Notes to the Consolidated Financial Statements
December 31, 2019 and 2018
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 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, 2019, the Company incurred a net loss of $3,749,660 and used cash in operating activities of $1,384,034, and at December 31, 2019, the Company had a stockholders’ deficit of $15,464,183. Also, at December 31, 2019, the Company is in default on notes payable and convertible notes payable in the aggregate amount of $3,551,924. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that these 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, 2019, the Company had cash on hand in the amount of $74,648. Subsequent to December 31, 2019, the Company issued three unsecured promissory notes for proceeds of $216,851, six unsecured convertible promissory notes for proceeds of $472,000 and received one SBA Paycheck Protection assistance loan for $313,212. 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 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 stockholders, in the case of equity financing.
Basis of presentation and principles of consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of the Company and its controlled 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. Intercompany balances and transactions have been eliminated in consolidation. At December 31, 2019, noncontrolling interests represents 51% of BlockSafe that the Company does not directly own.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to accounting for financing obligations, assumptions used in valuing stock instruments issued for services, assumptions used in valuing derivative liabilities, the valuation allowance for deferred tax assets, and the accrual of potential liabilities. Actual results could differ from those estimates.
Revenue Recognition
The Company follows the guidance of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. 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,
2019
|
|
|
December 31,
2018
|
|
Software
|
|
$
|
764,301
|
|
|
$
|
229,206
|
|
Service
|
|
|
3,908
|
|
|
|
4,672
|
|
Total revenue
|
|
$
|
768,209
|
|
|
$
|
233,878
|
|
Accounts Receivable
Accounts receivable consist of trade amounts due from customers, and are recorded at invoiced amounts. The Company maintains an allowance for doubtful accounts receivable based upon our business customers' financial condition and payment history, and our historical collection experience and expected collectability of accounts receivable. 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. At December 31, 2019 and 2018, the allowance for doubtful accounts was $20,417 and $31,004, respectively.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets as follows:
|
|
Estimated Useful Life (Years)
|
|
|
|
|
|
Computer equipment
|
|
|
5
|
|
Computer software
|
|
|
3
|
|
Furniture and fixture
|
|
|
7
|
|
Office equipment
|
|
|
7
|
|
Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. 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, 2019 and 2018, the Company did not recognize any impairment for its property and equipment.
Impairment of Long-lived Assets
The Company reviews its property and equipment, right-of-use assets, and other long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. For the years ended December 31, 2019 and 2018, the Company had no impairment of long-lived assets.
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.
Leases
Prior to January 1, 2019, the Company accounted for leases under ASC 840, Accounting for Leases. Effective January 1, 2019, the Company adopted the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified retrospective basis method under which prior comparative periods are not restated. The Company elected to exclude from its balance sheets recognition of leases having a term of 12 months or less (“short-term leases”) and elected to not separate lease components and non-lease components for its long-term leases. Lease expense is recognized on a straight-line basis over the lease term. At January 1, 2019, the Company had no leases that required recognition of operating lease right-of-use assets or liabilities for operating leases upon adoption of ASC 842. On January 31, 2019, the Company commenced a lease that resulted in the recognition of operating lease right-of-use assets of $214,272, and liabilities for operating leases of $214,272.
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.
The Company believes the carrying amounts reported in the balance sheet for accounts receivable, accounts payable, accrued expenses, convertible notes, and notes payables approximate fair values because of the short-term nature of these financial instruments.
As of December 31, 2019 and 2018, the Company’s balance sheet includes Level 2 liabilities comprised of the fair value of embedded derivative liabilities of $1,516,435 and $1,313,904, respectively (see Note 9). The following table sets forth a summary of the changes in the estimated fair value of our embedded derivative during the years ended December 31, 2019 and 2018:
|
|
Year ended
December 31,
2019
|
|
|
Year ended
December 31,
2018
|
|
Fair value at beginning of year
|
|
$
|
1,313,904
|
|
|
$
|
623,195
|
|
Recognition of derivative liabilities upon initial valuation
|
|
|
1,727,518
|
|
|
|
824,566
|
|
Extinguishment of derivative liabilities
|
|
|
(1,213,790
|
)
|
|
|
(279,687
|
)
|
Net change in the fair value of derivative liabilities
|
|
|
(311,197
|
)
|
|
|
145,830
|
|
Fair value at end of year
|
|
$
|
1,516,435
|
|
|
$
|
1,313,904
|
|
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 Company evaluates embedded conversion features within its convertible debt to determine whether the embedded conversion features should be bifurcated from the host instrument and accounted for as a derivative. The fair value of the embedded derivatives are determined using Monte Carlo simulation method at inception and on subsequent valuation dates. 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.
Stock-Based Compensation
The Company issues stock options, warrants, and shares of common stock as share-based compensation to employees and non-employees. The Company accounts for its share-based compensation to employees in accordance with FASB ASC 718, Compensation – Stock Compensation (Topic 718). Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period.
