Notes to the Financial Statements
Note 1 -
Organization and Summary of Significant Accounting Policies
StrikeForce Technical Services Corporation was incorporated in August 2001 under the laws of the State 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 State of Wyoming. The Company’s operations are based in Edison, New Jersey.
The Company is a software development and services company that offers a suite of integrated computer network security products using proprietary technology. The Company’s ongoing strategy is developing and marketing its suite of network security products to the corporate, financial, healthcare, legal, government, technology, insurance, e-commerce and consumer sectors.
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, 2016, the Company incurred a loss from operations of $2,442,620 and at December 31, 2016, the Company had a stockholders’ deficit of $8,439,490. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At December 31, 2016, we had cash on hand in the amount of $804,130. 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 and improve gross margins by redirecting its sales focus from direct sales to domestic and international sales channels, primarily selling through a channel of distributors, value added resellers, strategic partners and original equipment manufacturers. While the Company believes in the viability of its strategy to increase revenues, there can be no assurances to that effect. The Company’s ability to continue as a going concern is dependent upon its ability to continually increase its customer base and realize increased revenues from recently signed contracts. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, if needed, it may contain undue restrictions on its operations, in the case of debt financing, or cause substantial dilution for its stock holders, in the case of equity financing.
Reverse Stock Splits
In February 2015, the Company effected a 1:650 reverse stock split of the Company's issued and outstanding shares of common stock.
In August 2015, the Company effected a 1:1,000 reverse stock split of the Company's issued and outstanding shares of common stock.
All share and per share amounts have been adjusted, on a retroactive basis, to reflect the reverse stock splits adopted by the Company as if the reverse stock splits had occurred at the beginning of the earliest period presented.
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, derivative liabilities, and valuation allowance for deferred tax assets. Actual results could differ from those estimates.
Revenue
The Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer and there are no significant uncertainties surrounding acceptance by the customer, (iii) the sales price is fixed and determinable, and (iv) collectability is reasonably assured. When the Company recognizes revenue, no provisions are made for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.
Revenue from hardware sales is recognized when the product is shipped to the customer and there are either no unfulfilled obligations by the Company, or any obligations that will not affect the customer's final acceptance of the arrangement. All costs of these obligations are accrued when the corresponding revenue is recognized.
Revenue from time and service contracts is recognized as the services are provided. Revenue from delivered elements of one-time charge licensed software is recognized at the inception of the license term, and determined by the fair value of each delivered element. Revenue is deferred for undelivered elements. The Company recognizes revenue from the sale of software licenses when the four criteria discussed above are met. If the Company determines that collection of a fee is not reasonably assured, it defers the fee and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of payment. Revenue from monthly software licenses is recognized on a subscription basis.
The Company offers an Application Service Provider (ASP) hosted cloud service whereby customer usage transactions are invoiced monthly on a cost per transaction basis.
Accounts Receivable and Allowance for Doubtful Accounts
The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding. At December 31, 2016 and 2015, the Company did not record an allowance for doubtful accounts. For the year ended December 31, 2016, the Company recorded bad debt expense of $18,226. For the year ended December 31, 2015, the Company recorded no bad debt expense.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives of the respective assets as follows:
|
|
Estimated Useful Life (Years)
|
|
|
|
|
|
Computer equipment
|
|
|
5
|
|
|
|
|
|
|
Computer software
|
|
|
3
|
|
|
|
|
|
|
Furniture and fixture
|
|
|
7
|
|
|
|
|
|
|
Office equipment
|
|
|
7
|
|
Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of operations. Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. For the years ended December 31, 2016 and 2015, the Company did not recognize any impairment for its property and equipment.
Long-lived Assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. For the years ended December 31, 2016 and 2015, the Company did not recognize any such impairments.
Income Taxes
The Company accounts for income taxes using the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Stock Compensation
The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions 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 that their classification is appropriate.
Fair Value of Financial Instruments
The Company follows the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3—Unobservable inputs based on the Company's assumptions.
The Company is required to use of observable market data if such data is available without undue cost and effort.
