ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following is management’s discussion and analysis (“MD&A”) of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
The following discussion and analysis should be read in conjunction with our financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-K
Our MD&A is comprised of significant accounting estimates made in the normal course of its operations, overview of our business conditions, results of operations, liquidity and capital resources and contractual obligations. We did not have any off balance sheet arrangements as of December 31, 2016 or 2017.
The discussion and analysis of our financial condition and results of operations is based upon its financial statements, which have been prepared in accordance with generally accepted accounting principles generally accepted in the United States (or "GAAP"). The preparation of those financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities at the date of its financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Background
We are a software development and services company that offers a suite of integrated computer network security products (patented and patent pending) using proprietary technology.
We generated all of our revenues of $274,137 for the year ended December 31, 2017, compared to $384,289 for the year ended December 31, 2016, from the sales of our security software products.
We have incurred substantial losses since our inception. Our management believes that our products provide a cost-effective and technologically competitive solution to address the problems of network security and identity theft in general. Guidance for the
Federal Financial Institutions Examination Council
(“FFIEC”) regulations include the requirement for solutions that have Two-Factor Out-of-Band Authentication and products that stop keylogging malware, real time, which our management believes our proprietary products uniquely and directly address. This guidance went into effect as of January 1, 2012. Based on this requirement in the latest FFIEC update (published in June 2011 with enforcement commencing in January 2012), we have recently experienced a growing increase in sales orders and inquiries. However, there can be no assurance that our products will continue to gain acceptance and continue to grow in the commercial marketplace or that one of our competitors will not introduce technically superior products.
Because we are now experiencing a continual growing market demand, we believe our company is developing a sizeable global reseller and distribution channel as a strategy to generate, manage and fulfill demand for our products across market segments, minimizing the requirement for an increase in our staff. We have minimized the concentration on our initial direct sales efforts as our distribution and reseller channels continue to grow internationally and require appropriate levels of support.
On March 18, 2014, we effected a 1:1,500 reverse stock split of our issued and outstanding shares of common stock. On February 13, 2015, we effected a 1:650 reverse stock split of our issued and outstanding shares of common stock. On August 4, 2015, we effected a 1:1,000 reverse stock split of our issued and outstanding shares of common stock.
All shares and per share amounts in the financial statements have been adjusted to give retroactive effect to the reverse stock splits adopted by us as if the reverse had occurred at the beginning of the earliest period presented.
Results of Operations
FOR THE YEAR ENDED DECEMBER 31, 2017 COMPARED TO THE YEAR ENDED DECEMBER 31, 2016
Revenues for the year ended December 31, 2017 were $274,137 compared to $384,289 for the year ended December 31, 2016, a decrease of $110,152 or 28.7%. The decrease in revenues was due to the decrease in our software, hardware, services, maintenance and support sales, and the longer lead cycle of our new channel partners to close deals. Software, services, support, and maintenance sales for the year ended December 31, 2017 were $273,038 compared to $381,009 for the year ended December 31, 2016, a decrease of $107,971. The decrease in software, services, support, and maintenance revenues was primarily due to the decrease in the sales and support of our software products and the longer lead cycle of our new channel partners to close deals. Hardware sales for the year ended December 31, 2017 were $1,099 compared to $3,280 for the year ended December 31, 2016, a decrease of $2,181. The decrease in hardware revenues was due to the decrease in sales of our one-time-password token key-fobs, as we move towards our phone based one-time-password.
Cost of revenues for the year ended December 31, 2017 was $12,504 compared to $6,363 for the year ended December 31, 2016, an increase of $6,141, or 96.5%. The increase resulted from the increase in third party processing fees related to our revenues. Cost of revenues as a percentage of total revenues for the year ended December 31, 2017 was 4.6% compared to 1.2% for the year ended December 31, 2016.
Gross profit for the year ended December 31, 2017 was $261,633 compared to $377,926 for the year ended December 31, 2016, a decrease of $116,293, or 30.8%. The decrease in gross profit was due to the decrease in our software, hardware, services, maintenance and support sales and the increase in our cost of revenues.
Research and development expenses for the year ended December 31, 2017 were $537,282 compared to $521,663 for the year ended December 31, 2016, an increase of $15,619, or 3.0%. The increase in research and development expenses was due to an overall increase in salaries and the testing of our mobile products, which required the purchase of peripherals for testing purposes. The salaries, benefits and overhead costs of personnel conducting research and development of our software products primarily comprises our research and development expenses.
Compensation, professional fees, and selling, general and administrative (collectively, “SGA”) expenses for the year ended December 31, 2017 were $2,118,054 compared to $2,298,883 for the year ended December 31, 2016, a decrease of $180,829 or 7.9%. The decrease was due primarily to a decrease in professional fees and warrant expense, offset by an increase in salaries and related payroll taxes resulting from salary increases and additional staffing. SG&A expenses consist primarily of salaries, benefits and overhead costs for executive and administrative personnel, insurance, fees for professional services, including consulting, legal, and accounting fees, plus travel costs and non-cash stock compensation expense for the issuance of stock options to employees and non-employees and other general corporate expenses.
Other income (expense) for the year ended December 31, 2017 was expense of ($830,575) as compared to income of $5,381,185 for the nine months ended December 31, 2016, representing a decrease in other income of $6,211,760, or 115%. The decrease was primarily due to the net settlement in the prior year of patent remediation litigation, which was settled in January 2016, slightly reduced by an increase in private placement costs and an increase in the fair value of derivative liabilities, offset by an increase in the extinguishment of derivative liabilities.
Our net income (loss) for the year ended December 31, 2017 was a net loss ($3,224,278) compared to a net income of $2,938,565 for the year ended December 31, 2016, a decrease in net income of $6,162,843, or 210%. The decrease was primarily due to the net settlement of patent remediation litigation in the prior year, which was settled in January 2016, slightly reduced by an increase in private placement costs and an increase in the fair value of derivative liabilities, offset by an increase in the extinguishment of derivative liabilities.
Liquidity and Capital Resources
Our total current assets at December 31, 2017 were $512,036, which included cash of $455,484, as compared with $965,404 in total current assets at December 31, 2016, which included cash of $804,130. Additionally, we had a stockholders’ deficit in the amount of $10,793,186 at December 31, 2017 compared to a stockholders’ deficit of $8,439,490 at December 31, 2016. We have historically incurred recurring losses and have financed our operations through loans, principally from affiliated parties such as our directors, and from the proceeds of debt and equity financing.
We financed our operations during the year ended December 31, 2017 primarily through the first tranche, for $1,500,000, from a litigation funding agreement executed on September 6, 2017. In addition, we sold shares of Series B Preferred stock in January 2017 for $80,000.
Going Concern
We have yet to establish any history of profitable operations. For the year ended December 31, 2017, we incurred a loss from operations of $2,393,703, and at December 31, 2017, we had a stockholders’ deficit of $10,793,186. These factors raise substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2017 with respect to this uncertainty. This going concern opinion could materially limit our ability to raise additional funds through the issuance of new debt or equity securities or otherwise, and future reports on our financial statements may also include an explanatory paragraph with respect to our ability to continue as a going concern.
At December 31, 2017, we had cash on hand in the amount of $455,484. Management estimates that the current funds on hand will be sufficient to continue operations through the next three months. Our ability to continue as a going concern is dependent upon our ability to raise additional funds and implement our business plan. Management is currently seeking additional funds, primarily through the issuance of debt and equity securities for cash to operate our business. Currently, management is attempting to increase revenues and improve gross margins by a revised sales strategy. We are redirecting our sales focus from direct sales to domestic and international sales channel, where we are primarily selling through a channel of Distributors, Value Added Resellers, Strategic Partners and Original Equipment Manufacturers. While we believe in the viability of our strategy to increase revenues and in our ability to raise additional funds, there can be no assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to continually increase our customer base and realize increased revenues from recently signed contracts. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in the case of equity financing.
