The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders’ deficit in conformity with generally accepted accounting principles. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2017. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that can be expected for the year ending December 31, 2018.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
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.
Basis of Presentation
-
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. The results of operations for the nine months ended September 30, 2018 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2018. These financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2017 and notes thereto contained in the Annual Report on Form 10-K of the Company as filed with the SEC on March 30, 2018.
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 nine months ended September 30, 2018, the Company incurred a net loss of $2,432,07 3 and used cash in operating activities of $1,470,450, and at September 30, 2018, the Company had a stockholders’ deficit of $12,772,86 5 . In addition, the Company is in default on notes payable and convertible notes payable in the aggregate amount of $3,076,924. 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. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2017 financial statements, has expressed substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At September 30, 2018, the Company had cash on hand in the amount of $186,078. In October 2018, the Company issued an unsecured convertible promissory note for $140,000, bearing interest at 10% per annum, and maturing in October 2019. Management estimates that the current funds on hand will be sufficient to continue operations through the next six 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.
BlockSafe Technologies, Inc.
In December 2017, the Company formed a subsidiary, BlockSafe Technologies, Inc. (“BlockSafe”). BlockSafe is owned 49% by the Company and 31% by three executive officers of the Company, which combined represents an 80% controlling interest in BlockSafe. BlockSafe plans to focus on providing security solutions to protect blockchain and cryptocurrencies. Additionally, BlockSafe plans to create its own cryptocurrency tokens. During the nine months ended September 30, 2018, BlockSafe received $775,500 from the issuance of unsecured notes payable (see Note 4). As of September 30, 2018, BlockSafe had no operating activities and no cryptocurrency tokens have been developed. There is no assurance as to whether, or at what amount, or on what terms, tokens will be available, if ever. Moreover, there can be no assurance how such technology will function, which could expose the Company to legal and regulatory issues. In addition, legal and regulatory developments could render the technology impermissible, which could have a material adverse effect on the Company.
In June 2018, the former CEO of BlockSafe resigned, and the Board of Directors appointed two members of the Company’s management team to serve as BlockSafe’s CEO and Chief Technical Officer, respectively. Additionally, the Company’s CEO was appointed as Chairman and President of BlockSafe.
In June 2018, the Company and BlockSafe amended their management agreement. Pursuant to the terms of the amended agreement, BlockSafe shall remit a management fee of $36,000 per month to the Company, retroactive to January 1, 2018 and for a three-year term. Once BlockSafe reaches a milestone of $1,000,000 in financing, an additional management fee of $5,000,000 shall be owed to the Company by BlockSafe in the form of a monthly payment of $138,889 for a period of three years. Additionally, the Company retains the right to use and market BlockSafe’s patent pending Blockchain Defender™ product, perpetually, for a royalty fee of 15%. For the nine months ended September 30, 2018, the Company has received $324,000 in management fees from BlockSafe.
Principles of Consolidation
The condensed consolidated unaudited financial statements include the accounts of the Company and its controlled subsidiary, BlockSafe. Intercompany balances and transactions have been eliminated in consolidation.
At September 30, 2018, noncontrolling interests represents 51% of BlockSafe that the Company does not directly own.
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 Recognition
Effective January 1, 2018, the Company adopted the guidance of Accounting Standards Codification (“ASC”) 606,
Revenue from Contracts
. The implementation of ASC 606 did not have a material impact on the Company’s consolidated financial statements. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients.
The Company’s revenue consists of revenue from sales and support of our software products.
Revenue primarily consists of sales of software licenses of our ProtectID®, GuardedID® and MobileTrust® products. We recognize revenue from these arrangements ratably over the contractual service period. For service contracts, the Company’s performance obligations are satisfied, and the related revenue is recognized, as services are rendered.
The Company offers no discounts, rebates, rights of return, or other allowances to clients which would result in the establishment of reserves against service revenue. Additionally, to date, the Company has not incurred incremental costs in obtaining a client contract.
Cost of revenue includes direct costs and fees related to the sale of our products.
