainbowSecure™ system works as an extra layer of protection for the GPAS system.  When a professional product investigator scans the Micro Focus visible QR code with a special app on a smart phone it brings him to the VerifyMe secure cloud application to see what the hidden serialization number printed by the HP Indigo is for that particular label or package.  The product investigator then uses the VerifyMe RainbowSecure™ reading device to compare the hidden serialization number against the cloud number to prove authenticity.
 
Under the contract with Micro Focus, VerifyMe has a re-seller agreement where VerifyMe sells the combined Micro Focus GPAS system with our RainbowSecure™ identifier under the name VeriPAStm.
 
Under the terms of the Company’s; agreement with the GLM, the GLM will be able to create and print labeling containing the VerifyMe RainbowSecure™ ink technology.
 
HP has their own QR code track and trace system called, “HP Link Technology”.  HP Link competes with the Micro Focus GPAS system.  VerifyMe is in early discussions to build a similar covert serialization number layer utilized in the Micro Focus GPAS system into HP Indigo’s Link system.
 
 
We believe that the physical technologies we own, coupled with our new five-year contract with HP Indigo we will enable brand owners to securely prevent counterfeiting and alleviate the brand owner’s liability from counterfeit knockoffs which physically harm consumers.  Our covert technologies give the brand owner the ability to prove that the product causing an issue is authentic or made by a counterfeiter.
 
In addition to packaging and labels our physical security printing technologies can be applied to authenticate important credentials such as driver’s licenses, plastics, metal, apparel, birth certificates, immigration documents, gaming, apparel, currency, event and transportation tickets, passports, computer software, and credit cards. With our new partnerships described in this annual report (the “Annual Report”), our goal is to generate revenue through licenses and royalties of our technology and through direct sales of our technology.
 
Anti-Counterfeiting Technologies and Products
 
Recent developments in copying and printing technologies have made it easier to counterfeit a wide variety of documents and products.  We have broken the current state of counterfeiting into two types.  The first type is what we call “Traditional Counterfeiting” These include mainly paper type documents and instruments such as bank checks, birth certificates, credentials, identification documents, stock certificates, currency, lottery tickets, credit cards, driver’s licenses, event and transportation tickets, coupons, and travelers’ checks.  As you can see most of the Traditional Counterfeiting targets are mainly paper type instruments which can be traditionally copied, scanned, color copied, hand drawn, etc. by both professional and consumers alike.  The other type of counterfeiting we call “Modern Counterfeiting”.  Although Traditional Counterfeiting targets are extremely important and cause mainly financial harm, “Modern Counterfeiting” targets on the other hand are much more sophisticated.  Both organized crime, consumers, small and large businesses and even governments partake in Modern Counterfeiting.  Modern Counterfeiting consists of the actual counterfeiting of major brand owner’s products such as expensive luxury items like jewelry, purses, military items (sabotage), drug manufacturing, consumables like tobacco, alcohol, golf clubs and even food and beverages.  Not only is the packaging and labeling counterfeited, the actual products are counterfeited.  The modern counterfeiter has become the scourge of the earth.  There are even reports of whole companies being counterfeited.  People are getting sick and sometimes even killed with counterfeit cough syrup, watered down cancer drugs and even toothpaste containing poisonous substances.
 
Not only are consumers at risk, brand owners are also at risk.  Normally brand owners feel a financial impact when someone is selling or diverting their products by counterfeiters.  The financial impact seems to be the lesser of the risk factors.  The additional more impactful risk facing brand owners and drug manufacturers is the liability issue.  A brand owner may be called to a court room to prove that a product is authentic or counterfeit to avoid major liability exposure in the form of judgements and fines as well as the extremely severe negative marketing exposure for such issues.
 
Brand owners do not want their products published as the name of a product that injured or harmed a consumer.  Our covert RainbowSecure™ technology can be utilized by brand owners to authenticate products, labels and packaging in those circumstances.  We believe that losses and liability from such counterfeiting is increasing substantially with improvements in counterfeiting technology as well as the proliferation of highly skilled and well-funded counterfeiters.  It is therefore imperative that all brand owners, beverages, food and drug manufacturers utilize the best counterfeit prevention technologies available for their products.
 
 
We believe that our physical and material goods anti-counterfeit technologies may be useful to businesses desiring to authenticate a wide variety of materials and products. The best solution for brand owners and manufacturers is to layer as many technologies as they can to protect their products.  Our technologies include (1) a technology utilizing invisible ink taggant that can be revealed by use of a special calibrated laser light for authentication purposes, (2) an ink technology, which allows invisible codes to be printed and (3) a color changing technology that is activated by certain types of lights. All of those technologies cannot be copied or scanned by the counterfeiter.  We believe the useful life of our technologies on a label or package is at least 20 years.  Our technologies can be printed on labels and packaging and can also be applied to metals, plastics and textiles. Other possible variations of our laser-based technology involve multiple color responses from a common laser, visible marks of one color that turn another color with a second laser, or visible and invisible marks that turn into a multicolored image. These technologies provide users with the ability to authenticate products and detect counterfeit documents. Applications include the authentication of documents having intrinsic value, such as currency, checks, travelers’ checks, gift certificates and event tickets, and the authentication of product labeling and packaging. When applied to product labeling and packaging, our technologies can be used to detect counterfeit products with labels and/or in packaging that do not contain the authenticating marks invisibly printed on the packaging or labels of legitimate products, as well as to combat product diversion (i.e., the sale of legitimate products through unauthorized distribution channels or in unauthorized markets). We believe that our technologies also could be used in a manner that permits manufacturers and distributors to track the movement or pinpoint geographically where counterfeiting of products is occurring.  We can track and trace from production to ultimate consumption when coupled with our VeriPAStm proprietary software.
 
Due to a recently signed contract with HP Indigo and Micro Focus, VerifyMe RainbowSecure™ technology can now be printed variably on high-speed, high-quality labels and packaging.  Our technology cannot be seen by the human eye and requires special authentication equipment to see in labels and packaging which can be authenticated via a secure cloud process.  Brand owners can not only prove the authenticity of a product, but it can also prevent product diversion and enhance track and trace operations which generates business intelligence as to where counterfeiting is occurring around the globe.  These contracts give the Company the ability to secure, protect and identify the labels and packages of drugs, cosmetics, food, beverages and all other consumable products.  We are now working with HP Indigo to roll out the technology to their 6000 series Indigo owners.  Micro Focus is also now marketing our combined track and trace solution. S-One will also provide VerifyMe with a global and sales and marketing reach for this solution.

Physical and Material Goods Anti-Counterfeit Industry — Overview

The U.S. is projected to remain the largest single consumer of security services and products in the world. One of the most important new areas of expansion is in the area of authentication, which is the act of confirming that objects such as currency, passports, casino chips, credit cards, stock certificates, pharmaceuticals, stamps, identification cards, lottery tickets, and so forth, are real and not forgeries. With the advent of new technologies, including the color copier and other printing technologies and templates and the availability of the Internet, counterfeiters have had access to technologies which make it easier to produce counterfeit items. Counterfeiters are often located in foreign nations where counterfeiting is subject to little or no viable threat of prosecution.
 
While some currency and credit cards have introduced holograms, seals, and embedded strips in order to add a level of protection, most such methodologies are expensive and, in some cases involve a time-consuming production process. In other instances, such as when printing cigarette tax stamps or hundreds of millions of pieces used in a popular restaurant chain’s contest game pieces, the authentication process must be extremely inexpensive and easy to use or it will not be cost effective. Currently many national currencies lack a sufficient layer of protection to deter counterfeiting and can easily be counterfeited. 

 
Two major trends

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

According to the International Trademark Association, $460 billion worth of counterfeit goods were bought and sold last year. Not surprisingly, much of it happened online.

A new study from Red Points, a brand-protection firm based in Barcelona, Spain, shines a light into this shadowy realm. Using data generated by its custom-built web crawlers that search for fake merchandise on behalf of its 200 clients, Red Points compiled a Top 10 list of sites where counterfeit goods are most frequently bought and sold.  In fact, six of the 10 sites on the list are headquartered in the Far East—China in particular, which has a long-standing reputation for counterfeit production and what you might call a relaxed attitude toward intellectual property.
 
 
The Red Points’ study also identified the most commonly counterfeited goods. As it turns out, the most knocked-off item isn’t a designer handbag, but sneakers.

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

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

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

The UNODC and the World Customs Organization estimate 75 percent of counterfeit products seized worldwide in 2010 were manufactured in East Asia, mostly in China.
 
Counterfeiting is a continuously evolving economic crime. It presents companies, governments and individuals with a unique set of problems and has become a sophisticated network of counterfeiting.  Counterfeiting devalues corporate reputations, hinders investment, and imposes costs upon many people every year.

The Size of the Market Opportunity

The global anti-counterfeit packaging market was estimated at $107.26 Billion in 2016 and is projected to reach $206.57 Billion by 2021, at a compound annual growth rate of 14.0%. The base year considered for the study is 2015 with the market size projected from 2016 to 2021 based on a report by marketsandmarkets.com.
 
Based on Technology, the label and packaging market has been segmented as follows:
Coding & printing technology (Track and Trace)
RFID
Hologram
Security labels
Packaging design
Others (digital mass sterilization, digital mass encryption, and surveillance technologies)
 
The anti-counterfeiting industry is segmented into four general categories: (i) Optical technologies - use of light, i.e. holograms; (ii) Electronic - magnetic strips and smart cards; (iii) Biotechnologies - uses characteristics of biological proteins such as antibodies, enzymes and DNA; and (iv) Chemical technologies - includes photochromic (or light-reactive) and thermochromic (or heat-reactive) inks.

We operate in the chemical technologies and security ink sectors of the industry. Products in this industry change color when exposed to either heat or light and revert to their original color when exposed again. Generally, the effect is reversible as often as required. Inks have also been developed that are invisible to the human eye, but which can be read by bar-code scanners. These have been used in the fragrance and pharmaceutical industries to authenticate products. Other reactive inks change color when brought into contact with specific substances, such as ink from a felt-tipped pen.
 
 
The anticounterfeit packaging industry is segmented into the following:
Coding
Printing technology (Identifiers)
Radio Frequency Identification (“RFID”)
Hologram
Security labels
Packaging design
Others (digital mass sterilization, digital mass encryption, and surveillance technologies)

We operate in the coding & printing technology, security labels segments in the anti-counterfeit packaging industry.
 
Recent developments in printing technologies have made it easier to counterfeit a wide variety of documents. Lottery tickets, gift certificates, event and transportation tickets and travelers’ checks are all susceptible to counterfeiting, and we believe that losses from such counterfeiting have increased substantially due to improvements in technology. Counterfeiting has long caused losses to manufacturers of brand name products, and we believe that these losses have increased as the counterfeiting of labeling and packaging has become easier.
 
The Organization for Economic Cooperation and Development based on its recently published study in 2016, estimates that global trade related counterfeiting accounts for 2.5% of world trade or approximately $461 billion. They also conclude that millions of consumers are risking their lives by using unsafe and ineffective counterfeit products unknowingly.
 
