Notes to
the
Financial Statements
Note 1 -
Organization and Operations
StrikeForce Technical Services Corporation was incorporated in August 2001
under the laws of
the
S
tate of New Jersey
.
On September 3, 2004, the Company changed its name to StrikeForce Technologies, Inc. (the "Company"). On November 15, 2010, the Company was re-domiciled
under the laws of
the
S
tate of Wyoming. The Company's operations are based in Edison, N
ew
J
ersey.
The Company is a software development and services company. The Company owned the exclusive right to license and has developed various identification protection software products that were developed to protect computer networks from unauthorized access and to protect network owners and users from identity theft. The Company has developed a suite of products based upon the licenses and its strategy is to develop and exploit the products for customers in the areas of financial services, e-commerce, corporate, government, health care and consumer sectors.
In February 2014, a 1:1,500 reverse stock split of the Company's issued and outstanding shares of common stock was ratified, effective upon the filing of an amendment to the Company's Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in March 2014.
In December 2014, a 1:650 reverse stock split of the Company's issued and outstanding shares of common stock was ratified, effective upon the filing of an amendment to the Company's Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in January 2015.
In June 2015, a 1:1,000 reverse stock split of the Company's issued and outstanding shares of common stock was ratified, effective upon the filing of an amendment to the Company's Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in July 2015.
All shares and per share amounts in the financial statements have been adjusted to give retroactive effect to the reverse stock splits adopted by the Company as if the reverses had occurred at the beginning of the earliest period presented.
Liquidity and 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, during the year ended December 31, 2015, the Company incurred a net loss of $1,807,245, used cash in operations of $856,806, and at December 31, 2015, had a stockholders' deficit of $13,724,487. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At December 31, 2015, the Company had cash on hand in the amount of $37,153. Subsequent to December 31, 2015, as part of the settlement of a litigation matter against an outside party, the Company received a payment of $4.9 million, net of legal fees, which will be was recorded as other income in the first quarter of 2016. In addition subsequent to December 31, 2015, the Company repaid approximately $1.8 million of convertible and notes payable principal and accrued interest, and converted approximately $247,000 of convertible notes and accrued interest into 2.1 billion shares of the Company's common stock. Management estimates that the current funds on hand will be sufficient to continue operations through the next twelve months. The ability of the Company to continue as a going concern is dependent upon the Company's ability to raise additional funds and implement its business plan. Management is currently seeking additional funds, primarily through the issuance of debt and equity securities for cash to operate our business. Currently, management is attempting to increase revenues and improve gross margins by a revised sales strategy. The Company is redirecting its sales focus from direct sales to domestic and international sales channel, where the Company is 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 and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company's ability to continually increase its customer base and realize increased revenues from recently signed contracts. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case of equity financing.
Note 2 -
Summary of Significant Accounting Policies
Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to accounting for potential liabilities and the assumptions made in valuing stock instruments issued for services and derivative liabilities. Actual results could differ from those estimates.
Revenue Recognition Policy
The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. When the Company recognizes revenue, no provisions are made for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues. In addition to the aforementioned general policy, the following are the specific revenue recognition policies for each major category of products and services:
Software, Services and Maintenance
Revenue from time and service contracts is recognized as the services are provided. Revenue from delivered elements of one-time charge licensed software is recognized at the inception of the license term, provided the Company has vendor-specific objective evidence of the fair value of each delivered element. Revenue is deferred for undelivered elements
. The Company
recognizes revenue from the sale of software licenses when the four criteria discussed above are met. Delivery generally occurs when the product is delivered to a common carrier or the software is downloaded via email delivery or an FTP web site. The Company assesses collection based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. The Company does not request collateral from customers. If the Company determines that collection of a fee is not reasonably assured, the Company defers the fee and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. Revenue from monthly software licenses is recognized on a subscription basis.
ASP Hosted Cloud Services
The Company offers an Application Service Provider Cloud Service whereby customer usage transactions are invoiced monthly on a cost per transaction basis. The service is sold via the execution of a
Service
Agreement between the Company and the
customer
. Initial set-up fees are recognized over the period in which the services are performed.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over
the estimated useful lives of the respective assets as follows:
|
|
Estimated Useful Life (Years)
|
|
|
|
|
|
Computer equipment
|
|
|
5
|
|
|
|
|
|
|
Computer software
|
|
|
3
|
|
|
|
|
|
|
Furniture and fixture
|
|
|
7
|
|
|
|
|
|
|
Office equipment
|
|
|
7
|
|
Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of operations.
Patent Costs
Patent costs consist of patent-related legal and filing fees for internally developed patents and costs to acquire patents. Patent cost is amortized over its legal life, or estimated useful life, or the term of the contract, whichever is shorter. The legal lives of the patents are generally 17 to 20 years for domestic patents and 5 to 20 years for foreign patents.
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.
The Company had no such asset impairments at December 31, 2015 and 2014.
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 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.
To determine the number of authorized but unissued shares available to satisfy outstanding convertible securities, the Company uses a sequencing method to prioritize its convertible securities as prescribed by ASC 815-40-35. At each reporting date, the Company reviews its convertible securities to determine their classification is appropriate.