Changes in Authorized Shares
In June 2015, an increase of the authorized shares of our common stock from three billion (3,000,000,000) to five billion (5,000,000,000), $0.0001 par value, was ratified, effective upon the filing of an amendment to our Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in July 2015.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, result of operations, liquidity or capital expenditures.
Critical Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to accounting for potential liabilities and the assumptions made in valuing stock instruments issued for services and derivative liabilities. Actual results could differ from those estimates.
Revenue Recognition Policy
We recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. When we recognize revenue, no provisions are made for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.
Revenue from hardware sales is recognized when the product is shipped to the customer and there are either no unfulfilled obligations by us, or any obligations that will not affect the customer's final acceptance of the arrangement. All costs of these obligations are accrued when the corresponding revenue is recognized.
Revenue from time and service contracts is recognized as the services are provided. Revenue from delivered elements of one-time charge licensed software is recognized at the inception of the license term, and determined by the fair value of each delivered element. Revenue is deferred for undelivered elements. We recognize revenue from the sale of software licenses when the four criteria discussed above are met. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. Revenue from monthly software licenses is recognized on a subscription basis.
We offer an Application Service Provider (ASP) hosted cloud service whereby customer usage transactions are invoiced monthly on a cost per transaction basis.
Stock Compensation
We periodically issue stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. We account for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (FASB) whereas the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. We account for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Options granted to non-employees are revalued each reporting period to determine the amount to be recorded as an expense in the respective period. As the options vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current value on the date of vesting. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.
The fair value of our stock option and warrant grants are estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.
Derivative Financial Instruments
We evaluate our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
To determine the number of authorized but unissued shares available to satisfy outstanding convertible securities, we use a sequencing method to prioritize its convertible securities as prescribed by ASC 815-40-35. At each reporting date, we review our convertible securities to determine their classification is appropriate.
Recently Issued Accounting Pronouncements
Refer to Note 1 in the accompanying financial statements.
Additional Information
You are advised to read this Form 10-K in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K, and Current Reports on Form 8-K that we file from time to time. You may obtain copies of these reports directly from us or from the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers at its website http://www.sec.gov.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Please see pages F-1 through F-20.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
StrikeForce Technologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of StrikeForce Technologies, Inc. (the “Company”) as of December 31, 2017 and 2016, the related statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, 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.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, during the year ended December 31, 2017, the Company incurred a loss from operations and at December 31, 2017, had a stockholders' deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Weinberg & Company, P.A.
We have served as the Company’s auditor since 2015.
Los Angeles, California
March 30, 2018
STRIKEFORCE TECHNOLOGIES, INC.
|
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
455,484
|
|
|
$
|
804,130
|
|
Accounts receivable, net
|
|
|
47,454
|
|
|
|
152,009
|
|
Prepaid expenses
|
|
|
9,098
|
|
|
|
9,265
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
512,036
|
|
|
|
965,404
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
7,676
|
|
|
|
8,926
|
|
Other assets
|
|
|
20,485
|
|
|
|
22,539
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
540,197
|
|
|
$
|
996,869
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
935,979
|
|
|
$
|
890,799
|
|
Convertible notes payable, net
|
|
|
1,438,100
|
|
|
|
1,447,100
|
|
Convertible notes payable - related parties
|
|
|
355,500
|
|
|
|
355,500
|
|
Current maturities of notes payable, net
|
|
|
1,713,824
|
|
|
|
1,703,824
|
|
Current maturities of notes payable - related parties
|
|
|
742,513
|
|
|
|
742,513
|
|
Accrued interest (including $1,145,941 and $939,654 due to related parties, respectively)
|
|
|
4,002,811
|
|
|
|
3,805,158
|
|
Contingent payment obligation
|
|
|
1,500,000
|
|
|
|
-
|
|
Derivative liabilities
|
|
|
623,195
|
|
|
|
262,185
|
|
Accrued expenses
|
|
|
9,521
|
|
|
|
9,539
|
|
Accrued salaries and payroll taxes
|
|
|
11,940
|
|
|
|
10,549
|
|
Due to factor
|
|
|
-
|
|
|
|
209,192
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
11,333,383
|
|
|
|
9,436,359
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficit
|
|
|
|
|
|
|
|
|
Series A Preferred stock, no par value; 100 shares authorized;
|
|
|
|
|
|
|
|
|
3 shares issued and outstanding
|
|
|
987,000
|
|
|
|
987,000
|
|
Series B Preferred stock par value $0.10: 100,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
70,001 and 50,001 shares issued and outstanding, respectively
|
|
|
7,000
|
|
|
|
5,000
|
|
Preferred stock series not designated par value $0.10: 10,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
none issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock par value $0.0001: 5,000,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
2,335,843,241 and 2,319,683,886 shares issued and outstanding, respectively
|
|
|
233,584
|
|
|
|
231,970
|
|
Additional paid-in capital
|
|
|
25,522,331
|
|
|
|
24,655,363
|
|
Accumulated deficit
|
|
|
(37,543,101
|
)
|
|
|
(34,318,823
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders' Deficit
|
|
|
(10,793,186
|
)
|
|
|
(8,439,490
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Deficit
|
|
$
|
540,197
|
|
|
$
|
996,869
|
|
See accompanying notes to the financial statements.
STRIKEFORCE TECHNOLOGIES, INC.
|
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
274,137
|
|
|
$
|
384,289
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
12,504
|
|
|
|
6,363
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
261,633
|
|
|
|
377,926
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
656,653
|
|
|
|
491,255
|
|
Professional fees
|
|
|
394,212
|
|
|
|
617,019
|
|
Selling, general and administrative expenses
|
|
|
1,067,189
|
|
|
|
1,190,609
|
|
Research and development
|
|
|
537,282
|
|
|
|
521,663
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,655,336
|
|
|
|
2,820,546
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,393,703
|
)
|
|
|
(2,442,620
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(837,925
|
)
|
|
|
(875,234
|
)
|
Debt discount amortization
|
|
|
(4,000
|
)
|
|
|
(34,293
|
)
|
Private placement costs
|
|
|
(222,949
|
)
|
|
|
-
|
|
Change in fair value of derivative liabilities
|
|
|
(320,888
|
)
|
|
|
(92,997
|
)
|
Extinguishment of derivative liabilities
|
|
|
557,827
|
|
|
|
819,831
|
|
Forgiveness of debt
|
|
|
86,712
|
|
|
|
-
|
|
Litigation settlement
|
|
|
-
|
|
|
|
9,750,000
|
|
Fees related to litigation settlement
|
|
|
-
|
|
|
|
(4,187,257
|
)
|
Other income
|
|
|
119
|
|
|
|
1,135
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(741,104
|
)
|
|
|
5,381,185
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(3,134,807
|
)
|
|
|
2,938,565
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
71,693
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(3,206,500
|
)
|
|
|
2,938,565
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend on convertible preferred stock
|
|
|
(17,778
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(3,224,278
|
)
|
|
$
|
2,938,565
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share - basic and diluted
|
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
|
2,323,630,612
|
|
|
|
1,855,338,114
|
|
See accompanying notes to the financial statements.