Identification Cards and Secure Documents
 
Governments are increasingly vulnerable to counterfeiting, terrorism and other security threats at least in part because currencies, identity and security cards and other official documents can be counterfeited with relative ease. For instance, Havocscope, a company that collects black market intelligence and identifies security threats, reports that the value of counterfeit identification and passports in the United States is approximately $100 million. Governments must also enforce the various anti-counterfeiting and anti-piracy regimes of their respective jurisdictions which becomes increasingly difficult with the continued expansion of global trade. To highlight the size of the problem, in April 2012 the European Parliament estimated that of the 6.5 million biometric passports in circulation in France, between 500,000 and one million are counterfeit, having been obtained using counterfeit documents. Our overt and covert ink pigment platform can provide secure, forensic, and cost-effective anti-counterfeiting, anti-piracy and identification solutions to local, state, and federal governments as well as the defense contractors and the other companies that do business with them. Our pigment solution cans be used for many types of identification and official documents, such as:
 
Passports;
Permanent resident, or “green” cards and visas;
Drivers’ Licenses;
Social Security cards;
Military identification cards;
National transportation cards;
Security cards for access to sensitive physical locations; and
other important identity cards, official documents and security-related cards.
 

Pharmaceuticals
 
The pharmaceutical industry faces major problems relative to counterfeit, diluted, or falsely labeled drugs that make their way through healthcare systems worldwide, posing a health threat to patients and a financial threat to producers and distributors. Counterfeit prescription pharmaceuticals are a growing trend, widely recognized as a public health risk and a serious concern to public health officials, private companies, and consumers. The National Association of Boards of Pharmacy estimates that counterfeit drugs account for 1–2% of all drugs sold in the United States. The World Health Organization (“WHO”) estimates the annual worldwide “take” from counterfeit drugs to be £13 billion (approximately $20 billion USD), a figure that is expected to double by the end of this decade. In some countries, counterfeit prescription drugs comprise as much as 70% of the drug supply and have been responsible for thousands of deaths, according to the WHO. Counterfeit pharmaceuticals are estimated to be a billion-dollar industry, though some estimate it to be much larger. In 2012, the WHO reported that in over 50% of cases, medicines purchased over the Internet from illegal sites that conceal their physical address have been found to be counterfeit. According to the WHO, counterfeiting can apply to both branded and generic products and counterfeit pharmaceuticals may include products with the correct ingredients but fake packaging, with the wrong ingredients, without active ingredients or with insufficient active ingredients.
 
Based on this growing threat, many countries have started to address vulnerabilities in the supply chain by enacting legislation which, among other things, requires the implementation of a comprehensive system designed to combat counterfeit, diluted or falsely labelled pharmaceuticals.  These systems are often referred to as serialization, or in the United States as e-Pedigree (electronic pedigree).  One jurisdiction that has enacted such regulations is California, which passed legislation requiring all “dangerous drugs” (defined as all prescription drugs) that are distributed in California must be serialized and have an electronic pedigree by January 1, 2016 and with limited exceptions cannot be sold by a pharmacy without a pedigree after July 1, 2017.

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

The Federal Drug Administration (“FDA”) is currently implementing Title II of the Drug Quality and Security Act, entitled the “Drug Supply Chain Security Act.” This regulation requires drug manufactures to add product identifiers, such as our RainbowSecure™ technology as well as our VeriPAStm track and trace system, to certain prescription drug packages beginning in November 2017. Re-packagers must begin adding product identifiers in November 2018. We plan on selling directly to the pharmaceutical industry and their printers. We will also engage third party marketing and sales companies to present our solutions to the drug and pharmaceutical industry. The FDA intends to continue implementing the Drug Supply Chain Security Act to ensure that a full electronic identification system for prescription drugs is implemented by 2023.

Consumer Products
 
Counterfeit items are a significant and growing problem with all kinds of consumer-packaged goods, especially in the luxury retail and apparel industries.  Our unique ink pigments can be incorporated in dyes and used by manufacturers in these industries to combat counterfeiting and piracy of actual physical goods. Our pigments expressed as inks can also be used on packaging, as well to track products that have been lost in transit, whether misplaced or stolen.
 
 
Food and Beverage
 
Counterfeit food threats are becoming more common as supply chains become more global and as imaging and manufacturing technology become more accessible. Numerous reports of counterfeit foods have been reported, including long-grain rice labelled and sold as basmati rice, Spanish olive oil bottled and sold as Italian olive oil, and mixtures of industrial solvents and alcohol sold as vodka. Although many of these stories have emerged from the U.K. and Europe, the fake-food problem is also relevant in the United States.
 
The National Center for Food Protection and Defense estimates that Americans pay $10 billion to $15 billion annually for fake food — often due to product laundering, dilution and intentionally false labeling. We believe our pigments and authentication tools can help in the battle against counterfeit foods and beverages.
 
Printing and Packaging
 
Counterfeiting in packaging has greatly intensified in recent years, causing concerns for consumers and financial concern for businesses worldwide.  Billions of dollars per year are at stake for companies as they seek ways to ensure that the products sold with their logos and branding are authorized and authentic. The proliferation of counterfeiting requires brand owners and their converter/printer partners to work together to create a multi-layered protection plan so that their packaging and labels protect their brands and deter those trying to profit at their (and their reputation’s) expense.
 
Counterfeiters have become so good at their unlawful activity that spotting the difference between legitimate and counterfeit products can be daunting. Counterfeiters have many ways to subvert legitimate brands. These may include taking an out-of-date product and selling it in packaging and labels that have been forged; sometimes, the packaging, labels and product itself are all counterfeited. Counterfeiters might also use legitimate packaging coupled with fake products. We believe our pigment security systems are a cost-effective solution for printer and packagers and are easily integrated into their existing manufacturing process.
 
The Opportunity
 
As counterfeiting continues to increase and losses to manufacturers and others continue to escalate, we believe that those entities will seek better technologies to minimize their exposure. These technologies, however, must also be cost-effective, easy to integrate, and highly resistant to counterfeiting themselves. We offer products in two related market segments. We offer security Ink taggants in the Anti-Counterfeiting/Authentication Industry and we offer a software product called VeriPAStm in the identifier/track and trace industry.

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

Our Solutions 
In the areas of authentication and serialization of physical goods, we offer clients the following products as anti-counterfeit systems:
·
RainbowSecure™
·
SecureLight™
·
SecureLight+™
·
Authentication tools
·
VeriPAStm Global Product Identifier, Track and Trace System
 
 
RainbowSecure™ technology was our first technology to be patented. It combines an invisible ink with a proprietary tuned laser to enable counterfeit products to be exposed. It has been widely accepted in the gaming industry, where the technology has been used by casinos to protect their chips, dice, and playing cards from fraud.

In 2017, VerifyMe signed a five-year contract with HP Indigo to print this technology on packages and labels on their 6000 series digital Presses.  In January 2018, VerifyMe signed a contract with Micro Focus to use RainbowSecure™ in their Global Product Authentication, Track and Trace system (software). The technology also features a unique double layer of security which remains entirely covert at all times and provides licensees with additional protection. RainbowSecure™ is particularly well-suited to closed and controlled environments, such as casinos that want to verify transactions within a specific area, labels, packaging, textiles, plastics and metal products which need authentication.
  
SecureLight™ technology was developed as a result of our investment in new proprietary color changing inks that could penetrate broader markets and result in far greater revenues. During the past nine years, we have refined our technologies and their applications, and now have what we believe to be the easiest, most cost effective and efficient authentication technologies available in the world today. Our technology, known as SecureLight™, takes advantage of the new ubiquitous energy efficient fluorescent lighting to change the color of ink, resulting in hundreds of new applications ranging from credit cards to driver’s licenses, passports, stock certificates, clothing labels, currency, ID cards, and tax stamps. The technologies can also be used to protect apparel, pharmaceuticals, and virtually any other physical product.

SecureLight+™ technology combines the covert characteristics of RainbowSecure and the overt characteristics of SecureLight. This provides a solution which can be authenticated in two different ways - by proprietary tuned laser devices, and also by anyone with fluorescent lighting including end consumers.

VeriPAStm Technology combines the covert identifier of RainbowSecure™ with the Micro Focus Track and Trace software which provides brand owners geographical business intelligence on counterfeiting as well as the ability to authenticate labels, packaging and products.
 
Authentication tools have been developed which we can sell to customers in conjunction with pigments and are tuned to authenticate the unique frequency of each batch. This will allow for customers to instantly authenticate items with a customized beeper which will only positively identify a product bearing their unique anti-counterfeit solution. This authentication is provided in the form of an LED indicator, a camera device which reveals the hidden serialization numbers and codes on a viewing screen and audible beeping device when placed on a label, product or package containing the RainbowSecure™ technology.
 
Raw Material Suppliers
 
Our security pigments are manufactured from naturally occurring inorganic rare earth materials. The manufacturing process includes both chemical and mechanical elements. In many cases, we produce pigments that are unique to a customer or product line. This uniqueness can be achieved through a variety of techniques, including custom formulation or combination of our proprietary pigments and/or incorporation of other specialized taggants.
 
There are many manufacturers of these types of specialized pigments and we intend to maintain multiple simultaneous relationships to ensure ample sources of supply.
 
 
Distribution
 
We provide pigment mixing instructions for the specific uses of each client based on their existing equipment and processes. We maintain policies and procedures to monitor, track and log access to and disposition of all pigment. Our customers are also required to agree to and implement these policies and procedures.
 
Digital Authentication Technologies and Products
 
We believe accurate identification of human beings in electronic transactions, also known as Digital Identity Management, will continue to be a large and rapidly growing market. In today’s world the need for verification of the unique identity of human beings participating in those transactions has become more important as governments and banks are beginning to acknowledge these as valid financial transactions. In general, every electronic transaction has a least two actors – a subject and a relying party. The relying party has a business need to eliminate or reduce risk associated with the identification of the subject.
 
Electronic financial theft and electronic theft of private information make headlines almost every day. According to a 2018 Identity Fraud Study released by Javelin Strategy & Research $16.8 billion was stolen from 16.7 million U.S. consumers in 2017. The majority of this harm can be traced to weak authentication systems, such as Username/Password, yet these weak systems continue to be used in most of the world’s transactional systems. Cybersecurity is a growing threat requiring continuously evolving forms of electronic security.
 
Historically, stronger authentication solutions, such as biometric, two-factor and multi-factor solutions have been difficult to use and expensive to deploy and operate. The extraordinary proliferation of smart phones and tablets provide an infrastructure for disruptive solutions that leverage the mobile nature of these devices and the multi-sensor computing capabilities.
 
VerifyMe Authenticator is a digital identity management software platform that provides extensible authentication mechanisms that can be dynamically invoked to achieve a specified degree of identity assurance. The Authenticator platform incorporates a risk engine that associates individual risk parameters and scores with every unique authentication mechanism. The risk engine then generates aggregate risk scores based on the specific combination of individual authentication mechanisms used to confirm the identity of the human being.
 
