Note 1 - Organization and Summary of Significant Accounting Policies
StrikeForce Technologies, Inc. (the “Company”) is a software development and services company that offers a suite of integrated computer network security products using proprietary technology. The Company’s operations are based in Edison, New Jersey.
Basis of Presentation-Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. The results of operations for the nine months ended September 30, 2020 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2020. These financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2019 and notes thereto contained in the Annual Report on Form 10-K of the Company as filed with the SEC on May 1, 2020.
The consolidated financial statements include the accounts of the Company and its subsidiary, BlockSafe Technologies, Inc. (“BST”). BST is owned 49% by the Company and 31% by three executive officers of the Company. BST meets the definition of a variable interest entity (“VIE”) and based on the determination that the Company is the primary beneficiary of BST, BST’s operating results, assets and liabilities are consolidated by the Company. Intercompany balances and transactions have been eliminated in consolidation. At December 31, 2019, noncontrolling interests represents 51% of BST that the Company does not directly own. The Company and BST have a management agreement pursuant to which BST shall remit a management fee of $36,000 per month to the Company, and when BST reaches a milestone of $1,000,000 in financing, an additional management fee of $5,000,000 shall be owed to the Company, payable monthly over three years. The management fee is currently eliminated in consolidation. At September 30, 2020 and December 31, 2019, the amount of VIE cash on the accompanying consolidated balance cash can be used only to settle obligations of BST, and the amounts of VIE accounts payable, VIE Notes Payable, VIE Accrued Interest, and VIE Financing Obligation have no recourse to the general credit of the Company.
Reverse Stock Split
Effective June 25, 2020, the Company completed a 1:500 reverse stock split of the Company's issued and outstanding shares of common stock and all fractional shares will be rounded up. All share and per share amounts in the accompanying financial statements have been adjusted retroactively to reflect the reverse stock split as if it had occurred at the beginning of the earliest period presented.
COVID-19
In March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many businesses. This outbreak could decrease spending, adversely affect demand for the Company’s products, and harm the Company’s business and results of operations. In the period ended September 30, 2020, the Company believes the COVID-19 pandemic did impact its operating results as sales to customers in the second and third quarters were down 17% and 15%, respectively, from the first quarter of the year. However, the Company has not observed any impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic. At this time, it is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company’s business or results of operations, financial condition, or liquidity.
As of (and subsequent to) September 30, 2020, the Company has been following the recommendations of local health authorities to minimize exposure risk for its team members for the past several weeks, including the temporary closure of its corporate office and having team members work remotely. Most customers and vendors have transitioned to electronic submission of invoices and payments.
Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, for the nine months ended September 30, 2020, the Company incurred a net loss of $2,941,948 and used cash in operating activities of $1,328,834 and at September 30, 2020, the Company had a stockholders’ deficit of $15,607,208. Also, at September 30, 2020, the Company is in default on notes payable and convertible notes payable in the aggregate amount of $3,555,173. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that these financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2019 financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At September 30, 2020, the Company had cash on hand in the amount of $8,387. Subsequent to September 30, 2020, the Company issued two unsecured convertible promissory notes for proceeds of $81,000, one unsecured promissory note for proceeds of $60,000 and two secured promissory notes for proceeds of $32,000. 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 to increase its customer base and realize increased revenues. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, if needed, it may contain undue restrictions on its operations, in the case of debt financing, or cause substantial dilution for its stockholders, in the case of equity financing.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to accounting for financing obligations, assumptions used in valuing stock instruments issued for services, assumptions used in valuing derivative liabilities, the valuation allowance for deferred tax assets, and the accrual of potential liabilities. Actual results could differ from those estimates.
Revenue Recognition
The Company follows the guidance of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients.
The Company’s revenue consists of revenue from sales and support of our software products. Revenue primarily consists of sales of software licenses of our ProtectID®, GuardedID® and MobileTrust® products. The Company usually recognizes subscription revenue over a one-month period based on a typical monthly renewal cycle in accordance with its customer agreement terms. For service contracts, the Company’s performance obligations are satisfied, and the related revenue is recognized, as services are rendered.