As of December 31, 2016 and 2015, the Company’s balance sheets included the fair value of derivative liabilities of $262,185 and $989,019, respectively, which were based on Level 2 measurements.
The recorded amounts for accounts receivable, accounts payable, accrued expenses, convertible notes, and notes payables approximate their fair value due to their short term nature.
Income (loss) per Share
Basic income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share reflects the potential dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income (loss) of the Company. In computing diluted income (loss) per share, the treasury stock method assumes that outstanding options, warrants, and convertible preferred stock are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options, warrants, and convertible preferred stock may have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants.
For the years ended December 31, 2016 and 2015, the dilutive impact of outstanding stock options for 196,000,001 shares and 1,000,001 shares, respectively; outstanding warrants for 0 shares and 30 shares, respectively; Series B Preferred Stock that can convert into 33,876,016 shares and 32,875,063 shares of the Company’s common stock, respectively, and notes payable that can convert into 25 shares and 291,470 shares of the Company’s common stock, respectively, have been excluded because their impact on the loss per share is anti-dilutive.
The following tables set forth the computation of basic and diluted earnings (loss) per share:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Income (Loss) per share – Basic:
|
|
|
|
|
|
|
Income (Loss) for the period
|
|
$
|
2,938,565
|
|
|
$
|
(1,807,245
|
)
|
Basic average common stock outstanding
|
|
|
1,855,338,114
|
|
|
|
3,845,454
|
|
Net earnings (loss) per share
|
|
$
|
-
|
|
|
$
|
(0.47
|
)
|
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Income (Loss) per share – Diluted:
|
|
|
|
|
|
|
Income (Loss) for the period
|
|
$
|
2,938,565
|
|
|
$
|
(1,807,245
|
)
|
Basic average common stock outstanding
|
|
|
1,855,338,114
|
|
|
|
3,845,454
|
|
Diluted effect of outstanding stock options, warrants, notes and Series B Preferred stock
|
|
|
-
|
|
|
|
-
|
|
Diluted average common stock outstanding
|
|
|
1,855,338,114
|
|
|
|
3,845,454
|
|
Net earnings (loss) per share
|
|
$
|
-
|
|
|
$
|
(0.47
|
)
|
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, 2016 and 2015, advertising, sales and marketing expenses were $1,534 and $75,591, 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, 2016 and 2015, research and development costs were $521,663 and $262,973, respectively.
Significant Concentrations
For the year ended December 31, 2016, sales to two customers comprised 39% and 39% of revenues, respectively. For the year ended December 31, 2015, sales to one customer comprised 66% of revenues. At December 31, 2016, one customer comprised 82% of accounts receivable. For the year ended December 31, 2015, sales to one customer comprised 66% of revenues. At December 31, 2015, two customers comprised 67% and 17% of accounts receivable, respectively
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, and ASU 2016-20 all of which clarify certain implementation guidance within ASU 2014-09. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. The standard can be adopted either retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company is currently in the process of analyzing the information necessary to determine the impact of adopting this new guidance on its financial position, results of operations, and cash flows. The Company will adopt the provisions of this statement in the first quarter of fiscal 2018.
In February 2016, the FASB issued ASU No. 2016-02, Leases. 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 period presented in the financial statements. The Company is currently evaluating the expected impact that the standard could have on its financial statements and related disclosures.
In March 2016, the FASB issued the ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this ASU require, among other things, that all income tax effects of awards be recognized in the income statement when the awards vest or are settled. The ASU also allows for an employer to repurchase more of an employee's shares than it can today for tax withholding purposes without triggering liability accounting and allows for a policy election to account for forfeitures as they occur. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the expected impact that the standard could have on its 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,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
76,953
|
|
|
$
|
76,953
|
|
|
|
|
|
|
|
|
|
|
Computer software
|
|
|
36,907
|
|
|
|
28,989
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixture
|
|
|
10,157
|
|
|
|
10,157
|
|
|
|
|
|
|
|
|
|
|
Office equipment
|
|
|
16,511
|
|
|
|
16,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,528
|
|
|
|
132,610
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(131,602
|
)
|
|
|
(128,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,926
|
|
|
$
|
4,184
|
|
Depreciation expense for the years ended December 31, 2016 and 2015 was $3,177 and $3,692, respectively.