The following tables present our revenue disaggregated by major product and service lines:
|
|
Three Months Ended
|
|
|
|
September 30,
2018
(Unaudited)
|
|
|
September 30,
2017
(Unaudited)
|
|
Software
|
|
$
|
58,925
|
|
|
$
|
72,790
|
|
Service
|
|
|
61,906
|
|
|
|
3,552
|
|
Total revenue
|
|
$
|
120,831
|
|
|
$
|
76,342
|
|
|
|
|
Nine months ended
|
|
|
|
September 30,
2018
(Unaudited)
|
|
|
September 30,
2017
(Unaudited)
|
|
Software
|
|
$
|
169,310
|
|
|
$
|
175,262
|
|
Service
|
|
|
187,165
|
|
|
|
43,684
|
|
Total revenue
|
|
$
|
356,475
|
|
|
$
|
218,946
|
|
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 September 30, 2018 and December 31, 2017, the Company’s balance sheets included the fair value of derivative liabilities of $839,960 and $623,195, 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 nine months ended September 30, 2018 and 2017, the dilutive impact of stock options exercisable into 259,500,002 and 196,000,001 shares of common stock, respectively, convertible Series B Preferred stock that can convert into 2,743,297 and 11,575,282 shares of common stock, respectively, and notes payable that can convert into 40,858,491 and 26,666,692 shares of common stock, respectively, have been excluded because their impact on the loss per share is anti-dilutive.
Concentrations
For the nine months ended September 30, 2018, sales to two customers comprised 63% and 23% of revenues, respectively. For the nine months ended September 30, 2017, sales to three customers comprised 52%, 13% and 11% of revenues, respectively. At September 30, 2018, four customers comprised 31%, 21%, 20% and 15% of accounts receivable, respectively. At December 31, 2017, four customers comprised 30%, 29%, 19% and 14% of accounts receivable, respectively.
The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. At December 31, 2017, 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 its cash balances because of its assessment of the creditworthiness and financial viability of the financial institution.
Recent Accounting Pronouncements
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. In July 2018, the FASB issued ASU 2018-11,
Targeted Improvements
, which allows for a cumulative-effect adjustment in the period the new lease standard is adopted and will not require restatement of prior periods. The Company is in the process of evaluating the impact of ASU 2016-02 and ASU 2018-11 on the Company’s financial statements and disclosures.
In June 2018, the FASB issued ASU 2018-07,
“Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.”
The ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently assessing the effect that the ASU will have on our financial position, results of operations, and disclosures.
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 - Convertible Notes Payable
Convertible notes payable consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Secured
|
|
|
|
|
|
|
(a) DART, in default
|
|
$
|
542,588
|
|
|
$
|
542,588
|
|
|
|
|
|
|
|
|
|
|
Unsecured
|
|
|
|
|
|
|
|
|
(b) Convertible notes with fixed conversion features, in default
|
|
|
895,512
|
|
|
|
895,512
|
|
(c) Convertible notes with adjustable conversion features
|
|
|
455,000
|
|
|
|
-
|
|
Total convertible notes principal outstanding
|
|
|
1,893,100
|
|
|
|
1,438,100
|
|
Debt discount
|
|
|
(312,014
|
)
|
|
|
-
|
|
Convertible notes, net of discount
|
|
$
|
1,581,086
|
|
|
$
|
1,438,100
|
|
(a)
|
At September 30, 2018 and December 31, 2017, $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. Beginning in 2009, the note holder agreed to the forbearance of any further interest on the notes payable to DART/Citco Global. 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 nine months ended September 30, 2018 or 2017. 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 nine months ended September 30, 2018, the Company did not obtain DART/Citco Global’s written consent related to any of its financing agreements.
|
|
|
(b)
|
At September 30, 2018 and December 31, 2017, convertible notes payable with fixed conversion features (“fixed convertible notes”) consisted of 13 unsecured convertible notes convertible at a fixed amount into 13 shares of the Company’s common stock, at fixed conversion prices ranging from $1,950,000 to $9,750,000,000 per share, as defined in the agreements and adjusted for applicable reverse stock splits. The notes bear interest at 8% to 18% per annum and were due on various dates from March 2008 to March 2015. All of the fixed convertible notes are currently in default and the Company is pursuing settlements with certain of the holders. During the nine months ended September 30, 2018, there were no additional notes issued or any repayments of note principal.
|
|
|
|
At December 31, 2017, the balance of the accrued interest on the fixed convertible notes was $1,004,631. During the nine months ended September 30, 2018, interest of $56,195 was accrued. At September 30, 2018, the balance of accrued interest on the fixed convertible notes was $1,060,826.