In periods through December 31, 2018, the Company accounted for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB ASC 505-50, Equity - Based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The final fair value of the share-based payment transaction is determined at the performance completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied to that estimate to determine the cumulative expense recorded.
On January 1, 2019, the Company adopted ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 simplifies the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions are measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions. The adoption of ASU 2018-07 did not have a material impact on the Company’s financial statements for the year ended December 31, 2019 or the previously reported financial statements.
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 is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding, plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued using the treasury stock method. Diluted loss per share excludes all potential common shares if their effect is anti-dilutive. The following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive:
|
|
Year ended
|
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Options to purchase common stock
|
|
|
316,500,001
|
|
|
|
259,000,002
|
|
Warrants to purchase common stock
|
|
|
50,287,356
|
|
|
|
-
|
|
Convertible notes
|
|
|
777,433,216
|
|
|
|
78,318,710
|
|
Convertible Series B Preferred stock
|
|
|
15,773,958
|
|
|
|
3,481,149
|
|
Total
|
|
|
1,159,994,531
|
|
|
|
340,799,861
|
|
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, 2019 and 2018, advertising, sales and marketing expenses were $8,352 and $13,496, 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, 2019, sales to three customers comprised 58%, 21% and 14% of revenues, respectively. For the year ended December 31, 2018, sales to two customers comprised 65% and 24% of revenues, respectively. At December 31, 2019, three customers comprised 43%, 29% and 12% of accounts receivable, respectively. At December 31, 2018, two customers comprised 49% and 33% 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, 2019, the Company did not have cash deposits that exceeded the federally insured limit of $250,000 per account. 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 June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments ("ASC 326"). The standard significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables. The standard will replace today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard is effective for interim and annual reporting periods beginning after December 15, 2022. The Company is currently assessing the impact of adopting this standard on the Company’s financial statements and related 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,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
81,666
|
|
|
$
|
81,666
|
|
Computer software
|
|
|
43,318
|
|
|
|
41,786
|
|
Furniture and fixtures
|
|
|
10,157
|
|
|
|
10,157
|
|
Office equipment
|
|
|
16,511
|
|
|
|
16,511
|
|
|
|
|
151,652
|
|
|
|
150,120
|
|
Less accumulated depreciation
|
|
|
(146,204
|
)
|
|
|
(140,861
|
)
|
|
|
$
|
5,448
|
|
|
$
|
9,259
|
|
Depreciation expense for the years ended December 31, 2019 and 2018 was $5,342 and $4,695, respectively.
Note 3 - Convertible Notes Payable
Convertible notes payable consisted of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Secured
|
|
|
|
|
|
|
(a) Convertible notes due to DART/Citco, 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
|
|
|
845,000
|
|
|
|
695,000
|
|
Total convertible notes principal outstanding
|
|
|
2,283,100
|
|
|
|
2,133,100
|
|
Debt discount
|
|
|
(422,705
|
)
|
|
|
(521,763
|
)
|
Convertible notes, net of discount
|
|
$
|
1,860,395
|
|
|
$
|
1,611,337
|
|
(a)
|
At December 31, 2019 and 2018, $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.
|
|
|
(b)
|
At December 31, 2019 and 2018, 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 are unsecured, bear interest at 8% to 18% per annum, were due on various dates from March 2008 to March 2015, and are currently in default. At December 31, 2018, the balance of the accrued interest on the fixed convertible notes was $1,079,764. During the year ended December 31, 2019, interest of $75,132 was accrued. At December 31, 2019, the balance of accrued interest on the fixed convertible notes was $1,154,896.
|
|
|
(c)
|
At December 31, 2018, there were $695,000 of convertible notes with adjustable conversion features outstanding. During the year ended December 31, 2019, convertible notes for $985,000 were issued (see below), and convertible notes for $835,000 were converted into shares of the Company’s common stock. At December 31, 2019, the balance of the convertible notes with adjustable conversion features was $845,000.
|
During the year ended December 31, 2019, the Company issued fourteen convertible notes payable with adjustable conversion features to three lenders for aggregate proceeds of $985,000, bearing interest at 8% to 10% per annum, unsecured, and maturing between January 2020 and November 2020. At the option of the holder, the notes are convertible into shares of common stock of the Company at a price per share discount of 58% to 62% of the market price of the Company’s common stock, as defined, for 15 to 25 days preceding a conversion notice. As a result, the Company determined that the conversion options 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 during 2019, the initial fair value of the embedded conversion feature totaled $1,727,517 (see Note 9), of which $924,795 was recorded as debt discount, and the remainder of $802,722 was recorded as private placement costs. In addition, two of the convertible notes issued in 2019, that aggregated $150,000, were issued with warrants to purchase 50,287,356 shares of the Company’s common stock at prices ranging from $0.0015 to $0.0058 per share (See Note 11). The Company calculated the relative fair value of the warrants was $60,205 using a Black Scholes option-pricing model (see Note 11), which was recorded as debt discount.