Note 3 - Convertible Notes Payable
Convertible notes payable consisted of the following:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Secured
|
|
|
|
|
|
|
(a) DART
|
|
$
|
542,588
|
|
|
$
|
542,588
|
|
|
|
|
|
|
|
|
|
|
Unsecured
|
|
|
|
|
|
|
|
|
(b) Convertible notes with fixed conversion features
|
|
|
904,512
|
|
|
|
910,512
|
|
(c) Convertible notes with adjustable conversion features
|
|
|
-
|
|
|
|
824,861
|
|
Total convertible notes
|
|
|
1,447,100
|
|
|
|
2,277,961
|
|
Discount on convertible notes
|
|
|
-
|
|
|
|
(14,266
|
)
|
Convertible notes
|
|
$
|
1,447,100
|
|
|
$
|
2,263,695
|
|
(a)
|
At December 31, 2016 and 2015, $542,588 of notes payables are due to DART/Citco Global. The notes are convertible into shares of the Company’s common stock based on adjustable conversion prices, are secured by all of the Company’s assets, were due in 2010, and are currently in default. The adjustable conversion features of the notes are accounted for as derivative liabilities (see Note 7). DART/Citco Global did not process any conversions of notes into shares of common stock in fiscal 2016 or 2015. The Company has been in contact with the note holder who has indicated that it has no present intention of exercising its right to convert the debentures into shares of the Company's common stock. Under the terms of the secured debentures, the Company is restricted in its ability to issue additional securities as long as any portion of the principal or interest on the secured debentures remains outstanding. During 2016 or 2015, the Company did not obtain DART/Citco Global’s written consent related to any of its financing agreements.
|
|
|
(b)
|
Convertible notes payable consist of 14 unsecured convertible notes convertible at a fixed amount (”fixed convertible notes”) into 13 shares of the Company’s common stock, at fixed prices ranging from $1,950,000 to $9,750,000,000 per share, as defined in the agreements. The notes bear interest at 8% to 18% per annum, and were due on various dates from March 2008 to July 2015. All of the fixed convertible notes are currently in default and the Company is pursuing settlements with certain of the holders. During the year ended December 31, 2015, there were no notes issued or repaid. During the year ended December 31, 2016, there were no notes issued and the Company repaid $6,000 of note principal.
|
|
|
|
At December 31, 2014, the balance of the accrued interest on the fixed convertible notes was $828,814. During the year ended December 31, 2015, interest expense of $80,286 was accrued. At December 31, 2015, the balance of the accrued interest on the fixed convertible notes was $909,100. During the year ended December 31, 2016, interest expense of $79,687 was accrued, $49,148 of accrued interest was forgiven and written-off, and $3,000 of accrued interest was paid. At December 31, 2016, the balance of accrued interest on the fixed convertible notes was $936,639.
|
|
|
(c)
|
At December 31, 2014, the balance of convertible notes with adjustable conversion features (“adjustable convertible notes”) was $995,167. The notes bore interest at 10% to 24%, and were due on various dates from March 2013 to February 2016. During the year ended December 31, 2015, adjustable convertible notes of $57,884 were issued, and note holders converted $228,190 of note principal into shares of the Company’s common stock (see Note 8). At December 31, 2015, the balance of the adjustable convertible notes was $824,861. During the year ended December 31, 2016, the Company repaid $681,738 of note principal, and note holders converted $143,123 of note principal into shares of the Company’s common stock (see Note 8). At December 31, 2016, the balance of adjustable convertible notes was paid off.
