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EX-3.9 - EXHIBIT 3.9 - VerifyMe, Inc.ex3_9.htm
EX-32.1 - EXHIBIT 32.1 - VerifyMe, Inc.ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - VerifyMe, Inc.ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - VerifyMe, Inc.ex31_1.htm
EX-10.15 - EXHIBIT 10.15 - VerifyMe, Inc.ex10_15.htm
EX-4.2 - EXHIBIT 4.2 - VerifyMe, Inc.ex4_2.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, 2016
 
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.)
 
409 Boot Road
Downingtown, PA  19335
(Address of Principal Executive Offices) (Zip Code)
 
Registrant’s telephone number, including area code: (212) 994-7002
 
Securities registered pursuant to Section 12(b) of the Act:
 
None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, $0.001 par value
 

 
Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   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
 
 
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 $302,596 as of June 30, 2016 based on the price in which the common stock of the registrant was last sold as reported by the OTC Bulletin Board. 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 8,990,696 shares of common stock outstanding as of the close of business on March 31, 2017.
 

 

 
DOCUMENTS INCORPORATED BY REFERENCE
 
NONE
 
 
 
 
 
VERIFYME, INC.
 
FORM 10-K ANNUAL REPORT
Year Ended December 31, 2016
 
 
 
 
 
 
 
 
 
Page
 
PART I
 
 
 
 
 
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PART II
 
 
 
 
 
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PART III
 
 
 
 
 
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PART IV
 
 
 
 
 
38
  
 
 
PART I
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Except for the historical information contained herein or incorporated by reference, this Annual Report and the information incorporated by reference contains forward-looking statements that involve risks and uncertainties. These statements include projections about our accounting and finances, plans and objectives for the future, future operating and economic performance and other statements regarding future performance, including our ability to obtain additional financing and our ability to achieve full functionally in our digital technology products. These statements are not guarantees of future performance or events. Our actual results may differ materially from those discussed here. Factors that could cause or contribute to differences in our actual results include those discussed in the following section, and included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise our forward-looking statements.
 
ITEM 1. BUSINESS.
 
Overview

 VerifyMe, Inc. (the “Company,” “VerifyMe,” “we,” “us,” or “our”) 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 identities 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 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 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.
 
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.
 
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 heuristic scoring mechanism.  We have specialized systems that perform ‘liveness’ detection to insure the subject of authentication is in fact a live human being. We have systems that introduce learning capabilities into our solutions to improve the ease of use and flexibility.
 
 
We believe that 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 can generate sales through licenses of our technology and through direct sales of our technology.
 
Our physical technologies involve the utilization of invisible and/or color shifting/changing inks, which are compatible with today’s printing machines. 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.
 
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.  Currency, lottery tickets, credit cards, event and transportation tickets, casino slot tickets, and travelers’ checks are all susceptible to counterfeiting. We believe that losses from such counterfeiting have increased substantially with improvements in counterfeiting 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.
 
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. Our technologies include (1) a technology utilizing invisible ink that can be revealed by use of laser light for authentication purposes, (2) an inkjet ink technology, which allows invisible codes to be printed and (3) a color shifting technology that is activated by certain types of lights. All of those technologies are intended to be substantially different than pen systems that are currently in the marketplace. Pen systems also rely on invisible ink that is activated by a special marker. If the item is an original and not an invisible print, then the ink will be activated and show a visible mark as a different color than on an illegitimate copy. We believe that our technologies are superior to the pen system technology because, in the case of its laser and color shifting technologies, it will not result in a permanent mark on the merchandise. Permanent marks generally lead to the disposal of the merchandise or its sale as a “second” rather than best-quality product. In the case of rubbed ink technology, no special tools are required to distinguish the counterfeit. 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 of products from production to ultimate consumption when coupled with proprietary software.

           In the past, we have focused on the widespread problem of counterfeiting in the gaming industry. We have incorporated our technology into traditional gaming accessories such as playing cards, casino chips, and dice as well as gaming-based machinery such as slot machines with cashless gaming systems. This is accomplished during the regular manufacturing and printing processes. Our products use ink that is incorporated into dice and casino chips that can be viewed with a laser to reveal the authenticity of the item.
 
 
Physical and Material Goods Anti-Counterfeit Industry — Overview
 
Currency, passports, ID cards and other high-value documents have historically been subject to counterfeiting and forgery and continue to be today. Many consumer industries such as pharmaceutical, luxury goods and auto parts are also subject to significant counterfeiting. In the last 15 years, the counterfeiting of goods has increased significantly on a global basis and has become a major threat to brand owners in most industries. Major brands, whether national or multinational, are being systematically attacked by sophisticated criminals and terrorists. Furthermore, counterfeiting and forgery have filtered down to the level of lone criminals due to the availability of digital scanning and copying technologies.
 
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 the digital age, including the color copier and other new technologies and templates available on the web, thieves and forgers have been able to make near identical copies of almost any printed item, which has resulted in major financial losses to business and, importantly, has compromised security at critical installations. One particular problem is that criminal and civil penalties for forgery, fraud, and counterfeiting are relatively light, and many of those engaging in such activities are overseas and far from the reach of U.S. law enforcement.
 
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, time-consuming in the 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 be rejected. There is no commercially fiscal way, for example, that a hologram, costing around five cents a copy, can be introduced to verify tax stamps.  Moreover, more than half the national currencies in the world lack even one layer of protection and can easily be counterfeited.
 
Counterfeiting, product diversion, piracy, forgery, identity theft, and unauthorized intrusion into websites, physical locations and databases create significant and growing problems to companies in a wide range of industries as well as governments and individuals worldwide. Counterfeiting is a global problem, and it is a problem that appears to be increasing. According to the International Anti-counterfeiting Coalition (“IACC”) the number of Intellectual Property Rights (“IPR”) – related seizures in 2014 were 23,140.  Direct and indirect U.S. jobs supported by Intellectual Property (“IP”) – intensive industries in 2013 was 55.7 million.  The total value of IPR-infringing goods seized, originating from China in 2014 (including Hong Kong) was $1.08 billion.  The total value of IPR-related seizures based on the Manufacturers’ Suggested Retail Price (“MSRP”) in 2014 was $1.22 billion.  The projected value of global trade in counterfeit and pirated goods in 2015 was $1.77 trillion.  On April 18, 2016, the Organisation for Economic Co-operation and Development reported that imports of counterfeit and pirated goods were worth nearly half a trillion dollars per year, or around 2.5% of global imports, with the US, Italian and French brands hit the hardest.  This report was based on customs seizure data over the period 2011 to 2013.
 
Counterfeiting is one of the fastest growing economic crimes of modern times. It presents companies, governments and individuals with a unique set of problems. What was once a cottage industry has now become a highly sophisticated network of organized crime that has the capacity to threaten the very fabric of national economies, endanger safety and frequently kill.  It devalues corporate reputations, hinders investment, funds terrorism, and costs hundreds of thousands of people their livelihood every year.

The global anti-counterfeit packaging market is 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 market has been segmented as follows:
 
·
Coding & printing technology
·
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
·
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, RFID and security labels segments in the anticounterfeit 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 ‘false,’ 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 all 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.

The Company has a strategic partnership with AB Corp. based in Boston, Massachusetts, which is the largest manufacturer of plastic cards in North America.  All of our revenue in 2016 was derived from AB Corp.
 
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 that 50% of all “dangerous drugs” (defined as all prescription drugs) that are distributed in California must be serialized and have an electronic pedigree by January 1, 2015; 100% of all dangerous drugs must have an electronic pedigree by January 1, 2016.
 
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.

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.
 
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+™; and
·
Authentication tools.

RainbowSecureTM 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. 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, and are not interested in outside public verification by consumers. The technology is also appropriate for anti-counterfeit protection of tags and labels in the apparel industry, where it can be applied to a variety of different materials in the form of dyes.
 
 
SecureLightTM technology was developed as a result of our investment in new proprietary color shifting 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+TM 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.
 
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 and audible ‘beep’.
 
Raw Material Suppliers
 
Our security pigments are manufactured from naturally occurring inorganic materials. The manufacturing process includes both chemical and mechanical elements. In many cases, we produce pigments that are unique to a particular 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. As more electronic transactions incorporate the exchange of value and money, the verification of the unique identity of human beings participating in those transactions becomes more important. 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 2015 Identity Fraud Study released by Javelin Strategy & Research, in 2014, $16 billion was stolen from 12.7 million U.S. consumers. 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.
 