STRIKEFORCE TECHNOLOGIES, INC.
|
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
|
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred
stock, no par value
|
|
|
Series B Preferred
stock, par value $0.10
|
|
|
Common stock,
par value $0.0001
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance at December 31, 2015
|
|
|
3
|
|
|
|
987,000
|
|
|
|
175,338
|
|
|
|
17,534
|
|
|
|
22,711,924
|
|
|
|
2,271
|
|
|
|
22,526,096
|
|
|
|
(37,257,388
|
)
|
|
|
(13,724,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of common stock issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
154,905,000
|
|
|
|
15,491
|
|
|
|
170,668
|
|
|
|
-
|
|
|
|
186,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of vested options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
818,462
|
|
|
|
-
|
|
|
|
818,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon conversion of notes and interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,105,237,983
|
|
|
|
210,525
|
|
|
|
368,361
|
|
|
|
-
|
|
|
|
578,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon conversion of Series B preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(125,337
|
)
|
|
|
(12,534
|
)
|
|
|
35,703,979
|
|
|
|
3,570
|
|
|
|
8,964
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon exercise of options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,125,000
|
|
|
|
113
|
|
|
|
537
|
|
|
|
-
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness of accrued officers salaries recorded as capital contribution
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
762,275
|
|
|
|
-
|
|
|
|
762,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,938,565
|
|
|
|
2,938,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
3
|
|
|
$
|
987,000
|
|
|
|
50,001
|
|
|
$
|
5,000
|
|
|
|
2,319,683,886
|
|
|
$
|
231,970
|
|
|
$
|
24,655,363
|
|
|
$
|
(34,318,823
|
)
|
|
$
|
(8,439,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of shares of series B preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
53,334
|
|
|
|
5,333
|
|
|
|
-
|
|
|
|
-
|
|
|
|
74,667
|
|
|
|
-
|
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend on convertible preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,778
|
|
|
|
(17,778
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of common stock issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,000
|
|
|
|
3
|
|
|
|
541
|
|
|
|
-
|
|
|
|
544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of vested options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
772,260
|
|
|
|
-
|
|
|
|
772,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon conversion of Series B preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(33,334
|
)
|
|
|
(3,333
|
)
|
|
|
16,129,355
|
|
|
|
1,611
|
|
|
|
1,722
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,206,500
|
)
|
|
|
(3,206,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
3
|
|
|
$
|
987,000
|
|
|
|
70,001
|
|
|
$
|
7,000
|
|
|
|
2,335,843,241
|
|
|
$
|
233,584
|
|
|
$
|
25,522,331
|
|
|
$
|
(37,543,101
|
)
|
|
$
|
(10,793,186
|
)
|
See accompanying notes to the financial statements.
STRIKEFORCE TECHNOLOGIES, INC.
|
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
For the Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,206,500
|
)
|
|
$
|
2,938,565
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,618
|
|
|
|
5,231
|
|
Amortization of discount on notes payable
|
|
|
4,000
|
|
|
|
34,293
|
|
Discount on notes payable recorded as interest expense
|
|
|
371,000
|
|
|
|
353,473
|
|
Fair value of common stock issued for services
|
|
|
544
|
|
|
|
186,159
|
|
Fair value of vested options
|
|
|
772,260
|
|
|
|
818,462
|
|
Forgiveness of debt
|
|
|
(86,712
|
)
|
|
|
-
|
|
Change in fair value of derivative liabilities
|
|
|
320,888
|
|
|
|
92,997
|
|
Private placement costs
|
|
|
222,949
|
|
|
|
-
|
|
Extinguishment of derivative liabilities
|
|
|
(557,827
|
)
|
|
|
(819,831
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
104,555
|
|
|
|
(133,485
|
)
|
Prepaid expenses
|
|
|
167
|
|
|
|
(4,533
|
)
|
Accounts payable
|
|
|
45,180
|
|
|
|
(405,030
|
)
|
Accrued expenses
|
|
|
(18
|
)
|
|
|
(3,829
|
)
|
Accrued interest
|
|
|
285,173
|
|
|
|
(66,556
|
)
|
Accrued salaries and payroll taxes
|
|
|
1,391
|
|
|
|
(574,948
|
)
|
Net cash provided by (used in) operating activities
|
|
|
(1,716,332
|
)
|
|
|
2,420,968
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(3,314
|
)
|
|
|
(7,918
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from contingent payment obligation
|
|
|
1,500,000
|
|
|
|
-
|
|
Proceeds from convertible note payable
|
|
|
375,000
|
|
|
|
-
|
|
Proceeds from exercise of options and warrants
|
|
|
-
|
|
|
|
650
|
|
Proceeds from sale of Series B preferred stock
|
|
|
80,000
|
|
|
|
-
|
|
Proceeds from notes payable
|
|
|
-
|
|
|
|
75,000
|
|
Repayment of convertible notes payable
|
|
|
(384,000
|
)
|
|
|
(687,738
|
)
|
Repayment of notes payable
|
|
|
(200,000
|
)
|
|
|
(1,033,985
|
)
|
Net cash provided by (used in) financing activities
|
|
|
1,371,000
|
|
|
|
(1,646,073
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(348,646
|
)
|
|
|
766,977
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of the period
|
|
|
804,130
|
|
|
|
37,153
|
|
|
|
|
|
|
|
|
|
|
Cash at end of the period
|
|
$
|
455,484
|
|
|
$
|
804,130
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
89,310
|
|
|
$
|
233,973
|
|
Income tax paid
|
|
|
71,318
|
|
|
|
3,092
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Deemed dividend on convertible preferred stock
|
|
$
|
17,778
|
|
|
$
|
-
|
|
Note payable in exchange for due to factor and accrued interest
|
|
|
210,000
|
|
|
|
-
|
|
Common stock issued for conversion of debt and accrued interest
|
|
|
-
|
|
|
|
192,665
|
|
Forgiveness of accrued officers salaries recorded as capital contribution
|
|
|
-
|
|
|
|
762,275
|
|
Common stock issued for conversion of Series B preferred stock
|
|
|
3,333
|
|
|
|
12,534
|
|
See accompanying notes to the financial statements.
StrikeForce Technologies, Inc.
December 31, 2017 and 2016
Notes to the Financial Statements
Note 1 -
Organization and Summary of Significant Accounting Policies
StrikeForce Technologies, Inc. (the “Company”) is a software development and services company that offers a suite of integrated computer network security products using proprietary technology. The Company’s ongoing strategy is developing and marketing its suite of network security products to the corporate, financial, healthcare, legal, government, technology, insurance, e-commerce and consumer sectors. The Company’s operations are based in Edison, New Jersey.
Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, for the year ended December 31, 2017, the Company incurred a net loss of $3,224,278 and used cash in operating activities of $1,716,332, and at December 31, 2017, the Company had a stockholders’ deficit of $10,793,186. In addition, the Company is in default on notes payable and convertible notes payable in the aggregate amount of $2,539,336. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At December 31, 2017, the Company had cash on hand in the amount of $455,484. Management estimates that the current funds on hand will be sufficient to continue operations through the next three months. The Company’s ability to continue as a going concern is dependent upon its ability to continue to implement its business plan. Currently, management is attempting to increase revenues by redirecting its sales focus from direct sales to domestic and international sales channels, primarily selling through a channel of distributors, value added resellers, strategic partners and original equipment manufacturers. While the Company believes in the viability of its strategy to increase revenues, there can be no assurances to that effect. The Company’s ability to continue as a going concern is dependent upon its ability to increase its customer base and realize increased revenues. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, if needed, it may contain undue restrictions on its operations, in the case of debt financing, or cause substantial dilution for its stock holders, in the case of equity financing.
Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to accounting for potential liabilities, assumptions used in valuing stock instruments issued for services, assumptions used in valuing derivative liabilities, and the valuation allowance for deferred income taxes. Actual results could differ from those estimates.
Revenue
The Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer and there are no significant uncertainties surrounding acceptance by the customer, (iii) the sales price is fixed and determinable, and (iv) collectability is reasonably assured. When the Company recognizes revenue, no provisions are made for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.
Revenue from hardware sales is recognized when the product is shipped to the customer and there are either no unfulfilled obligations by the Company, or any obligations that will not affect the customer's final acceptance of the arrangement. All costs of these obligations are accrued when the corresponding revenue is recognized.
Revenue from time and service contracts is recognized as the services are provided. Revenue from delivered elements of one-time charge licensed software is recognized at the inception of the license term, and determined by the fair value of each delivered element. Revenue is deferred for undelivered elements. The Company recognizes revenue from the sale of software licenses when the four criteria discussed above are met. If the Company determines that collection of a fee is not reasonably assured, it defers the fee and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of payment. Revenue from monthly software licenses is recognized on a subscription basis.
The Company offers an Application Service Provider (ASP) hosted cloud service whereby customer usage transactions are invoiced monthly on a cost per transaction basis.
Accounts Receivable and Allowance for Doubtful Accounts
The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding. At December 31, 2017, the allowance for doubtful accounts was $19,584. At December 31, 2016, there was no allowance for doubtful accounts. For the years ended December 31, 2017 and 2016, the Company recorded bad debt expense of $20,715 and $18,226, respectively.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives of the respective assets as follows:
|
|
Estimated Useful Life (Years)
|
|
|
|
|
|
Computer equipment
|
|
|
5
|
|
|
|
|
|
|
Computer software
|
|
|
3
|
|
|
|
|
|
|
Furniture and fixture
|
|
|
7
|
|
|
|
|
|
|
Office equipment
|
|
|
7
|
|
Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of operations. Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. For the years ended December 31, 2017 and 2016, the Company did not recognize any impairment for its property and equipment.
Long-lived Assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. For the years ended December 31, 2017 and 2016, the Company did not recognize any such impairments.
Income Taxes
The Company accounts for income taxes using the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Stock Compensation
The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions, and for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (FASB) whereas the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Options granted to non-employees are revalued each reporting period to determine the amount to be recorded as an expense in the respective period. As the options vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current value on the date of vesting. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.
The fair value of the Company’s stock option and warrant grants are estimated using the Black-Scholes-Merton option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. At each reporting date, the Company reviews its convertible securities to determine that their classification is appropriate.
Fair Value of Financial Instruments
The Company follows the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3—Unobservable inputs based on the Company's assumptions.
The Company is required to use of observable market data if such data is available without undue cost and effort.
As of December 31, 2017 and 2016, the Company’s balance sheets included the fair value of derivative liabilities of $623,195 and $262,185, respectively, which were based on Level 2 measurements.
The recorded amounts for accounts receivable, accounts payable, accrued expenses, convertible notes, and notes payables approximate their fair value due to their short-term nature.
Income (loss) per Share
Basic income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share reflects the potential dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income (loss) of the Company. In computing diluted income (loss) per share, the treasury stock method assumes that outstanding options, warrants, and convertible preferred stock are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options, warrants, and convertible preferred stock may have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants.
For the years ended December 31, 2017 and 2016, the dilutive impact of stock options exercisable into 259,000,001 and 196,000,001 shares of common stock, respectively, convertible Series B Preferred stock that can convert into 14,815,026 and 33,876,016 shares of common stock, respectively, and notes payable that can convert into 25 and 25 shares of common stock, respectively, have been excluded because their impact on the income and (loss) per share is anti-dilutive.
The following tables set forth the computation of basic and diluted earnings (loss) per share:
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Income (Loss) per share – Basic and Diluted:
|
|
|
|
|
|
|
Income (Loss) for the period
|
|
$
|
(3,224,278
|
)
|
|
$
|
2,938,565
|
|
Series B convertible preferred stock deemed dividends
|
|
|
17,778
|
|
|
|
-
|
|
Net income (loss) attributable to common shareholders
|
|
|
(3,206,500
|
)
|
|
|
2,938,565
|
|
Basic average common stock outstanding
|
|
|
2,323,630,612
|
|
|
|
1,855,338,114
|
|
Net earnings (loss) per share
|
|
$
|
-
|
|
|
$
|
-
|
|
Advertising, Sales and Marketing Costs
Advertising, sales and marketing costs are expensed as incurred and are included in sales and marketing expenses. For the years ended December 31, 2017 and 2016, advertising, sales and marketing expenses were $20,507 and $1,534, respectively.
Research and Development Costs
Costs incurred for research and development are expensed as incurred. The salaries, benefits, and overhead costs of personnel conducting research and development of the Company’s software products comprise research and development expenses. Purchased materials that do not have an alternative future use are also expensed.
For the years ended December 31, 2017 and 2016, research and development costs were $537,282 and $521,663, respectively.
Significant Concentrations
For the year ended December 31, 2017, sales to one customer comprised 55% of revenues. For the year ended December 31, 2016, sales to two customers comprised 39% and 39% of revenues, respectively. At December 31, 2017, four customers comprised 30%, 29%, 19% and 14% of accounts receivable, respectively. At December 31, 2016, one customer comprised 82% of accounts receivable.
The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. At December 31, 2017 and 2016, the Company had cash deposits that exceeded the federally insured limit of $250,000. The Company believes that no significant concentration of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness and financial viability of the financial institution.
Segments
The Company operates in one segment for the development and distribution of our products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20, and ASU 2017-05, all of which clarify certain implementation guidance within ASU 2014-09. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. The standard can be adopted either retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company is currently in the process of analyzing the information necessary to determine the impact of adopting this new guidance on its financial position, results of operations, and cash flows. The Company will adopt the provisions of this statement in the first quarter of fiscal 2018.
In February 2016, the FASB issued ASU No. 2016-02,
Leases.
This update will require the recognition of a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, for all leases with terms longer than 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its financial statements and related disclosures.
In July 2017, the FASB issued ASU 2017-11
, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
. ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. The guidance in ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach. The adoption of ASU 2017-11 is not expected to have a material impact on the Company’s financial statements because the embedded conversion feature of the Company’s convertible notes have features other than down round provisions that require the current accounting and classification as derivative liabilities.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
Note 2 -
Property and Equipment
Property and equipment, stated at cost, less accumulated depreciation consisted of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
78,769
|
|
|
$
|
76,953
|
|
|
|
|
|
|
|
|
|
|
Computer software
|
|
|
38,404
|
|
|
|
36,907
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixture
|
|
|
10,157
|
|
|
|
10,157
|
|
|
|
|
|
|
|
|
|
|
Office equipment
|
|
|
16,511
|
|
|
|
16,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,841
|
|
|
|
140,528
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(136,165
|
)
|
|
|
(131,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,676
|
|
|
$
|
8,926
|
|
Depreciation expense for the years ended December 31, 2017 and 2016 was $4,563 and $3,177, respectively.
