Notes to the Consolidated 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, 2018, the Company incurred a net loss of $3,837,249 and used cash in operating activities of $2,023,545, and at December 31, 2018, the Company had a stockholders’ deficit of $13,802,504. 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. The consolidated 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, 2018, the Company had cash on hand in the amount of $86,160. From January to March 2019, the Company issued four unsecured convertible promissory notes for a total of $354,000, bearing interest at 10% per annum, and maturing from January to March 2020. 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. Accordingly, BlockSafe is consolidated by the Company. BlockSafe plans to focus on providing security solutions to protect blockchain and cryptocurrencies. Additionally, BlockSafe plans to create its own cryptocurrency tokens. During the year ended December 31, 2018, BlockSafe received $775,500 from the issuance of unsecured notes payable (see Note 5) and $50,000 from a private placement memorandum (see Note 7). As of December 31, 2018, 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 BlockSafe and 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.
The Company and BlockSafe have a management agreement pursuant to which BlockSafe shall remit a management fee of $36,000 per month to the Company, and when BlockSafe reaches a milestone of $1,000,000 in financing, an additional management fee of $5,000,000 shall be owed to the Company, payable monthly over three years. The management fee is currently eliminated in consolidation. Additionally, the Company retains the right to use and market BlockSafe’s patent pending Blockchain Defender™ product, perpetually, for a royalty fee of 15%.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its controlled subsidiary, BlockSafe. Intercompany balances and transactions have been eliminated in consolidation.
At December 31, 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.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased.
Revenue Recognition
Prior to January 1, 2018, the Company recognized its revenue in accordance with Accounting Standards Codification (ASC) 605
Revenue Recognition
, upon the delivery of its services or products when: (1) delivery had occurred or services rendered; (2) persuasive evidence of an arrangement existed; (3) there are no continuing obligations to the customer; and (4) the collection of related accounts receivable was probable
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:
|
|
Year ended
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Software
|
|
$
|
229,206
|
|
|
$
|
228,711
|
|
Service
|
|
|
4,672
|
|
|
|
45,426
|
|
Total revenue
|
|
$
|
233,878
|
|
|
$
|
274,137
|
|
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, 2018 and 2017, the allowance for doubtful accounts was $31,004 and $19,584, respectively. For the years ended December 31, 2018 and 2017, the Company recorded bad debt expense of $11,420 and $20,715, respectively.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and amortization. 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, 2018 and 2017, 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, 2018 and 2017, 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, 2018 and 2017, the Company’s balance sheets included the fair value of derivative liabilities of $1,313,904 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.
Loss per Share
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted 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 loss of the Company. In computing diluted 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, 2018 and 2017, the dilutive impact of stock options exercisable into 259,500,002 and 259,000,001 shares of common stock, respectively, convertible Series B Preferred stock that can convert into 3,481,149 and 14,815,026 shares of common stock, respectively, and notes payable that can convert into 78,318,710 and 25 shares of common stock, respectively, have been excluded because their impact on the loss per share is anti-dilutive.
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, 2018 and 2017, advertising, sales and marketing expenses were $13,496 and $20,507, 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.
Concentrations
For the year ended December 31, 2018, sales to two customers comprised 65% and 24% of revenues, respectively. For the year ended December 31, 2017, sales to one customer comprised 55% of revenues. At December 31, 2018, two customers comprised 68% and 12% 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, 2018, the Company did not have 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.
Segments
The Company operates in one segment for the development and distribution of our software 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 February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02,
Leases
, which was subsequently amended in 2018 by ASU 2018-10, ASU 2018-11 and ASU 2018-20 (collectively, Topic 842). Topic 842 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. Topic 842 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. Topic 842 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 Topic 842 on the Company’s financial statements and disclosures, though the adoption is expected to result in an increase in the assets and liabilities reflected on the Company’s balance sheets.
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 -
Property and Equipment
Property and equipment, stated at cost, less accumulated depreciation consisted of the following:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
81,666
|
|
|
$
|
78,769
|
|
Computer software
|
|
|
41,786
|
|
|
|
38,404
|
|
Furniture and fixtures
|
|
|
10,157
|
|
|
|
10,157
|
|
Office equipment
|
|
|
16,511
|
|
|
|
16,511
|
|
|
|
|
150,120
|
|
|
|
143,841
|
|
Less accumulated depreciation
|
|
|
(140,861
|
)
|
|
|
(136,165
|
)
|
|
|
$
|
9,259
|
|
|
$
|
7,676
|
|
Depreciation expense for the years ended December 31, 2018 and 2017 was $4,695 and $4,563, respectively.