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 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.
 
When we have sufficient working capital, we will devote resources to resolving certain functionality issues, which presently affect our Authenticator technology.
 
 
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 (“UX”) and total cost of ownership (“TCO”). 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 multifactor authentication (“MFA”) market was valued at $3.6 billion in 2014 and is predicted to reach more than $9.6 billion by 2020 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
 
2012 was the year of password theft, according to SecurityCoverage. The security software company says that in the first six months of 2012, online password breaches increased 300% over the same period in 2011. Since then, this growth rate has continued. In the case of the recent data breach of dating service Ashley Madison, it is expected that the exposed personally identifiable information of over 30 million people will directly lead to the compromise of other password based accounts and services.
 
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.
 
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 also geo-location is very important to comply with state/country regulations;
·
Financial services market, where there is a large financial risk to identity theft and fraud; and
·
Physical access control market, where the identity of individuals is key to allow access to buildings.

 
Our Solution
 
VerifyMe Authenticator delivers an electronic authentication solution for identifying individual human beings. When a 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 (“SSO”) 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 are able to 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 (“Rackspace”);
·
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 device’s 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
 
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 nineteen granted patents and six applications pending. 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 begin to expire between the years 2019 and 2031.
 
We continue to develop new anti-counterfeiting technologies and to apply for patent protection for these technologies wherever possible.  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. 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.
 
Research and Development
 
We have been involved in research and development since our inception and intend to continue our research and development activities, funds permitting. Until January 1, 2013, our research and development focused on pigment technologies. Since January 1, 2013, we have allocated research and development efforts between digital and pigment technologies. We hope to expand our technology into new areas of implementation and to develop unique customer applications. We spent approximately $0.3 million and $2.4 million on research and development during the years ended December 31, 2016 and 2015.
 
 
Our Revenue Model
 
To date, we have not generated significant revenue. We believe that creating demand for our products and services will require a marketing program that effectively reaches potential customers. In developing our most recent marketing approach, 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 collecting license fees 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.

 
Sales and Marketing Strategy
 
We plan to direct our sales and marketing strategy at multiple target groups as follows:
 
Consumer Product Security
 
·Pharmaceuticals
·Luxury goods
·Tobacco
·Alcohol
·Auto parts
·Aviation parts
·Any other 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
 
 
Gaming
 
·Online gaming sites
·Casino chips
·Dice
·Playing cards
·E-proms/critical memory devices
·Lottery tickets
 
 
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.
 
Competition
 
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, particularly in the area of traditional overt security technologies. This is due to the fact that security printing for currency production, for example, 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. 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 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 American Banknote Holographics and Digimarc, which provide holograms and digital watermarking, respectively; (iv) Product Diversion Tracking Providers. Next-Generation Technology Providers LLC falls into this group, along with several companies such as Applied DNA Sciences, Authentix, DNA Technologies, and Identif, which provide on-product and in-product tagging technologies; (v) Traditional Security Printers. This group includes traditional security printers such as Thomas de la Rue and Portals, whose core products are printing the world’s currencies; and (vi) Biometric Solution Providers. These companies offer biometric authentication capabilities to be integrated with existing mobile device authentication, such as ImageWare Systems.
 
To compete effectively, we expect that 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 to the market effectively, if at all.
 
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;
·
timing of 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, 2016 and 2015, one and three customers accounted for 100.0% 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.

During the years ended December 31, 2016 and 2015, we purchased 100.0% of our pigment from one vendor.


Facilities
Our principal offices are located at 409 Boot Road, Downingtown, PA  19335.

We believe that our office is suitable and adequate for our current needs but we do anticipate seeking more permanent office.

Employees
 
As of March 31, 2017, we had one full time employee.
 
ITEM 1A. RISK FACTORS.

 
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

Lack of working capital has severely curtailed our operations, and if we cannot complete a financing in the near future, we will be required to cease operations.

Due to lack of working capital, we have reduced our personnel to a single employee and our two executive officers, who serve as consultants, and we are marketing SecureLightTM and Rainbow SecureTM, which are the only products we currently have in inventory and available for sale. We incurred a net loss of $1.6 million during the year ended December 31, 2016. As of April 12, 2017, we expect that we can manage our accounts payable and sustain our scaled operations until April 30, 2017. Because small companies like ours generally face more obstacles in obtaining financing, we cannot assure you that we will be successful in raising additional capital if needed.  Aditionally, if we complete a financing it will be very dilutive to shareholders. Further, even if we do raise all or substantially all of the capital we are seeking, it is likely we will need to implement another financing in the future.

Our ability to continue as a going concern is in doubt unless we obtain adequate new debt or equity financing and achieve sufficient sales levels.
 
As noted above, we have incurred significant net losses to date. We anticipate that we will continue to lose money for the foreseeable future. Additionally, we have negative cash flows from operations. Our continued existence is dependent upon generating sufficient working capital and obtaining adequate new debt or equity financing. Because of our continuing losses, without improvements in our cash flow from operations or new financing, we will have to continue to restrict our expenditures. Working capital limitations have impinged on our day-to-day operations, which contribute to continued operating losses.

If we are unable to reach an agreement with certain holders of our securities, any future financing may be very dilutive.

Holders of our preferred stock and certain warrants issued in February 2016 and November 2016 contain anti-dilution provisions that would apply in the event of any lower-priced financing and which would entitle the holders to additional warrants and additional shares of stock upon conversion of the preferred stock. Although we have an oral agreement with the November investors, we must reach a solution with the February investors that would permit a lower-priced financing with less extensive dilution. However, we cannot assure you that we will be successful in reaching an agreement. If we cannot do so, we cannot remain operational.
 
 
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 of directors and executive officer roles in recent years. To provide stability and guidance, our founder, Norman Gardner, recently returned to the company and became Chairman and CEO. 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.

If we cannot expand our operations, or if we cannot manage our growth effectively, we may not become profitable.
 
As discussed above, due to limited operating capital, we are presently operating on a minimal scale, and we require immediate financing to expand our operations in order to generate revenue. However, 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 we are unable to hire an experienced sales team, or they are unsuccessful, we may not be able to generally material revenue.

Presently our sales personnel consists of one employee.  Our potential customers are large companies which do not impulsively enter into large contracts.  Accordingly, a portion of the proceeds we may receive will be used to hire more sales persons and support the sales effort.  If we are unable to retain the right sales persons or they are unsuccessful, we may be unable to generate material revenue.
 
 
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.

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.
 
We regard the protection of our trade secrets, copyrights, trademarks, domain names and other product rights as 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 in order 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.
 
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 a number of 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 like ours. 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. In particular, the success of our business will be driven by our ability to responsibly use the data that our users share with us. Therefore, our business could be harmed by any significant change to applicable laws, regulations or industry practices regarding the use or disclosure of data our users choose to share with us, or regarding the manner in which the express or implied consent of users for such use and disclosure is obtained. 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.
 
 
Because we will process and store some of the personal information of our users, including credit card and other payment information, we are potentially vulnerable to security breaches resulting in the theft of confidential information, which would adversely affect our business.

Once we re-launch our digital technology operations, we will receive, store and process personal information and other user data, and we enable our users to share their personal information with each other and with third parties, including on the Internet and mobile platforms. There are numerous federal, state and local laws around the world regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other user data on the Internet and mobile platforms, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules. Compliance with these rules may be costly. Further, while we will take steps to protect our users’ confidential information from misuse and theft, we cannot guarantee that our electronic systems for storing and processing personal and credit card information will not be vulnerable to security breaches. Our own errors in the storage, use or transmission of personal information could also result in a breach of user privacy. If our users’ confidential information is stolen or inadvertently disseminated, we may become subject to lawsuits or other proceedings for purportedly fraudulent transactions or invasions of privacy. In addition, we could face in liability under state and federal privacy statutes and legal or administrative actions by state attorneys general, private litigants, and federal regulators. Any such claim or proceeding, or any adverse publicity resulting from these allegations, may harm our reputation, discourage users and potential users, and have a material adverse effect on our business, financial condition, results of operations and cash flows.
 
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.
 