Note 3 - Convertible Notes Payable
Convertible notes payable consisted of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Secured
|
|
|
|
|
|
|
(a) DART
|
|
$
|
542,588
|
|
|
$
|
542,588
|
|
|
|
|
|
|
|
|
|
|
Unsecured
|
|
|
|
|
|
|
|
|
(b) Convertible notes with fixed conversion features
|
|
|
895,512
|
|
|
|
910,512
|
|
(c) Convertible notes with adjustable conversion features
|
|
|
-
|
|
|
|
-
|
|
Total convertible notes
|
|
$
|
1,438,100
|
|
|
$
|
1,447,100
|
|
_________
(a)
|
At December 31, 2017 and December 31, 2016, $542,588 of notes payables are due to DART/Citco Global. The notes are convertible into shares of the Company’s common stock based on adjustable conversion prices, are secured by all of the Company’s assets, were due in 2010, and are currently in default. The adjustable conversion features of the notes are accounted for as derivative liabilities (see Note 8). DART/Citco Global did not process any conversions of notes into shares of common stock during the years ended December 31, 2017 or 2016. The Company has been in contact with the note holder who has indicated that it has no present intention of exercising its right to convert the debentures into shares of the Company's common stock. Under the terms of the secured debentures, the Company is restricted in its ability to issue additional securities as long as any portion of the principal or interest on the secured debentures remains outstanding. During the year ended December 31, 2017, the Company did not obtain DART/Citco Global’s written consent related to any of its financing agreements.
|
|
|
(b)
|
Convertible notes payable consisted of 13 unsecured convertible notes convertible at a fixed amount (“fixed convertible notes”) into 13 shares of the Company’s common stock, at fixed prices ranging from $1,950,000 to $9,750,000,000 per share, as defined in the agreements. The notes bear interest at 8% to 18% per annum, and were due on various dates from March 2008 to July 2015. All of the fixed convertible notes are currently in default and the Company is pursuing settlements with certain of the holders. During the year ended December 31, 2017, there were no additional notes issued and the Company repaid $9,000 of note principal.
|
|
|
|
At December 31, 2016, the balance of the accrued interest on the fixed convertible notes was $936,639. During the year ended December 31, 2017, the Company paid $11,500 of accrued interest and interest expense of $79,492 was accrued. At December 31, 2017, the balance of accrued interest on the fixed convertible notes was $1,004,631. During the year ended December 31, 2016, interest expense of $79,687 was accrued, $49,148 of accrued interest was forgiven and written-off, and $3,000 of accrued interest was paid.
|
|
|
(c)
|
At December 31, 2016, there were no convertible notes with adjustable conversion features outstanding. During the year ended December 31, 2017, the Company issued two convertible notes payable for an aggregate of $375,000, bearing interest at 10% per annum, and maturing through July 2018. Both notes were paid in full in September 2017, including $96,825 of accrued and premium interest. At the option of the holder, beginning seven months from the date issued, the notes were convertible into shares of common stock of the Company at a price per share discount of 42% of the lowest closing market price of the Company’s common stock for the twenty days preceding a conversion notice. As a result, the Company determined that the conversion feature of the convertible notes were not considered indexed to the Company’s own stock and characterized the fair value of the conversion feature as a derivative liability upon issuance. The Company determined that upon issuance of the convertible notes in June and July 2017, the initial fair value of the embedded conversion features was $597,949 (see Note 8), of which $375,000 was recorded as debt discount offsetting the face amount of the convertible notes, and the remainder of $222,949 was recorded as private placement costs. During the year ended December 31, 2017 the Company amortized $4,000 of the valuation discount and recorded the balance of $371,000 to interest expense when the convertible notes were paid off.
|
At December 31, 2017 and December 31, 2016, accrued interest due for all convertible notes was $1,004,631 and $936,639, respectively, and is included in accrued interest in the accompanying balance sheets. Interest expense for all convertible notes payable for the years ended December 31, 2017 and 2016 was $176,317 and $96,753, respectively.
Note 4 - Convertible Notes Payable – Related Parties
At December 31, 2017 and December 31, 2016, convertible notes payable - related parties consist of 12 convertible notes payable in the aggregate of $355,500. The notes are unsecured and have extended due dates of December 31, 2018. Six notes totaling $268,000 are due to the Company’s Chief Executive Officer, at a compounded interest rate of 8% per annum; two notes totaling $57,000 are due to the Company’s VP of Technology, interest at prime plus 2% and prime plus 4% per annum; and four notes totaling $30,000 are due to the spouse of the Company’s Chief Technology Officer at a compounded interest rate of 8% per annum. $33,000 of the notes are convertible at a fixed conversion price of $7,312,500 per share and $322,500 of the notes are convertible at a fixed conversion price of $9,750,000,000 per share, as defined in the note agreements.
At December 31, 2016, accrued interest due for the convertible notes – related parties was $437,305. During the year ended December 31, 2017, interest expense of $60,772 was accrued. At December 31, 2017, accrued interest due for the convertible notes – related parties was $498,077. During the year ended December 31, 2016, interest expense of $55,721 was accrued, and $9,417 of accrued interest due a former officer was forgiven and written-off.
Note 5 - Notes Payable
Notes payable consisted of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Unsecured
|
|
|
|
|
|
|
(a) Promissory notes
|
|
$
|
413,824
|
|
|
$
|
413,824
|
|
(b) Promissory notes – StrikeForce Investor Group
|
|
|
1,230,000
|
|
|
|
1,290,000
|
|
(c) Promissory note
|
|
|
70,000
|
|
|
|
-
|
|
Notes payable, current maturities
|
|
$
|
1,713,824
|
|
|
$
|
1,703,824
|
|
_________
(a)
|
Notes payable consists of various unsecured promissory notes with interest from 8% to 14% per annum. $413,824 of the notes were due on various dates from December 2011 to July 2017 and are currently in default, The Company is currently pursuing settlements with certain of the note holders. At December 31, 2017 and December 31, 2016, the balance due under these notes was $413,824.
|
|
|
|
At December 31, 2016, the balance of the accrued interest on the notes payable-various was $414,342. During the year ended December 31, 2017, $45,556 of interest expense was accrued. At December 31, 2017, accrued interest on the notes payable was $459,898. During the year ended December 31, 2016, $45,681 of interest expense was accrued, and $70,121 was forgiven and written-off.
|
(b)
|
Notes payable to StrikeForce Investor Group (SIG), made up of various investors with unsecured notes, interest at 10% per annum, originally due in 2011, and currently in default. At December 31, 2016, the balance of notes payable-SIG was $1,290,000. During the year ended December 31, 2017, one note holder assigned a delinquent note totaling $25,000, to an unrelated party, who agreed to extend payment of the note to February 2018. During the year ended December 31, 2017, the Company repaid $60,000 of principal and at December 31, 2017, the balance of notes payable-SIG was $1,230,000. The Company is currently pursuing extensions on the remaining delinquent notes.
|
|
|
|
At December 31, 2016, the balance of the accrued interest on the notes payable-SIG was $1,425,087. During the year ended December 31, 2017, $125,033 of interest expense was accrued, $71,639 of accrued interest was paid, and $86,140 of accrued interest was forgiven and written-off. At December 31, 2017, accrued interest on the notes payable-SIG was $1,392,341. During the year ended December 31, 2016, $141,995 of interest expense was accrued, and $10,000 of accrued interest was paid.
|
(c)
|
In July 2017, the Company executed an exchange agreement with a factor which transferred the amount due to the factor of approximately $209,000 into a promissory note for $210,000, non-interest bearing, and maturing on February 7, 2018. Per the terms of the note, the Company shall make seven payments as follows: $60,000 in August 2017 and $20,000 each from September through December 2017, which have been paid, $20,000 for January 2018 and $50,000 in February 2018. In the event of a default of the payment terms, the outstanding balance shall increase to 120% of the note balance. Additionally, if the note is not paid in full by the maturity date, the revised outstanding balance shall be convertible at the note holders option into shares of common stock of the Company at a price per share discount of 20% of the lowest trading market price of the Company’s common stock for the twenty days preceding a conversion notice. As of December 31, 2017, the balance due on the promissory note was $70,000. The remaining balance was paid off in 2018 (see Note 15).
|
At December 31, 2017 and December 31, 2016, accrued interest due for all notes payable above was $1,852,239 and $1,839,429, respectively, and is included in accrued interest in the accompanying balance sheets. Interest expense for notes payable for the years ended December 31, 2017 and 2016 was $170,589 and $190,478, respectively.