The Company offers no discounts, rebates, rights of return, or other allowances to clients which would result in the establishment of reserves against service revenue. Additionally, to date, the Company has not incurred incremental costs in obtaining customer contracts.
Cost of revenue includes direct costs and fees related to the sale of our products.
The following tables present our revenue disaggregated by major product and service lines:
|
|
Three months ended
|
|
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Software
|
|
$
|
48,937
|
|
|
$
|
123,023
|
|
Service
|
|
|
1,908
|
|
|
|
48,261
|
|
Total revenue
|
|
$
|
50,845
|
|
|
$
|
171,284
|
|
|
|
Nine months ended
|
|
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Software
|
|
$
|
156,226
|
|
|
$
|
513,813
|
|
Service
|
|
|
5,463
|
|
|
|
96,896
|
|
Total revenue
|
|
$
|
161,689
|
|
|
$
|
610,709
|
|
Fair Value of Financial Instruments
The Company follows the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3—Unobservable inputs based on the Company's assumptions.
The Company is required to use of observable market data if such data is available without undue cost and effort.
The Company believes the carrying amounts reported in the balance sheet for accounts receivable, accounts payable, accrued expenses, convertible notes, and notes payables approximate fair values because of the short-term nature of these financial instruments.
As of September 30, 2020 and December 31, 2019, the Company’s balance sheet includes Level 2 liabilities comprised of the fair value of embedded derivative liabilities of $790,000 and $1,516,435, respectively (see Note 9).
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The Company evaluates embedded conversion features within its convertible debt to determine whether the embedded conversion features should be bifurcated from the host instrument and accounted for as a derivative. The fair value of the embedded derivatives are determined using Monte Carlo simulation method at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.
Stock-Based Compensation
The Company periodically issues stock options, warrants, and shares of common stock as share-based compensation to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for such grants issued and vesting based on FASB ASC 718, Compensation – Stock Compensation (Topic 718) whereby 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 recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered.
The fair value of the Company’s stock options and warrants 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 restricted stock, 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.
Loss per Share
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding, plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued using the treasury stock method. Diluted loss per share excludes all potential common shares if their effect is anti-dilutive. The following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive:
|
|
Nine months ended
|
|
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Options to purchase common stock
|
|
|
633,000
|
|
|
|
519,000
|
|
Warrants to purchase common stock
|
|
|
738,810
|
|
|
|
-
|
|
Convertible notes
|
|
|
229,203,829
|
|
|
|
466,183
|
|
Convertible Series B Preferred stock
|
|
|
12,619,167
|
|
|
|
48,073
|
|
Total
|
|
|
243,194,806
|
|
|
|
1,033,256
|
|
Concentrations
For the nine months ended September 30, 2020, sales to two customers comprised 72% and 14% of revenues, respectively. For the nine months ended September 30, 2019, sales to three customers comprised 57%, 20% and 16% of revenues, respectively. At September 30, 2020, three customers comprised 46%, 29% and 12% of accounts receivable, respectively.
The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. At September 30, 2020, the Company did not have cash deposits that exceeded the federally insured limit of $250,000 per account. The Company believes that no significant concentration of credit risk exists with respect to its cash balances because of its assessment of the creditworthiness and financial viability of the financial institution.