|
|
|
|
At December 31, 2014, the balance of the accrued interest on the adjustable convertible notes was $175,276. During the year ended December 31, 2015, interest expense of $144,294 was accrued. At December 31, 2015, the balance of the accrued interest on the adjustable convertible notes was $319,570. During the year ended December 31, 2016, interest expense of $17,066 was accrued, $189,442 of accrued interest was paid, note holders converted $49,542 of accrued interest into shares of common stock (see Note 8), and $97,652 of accrued interest was forgiven and written-off. At December 31, 2016, the balance of accrued interest on adjustable convertible notes was paid off.
|
|
|
|
At the option of the holder, the adjustable convertible notes were convertible into shares of common stock of the Company at a price per share discount of 40% of the Company’s common stock trading market price during a certain time period. The Company determined that the conversion feature of the notes were not fixed, and recorded them as a derivative liability. During the year ended December 31, 2016, the payment and conversion of the convertible notes resulted in the Company recording a gain of $819,831 related to the extinguishment of the corresponding derivative liability (see Note 7).
|
At December 31, 2016 and 2015, accrued interest due for all convertible notes was $936,639 and $1,230,507, 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, 2016 and 2015 was $96,753 and $224,579, respectively.
Note 4 - Convertible Notes Payable – Related Parties
At December 31, 2016 and 2015, convertible notes payable - related parties consist of 12 convertible notes payable in the aggregate of $355,500. The notes are unsecured and due December 31, 2017. Six notes totaling $268,000 are due to the Company’s Chief Executive Officer, at a compounded interest rate of 8% per annum; two notes totaling $57,000 are due to the Company’s VP of Technology, interest at prime plus 2% and prime plus 4% per annum; and four notes totaling $30,000 are due to the spouse of the Company’s Chief Technology Officer at a compounded interest rate of 8% per annum. $33,000 of the notes are convertible at the fixed conversion price of $7,312,500 per share and $322,500 of the notes are convertible at the fixed conversion price of $9,750,000,000 per share, as defined in the note agreements.
At December 31, 2014, accrued interest due for the convertible notes – related parties was $339,812. During the year ended December 31, 2015, interest expense of $51,189 was accrued and at December 31, 2015, accrued interest due for the convertible notes – related parties was $391,001. During the year ended December 31, 2016, interest expense of $55,721 was accrued, and $9,417 of accrued interest due a former officer was forgiven and written-off. At December 31, 2016, accrued interest due for the convertible notes – related parties was $437,305.
Note 5 - Notes Payable
Notes payable consisted of the following:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Secured
|
|
|
|
|
|
|
(a) Promissory note-H. Group Partners, Inc.
|
|
$
|
-
|
|
|
$
|
310,000
|
|
(b) Promissory note - factoring
|
|
|
-
|
|
|
|
35,200
|
|
|
|
|
|
|
|
|
|
|
Unsecured
|
|
|
|
|
|
|
|
|
(c) Promissory notes
|
|
|
413,824
|
|
|
|
467,609
|
|
(d) Promissory note-Cyber Safety
|
|
|
-
|
|
|
|
408,000
|
|
(e) Promissory notes – StrikeForce Investor Group
|
|
|
1,290,000
|
|
|
|
1,475,000
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
1,703,824
|
|
|
|
2,695,809
|
|
Discount on secured notes payable
|
|
|
-
|
|
|
|
(20,027
|
)
|
Notes payable, net of discount
|
|
|
1,703,824
|
|
|
|
2,675,782
|
|
Long-term portion
|
|
|
-
|
|
|
|
(222,991
|
)
|
|
|
|
|
|
|
|
|
|
Promissory notes, current maturities
|
|
$
|
1,703,824
|
|
|
$
|
2,452,791
|
|
(a)
|
In May 2015, the Company executed a secured promissory note with an unrelated party for $310,000, bearing interest at 10% per annum, maturing March 31, 2018. The note was secured by the Company's intellectual property, accounts, fixtures and property. As an inducement to make the loan, the note holder received 16,667 shares Series B preferred stock valued at $1.50 per share that are convertible into shares of the Company's common stock at a 30% discount to current market value, as defined. During the year ended December 31, 2016, the Company repaid $310,000 of note principal, $23,611 of accrued interest, and $204,560 of additional interest expense was paid to the note holder.