|
(c)
|
During the nine months ended September 30, 2018, the Company issued four convertible notes payable for an aggregate of $505,000, bearing interest at 10% per annum, and maturing through September 2019. During the nine months ended September 30, 2018, interest of $17,474 was accrued. At the option of the holder, each of the notes is convertible into shares of common stock of the Company at a price per share discount of 58% of the lowest closing market price of the Company’s common stock during the twenty days preceding a conversion notice. The variable conversion price is not considered predominately based on a fixed monetary amount settleable with a variable number of shares due to the volatility and trading volume of the Company’s common stock. 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 derivative liabilities upon issuance. The Company determined that upon issuance of the convertible notes in March, April, June and September 2018, the initial fair value of the embedded conversion feature totaled $903,851 (see Note 8), of which $505,000 was recorded as debt discount offsetting the face amount of the convertible notes, and the remainder of $398,851 was recorded as private placement costs. During the nine months ended September 30, 2018, debt discount amortization of $168,986 was recorded in interest expense, $24,000 of debt discount was removed related to debt that was converted, and the balance of the unamortized discount at September 30, 2018 was $312,014.
|
|
|
|
During the nine months ended September 30, 3018, a note holder elected to convert one note for $50,000 plus interest of $2,622 (total of $52,622) into 5,091,745 shares of the Company’s common stock at conversion prices ranging from $0.010266 to $0.01044 per share. On the dates of conversion, the closing price of the Company’s common stock ranged from $0.0184 to $0.0195 per share, or total fair value of shares of $95,903. The Company followed the general extinguishment model to record the settlement of the debt. The debt and accrued interest of $52,622, an unamortized discount of ($24,000), and the bifurcated conversion option derivatives after a final mark-up to $58,317, were removed at their carrying amounts aggregating $86,939, and the shares issued were measured at their fair value of $95,903. The difference of $8,964 was recorded as loss on settlement of debt.
|
At September 30, 2018 and December 31, 2017, accrued interest due for all convertible notes was $1,075,678 and $1,004,631, respectively, and is included in accrued interest in the accompanying balance sheets. Interest expense for all convertible notes payable for the nine months ended September 30, 2018 and 2017 was $73,669 and $39,814, respectively.
Note 3 - Convertible Notes Payable – Related Parties
At September 30, 2018 and December 31, 2017, 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 and adjusted for applicable reverse stock splits.
At December 31, 2017, accrued interest due for the convertible notes – related parties was $498,077. During the nine months ended September 30, 2018, interest of $48,339 was accrued. At September 30, 2018, accrued interest due for the convertible notes – related parties was $546,416.
Note 4 - Notes Payable
Notes payable consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Unsecured
|
|
|
|
|
|
|
(a) Promissory notes-in default
|
|
$
|
413,824
|
|
|
$
|
413,824
|
|
(b) Promissory notes – StrikeForce Investor Group-in default
|
|
|
1,225,000
|
|
|
|
1,230,000
|
|
(c) Promissory note
|
|
|
-
|
|
|
|
70,000
|
|
(d) Promissory notes issued by BlockSafe
|
|
|
775,500
|
|
|
|
-
|
|
Total notes payable principal outstanding
|
|
|
2,414,324
|
|
|
|
1,713,824
|
|
Debt discount
|
|
|
(391,122
|
)
|
|
|
-
|
|
Notes payable, net of discount
|
|
$
|
2,023,202
|
|
|
$
|
1,713,824
|
|
(a)
|
Notes payable consists of various unsecured promissory notes with interest from 8% to 14% per annum. 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 September 30, 2018 and December 31, 2017, the balance due under these notes was $413,824.
|
|
|
|
At December 31, 2017, the balance of the accrued interest on the notes payable-various was $459,898. During the nine months ended September 30, 2018, $34,073 of interest was accrued. At September 30, 2018, accrued interest on the notes payable-various was $493,971.
|
|
|
(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, 2017, the balance of notes payable-SIG was $1,230,000. During the nine months ended September 30, 2018, the Company repaid $5,000 of principal and at September 30, 2018, the balance of notes payable-SIG was $1,225,000. The Company is currently pursuing extensions on the remaining delinquent notes.
|
|
|
|
At December 31, 2017, the balance of the accrued interest on the notes payable-SIG was $1,392,341. During the nine months ended September 30, 2018, $91,626 of interest was accrued and $5,000 of accrued interest was paid. At September 30, 2018, accrued interest on the notes payable-SIG was $1,483,967.
|
|
|
(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. As of December 31, 2017, the balance due on the promissory note was $70,000. The remaining balance was paid off in January 2018, for $20,000, and February 2018, for $50,000.