The Company currently depends 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 servicers relating to our electronic technology. We cannot be certain that any of these providers will be willing and able to provide these services in an efficient and cost-effective manner or that they will be willing or able to meet our evolving needs. If our potential vendors or service providers fail to meet their obligations, provide poor, inaccurate or untimely service, or we are unable to make alternative arrangements 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 our operating results could be materially harmed.
 

 
Risks Relating to Our Common Stock

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 Securities and Exchange Commission (“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.

If one of the beneficial owners of our warrants were to exercise his warrants, he would gain control of our company and might be able to exert control over us to the detriment of minority shareholders.

As detailed under Item 12, below, Mr. Laurence J. Blickman, through an affiliated trust and defined benefit plan, holds a number of warrants to purchase common stock which, if exercised, would make him the beneficial owner of over 42% of our outstanding common stock. These warrants are not presently in the money, and we are not aware of any intention by Mr. Blickman to exercise these warrants or exert control over our management. Further, Mr. Blickman has historically been very supportive of our Company. However, investors should be aware that Mr. Blickman, if he did choose to exercise his warrants, would be able to control 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. For more information see Item 12, below.

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 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.

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.

Since we intend to retain any earnings for development of our business for the foreseeable future, you will likely not receive any dividends for the foreseeable future.

We have not paid dividends in the past and do not intend to pay any dividends in the foreseeable future, as we intend to retain any earnings for development and expansion of our business operations. As a result, you will not receive any dividends on your investment for an indefinite period of time.
 
 
ITEM 1B. UNRESOLVED STAFF COMMENTS.
 
None.
 
ITEM 2. PROPERTIES.
 
Our principal offices are currently located at 409 Boot Road, Downingtown, PA  19335.
 
ITEM 3. LEGAL PROCEEDINGS.
 
None.
 
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, 2015
 
High
   
Low
 
Quarter ended March 31, 2015
 
$
3.74
   
$
0.85
 
Quarter ended June 30, 2015
 
$
8.08
   
$
0.54
 
Quarter ended September 30, 2015
 
$
6.20
   
$
1.31
 
Quarter ended December 31, 2015
 
$
2.94
   
$
0.50
 

 
Fiscal Year Ended December 31, 2016
 
High
   
Low
 
Quarter ended March 31, 2016
 
$
2.5
   
$
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 31, 2017, our shares of common stock were held by approximately 1,326 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.
 
Recent Sales of Unregistered Securities

On October 24, 2016, the Company issued to certain accredited investors 166,750 shares of 0% Series D Convertible Preferred Stock, par value $0.001 per share (“Series D”) at a purchase price of $0.40 per share with gross proceeds to the Company of $66,700. In connection with the sale of the Series D, the Company issued to the purchasers warrants to purchase in the aggregate 667,000 shares of the Company’s common stock at an exercise price of $0.40 per share. Each share of Series D is convertible into one share of common stock, subject to adjustment for lower priced issuances.
 
The foregoing issuances of the securities were exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(a)(2) and Rule 506 as transactions not involving a public offering.
 
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 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 from 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/or color shifting/changing inks, which are compatible with today’s printing machines. 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, 2016 and 2015
 
The following discussion analyzes our results of operations for the years ended December 31, 2016 and 2015. 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, 2016 and 2015, we generated revenues of $37,055 and $217,268. Our net loss was $1,646,255 for the year ended December 31, 2016, a decrease of $655,630 from a net loss of $2,301,885 for the year ended December 31, 2015, 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, 2016 and 2015, we incurred proprietary technology costs of sales of $24,363 and $65,723. Cost of sales was lower for the year end December 31, 2016, since we had lower sales volumes.
 
General and Administrative Expenses
 
General and administrative expenses were $1,010,648 for the year ended December 31, 2016 compared to $449,483 for the year ended December 31, 2015, an increase of $561,165. The increase is attributable primarily to increased consulting expenses of approximately $762,000, including non-cash option and warrant expense of approximately $606,000, offset by approximate decreases in bad debt expense of $62,000, depreciation of $67,000, SEC filing fees of $32,000, rent expense of $43,000 and website expenses of $41,000.

Legal and Accounting
 
Legal and accounting fees decreased $44,769 to $414,032 for the year ended December 31, 2016 from $458,801 for the year ended December 31, 2015. 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 $1,789,303 for the year ended December 31, 2016 from $1,875,488 for the year ended December 31, 2015, a decrease of $86,185. 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 $2,162,653 to $250,180 for the year ended December 31, 2016 from $2,412,833 for the year ended December 31, 2015. The decrease in research and development expenses was due to license fees related to the Patent and Technology License Agreement which were $2,000,000 in 2015 and did not reoccur in 2016.
 
Sales and Marketing
 
Sales and marketing expenses for the year ended December 31, 2016 were $282,867 as compared to $197,430 for the year ended December 31, 2015, an increase of $85,437. 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, 2016, we incurred interest expense of $12,871, as compared to $61,438 for the year ended December 31, 2015, a decrease of $48,567. The decrease in interest expense relates to the conversion of notes payable and accrued interest into common stock as part of the restructuring transaction in June 2015.
 
Gain (Loss) on Extinguishment of Debt
 
The gain from extinguishment of debt was $0 for the year ended December 31, 2016 and $332,523 for the year ended December 31, 2015. The gain on extinguishment of debt was a result of the excess fair value of the notes payable and accrued interest over the value of the common stock issued, and accrued interest thereon, that were part of the restructuring transaction in June 2015.
 
Change in Fair Value of Warrants
 
During the year ended December 31, 2016, the Company benefitted from the change in the fair value of warrants in the amount of $3,357,149 as compared to $2,669,520 for the year ended December 31, 2015. The change resulted from the re-valuation of warrants associated with the Investment Agreement entered into on December 31, 2012, the Subscription Agreement entered into on January 31, 2013, the notes payable issued during 2014 and warrants issued in February and October of 2016. The value of the warrant liability has decreased because the value of the Company’s stock has decreased during 2016.

Change in Fair Value Embedded Derivative Liability
 
During the year ended December 31, 2016, the Company benefitted from the change in fair value of the embedded derivative liability in the amount of $698,303 as compared to $0 for the year ended December 31, 2015. The decrease in the fair value of the embedded derivative liability was due to the decrease in the price of the Company’s common stock from the dates of the Subcription Agreements, February 2016 and October 2016, to December 31, 2016.

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

During the year ended December 31, 2016, the Company issued warrants with convertible preferred stock. The fair value of the warrants were in excess of consideration for the convertible stock and resulted in a loss of $1,949,517. No such transaction occurred during the ended December 31, 2015.
 
Liquidity and Capital Resources

Net cash used in operating activities increased $1,344,708 to $1,344,708 for the year ended December 31, 2016 as compared to $1,495,315 for the year ended December 31, 2015.  The decrease resulted primarily from operational changes discussed previously.

Net cash used in investing activities was $0 for the year ended December 31, 2016, materially unchanged from $2,532 for the year ended December 31, 2015. 
 
 
Net cash provided by financing activities increased by $74,843 to $1,363,200 for the year ended December 31, 2016 from $1,438,043 for the year ended December 31, 2015.  Cash provided by financing activities during the year ended December 31, 2016, consisted primarily of our Series C and Series D Preferred Stock offerings which raised $1,284,200  and bridge loans of $79,000.  Financings during the year ended December 31, 2015 related to our Series A Preferred Stock offering.
 
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 April 12, 2017 we had cash resources of approximately $11,000. Our existing cash resources are not sufficient to sustain our operations during the next twelve months, and we may need to raise additional funds in the future. To supply immediate working capital, we are seeking to raise a minimum of $600,000 and a maximum of $1.75 million from the sale of units of common stock and warrants. In order to do so, we must obtain concessions from the purchasers in our Series C Convertible Preferred Stock (the “Series C”) offering as well as the Series D investor and our lender must convert its outstanding notes into common stock. While we have oral agreements with the holders of our Series D and notes, we are uncertain if the Series C investors will agree to the concessions. If we are unsuccessful in obtaining the concessions and raising capital, we will cease operations.
 
Off-Balance Sheet Arrangements

As of December 31, 2016, 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 particular importance in the presentation of our financial position, results of operations and cash flows and which require the application of significant judgment by management.
 
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.
 