Note 3 - Convertible Notes Payable
Convertible notes payable consisted of the following:
|
|
December 31,
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
|
|
|
695,000
|
|
|
|
-
|
|
Total convertible notes principal outstanding
|
|
|
2,133,100
|
|
|
|
1,438,100
|
|
Debt discount
|
|
|
(521,763
|
)
|
|
|
-
|
|
Convertible notes, net of discount
|
|
$
|
1,611,337
|
|
|
$
|
1,438,100
|
|
(a)
|
At December 31, 2018 and 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 9). DART/Citco Global did not process any conversions of notes into shares of common stock during the year ended December 31, 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 year ended December 31, 2018, the Company did not obtain DART/Citco Global’s written consent related to any of its financing agreements.
|
|
|
(b)
|
At December 31, 2018 and 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 year ended December 31, 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 year ended December 31, 2018, interest of $75,133 was accrued. At December 31, 2018, the balance of accrued interest on the fixed convertible notes was $1,079,764.
|
(c)
|
At December 31, 2017, there were no convertible notes with adjustable conversion features outstanding. During the year ended December 31, 2018, the Company issued seven convertible notes payable to one lender for an aggregate of $910,000, bearing interest at 10% per annum, and maturing through December 2019. During the year ended December 31, 2018, interest of $19,241 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 between March 2018 and December 2018, the initial fair value of the embedded conversion feature totaled $1,116,226 (see Note 9), of which $910,000 was recorded as debt discount offsetting the face amount of the convertible notes, and the remainder of $206,226 was recorded as private placement costs. During the year ended December 31, 2018, debt discount amortization of $293,487 was recorded, $94,750 of debt discount was removed related to debt that was converted, and the balance of the unamortized discount at December 31, 2018 was $521,763.
|
|
|
|
During the year ended December 31, 3018, the note holder elected to convert two notes for $215,000 plus interest of $12,475 (total of $227,475) into 29,542,856 shares of the Company’s common stock at conversion prices ranging from $0.006554 to $0.01044 per share. On the dates of conversion, the closing price of the Company’s common stock ranged from $0.0122 to $0.0195 per share, or total fair value of shares of $470,358. The Company followed the general extinguishment model to record the settlement of the debt. The debt and accrued interest totaled $227,474, the related unamortized discount totaled ($94,750), and the shares issued were measured at their fair value of $470,358. The difference of $337,634 was recorded as loss on settlement of debt. In addition, the bifurcated conversion option derivatives, after a final mark-up to $279,687, were removed and recorded as a gain on extinguishment.
|
At December 31, 2018 and 2017, accrued interest due for all convertible notes was $1,099,005 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 years ended December 31, 2018 and 2017 was $94,374 and $176,317, respectively.
Note 4 - Convertible Notes Payable – Related Parties
At December 31, 2018 and 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, 2019. 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 year ended December 31, 2018, interest of $65,728 was accrued. At December 31, 2018, accrued interest due for the convertible notes – related parties was $563,805.
Note 5 - Notes Payable
Notes payable consisted of the following:
|
|
December 31,
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
|
|
|
(195,654
|
)
|
|
|
-
|
|
Notes payable, net of discount
|
|
$
|
2,218,670
|
|
|
$
|
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 December 31, 2018 and 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 year ended December 31, 2018, $45,556 of interest was accrued. At December 31, 2018, accrued interest on the notes payable-various was $505,454.
|
(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 year ended December 31, 2018, the Company repaid $5,000 of principal and at December 31, 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 year ended December 31, 2018, $122,503 of interest was accrued and $5,000 of accrued interest was paid. At December 31, 2018, accrued interest on the notes payable-SIG was $1,509,844.
|
|
|
(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 year ended December 31, 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 year ended December 31, 2018, interest of $46,388 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 7) 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 year ended December 31, 2018, debt discount amortization of $579,847 was recorded and the balance of the unamortized discount at December 31, 2018 was $195,653.
|
At December 31, 2018 and 2017, accrued interest due for all notes payable above was $2,061,686 and $1,852,239, respectively, and is included in accrued interest in the accompanying balance sheets. Interest expense for notes payable for the year ended December 31, 2018 and 2017 was $214,447 and $170,589, respectively.