Note 6 - Notes Payable – Related Party
Notes payable- related party consist of 18 unsecured notes payable to the Company’s Chief Executive Officer ranging in interest rates of 0% per annum to 10% per annum. The notes are unsecured and have extended due dates of December 31, 2018. At December 31, 2017 and 2016, the balance due under these notes $742,513.
At December 31, 2016, accrued interest due for the notes payable – related party was $591,784. During the year ended December 31, 2017, interest expense of $56,080 was accrued. At December 31, 2017, accrued interest due for the notes payable – related party was $647,864. During the year ended December 31, 2016, interest expense of $56,233 was accrued, and accrued interest of $13,102 owed to a former officer was forgiven and written-off.
Note 7 - Contingent Payment Obligation
On September 6, 2017, the Company entered into a litigation funding agreement with Therium Inc. and VGL Capital, LLC (collectively the “Funders”). Under the agreement, the Company received $1,500,000 from the Funders to allow the Company to pursue patent enforcement actions against infringements of its patents (see Note 14). In exchange, the Funders are entitled to receive, after the payment of legal fees, the first $1,500,000 from the gross proceeds of any claims awarded, 10% of any additional claim proceeds until the Funders have received an additional $7,500,000, and 2.5% of any claim proceeds thereafter. The Funders shall be paid only in the event that the Company achieves recoveries of claim proceeds. The terms of the litigation funding agreement allow for additional funding of $1,500,000, between February 1, 2018 to January 31, 2019, which would require the Company to repay the funders an additional $5,000,000, plus a percentage of any claim proceeds thereafter.
Note 8 - Derivative Financial Instruments
At December 31, 2017, the Company had convertible promissory notes outstanding that are convertible into shares of common stock of the Company at the option of the holder at a price per share discount of 20% of the Company’s common stock market price, as defined in the note agreements. Also, in July 2017, the Company issued two convertible notes payable (see Note 3) that, at the option of the noteholder beginning seven months from the date issued, were convertible into shares of common stock of the Company at a price per share discount of 42% of the lowest closing market price of the Company’s common stock for the 20 days preceding a conversion notice. As a result, the Company determined that the conversion features of the convertible notes were not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as a derivative liability. As the ultimate determination of shares to be issued upon conversion of these notes could exceed the current number of available authorized shares, the conversion features of these notes are recorded as a derivative liability. Accordingly, the conversion feature of the notes was separated from the host contract (i.e. the notes) and characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
At December 31, 2016, the balance of the derivative liabilities was $262,185. During the year ended December 31, 2017, the Company recorded additions of $597,949 (see Note 3), an increase in fair value of derivatives of $320,888, and an extinguishment of $557,827. At December 31, 2017, the balance of the derivative liabilities was $623,195.
The derivative liability was valued at the following dates using a probability weighted Black-Scholes-Merton model with the following assumptions:
|
|
December 31,
2017
|
|
|
September 6. 2017 (date extinguished)
|
|
|
June, July 2017
(dates issued)
|
|
|
December 31,
2016
|
|
Conversion feature:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.18
|
%
|
|
|
0.16
|
%
|
|
|
0.16
|
%
|
|
|
0.16
|
%
|
Expected volatility
|
|
|
147
|
%
|
|
|
150
|
%
|
|
152%-157
|
%
|
|
75
|
%
|
Expected life (in years)
|
|
1 year
|
|
|
1 year
|
|
|
1 year
|
|
|
1 year
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion feature
|
|
$
|
623,195
|
|
|
$
|
557,827
|
|
|
$
|
597,949
|
|
|
$
|
262,185
|
|
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected volatility is based on the historical volatility of the Company’s stock. The expected life of the conversion feature of the notes was based on the remaining terms of the related notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.
Note 9 - Stockholders’ Deficit
Preferred Stock
On October 21, 2010, the Company amended its Articles of Incorporation in New Jersey to authorize 10,000,000 shares of preferred stock, par value $0.10. The designations, rights, and preferences of such preferred stock are to be determined by the Board of Directors. On November 15, 2010, the Company changed its domicile from the State of New Jersey to the State of Wyoming.
In addition to the 10,000,000 shares of preferred stock authorized on October 21, 2010, on January 10, 2011, 100 shares of preferred stock were designated as Series A Preferred Stock and 100,000,000 shares were designated as Series B Preferred Stock. The bylaws under the Wyoming Incorporation were amended to reflect the rights and preferences of each additional new designation.
The Series A Preferred Stock collectively has voting rights equal to eighty percent of the total current issued and outstanding shares of common stock. If at least one share of Series A Preferred Stock is outstanding, the aggregate shares of Series A Preferred Stock shall have voting rights equal to the number of shares of common stock equal to four times the sum of the total number of shares of common stock issued and outstanding, plus the number of shares of Series B Preferred Stock (or other designated preferred stock) which are issued and outstanding.
The Series B Preferred Stock has preferential liquidation rights in the event of any liquidation, dissolution or winding up of the Company, such liquidation rights to be paid from the assets of the Company not delegated to parties with greater priority at $1.00 per share or, in the event an aggregate subscription by a single subscriber of the Series B Preferred Stock is greater than $100,000,000, $0.997 per share. The Series B Preferred Stock shall be convertible to a number of shares of common stock equal to the price of the Series B Preferred Stock divided by the par value of the Series B Preferred Stock. The option to convert the shares of Series B Preferred Stock may not be exercised until three months following the issuance of the Series B Preferred Stock to the recipient shareholder. The Series B Preferred Stock shall have ten votes on matters presented to the shareholders of the Company for one share of Series B Preferred Stock held. The initial price of the Series B Preferred Stock shall be $2.50, (subject to adjustment by the Company’s Board of Directors) until such time, if ever, the Series B Preferred Stock are listed on a secondary and/or public exchange.
In February 2014, the Company's Board of Directors amended the conversion feature of the Series B Preferred Stock, to permit conversion to common shares at a 40% market discount to current market value at the time the Company receives a conversion request. Current market value is defined as the average of the immediately prior five trading day's closing prices. Additionally, when Series B Preferred Stock shares convert to the Company's common stock, the minimum price discount floor level is set at $0.005, as decided by the Company's Board of Directors.
Series A Preferred Stock
In 2011, the Company issued three shares of non-convertible Series A Preferred Stock valued at $329,000 per share, or $987,000 in aggregate to three members of the management team. The Series A Preferred Stock are convertible into four times the total number of common shares plus the total number of shares of Series B preferred stock issued and outstanding at the time of conversion and have voting rights equal to eighty percent of the total issued and outstanding shares of the Company's common stock. This effectively provided the management team, upon retention of their Series A Preferred Stock, voting control on matters presented to the shareholders of the Company. The shareholders of the Series A Preferred Stock have each irrevocably waived their conversion rights relating to the Series A Preferred Stock issued.