During the year ended December 31, 2019, one lender elected to convert seven notes totaling $835,000 plus interest of $56,613 (total of $891,613) into 578,914,179 shares of the Company’s common stock at conversion prices ranging from $0.00081 to $0.0087 per share. On the dates of conversion, the closing price of the Company’s common stock ranged from $0.0018 to $0.0178 per share, or total fair value of shares of $2,006,772. The Company followed the general extinguishment model to record the settlement of the debt. The debt and accrued interest totaled $891,613, the related unamortized discount totaled ($232,645), and the shares issued were measured at their fair value of $2,006,772. The difference of $1,347,804 was recorded as loss on extinguishment of debt. In addition, the bifurcated conversion option derivatives, after a final mark-up to $1,213,790, were removed and recorded as a gain on extinguishment of derivative liabilities.
At December 31, 2018, the balance of unamortized discount on convertible notes with adjustable conversion features was $521,763. During the year ended December 31, 2019, debt discount of $985,000 was recorded, debt discount amortization of $851,413 was recorded, and $232,645 of debt discount was removed related to debt that was converted. At December 31, 2019, the balance of the unamortized discount was $422,705.
At December 31, 2019 and 2018, accrued interest due for all convertible notes was $1,192,021 and $1,099,005, 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, 2019 and 2018 was $149,628 and $106,848, respectively.
Note 4 - Convertible Notes Payable – Related Parties
At December 31, 2019 and December 31, 2018, convertible notes payable - related parties consist of 12 convertible notes payable in the aggregate of $355,500. The notes are unsecured and are due December 31, 2020. Six notes totaling $268,000 are payable to the Company’s Chief Executive Officer, at a compounded interest rate of 8% per annum; two notes totaling $57,000 are payable 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 payable 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, 2018, accrued interest due for the convertible notes – related parties was $563,805. During the year ended December 31, 2019, interest of $72,467 was accrued. At December 31, 2019, accrued interest due for the convertible notes – related parties was $636,272.
Note 5 - Notes Payable
Notes payable consisted of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Unsecured-in default
|
|
|
|
|
|
|
(a) Promissory notes-in default
|
|
$
|
413,824
|
|
|
$
|
413,824
|
|
(b) Promissory notes – StrikeForce Investor Group-in default
|
|
|
1,225,000
|
|
|
|
1,225,000
|
|
(c) Promissory notes issued by BlockSafe ($475,000 and zero in default at December 31, 2019 and 2018, respectively)
|
|
|
475,000
|
|
|
|
775,500
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
|
|
|
|
|
|
|
(d) Notes payable
|
|
|
271,550
|
|
|
|
-
|
|
Total notes payable principal outstanding
|
|
|
2,385,374
|
|
|
|
2,414,324
|
|
Debt discount
|
|
|
-
|
|
|
|
(195,654
|
)
|
Notes payable, net of discount
|
|
|
2,385,374
|
|
|
|
2,218,670
|
|
Less current portion of notes payable
|
|
|
2,237,484
|
|
|
|
2,218,670
|
|
Long term notes payable
|
|
$
|
147,890
|
|
|
$
|
-
|
|
(a)
|
Notes payable, with interest from 8% to 14% per annum, due on various dates from December 2011 to July 2017 and are currently in default. At December 31, 2018, the balance of the accrued interest on the notes payable-various was $505,454. During the year ended December 31, 2019, $45,556 of interest was accrued. At December 31, 2019, accrued interest on the notes payable was $551,009.
|
|
|
(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, 2018, the balance of the accrued interest on the notes payable-SIG was $1,509,844. During the year ended December 31, 2019, $122,500 of interest was accrued. At December 31, 2019, accrued interest on the notes payable-SIG was $1,632,344.
|
|
|
(c)
|
At December 31, 2018, the Company’s consolidated subsidiary BlockSafe (see Note 1) had $775,500 of outstanding unsecured promissory notes, bearing interest at 8% per annum, and maturing through September 2019. During the year ended December 31, 2019, $5,000 of the unsecured promissory notes were paid, and note holders agreed to exchange $295,500 of principal into a financing obligation (see Note 7). At December 31, 2019, the balance of the unsecured promissory notes was $475,000, and the notes are currently in default.
|
|
|
|
At December 31, 2018, the balance of the unamortized discount on the unsecured promissory notes was $195,653. During the year ended December 31, 2019, debt discount amortization of $195,653 was recorded and at December 31, 2019, the balance of the discount was zero.