 
Revenue Recognition
 
In accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 104, Revenue Recognition (Codified in FASB ASC 605), we recognize revenue when (i) persuasive evidence of a customer or distributor arrangement exists, (ii) a retailer, distributor or wholesaler receives the goods and acceptance occurs, (iii) the price is fixed or determinable, and (iv) collectability of the sales revenues is reasonably assured. Subject to these criteria, the Company recognizes revenue from product sales, consisting mainly of pigments and penlights, upon shipment to the customer. Royalty revenue is recognized upon receipt of notification from a customer that the Company’s product has been used in the customer’s production process.
 
Recently Issued Accounting Pronouncements
 
Recently issued accounting pronouncements are discussed in Note 1 of the Notes to Financial Statements contained elsewhere in this report.

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 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.
 
None.
 


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 (COSO). Our management has concluded that our internal controls over financial reporting were not effective as of December 31, 2016. Management’s conclusion was based on a lack of segregation of duties resulting from staff reductions in accordance with cost containment measures. If we are able to obtain additional funding in the future, we intend to hire sufficient staff to enable an appropriate level of segregation of duties and to provide appropriate controls surrounding the financial reporting function.
 
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permits us to provide only management’s report in this annual report.
 
  
Changes in Internal Control Over Financial Reporting
 
As of December 31, 2016, 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, 2016, 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.
 
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, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B. OTHER INFORMATION.
 
None.
 
  
PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
 
The current members of our board of directors and executive officers of the Company are as follows:
 
 
Name
 
Age
 
Position with Company
Norman Gardner*
 
74
 
Chairman and Chief Executive Officer
Claudio R. Ballard**
 
58
 
Director
Lawrence G. Schafran
 
78
 
Director
Jonathan Weinberger
 
40
 
Director
Scott A. McPherson
 
55
 
Chief Financial Officer
 
*
Appointed Chairman effective December 10, 2016 and Chief Executive Officer effective January 31, 2017
**
Appointed as Director by VerifyMe, Inc. (a Texas Corporation)

 
Board of Directors
 
We believe that our board of directors should be composed of individuals with sophistication and experience in many substantive areas that impact our business. We believe that experience, qualifications, or skills in the following areas are most important: security industry experience, accounting and finance; strategic planning; human resources and development practices; and board practices of other corporations. These areas are in addition to the personal qualifications described in this section. We believe that all of our current board members possess the professional and personal qualifications necessary for board service, and have highlighted particularly noteworthy attributes for each board member in the individual biographies below. The principal occupation and business experience, for at least the past five years, of each current director is as follows:
 
NORMAN A. GARDNER
 
Mr. Gardner was appointed Chief Executive Officer on January 31, 2017.  He became Chairman of the Board on December 10, 2016 and has been a consultant to the Company since 2013. Mr. Gardner was the developer of our core technologies.

Mr. Gardner’s experience leading the Company in the past and his familiarity with the Company’s technology strengthens the Board’s collective qualifications, skills and experience.
 
 
CLAUDIO R. BALLARD
 
Claudio R. Ballard has served as a director on our board of directors since March 30, 2013. He currently serves as the Chairman, Founder and one of the Managing Members of VEEDIMS, where he has served since April 2011.
  
Mr. Ballard’s knowledge of the digital technology strengthens the Board’s collective qualifications, skills and experience.
   
LAWRENCE G. SCHAFRAN
 
Lawrence G. Schafran has served as a director on our board of directors since September 30, 2015. Since 2006, Mr. Schafran has served as a director, chairman of the audit committee and member of the compensation committee of Wright Investors’ Service Holdings, Inc., a provider of investment and financial services. Mr. Schafran was previously a director, audit committee chairman and member of the compensation committee of SecureAlert, Inc., now Track Group, Inc. a manufacturer and distributor of tracking systems, from 2006 to 2013.
 
Mr. Schafran’s experience in finance and with public company boards strengthens the Board’s collective qualifications, skills and experience.
 
 
JONATHAN WEINBERGER
 
Jonathan R. Weinberger has served as a director on our board of directors since November 21, 2012. He has been Vice President of Innovation and Technology at the Alliance of Automobile Manufacturers, based in Washington D.C. since September 2015.  The Alliance is the leading advocacy group for the auto industry and represents 77% of all car and light truck sales in the United States. He previously served as President and Executive Vice President Veedims, LLC, based in Fort Lauderdale, Florida from 2012 to 2015. He also acted as a senior advisor to the owners of the private holding company that owns Veedims.  He held a variety of important jobs in the White House with his most recent position from 2008 – 2012 being Executive Secretary and Associate General Counsel in the office of the United States Trade Representative.
 
As a result of these and other professional experiences, Mr. Weinberger possesses particular knowledge and experience in information technology that strengthen the board’s collective qualifications, skills and experience. 
 

SCOTT MCPHERSON
 
Scott McPherson has served as our Chief Financial Officer (“CFO”) of VerifyMe, Inc. since December 1, 2014. Mr. McPherson previously served as our Chief Financial Officer from December 2012 to October 2013. Mr. McPherson is currently the CFO of Virtual Piggy, Inc. Mr. McPherson also served as CFO of Cannlabs from April 2014 to June 2015. He also served as Chief Executive Officer of Cannlabs from April 2015 to June 2015.  Prior to his tenure with us, from August 2012 through November 2012, Mr. McPherson served as the CFO of Virtual Piggy, Inc., from August 2012 through November 2012.  In January 2005, Mr. McPherson formed McPherson, CPA, PLLC in January 2005, which he continues to manage today. The firm performs accounting and tax services for numerous clients in various industries. The firm also performs in addition to providing litigation support services, primarily involving for clients involved in class action lawsuits and other lawsuits involving accounting malpractice or manipulation.

Composition of our Board of Directors

Our board of directors currently consists of four members, three of whom are non-employee directors. Our directors hold office until their successors have been elected and qualified or until the earlier of their death, resignation or removal. There are no family relationships among any of our directors or executive officers.
 
Board Diversity

Our nominating and governance committee is responsible for reviewing with the board of directors, on an annual basis, the appropriate characteristics, skills and experience required for the board of directors as a whole and has individual members. In evaluating the suitability of individual candidates (both new candidates and current members), the nominating and corporate governance committee, in recommending candidates for election, and the board of directors, in approving (and, in the case of vacancies, appointing) such candidates, takes into account many factors, including the following:
diversity of personal and professional background, perspective, experience, age, gender, ethnicity and country of citizenship;
personal and professional integrity and ethical values;
experience in one or more fields of business, professional, governmental, scientific or educational endeavors, and a general appreciation of major issues facing public companies similar in scope and size to us;
experience relevant to our industry or with relevant social policy concerns;
relevant academic expertise or other proficiency in an area of our operations;
objective and mature business judgment and expertise; and
any other relevant qualifications, attributes or skills.
 

 
Committees of the Board of Directors

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. Each committee operates under a charter approved by our board of directors. The composition and function of each of these committees are described below.
Audit Committee. Our audit committee is comprised of Lawrence Schafran, Jonathan Weinberger, and Claudio Ballard.  Mr. Schafran is the chairperson of the committee. Our board of directors has determined that Mr. Schafran is an audit committee financial expert, as defined by the rules of the Securities and Exchange Commission, and satisfies the financial sophistication requirements of applicable NASDAQ rules.
 
Our board of directors has determined that each of the audit committee members other than Claudio Ballard is an independent director under the NASDAQ Marketplace Rules and Rule 10A-3 of the Exchange Act.

Our audit committee is authorized to:
approve and retain the independent auditors to conduct the annual audit of our financial statements;
review the proposed scope and results of the audit;
review and pre-approve audit and non-audit fees and services;
review accounting and financial controls with the independent auditors and our financial and accounting staff;
review and approve transactions between us and our directors, officers and affiliates;
recognize and prevent prohibited non-audit services;
establish procedures for complaints received by us regarding accounting matters;
oversee internal audit functions, if any; and
prepare the report of the audit committee that the rules of the Securities and Exchange Commission require to be included in our annual meeting proxy statement.

Compensation Committee. Our compensation committee is comprised of Claudio Ballard, Lawrence Schafran and Jonathan Weinberger. Mr. Ballard is the chairman of the compensation committee. Our compensation committee is authorized to:
review and recommend the compensation arrangements for management, including the compensation for our president and chief executive officer;
establish and review general compensation policies with the objective to attract and retain superior talent, to reward individual performance and to achieve our financial goals;
administer our stock incentive plans; and
prepare the report of the compensation committee that the rules of the Securities and Exchange Commission require to be included in our annual meeting proxy statement.