Fair Value of Financial Instruments
Effective January 1, 2008, fair value measurements are determined by the Company's adoption of authoritative guidance issued by the FASB, with the exception of the application of the statement to non-recurring, non-financial assets and liabilities as permitted. The adoption of the authoritative guidance did not have a material impact on the Company's fair value measurements. Fair value is defined in the authoritative guidance 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, 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, 2015 and 2014, the Company's balance sheets included the fair value of derivative liabilities of $989,019 and $1,415,402, respectively, which were based on Level 2 measurements.
The recorded amounts for accounts payable, accrued expenses and convertible debentures 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 and warrants are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options and warrants 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, 2015 and 2014, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have an anti-dilutive effect. The potentially dilutive securities consisted of the following as of:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Options
|
|
|
1,000,001
|
|
|
|
154
|
|
Warrants
|
|
|
30
|
|
|
|
4
|
|
Shares issuable on conversion of notes
|
|
|
291,470
|
|
|
|
551
|
|
|
|
|
1,291,501
|
|
|
|
709
|
|
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, 2015 and 2014, advertising, sales and marketing expenses were $75,591 and $57,400, respectively.
Research and Development Costs
Costs incurred for research and development are expensed as incurred. The salaries, benefits, and overhead costs of personnel conducting research and development of the Company's software products comprise research and development expenses. Purchased materials that do not have an alternative future use are also expensed.
For the years ended December 31, 2015 and 2014, research and development costs were $262,973 and $287,646, respectively.
Significant Concentrations
For the year ended December 31, 2015, sales to one customer comprised 66% of revenues. For the year ended December 31, 2014, sales to two customers comprised 46% and 23% of revenues, respectively. At December 31, 2015, two customers comprised 67% and 17% of accounts receivable, respectively. At December 31, 2104, three customers comprised 42%, 36%, and 12% of accounts receivable, respectively.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consisted primarily of cash and accounts receivable. From time to time, the amount of the Company's cash on deposit may exceed the federally insured limits. Management believes that the financial institution that holds the Company's cash is financially sound and, accordingly, minimal credit risk exists. The Company does not require collateral and maintains reserves for potential credit losses related to its accounts receivables. Such losses have historically been immaterial and have been within management's expectations.
Recent Accounting Pronouncements
In August, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity's ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company's financial statements and disclosures.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company's financial statements 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 statement presentation or disclosures.
Note 3 -
Property and Equipment
Property and equipment, stated at cost, less accumulated depreciation
consisted of the following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
76,953
|
|
|
$
|
76,952
|
|
|
|
|
|
|
|
|
|
|
Computer software
|
|
|
28,988
|
|
|
|
26,634
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixture
|
|
|
10,157
|
|
|
|
10,157
|
|
|
|
|
|
|
|
|
|
|
Office equipment
|
|
|
16,511
|
|
|
|
16,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,609
|
|
|
|
130,254
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(128,425
|
)
|
|
|
(124,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,184
|
|
|
$
|
5,522
|
|
Depreciation expense
for the year ended December 31, 2015 and 2014 was
$3,692 and $3,983
, respectively.
Note 4 - Patents
Patents, stated at cost, less accumulated amortization, consisted of the following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
|
|
|
|
|
|
|
Patents
|
|
|
22,329
|
|
|
|
22,329
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
(6,419
|
)
|
|
|
(4,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,910
|
|
|
$
|
17,965
|
|
Amortization expense for the years ended December 31, 2015 and 2014 was $2,055 and $2,054, respectively.
Note 5 - Convertible Notes Payable
Convertible notes payable consisted of the following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Secured
|
|
|
|
|
|
|
(a) DART
|
|
$
|
542,588
|
|
|
$
|
542,588
|
|
|
|
|
|
|
|
|
|
|
Unsecured
|
|
|
|
|
|
|
|
|
(b) Convertible notes with fixed conversion features
|
|
|
910,512
|
|
|
|
910,512
|
|
(c) Convertible notes with adjustable conversion features
|
|
|
824,861
|
|
|
|
995,168
|
|
Total convertible notes
|
|
|
2,277,961
|
|
|
|
2,448,268
|
|
Discount on convertible notes
|
|
|
(14,266
|
)
|
|
|
(866,161
|
)
|
Convertible notes, net of discount
|
|
|
2,263,695
|
|
|
|
1,582,107
|
|
Long-term portion
|
|
|
-
|
|
|
|
(97,404
|
)
|
|
|
|
|
|
|
|
|
|
Convertible notes, current maturities
|
|
$
|
2,263,695
|
|
|
$
|
1,484,703
|
|
_________________
(a)
|
At December 31, 2015, $542,588 in aggregate principal amount of the DART/Citco Global debentures was issued and outstanding and are secured through the note holder's claim on the Company's intellectual property. The secured convertible debentures are past maturity. Due to the adjustable conversion price feature of the secured convertible debentures, our obligation to issue shares upon conversion of the secured convertible debentures owed to DART is potentially limitless. DART did not process any conversions in fiscal 2015 or 2014 and 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. In connection with the secured convertible debentures with DART/Citco Global, we granted DART/Citco Global a secured interest in all of our assets. Under the terms of the secured debentures, we are restricted in our ability to issue additional securities as long as any portion of the principal or interest on the secured debentures remains outstanding. During 2015 or 2014, we did not obtain DART/Citco Global's written consent related to any of our financing agreements.