We are now enhancing this product and getting it ready for deployment into the financial services industry.  We cannot assure you we will generate any revenues from these efforts.

Digital Authentication Technology

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

The challenges associated with digital access control and identity theft are problems that are highly relevant in the world today. Consumers, citizens, employees, governments and employers demand comprehensive solutions that are timely, reliable but not intrusive. The current widespread use of passwords and personal identification numbers, or PINs for authentication has proven to be unsecure and inadequate. Individuals increasingly expect anywhere-anytime experiences—whether they are making purchases, crossing borders, accessing services or logging into online accounts or corporate resources. They expect those experiences to ensure the protection of their privacy and to provide uncompromising confidentiality.
 
 
Verification is the front door of all access and transactions. The most fundamental action is to identify “who the person is and how you identify yourself” We feel our VerifyMe digital authentication is the building block that answers that question. Our VerifyMe Verification technology ensures that users are who they say they are.  Our technology becomes their virtual credentials which are protected from fraud and theft.  There are literally hundreds of millions of identities stolen annually. It is absolutely crucial to know which users have the right to access particular information or transaction, and whether or not unauthorized users have been prevented from accessing those same critically important items.

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

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

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

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

Additionally, our multi-factor authentication does not use tokens or complicated, tiered passwords.  Our digital technologies involve the utilization of multiple authentication mechanisms, some of which we own.  These mechanisms include biometric factors, knowledge factors, possession factors and location factors.   Biometric factors include facial recognition with liveness detection, finger print and voice recognition.  Knowledge factors include a personal gesture swipe and a safe and panic color choice.  Possession factor includes devices that the user has in their possession such as a smartphone, smart watch, and other wearable computing devices.  The location factor geo-locates the user during a secure login.  We surround these authentication mechanisms with proprietary systems that improve the usability and the security of the solutions. Our solutions allow the assessment and quantification of risk using a sophisticated patented heuristic scoring mechanism.  We have specialized systems that perform ‘liveness’ detection to insure the subject of authentication is in fact a live human being. We have software systems that introduce learning capabilities into our solutions to improve the ease of use and flexibility.

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

The digital technologies we own will enable businesses and consumers to reconstruct their overall approaches to security—from identity and authentication to the management of legacy passwords and PINs. We empower our customers to take advantage of the full capabilities of smart mobile devices and provide solutions that are both simple to use and deliver the highest level of security.
 
Our digital multi-factor verification software solutions can be applied to:
·
Cryptocurrencies
·
Blockchain Authentication
·
Corporate Networks
·
Digital Drop Box Access
 
 
·
Physical Access
·
Banking
·
Financial Transaction Services
·
Medical
·
Gaming
·
Retail
·
Notary
·
Digital Wallets
·
Legal
·
Government (e-gov services)
·
Military
·
Pharmaceutical
·
Immigration
·
Entertainment
·
Social Media
·
Mobile Payments
·
Subscription services
·
Employee Time Systems
 
 Digital Authentication Industry Background
 
The growth in internet banking and internet commerce and the increasing use and reliance upon proprietary or confidential information that is remotely accessible by many users by businesses, government and educational institutions, has made information security a paramount concern. We believe that enterprises are seeking solutions that will continue to allow them to expand access to data and financial assets while maintaining network security.
 
A vendor in the user authentication market delivers on-premises software/hardware or a cloud-based service that makes real-time authentication decisions for users who utilize an arbitrary endpoint device (that is, not just Windows PCs or Macs) to access one or more applications, systems or services in a variety of use cases. Where appropriate to the authentication methods supported, a vendor in this market also delivers client-side software or hardware that end users utilize to make those real-time authentication decisions.
  
The market is mature, with several vendors offering products that have been continuously offered during the past three decades (although ownership has changed over that time). However, new methods and vendors continue to emerge, with the most rapid growth occurring within the past decade in response to the changing market needs for different trade-offs among trust, user experience and total cost of ownership. The greater adoption of user authentication over a wider variety of use cases, the impact of mobile, cloud and big data analytics, and the emergence of innovative methods continue to be disruptive.
 
While over 100 authentication vendors currently operate in the market, the vast majority deliver two-factor authentication solutions. Even the few vendors that market biometric solutions simply combine them with a password for two-factor security.
 
Internet and Enterprise Security.  With the advent of personal computers and distributed information systems in the form of wide area networks, intranets, local area networks and the Internet, as well as other direct electronic links, many organizations have implemented applications to enable their workforce and third parties, including vendors, suppliers and customers, to access and exchange data and perform electronic transactions. As a result of the increased number of users having direct and remote access to such enterprise applications, data and financial assets have become increasingly vulnerable to unauthorized access and misuse.
 
 
Individual User Security.  In addition to the need for enterprise-wide security, the proliferation of personal computers, personal digital assistants and mobile telephones in both the home and office settings, combined with widespread access to the Internet, have created significant opportunities for electronic commerce by individual users such as electronic bill payment, home banking and home shopping.
 
The continued reliance by most enterprises on passwords and PINs has resulted in daily identity theft and data breaches, with massive attacks being announced almost every week. The companies that have been attacked and compromised private data include top brands in finance, retail, entertainment, technology and governments.
 
Strong Authentication Market

A strong authentication market has emerged, initially led by two-factor authentication solutions. Two-factor authentication solutions combine a password with a second factor, which typically involves proving possession of some object, which may include a one-time password token that generates rotating secret codes, a telephone via a callback or a SMS message, or an email address via emailing a secret code.
 
The global MFA market was valued at $4.05 billion in 2015 and is predicted to reach more than $13.59 billion by 2022 as three-, four- and five-factor authentication systems gain prominence. Part of this growth can be attributed to the rise of biometric security services, such as fingerprint, retina and facial scanning. A recent report found that all authentication methods using more than two factors included some form of biometric scanning.

Currently, 90% of the MFA market belongs to two-factor authentication. These “standard” methods include passwords, hardware tokens and PINs, although some systems do employ a secondary biometric scan. With a predicated compound annual growth rate of 19.67 percent over the next three years, however, it’s clear that the other 10 percent — and the biometric technology needed to support them — will play a large role. As it stands, three-factor authentication is mostly used in bank lockers and immigration, while four- and five-step methods only make an appearance in high-level government operations. Part of the problem is cost since it’s often prohibitive for a small business to roll out full facial recognition or install high-level fingerprint scanners.
 
Password Manager/Digital Wallet Market
 
Until companies figure out a better way to protect their data in the cloud, we believe that the best solution is to enforce higher security with password managers.  Password managers provide tools to encrypt text files that can store passwords that are not Web based, such as Windows and Outlook passwords, Lotus Notes passwords, administration passwords including local and domain accounts, BIOS passwords, encrypted hard drive passwords, cell phone and voicemail passwords and iPad and iPhone passwords.  Password managers promise greater security while improving the user experience.
 
The best password managers sync to the cloud across all dominant platforms and require multi-factor authentication. There are currently no password managers that utilize more than two-factor authentication and none that incorporate additional biometric mechanisms.
 
The Opportunity
 
As identity theft and data breaches continue to increase and losses to service providers and individuals continue to escalate, we see both enterprises and consumers seeking better solutions to protect their interests. These solutions must be cost effective, easy to integrate, and simple to use.
 
 
According to the November 2016 market research report prepared by www.marketsandmarkets.com, the biometric system market size is expected to increase from USD 10.74 billion in 2015 to USD 32.73 billion by 2022, at a compound annual growth rate of 16.79% between 2016 and 2022. Any transaction or action which requires authentication of an individual is a potential opportunity for a strong multi-factor solution such as VerifyMe Authenticator. This is a very large market opportunity, within which we are focused on four specific segments:
 
·
Subscription services market, where revenue is commonly lost due to multiple individuals sharing user credentials to access information and services;

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

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

·
Access control market, where the identity of individuals is key to allow access to buildings as well as digital access to data
 
·
Social Media Market to identify people versus robots or imposters
 
Our Solution
 
VerifyMe Authenticator delivers an electronic authentication solution for identifying individual human beings. When subject attempts to access an internet resource and asserts an identity, VerifyMe Authenticator attempts to authenticate the asserted identity. It does this utilizing multiple strong authentication mechanisms, involving at least three independent factors. VerifyMe Authenticator can deliver identity assurance consistent with National Institute of Standards and Technology (NIST) Level 4 authentication requirements as specified in Special Publication 800-63-1.
  
VerifyMe Authenticator is based around mobile apps that incorporate a password manager and single sign on capability. In addition to facilitating strong authentication during the logon process to the enterprise resource or service, VerifyMe Authenticator also lets the user conveniently integrate and protect all of their legacy username and passwords.
 
Fast and Easy to Use
 
VerifyMe Authenticator replaces passwords and PINs with a quick, intuitive and user-friendly interface. Our customers can authenticate end users in multiple ways (multi-factor) in the same timeframe as a conventional password login. The service is platform agnostic (available for IOS, Android, Mac and PC), and scalable for use on wearable personal devices.
 
Support for Any Authentication Method
 
VerifyMe Authenticator has the ability to authenticate individuals using facial recognition, fingerprint, voice scanning, retina scanning, swipe pattern recognition, location detection and approved IP detection. We believe that Authenticator can provide the highest levels of confidence, security and account protection to a businesses’ customers, all within seconds. VerifyMe Authenticator are not limited to specific authentication factors. Our platform can support any available authentication mechanism, including those that require policy-driven mechanisms.  We are continuing to add new authentication mechanisms, including mechanisms suitable for wearable devices and new biometrics.
 
 
Multi-Factor Confidence Scores
 
Depending on the desired level of confidence, different online and mobile application accounts can require varying quality scores. As the desired level of security increases, so does the required quality score to complete a sign-in transaction. As the quality score increases, additional authentication factors are added to the sign-in process.
 
Secure Platform, Easy to Integrate
 
VerifyMe Authenticator can be delivered either as managed service from our secure cloud or as licensed software which can be operated with existing infrastructure.  VerifyMe Authenticator also features the following benefits:

Available to be white-labeled and integrated into existing digital platforms;
Non-Stop, audited, monitored, private cloud service;
Three independent, fault tolerant, redundant data centers;
Global load balancing and traffic management;
High level commercial API’s can be integrated in hours; and
Complete audit information, including fresh biometrics.
 
The three factors VerifyMe Authenticator utilize include, but are not limited to, the following:
 
Factor 1 – Something you have – a possession device – typically this is a registered mobile device, which we can authenticate either via SMS or email round robin protocol.
 
Factor 2 – Something you know – a knowledge factor – we currently utilize a color gesture swipe. This requires the subject to confirm their secret color and appropriately connect dots on a matrix consistent with their registered gesture pattern.
 
Factor 3 – Something you are – we utilize facial recognition to authenticate images captured in real-time using the registered devices built in camera, with images that were stored in the subject’s profile during registration.
 