Reclassification
In presenting the Company’s consolidated statements of operations for the three and nine months ended September 30, 2019, the Company presented the loss on extinguishment of debt of ($323,570) and ($1,024,563), respectively, and a gain on extinguishment of related derivatives of $324,098 and $1,002,790, respectively, as two separate amounts. In presenting the Company’s consolidated statements of operations for the three and nine months ended September 30, 2020, the Company has reclassified the two amounts into $528 and ($21,773), respectively, of gain/(loss) on extinguishment of debt in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2019. This reclassification has no effect on the results of operations, stockholders’ deficit, and cash flows previously reported.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments ("ASC 326"). ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective January 1, 2024, for the Company. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements, but currently does not believe ASU 2020-06 will have a significant impact on the Company’s accounting for its convertible debt instruments as they are not considered indexed to the Company’s own stock. The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
Note 2 - Convertible Notes Payable
Convertible notes payable consisted of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Secured
|
|
|
|
|
|
|
(a) DART/Citco Global, in default
|
|
$
|
542,588
|
|
|
$
|
542,588
|
|
|
|
|
|
|
|
|
|
|
Unsecured
|
|
|
|
|
|
|
|
|
(b) Convertible notes with fixed conversion prices, in default
|
|
|
895,512
|
|
|
|
895,512
|
|
(c) Convertible notes with adjustable conversion prices
|
|
|
560,950
|
|
|
|
845,000
|
|
Total convertible notes principal outstanding
|
|
|
1,999,050
|
|
|
|
2,283,100
|
|
Debt discount
|
|
|
(317,813
|
)
|
|
|
(422,705
|
)
|
Convertible notes, net of discount
|
|
$
|
1,681,237
|
|
|
$
|
1,860,395
|
|
|
(a)
|
At December 31, 2019 and September 30, 2020, convertible notes payables due to DART/Citco Global totaled $542,588. The notes are secured by all of the Company’s assets, were due in 2010, and are currently in default. Beginning in 2009, the note holder agreed to the forbearance of any interest on the notes payable to DART/Citco Global. The DART/Citco Global note payables are convertible into less than one share of the Company’s common stock based on a fixed conversion price adjusted for applicable reverse stock splits.
|
|
|
|
|
(b)
|
At December 31, 2019 and September 30, 2020, convertible notes payable with fixed conversion prices totaled $895,512. The notes are unsecured, bear interest at 8% to 18% per annum, were due on various dates from March 2008 to March 2015, and are currently in default. The aggregate notes are convertible into less than one share of the Company’s common stock based on fixed conversion prices adjusted for applicable reverse stock splits. At December 31, 2019, the balance of the accrued interest on the fixed convertible notes was $1,154,095. During the nine months ended September 30, 2020, interest of $56,402 was accrued. At September 30, 2020, the balance of accrued interest on the fixed convertible notes was $1,210,497.
|
|
|
|
|
(c)
|
At December 31, 2019, there were $845,000 of convertible notes with adjustable conversion prices outstanding. During the nine months ended September 30, 2020, convertible notes for $688,500 were issued, a convertible note for $43,000 was repaid, and convertible notes for $929,550 were converted into shares of the Company’s common stock (see discussions below). At September 30, 2020, the balance of the convertible notes with adjustable conversion prices was $560,950.
|
|
|
|
|
|
During the nine months ended September 30, 2020, the Company issued ten convertible notes payable with adjustable conversion prices to seven lenders for aggregate proceeds of $688,500, bearing interest at 8% to 10% per annum, unsecured, and maturing between October 2020 and August 2021. At the option of the holder, the notes are convertible into shares of common stock of the Company at a price per share discount of 58% to 70% of the market price of the Company’s common stock, as defined, for 15 to 25 days preceding a conversion notice. As a result, the Company determined that the conversion options of the convertible notes were not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as derivative liabilities upon issuance. The Company determined that upon issuance of the convertible notes during the nine months ended September 30, 2020, the initial fair value of the embedded conversion feature totaled $776,000 (see Note 9), of which $635,833 was recorded as debt discount to be amortized over the term of the related notes, and the remainder of $140,167 was recorded as private placement costs. In addition, two of the convertible notes issued during the nine months ended September 30, 2020, were issued with warrants to purchase 638,235 shares of the Company’s common stock (see Note 11). The Company determined the relative fair value of the warrants was $52,667, which was recorded as debt discount to be amortized over the term of the related note.