|
(b)
|
Convertible notes payable consisted of fourteen unsecured convertible notes ranging in interest rates of 0% per annum to 18% per annum. The notes are convertible at a fixed amount into 44 shares of the Company's common stock, at fixed per share amounts ranging from $1,950,000 to $9,750,000,000 per share, as defined in the agreements. The notes were due in various dates through 2015 and are all currently in default. The company is currently pursuing settlements with certain of the holders.
|
|
|
(c)
|
Convertible notes payable with adjustable conversion features consisted of twenty-one unsecured convertible notes ranging in interest rates of 4% per annum to 12% per annum. Certain of the notes carry default interest rates up to 24% per annum. The remaining principal balance of the Convertible notes included $13,581 of notes originally issued to non-related third parties from September 29, 2006 to January 23, 2009, and sold to the investors with no additional consideration to the Company. All of the notes were due in various dates through 2015 and are all currently in default except for $135,591 of notes which are due in 2016. The Company is currently pursuing settlements with certain of the holders.
|
The Notes are convertible into shares of Common Stock of the Company at the option of the holder commencing on various dates following the issuance date of the Notes and ending on the later of the maturity date or date of full payment of principal and interest. The principal amount of the Notes along with, at the holder's option, any unpaid interest and penalties, are convertible at price per share at discounts ranging from 40% to 60% of the Company's Common Stock trading market price during a certain time period, as defined in the agreements. In addition, the conversion prices are subject to adjustment in certain events, such as in conjunction with any sale, conveyance or disposition of all or substantially all of the Company's assets or consummation of a transaction or series of related transactions in which the Company is not the surviving entity.
The Company considered the current FASB guidance of "Contracts in Entity's Own Stock" which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability of whether or not within the issuers' control means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion prices of the Notes were not a fixed amount because they were subject to an adjustment based on the occurrence of future offerings or events. In addition, the Company determined that instruments with floor prices ranging from $0.004 to $0.015 were de minimus and in substance not indexed to the Company's own stock. As a result, the Company determined that the conversion features of the 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 records debt discount to the face amount of the notes, and any excess is recorded as a derivative liability.
During the year ended December 31, 2015, the Company issued $67,000 of convertible notes with interest at 10% per annum and maturing through February 2016. The notes are convertible are convertible into shares of the Company's common stock at a price per share discount ranging from 40% to 42% of the Company's common stock trading market price during a certain time period, as defined in the agreements.
During the year ended December 31, 2015, note holders converted an aggregate of $245,040 of principal and $13,195 of accrued interest into 22,691,904 shares of the Company's common stock at conversion prices ranging from $0.00024 to $39.00 per share. During the year ended December 31, 2014, note holders converted an aggregate of $925,209 of principal and $34,348 of accrued interest into 2,127 shares of the Company's common stock at conversion prices ranging from $37.70 to $72,280.00 per share.
Subsequent to December 31, 2015,
approximately $247,000 of convertible notes and accrued interest were converted into 2.1 billion shares of the Company's common stock.
Note 6 - Convertible Notes Payable – Related Parties
Convertible notes payable - related parties consisted of twelve unsecured convertible notes payable: six to the Company's Chief Executive Officer, for $268,000, at a compounded interest rate of 8% per annum; two to the Company's VP of Technology, for $57,500, interest ranging from prime plus 2% to prime plus 4% per annum; and four to a Developer who is the spouse of the Company's Chief Technology Officer, for $30,000, at a compounded interest rate of 8% per annum. All of the notes are convertible at a fixed conversion price of $9,750,000,000 per share, as defined in the agreements, and have extended due dates of December 31, 2016. The balance of the outstanding convertible notes payable - related parties was $355,500 and $355,500 as of December 31, 2015 and 2014, respectively. At December 31, 2015, all convertible notes payable-related parties are current liabilities.
At December 31, 2015 and 2014, accrued interest due for the convertible notes – related parties was $391,001 and $339,812, respectively, and is included in accrued expenses in the accompanying balance sheets. Interest expense for convertible notes payable – related parties for the year ended December 31, 2015 and 2014 was $51,189 and $47,363, respectively.