Our platform can be distinguished from competitors in that it is not limited to any of the above authentication mechanisms; VerifyMe Authenticator currently supports many more authentication mechanisms and we intend to continue expanding this list.  For example, our platform is not limited to facial recognition as a biometric mechanism. It currently supports voice, fingerprint and other mechanisms.
 
In addition, VerifyMe Authenticator includes a risk-scoring engine that is able to enforce complex, customer specific authentication policies and shield them from the underlying complexity of evaluating multiple, independent authentication mechanisms. This risk engine allows us to constantly add new authentication mechanisms as they emerge. We see the emerging market of wearable devices as providing new authentication mechanisms that will be very simple and reliable for the end-user. Because our risk engine insulates the enterprise from the complexity of having to interface with all these different platforms, they are available to benefit from and insure their customers can utilize these devices to their full potential.
 
VerifyMe Authenticator is platform agnostic (available for IOS, Android, Mac, Linux and Windows) and scalable for use on wearable personal devices. The digital platform is an enterprise solution, which combines multiple independent authentication factors and can also determine geo-location utilizing a number of mechanisms including GPS, cell tower triangulation and IP/WIFI address. Because the service utilizes biometrics and liveness detection, it eliminates the possibility that users might share their authentication credentials, or that user accounts can be accessed by other individuals. The combination of biometrics and geo-location provides extremely strong transactional evidence, making it nearly impossible for an end-user to refute having been part of a transaction.
 
 
The VerifyMe Authenticator technology requires additional research and development efforts to produce the full array of features described above.  We do not presently have sufficient working capital to resolve certain functionality issues affecting this technology.
 
Our Technology
 
Intellectual property is important to our business. Our current patent portfolio consists of 11 granted US patents and two US patent applications pending. In addition, 6 patent applications were abandoned.  The company plans on filing for reinstatement on at least 3 of the abandoned patent applications.
 
We have attempted to achieve sufficient flexibility in our products and technologies so as to provide cost-effective solutions to a wide variety of counterfeiting problems. We intend to generate revenues primarily by selling pigment to manufacturers who incorporate our technologies into their manufacturing processes and their products as well as through licensing fees where we are providing unique or custom solutions.

Our Intellectual Property
 
Intellectual property is important to our business. Our current patent portfolio consists of 11 granted patents. While some of our granted patents are commercially ready, we believe that others may have commercial application in the future but will require additional capital and/or a strategic partner in order to reach the potential markets. All of our patents are related to the inventions described above. Our patents expire between the years 2019 and 2037.

It is cost prohibitive to file patents worldwide.  We continue to develop new anti-counterfeiting technologies and we apply for patent protection for these technologies in countries with the most market potential and strong patent enforcement tools.  When a new product or process is developed, we may seek to preserve the economic benefit of the product or process by applying for a patent in each jurisdiction in which the product or process is likely to be exploited.
 
The granting of a patent does not prevent a third party from seeking a judicial determination that the patent is invalid. Such challenges to the validity of a patent are not uncommon and can be successful. There can be no assurance that a challenge will not be filed to one or more of our patents, if granted, and that if filed, such a challenge will not be successful.

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

Research and Development
 
We have been involved in research and development since our inception and intend to continue our research and development activities, funds permitting. Until January 1, 2013, our research and development focused on pigment technologies. Since January 1, 2013, we have allocated research and development efforts between digital and pigment technologies. We hope to expand our technology into new areas of implementation and to develop unique customer applications. We spent approximately $.1 million and $0.3 million on research and development during the years ended December 31, 2017 and 2016.
 
 
Our Revenue Model
 
To date, we have not generated significant revenue. VerifyMe has three potential revenue streams.
  
RainbowSecure™ We believe that our recent contract with HP Indigo will create demand for our RainbowSecure™ and VeriPAStm products.  Working with HP Indigo and S-One Labels and Packaging, we are creating a co-marketing programs to effectively reaches all 6000 series HP Indigo owners.   We also will reach out to brand owners and make them aware of our physical security solutions which can provide brand owners counterfeit prevention protection. We intend to generate revenues primarily by collecting license fees based on usage fees generated from HP Indigo 6000 series users as well as non-digital press technology usage.  Our revenue is derived utilizing a royalty rate based on the volume of a particular label or package printed with our RainbowSecure™ technology e.g. a royalty on each impression. We also have revenue that will be generated with the sales of authentication devices from manufacturers who incorporate our technologies into their manufacturing processes and user authentication protocols, as well as through the sale of pigments to be incorporated in inks and dyes and the sale of authentication tools.

Our VeriPAStm technology product is an identifier, track and trace system which generates revenue from a contracted usage fee per impression rate based on the number of labels and packages printed with the technology.

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

Sales and Marketing Strategy:

Physical Security Technology Marketing Strategy
 
Due to our 2017 signed five-year contract with HP Indigo we plan on marketing directly with HP Indigo 6000 series owners as well as the label and packaging printing industry including both traditional and digital printers and users to address their clients’ needs for our covert serialization. Those printers will market and resell our technologies to both current and future brand owner clients.

Currently the only HP Indigo model approved for the use of our technology is the HP Indigo 6000.  We plan on working with HP Indigo to expand the number of HP Indigo Models that can utilize our technology.

In addition to the printing industry we will be marketing directly to all brand owners who utilize labels and packaging for their products. Brand owners can be licensed directly by VerifyMe and direct their personal printer to print their labels and packaging with the VerifyMe printing technologies.  The brand owner will therefore pay their royalties directly to VerifyMe based on the number of labels and packages units that their printer applied the technology to.
  
In addition, VerifyMe will engage third parties to market, sell and support our physical security technologies on a global basis for a contracted fee based on their sales.  Our targeted third parties will already have a successful track record in supporting HP Indigo owners as well as traditional printing clients.
  
As discussed above, in March 2018 we entered into a strategic partnership with S-One. S-One will provide the VerifyMe with global sales, distribution, and promotion support for the Company’s products and will employ a representative that will be solely dedicated to promoting the Company’s products. Under the terms of the Company’s agreement with S-One, S-One will act as a sales and marketing contractor for the Company’s printed products and services on a global basis and will assist the Company in fulfilling the Company’s obligations under the Company’s signed current and future reseller agreements with various global and domestic print providers and brand owners.
 
 
The FDA is currently implementing Title II of the Drug Quality and Security Act, entitled the “Drug Supply Chain Security Act.” This regulation requires drug manufactures to add product identifiers, such as our RainbowSecure™ technology as well as our VeriPAStm track and trace system, to certain prescription drug packages beginning in November 2017. Re-packagers must begin adding product identifiers in November 2018.  We will also engage third party marketing and sales companies to present our solutions to the drug and pharmaceutical industry. The FDA intends to continue implementing the Drug Supply Chain Security Act to ensure that a full electronic identification system for prescription drugs is implemented by 2023.

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

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

Some of the major brand segments that need our type of label, packaging and serialization identifier products are:
 
Consumer Product Security
·
Pharmaceuticals
·
Food
·
Beverages
·
Luxury goods
·
Cosmetics
·
Alcohol
·
Auto parts
·
Aviation parts
·
Any other label/ packaging requirements
 
 
Documents of Value
·
Currency
·
Stock certificates and bonds
·
Event tickets
·
Lottery tickets

 
Homeland Security
·
Passports
·
ID cards
·
Driver’s licenses
·
Visas
·
Container seals
·
Pallet security

 
Military
·
Uniforms
·
Weapons
·
Ammunition
 
 
Product Diversion Tracking
·
Pharmaceuticals
·
Apparel/licensed merchandise
·
Cosmetics and fragrances
·
Watches and jewelry

 
Financial Services and Products
·
Consumer login credentials
·
Online transaction approval
·
Credit cards
·
Bank checks
·
Financial documents/promissory notes

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

Digital VerifyMe Authenticator Technology Marketing Strategy

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

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

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

The market for protection from counterfeiting, diversion, theft and forgery is a mature more than 25-year old industry dominated by a number of large, well-established companies, particularly in the area of traditional overt security technologies where repeating static produced images are commonly used. This is due to the fact that security printing for currency production began in Europe over a century ago and has resulted in the establishment of old-line security printers which have branched out into brand and product protection as well. In North America, brand protection products, such as tamper-resistant packaging, security labels, and anti-theft devices are readily available and utilized on a widespread basis. In recent years, however, demand has increased for more sophisticated overt and covert security technologies with a strong desire for technologies that can provide variable images and data. Competitors can be segregated into the following groups: (i) Security Ink Manufacturers. These are generally well-established companies such as SICPA and Sun Chemical, whose core business is manufacturing and selling printing inks; (ii) System Integrators. These companies have often evolved from other sectors in the printing industry, mainly security printing manufacturers, technology providers, or packaging and label manufacturers. These companies offer a range of security solutions, enabling them to provide a complete suite of solutions tailored to the customer’s specific needs and requirements. The companies in this space include 3M, DuPont, Honeywell, and Avery Dennison; (iii) System Consultancy Groups. These companies offer a range of technologies from several different providers and tailor specific solutions to end-users; (iv) Traditional Authentication Technology Providers. These purveyors include companies like American Banknote Holographics, Crown Roll Leaf and Digimarc, which provide holograms and digital watermarking, respectively; (v) Product Diversion Tracking Providers. Applied DNA Sciences Next-Generation Technology Providers LLC falls into this group, along with several companies such as Applied DNA Sciences, Authentix, DNA Technologies, and Identif, Kodak Traceless, which provide on-product and in-product tagging technologies; (vi) Traditional Security Printers. This group includes traditional security printers such as Thomas de la Rue, Canadian Banknote, and Banknote Corporation or America, and Portals, whose core products are printing the world’s currencies; and (vii) Biometric Solution Providers. These companies offer biometric authentication capabilities to be integrated with existing mobile device authentication, such as OT-Morpho and ImageWare Systems.
 
 
To compete effectively, we are seeking to establish key relationships with major digital solution equipment and distribution providers such as we have done with HP Indigo.  While leveraging these relationships, we still expect that we will need to expend significant resources in technology and marketing. Many of our competitors have substantially greater financial, human and other resources than we have. As a result, we may not have sufficient resources to develop and market our services to the market effectively.

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

product performance, features and liability;
price; new laws and regulations;
product innovation and timing of new product introductions;
ability to develop, maintain and protect proprietary products and technologies;
sales and distribution capabilities;
technical support and service;
brand loyalty;
applications support; and
breadth of product line.

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

Major Customers/Vendors
 
During the years ended December 31, 2017 and 2016, between one and three customers accounted for 100% of total sales.  Generally, a substantial percentage of the Company's sales has been made to a small number of customers and is typically on an open account basis.
 
In 2018, the company announced 2 re-seller contracts for its RainbowSecure™ technology.  One of these contracts was with a global billion $ label printer.  The company also signed a similar contract for its RainbowSecure™ technology with a leading RFID technology label group.  Both of these customers have clients in the consumer products industry.