|
|
|
|
|
|
During the nine months ended September 30, 2020, lenders elected to convert eleven notes totaling $929,550 plus interest of $55,911 (total of $985,461) into 43,954,085 shares of the Company’s common stock at conversion prices ranging from $0.00123 to $0.95 per share. On the dates of conversion, the closing price of the Company’s common stock ranged from $0.004 to $1.65 per share for a total fair value of shares of $2,176,594. The Company followed the general extinguishment model to record the settlement of the debt. The liabilities for the debt and conversion feature totaled $2,116,020, and was made up of debt and accrued interest of $985,461, the related unamortized debt discount of ($206,641), and the derivative liability related to the conversion option of the debt, after final valuation, of $1,337,200. The shares issued were measured at their fair value of $2,176,594, and the difference of $60,574 was recorded as loss on extinguishment of debt.
|
|
|
|
|
|
At December 31, 2019, the balance of unamortized discount on convertible notes with adjustable conversion features was $422,705. During the nine months ended September 30, 2020, debt discount of $688,500 was recorded, debt discount amortization of $586,751 was recorded, and $206,641 of debt discount was removed related to debt that was converted to common shares. At September 30, 2020, the balance of the unamortized discount was $317,813.
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Note 3 - Convertible Notes Payable – Related Parties
At December 31, 2019, convertible notes payable - related parties totaled $355,500. During the nine months ended September 30, 2020, two notes aggregating $57,500 held by the Company’s VP of Technology were extinguished as part of a debt settlement obligation transaction (see Note 8). At September 30, 2020, the balance of convertible notes payable-related parties totaled $298,000. The notes are made up of ten convertible note payables, are unsecured, and have extended due dates of December 31, 2020. Six notes totaling $268,000 are due to the Company’s Chief Executive Officer, at a compounded interest rate of 8% 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. The aggregate notes are convertible into less than one share of the Company’s common stock at fixed conversion prices adjusted for applicable reverse stock splits.
At December 31, 2019, accrued interest due for the convertible notes – related parties was $636,272. During the nine months ended September 30, 2020, interest of $54,651 was accrued, and accrued interest of $83,273 due to the Company’s VP of Technology was extinguished as part of a debt settlement obligation transaction (see Note 8). At September 30, 2020, accrued interest due for the convertible notes – related parties was $607,650.
Note 4 - Notes Payable
Notes payable consisted of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Unsecured notes
|
|
|
|
|
|
|
(a) Notes payable-in default
|
|
$
|
1,638,824
|
|
|
$
|
1,638,824
|
|
(b) Notes payable issued by BST-in default
|
|
|
475,000
|
|
|
|
475,500
|
|
(c) Note payable-PPP loan
|
|
|
313,212
|
|
|
|
-
|
|
(d) Note payable-EID loan
|
|
|
150,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Secured notes payable
|
|
|
|
|
|
|
|
|
(e) Notes payable ($3,249 in default at September 30, 2020)
|
|
|
146,940
|
|
|
|
271,550
|
|
Total notes payable principal outstanding
|
|
|
2,723,976
|
|
|
|
2,385,374
|
|
Less current portion of notes payable
|
|
|
(2,260,764
|
)
|
|
|
(2,237,484
|
)
|
Long term notes payable
|
|
$
|
463,212
|
|
|
$
|
147,890
|
|
|
(a)
|
At December 31, 2019 and September 30, 2020, notes payable totaled $1,638,824. The notes bear interest at 8% to 14% per annum, are unsecured, and were due on various dates from December 2011 to July 2017 and are currently in default. At December 31, 2019, the balance of the accrued interest on the notes payable was $2,183,352. During the nine months ended September 30, 2020, $126,157 of interest was accrued. At September 30, 2020, accrued interest on the promissory notes payable was $2,309,509.
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|
|
|
|
(b)
|
At December 31, 2019 and September 30, 2020, the Company’s consolidated subsidiary BST (see Note 1) had $475,500 of outstanding promissory notes. The notes bear interest at 8% per annum, are unsecured, matured through September 2019, and are currently in default. In conjunction with these notes, the Company recorded a related financing obligation (See Note 6). At December 31, 2019, the balance of the accrued interest on the notes payable-BST was $70,545. During the nine months ended September 30, 2020, $28,526 of interest was accrued. At September 30, 2020, accrued interest on the notes payable-BST was $99,071.