|
|
|
(b)
|
In October 2015, the Company entered into a promissory note agreement for $50,400, secured by all accounts, chattel paper, equipment, general intangibles, instruments and inventory, as defined in the agreement. As December 31, 2015, the balance of the note was $35,200. During the year ended December 31, 2016, the Company repaid the balance of $35,200.
|
|
|
(c)
|
Notes payable consists of various unsecured promissory notes with interest from 8% to 14% per annum. $397,500 of the notes were due on various dates from December 2011 to July 2015 and are currently in default, and the balance of $16,324 is due July 2017. The Company is currently pursuing settlements with certain of the note holders. At December 31, 2014, the balance due under these notes was $397,500. During the year ended December 31, 2015, the Company issued $123,324 of notes, and repaid $53,215 of notes. At December 31, 2015, the balance due under these notes was $467,609. During the year ended December 31, 2016, the Company paid off note principal totaling $53,785, and at December 31, 2016, the balance due under these notes was $413,824.
|
|
|
|
At December 31, 2015, the balance of the accrued interest on the notes payable-various was $438,782. During the year ended December 31, 2016, $45,681 of interest expense was accrued, and $70,121 was forgiven and written-off. At December 31, 2016, accrued interest on the notes payable was $414,342.
|
(d)
|
In 2015, the Company issued a note to Cyber Security in relation to an asset purchase and licensing agreement (see Note 13). At December 31, 2015, the balance of note payable was $408,000, and due December 31, 2016. During the year ended December 31, 2016, the Company borrowed an additional $75,000 of principal and repaid $450,000 of principal. In addition, $33,000 of principal was adjusted and written off. At December 31, 2016, the balance of the note was paid off. The note was non-interest bearing and unsecured.
|
|
|
(e)
|
Notes payable to StrikeForce Investor Group (SIG), made up of various investors with unsecured notes, interest at 10% per annum. At December 31, 2016, Notes payable-SIG of $1,250,000, originally due in 2011, are in default, and the balance of $40,000 is due April 30, 2017. The Company is currently pursuing extensions on the delinquent notes. At December 31, 2014, the balance of notes payable-SIG was $1,500,000. During the year ended December 31, 2015, the Company repaid $25,000 of principal and at December 31, 2015, the balance of notes payable-SIG was $1,475,000. During the year ended December 31, 2016, the Company repaid $185,000 of principal and at December 31, 2016, the balance of notes payable-SIG was $1,290,000.
|
|
|
|
At December 31, 2014, the balance of the accrued interest on the notes payable-SIG was $1,145,271. During the year ended December 31, 2015, $147,821 of interest expense was accrued. At December 31, 2015, the balance of the accrued interest on the notes payable-SIG was $1,293,092. During the year ended December 31, 2016, $141,995 of interest expense was accrued, and $10,000 of accrued interest was paid. At December 31, 2016, accrued interest on the notes payable-SIG was $1,425,087.
|
At December 31, 2016 and 2015, accrued interest due for all notes payable above was $1,839,429 and $1,731,874, respectively, and is included in accrued interest in the accompanying balance sheets. Interest expense for notes payable for the years ended December 31, 2016 and 2015 was $190,478 and $192,668, respectively.
Note 6 - Notes Payable – Related Party
Notes payable- related party consist of 18 unsecured notes payable to the Company’s Chief Executive Officer ranging in interest rates of 0% per annum to 10% per annum. The notes have extended due dates of December 31, 2017 and all are shown as current liabilities. At December 31, 2016 and 2015, the balance of the outstanding notes payable - related party was $742,513 and $722,618, respectively.
At December 31, 2015, accrued interest due for the notes payable – related party was $548,653. During the year ended December 31, 2016, interest expense of $56,233 was accrued, and accrued interest of $13,102 owed to a former officer was forgiven and written-off. At December 31, 2016, accrued interest due for the notes payable – related party was $591,784. Interest expense for notes payable - related party for the year ended December 31, 2015 was $56,080.