Note 7 - Notes Payable
Notes payable consisted of the following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Secured
|
|
|
|
|
|
|
(a) H. Group Partners, Inc.
|
|
$
|
310,000
|
|
|
$
|
-
|
|
(b) Promissory note - factoring
|
|
|
35,200
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Unsecured
|
|
|
|
|
|
|
|
|
(c) Promissory notes – various parties
|
|
|
875,609
|
|
|
|
397,500
|
|
(d) Promissory notes – StrikeForce Investor Group
|
|
|
1,475,000
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
2,695,809
|
|
|
|
1,897,500
|
|
Discount on secured notes payable
|
|
|
(20,027
|
)
|
|
|
-
|
|
Notes payable, net of discount
|
|
|
2,675,782
|
|
|
|
1,897,500
|
|
Long-term portion
|
|
|
(222,991
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Promissory notes, current maturities
|
|
$
|
2,452,791
|
|
|
$
|
1,897,500
|
|
_______________
(a)
|
In May 2015, per the terms of a Security Agreement, the Company executed a secured promissory note with an unrelated party for $310,000, bearing interest at 10% per annum maturing in equal thirds on March 31, 2016, March 31, 2017 and March 31, 2018. The note is secured through the note holder's first position claim on the Company's intellectual property, accounts, fixtures and property. The proceeds of the note were received by the Company through April 2015. As inducement to make the loan, the note holder received 16,667 shares Series B preferred stock at $1.50 per share, valued at $25,001, in May 2015, that are convertible into shares of the Company's common stock at a 30% discount to current market value, defined as the average of the immediately prior five trading day's closing prices upon receipt of a conversion notice. The Series B preferred shares can be converted at any time after six months from the date of issuance, but only once every 30 days. The conversion feature contains an embedded derivative (see Note 10).
|
(b)
|
In October 2015, the Company entered into a promissory note agreement with a funder whereby the Company has the option to sell certain of its future receipts from accounts receivables to the funder. The Company executed a note for $50,400 with the funder. The Company will make 126 daily loan payments of $400 each, and the funder has a security interest in all accounts, chattel paper, equipment, general intangibles, instruments and inventory, as defined, until the promissory note is repaid. As of December 31, 2015, the Company has repaid $15,200 of the note.
|
(c)
|
Notes payable consists of twenty unsecured promissory notes ranging in interest rates of 0% per annum to 10% per annum. During the year ended December 31, 2015, the Company issued unsecured promissory notes for $534,324 to three unrelated parties, interest up to 8% per annum, maturing through July 2017. One note, for $408,000 and due December 2016, was issued in relation to an asset purchase and licensing agreement (see Note 15). Notes in the amount of $397,500 were due in various dates through 2015 and are currently in default. Certain of the notes carry default interest rates up to 14% per annum. The Company is currently pursuing settlements with certain of the holders.
|
|
|
(d)
|
Consists of seventy units, with each unit consisting of a 10% promissory note of $25,000, matured in 2011, and currently in default, with a 10% discount rate, and 1 non-dilutable (for one (1) year) restricted share of the Company's common stock, at market price. The Company is currently pursuing extensions on the remaining twenty-one notes.
|
At December 31, 2015 and 2014, accrued interest due for the notes was $1,731,874 and $1,539,206, respectively, and is included in accrued expenses in the accompanying balance sheets. Interest expense for notes payable for the year ended December 31, 2015 and 2014 was $192,668 and $209,371, respectively. At December 31, 2015, accrued interest due for the secured note was $20,808 and included in accrued expenses in the accompanying balance sheets. Interest expense for secured note payable for the year ended December 31, 2015 was $20,808. At December 31, 2014, there was no accrued interest or interest expense.
Principal maturities of non-current notes payable, outstanding at December 31, 2015, were as follows:
|
|
Amount
|
|
2017
|
|
$
|
119,657
|
|
2018
|
|
|
103,334
|
|
Total
|
|
$
|
222,991
|
|
Note 8 - Notes Payable – Related Parties
Notes payable- related party consist of eighteen unsecured notes payable to the Company's Chief Executive Officer ranging in interest rates of 0% per annum to 10% per annum. All of the notes have extended due dates of December 31, 2016, and are shown as current liabilities except for one note, for $19,875, which is due in 2017. The balance of the outstanding notes payable - related party was $742,513 and $722,638 as of December 31, 2015 and 2014, respectively.
At December 31, 2015 and 2014, accrued interest due for the notes – related party was $548,653 and $492,573, respectively, and is included in accrued expenses in the accompanying balance sheets. Interest expense for notes payable - related parties for the year ended December 31, 2015 and 2014 was $56,080 and $56,080, respectively.
Note 9 - Derivative Financial Instruments
Under authoritative guidance issued by the FASB, instruments which do not have fixed settlement provisions, are deemed to be derivative instruments. The conversion feature of the certain of the Company's convertible notes payable and liabilities payable in shares (described in Note 5 through 7 above) did not have fixed settlement provisions because the ultimate determination of shares to be issued could exceed current available authorized shares.
In accordance with the FASB authoritative guidance, the conversion feature of the financial instruments was separated from the host contract and recognized as a derivative instrument. The conversion feature of the financial instruments had been characterized as a derivative liability and was re-measured at the end of every reporting period with the change in value reported in the statement of operations.
At December 31, 2015, the fair value of the derivative liabilities was determined through use of a probability-weighted Black-Scholes-Merton valuation model, based on the following assumptions: (i) volatility rate of 100%, (ii) discount rate of 0.16% (iii) zero expected dividend yield, and (iv) expected life ranging from 0.25 to 5 years. The risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected life of the exercise feature of the warrants was based on the remaining term of the notes, warrants, and preferred stock. The expected dividend yield was based on the fact that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future.