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|
|
|
|
(c)
|
On April 7, 2020, the Company was granted a loan (the “PPP loan”) from Chase Bank in the aggregate amount of $313,212, pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. The PPP loan agreement is dated April 7, 2020, matures on April 7, 2022, bears interest at a rate of 1% per annum, with the first six months of interest deferred, is payable monthly commencing on October 2020, and is unsecured and guaranteed by the U.S. Small Business Administration (“SBA”). The loan term may be extended to April 7, 2025, if mutually agreed to by the Company and lender. The Company applied ASC 470, Debt, to account for the PPP loan. The PPP loan may be prepaid at any time prior to maturity with no prepayment penalties. Funds from the PPP loan may only be used for qualifying expenses as described in the CARES Act, including qualifying payroll costs, qualifying group health care benefits, qualifying rent and debt obligations, and qualifying utilities. The Company intends to use the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses. The Company intends to apply for forgiveness of the PPP loan with respect to these qualifying expenses, however, the Company cannot assure that such forgiveness of any portion of the PPP loan will occur. As for the potential loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded. The terms of the PPP loan provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The Company was in compliance with the terms of the PPP loan as of September 30, 2020.
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|
(d)
|
On May 15, 2020, the Company received a $150,000 loan (the “EID Loan”) from the SBA under the SBA’s Economic Injury Disaster Loan program. The EID Loan has a thirty-year term and bears interest at a rate of 3.75% per annum. Monthly principal and interest payments of $0.7 per month are deferred for twelve months and commence in May 2021. The EID Loan may be prepaid at any time prior to maturity with no prepayment penalties. The proceeds from the EID Loan must be used for working capital. The EID Loan contains customary events of default and other provisions customary for a loan of this type. The Company was in compliance with the terms of the EID loan as of September 30, 2020.
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|
|
|
|
(e)
|
At December 31, 2019, secured notes payable totaled $271,550. During the nine months ended September 30, 2020, the Company issued two notes payable aggregating $79,949. In addition, during the nine months ended September 30, 2020, the Company made principal payments of $183,559 on the secured notes payable, and one secured note aggregating $21,000 was extinguished as part of a debt settlement obligation transaction (see Note 8). At September 30, 2020, the outstanding balance of the secured note payables was $146,940. The notes bear interest at 8% to 148% per annum, each agreement is secured by substantially all of the assets of the Company, and the notes mature through April 2021. During the nine months ended September 30, 2020, $95,800 of interest was accrued, $59,155 of interest was paid and $8,400 was extinguished as part of a debt settlement obligation transaction (see Note 8). One note for $3,249 was due in April 2020 and were not repaid in full when due. The Company and the note holders are in negotiations to extend the due date of the note.
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Note 5 - Notes Payable – Related Parties
At December 31, 2019, the balance of notes payable-related parties totaled $742,513. During the nine months ended September 30, 2020, the Company issued eight notes payable for $263,254 to its Chief Executive Officer. Also, during the nine months ended September 30, 2020, $4,223 of the notes were repaid. At September 30, 2020, the balance of notes payable-related parties totaled $1,001,544. The notes are made up of twenty-six notes payable due to the Company’s Chief Executive Officer, are non-interesting bearing or bear interest at rates ranging from 8% per annum to 10.49% per annum, are unsecured. Notes totaling $752,513 are due on December 31, 2020 and notes totaling $249,031 have no specified due date.
At December 31, 2019, accrued interest due for the notes was $760,024. During the nine months ended September 30, 2020, interest of $43,559 was accrued. At September 30, 2020, accrued interest due for the notes was $803,583.