Nominating and Governance Committee. Our nominating and governance committee is comprised of Jonathan Weinberger, Claudio Ballard and Lawrence Schafran. Mr. Weinberger is the chairman of the nominating and governance committee. Our nominating and governance committee is authorized to:
identify and nominate members of the board of directors;
develop and recommend to the board of directors a set of corporate governance principles applicable to our company; and
oversee the evaluation of our board of directors.
 
 
Code of Business Conduct and Ethics
 
We have adopted a code of business conduct and ethics that will apply to all of our employees, officers and directors, including those officers responsible for financial reporting.  The code of business conduct and ethics is available on our website at http://www.verifyme.com.  We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website.
 
 
Board Leadership Structure and Board’s Role in Risk Oversight
 
Our amended and restated by-laws and corporate governance guidelines do not require that our chairman and chief executive officer positions be separate.  Our board of directors believes that having a single person in both positions is the appropriate leadership structure for us at this time.
 
Risk is inherent with every business, and how well a business manages risk can ultimately determine its success.  We face a number of risks, including risks relating to product candidate development, technological uncertainty, dependence on collaborative partners and other third parties, uncertainty regarding patents and proprietary rights, comprehensive government regulations, having no commercial manufacturing experience, marketing or sales capability or experience and dependence on key personnel.  Management is responsible for the day-to-day management of risks we face, while our board of directors, as a whole and through its committees, has responsibility for the oversight of risk management.  In its risk oversight role, our board of directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed.
 
Our board of directors is actively involved in oversight of risks that could affect us.  This oversight is conducted primarily through committees of the board of directors, but the full board of directors has retained responsibility for general oversight of risks.  Our board of directors satisfies this responsibility through full reports by each committee chair regarding the committee’s considerations and actions, as well as through regular reports directly from officers responsible for oversight of particular risks within our company as our board of directors believes that full and open communication between management and the board of directors is essential for effective risk management and oversight.
 
Limitation of Directors’ and Officers’ Liability and Indemnification
 
The corporate laws of the state of Nevada authorize corporations to limit or eliminate, subject to specified conditions, the personal liability of directors to corporations and their stockholders for monetary damages for breach of their fiduciary duties.  Our amended and restated articles of incorporation limit the liability of our directors to the fullest extent permitted by Nevada law.
 
We have obtained director and officer liability insurance to cover liabilities our directors and officers may incur in connection with their services to us.  Our amended and restated articles of incorporation and amended and restated by-laws also provide that we will indemnify and advance expenses to any of our directors and officers who, by reason of the fact that he or she is one of our officers or directors, is involved in a legal proceeding of any nature.  We will repay certain expenses incurred by a director or officer in connection with any civil, criminal, administrative or investigative action or proceeding, including actions by us or in our name.  Such indemnifiable expenses include, to the maximum extent permitted by law, attorney’s fees, judgments, fines, ERISA excise taxes, penalties, settlement amounts and other expenses reasonably incurred in connection with legal proceedings.  A director or officer will not receive indemnification if he or she is found not to have acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interest.
 
The Company has entered into separate agreements with its directors and officers.  Pursuant to such agreements, the Company agrees to indemnify, defend and hold harmless each director to the fullest extent of the law of the State of Nevada and in accordance with the Company’s amended and restated articles of incorporation and amended and restated by-laws.  Such indemnification applies to any actions taken in the director’s official capacity as a director, as well as those actions that relate to the Company’s business while the director holds office.  Such indemnification does not apply to matters arising out of the director’s gross negligence or willful misconduct.  The Company’s indemnification of its directors covers payment for or reimbursement of expenses, including legal fees and expenses.  Additionally, the company agrees to maintain directors’ and officers’ insurance throughout the terms of such agreements and for a period of six years thereafter. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers.
 
Such limitation of liability and indemnification does not affect the availability of equitable remedies.  In addition, we have been advised that in the opinion of the Securities and Exchange Commission, indemnification for liabilities arising under the Securities Act is against public policy as expressed in the Securities Act and is therefore unenforceable.
 
 
There is no pending litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification will be required or permitted.  We are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Exchange Act requires that our officers and directors and persons who beneficially own more than 10% of our common stock file initial reports of ownership and reports of changes in beneficial ownership of our common stock with the SEC. They are also required to furnish us with copies of all Section 16(a) forms that they file with the SEC. Based solely on our review of the copies of such forms received by us, or written representations from such persons that no reports were required for those persons, we believe that all Section 16(a) filing requirements were satisfied in a timely fashion during our fiscal year ended December 31, 2016, except for the late filings or failures to file by Norman Gardner, Scott McPherson, Ben Burrell, Sandy Fliderman, Claudio Ballard, Jonathan Weinberger, and Lawrence Schafran set forth below:
 
With respect to Norman Gardner, he failed to file his Form 3 upon his appointment as a director of the Company in December 2016, and his Form 4 upon his receipt of which included his receipt of 165,000 options at an exercise price of $0.11 per share and 250,000 options at an exercise price of $0.25 per share in December 2016.
 
With respect to Scott McPherson, he failed to file a Form 4 upon his receipt of 300,000 options at an exercise price of $0.11 per share, and 250,000 options at an exercise price of $0.25 per share in December 2016.
 
With respect to Jonathan Weinberger, he failed to file a Form 4 upon his receipt of 175,000 options at an exercise price of $0.11 per share, and 250,000 options at an exercise price of $0.25 per share in December 2016.
 
With respect to Claudio Ballard, he failed to file a Form 4 upon his receipt of 75,000 options at an exercise price of $0.11 per share, and 250,000 options at an exercise price of $0.25 per share in December 2016.

With respect to Lawrence Schafran, he failed to file a Form 4 upon his receipt of 75,000 options at an exercise price of $0.11 per share, and 250,000 options at an exercise price of $0.25 per share in December 2016.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
Summary Compensation Table
 
The following table sets forth the compensation earned by the Company’s principal executive officer and named executive officers during the years ended December 31, 2016 and 2015.
 
 
                 
Stock
   
Option
   
All Other
       
      
Salary
   
Bonus
   
Awards (1)
   
Awards (1)
   
Compensation
   
Total
 
Name and Principal Position
Year
 
($)
   
($)
   
($)
   
($)
   
($)
   
($)
 
Norman Gardner, Chairman, Chief Executive
2016
   
34,000
*
   
-
     
16,125
     
53,208
     
-
     
103,333
 
  Officer (a)
2015
   
-
     
-
     
-
     
-
     
-
     
-
 
Thomas Nicolette, Chief Executive Officer (b)
2016
   
72,354
     
-
     
-
     
-
     
49,885
     
122,239
 
 
2015
   
-
     
-
     
-
     
-
     
-
     
-
 
Paul Donfried, Chief Executive Officer, President
2016
   
88,715
     
-
     
-
     
-
             
88,715
 
  and Secretary
2015
   
151,107
**
   
-
     
280,000
     
405,342
     
-
     
836,449
 
 
(1)  
Represents the grant date fair value of the option award, calculated in accordance with FASB Accounting Standard Codification 718, “Compensation – Stock Compensation,” or ASC 718. The assumptions used in calculating the grant date fair value of the option awards are set forth in Note 13 of our Financial Statements.
  
(a)
– Mr. Gardner was appointed Chairman on December 10, 2016.
(b)
– Mr. Nicolette was appointed Chief Executive Officer on May 1, 2016.
 
As of December 31, 2016, the named executive officer had accrued the following:

*
$18,750

As of December 31, 2015, the named executive officer had accrued the following:

**
$4,167
Outstanding Equity Awards At December 31, 2016
 
The following table sets forth, for each named executive officer had no outstanding equity awards as of the end of our fiscal year ended December 31, 2016.
  