Note 6 - Notes Payable – Related Parties
Notes payable- related parties consisted of the following:
|
|
December 31,
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, 2019. At December 31, 2018 and 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 year ended December 31, 2018, interest of $56,080 was accrued. At December 31, 2018, accrued interest due for the notes was $703,944.
|
Note 7 – Financing Obligation
During the year ended December 31, 2018, BlockSafe issued promissory notes payable to nineteen unrelated parties aggregating $775,500 (see Note 5). 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 December 31, 2018 and through the date of filing, BlockSafe has not developed or issued any cryptocurrency 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.
In addition, in December 2018, BlockSafe agreed to issue 200,000 cryptocurrency tokens to an unrelated party for receipt of $50,000. In February 2019, the agreement was amended and the unrelated party is to receive an additional 100,000 tokens. At December 31, 2018 and through the date of filing, BlockSafe has not developed or issued any cryptocurrency 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. When BlockSafe received the $50,000, it agreed to issue 300,000 tokens (as amended). As the tokens do not exist yet, and are not considered equity, at December 31, 2018, management determined that 100% of the $50,000 is probable of being a liability to be settled by BlockSafe, through the issuance of tokens, or through other means if tokens are never issued. Accordingly, the Company recorded a liability for $50,000 as a financing obligation
Note 8 – 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 13). 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 year ended December 31, 3018. At December 31, 2018 and 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 9 – Derivative Financial Instruments
At December 31, 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 year ended December 31, 2018, the Company recorded additions of $1,116,226 related to the conversion features of notes issued during the period (see Note 3), and a decrease in fair value of derivatives of ($145,830). In addition, the Company recorded a decrease in derivative liability of ($279,687) related to derivative liabilities that were extinguished. At December 31, 2018, the balance of the derivative liabilities was $1,313,904.
The derivative liability was valued at the following dates using a probability weighted Black-Scholes-Merton model with the following assumptions:
|
|
December 31,
2018
|
|
|
March 2018 to December 2018
(dates of inception)
|
|
|
December 31,
2017
|
|
Conversion feature:
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
0.25%
|
|
|
0.23%-0.25%
|
|
|
0.18%
|
|
Expected volatility
|
|
129%
|
|
|
124%-146%
|
|
|
147%
|
|
Expected life (in years)
|
|
1 year
|
|
|
1 year
|
|
|
1 year
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion feature
|
|
$
|
1,313,904
|
|
|
$
|
1,116,226
|
|
|
$
|
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 10 – Stockholders’ Deficit
Common Stock
During the year ended December 31, 2018, the Company issued an aggregate of 37,906,356 shares of its common stock as follows:
|
·
|
The Company issued 30,000 shares of its common stock for services, valued at $456.
|
|
|
|
|
·
|
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 $215,000 of principal and $12,475 of accrued interest into 29,542,856 shares of common stock at conversion prices ranging from $0.006554 to $0.01044 per share.
|
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.
|
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 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 years ended December 31, 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 year ended December 31, 2018, the Company recognized non-employee compensation costs of $1,838 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, 2017 to December 31, 2018:
|
|
Number of
Options Shares
|
|
|
Exercise Price Range
Per Share
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
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, January 1, 2018
|
|
|
259,000,001
|
|
|
$
|
0.0057-2,242,500
|
|
|
$
|
0.00625
|
|
Granted
|
|
|
500,001
|
|
|
$
|
0.016
|
|
|
$
|
0.016
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Balance outstanding, December 31, 2018
|
|
|
259,500,002
|
|
|
$
|
0.0057-2,242,500
|
|
|
$
|
0.0062
|
|
Balance exercisable, December 31, 2018
|
|
|
259,112,330
|
|
|
$
|
0.0057-2,242,500
|
|
|
$
|
0.0062
|
|
At December 31, 2018 and 2017, the intrinsic value of outstanding options was zero.