At December 31, 2014, the Company utilized a third party valuation consultant to assist the Company in determining the fair value of its derivative financial instruments related to convertible notes, preferred stock, and warrants, based on the following assumptions generally for notes or warrants; Initial conversion price of 40%-60% of the average bid price, as defined; projected volatility in the range of 486% to 491%; an event of default would occur 1% of the time, increasing 1.00% per month to a maximum of 10%; The company would redeem the notes (some notes at 130% on average in the first 90 days and 145% on average from 91 to 180 days or 150%) the notes projected initially at 0% of the time and increase monthly by 2.0% to a maximum of 10.0% (from alternative financing being available for a redemption event to occur); and the holder would not automatically convert the note at the maximum of 2 times the conversion price.
As noted above, for the year ended December 31, 2015, the Company utilized the probability-weighted Black-Scholes-Merton valuation mode to value its derivatives, whereas in the prior period a lattice model was utilized. To meet the fair value objective of valuation, a company should select a technique or model that (a) is applied in a manner that is consistent with the fair value measurement objective and other requirements of FASB ASC 815 or other literature, (b) is based on established principles of financial economic theory and generally applied in that field and (c) reflects all substantive characteristics of the instrument. Management believes the probability-weighted Black-Scholes-Merton valuation model utilized meets all three of these requirements. Further, SEC Codification of Staff Accounting Bulletins Topic 14: Share-Based Payment (used by analogy to stock based derivative instruments) states the SEC would not object to a company changing its valuation technique or model and such change would not be considered a change in accounting principle. Management's basis for changing methodologies included: (1) its conclusion that the probability-weighted Black-Scholes-Merton valuation model would meet the fair value objective for these types of derivatives; (2) the simplicity and transparency of the probability-weighted Black-Scholes-Merton valuation model, including the Company's disclosure of all input assumptions, provides the user of the financial statements the benefit of more clearly understanding managements judgments and estimates utilized in valuing these instruments in comparison to the more complex and less transparent lattice binomial model; and (3) cost benefit considerations in preparing the estimates, considering that both methodologies (Black Scholes Merton and the lattice model) are acceptable for valuing instruments with these characteristics.
Note 10 - Preferred and Common Stock Transactions
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 February 2011, the Company issued three (3) shares of non-convertible Series A preferred stock valued at $329,000 per share, or $987,000 in aggregate, for voting purposes only, to the three members of the management team at one share each. The issued and outstanding shares of the Series A preferred stock 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. They have each irrevocably waived their conversion rights relating to the Series A preferred shares issued.
Series B Preferred Stock
In July 2015, the Company sold subscriptions to one individual for the purchase of shares of its Series B preferred stock at $1.50 per share. The Company sold a total of 16,667 shares, for $25,000, that are convertible into shares of its common stock at a 40% discount to current market value, as defined with a minimum price level set by the Company's Board of Directors at $0.005.
In May 2015, as an inducement to execute a secured promissory note, the note holder received 16,667 shares Series B preferred stock at $1.50 per share, valued at $25,001,that are convertible into shares of the Company's common stock at a 30% discount to current market value, as defined with a minimum price level set by the Company's Board of Directors at $0.005.
In 2014, the Company sold subscriptions to individuals for the purchase of shares of its Series B preferred stock at $1.50 per share. The Company sold a total of 142,004 shares, for $213,000, that are convertible into shares of its common stock at a 40% discount to current market value, as defined with a minimum price level set by the Company's Board of Directors at $0.005. As of December 31, 2015, there were 1
75,338 shares of
Series B Preferred Stock issued and outstanding, 16,667 shares which convert to common shares at a 30% market discount, and 158,617 shares which convert at a 40% market discount, as defined. The Series B preferred shares can be converted at any time after six months from the date subscribed or issued, with one conversion allowed per a 30 day period.
Common Stock
In June 2015, an increase of the authorized shares of the Company's common stock from three billion (3,000,000,000) to five billion (5,000,000,000), $0.0001 par value, was ratified, effective upon the filing of an amendment to the Company's Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in July 2015.
During the year ended December 31, 2015, the Company issued an aggregate of 22,709,470 shares of its common stock as follows:
|
·
|
Convertible note holders converted $228,190 of principal and $13,195 of accrued interest into 22,691,902 shares of common stock at conversion prices ranging from $0.00024 to $39.00 per share.
|
|
·
|
The Company issued 17,377 shares of common stock, valued in aggregate of $150, including 15,018 shares issued for services valued at $123, and 2,360 shares valued at $23 that were issued for rounding shares related to the stock splits of the Company's issued and outstanding shares of common stock in 2015.
|
|
·
|
The Company issued 191 shares of common stock to warrant holders that exercised 1 warrant at $1,395 per share.
|
During the year ended December 31, 2014, the Company issued an aggregate of 2,454 shares of its common stock as follows:
|
·
|
Convertible note holders converted an aggregate of $657,882 of principal and $34,348 of accrued interest into 2,127 shares of the Company's common stock at conversion prices ranging from $37.70 to $72,280.00 per share.