Note 7 - 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 certain of the Company’s convertible notes payable (see Note 3) 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 has 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, 2014, the balance of the derivative liabilities was $1,415,402. During the year ended December 31, 2015, the decrease in derivative liability was $426,383, and at December 31, 2015, the balance of the derivative liabilities was $989,019. During the year ended December 31, 2016, convertible notes and accrued interest totaling $1,063,845 were paid off or converted into shares of common stock (See Note 3), and the Company recorded a gain of $819,831 related to the extinguishment of the corresponding derivative liabilities. Also during the year ended December 31, 2016, the Company recorded a change in fair value of derivatives of $92,997. At December 31, 2016, the balance of the derivative liabilities was $262,185.
The derivative liability was valued at the following dates using a probability weighted Black-Scholes-Merton model with the following assumptions:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Conversion feature:
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.16
|
%
|
|
|
0.16
|
%
|
Expected volatility
|
|
|
75
|
%
|
|
|
100
|
%
|
Expected life (in years)
|
|
1 year
|
|
|
.25 to 5 years
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
|
|
|
|
Conversion feature
|
|
$
|
262,185
|
|
|
$
|
989,019
|
|
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 a group of comparable public companies. 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 8– 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
In 2016, 125,377 shares of Series B Preferred Stock were converted into 35,703,979 shares of the Company’s common stock (See below).
In July 2015, the Company sold a total of 16,667 shares to an individual at $1.50 per share, or a total of $25,000. In May 2015, as an inducement to execute a secured promissory note, a note holder received 16,667 shares Series B preferred stock valued at $1.50 per share, or a total of $25,001. The shares of Series B Preferred Stock are convertible into shares of its common stock at a 30% to 40% discount to current market value, as defined, with a minimum price level set by the Company's Board of Directors at $0.005.
Common Stock
During the year ended December 31, 2016, the Company issued an aggregate of 2,296,971,962 shares of its common stock as follows:
|
·
|
The Company issued 1,594,171,737 shares of its common stock in exchange for conversion of $143,123 of convertible note principal and $49,542 of accrued interest at conversion prices ranging from $0.000058 to $0.0013 per share. In addition, the Company issued 511,066,246 shares of common stock, with a fair value of $386,221, to the convertible note holders and recorded as additional interest expense.
|
|
|
|
|
·
|
The Company issued 125,000 shares of its common stock upon the exercise of 30 warrants for $150. In addition, the Company issued 154,875,000 shares of its common stock, with a fair value of $185,850, to the warrant holder as additional consideration for services and recorded in general and administrative expenses
|
|
|
|
|
·
|
The Company issued 30,000 shares of its common stock for services, valued at $309.
|
|
|
|
|
·
|
The Company issued 1,000,000 shares of its common stock for exercise of options at a price of $0.005 per share for $500.
|
|
|
|
|
·
|
The Company issued 35,703,979 shares of its common stock in exchange for conversion of 125,337 shares of Series B Preferred Stock at conversion prices ranging from $0.00383 to $0.00532 per share.
|
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 convertible note principal 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 $22 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.
|
Capital Contribution
In January 2016, the Company’s officers forgave an aggregate total of $762,275 of accrued payroll due to them from the Company. The Company recorded the forgiveness of accrued payroll as a capital contribution.
Note 9 -
Warrants
The table below summarizes the Company’s warrant activities for the period January 1, 2015 to December 31, 2016:
|
|
Number of
Warrant Shares
|
|
|
Exercise Price Range
Per Share
|
|
|
Weighted Average Exercise Price
|
|
Balance, January 1, 2015
|
|
|
32
|
|
$
|
|
695,000-9,750,000,000
|
|
|
$
|
25,486,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
(-
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1
|
)
|
|
$
|
39.00
|
|
|
$
|
39.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1
|
)
|
|
$
|
19,500,000- 39,000,000
|
|
|
$
|
587,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
30
|
|
|
$
|
695,000- 9,750,000,000
|
|
|
$
|
10,430,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
(-
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(30
|
)
|
|
$
|
0.00024
|
|
|
$
|
8,382,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
(-
|
)
|
|
$
|
29,250,000-9,750,000,000
|
|
|
$
|
29,886,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable, December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
In April 2016, the Company executed a settlement agreement with an investor relating to outstanding warrant agreements issued in conjunction with convertible notes that were repaid by the Company in January 2016. Per the terms of the settlement, the investor processed an exercise of 30 warrant shares into 125,000 shares of the Company’s common stock. The investor also received an additional 154,875,000 shares of the Company’s common stock valued at $185,850, for services (see Note 8).