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

On January 17, 2018 we announced a cross re-selling agreement with Micro Focus, a public global software developer.  Micro Focus will be offering our technology to their track and trace clients requiring an identifier to accompany Micro Focuses Track and Trace system.  VerifyMe also can sell GPAS which is printed on labels and packaging along with our covert to store our hidden covert serial number in the cloud for product diversion investigators to authenticate with a proprietary app on a mobile device.
 
In March 2018 we entered into a strategic partnership with S-One Labels & Packaging, a division of S-One Holdings Corporation (“S-One”). S-One provides companies with product and sales channels, technical and marketing support, digital development support, and distribution channels through the other companies which have partnered with S-One. S-One will provide the VerifyMe with global sales, distribution, and promotion support for the Company’s products and will employ a representative that will be solely dedicated to promoting the Company’s products. Under the terms of the Company’s agreement with S-One, S-One will act as a sales and marketing contractor for the Company’s printed products and services on a global basis and will assist the Company in fulfilling the Company’s obligations under the Company’s signed current and future reseller agreements with various global and domestic print providers and brand owners.
 
 
During the years ended December 31, 2017 and 2016, we purchased 100% of our pigment from one vendor.

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

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

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

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

Employees

As of March 31, 2018, we had one full time employee Chief Executive Officer and three outside contractors, including our Chief Operating Officer and our Chairman.
 
ITEM 1A. RISK FACTORS

Not applicable for smaller reporting companies.  

ITEM 1B. UNRESOLVED STAFF COMMENTS.
 
None.
 
ITEM 2. PROPERTIES.
 
Our principal offices are currently located at 75 S. Clinton Avenue, Suite 1525 Rochester, NY 14604 which we rent on a non-contractual basis for approximately $1,000 per month.

ITEM 3. LEGAL PROCEEDINGS.
 
From time to time, the Company may be a party to, or otherwise involved in, legal proceedings arising in the normal course of business. As of the date of this Annual Report the Company is not aware of any proceedings, threatened or pending, against it which, if determined adversely, would have a material effect on its business, results of operations, cash flows or financial position.
 
ITEM 4. MINE SAFETY DISCLOSURES.
 
Not applicable.
PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Our common stock is quoted on the OTCQB under the trading symbol “VRME”. The following table sets forth the range of high and low bid prices of our common stock for the periods indicated as reported by the OTCQB, Inc. Until recently, there was only sporadic and intermittent trading activity of our common stock. The quoted prices represent only prices between dealers on each trading day as submitted from time to time by certain of the securities dealers wishing to trade in our common stock, do not reflect retail mark-ups, mark-downs or commissions, and may differ substantially from prices in actual transactions.
 
Fiscal Year Ended December 31, 2017
 
High
   
Low
 
Quarter ended March 31, 2017
 
$
0.15
   
$
0.06
 
Quarter ended June 30, 2017
 
$
0.12
   
$
0.046
 
Quarter ended September 30, 2017
 
$
0.15
   
$
0.035
 
Quarter ended December 31, 2017
 
$
0.27
   
$
0.06
 

Fiscal Year Ended December 31, 2016
 
High
   
Low
 
Quarter ended March 31, 2016
 
$
2.50
   
$
0.435
 
Quarter ended June 30, 2016
 
$
0.75
   
$
0.09
 
Quarter ended September 30, 2016
 
$
0.44
   
$
0.07
 
Quarter ended December 31, 2016
 
$
0.39
   
$
0.10
 
 
 
Common Stockholders
 
As of March 19, 2018, our shares of common stock were held by approximately 1,366 stockholders of record.
 
Dividend Policy
 
We have never declared or paid a cash dividend. At this time, we do not anticipate paying dividends in the foreseeable future. The declaration and payment of dividends is subject to the discretion of our board of directors (the “Board”) and will depend upon our earnings (if any), our financial condition, and our capital requirements.  Additionally, state law may restrict us from paying dividends.
 
Recent Sales of Unregistered Securities

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

As previously discussed in the Company’s filing on January 25, 2018, on Form 8-K, the Company approved a private placement offering (the “Offering”) with a maximum offering amount of $2,643,000 and had raised $2,635,343 from the sale of shares of common stock and warrants. Each unit sold in the Offering cost $50,000 and consisted of 715,000 shares of common stock and 715,000 five-year warrants exercisable at $0.15 per share. The Company authorized one additional investment of $50,000 in 2018. The Offering has raised a total of $2,685,343. All units sold in the Offering were exempt from registration under Section 4(a)(2) of the Securities Exchange Act of 1933 and Rule 506(b) thereunder as transactions not involving a public offering.
 

On February 13, 2018, the Company authorized the issuance of 240,000 shares of the Company’s restricted common stock to a consultant. All shares were exempt from registration under Section 4(a)(2) of the Securities Exchange Act of 1933 and Rule 506(b) thereunder as transactions not involving a public offering.
 
On February 20, 2018, the Company authorized a 30-day warrant reduction program (the “Program”) permitting warrant holders of the Company’s outstanding $0.15 warrants are eligible to exercise their warrants for $0.10 (the “Reduced Price”) under the terms of the Program. As of April 11, 2018, the Company has received total gross proceeds of $1,542,224 from the exercise of warrants under the Program at the Reduced Price. All of the securities under the Program were sold in offerings exempt from registration under Section 4(a)(2) of the Securities Exchange Act of 1933 and Rule 506(b) thereunder as transactions not involving a public offering. The Company has extended the Program for two additional 30-day time periods. The Program is set to expire on May 22, 2018.

Equity compensation plan information

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

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

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

Equity compensation plan information as of December 31, 2017

 

(a)
(b)
(c)
Plan category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
Equity compensation
plans approved by
security holders*
 22,013,530
$0.11
 n/a
Equity compensation
plans not approved
by security holders
 0
n/a
 13,050,000
Total
 22,013,530
$0.11
 13,050,000

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

 ITEM 6. SELECTED FINANCIAL DATA.
 
Not applicable.
 
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operation and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and except as required by law, we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors. The following should be read in conjunction with our annual financial statements contained elsewhere in this Annual Report.
 
Overview

VerifyMe is a technology pioneer in the anti-counterfeiting industry. This broad market encompasses counterfeiting of physical and material goods and products, as well as counterfeiting of identity in digital transactions. We can deliver security solutions for identification and authentication of people, products and packaging in a variety of applications in the security field for both digital and physical transactions. Our products can be used to manage and issue secure credentials, including national identifications, passports, driver licenses and access control credentials, as well as comprehensive authentication security software to secure physical and logical access to facilities, computer networks, internet sites and mobile applications.
 
The challenges associated with digital access control and identity theft are problems that are highly relevant in the world today. Consumers, citizens, employees, governments and employers demand comprehensive solutions that are reliable but not intrusive. The current widespread use of passwords or PINs for authentication has been proven insecure and inadequate. Individuals increasingly expect anywhere-anytime experiences—whether they are making purchases, crossing borders, accessing services or logging into online accounts or corporate resources. They expect those experiences to ensure the protection of their privacy and to provide uncompromising confidentiality.
 
We believe that the digital technologies we own will enable businesses and consumers to reconstruct their overall approaches to security—from identity and authentication to the management of legacy passwords and PINs. We empower our customers to take advantage of the full capabilities of smart mobile devices and provide solutions that are both simple to use and deliver the highest level of security. These solutions can be applied to corporate networks, financial services, e-gov services, digital wallets, mobile payments, entertainment, subscription services, and social media.
 
Brand owners, government agencies, professional associations, and others all share in the challenge of responding to counterfeit goods and product protection issues. Counterfeit goods span across multiple industries including currency, passports, ID cards, pharmaceuticals, apparel, accessories, music, software, food, beverages, tobacco, automobile and airplane parts, consumer goods, toys and electronics. Described by the U.S. Federal Bureau of Investigation as the crime of the twenty-first century, product counterfeiting accounts for an estimated 2.5% of global trade or $461 billion and wreaks dire global health, safety and economic consequences on individuals, corporations, government and society.
 
We believe that the physical technologies we own will enable businesses and consumers to reconstruct their overall approaches to security—from counterfeit identification to employee or customer monitoring. Potential applications of our technologies are available in different types of products and industries—e.g., gaming, apparel, tobacco, fragrances, pharmaceuticals, event and transportation tickets, driver’s licenses, insurance cards, passports, computer software, and credit cards. We generate sales through licenses of our technology or through direct sales of our technology.
 
 
Our physical technologies involve the utilization of invisible and color changing inks, which are compatible with today’s printing presses. The inks may be used with certain printing systems such as offset, flexographic, silkscreen, gravure, and laser. Based upon our experience, we believe that the ink technologies may be incorporated into existing manufacturing processes. We believe that some of our patents may have non-security applications, and we are attempting to commercialize these opportunities.
 
Our digital technologies involve the utilization of multiple authentication mechanisms, some of which we own and some of which we license.  These mechanisms include biometric factors, knowledge factors, possession factors and location factors.   Biometric factors include facial recognition with liveness detection, finger print and voice recognition.  Knowledge factors include a personal gesture swipe and a safe and panic color choice.  Possession factor includes devices that the user has in their possession such as a smartphone, smart watch, and other wearable computing devices.  The location factor geo-locates the user during a secure login.  We surround these authentication mechanisms with proprietary systems that improve the usability and the security of the solutions. Our solutions allow the assessment and quantification of risk using a sophisticated heuristic scoring mechanism.  We have specialized systems that perform ‘liveness’ detection to insure the subject of authentication is in fact a live human being. We have systems that introduce learning capabilities into our solutions to improve the ease of use and flexibility.
 
 Results of Operations
 
Comparison of the Years Ended December 31, 2017 and 2016
 
The following discussion analyzes our results of operations for the years ended December 31, 2017 and 2016. The following information should be considered together with our financial statements for such periods and the accompanying notes thereto.
 
Revenue/Net Loss
 
We have not generated significant revenue since our inception. For the years ended December 31, 2017 and 2016, we generated revenues of $0 and $37,055, respectively. Our net loss was $3,385,340 for the year ended December 31, 2017, a decrease of $1,739,085 from a net loss of $1,646,255 for the year ended December 31, 2016.  Net loss excluding non-cash charges was $1,005,635 for the year ended December 31, 2017, an improvement of $592,903 from a net loss of $1,598,538 for the year ended December 31, 2016, primarily as a result of cost conservation measures, which included reducing the number of employees and salary reductions.
 
Cost of Sales
 
For the years ended December 31, 2017 and 2016, we incurred proprietary technology costs of sales of $0 and $24,363. Cost of sales was lower for the year end December 31, 2017, since we had no sales during the year.
 
General and Administrative Expenses
 
General and administrative expenses were $1,689,883 for the year ended December 31, 2017 compared to $1,010,648 for the year ended December 31, 2016, an increase of $679,235. The increase is attributable primarily to increased non-cash stock-based compensation for consultants of approximately $139,800 and an increase of a non-cash charge of $277,032 related to common stock and warrants issued for services.
    