|
|
·
|
The Company issued 323 shares of common stock to warrant holders that exercised 1 warrant at $8,489 per share.
|
Note
11
-
Warrants
The table below summarizes the Company's warrant activities through December 31, 2015
:
|
|
Number of
Warrant Shares
|
|
|
Exercise Price Range
Per Share
|
|
|
Weighted Average Exercise Price
|
|
|
Fair Value at Date of Issuance
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2014
|
|
|
33
|
|
|
$
|
1,462,500-9,750,000,000
|
|
|
$
|
155,025,000
|
|
|
$
|
1,105,250
|
|
|
$
|
-
|
|
Granted
|
|
|
2
|
|
|
$
|
695,000-312,000,000
|
|
|
$
|
2,651,000
|
|
|
$
|
19,949
|
|
|
$
|
-
|
|
Exercised
|
|
|
(1
|
)
|
|
$
|
35,159,000
|
|
|
|
-
|
|
|
$
|
(8,521
|
)
|
|
$
|
-
|
|
Expired
|
|
|
(2
|
)
|
|
$
|
19,500,000–9,750,000,000
|
|
|
$
|
86,314,000
|
|
|
$
|
(528,199
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
|
|
|
32
|
|
|
$
|
695,000-9,750,000,000
|
|
|
$
|
25,486,000
|
|
|
$
|
588,479
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Canceled
|
|
(-
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(1
|
)
|
|
$
|
39.00
|
|
|
$
|
39.00
|
|
|
|
(1,395
|
)
|
|
|
-
|
|
Expired
|
|
|
(1
|
)
|
|
$
|
19,500,000-39,000,000
|
|
|
$
|
587,918
|
|
|
$
|
(83,404
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
30
|
|
|
$
|
695,000-9,750,000,000
|
|
|
$
|
10,430,000
|
|
|
$
|
509,262
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable, December 31, 2015
|
|
|
30
|
|
|
$
|
695,000-9,750,000,000
|
|
|
$
|
25,495,000
|
|
|
$
|
509,262
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The following table summarizes information concerning outstanding and exercisable warrants as of December 31, 2015:
|
|
|
Warrants Outstanding
|
|
|
Warrants 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$9,750,000,000
|
|
|
|
1
|
|
|
|
0.15
|
|
|
$
|
9,750,000,000
|
|
|
|
1
|
|
|
|
0.15
|
|
|
$
|
9,750,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$695,000 - 312,000,000
|
|
|
|
29
|
|
|
|
0.88
|
|
|
$
|
25,318,000
|
|
|
|
29
|
|
|
|
0.88
|
|
|
$
|
25,318,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$695 - $9,750,000
|
|
|
|
30
|
|
|
|
0.88
|
|
|
$
|
25,495,000
|
|
|
|
30
|
|
|
|
0.88
|
|
|
$
|
25,495,000
|
|
Note
12
- Options
In August 2015, the Company awarded options to purchase 1,000,000 shares of its common stock to an unrelated consultant, exercisable at $0.0005 per share. The options expire in August 2017, and vested over a four month period. The fair value of these options was determined using the Black-Scholes-Merton option-pricing model based on the following assumptions: (i) volatility rate of 387%, (ii) discount rate of 0.67%, (iii) zero expected dividend yield, and (iv) expected life of 2 years. The risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected life of the exercise feature of the options was based on the remaining term of the options. The expected dividend yield was based on the fact that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future. The fair value of $2,083 was expensed during 2015.
The table below summarizes the Company's 2004 Incentive Plan and 2012 Stock Incentive Plan activities through December 31, 2015
:
|
|
Number of
Options Shares
|
|
|
Exercise Price Range
Per Share
|
|
|
Weighted Average Exercise Price
|
|
|
Fair Value at Date of Issuance
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2014
|
|
|
4
|
|
|
$
|
2,242,500–9,750,000,000
|
|
|
$
|
12,646,000
|
|
|
$
|
2,799,653
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1
|
)
|
|
$
|
9,750,000,000
|
|
|
$
|
9,750,000,000
|
|
|
$
|
(14,840
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
|
|
|
3
|
|
|
$
|
2,242,500-9,750,000,000
|
|
|
$
|
12,650,000
|
|
|
$
|
2,775,163
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,000,000
|
|
|
$
|
0.0005
|
|
|
$
|
0.0005
|
|
|
$
|
10,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
1,000,003
|
|
|
$
|
0.0005-9,750,000,000
|
|
|
$
|
2.00
|
|
|
$
|
2,785,163
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable, December 31, 2015
|
|
|
208,334
|
|
|
$
|
0.0005-9,750,000,000
|
|
|
$
|
2.00
|
|
|
$
|
2,777,246
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2015
|
|
|
791,669
|
|
|
$
|
0.0005
|
|
|
$
|
0.0005
|
|
|
$
|
7,917
|
|
|
$
|
-
|
|
As of December 31, 2015, options to purchase an aggregate of 3 shares of common stock were outstanding under the 2004 incentive plan and 2012 Stock Incentive Plan and there were 5,500,000 shares remaining available for issuance.