Note 10 - Options
In November 2012, the stockholders approved the 2012 Stock Incentive Plan effective January 3, 2013. The number of shares authorized for issuance under the plan was 100,000,000. The number of shares authorized for issuance under the Incentive Plan was increased to 200,000,000 in September 2016 by unanimous consent of the Board of Directors.
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.
In September 2016, the Company issued options to purchase 196,000,000 shares of its common stock to its management team and employees with a fair value of $1,568,000 determined using the Black-Scholes Option Pricing model. The options are exercisable at $0.00625 per share, vest in 6 months, and expiring in ten years from the date of grant. During the year ended December 31, 2016, the Company recognized compensation costs of $818,462 based on the fair value of options that vested.
The fair value of each stock option award was estimated using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate
|
|
|
0.16
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
78
|
%
|
Expected life
|
|
10 years
|
|
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 a group of comparable public companies. The expected life of the employee option is estimated by considering the contractual term of the option, the vesting period of the option, and the employees’ expected exercise behavior. 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.
The table below summarizes the Company’s 2004 Incentive Plan and 2012 Stock Incentive Plan activities for the period January 1, 2015 to December 31, 2016:
|
|
Number of
Options Shares
|
|
|
Exercise Price
Range
Per Share
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2015
|
|
|
3
|
|
|
$
|
2,242,500-9,750,000,000
|
|
|
$
|
12,650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,000,000
|
|
|
$
|
0.0005
|
|
|
$
|
0.0005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
1,000,003
|
|
|
$
|
0.0005-9,750,000,000
|
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
196,000,000
|
|
|
$
|
0.00625
|
|
|
$
|
0.00625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,000,000
|
)
|
|
$
|
0.0005
|
|
|
$
|
0.0005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(2
|
)
|
|
$
|
9,750,000
|
|
|
$
|
9,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
196,000,001
|
|
|
$
|
0.0023-975,000,000
|
|
|
$
|
0.00625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable, December 31, 2016
|
|
|
103,307,693
|
|
|
$
|
0.0023-975,000,000
|
|
|
$
|
0.005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, December 31, 2016
|
|
|
92,692,308
|
|
|
$
|
0.00625
|
|
|
$
|
0.00625
|
|
As of December 31, 2016, options to purchase an aggregate of 196,000,001 shares of common stock were outstanding under the 2004 incentive plan and 2012 Stock Incentive Plan and there were 4,000,000 shares remaining available for issuance. At December 31, 2016 and 2015, the intrinsic value of outstanding options was zero.
The following table summarizes information concerning 2004 Incentive plan and 2012 Stock Incentive Plan as of December 31, 2016:
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.00625
|
|
|
|
196,000,000
|
|
|
|
10.00
|
|
|
$
|
0.00625
|
|
|
|
103,307,692
|
|
|
|
10.00
|
|
|
$
|
0.00625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.00625 - 975,000,000
|
|
|
|
196,000,001
|
|
|
|
10.00
|
|
|
$
|
0.00625
|
|
|
|
103,307,693
|
|
|
|
10.00
|
|
|
$
|
0.00625
|
|
Note 11 - Other Income
On March 28, 2013 the Company initiated patent litigation against an outside party. Mediation took place in May 2015 to discuss a potential settlement, and on January 15, 2016, the parties reached a settlement in the matter. As part of the settlement, the Company received a payment in January 2016 of $9,750,000 and incurred fees related to the settlement of $4,187,257.