Legal and Accounting
 
Legal and accounting fees decreased $167,512 to $246,520 for the year ended December 31, 2017 from $414,032 for the year ended December 31, 2016. The decrease in legal and accounting fees related to cost containment measures implemented in the last quarter of 2016. 
 
 
Payroll Expenses
 
Payroll expenses decreased to $767,257 for the year ended December 31, 2017 from $1,789,303 for the year ended December 31, 2016, a decrease of $1,022,046. The majority of the decrease was the result of reduced sales and marketing payroll expenses during the year ended December 31, 2016.
 
Research and Development
 
Research and development expenses decreased $122,136 to $128,044 for the year ended December 31, 2017 from $250,180 for the year ended December 31, 2016. 

Sales and Marketing
 
Sales and marketing expenses for the year ended December 31, 2017 were $3,800 as compared to $282,867 for the year ended December 31, 2016, a decrease of $279,067. The increase was related to deferred compensation costs for consultants hired at the end of 2015, for which the expense was incurred primarily in 2016.
 
Interest Expense
 
During the year ended December 31, 2017, we incurred interest expense of $218,316, as compared to $12,871 for the year ended December 31, 2016, an increase of $205,445.  The increase in interest expense relates primary to the non-cash amortization of note discount of $174,517.

Loss on Settlement of Related Party Notes Payable

During the year ended December 31, 2017, we settled related party notes payable outstanding as of June 30, 2017, by issuing common stock and warrants to issue common stock exercisable at $0.15.  The fair value of the warrants resulted in a non-cash loss on settlement of related party notes payable of $331,912 compared to $0 for the year ended December 31, 2016.
 
Change in Fair Value of Warrants
 
During the year ended December 31, 2017, the change in the fair value of warrants was $0, as compared to $3,357,149 for the year ended December 31, 2016. This change resulted from the Company’s adoption of ASU 2017-11.  See Note 1 to the Notes accompanying the Financial Statements.

Change in Fair Value Embedded Derivative Liability
 
During the year ended December 31, 2017, the change in fair value of the embedded derivative liability was $0, as compared to $698,303 for the year ended December 31, 2016. This change resulted from the Company’s adoption of ASU 2017-11.  See Note 1 to the Notes accompanying the Financial Statements.

Fair Value of Warrants in Excess of Consideration for Convertible Preferred Stock

During the year ended December 31, 2017, the excess of consideration for warrants issued for convertible stock resulted in a loss of $0 compared to $1,949,517 for the year ending December 31, 2016.
 
Liquidity and Capital Resources

Net cash used in operating activities decreased by $408,790 to $935,918 for the year ended December 31, 2017 as compared to $1,344,708 for the year ended December 31, 2016.  The decrease resulted primarily from operational changes discussed previously.
 
    
Net cash used in investing activities was $2,650 for the year ended December 31, 2017, compared to $0 for the year ended December 31, 2016. 
 
Net cash provided by financing activities increased by $245,725 to 1,608,925 for the year ended December 31, 2017 from $1,363,200 for the year ended December 31, 2016.  Cash provided by financing activities during the year ended December 31, 2017, consisted primarily of the private placement held during the year. Financings during the year ended December 31, 2016 related to our Series C and Series D Convertible Preferred Stock offerings which raised $1,284,200 and bridge loans of $79,000.
   
Since our inception, we have focused on developing and implementing our business plan. Our business plans are dependent on our ability to raise capital through private placements of our common stock and/or preferred stock, through the possible exercise of outstanding options and warrants, through debt financing and/or through future public offering of our securities. As of March 31, 2018, we had cash resources of approximately $2,376,000. Our existing cash resources are sufficient to sustain our operations during the next twelve months, however we may need to raise additional funds in the future in order to expand our business. While we have met our working capital needs since 2017 with funds supplied by and through our directors, we cannot assure you they will continue funding us if we need additional capital, or if they do, how dilutive the financing will be.
 
Off-Balance Sheet Arrangements

As of December 31, 2017, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
 
Critical Accounting Policies
 
Our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of these policies is included in Note 1 of the Notes to our financial statements included elsewhere herein. We have identified below the accounting policies that are of importance in the presentation of our financial position, results of operations and cash flows and which require the application of significant judgment by management.
 
Stock-based Compensation
We account for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method.
 
We account for stock-based compensation awards to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees (“ASC 505-50”). Under ASC 505-50, we determine the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received, or the fair value of the equity instruments issued, whichever is more reliably measurable.
 
All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Any stock options issued to non-employees are recorded as an expense and additional paid-in capital in stockholders’ equity over the applicable service periods using variable accounting through the vesting dates based on the fair value of the options at the end of each period.
 
 
Recently Issued Accounting Pronouncements
 
Recently issued accounting pronouncements are discussed in Note 1 of the Notes to Financial Statements contained elsewhere in this Annual Report.

Cautionary Note Regarding Forward Looking Statements

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

RISK FACTORS

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

Risks Relating to Our Business


Because our management team has experienced turnover in recent periods, it may be difficult to evaluate our existing future prospects and the risk of success or failure of our business.
 

We have had numerous changes to our Board and executive officer roles in recent years. To provide stability and guidance, our founder, Norman Gardner, returned to the Company in 2017 and became Chairman and interim Chief Executive Officer (“CEO”). Patrick White was appointed as President and CEO of the Company effective August 15, 2017 with Mr. Gardner remaining as Chairman and a consultant to the Company. As a result of the turnover, it may be more difficult to project whether we will be successful in growing our business even if we are able to raise capital.

Our success depends on the efforts, abilities and continued service of Patrick White, our President and CEO, and if we are unable to continue to retain the services of Mr. White, we may not be able to continue our operations.
 
Our success depends to a significant extent upon the continued service of Patrick White, our President and CEO.  On August 15, 2017, we entered into a two-year employment agreement with Mr. White. Loss of the services of Mr. White and any negative market or industry perception arising from the loss of such services could significantly harm our business, future prospects and the price of our common stock. We do not maintain key-person insurance on the life of Mr. White.
 
If we cannot expand our operations, or if we cannot manage our growth effectively, we may not become profitable.
 
Businesses which grow rapidly often have difficulty managing their growth. If we successfully obtain financing, we intend to grow rapidly and we will need to expand our management by recruiting and employing experienced executives and key employees capable of providing the necessary support. We cannot assure you that our management will be able to manage our growth effectively or successfully. Our failure to meet these challenges could cause us to lose money, and your investment could be lost.

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

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

While we believe that we have world class technologies and major businesses have tested our ink technology in trials, our ink business is just on the verge of market acceptance and without material sales and feedback from customers, we cannot be certain that if we increase revenue, we will be successful.

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

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

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

We have a small management team that is focused on sales. In addition, our Chairman who is not involved in sales handles operational matters, legal compliance, board relationships and shareholder relations. Because we have only two officers dedicated to business development, we lack the resources to grow beyond certain levels. We cannot assure you that we will generate cash flow from operations or from a financing which will enable us to grow our revenues.
 
If we are unable to hire an experienced sales team, or our partners are not successful, we may not be able to generate material revenue.

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

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

Businesses which grow rapidly often have difficulty managing their growth. Our staff presently consists of one employee and three contractors. If we continue to grow as rapidly as we anticipate, we will need to expand our management by recruiting and employing experienced executives and key employees capable of providing the necessary support. We cannot assure you that our management will be able to manage our growth effectively or successfully. Our failure to meet these challenges could cause us to lose money, and your investment could be lost.
  
In order to market our digital technology, we need to resolve certain functionality issues but we do not presently have resources to engage in research and development activities.

Our VerifyMe Authenticator technology, described above, does not presently function as intended. Due to our lack of operating capital, we have been unable to invest in the research and development needed to bring this product to full functionality. Further, we cannot guarantee that even with sufficient financial resources we would be able to make this product fully functional, or that if functional, it would appeal to customers. If we cannot make the product function, or if it is not appealing to customers, we will not be able to compete in the digital technology sector, and our business may be unable to generate sufficient revenues to be profitable.

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

Historically, we have derived a significant portion of our revenue from a limited number of customers. Our revenue in 2017 was nominal. Any termination of a business relationship with, or a significant sustained reduction in business received from, one or more of these customers could have a material adverse effect on our operating results and cash flows.
 

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

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

If we fail to protect or enforce our intellectual property rights, or if the costs involved in protecting and defending these rights are prohibitively high, our business and operating results may suffer.
 
Our trade secrets, copyrights, trademarks, domain names and other product rights are critical to our success. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We may enter into confidentiality and invention assignment agreements with our employees and contractors and confidentiality agreements with parties with whom we conduct business to limit access to, and disclosure and use of, our proprietary information. However, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others. It may be expensive and cost prohibitive to file patents worldwide and we may be financially required to file patents in select countries where we see the greatest potential for our technologies.
 
As management deems appropriate, we will pursue the registration of our domain names, trademarks, and service marks in the United States and in certain locations outside the United States as we grow and launch our products. We will seek to protect our trademarks, patents and domain names in an increasing number of jurisdictions, a process that is expensive and time-consuming and may not be successful or which we may not pursue in every location. We may, over time, increase our investment in protecting our innovations through increased patent filings that are expensive and time-consuming and may not result in issued patents that can be effectively enforced. The Leahy-Smith America Invents Act (“the Leahy-Smith Act”) was adopted in September 2011. The Leahy-Smith Act includes several significant changes to United States patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. One of the key provisions of this law, changing the U.S. patent registry from a “first to invent” to a “first inventor to file” system, has only been effective since March 2013, and the effects of this change on small businesses like ours are not yet clear. It is remains possible that the Leahy-Smith Act and its implementation will increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents, all of which could harm our business.

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

Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights claimed by others. Patent and intellectual property litigation is extremely expensive and beyond our ability to pay.  While third parties do, under certain circumstances, finance litigation for companies that file suit, we cannot assure you we could find a third party to finance any claim we choose to pursue.  Moreover, third parties do not finance companies that are sued.  Any litigation of this nature, regardless of outcome or merit, could result in substantial costs, adverse publicity or diversion of management and technical resources, any of which could adversely affect our business and operating results. If we fail to maintain, protect and enhance our intellectual property rights, our business and operating results may be harmed.
 
From time to time, we may face allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including from our competitors and inactive entities. Patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict. As the result of any court judgment or settlement we may be obligated to cancel the launch of a new feature or product, stop offering certain features or products, pay royalties or significant settlement costs, purchase licenses or modify our products and features while we develop substitutes. 
 

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

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

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

Risks Relating to Our Common Stock

Failure to implement and maintain effective internal controls over financial reporting could result in material misstatements in our financial statements, which could require us to restate financial statements, cause investors to lose confidence in our reported financial information and could have an adverse effect on our stock price.

Our management determined that as of December 31, 2017, our internal control over financial reporting had a material weakness related to lack of segregation of duties resulting from staff reductions due to cost containment measures.  We have not yet been able to remediate the material weakness related to our internal control over financial reporting.
 