|
|
At December 31, 2018, the balance of the accrued interest on the unsecured promissory notes was $46,387. During the year ended December 31, 2019, $43,856 of interest was accrued and $19,700 of accrued interest was converted into a financing obligation (See Note 7). At December 31, 2019, accrued interest on the unsecured promissory notes was $70,543.
|
|
|
(d)
|
During the year ended December 31, 2019, the Company entered into four note payable agreements aggregating $315,500, bearing interest from 31.8% to 148% per annum, each agreement secured by substantially all of the assets of the Company, and maturing between March 2020 and April 2021. During the year December 31, 2019, the Company made principal payments of $43,550, and at December 31, 2019, the outstanding balance of the secured note agreements was $271,550. During the year ended December 31, 2019, $14,944 of interest was accrued and paid on the secured note agreements. Two notes with balances of approximately $44,000 each were due on March 28, 2020, and April 2, 2020, and were not paid when due. The Company and lenders are in negotiations to extend the due date of the loans.
|
At December 31, 2019 and 2018, accrued interest due for all notes payable above was $2,253,898 and $2,061,686, respectively, and is included in accrued interest in the accompanying balance sheets. Interest expense for notes payable for the year ended December 31, 2019 and 2018 was $192,212 and $214,447, respectively.
Note 6 - Notes Payable – Related Parties
Notes payable-related parties 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, 2020. At December 31, 2019 and 2018, the balance due under these notes was $742,513.
At December 31, 2018, accrued interest due for the notes was $703,944. During the year ended December 31, 2019, interest of $56,080 was accrued. At December 31, 2019, accrued interest due for the notes was $760,024.
Note 7 – Financing Obligation
In 2018, the Company’s consolidated subsidiary BlockSafe issued promissory notes to nineteen unrelated parties aggregating $775,500 (see Note 5). As part of each promissory note agreement BlockSafe agreed to pay a financing obligation to the note holders equal to the note principal in tokens, as defined, to be issued by BlockSafe. In addition, in December 2018, BlockSafe agreed to issue tokens to an unrelated party for receipt of $50,000. At December 31, 2018, the total of the financing obligation for BlockSafe was $825,500. During the year ended December 31, 2019, BlockSafe agreed to issue tokens to four unrelated parties for receipt of $122,500. In addition, holders of unsecured promissory notes issued by BlockSafe agreed to exchange $295,500 principal and $19,700 of accrued interest into the financing obligation to be paid by tokens to be issued by BlockSafe. At December 31, 2019, the total of the financing obligation for BlockSafe totaled $1,263,200. At December 31, 2019 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. At December 31, 2019, as the tokens do not exist yet, and any amounts received for tokens are not considered equity, management determined that 100% of the obligation of $1,263,200 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, at December 31, 2019, a financing obligation of $1,263,200 has been recorded.
Note 8 – Contingent Payment Obligation
On September 6, 2017, the Company entered into a litigation funding agreement with Therium Inc. (subsequently Therium Luxembourg) and VGL Capital, LLC (collectively the “Funders”). Under the agreement, the Company received $1,500,000 from the Funders to allow the Company to pursue patent enforcement actions against infringements of its patents (see Note 14). In exchange, the Funders are entitled to receive, after the payment of legal fees, the first $1,500,000 from the gross proceeds of any claims awarded, 10% of any additional claim proceeds until the Funders have received an additional $7,500,000, and 2.5% of any claim proceeds thereafter. The Funders shall be paid only in the event that the Company achieves recoveries of claim proceeds. At December 31, 2019 and 2018, 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.
Note 9 – Derivative Financial Instruments
At December 31, 2019, the Company had convertible promissory notes outstanding that are convertible into shares of common stock of the Company at the option of the holders at price per share discounts ranging from 20% to 62% 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, 2018, the balance of the derivative liabilities was $1,313,904. During the year ended December 31, 2019, the Company recorded additions of $1,727,518 related to the conversion features of notes issued during the period (see Note 3), and an decrease in fair value of derivatives of $311,197. In addition, the Company recorded a decrease in derivative liability of $1,213,790 related to derivative liabilities that were extinguished. At December 31, 2019, the balance of the derivative liabilities was $1,516,435.
At December 31, 2019, the fair value of the Company’s embedded derivatives were estimated using the Monte Carlo simulation model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the conversion features, and future dividends. The fair value of the embedded derivative was determined using the following assumptions:
|
|
December 31, 2019
|
|
|
January 2019 to December 2019
(dates of inception)
|
|
|
December 31, 2018
|
|
Conversion feature:
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
1.59
|
%
|
|
0.18%-1.60
|
%
|
|
|
0.25
|
%
|
Expected volatility
|
|
145%-155
|
%
|
|
118%-191
|
%
|
|
|
129
|
%
|
Expected life (in years)
|
|
0.25 to 1 year
|
|
|
1 year
|
|
|
1 year
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion feature
|
|
$
|
1,516,435
|
|
|
$
|
1,727,518
|
|
|
$
|
1,313,904
|
|
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 - Operating Lease
In January 2019, the Company entered into a noncancelable operating lease for its headquarters office requiring payments of $4,409 per month, payments increasing 3% each year, and ending on January 31, 2024. At December 31, 2019, the remaining lease term was 4.08 years. The Company does not have any other leases.
Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The operating lease ROU asset includes any lease payments made and excludes lease incentives.
The components of lease expense and supplemental cash flow information related to leases for the period are as follows:
|
|
Year ended
December 31, 2019
|
|
Lease Cost
|
|
|
|
Operating lease cost (included in general and administration in the Company’s statement of operations)
|
|
$
|
56,185
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities for the year ended December 31, 2019
|
|
$
|
52,913
|
|
Weighted average remaining lease term – operating leases (in years)
|
|
|
4.1
|
|
Average discount rate – operating leases
|
|
|
4.0
|
%
|
The supplemental balance sheet information related to leases for the period is as follows:
|
|
At December 31, 2019
|
|
Operating leases
|
|
|
|
Long-term right-of-use assets
|
|
|
205,970
|
|
|
|
|
|
|
Short-term operating lease liabilities
|
|
$
|
46,953
|
|
Long-term operating lease liabilities
|
|
|
162,789
|
|
Total operating lease liabilities
|
|
$
|
209,742
|
|
Maturities of the Company’s lease liabilities are as follows:
Year Ending
|
|
Operating Leases
|
|
2020
|
|
$
|
54,501
|
|
2021
|
|
|
56,136
|
|
2022
|
|
|
57,820
|
|
2023
|
|
|
63,611
|
|
2024
|
|
|
4,963
|
|
Total lease payments
|
|
|
237,031
|
|
Less: Imputed interest/present value discount
|
|
|
(27,290
|
)
|
Present value of lease liabilities
|
|
$
|
209,741
|
|
Lease expenses were $51,503 and $51,330 during the years ended December 31, 2019 and 2018, respectively.
Note 11 – Stockholders’ Deficit
Preferred Stock
On October 21, 2010, the Company amended its Articles of Incorporation in New Jersey to authorize 10,000,000 shares of preferred stock, par value $0.10. The designations, rights, and preferences of such preferred stock are to be determined by the Board of Directors. On November 15, 2010, the Company changed its domicile from the State of New Jersey to the State of Wyoming.
In addition to the 10,000,000 shares of preferred stock authorized on October 21, 2010, on January 10, 2011, 100 shares of preferred stock were designated as Series A Preferred Stock and 100,000,000 shares were designated as Series B Preferred Stock. The bylaws under the Wyoming Incorporation were amended to reflect the rights and preferences of each additional new designation.
The Series A Preferred Stock collectively has voting rights equal to eighty percent of the total current issued and outstanding shares of common stock. If at least one share of Series A Preferred Stock is outstanding, the aggregate shares of Series A Preferred Stock shall have voting rights equal to the number of shares of common stock equal to four times the sum of the total number of shares of common stock issued and outstanding, plus the number of shares of Series B Preferred Stock (or other designated preferred stock) which are issued and outstanding.
The Series B Preferred Stock has preferential liquidation rights in the event of any liquidation, dissolution or winding up of the Company, such liquidation rights to be paid from the assets of the Company not delegated to parties with greater priority at $1.00 per share or, in the event an aggregate subscription by a single subscriber of the Series B Preferred Stock is greater than $100,000,000, $0.997 per share. The Series B Preferred Stock shall be convertible to a number of shares of common stock equal to the price of the Series B Preferred Stock divided by the par value of the Series B Preferred Stock. The option to convert the shares of Series B Preferred Stock may not be exercised until three months following the issuance of the Series B Preferred Stock to the recipient shareholder. The Series B Preferred Stock shall have ten votes on matters presented to the shareholders of the Company for one share of Series B Preferred Stock held. The initial price of the Series B Preferred Stock shall be $2.50, (subject to adjustment by the Company’s Board of Directors) until such time, if ever, the Series B Preferred Stock are listed on a secondary and/or public exchange.
In February 2014, the Company's Board of Directors amended the conversion feature of the Series B Preferred Stock, to permit conversion to common shares at a 40% market discount to current market value at the time the Company receives a conversion request. Current market value is defined as the average of the immediately prior five trading day's closing prices. Additionally, when Series B Preferred Stock shares convert to the Company's common stock, the minimum price discount floor level is set at $0.005, as decided by the Company's Board of Directors.