Note 6 – Financing Obligation
At December 31, 2019 and September 30, 2020, the Company’s consolidated subsidiary, BST, had recorded a financing obligation of $1,263,200 to be paid in tokens, as defined. At September 30, 2020 and through the date of filing, BST has not developed or issued any tokens and there is no assurance as to whether, or at what amount, or on what terms, tokens will be available to be issued, if ever. At September 30, 2020, as the tokens do not exist, and any amounts received for tokens are not considered equity or revenue, management determined that 100% of the obligation of $1,263,200 is a liability to be settled by BST, through the issuance of tokens, or through other means if tokens are never issued.
Note 7 – Contingent Payment Obligation
On September 6, 2017, the Company entered into a litigation funding agreement with Therium Inc. (subsequently Therium Luxembourg) and VGL Capital, LLC (collectively the “Funders”). Under the agreement, the Company received $1,500,000 from the Funders to allow the Company to pursue patent enforcement actions against infringements of its patents (see Note 12). In exchange, the Funders are entitled to receive, after the payment of legal fees, the first $1,500,000 from the gross proceeds of any claims awarded, 10% of any additional claim proceeds until the Funders have received an additional $7,500,000, and 2.5% of any claim proceeds thereafter. The Funders shall be paid only in the event that the Company achieves recoveries of claim proceeds. At December 31, 2019 and September 30, 2020, the Company has reflected the $1,500,000 received from the Funders as a contingent payment obligation to be paid only if claim proceeds are recovered.
Note 8 – Debt Settlement Obligation
On May 13, 2020, the Company entered into a settlement agreement with Continuation Capital, Inc (“Continuation”). Continuation agreed to pay $197,738 owed to Company creditors, including $139,712 of convertible debt and accrued interest due to a related party (see Note 3), $29,400 of secured notes payable and accrued interest (see Note 4) and $28,626 of accounts payable. In exchange, the Company agreed to issue shares of its common stock to Continuation as consideration for the extinguishment of the debt, accrued interest, and accounts payables. The shares to be issued will be determined at a discount based on 45% of the lowest closing price of the Company common stock for the 30 trading days prior to the date of any issuance for payment. The Company determined that the settlement agreement with Continuation was a contract to settle debt with a variable number of shares based on a fixed monetary amount known at inception, and in accordance with ASC 480-10, the obligation was measured at fair value. The Company determined the fair value of the settlement obligation was $360,000 and recorded this as a liability. During the nine months ended September 30, 2020, the Company issued 11,585,725 shares of its common stock to Continuation for the payment of $284,119 of the settlement obligation. At September 30, 2020, the balance of the debt settlement obligation liability was $75,881.
When the Company initially recorded the obligation, the difference between the $360,000 fair value and $197,738 of debt and accounts payables assumed by Continuation was recorded as a loss on extinguishment of debt of $162,262 The fair value of the 11,585,725 shares issued for payment of $284,119 of the settlement obligation was determined to be $333,025 based on the closing price of the shares on the date issued, and the difference of $48,906 was recorded as interest expense. As part of the transaction, the Company also issued 90,909 shares of common stock to Continuation as a fee. The fair value of the shares issued for fees was determined to be $18,182 and is included in general and administrative expenses.
Note 9 – Derivative Financial Instruments
At September 30, 2020, the Company had convertible promissory notes outstanding that are convertible into shares of common stock of the Company at the option of the holders at price per share discounts ranging from 58% to 70% of the Company’s common stock market price, as defined in the note agreements. As the ultimate determination of shares to be issued upon conversion of these notes could exceed the current number of available authorized shares, the Company determined that the conversion features of the convertible notes were not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as derivative liabilities. Accordingly, the conversion features of the notes were separated from the host contracts (i.e. the notes) and characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
At December 31, 2019, the balance of the derivative liabilities was $1,516,435. During the nine months ended September 30, 2020, the Company recorded additions of $776,000 related to the conversion features of notes issued during the period (see Note 3), and a decrease in fair value of derivatives of $165,235. In addition, the Company recorded a decrease in derivative liability of $1,337,200 related to derivative liabilities that were extinguished when the related convertible note payable was converted into shares of common stock (see Notes 3 and 11). At September 30, 2020, the balance of the derivative liabilities was $790,000.