Director Compensation
 
                           
Nonqualified
             
                     
Non-equity incentive
   
deferred
             
   
Fees Earned or
   
Stock
   
Option
   
plan
   
compensation
   
All Other
       
   
paid in cash
   
awards
   
awards
   
compensation
   
earnings
   
Compensation
   
Total
 
Name
 
($)
   
($)
   
($)
   
($)
   
($)
   
($)
   
($)
 
Norman Gardner
   
-
     
4,875
     
53,208
                       
58,083
 
Michael Madon
   
6,500
     
-
     
-
     
-
     
-
     
-
     
6,500
 
Claudio Ballard
   
-
     
-
     
39,717
     
-
     
-
     
-
     
39,717
 
Lawrence G. Schafran
   
-
     
-
     
39,717
     
-
     
-
     
-
     
39,717
 
Jonathan Weinberger
   
-
     
-
     
54,707
     
-
     
-
     
-
     
54,707
 

(1)
  
Represents the grant date fair value of the option award, calculated in accordance with FASB Accounting Standard Codification 718, “Compensation – Stock Compensation,” or ASC 718. The assumptions used in calculating the grant date fair value of the option awards are set forth in Note 13 of our Consolidated Financial Statements.
(2)
 
Paul Donfried who was a director in 2016 is not included in this table as he was an employee director who did not receive additional compensation for his service as a director.
 
 
Narrative Disclosure to Directors Compensation Table
 
We only paid a fee to the then Chairman of the Board, Michael Madon during 2016 and nothing in 2015. Each member of our board of directors receives reimbursement of expenses incurred in connection with his or her services as a member of our board or board committees.
 
Our non-employee directors are eligible to receive options, restricted stock and other equity linked grants under our options plans.
 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND DIRECTORS
 
Security Ownership
 
The following table sets forth, as of March 28, 2017, information with respect to the securities holdings of all persons that we have reason to believe, pursuant to filings with the SEC, may be deemed the beneficial owner of more than 5% of our outstanding common stock. The following table also sets forth, as of such date, the beneficial ownership of our common stock by all executive officers and directors, individually and as a group.
 
The beneficial owners and amount of securities beneficially owned have been determined in accordance with Rule 13d-3 under the Exchange Act and, in accordance therewith, includes all shares of our common stock that may be acquired by such beneficial owners within 60 days of filing of this Form 10-K upon the exercise or conversion of any options, warrants or other convertible securities. Unless otherwise indicated, each person or entity named below has sole voting and investment power with respect to all common stock beneficially owned by that person or entity, subject to the matters set forth in the footnotes to the table below, and has an address of c/o VerifyMe, Inc., 409 Boot Road, Downingtown, PA  19335.

Title of
 
Name and address of beneficial
 
Amount and nature of beneficial
   
Percent of
class
 
owner
 
ownership +
   
class
5% Beneficial Owners
             
Common
 
Clydesdale Partners II LLC
         
   
201 Spear Street, Suite 1750
         
   
San Francisco, CA  94105
 
734,920
 (1)
 
8.6%
Common
 
Laurence J. Blickman
         
   
233 Alameda de las Pulgas
         
   
Atherton, CA  94027
 
6,303,529
 (2)
 
42.3%
               
Executive Officers and Directors
             
Norman Gardner
     
436,691
 (3)
 
*
Claudio Ballard
     
325,000
 (4)
 
*
Jonathan Weinberger
     
425,000
 (5)
 
*
Lawrence Schafran
     
325,000
 (6)
   
Scott McPherson
     
570,000
 (7)
 
6.2%
All officers and directors as a group
             
(5 people)
     
2,081,691
   
19.5%
*
Less than 1 percent
+
In accordance with SEC rules, options, warrants and other securities exercisable for or convertible into shares of our common stock that were exercisable as of March 28, 2017, or would become exercisable within 60 days thereafter, are deemed to be outstanding and beneficially owned by the person holding such options, warrants or other securities for the purpose of computing such person’s percentage ownership, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person.This table has been prepared based on 8,590,696 shares of our common stock outstanding on March 28, 2017.
 
 
(1)
Consists of 600,831 shares of common stock and 134,089 shares owned by PFK Acquisition Group II LLC, which is under common control and 3,700,000 shares of common stock owned by Paul F. Klapper underlying warrants exercisable at $0.40 per share.
(2)
Consists of 3,529 shares of common stock underlying warrants exercisable at $4.25; 50,000 shares of common stock held by the Blickman 2005 Family Trust; 1,250,000 shares, underlying warrants exercisable at $0.40 per share held by the Laurence J. Blickman ’91 Trust; and 5 million shares of common stock underlying options exercisable at $0.40 per share held by the Laurence J. Blickman Defined Benefit Plan. The beneficial ownership table does not include shares underlying warrants that are subject to 4.99% blockers. The Company has no knowledge as to whether Mr. Blickman is disclaiming beneficial ownership relative to any of the disclosed beneficial ownership shares above.
(3)
Includes 21,691 shares of common stock, 165,000 shares of common stock underlying options exercisable at $0.11 per share and 250,000 shares of common stock underlying options exercisable at $0.25 per share.
(4)
Includes 75,000 shares of common stock underlying options exercisable at $0.11 per share and 250,000 shares of common stock underlying options exercisable at $0.25 per share.
(5)
Includes 175,000 shares of common stock underlying options exercisable at $0.11 per share and 250,000 shares of common stock underlying options exercisable at $0.25 per share.
(6)
Includes 75,000 shares of common stock underlying options exercisable at $0.11 per share and 250,000 shares of common stock underlying options exercisable at $0.25 per share..
(7)
Includes 20,000 shares of common stock, 300,000 shares of common stock underlying options exercisable at $0.11 per share and 250,000 shares of common stock underlying options exercisable at $0.25 per share.

Transfer Agent
 
Our Transfer Agent is Interwest Transfer Company, Inc. and their address and phone number are 1981 Murray Holladay Road, #100, Salt Lake City, UT 84117; (801) 272-9294.

Securities Authorized for Issuance Under Equity Compensation Plans
 
The following table provides certain information with respect to all of our equity compensation plans in effect as of the date of this filing.
 
 
2003 and 2013 Stock Option Plans
 
We adopted our 2003 Stock Option Plan as of December 17, 2003 (the “2003 Plan”). Awards were available to be made under the 2003 Plan for up to 18,000,000 shares of our common stock in the form of stock options or deferred stock awards. Awards were available to be made to our employees, officers or directors as well as our consultants or advisors. The Plan is administered by our board of directors which has full and final authority to interpret the Plan, select the persons to whom awards may be granted, and determine the amount, vesting and all other terms of any awards.
 
During 2013, our Board adopted, and our shareholders approved, a new comprehensive incentive compensation plan (the “2013 Plan”, and together with the 2003 Plan, the “Plans”) which serves as the successor incentive compensation plan to the 2003 Plan, and provides the Company with an omnibus plan to design and structure grants of stock options, stock units, stock awards, stock appreciation rights and other stock-based awards for selected individuals in our employ or service. Our Board believes that the availability of (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 but not subject to previously exercised, vested or paid grants, for issuance under the 2013 Plan, as sufficient to meet the current needs of the Company.
 
All stock options issued prior to June 12, 2015 under the Plans are exercisable for a period of up to ten years from the date of grant.  All stock options issued on or subsequent to June 12, 2015 under the Plans are exercisable for a period of up to five years from the date of grant.  All of the options are subject to vesting as determined by the Board upon grant, and have an exercise price equal to not less than the fair market value of our common stock on the date of grant (except for incentive stock options granted to 10% stockholders, which are required to have an exercise price of not less than 110% of the fair market value of the common stock on the date the option is granted). Unless otherwise determined by the Board, awards may not be transferred except by will or the laws of descent and distribution. The Board has discretion to determine the effect on any award granted under the Plans of the death, disability, retirement, resignation, termination or other change in employment or other status of any participant in the Plans.
 
 
Upon the occurrence of a “Change in Control”, as defined in the Plans, the Board may take any number of actions. These actions include, providing for all options outstanding under the Plans to be assumed by the acquiring corporation or to become immediately vested and exercisable in full. As of the date of this report, we have issued options and restricted stock units under the Plans to purchase 3,695,148 shares of common stock that are outstanding.

 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
Related Party Transactions

None.
 
Policies and Procedures for Reviewing Related Party Transactions
 
We have not adopted any written policies or procedures governing the review, approval or ratification of related party transactions. However, our Board of Directors reviews, approves or ratifies, when necessary, all transactions with related parties.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND DISCLOSURES.
 
Audit Fees
 
The fees billed for professional services rendered by our principal accountant for the audit of our annual financial statements for the years ended December 31, 2016 and 2015 and the review of the financial statements included in each of our quarterly reports during the years ended December 31, 2016 and 2015, were $66,900 and $72,400, respectively.
 