Series A Preferred Stock
In 2011, the Company issued three shares of non-convertible Series A Preferred Stock valued at $329,000 per share, or $987,000 in aggregate to three members of the management team. The Series A Preferred Stock are convertible into four times the total number of common shares plus the total number of shares of Series B preferred stock issued and outstanding at the time of conversion and have voting rights equal to eighty percent of the total issued and outstanding shares of the Company's common stock. This effectively provided the management team, upon retention of their Series A Preferred Stock, voting control on matters presented to the shareholders of the Company. The shareholders of the Series A Preferred Stock have each irrevocably waived their conversion rights relating to the Series A Preferred Stock issued.
Series B Preferred Stock
The Series B Preferred Stock has preferential liquidation rights in the event of any liquidation, dissolution or winding up of the Company, such liquidation rights to be paid from the assets of the Company not delegated to parties with greater priority at $1.00 per share or, in the event an aggregate subscription by a single subscriber of the Series B Preferred Stock is greater than $100,000,000, $0.997 per share. The Series B Preferred Stock shall be convertible to a number of shares of common stock equal to the price of the Series B Preferred Stock divided by the par value of the Series B Preferred Stock. The option to convert the shares of Series B Preferred Stock may not be exercised until three months following the issuance of the Series B Preferred Stock to the recipient shareholder. The Series B Preferred Stock shall have ten votes on matters presented to the shareholders of the Company for one share of Series B Preferred Stock held. The initial price of the Series B Preferred Stock shall be $2.50, (subject to adjustment by the Company’s Board of Directors) until such time, if ever, the Series B Preferred Stock are listed on a secondary and/or public exchange.
At January 1, 2018, there were 70,001 shares of Series B Preferred Stock outstanding. During the year ended December 31, 2018, 33,334 shares of Series B Preferred Stock were converted into 8,333,500 shares of the Company’s common stock (see below). At December 31, 2018 and 2019, there were 36,667 shares of Series B Preferred Stock outstanding.
Common Stock
During the year ended December 31, 2019, the Company issued an aggregate of 578,944,179 shares of its common stock as follows:
|
·
|
The Company issued 30,000 shares of its common stock for services, valued at $134.
|
|
|
|
|
·
|
A convertible note holder converted $835,000 of principal and $56,610 of accrued interest into 578,914,179 shares of common stock at conversion prices ranging from $0.00081 to $0.0087 per share, with a total fair value of $2,006,773.
|
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, with total fair value of $470,358.
|
Warrants
In November 2019, in connection with the issuance of two convertible notes that aggregated $150,000 (See Note 4), the Company issued warrants to purchase 50,287,356 shares of the Company's common stock. The warrants were exercisable immediately, at exercise prices ranging from 0.0015 to 0.0058 per share, and expire in 5 years. The warrants are classified within stockholders’ deficit, and the proceeds were allocated between the convertible notes and warrants based on their relative fair value. The fair value of the warrants was determined to be $60,205 using a Black‑Scholes option pricing model based on the following assumptions: (i) volatility rate of 145%, (ii) discount rate of 1.74%, (iii) zero expected dividend yield, and (iv) expected life of 5 years. The fair value of the warrants was recorded as debt discount and additional paid-in-capital.
The table below summarizes the Company’s warrant activities for the years ended December 31, 2019 and 2018:
|
|
Number of
Warrant Shares
|
|
|
Exercise Price Range
Per Share
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, January 1, 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
50,287,356
|
|
|
0.0015-0.0058
|
|
|
$
|
0.002237
|
|
Canceled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, December 31, 2019
|
|
|
50,287,356
|
|
|
$
|
0.0015-0.0058
|
|
|
$
|
0.002237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding and exercisable, December 31, 2019
|
|
|
50,287,356
|
|
|
$
|
0.0015-0.0058
|
|
|
$
|
0.002237
|
|
At December 31, 2019, the intrinsic value of the warrants was $70,833.
The following table summarizes information concerning outstanding and exercisable warrants as of December 31, 2019:
|
|
|
Warrants Outstanding and Exercisable
|
|
Range of Exercise Prices
|
|
|
Number Outstanding
|
|
|
Average Remaining Contractual Life (in years)
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.0015
|
|
|
|
41,666,667
|
|
|
|
5.00
|
|
|
$
|
0.0015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.0058
|
|
|
|
8,620,689
|
|
|
|
5.00
|
|
|
$
|
0.0058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.0015 - $0.0058
|
|
|
|
50,287,356
|
|
|
|
5.00
|
|
|
$
|
0.002237
|
|
Note 12 – Stock-Based Compensation
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.
At January 1, 2018, the Company had 259,000,001 options outstanding with remaining estimated lives of approximately eight years. In July 2018, the Company granted options to purchase an aggregate of 500,001 shares of its common stock to a consulting firm. The options vested over three months, were exercisable at an exercise price of $0.016 per share and expired in July 2019. The fair value of the options was determined to be $3,855 and was expensed over the term of the options. At December 31, 2018, the Company had 259,500,002 options outstanding.