In 2015 the Company entered into a settlement agreement relating to a lawsuit with a former channel partner and received a total settlement of $305,000.
Note 12- Income Tax Provision
The Company has no tax provision for any period presented due to its history of operating losses. As of December 31, 2016, the Company had deferred tax assets of approximately $6,369,000, resulting from certain temporary differences and net operating loss (“NOL”) carry-forwards of approximately $18,732,000, which are available to offset future taxable income, if any, through 2036. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as management has determined that their realization is not likely to occur and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards.
Components of deferred tax assets as of December 31, 2016 and 2015 are as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Net deferred tax assets – non-current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax benefit from NOL carry-forwards
|
|
$
|
6,369,000
|
|
|
$
|
7,552,000
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(6,369,000
|
)
|
|
|
(7,552,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income tax provision is as follows:
|
|
For the
year ended December 31,
2016
|
|
|
For the
year ended December 31,
2015
|
|
|
|
|
|
|
|
|
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 2009 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, 2016, no liability for unrecognized tax benefits was required to be recorded.
Note 13 - Commitments and Contingencies
Operating Lease
The Company leases its office facilities in New Jersey under a non-cancellable lease agreement that expires January 31, 2019. Minimum annual rental commitments under the non-cancelable lease at December 31, 2016 are as follows:
Years ending December 31,
|
|
Amount
|
|
2017
|
|
$
|
50,280
|
|
2018
|
|
|
51,729
|
|
2019
|
|
|
4,316
|
|
Total
|
|
$
|
106,325
|
|
For the years ending December 31, 2016 and 2015, rent expense was $48,548 and $45,680, respectively.
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
Ò
and MobileTrust
Ò
software. In conjunction with the licensing and the option to purchase, Cyber Safety loaned the Company $408,000 in 2015 and $75,000 in 2016. During the year ended December 31, 2016, the note was repaid in full to Cyber Safety (See Note 5).
Cyber Safety has the option to buy the Company’s GuardedID
Ò
patent for $9,000,000 that expires on September 30, 2020. At December 31, 2016, the Company does not have an estimate if Cyber Safety will exercise its option to make the purchase. Cyber Safety will also resell the Company’s GuardedID
Ò
and MobileTrust
Ò
products, for which the Company will receive a royalty, while the Company retains an unlimited license to resell those products.
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.
During 2016, the Company recorded revenue from Advanced Cyber, a subsidiary of Cyber Safety, of $125,000 for support services in conjunction with its agreements with Cyber Safety.
Legal Proceedings
On June 20, 2016, the Company initiated additional patent litigation against three major competitors in the U.S. District Court for the District of New Jersey, for infringement of United States Patent No. 8,484,698. This litigation is ongoing. On March 14, 2017, one of the parties initiated an inter partes review (IPR) against the Company’s second Patent No. 8,484,698.
On March 14, 2017, the Company initiated additional patent litigation against two major competitors in the U.S. District Court for the District of Massachusetts, for infringement of United States Patent Nos. 7,870,599, 8,484,698 and 8,713,701. This litigation is ongoing.
On March 14, 2017, the Company initiated additional patent litigation against two major competitors in the U.S. District Court for the Eastern District of Virginia, for infringement of United States Patent Nos. 7,870,599, 8,484,698 and 8,713,701. This litigation is ongoing.
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. By December 31, 2007, the two invoices were deemed uncollectible. In February 2008, the Company agreed to pay the factor a settlement 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, 2016, the balance due to the factor was $209,192 including interest.
Note 14 – Subsequent Events
Subscription agreements for Series B Preferred Stock
In January 2017, the Company sold subscriptions to two individuals for the purchase of 53,334 shares of its Series B Preferred Stock at $1.50 per share, or an aggregate of $80,000. The shares of Series B Preferred Stock are convertible into shares of the Company’s common stock at a 25% discount to current market value, as defined, with a minimum conversion price set by the Company's Board of Directors of $0.001 per share. The Series B Preferred Stock can be converted at any time into shares of common stock after twelve months from acceptance by the Company of the subscription agreements, but only once every 30 days.