|
|
|
(d)
|
During the nine months ended September 30, 2018, BlockSafe (see Note 1) issued an aggregate of $775,500 of unsecured promissory notes to nineteen unrelated parties, including a former executive of BlockSafe, bearing interest at 8% per annum, and maturing through September 2019. During the nine months ended September 30, 2018, interest of $30,750 was accrued. Contemporaneously with the issuance of the promissory notes, BlockSafe entered into an obligation to pay the same parties a fixed amount equal to the face amount of the promissory notes in tokens, as defined (see Note 6) as a financing obligation. The value of the financing obligation was determined to be $775,500 and was recorded as a liability and as a discount to the promissory notes. The discount will be amortized over the term of the promissory notes. During the nine months ended September 30, 2018, debt discount amortization of $384,378 was recorded and the balance of the unamortized discount at September 30, 2018 was $391,122.
|
At September 30, 2018 and December 31, 2017, accrued interest due for all notes payable above was $2,003,688 and $1,852,239, respectively, and is included in accrued interest in the accompanying balance sheets. Interest expense for notes payable for the nine months ended September 30, 2018 and 2017 was $151,449 and $85,004, respectively.
Note 5 - Notes Payable – Related Parties
Notes payable- related parties consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Unsecured
|
|
|
|
|
|
|
(a) Promissory notes
|
|
$
|
742,513
|
|
|
$
|
742,513
|
|
Notes payable, current maturities
|
|
$
|
742,513
|
|
|
$
|
742,513
|
|
(a)
|
Promissory notes represent eighteen 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 September 30, 2018 and December 31, 2017, the balance due under these notes was $742,513. At December 31, 2017, accrued interest due for the notes was $647,864. During the nine months ended September 30, 2018, interest of $41,945 was accrued. At September 30, 2018, accrued interest due for the notes was $689,809.
|
Note 6 – Financing Obligation
Between January 2018 and September 2018, BlockSafe issued promissory notes payable to nineteen unrelated parties aggregating $775,500 (see Note 4). The notes mature one year from the date of issuance, are unsecured, and bear interest at 8% per annum. As part of each promissory note agreement BlockSafe agreed to pay a financing obligation to the note holders equal to the note principal in cryptocurrency tokens to be issued by BlockSafe. At September 30, 2018 and through the date of filing, BlockSafe has not developed or issued any tokens and there is no assurance as to whether, or at what amount, or on what terms, tokens will be available to be issued, if ever. Nonetheless, management determined an obligation is bundled with the note agreements and determined that 100% of the face amount of the promissory notes, or $775,500, is probable of being settled. Accordingly, the Company recorded a liability for $775,500 as a financing obligation.
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 11). 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. The Company received no additional funding during the nine months ended September 30, 3018. At September 30, 2018 and December 31, 2017, the Company has reflected the $1,500,000 received from the Funders as a contingent payment obligation to be paid only if claim proceeds are recovered. On May 22, 2018, the Company was notified by Therium Inc. of the assignment of the debt to Therium Luxembourg.
Note 8 – Derivative Financial Instruments
At September 30, 2018, 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 price per share discounts ranging from 20% to 58% of the Company’s common stock market price, as defined in the note agreements. As the ultimate determination of shares to be issued upon conversion of these notes could exceed the current number of available authorized shares, 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 derivative liabilities. Accordingly, the conversion features of the notes were separated from the host contracts (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, 2017, the balance of the derivative liabilities was $623,195. During the nine months ended September 30, 2018, the Company recorded additions of $903,851 related to the conversion features of notes issued during the period (see Note 2), a reduction of the fair value of derivatives of $58,317 related to notes that were converted into shares of common stock (see Note 2), and a decrease in fair value of derivatives of $628,769. At September 30, 2018, the balance of the derivative liabilities was $839,960.
The derivative liability was valued at the following dates using a probability weighted Black-Scholes-Merton model with the following assumptions:
|
|
September 30,
2018
|
|
|
March to
September 2018
(dates of inception)
|
|
|
December 31,
2017
|
|
Conversion feature:
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.26
|
%
|
|
0.23%-0.25
|
%
|
|
|
0.18
|
%
|
Expected volatility
|
|
|
122
|
%
|
|
124%-138
|
%
|
|
|
147
|
%
|
Expected life (in years)
|
|
|
1 year
|
|
|
1 year
|
|
|
1 year
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion feature
|
|
$
|
839,960
|
|
|
$
|
903,851
|
|
|
$
|
623,195
|
|
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
Common Stock
During the nine months ended September 30, 2018, the Company issued an aggregate of 13,447,745 shares of its common stock as follows:
|
·
|
The Company issued 22,500 shares of its common stock for services, valued at $348.