The following table summarizes information concerning 2004 Incentive plan and 2012 Stock Incentive Plan as of December 31, 2015:
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$9,750,000,000
|
|
|
|
1
|
|
|
|
0.01
|
|
|
$
|
9,750,000,000
|
|
|
|
1
|
|
|
|
0.01
|
|
|
$
|
9,750,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$975,000,000
|
|
|
|
1
|
|
|
|
1.02
|
|
|
$
|
975,000,000
|
|
|
|
1
|
|
|
|
1.02
|
|
|
$
|
975,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2,437,500-365,625,000
|
|
|
|
0
|
|
|
|
0.64
|
|
|
$
|
10,935,000
|
|
|
|
0
|
|
|
|
0.64
|
|
|
$
|
10,935,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2,242,500
|
|
|
|
1
|
|
|
|
7.51
|
|
|
$
|
2,242,500
|
|
|
|
1
|
|
|
|
7.51
|
|
|
$
|
2,242,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.0005
|
|
|
|
1,000,000
|
|
|
|
2.00
|
|
|
$
|
0.0005
|
|
|
|
208,333
|
|
|
|
2.00
|
|
|
$
|
0.0005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2,242.50-9,750,000
|
|
|
|
1,000,003
|
|
|
|
1.13
|
|
|
$
|
2.00
|
|
|
|
208,336
|
|
|
|
1.13
|
|
|
$
|
2.00
|
|
Note 13 - Other Income
In March 2015 the Company entered into a settlement agreement relating to a lawsuit with a former channel partner. In September 2015, the Company and the former channel partner amended the settlement agreement. In accordance with the amended settlement agreement the Company received payments totaling $305,000 which have been reflected as other income in the accompanying statement of operations.
Note 14 -
Income Tax Provision
The Company has no tax provision for any period presented due to our history of operating losses. As of December 31, 2015, the Company had deferred tax assets of approximately
$6,435,772, resulting from certain temporary differences and net operating loss
("NOL")
carry-forwards of approximately $18,928,742, which are available to offset future taxable income, if any, through 2035. 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.
Components of deferred tax assets as of December 31, 2015 and 2014 are as follows:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Net deferred tax assets – non-current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax benefit from NOL carry-forwards
|
|
$
|
6,435,772
|
|
|
$
|
6,250,388
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(6,435,772
|
)
|
|
|
(6,250,388
|
)
|
|
|
|
|
|
|
|
|
|
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, 2015
|
|
|
For the year ended December 31, 2014
|
|
|
|
|
|
|
|
|
Federal statutory income tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance on net operating loss carry-forwards
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The Company's operations are based in New Jersey and it is subject to federal and New Jersey state income tax. Tax years subsequent to 2008 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, 2015, no liability for unrecognized tax benefits was required to be recorded.
Note 15 - Commitments and Contingencies
Payroll Taxes
At December 31, 2015, the Company recorded $53,901 of payroll taxes, of which approximately $45,000 were delinquent. The Company had also recorded $32,462 of estimated penalties and interest on the delinquent payroll taxes.
Lease Agreement
The Company operates from a leased office in New Jersey. Per the terms of the lease agreement with the landlord, the Company pays a monthly base rent of $3,807 commencing on July 1, 2009 through the lease termination date of January 31, 2016. In November 2015, the lease was extended for three years to January 31, 2019. The Company will pay a monthly base rent of $4,067 from February 2016 thru January 2017, $4,190 from February 2017 thru January 2018 and $4,316 from February 2018 thru January 2019.
Future minimum payments required under this non-cancelable operating lease were as follows:
Year ending December 31:
|
|
|
|
|
|
|
|
2016
|
|
$
|
48,548
|
|
|
|
|
|
|
2017
|
|
|
50,162
|
|
|
|
|
|
|
2018
|
|
|
51,662
|
|
|
|
|
|
|
2019
|
|
|
4,316
|
|
|
|
|
|
|
|
|
$
|
154,688
|
|
Consulting Agreement
s
In 2014, the Company
entered into consulting agreements with a firm whereby the consultant will assist the Company in obtaining investors. The consultant will receive a commission of 10% cash per deal, plus warrants to purchase shares of the Company's common stock, to be negotiated per deal, of all financing raised as a result of the consultant's efforts. For the year ended December 31, 2015, the consultant received cash commissions of $49,700 as a result of financing raised relating to the agreements. For the year ended December 31, 2014, the Company issued warrants to purchase 1 share of its common stock, exercisable at $19,500 per share, to the consultant per the terms of the agreement. The warrant shares have a 50% exercise price premium and expire three (3) years from the date of issuance.