Series B Preferred Stock
The Series B Preferred Stock has preferential liquidation rights in the event of any liquidation, dissolution or winding up of the Company, such liquidation rights to be paid from the assets of the Company not delegated to parties with greater priority at $1.00 per share or, in the event an aggregate subscription by a single subscriber of the Series B Preferred Stock is greater than $100,000,000, $0.997 per share. The Series B Preferred Stock shall be convertible to a number of shares of common stock equal to the price of the Series B Preferred Stock divided by the par value of the Series B Preferred Stock. The option to convert the shares of Series B Preferred Stock may not be exercised until three months following the issuance of the Series B Preferred Stock to the recipient shareholder. The Series B Preferred Stock shall have ten votes on matters presented to the shareholders of the Company for one share of Series B Preferred Stock held. The initial price of the Series B Preferred Stock shall be $2.50, (subject to adjustment by the Company’s Board of Directors) until such time, if ever, the Series B Preferred Stock are listed on a secondary and/or public exchange.
At December 31, 2016, there were 50,001 shares of Series B Preferred Shares outstanding. In January 2017, the Company sold two individuals 53,334 shares of its Series B Preferred Stock at $1.50 per share, or an aggregate of $80,000. The shares of Series B Preferred Stock are convertible into shares of the Company’s common stock at a 25% discount to current market value, as defined, with a minimum conversion price set by the Company's Board of Directors of $0.001 per share. The Series B Preferred Stock can be converted at any time into shares of common stock after twelve months from acceptance by the Company of the subscription agreements, but only once every 30 days. For the year ended December 31, 2017, the Company recorded a deemed dividend for the beneficial conversion feature of $17,778 relating to the issuance of the Series B Preferred Stock.
In October 2017, 33,334 shares of Series B Preferred Stock were converted into 16,129,355 shares of the Company’s common stock (See below) and at December 31, 2017, there were 70,001 shares of Series B Preferred Stock outstanding.
Common Stock
During the year ended December 31, 2017, the Company issued an aggregate of 16,159,355 shares of its common stock as follows:
|
·
|
The Company issued 30,000 shares of its common stock for services, valued at $544.
|
|
|
|
|
·
|
The Company issued 16,129,355 shares of its common stock in exchange for conversion of 33,334 shares of Series B Preferred Stock at a conversion price of $0.00207 per share.
|
During the year ended December 31, 2016, the Company issued an aggregate of 2,296,971,962 shares of its common stock as follows:
|
·
|
The Company issued 1,594,171,737 shares of its common stock in exchange for conversion of $143,123 of convertible note principal and $49,542 of accrued interest at conversion prices ranging from $0.000058 to $0.0013 per share. In addition, the Company issued 511,066,246 shares of common stock, with a fair value of $386,221, to the convertible note holders and recorded as additional interest expense.
|
|
|
|
|
·
|
The Company issued 125,000 shares of its common stock upon the exercise of 30 warrants for $150. In addition, the Company issued 154,875,000 shares of its common stock, with a fair value of $185,850, to the warrant holder as additional consideration for services and recorded in general and administrative expenses
|
|
|
|
|
·
|
The Company issued 30,000 shares of its common stock for services, valued at $309.
|
|
|
|
|
·
|
The Company issued 1,000,000 shares of its common stock for exercise of options at a price of $0.005 per share for $500.
|
|
|
|
|
·
|
The Company issued 35,703,979 shares of its common stock in exchange for conversion of 125,337 shares of Series B Preferred Stock at conversion prices ranging from $0.00383 to $0.00532 per share.
|
Capital Contribution
In January 2016, the Company’s officers forgave an aggregate total of $762,275 of accrued payroll due to them from the Company. The Company recorded the forgiveness of accrued payroll as a capital contribution.
Note 10 -
Warrants
At December 31, 2017, the Company had no warrants outstanding. The table below summarizes the Company’s warrant activities for the period January 1, 2016 to December 31, 2016:
|
|
Number of
Warrant Shares
|
|
|
Exercise Price Range
Per Share
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016
|
|
|
30
|
|
|
$
|
0.00024-9,750,000,000
|
|
|
$
|
10,430,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
(-
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(30
|
)
|
|
$
|
0.00024
|
|
|
$
|
8,382,915
|
|
Expired
|
|
(-
|
)
|
|
$
|
0.00024-9,750,000,000
|
|
|
$
|
29,886,738
|
|
Balance, December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable, December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
In April 2016, the Company executed a settlement agreement with an investor relating to outstanding warrant agreements issued in conjunction with convertible notes that were repaid by the Company in January 2016. Per the terms of the settlement, the investor processed a cashless exercise of 30 warrant shares into 125,000 shares of the Company’s common stock. The investor also received an additional 154,875,000 shares of the Company’s common stock valued at $185,850, for services (see Note 9).
Note 11 - Options
In November 2012, the stockholders approved the 2012 Stock Option Plan for our employees, effective January 3, 2013. The number of shares authorized for issuance under the plan was 100,000,000 and was increased to 400,000,000 in November 2017 by unanimous consent of the Board of Directors.
In September 2016, the Company issued options to purchase 196,000,000 shares of its common stock to its management team and employees with a total fair value of $1,568,000 determined using the Black-Scholes Option Pricing model. The options are exercisable at $0.00625 per share, vest in 6 months, and expire in September 2026.
In December 2017, the Company issued options to purchase 63,000,000 shares of its common stock to its management team and employees with a total fair value of $378,000 determined using the Black-Scholes Option Pricing model. The options are exercisable at $0.0057 per share, vest in 6 months, and expire in December 2027.
During the years ended December 31, 2017 and 2016, the Company recognized compensation costs of $772,260 and $818,462, respectively, based on the fair value of options that vested.
The table below summarizes the Company’s 2004 Incentive Plan and 2012 Stock Incentive Plan activities for the period January 1, 2016 to December 31, 2017:
|
|
Number of
Options Shares
|
|
|
Exercise
Price Range
Per Share
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016
|
|
|
1,000,003
|
|
|
$
|
0.0005-9,750,000,000
|
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
196,000,000
|
|
|
$
|
0.00625
|
|
|
$
|
0.00625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,000,000
|
)
|
|
$
|
0.0005
|
|
|
$
|
0.0005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(2
|
)
|
|
$
|
9,750,000,000
|
|
|
$
|
9,750,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2017
|
|
|
196,000,001
|
|
|
$
|
0.00625-
2,242,500
|
|
|
$
|
0.00625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
63,000,000
|
|
|
$
|
0.0057
|
|
|
$
|
0.0057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
259,000,001
|
|
|
$
|
0.0057-
2,242,500
|
|
|
$
|
0.0062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable, December 31, 2017
|
|
|
199,786,886
|
|
|
$
|
0.0057-
2,242,500
|
|
|
$
|
0.0062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2017
|
|
|
59,213,115
|
|
|
$
|
0.0057
|
|
|
$
|
0.0057
|
|
As of December 31, 2017, options to purchase an aggregate of 259,000,001 shares of common stock were outstanding under the 2012 Stock Incentive Plan and there were 140,999,999 shares remaining available for issuance. At December 31, 2017 and 2016, the intrinsic value of outstanding options was zero.