|
|
·
|
The Company issued 8,333,500 shares of its common stock in exchange for conversion of 33,334 shares of Series B Preferred Stock at a conversion price of $0.004 per share.
|
|
·
|
A convertible note holder converted $50,000 of principal and $2,622 of accrued interest into 5,091,745 shares of common stock at conversion prices ranging from $0.010266 to $0.01044 per share.
|
Note 10 - 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 and December 2017, the Company issued options to purchase an aggregate of 259,000,000 shares of its common stock to management and employees with a total fair value of $1,946,000 determined using the Black-Scholes Option Pricing model. The options are exercisable at $0.0057 to $0.00625 per share, vest in 6 months, and expire through December 2027. During the nine months ended September 30, 2018 and 2017, the Company recognized compensation costs of $355,277 and $749,538, respectively, related to the amortization of the fair value of options that vested.
In July 2018, the Company issued options to purchase an aggregate of 500,001 shares of its common stock to a consulting firm with a total fair value of $3,855 determined using the Black-Scholes Option Pricing model. The options are exercisable at $0.016 per share, vest in 12 months, and expire in July 2019. During the nine months ended September 30, 2018, the Company recognized non-employee compensation costs of $866 related to the amortization of the fair value of options that vested.
The table below summarizes the Company’s stock option activities for the period January 1, 2016 to September 30, 2018:
|
|
Number of
Options Shares
|
|
|
Exercise Price Range
Per Share
|
|
|
Weighted Average Exercise Price
|
|
Balance, January 1, 2018
|
|
|
259,000,001
|
|
|
$
|
0.0057-2,242,500
|
|
|
$
|
0.00625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
500,001
|
|
|
$
|
0.016
|
|
|
$
|
0.016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding, September 30, 2018
|
|
|
259,500,002
|
|
|
$
|
0.0057-2,242,500
|
|
|
$
|
0.0062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance exercisable, September 30, 2018
|
|
|
259,112,330
|
|
|
$
|
0.0057-2,242,500
|
|
|
$
|
0.0062
|
|
At September 30, 2018 and 2017, the intrinsic value of outstanding options was zero.
The following table summarizes information concerning the Company’s stock options as of September 30, 2018:
|
|
|
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
|
|
|
|
63,000,000
|
|
|
|
10.00
|
|
|
$
|
0.0057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.016
|
|
|
|
500,001
|
|
|
|
1.00
|
|
|
$
|
0.016
|
|
|
|
112,329
|
|
|
|
1.00
|
|
|
$
|
0.016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.00625
|
|
|
|
196,000,000
|
|
|
|
10.00
|
|
|
$
|
0.0062
|
|
|
|
196,000,000
|
|
|
|
10.00
|
|
|
$
|
0.0062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.00625 - 975,000,000
|
|
|
|
259,500,002
|
|
|
|
10.00
|
|
|
$
|
0.0062
|
|
|
|
259,112,330
|
|
|
|
10.00
|
|
|
$
|
0.0062
|
|
Note 11 - Commitments and Contingencies
Legal Proceedings
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 1, 2017, The United States District Court for the Central District of California issued an opinion in the
StrikeForce Technologies, Inc. v. SecureAuth Corp
. case, which invalidated claims of U.S. Patent Nos. 7,870,599, 8,484,698 and 8,713,701 under 35 U.S.C. §101. The Company strongly disagrees with the Court’s decision and an appeal has been prepared by the Company’s attorney. The Company has agreed to stay its patent litigations in the District of New Jersey against Centrify Corp. and Duo Security Inc. pending the appeal. The Company believes that the litigations currently pending in the District of Massachusetts should also be stayed pending appeal and is discussing such a motion with the defendants in that case. The Company expects the Court will rule on the appeal in early 2019. However, the Company cannot guarantee that the appeal will be ruled upon in that time frame, or of the outcome of the ruling.
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.
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 nine months ended September 30, 2018 and 2017, the Company received $162 and $0, respectively, in license payments from Cyber Safety.
Note 12 – Subsequent Events
In October 2018, the Company issued an unsecured convertible promissory note for $140,000, bearing interest at 10% per annum, and maturing in October 2019. The note is convertible at a 58% discount to the price of the Company’s common stock, as defined.
In October 2018 and November 2018, convertible note holders converted $80,000 of principal and $4,526 of accrued interest into 10,713,317 shares of common stock at conversion prices ranging from $0.007018 to $0.008526 per share.