Audit-Related Fees
 
There were no fees billed by our independent accountants for audit-related services during the fiscal year ended December 31, 2016 and 2015.
 
Tax Fees
 
During the fiscal years ended December 31, 2016 and 2015, there were no fees billed for tax compliance, tax advice and/or tax planning by our principal accountants.
 
All Other Fees
 
During the for the year ended December 31, 2016 and 2015, there were no additional fees billed for products and services provided by the principal accountant other than those set forth above.
 
Audit Committee Approval
 
Our audit committee approves the engagement of our independent auditors, and meets with our independent auditors to approve the annual scope of accounting services to be performed and the related fee estimates. It also meets with our independent auditors prior to the completion of our annual audit and reviews the results of their audit and review of our annual and interim consolidated financial statements, respectively. During the course of the year, our chairperson has the authority to pre-approve requests for services that were not approved in the annual pre-approval process. The chairperson reports any interim pre-approvals at the following quarterly meeting. At each of the meetings, management and our independent auditors update our board of directors regarding material changes to any service.
 
We did not have any pre-approval policies for the year ended December 31, 2016.
 
 
PART IV
 
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.


 
 
 
 
 
Incorporated by Reference
 
Filed or
Furnished
Exhibit #
 
Exhibit Description
 
 
Form
 
Date
 
 
Number
 
Herewith
3.1
 
Certificate of Amendment to Amended and Restated Articles of Incorporation of LaserLock Technologies, Inc., as amended
 
 
10-Q
 
8-19-15
   
3.1
 
 
3.2
 
Amended Certificate of Designation of Series A Preferred Stock
 
 
8-K
 
2-6-13
 
 
3.1
 
 
3.3
 
Second Amended Certificate of Designation for Series A Preferred Stock
 
 
8-K
 
6-18-15
 
 
3.2
 
 
3.4
 
Certificate of Designation for Series B Preferred Stock, dated as of June 2015
 
 
8-K
 
6-18-15
 
 
3.3
 
 
3.5
 
Certificate of Designation for Series C Preferred Stock, filed with the Nevada Secretary of State on January 27, 2016
 
 
8-K
 
2-10-16
 
 
3.1
 
 
3.6
 
Amended and Restated Bylaws of LaserLock Technologies, Inc. as amended
 
 
10-Q
 
8-19-15
 
 
3.2
 
 
3.7
 
Second Amendment to Amended and Restated Bylaws of the Company, dated January 27, 2016
 
 
8-K
 
2-10-16
 
 
3.2
 
 
3.8
 
Amended and Restated Bylaws of LaserLock Technologies, Inc. as amended
 
 
10-Q
 
5-18-16
 
 
3.2
   
3.9
 
Certificate of Designation for Series D Preferred Stock filed with the Nevada Secretary of State on December 5, 2016
 
 
           
 
Filed
4.1
 
Form of Warrant for Purchase of Common Stock
 
 
8-K
 
2-10-16
 
 
4.1
   
4.2
 
Form of Warrant for Purchase of Common Stock
 
 
           
 
Filed
10.1
 
Form of Securities Purchase Agreement by and between the Company and each of the Investors
 
 
8-K
 
2-10-16
 
 
10.1
   
10.2
 
Form of Registration of Rights Agreement by and between the Company and each of the Investors
 
 
8-K
 
2-10-16
 
 
10.2
 
 
10.3
 
Master Acquisition Agreement by and among OPC Partners LLC, VerifyMe, Inc., Laserlock Technologies, Inc., Zaah Technologies, Inc. and a Common Stock Investor dated as of June 12, 2015
 
 
8-K
 
6-18-15
 
 
10.1
 
 
10.4
 
Form of Promissory Note Conversion Agreement
 
 
8-K
 
6-18-15
   
10.2
 
 
10.5
 
Form of Warrant Conversion Agreement
   
8-K
 
6-18-15
   
10.3
   
10.6*
 
Employment Letter to Paul Donfried from LaserLock Technologies, Inc.
   
8-K
 
6-18-15
   
10.4
   
10.7*
 
Employment Letter to Sandy Fliderman from LaserLock Technologies, Inc.
   
8-K
 
6-18-15
   
10.5
   
10.8
 
Independent Director’s Agreement between LaserLock Technologies, Inc. and Jonathan Weinberger dated as of June 12, 2015
   
8-K
 
6-18-15
   
10.6
   
10.9
 
Independent Director’s Agreement between LaserLock Technologies, Inc. and Claudio Ballard dated as of June 12, 2015
   
8-K
 
6-18-15
   
10.7
   
10.10*
 
Employment Letter to Ben Burrell from LaserLock Technologies, Inc. dated as of June 12, 2015
   
8-K
 
7-15-15
   
10.1
   
10.11
 
Separation Agreement and General Release dated as of April 27, 2016
   
8-K
 
4-29-16
         
10.12
 
Amendment No. 1 to Stock Option Agreement dated as of April 29, 2016
   
8-K
 
4-29-16
         
10.13
 
Amendment No. 1 to Restricted Stock Unit Agreement dated as of April 29, 2016
   
8-K
 
4-29-16
         
10.14
 
Consulting Services Agreement dated as of May 1, 2016
   
8-K
 
5-2-16
         
10.15
 
Form of Securities Purchase Agreement by and between the Company and each of the Investors
                 
Filed
31.1  
 
Certification of Principal Executive Officer (302)
 
 
 
 
 
 
 
   
Filed
31.2  
 
Certification of Principal Financial Officer (302)
 
 
 
 
 
 
 
   
Filed
32.1  
 
Certification of Principal Executive and Principal Financial Officer (906)
 
 
 
 
 
 
 
   
Furnished**
101.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.
 
 
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/ Norman Gardner
 
 
 
Norman Gardner
Chief Executive Officer
 
 
 
Date: April 12, 2017
 
 
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/ Norman Gardner
 
Chairman of the Board and Chief
 
April 12, 2017
Norman Gardner
 
Executive Officer
(Principal Executive Officer)
 
 
 
 
 
 
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Scott McPherson
 
Chief Financial Officer
 
April 12, 2017
Scott McPherson
 
(Principal Financial Accounting
Officer)
 
 
 
 
 
 
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Claudio Ballard
 
Director
 
April 12, 2017
Claudio Ballard
 
 
 
 
 
 
 
 
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Jonathan Weinberger
 
Director
 
April 12, 2017
Jonathan Weinberger
 
 
 
 
Signature
 
Title
 
Date
         
/s/ Lawrence Schafran
 
Director
 
April 12, 2017
Lawrence Schafran        
 
 
ITEM 16.  FORM 10-K SUMMARY

Not provided.

CONTENTS
 
   
PAGE
 
       
 
F-1
 
       
 
F-2
 
       
 
F-3
 
       
 
F-4
 
       
 
F-5
 
       
 
F-6 to F-29
 
 
 
Report of Independent Registered Public Accounting Firm

 
To the Board of Directors
VerifyMe, Inc.
 
We have audited the accompanying balance sheets of VerifyMe, Inc. as of December 31, 2016 and 2015 and the related statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of VerifyMe, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company has incurred significant losses and experienced negative cash flow from operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 
 
/s/ MORISON COGEN LLP 
 
Blue Bell, Pennsylvania
April 12, 2017
 

VerifyMe, Inc.
Balance Sheets
       
December 31, 2016
   
December 31, 2015
 
             
ASSETS
           
             
CURRENT ASSETS
           
Cash and cash equivalents
 
$
22,644
   
$
4,152
 
Prepaid expenses
   
9,425
     
-
 
Inventory
   
17,093
     
28,687
 
                 
TOTAL CURRENT ASSETS
   
49,162
     
32,839
 
                 
PROPERTY AND EQUIPMENT
               
Capital equipment, net of accumulated depreciation of $203,223 and $230,621 as of December 31, 2016 and 2015
   
-
     
7,838
 
                 
OTHER ASSETS
               
Deposits
   
-
     
37,197
 
Patents and Trademark, net of accumulated amortization of $194,236 and $166,894 as of December 31, 2016 and 2015
   