The following table summarizes information concerning 2004 Incentive plan and 2012 Stock Incentive Plan as of December 31, 2017:
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
|
Number Outstanding
|
|
|
Average Remaining Contractual Life (in years)
|
|
|
Weighted Average Exercise Price
|
|
|
Number
Exercisable
|
|
|
Average Remaining Contractual Life
(in years)
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
975,000,000
|
|
|
|
1
|
|
|
|
1.00
|
|
|
$
|
975,000,000
|
|
|
|
1
|
|
|
|
1.00
|
|
|
$
|
975,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.0057
|
|
|
|
63,000,000
|
|
|
|
10.00
|
|
|
$
|
0.0057
|
|
|
|
3,786,885
|
|
|
|
10.00
|
|
|
$
|
0.0057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.00625
|
|
|
|
196,000,000
|
|
|
|
10.00
|
|
|
$
|
0.00625
|
|
|
|
196,000,000
|
|
|
|
10.00
|
|
|
$
|
0.00625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.00625 - 975,000,000
|
|
|
|
259,000,001
|
|
|
|
10.00
|
|
|
$
|
0.00625
|
|
|
|
199,786,886
|
|
|
|
10.00
|
|
|
$
|
0.00625
|
|
Note 12 - Other Income
The Company initiated patent litigation against an outside party in 2013. Mediation took place in May 2015 to discuss a potential settlement, and on January 15, 2016, the parties reached a settlement in the matter. As part of the settlement, the Company received a payment in January 2016 of $9,750,000 and incurred fees related to the settlement of $4,187,257.
Note 13 - Income Tax Provision
On December 22, 2017, the Tax Reform Act was signed into law which significantly changed U.S. tax law by, among other things, lowering the corporate income tax rate from 35% to 21%, effective January 1, 2018; allowing for the acceleration of expensing for certain business assets; requiring companies to pay a one-time transition tax on certain un-remitted earnings of foreign subsidiaries; and eliminating U.S. federal income tax on dividends from foreign subsidiaries. The Company has no tax provision for any period presented due to its history of operating losses. As of December 31, 2017, the Company had deferred tax assets of approximately $4,863,000, resulting from certain temporary differences and net operating loss (“NOL”) carry-forwards of approximately $21,375,000, which are available to offset future taxable income, if any, through 2036. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as management has determined that their realization is not likely to occur and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards.
The income tax provision consists of the following for the year ended:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Federal
|
|
|
|
|
|
|
Current
|
|
$
|
71,693
|
|
|
$
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
71,693
|
|
|
$
|
-
|
|
Components of deferred tax assets as of December 31, 2017 and 2016 are as follows:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Net deferred tax assets – non-current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOL carry-forwards
|
|
$
|
4,489,000
|
|
|
$
|
6,369,000
|
|
Share-based compensation
|
|
|
374,000
|
|
|
|
342,000
|
|
Less valuation allowance
|
|
|
(4,863,000
|
)
|
|
|
(6,711,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income tax provision is as follows:
|
|
For the year
ended
December 31,
2017
|
|
|
For the year
ended
December 31,
2016
|
|
|
|
|
|
|
|
|
Federal statutory income tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance on net operating loss carry-forwards
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The Company’s operations are based in New Jersey and it is subject to Federal and New Jersey state income tax. Tax years after 2014 are open to examination by United States and state tax authorities.
The Company adopted accounting rules which address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under these rules, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. These accounting rules also provide guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of December 31, 2017, no liability for unrecognized tax benefits was required to be recorded.
Note 14 - Commitments and Contingencies
Leases
The Company operates from leased offices under a lease agreement through January 31, 2019. The Company paid a monthly base rent of $4,067 from February 2016 thru January 2017, $4,190 from February 2017 through January 2018, and will pay a monthly base rent of $4,316 from February 2018 thru January 2019.
Asset Sale and Licensing Agreement
On August 24, 2015, the Company entered into an agreement with Cyber Safety, Inc., a New York corporation (“Cyber Safety”) for Cyber Safety to license, and retain an option to purchase, the patents and Intellectual Property related to the GuardedID® and MobileTrust® software. Cyber Safety has the option to buy the Company’s GuardedID® patent for $9,000,000 that expires on September 30, 2020. The Company anticipates Cyber Safety will make the purchase by September 30, 2020. Cyber Safety will also resell the Company’s GuardedID® and MobileTrust® products, for which the Company will receive a royalty, while the Company retains an unlimited license to resell those products. Cyber Safety also licensed the Malware Suite until September 30, 2020 and agreed to pay the Company 15% to 20% of the net amount Cyber Safety receives from this product. During the years ended December 31, 2017 and 2016, the Company did not receive any royalty or license payments from Cyber Safety.
Legal Proceedings
On March 28, 2013, we initiated patent litigation against an outside party. On January 15, 2016, the parties reached a settlement in the matter. As part of the settlement, we received a payment in January 2016 of $9,750,000 and incurred fees related to the settlement of $4,187,257.
On June 20, 2016, the Company initiated additional patent litigation against three major competitors in the U.S. District Court for the District of New Jersey, for infringement of United States Patent No. 8,484,698. This litigation is ongoing. On March 14, 2017, one of the parties initiated an inter partes review (IPR) (a procedure for challenging the validity of a United States patent before the United States Patent and Trademark Office) against the Company’s second Patent No. 8,484,698.
On March 14, 2017, the Company initiated additional patent litigation against two major competitors in the U.S. District Court for the District of Massachusetts, for infringement of United States Patent Nos. 7,870,599, 8,484,698 and 8,713,701. This litigation is ongoing.
On March 14, 2017, the Company initiated additional patent litigation against two major competitors in the U.S. District Court for the Eastern District of Virginia, for infringement of United States Patent Nos. 7,870,599, 8,484,698 and 8,713,701. This litigation is ongoing. On June 13, 2017, one of the competitors initiated a lawsuit against the Company in the U.S. District Court for the District of New Jersey for patent infringement (which the Company believes is without merit and will defend vigorously). This litigation is ongoing.
On December 4, 2017,
StrikeForce Technologies, Inc. v. Trustwave Holdings, Inc.,
Civil Action No. 2:16-cv-03573-JMV-MF which was pending in the United States District Court for the District of New Jersey, was settled. Trustwave’s infringing sales were made as an OEM of Duo Security Incorporated. The Company agreed to dismiss its claims against Trustwave because they were essentially duplicative of its claims against Duo Security Incorporated pursuant to
StrikeForce Technologies, Inc
.
v. Duo Security Incorporated
, Civil Action No. 2:16-cv-03571.
Due to Factor
In March 2007, the Company entered into a sale and subordination agreement with a factoring firm whereby the Company sold its rights to two invoices, from February 2007 and March 2007, totaling $470,200 to the factor. Upon signing the agreement and providing the required disclosures, the factor remitted $197,450 to the Company. As of December 31, 2016, the balance due to the factor was $209,192 including interest. In July 2017, the Company executed an exchange agreement with the factor which transferred the amount due to the factor into a promissory note for $210,000, non-interest bearing, and maturing on February 7, 2018. The Company repaid the remaining balance owed on the promissory note by making payments of $20,000 in January 2018 and $50,000 in February 2018 (see Note 5).
Note 15 – Subsequent Events
Subsidiary Company
In December 2017, the Company formed a new subsidiary, BlockSafe Technologies, Inc. ("BlockSafe"). The Company owns 49% of BlockSafe, 31% is owned by executives of the Company, and the remaining 20% is owned by unrelated parties. Through December 31, 2017, BlockSafe was dormant and had no activity. BlockSafe will focus on providing security solutions to protect blockchain and cryptocurrencies. The Company will license its existing technologies to BlockSafe. In January 2018, BlockSafe executed two promissory notes for an aggregate of $147,000 with two unrelated parties, bearing interest at 8% per annum, unsecured, and maturing in January 2019. Per the terms of the promissory note, the note holder purchased 147,000 units of BlockSafe coins.
Term Sheet
In March 2018, the Company executed a term sheet with an investor firm whereby the firm would invest in the Company up to $130,000 in the form of a convertible promissory note, bearing interest at 10% per annum maturing twelve months from the date of issuance. Conversions would include a 42% discount to the price of the Company’s common stock, as defined.