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

As a result of our recent financings we are obligated to issue a substantial number of additional shares of common stock, which will dilute our present shareholders.
    
From June 2017 to January 2018, we engaged in a series of private placement transactions issuing $2,683,211 worth of common stock and warrants to accredited investors. This transaction caused us to issue a total of 38,378,011 shares of common stock and 38,378,011 warrants exercisable at $0.15 to investors. For a period of 30-days, beginning on February 20, 2018, holders of our $0.15 warrants were able to exercise their warrants at a reduced exercise price of $0.10 per warrant share. The Program has been extended to May 22, 2018. As of the date of this Annual Report, we issued 15,322,583 shares of common stock upon exercise of warrants. In the future, we may grant additional options, warrants and convertible securities. The exercise, conversion or exchange of options, warrants or convertible securities, including for other securities, will dilute the percentage ownership of our shareholders. The dilutive effect of the exercise or conversion of these securities may adversely affect our ability to obtain additional capital. The holders of these securities may be expected to exercise or convert such options, warrants and convertible securities at a time when we would be able to obtain additional equity capital on terms more favorable than such securities or when our common stock is trading at a price higher than the exercise or conversion price of the securities. The exercise or conversion of outstanding warrants, options and convertible securities will have a dilutive effect on the securities held by our shareholders. We have in the past, and may in the future, exchange outstanding securities for other securities on terms that are dilutive to the securities held by other shareholders not participating in such exchange.
    
Because our common stock is subject to the “penny stock” rules, brokers cannot generally solicit the purchase of our common stock, which adversely affects its liquidity and market price.

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

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

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

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

Our failure to generate increasing material revenues;
Cancellation of key contracts;
Regulatory changes including new laws and rules which adversely affect companies in our line of business;
Our public disclosure of the terms of any financing which we consummate in the future;
Our failure to become profitable;
Our failure to raise working capital;
Any acquisitions we may consummate;
Announcements by us or our competitors of significant contracts, new services, acquisitions, commercial relationships, joint ventures or capital commitments;
 
 
Changes in our management;
Our failure to meet financial forecasts we or broker-dealers publicly disclose;
The sale of large numbers of shares of common stock which we may register in the future;
Short selling activities; or
Changes in market valuations of similar companies.

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

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

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

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

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

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

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

If two of our principal shareholders were to act together they would likely control our Company and might be able to act to the detriment of minority shareholders.

Mr. Laurence J. Blickman, a director, through an affiliated trust and other indirect holdings, holds a number of shares of common stock and warrants to purchase common stock which, if exercised, would make him the beneficial owner of over 20% of our outstanding common stock. Mr. Blickman has exercised a number of his warrants since the beginning of 2018. Mr. Blickman has historically been very supportive of our Company and continues to be involved with the company. However, investors should be aware that Mr. Blickman would be able to exert a significant amount of control over our management and affairs and all matters requiring shareholder approval, including significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing our change in control and might affect the market price of our common stock.
 

Additionally, Mr. Carl Berg, a director and associate of Mr. Blickman, holds a number of shares of common stock which make him the beneficial owner of over 14% of our outstanding common stock. Investors should be aware that Mr. Berg would be able to exert a significant amount of control over our management and affairs and all matters requiring shareholder approval, including significant corporate transactions.

If Messrs. Blickman and Berg were to act together, they would likely control our Company and they could take action to the detriment of shareholders.

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

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

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

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

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not required.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report beginning on page F-1 located immediately after the signature page.
 
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
As disclosed in the Company’s Form 8-K filed on December 1, 2017, the Audit Committee of the Company approved the dismissal of Morison Cogen LLP (“Former Auditor”) as the Company’s independent registered public accountant on November 27, 2017.
 
During the Company’s two most recent fiscal years, and through the date of their dismissal: (i) there were no disagreements (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) between the Company and the Former Auditor on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of the Former Auditor would have caused the Former Auditor to make reference to the subject matter of the disagreement in connection with its reports on the Company’s consolidated financial statements for such years, and (ii) there were no “reportable events” (as that term is defined in Item 304(a)(1)(v) of Regulation S-K). A copy of the Former Auditor’s letter, dated November 27, 2017, is attached as Exhibit 16.1 to this Form 10-K.

ITEM 9A. CONTROLS AND PROCEDURES.
 
Management’s Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934 as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Our management conducted an evaluation of the effectiveness of our internal controls over financial reporting as of December 31, 2016 using criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management has concluded that our internal controls over financial reporting were not effective as of December 31, 2017 based on a finding of a material weakness related to a lack of segregation of duties, resulting from staff reductions in accordance with cost containment measures. We have taken measures to improve segregation of duties and the overall effectiveness of internal controls by outsourcing certain functions of the accounting department and by forming an Audit Committee.  If we are able to obtain additional funding in the future, we intend to hire sufficient staff to enable an appropriate level of segregation of duties and to provide appropriate controls surrounding the financial reporting function.
 
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permits us to provide only management’s report in this Annual Report.

Disclosure Controls and Procedures
 
As of December 31, 2017, our management carried out the evaluation of the effectiveness of our disclosure controls and procedures required by Rule 13a-15(e) under the Exchange Act with the participation of our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017, our disclosure controls and procedures were ineffective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
 
Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting identified in connection with this evaluation that occurred during our fiscal quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B. OTHER INFORMATION.
 
None.
 
PART III
 
The information required in Items 10 (Directors, Executive Officers and Corporate Governance), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), Item 13 (Certain Relationships and Related Transactions, and Director Independence), and Item 14 (Principal Accounting Fees and Services) is incorporated by reference to the Company’s definitive proxy statement for the 2018 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of December 31, 2017.
 
 
PART IV
 
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 
 
 
 
 
 
 
 
 
 
Filed or
 
 
 
 
Incorporated by Reference
 
Furnished
Exhibit No.
 
Exhibit Description
 
Form
 
Date
 
Number
 
Herewith
3.1(i)
 
 
10-Q
 
August 19, 2015
 
3.1
 
 
3.2(ii)
 
 
8-K
 
August 15, 2017
 
3.1
 
 
4.1
 
 
8-K
 
June 18, 2015
 
3.2
 
 
4.2
 
 
8-K
 
June 18, 2015
 
3.3
 
 
10.1
 
 
10-K
 
April 12, 2017
 
10.15
 
 
10.2
 
 
10-K
 
April 12, 2017
 
4.2
 
 
10.3
 
 
8-K
 
November 20, 2017
 
10.1
 
 
10.4
 
 
8-K
 
May 31, 2017
 
10.1
 
 
10.5
 
 
10-Q
 
May 15, 2017
 
10.1
 
 
10.6
 
 
10-Q
 
May 15, 2017
 
10.2
 
 
10.7
 
 
10-Q
 
May 15, 2017
 
10.3
 
 
10.8
 
 
10-Q
 
May 15, 2017
 
10.4
 
 
10.9
 
 
10-Q
 
May 15, 2017
 
10.5
 
 
10.10
 
 
10-Q
 
May 15, 2017
 
10.6
 
 
10.11
 
 
10-Q
 
May 15, 2017
 
10.7
 
 
10.12
 
 
10-Q
 
May 15, 2017
 
10.8
 
 
10.13
 
 
10-Q
 
May 15, 2017
 
10.9
 
 
 
 
10.14
 
 
8-K
 
May 1, 2017
 
10.1
 
 
10.15
 
 
8-K
 
May 1, 2017
 
10.2
 
 
10.16
 
 
8-K
 
February 10, 2016
 
10.1
 
 
10.17
 
 
 
 
 
 
 
 
Filed
10.18
 
 
 
 
 
 
 
 
Filed
10.19
 
 
 
 
 
 
 
 
Filed
10.20
 
 
 
 
 
 
 
 
Filed
10.21
 
 
 
 
 
 
 
 
Filed
10.22
 
 
8-K
 
June 18, 2015
 
10.6
 
 
10.23
 
 
8-K
 
June 18, 2015
 
10.7
 
 
10.24
 
 
8-K
 
April 29, 2016
 
10.1
 
 
10.25
 
 
8-K
 
April 29, 2016
 
10.2
 
 
10.26
 
 
8-K
 
April 29, 2016
 
10.3
 
 
10.27
 
 
8-K
 
May 2, 2016
 
10.1
 
 
10.28
 
 
 
 
 
 
 
 
Filed
10.29
 
 
 
 
 
 
 
 
Filed
10.30
 
 
 
 
 
 
 
 
Filed
10.31
 
 
 
 
 
 
 
 
Filed
10.32
 
 
 
 
 
 
 
 
Filed
16.1
 
 
8-K
 
December 1, 2017
 
16.1
 
 
31.1
 
 
 
 
 
 
 
 
Filed
31.2
 
 
 
 
 
 
 
 
Filed
32.1
 
 
 
 
 
 
 
 
Furnished**
101.INS
 
XBRL Instance Document
 
 
 
 
 
 
 
Filed
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
Filed
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
Filed
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
Filed
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
Filed
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
 
Filed
 
*
Management contract or compensatory plan or arrangement.
**
This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
 
+            Certain schedules, appendices and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplemental to the Securities and Exchange Commission staff upon request.
 
Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to VerifyMe, Inc., at the address on the cover page of this report, Attention: Corporate Secretary.
 
ITEM 16. FORM 10-K SUMMARY

Not applicable.
 
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
VerifyMe, Inc.
 
 
 
 
 
 
By:
/s/ Patrick White
 
 
 
Patrick White
Chief Executive Officer
 
 
 
Date: April 16, 2018
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
 
 
 
 
 
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Patrick White
 
Chief Executive Officer
 
April 16, 2018
Patrick White
 
(Principal Executive Officer)
 
 
 
 
 
 
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ James S. Cardwell
 
Chief Financial Officer
 
April 16, 2018
James S. Cardwell
 
(Principal Financial Accounting
Officer)
 
 
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Norman Gardner
 
Chairman of the Board
 
April 16, 2018
Norman Gardner
 
 
 
 
 
 
 
 
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Carl Berg
 
Director
 
April 16, 2018
Carl Berg
 
 
 
 
         
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Lawrence Schafran
 
Director
 
April 16, 2018
Lawrence Schafran
 
 
 
 
         
 
 
 
 
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/Laurence Blickman
 
Director
 
April 16, 2018
Laurence Blickman
 
 
 
 
 
 
 
 
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Howard Goldberg
 
Director
 
April 16, 2018
Howard Goldberg
 
 
 
 
 
 
INDEX TO
FINANCIAL STATEMENTS

CONTENTS
 
 
 
PAGE
 
 
 
 
 
 
F-1
 
 
 
 
 
 
F-2
 
 
 
 
 
 
F-3
 
 
 
 
 
 
F-4
 
 
 
 
 
 
F-5
 
 
 
 
 
 
F-6 to F-28
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Shareholders and Board of Directors of
VerifyMe, Inc.