The following table summarizes information concerning the Company’s stock options as of December 31, 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
|
|
|
|
238,358
|
|
|
|
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
|
|
|
|
259,238,358
|
|
|
|
10.00
|
|
|
$
|
0.0062
|
|
Note 12 - 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, 2018, the Company had deferred tax assets of approximately $5,168,000, resulting from certain temporary differences and net operating loss (“NOL”) carry-forwards of approximately $22,472,000, which are available to offset future taxable income. 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,
2018
|
|
|
December 31,
2017
|
|
Federal
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
71,693
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,500
|
|
|
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
1,500
|
|
|
$
|
71,693
|
|
Components of deferred tax assets as of December 31, 2018 and 2017 are as follows:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Net deferred tax assets – non-current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOL carry-forwards
|
|
$
|
4,719,000
|
|
|
$
|
4,489,000
|
|
Share-based compensation
|
|
|
449,000
|
|
|
|
374,000
|
|
Less valuation allowance
|
|
|
(5,168,000
|
)
|
|
|
(4,863,000
|
)
|
|
|
|
|
|
|
|
|
|
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,
2018
|
|
|
For the year ended December 31,
2017
|
|
|
|
|
|
|
|
|
Federal statutory income tax rate
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance on net operating loss carry-forwards
|
|
|
(21.0
|
)
|
|
|
(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, 2018, no liability for unrecognized tax benefits was required to be recorded.
Note 13 - Commitments and Contingencies
Leases
The Company leases its offices premises under a lease agreement through January 31, 2024. During the years ended December 31, 2018 and 2017, the Company recorded rental expense of $51,330 and $50,157. As of December 31, 2018, the Company has future minimum rental payments for its office premises due under its non-cancellable operating lease as follows:
Year ending December 31:
|
|
|
|
2019
|
|
$
|
52,815
|
|
2020
|
|
|
54,371
|
|
2021
|
|
|
56,000
|
|
2022
|
|
|
57,676
|
|
2023
|
|
|
59,411
|
|
Thereafter
|
|
|
4,963
|
|
|
|
|
|
|
Total
|
|
$
|
285,236
|
|
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. In February 2019, a panel of the United States Court of Appeals for the Federal Circuit issued a “Rule 36” decision, affirming the District Court’s order, thereby dismissing the Company’s lawsuit on the grounds of 35 U.S.C. #101, a statue that concerns what types of inventions are patentable. The Company plans on working with a patent attorney in order to develop an appropriate course of action relating to this case.
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 had the option to buy the Company’s GuardedID® patent for $9,000,000 that expired on September 30, 2020. In March 2019, the option to purchase agreement was modified to increase the purchase price to $10,000,000 and extend the expiration date to September 30, 2021. If the purchase price is not paid by September 30, 2021, it will increase to $11,000,000 and be due September 30, 2022. The Company anticipates, but cannot guarantee, Cyber Safety will complete the purchase by September 30, 2021. 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. In 2018, the Company received nominal license payments from Cyber Safety.
Note 14 – Subsequent Events
In January 2019 through March 2019, the Company issued four unsecured convertible promissory note aggregating $354,000, bearing interest at 10% per annum, and maturing in one year through March 2020. The notes are convertible at a 58% discount to the price of the Company’s common stock, as defined.
From January 2019 to March 2019, a convertible note holder converted $260,000 of principal and $16,108 of accrued interest into 73,442,605 shares of common stock at conversion prices ranging from $0.002552 to $0.008062 per share.
From February 2019 to March 2019, BlockSafe agreed to issue 56,250 restricted shares of BlockSafe common stock and 450,000 cryptocurrency tokens and to four unrelated parties for receipt of $112,500. The tokens or restricted stock of BlockSafe have not been issued as of the date of the financial statements.
Subsequent to December 31, 2018, and through the date of their financial statements, $457,000 of the promissory notes payable by BlockSafe (see Note 5) to 13 note holders matured. Five of the noteholders agreed to convert $275,500 of principal and $18,170 of accrued interest into 1,845,041 cryptocurrency tokens to be issued by BlockSafe. The tokens have not been issued as of the date of the financial statements. The balance of the promissory notes that matured of $181,500 are past due and the Company is working with the note holders to cure the defaults.