231,952
     
259,294
 
     
231,952
     
296,491
 
                 
TOTAL ASSETS
 
$
281,114
   
$
337,168
 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
                 
CURRENT LIABILITIES
               
Accounts payable and accrued expenses
 
$
867,436
   
$
652,973
 
Note payable, net of discount of $60,931 and $0 as of December 31, 2016 and 2015
   
68,069
     
50,000
 
Embedded derivative liability
   
228,718
     
-
 
Warrant liability
   
394,744
     
1,802,375
 
                 
TOTAL CURRENT LIABILITIES
   
1,558,967
     
2,505,348
 
                 
CONTINGENCIES
               
                 
STOCKHOLDERS' DEFICIT
               
                 
Series A Convertible Preferred Stock, $ .001 par value; 37,564,767 shares authorized; 397,778 shares issued and outstanding
               
   as of December 31, 2016; 441,938 issued and outstanding as of December 31, 2015
   
398
     
442
 
                 
Series B Convertible Preferred Stock, $.001 par value; 85 shares authorized; 0.92 shares issued and outstanding
               
   as of December 31, 2016  and 1 share issued and outstanding as of December 31, 2015
   
-
     
-
 
 
               
Series C Convertible Preferred Stock, $.001 par value; 7,500,000 shares authorized; 1,912,500 shares issued and outstanding
               
   as of December 31, 2016  and 0 shares issued and outstanding as of December 31, 2015
   
1,913
     
-
 
                 
Series D Convertible Preferred Stock, $.001 par value; 6,000,000 shares authorized; 166,750 shares issued and outstanding
               
   as of December 31, 2016  and 0 shares issued and outstanding as of December 31, 2015
   
167
     
-
 
                 
Common stock, $ .001 par value; 675,000,000 shares authorized; 8,681,236 and 6,327,570 shares issued, 8,330,696 and 5,977,030
               
  shares outstanding at December 31, 2016 and 2015
   
8,331
     
5,977
 
                 
Additional paid in capital
   
40,469,272
     
39,779,414
 
 
               
Treasury stock, at cost (350,540 shares at December 31, 2016 and 2015)
   
(113,389
)
   
(113,389
)
                 
Deferred compensation
   
-
     
(1,842,334
)
                 
Accumulated deficit
   
(41,644,545
)
   
(39,998,290
)
                 
STOCKHOLDERS' DEFICIT
   
(1,277,853
)
   
(2,168,180
)
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
 
$
281,114
   
$
337,168
 
 
The accompanying notes are an integral part to these financial statements.
 
 
VerifyMe, Inc.
Statements of Operations

   
Year Ended
 
   
December 31, 2016
   
December 31, 2015
 
             
NET REVENUES
           
Sales
   
37,055
   
$
200,601
 
Royalties
   
-
     
16,667
 
                 
TOTAL NET REVENUE
   
37,055
     
217,268
 
                 
COST OF SALES
   
24,363
     
65,723
 
                 
GROSS PROFIT
   
12,692
     
151,545
 
                 
OPERATING EXPENSES
               
General and administrative
   
1,010,648
     
449,483
 
Legal and accounting
   
414,032
     
458,801
 
Payroll expenses
   
1,789,303
     
1,875,488
 
Research and development
   
250,180
     
2,412,833
 
Sales and marketing
   
282,867
     
197,430
 
Total operating expenses
   
3,747,030
     
5,394,035
 
                 
LOSS BEFORE OTHER INCOME (EXPENSE)
   
(3,734,338
)
   
(5,242,490
)
                 
OTHER INCOME (EXPENSE)
               
Interest expense
   
(12,871
)
   
(61,438
)
Gain on extinguishment of debt
   
-
     
332,523
 
Loss on disposition of fixed assets
   
(4,981
)
   
-
 
Change in fair value of warrants
   
3,357,149
     
2,669,520
 
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
)
   
-
 
     
2,088,083
     
2,940,605
 
                 
NET LOSS
 
$
(1,646,255
)
 
$
(2,301,885
)
                 
LOSS PER SHARE
               
BASIC
 
$
(0.24
)
 
$
(0.47
)
DILUTED
 
$
(0.24
)
 
$
(0.47
)
                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
               
BASIC
   
6,860,955
     
4,848,738
 
DILUTED
   
6,860,955
     
4,848,738
 

The accompanying notes are an integral part to these financial statements.
 
 
VerifyMe, Inc.
Statement of Changes in Stockholders’ Deficit
For the Years Ended December 31, 2016 and 2015

 
   
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
   
Shares
   
Amount
 
Shares
 
Amount
 
Shares
 
Amount
   
Shares
   
Amount
   
Capital
   
Stock
   
Compensation
   
Deficit
   
Total
 
Balance at December 31, 2014
   
248,366
   
$
633,333
     
-
   
$
-
                     
3,618,566
   
$
3,618
   
$
25,047,050
   
$
(113,389
)
 
$
-
   
$
(37,696,405
)
 
$
(12,125,793
)
                                                                                                         
Conversion of Series A Convertible Preferred Stock into common stock
   
(248,366
)
   
(633,333
)
   
-
     
-
                     
248,366
     
248
     
633,085
     
-
     
-
     
-
     
-
 
Sale of Series A Convertible Preferred
Stock
   
389,668
     
390
     
-
     
-
                     
-
     
-
     
1,278,111
     
-
     
-
     
-
     
1,278,501
 
Conversion of stockholder deferred compensation into Series A Convertible Preferred Stock
   
10,667
     
10
     
-
     
-
                     
-
     
-
     
34,990
     
-
     
-
     
-
     
35,000
 
Conversion of notes payable and accrued interest into Series A Convertible Preferred Stock
   
41,603
     
42
     
-
     
-
                     
-
     
-
     
136,771
     
-
     
-
     
-
     
136,813
 
Conversion of accrued expenses into Series B Convertible Preferred Stock
   
-
     
-
     
1.00
     
-
                     
-
     
-
     
8,367,417
     
-
     
-
     
-
     
8,367,417
 
Sale of common stock
   
-
     
-
     
-
     
-
                     
304,785
     
305
     
49,695
     
-
     
-
     
-
     
50,000
 
Conversion of warrants into common stock
   
-
     
-
     
-
     
-
                     
51,372
     
51
     
36,949
     
-
     
-
     
-
     
37,000
 
Conversion of stockholder notes payable and accrued interest into common stock
   
-
     
-
     
-
     
-
                     
673,706
     
674
     
730,752
     
-
     
-
     
-
     
731,426
 
Conversion of accounts payable and accrued expenses into common stock
   
-
     
-
     
-
     
-
                     
116,997
     
117
     
99,330
     
-
     
-
     
-
     
99,447
 
Cashless exercise of warrants into common stock
   
-
     
-
     
-
     
-
                     
2,353
     
2
     
(2
)
   
-
     
-
     
-
     
-
 
Issuance of stock for services
   
-
     
-
     
-
     
-
                     
960,000
     
960
     
2,415,690
     
-
     
(2,416,650
)
   
-
     
-
 
Decrease in fair value of restricted stock units
   
-
     
-
     
-
     
-
                                     
(75,500
)
   
-
     
75,500
     
-
     
-
 
Forgiveness of stockholder compensation
   
-
     
-
     
-
     
-
                     
-
     
-
     
175,287
     
-
     
-
     
-
     
175,287
 
Amortization of deferred compensation
   
-
     
-
     
-
     
-
                     
-
     
-
     
-
     
-
     
498,816
     
-
     
498,816
 
Fair value of employee stock options
   
-
     
-
     
-
     
-
                     
-
     
-
     
849,791
     
-
     
-
     
-
     
849,791
 
Rounding of partial shares relative to reverse split
           
-
     
-
     
-
                     
885
     
1
     
(1
)
   
-
     
-
     
-
     
-
 
Net loss
   
-
     
-
     
-
     
-
                     
-
     
-
     
-
     
-
     
-
     
(2,301,885
)
   
(2,301,885
)
                                                                                                         
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
)
   
-
     
-
     
-
     
-
     
-
     
674,983
     
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
)
   
-
     
-
     
1,175,000
     
1,175
     
-
     
-
     
-
     
-
     
-
 
Effect of Conversion of Series C Convertible Preferred
                                                                                                                       
Stock on embedded derivative liability
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
350,500
     
-
     
-
     
-
     
350,500
 
Sale of Series D Convertible Preferred Stock
   
-
     
-
     
-
     
-
     
-
     
-
     
166,750
     
167
     
-
     
-
     
66,533
     
-
     
-
     
-
     
66,700
 
Deemed dividend distribution
   
-
     
-
     
-
     
-
     
-
     
-