Licensing Agreement
On August 24, 2015, the Company entered into an asset purchase and licensing agreement with Cyber Safety, Inc., a New York corporation ("Cyber Safety") to license and retain an option to purchase the patents and Intellectual Property related to the GuardedID
Ò
and MobileTrust
Ò
software for a purchase price of $9 million, which may be paid in the form of a promissory note due September 30, 2020. Pursuant to the terms of the Asset Purchase Agreement, Cyber Safety will license and have the option to purchase the white label version of the "GuardedID
Ò
" software for up to $120,000 of development and the MobileTrust
Ò
software products. The Company's license granted to Cyber Safety does not affect or impact existing distributor relationships. The Company, directly and through its distribution channel, will maintain the right to sell in the retail space in perpetuity.
As a condition of the Asset Purchase Agreement, Cyber Safety will license the Malware Suite, as defined, to September 30, 2020. Pursuant to this license, Cyber Safety shall pay the Company 15% of the net amount Cyber Safety receives, as defined, from the sale or licensing of the Malware Suite, which amount may be increased to 20% under certain conditions, and is subject to reduction for commissions and support costs Cyber Safety will pay the Company (see Note 16). In conjunction with the licensing, the Company has executed a Distributor and Reseller Agreement with Cyber Safety, dated August 24, 2015. In conjunction with the licensing and the option to purchase, Cyber Safety loaned the Company $408,000 (see Note 7).
Due to Factor
In March 2007, the Company entered into a sale and subordination agreement with a factoring firm whereby the Company sold its rights to two invoices, from February 2007 and March 2007, totaling $470,200 to the factor. Upon signing the agreement and providing the required disclosures, the factor remitted $197,450 to the Company, including $144,440 of the February 2007 invoice and $53,010 of the March 2007 invoice. In September 2007, the February 2007 factored invoice was deemed uncollectible and in December 2007, the March 2007 factored invoice was deemed uncollectible. In February 2008, the Company and the factor agreed to a total settlement amount of $75,000 in September 2008, unless both parties mutually agreed to extend the due date. In September 2008, the Company and the factor reached a verbal agreement to extend the due date to December 31, 2008. The Company is currently pursuing a further extension. As of December 31, 2015, the balance due to the factor by the Company was $209,192 including interest.
Litigation
On March 28, 2013 the Company initiated patent litigation against an outside party. As of March 31, 2015, the case was in full discovery, the pre-trial hearing was held, and the deliberations were continuing. M
ediation took place in May 2015 to discuss a potential settlement, and on January 15, 2016, the parties reached a settlement in the matter. As part of the settlement, the Company will receive a payment of $4.9 million, net of legal fees, which will be recorded as other income in the first quarter of 2016.
Note 16 - Subsequent Events
The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued. The Management of the Company determined that there were certain reportable subsequent events to be disclosed as follows:
Repayment of Unsecured Convertible Notes Payable
Subsequent to December 31, 2015, the Company
repaid $623,351 of principal and $218,350 of accrued interest and/or fees of unsecured convertible notes to nine unrelated parties, which resulted in the extinguishment of approximately $637,330 of derivative liabilities.
Repayment of Unsecured and Secured Notes Payable
Subsequent to December 31, 2015
, the Company received proceeds of $75,000 from one unsecured note payable, and repaid $465,000 of principal of unsecured notes to two unrelated parties.
Subsequent to December 31, 2015
, the Company repaid $310,000 of principal and $228,171 of accrued interest and fees of a secured note to one unrelated party.
Issuance of shares of Common Stock upon conversion of convertible notes
Subsequent to December 31, 2015, convertible note holders converted a total of $151,169 principal and $95,947 of accrued interest into 2,105,237,983 shares of the Company's common stock at conversion prices ranging from
$0.000058 to $0.0003 per share. The Company also issued 7,500 shares of common stock valued at $5, or $0.00067 per share, for services.
Compensation
In January 2016, the Company's Board of Directors increased the base salaries of the Company's officers and employees, including its named executive officers, such that the new salaries are comparable to similarly situated companies. Consequently, the base salaries of the Company's officers have been set at $150,000 per annum. Other employees were granted increases to between $105,000 and $125,000 per annum. Additionally, the Company's officers forgave an aggregate total of $699,000 of accrued payroll owed to them by the Company.
Licensing Agreement
In January 2016, Cyber Safety, finalized the purchase of the option to buy the keystroke encryption patents and Intellectual Property related to the GuardedID
Ò
and MobileTrust
Ò
software pursuant to the terms and conditions of an asset purchase agreement, executed in August 2015, for a purchase price of $9 million, which may be paid in the form of a promissory note due by and no later than September 30, 2020. Pursuant to the terms and conditions of the asset purchase agreement, the Company's license granted to Cyber Safety does not affect or impact its existing distributor relationships. The Company, directly and through our distribution channel, will maintain the right to sell in the retail space in perpetuity. As a condition of the asset purchase agreement, Cyber Safety will license the Malware Suite (as defined in the Asset Purchase Agreement) up to and until September 30, 2020. Pursuant to this license, Cyber Safety shall pay the Company 15% of the net amount Cyber Safety receives, as defined, which amount may be increased to 20% under certain conditions for ProtectID
Ò
, and is subject to reduction for commissions and support costs that Cyber Safety will be obligated to pay to the Company (see Note 15).