In July 2019, option to purchase 500,001 shares of common stock expired. In December 2019, the Company granted options to purchase an aggregate of 57,500,000 shares of its common stock to employees. The options have an exercise price of $0.0041 per share, vest over six months, and expire in 10 years. The fair value of the options was determined to be $235,750 using a Black-Scholes option pricing model based on the following assumptions: (i) volatility rate of 141%, (ii) discount rate of 1.54%, (iii) zero expected dividend yield, and (iv) expected life of 5.25 years. The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the stock options granted is estimated using the “simplified” method, whereby the expected term equals the average of the vesting term and the original contractual term of the stock option. The expected dividend yield was based on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future
For the years ended December 31, 2019 and 2018, the Company recognized compensation costs of $20,870 and $355,277, respectively, related to the fair value of vested options.
The table below summarizes the Company’s stock option activities for the period January 1, 2018 to December 31, 2019:
|
|
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, December 31, 2018
|
|
|
259,500,002
|
|
|
0.0057-2,242,500
|
|
|
|
0.0062
|
|
Granted
|
|
|
57,500,000
|
|
|
|
0.0041
|
|
|
|
0.0041
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(500,001
|
)
|
|
|
0.016
|
|
|
|
0.016
|
|
Balance outstanding, December 31, 2019
|
|
|
316,500,001
|
|
|
$
|
0.0041-2,242,500
|
|
|
$
|
0.00586
|
|
Balance exercisable, December 31, 2019
|
|
|
264,213,117
|
|
|
$
|
0.0041-2,242,500
|
|
|
$
|
0.00586
|
|
At December 31, 2019 and 2018, the intrinsic value of outstanding options was zero.
The following table summarizes information concerning the Company’s stock options as of December 31, 2019:
|
|
|
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
|
|
|
|
7.8
|
|
|
|
0.0057
|
|
|
|
63,000,000
|
|
|
|
7.8
|
|
|
|
0.0057
|
|
$
|
0.00625
|
|
|
|
196,000,000
|
|
|
|
6.5
|
|
|
|
0.0062
|
|
|
|
196,000,000
|
|
|
|
6.5
|
|
|
|
0.0062
|
|
$
|
0.0041
|
|
|
|
57,500,000
|
|
|
|
9.7
|
|
|
|
0.0041
|
|
|
|
4,713,115
|
|
|
|
9.7
|
|
|
|
0.0041
|
|
$
|
0.0041-975,000,000
|
|
|
|
316,500,001
|
|
|
|
8.0
|
|
|
$
|
0.00586
|
|
|
|
264,213,117
|
|
|
|
8.0
|
|
|
$
|
0.00586
|
|
Note 13 - Income Tax Provision
The income tax provision consists of the following for the year ended:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Federal
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,522
|
|
|
|
1,500
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
1,522
|
|
|
$
|
1,500
|
|
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,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Federal statutory income tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State tax, net of federal benefit
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance on net operating loss carry-forwards
|
|
|
(26.0
|
)
|
|
|
(26.0
|
)
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Deferred tax assets and liabilities consist of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Net deferred tax assets:
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
561,000
|
|
|
$
|
555,000
|
|
Private placement costs
|
|
|
320,000
|
|
|
|
112,000
|
|
Operating lease liability
|
|
|
54,000
|
|
|
|
-
|
|
Loss on extinguishment of debt
|
|
|
438,000
|
|
|
|
88,000
|
|
Net operating loss carryforwards
|
|
|
5,431,000
|
|
|
|
4,880,000
|
|
Gross deferred tax assets
|
|
|
6,804,000
|
|
|
|
5,635,000
|
|
Less valuation allowance
|
|
|
(5,775,000
|
)
|
|
|
(4,980,000
|
)
|
Total deferred tax assets
|
|
|
1,029,000
|
|
|
|
655,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Derivative gain
|
|
|
865,000
|
|
|
|
469,000
|
|
Debt discount
|
|
|
110,000
|
|
|
|
186,000
|
|
Operating lease right-of-use asset
|
|
|
54,000
|
|
|
|
-
|
|
Total deferred tax liabilities
|
|
|
1,029,000
|
|
|
|
655,000
|
|
Net deferred tax asset (liability)
|
|
$
|
-
|
|
|
$
|
-
|
|
The provisions of ASC Topic 740, Accounting for Income Taxes, require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. For the years ended December 31, 2019 and 2018, based on all available objective evidence, including the existence of cumulative losses, the Company determined that it was more likely than not that the net deferred tax assets were not fully realizable. Accordingly, the Company established a full valuation allowance against its net deferred tax assets. The Company intends to maintain a full valuation allowance on net deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance. During the years ended December 31, 2019 and 2018, the valuation allowance increased by $795,000 and $305,000, respectively.