Opinion on the Financial Statements

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

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ MaloneBailey, LLP
www.malonebailey.com
We have served as the Company's auditor since 2018.
Houston, Texas
April 16, 2018
 
 
VerifyMe, Inc.
Balance Sheets
 
    
Year Ended
 
    
December 31, 2017
   
December 31, 2016
 
             
             
ASSETS
           
             
CURRENT ASSETS
           
Cash and cash equivalents
 
$
693,001
   
$
22,644
 
Prepaid expenses and other current assets
   
18,668
     
9,425
 
Inventory
   
-
     
17,093
 
TOTAL CURRENT ASSETS
   
711,669
     
49,162
 
                 
OTHER ASSETS
               
Patents and Trademarks, net of accumulated amortization of
               
$237,331 and $194,236 as of December 31, 2017 and December 31, 2016
   
191,507
     
231,952
 
                 
                 
TOTAL ASSETS
 
$
903,176
   
$
281,114
 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
                 
CURRENT LIABILITIES
               
Accounts payable and accrued expenses
 
$
923,202
   
$
867,436
 
Notes payable net of discount of $0 and $60,931, as of December 31, 2017 and December 31, 2016
   
50,000
     
68,069
 
Common stock payable – related party
   
122,478
         
Embedded derivative liability
   
-
     
228,718
 
Warrant liability
   
-
     
394,744
 
TOTAL CURRENT LIABILITIES
   
1,095,680
     
1,558,967
 
                 
STOCKHOLDERS' DEFICIT
               
Series A Convertible Preferred Stock, $.001 par value, 37,564,767 shares
               
  authorized; 324,778 shares issued and outstanding as of December 31, 2017 and
         
  397,778 shares issued and outstanding as of December 31, 2016
   
325
     
398
 
                 
Series B Convertible Preferred Stock, $.001 par value; 85 shares
               
  authorized; 0.92 shares issued and outstanding as of December 31, 2017 and
         
  December 31, 2016
   
-
     
-
 
                 
Series C Convertible Preferred Stock, $.001 par value; 7,500,000 shares
               
  authorized, 0 shares issued and outstanding as of December 31, 2017 and
         
  1,912,500 issued and outstanding as of December 31, 2016
   
-
     
1,913
 
                 
Series D Convertible Preferred Stock, $.001 par value;  6,000,000
               
  shares authorized; 0 shares issued and outstanding as of December 31, 2017
         
  and 166,750 issued and outstanding as of December 31, 2016
   
-
     
167
 
                 
Common stock of $.001 par value; 675,000,000 authorized; 53,873,872 and 8,681,236
issued, 53,523,332 and 8,330,696 shares outstanding as of December 31, 2017 and
December 31, 2016
   
53,522
     
8,331
 
                 
Additional paid in capital
   
56,198,126
     
40,469,272
 
 
               
Treasury stock at cost (350,540 shares at December 31, 2017 and  December 31, 2016)
   
(113,389
)
   
(113,389
)
                 
Accumulated deficit
   
(56,331,088
)
   
(41,644,545
)
                 
STOCKHOLDERS' DEFICIT
   
(192,504
)
   
(1,277,853
)
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
 
$
903,176
   
$
281,114
 
 
The accompanying notes are an integral part to these financial statements.
 
 
VerifyMe, Inc.
Statements of Operations
 
 
  
 
Year Ended
 
  
 
December 31, 2017
   
December 31, 2016
 
 
           
 
           
NET REVENUE
           
Sales
 
$
-
   
$
37,055
 
TOTAL NET REVENUE
   
-
     
37,055
 
 
               
COST OF SALES
   
-
     
24,363
 
 
               
GROSS PROFIT
   
-
     
12,692
 
 
               
OPERATING EXPENSES
               
General and administrative (a)
   
1,689,883
     
1,010,648
 
Legal and accounting
   
246,520
     
414,032
 
Payroll expenses (a)
   
767,257
     
1,789,303
 
Research and development
   
128,044
     
250,180
 
Sales and marketing
   
3,800
     
282,867
 
Total Operating expenses
   
2,835,504
     
3,747,030
 
 
               
LOSS BEFORE OTHER INCOME (EXPENSE)
   
(2,835,504
)
   
(3,734,338
)
 
               
OTHER (EXPENSE) INCOME
               
Interest expenses
   
(218,316
)
   
(12,871
)
Loss on settlement of related party notes payable
   
(331,912
)
   
-
 
Other income
   
392
     
-
 
Loss on disposition of fixed assets
   
-
     
(4,981
)
Change in fair value of warrants
   
-
     
3,357,149
 
Change in fair value of embedded derivative liability
   
-
     
698,303
 
Fair value of warrants in excess of consideration for convertible preferred stock
   
-
     
(1,949,517
)
 
   
(549,836
)
   
2,088,083
 
 
               
NET LOSS
 
$
(3,385,340
)
 
$
(1,646,255
)
 
               
Deemed dividend on convertible preferred shares
   
(596,878
)
   
-
 
 
               
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
 
$
(3,982,218
)
 
$
(1,646,255
)
 
               
LOSS PER SHARE
               
BASIC
 
$
(0.14
)
 
$
(0.24
)
DILUTED
 
$
(0.14
)
 
$
(0.24
)
 
               
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING
               
BASIC
   
28,244,361
     
6,860,955
 
DILUTED
   
28,244,361
     
6,860,955
 
 
(a)
Includes share based compensation of $1,800,181 and $1,405,877 for the years ended December 31, 2017 and 2016, respectively.
 
The accompanying notes are an integral part to these financial statements.
 
 
VerifyMe, Inc.
Statements of Changes in Stockholders’ Deficit
For the Years Ended December 31, 2017 and 2016
 
   
Series A
   
Series B
 
Series C
 
Series D
                                           
   
Convertible
   
Convertible
 
Convertible
 
Convertible
                                           
   
Preferred
   
Preferred
 
Preferred
 
Preferred
   
Common
                               
   
Stock
   
Stock
 
Stock
 
Stock
   
Stock
   
Additional
                         
   
Number of
         
Number of
       
Number of
       
Number of
         
Number of
         
Paid-In
   
Treasury
   
Deferred
   
Accumulated
       
   
Shares
   
Amount
         
Amount
 
Shares
   
Amount
 
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Stock
   
Compensation
   
Deficit
   
Total
 
Balance at December 31, 2015
   
441,938
   
$
442
     
1.00
   
$
-
         
-
         
-
     
5,977,030
   
$
5,977
   
$
39,779,414
   
$
(113,389
)
 
$
(1,842,334
)
 
$
(39,998,290
)
 
$
(2,168,180
)
 
                                                                                                               
Conversion of Series A Convertible Preferred Stock
   
(44,160
)
   
(44
)
   
-
     
-
         
-
         
-
     
883,200
     
883
     
(839
)
   
-
     
-
     
-
     
-
 
Conversion of Series B Convertible Preferred Stock
                   
(0.08
)
   
-
         
-
         
-
     
647,983
     
675
     
(675
)
   
-
     
-
     
-
     
-
 
Sale of Series C Convertible Preferred Stock
                                   
3,087,500
     
3,088
         
-
     
1,231,912
     
-
     
-
     
-
     
-
     
-
     
1,235,000
 
Stock issuance costs
                                                               
(17,500
)
   
-
     
-
     
-
     
-
     
-
     
(17,500
)
Conversion of Series C Convertible Preferred Stock
                                   
(1,175,000
)
   
(1,175
)
   
166,750
     
167
     
1,175,000
     
1,175
     
-
     
-
     
-
     
-
     
-
 
Stock on embedded derivative liability
                                                                   
350,500
                                             
350,500
 
Sale of Series D Convertible Preferred Stock
   
-
     
-
     
-
     
-
             
-
             
-
                     
66,533
     
-
     
-
     
-
     
66,700
 
Deemed dividend distribution
   
-
     
-
     
-
     
-
             
-
             
-
                     
(1,277,521
)
   
-
     
-
     
-
     
(1,277,521
 
Issuance of stock for services
   
-
     
-
     
-
     
-
             
-
             
-
     
32,983
     
33
     
20,742
     
-
     
-
     
-
     
20,775
 
Issuance of restricted stock for services
   
-
     
-
     
-
     
-
             
-
             
-
     
40,000
     
40
     
(40
)
   
-
     
-
     
-
     
-
 
Forfeiture of restricted stock units
   
-
     
-
     
-
     
-
             
-
             
-
     
(452,500
)
   
(452
     
(1,069,256
)
   
-
     
1,069,708
     
-
     
-
 
Warrants issued in conjunction with notes payable                   
                   
-
     
-
             
-
             
-
     
-
     
-
     
69,500
     
-
     
-
     
-
     
69,500
 
Fair value of stock options and warrants
                                                                   
-
     
-
     
1,405,877
     
-
     
-
     
-
     
1,405,877
 
Decrease in fair value of restricted stock units
                                                                   
-
     
-
     
(89,375
)
   
-
     
89,375
     
-
     
-
 
Amortization of deferred compensation
                                                                   
-
     
-
     
-
     
-
     
683,251
     
-
     
683,251
 
Net loss
                                                                                   
-
     
-
     
-
     
(1,646,255
)
   
(1,646,255
)
                                                                                                                         
Balance at December 31, 2016   
   
397,778
     
398
     
0.92
             
1,912,500
     
1,913
     
166,750
     
167
     
8,330,696
     
8,331
     
40,469,272
     
(113,389
)
           
(41,644,545
)
   
(1,277,853
)
Cumulative adjustment related to change in accounting principle (Note 1, Change in Accounting Principle)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
11,924,665
             
-
     
(11,301,203
)
   
623,462
 
Adjusted balance at January 1, 2017
   
397,778
     
398
     
0.92
     
-
     
1,912,500
     
1,913
     
166,750
     
167
     
8,330,696
     
8,331
     
52,393,937
     
(113,389
)
   
-
     
(52,945,748
)
   
(654,391
)
Conversion of Series A Convertible Preferred Stock
   
(73,000
)
   
(73
)
   
-
     
-
     
-
     
-
     
-
     
-
     
1,460,000
     
1,460
     
(1,387
)
   
-
     
-
     
-
     
-
 
Conversion of Series C Convertible Preferred Stock
   
-
     
-
             
-
     
(1,912,500
)
   
(1,913
)
   
-
     
-
     
4,767,858
     
4,768
     
(2,855
)
   
-
     
-
     
-
     
-
 
Conversion Preferred C - Warrants
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
6,175,000
     
6,175
     
(6,175
)
                           
-
 
Conversion of Series D Convertible Preferred Stock
 
-
     
-
     
-
     
-
     
-
     
-
     
(166,750
)
   
(167
)
   
496,429
     
496
     
(329
)
   
-
     
-
     
-
     
-
 
Conversion Preferred D - Warrants
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
1,985,716
     
1,986
     
(1,986
)
                           
-
 
Sale of common stock
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
19,451,575
     
19,452
     
1,340,798
     
-
     
-
     
-
     
1,360,250
 
Sale of common stock - Past issuances
   
-
     
-