At December 31, 2019 and 2018, the Company had available Federal and state net operating loss carryforwards (“NOL”s) to reduce future taxable income. For Federal NOL purposes approximately $22.5 million and $20.6 million was available at December 31, 2019 and 2018. For state NOL purposes approximately $10 million and $8 was available at December 31, 2019 and 2018, respectively. The Federal carryforwards expire on various dates through 2039 and the state carryforwards expire through 2036. Due to restrictions imposed by Internal Revenue Code Section 382 regarding substantial changes in ownership of companies with loss carryforwards, the utilization of the Company’s NOL may be limited as a result of changes in stock ownership. NOLs incurred subsequent to the latest change in control are not subject to the limitation.
The Company’s operations are based in New Jersey and it is subject to Federal and New Jersey state income tax. Tax years after 2015 are open to examination by United States and state tax authorities.
The Company adopted the provisions of ASC 740, which requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any tax benefit can be recorded in the financial statements. ASC 740 also provides guidance on the recognition, measurement, classification and interest and penalties related to uncertain tax positions. As of December 31, 2019 and 2018, no liability for unrecognized tax benefits was required to be recorded or disclosed.
Note 14 - 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. 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. In October 2019, the litigation against the remaining two parties was dismissed. Management is currently considering its options regarding the two parties, Duo and Centrify.
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. The Company’s management is currently considering its options in the Massachusetts litigation.
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. 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 believe 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 disagreed with the Court’s decision and an appeal was filed by its attorney in July 2019. In October 2019, the Supreme Court of the United States denied the Company’s petition for a writ of certiorari in StrikeForce Technologies, Inc. v. SecureAuth Corp (19-103). Thus, the claims asserted against SecureAuth in the Central District of California, case no. 2:17-cv-04314-JAK-SK, remain invalid under 35 U.S.C. 101. The Company’s three patents contain a total of 108 claims, 43 claims were deemed invalid, however, 65 claims are still valid. Despite the Supreme Court’s decision, the Company’s Protect ID® products still retain patent protection and the Company’s management intends to further expand those protections with new patents in the coming months.
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 expires 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. During the years ended December 31, 2019 and 2018, the Company recorded revenue of $440,628 and $162, respectively, from Cyber Safety.
Note 15 – Subsequent Events
Financing Transactions
Subsequent to December 31, 2019, the Company issued six unsecured convertible promissory notes with four unrelated parties aggregating $472,000, bearing interest at 8% to 10% per annum, and maturing from October 2020 through March 2021. The notes are convertible at discount rates of 61% to 62% of the price of the Company’s common stock, as defined. One of the notes included underlying warrants to purchase 25,000,000 shares of the Company’s common stock at an exercise price of $0.0015.
Subsequent to December 31, 2019, convertible notes aggregating $502,680 of principal and $37,364 of accrued interest were converted into 608,990,283 shares of common stock at conversion prices ranging from $0.00024 to $0.001566 per share.
Subsequent to December 31, 2019, the Company issued two secured promissory notes with two unrelated parties aggregating $206,851, bearing interest at 8% to 35% per annum, and maturing in three to five months through July 2020. Subsequent to December 31, 2019, the Company repaid principal of $132,384 and accrued interest of $49,249, for a total of $181,633, towards the balance of six open notes payable.
Subsequent to December 31, 2019, the Company issued one unsecured promissory note with its CEO for $10,000, non-interest bearing, with no specified maturity date.
The Company applied for funding pursuant to the Small Business Administration program. The Paycheck Protection Program provides forgivable funding for payroll and related costs as well as some non-payroll costs. The Company has applied for funding and, to date, has received (on April 17, 2020) funding in the amount of $313,212.
Subsequent to December 31, 2019, the Company issued 7,500 shares of common stock for services.
Reverse Stock Split and Increase in Authorized Shares
In April 2020, the Company’s Board of Directors approved a 500:1 reverse stock split that was approved by stockholders controlling 80% of the Company’s common stock. As of the date of this filing, the reverse stock split is not effective and all share and per share amounts on the accompanying financial statements are presented in pre-split amounts. The pro-forma loss per share based on the effect of the reverse stock split is as follows:
|
|
As presented
|
|
|
Pro-forma
for 500:1 stock split
|
|
Net loss attributable to StrikeForce Technologies, Inc.
|
|
$
|
(3,527,985
|
)
|
|
$
|
(3,527,985
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
|
|
|
|
|
|
|
-Basic and diluted
|
|
$
|
-
|
|
|
$
|
(0.67
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
-Basic and diluted
|
|
|
2,607,705,387
|
|
|
|
5,215,411
|
|
In April 2020, an increase of the Company’s common stock from 12,000,000,000 to 17,000,000,000 shares was authorized.
Covid-19
In March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many businesses. This outbreak could decrease spending, adversely affect demand for the Company’s products, and harm the Company’s business and results of operations. It is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company’s business or results of operations, financial condition, or liquidity, at this time.