At September 30, 2020, the fair value of the Company’s embedded derivatives were estimated using the Monte Carlo simulation model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the conversion features, and future dividends. The fair value of the embedded derivative was determined using the following average assumptions:
|
|
September 30,
2020
|
|
|
January 2020 to September 2020
(dates of
inception)
|
|
|
December 31,
2019
|
|
Conversion feature:
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.69
|
%
|
|
0.11%-0.65
|
%
|
|
|
1.59
|
%
|
Expected volatility
|
|
|
197
|
%
|
|
152%-197
|
%
|
|
145%-155
|
%
|
Expected life (in years)
|
|
1 year
|
|
|
1 year
|
|
|
0.25 to 1 year
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion feature
|
|
$
|
790,000
|
|
|
$
|
776,000
|
|
|
$
|
1,516,435
|
|
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected volatility is based on the historical volatility of the Company’s stock. The expected life of the conversion feature of the notes was based on the remaining terms of the related notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.
The following table sets forth a summary of the changes in the estimated fair value of our embedded derivative during the nine months ended September 30, 2020 and 2019:
|
|
Nine months
ended
September 30,
2020
|
|
|
Nine months
ended
September 30,
2019
|
|
Fair value at beginning of period
|
|
$
|
1,516,435
|
|
|
$
|
1,313,904
|
|
Recognition of derivative liabilities upon initial valuation
|
|
|
776,000
|
|
|
|
1,369,518
|
|
Extinguishment of derivative liabilities
|
|
|
(1,337,200
|
)
|
|
|
(1,002,790
|
)
|
Net change in the fair value of derivative liabilities
|
|
|
(165,235
|
)
|
|
|
1,302,374
|
|
Fair value at end of period
|
|
$
|
790,000
|
|
|
$
|
2,983,006
|
|
Note 10 - Operating Lease
In January 2019, the Company entered into a noncancelable operating lease for its headquarters office requiring payments of $4,409 per month, payments increasing 3% each year, and ending on January 31, 2024. At September 30, 2020, the remaining lease term was 3.33 years. The Company does not have any other leases.
Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The operating lease ROU asset includes any lease payments made and excludes lease incentives.
The components of lease expense and supplemental cash flow information related to leases for the period are as follows:
|
|
Nine months
ended
September 30,
2020
|
|
|
Nine months
ended
September 30,
2019
|
|
Lease Cost
|
|
|
|
|
|
|
Operating lease cost (included in general and administration in the Company’s unaudited condensed statement of operations)
|
|
$
|
42,138
|
|
|
$
|
37,456
|
|
|
|
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities for the nine months ended September 30, 2020 and 2019
|
|
$
|
40,743
|
|
|
$
|
39,685
|
|
Weighted average remaining lease term – operating leases (in years)
|
|
|
3.3
|
|
|
|
4.3
|
|
Average discount rate – operating leases
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
The supplemental balance sheet information related to leases for the period is as follows:
|
|
At
September 30,
2020
|
|
Operating leases
|
|
|
|
Long-term right-of-use assets
|
|
$
|
169,538
|
|
|
|
|
|
|
Short-term operating lease liabilities
|
|
$
|
49,622
|
|
Long-term operating lease liabilities
|
|
|
124,581
|
|
Total operating lease liabilities
|
|
$
|
174,203
|
|
Maturities of the Company’s lease liabilities are as follows:
Year Ending
|
|
Operating Leases
|
|
2020 (remaining 3 months)
|
|
$
|
13,625
|
|
2021
|
|
|
56,000
|
|
2022
|
|
|
57,680
|
|
2023
|
|
|
59,410
|
|
2024
|
|
|
4,963
|
|
Total lease payments
|
|
|
191,678
|
|
Less: Imputed interest/present value discount
|
|
|
(17,475
|
)
|
Present value of lease liabilities
|
|
$
|
174,203
|
|
Lease expenses were $42,138 and $37,456 during the nine months ended September 30, 2020 and 2019, respectively.
Note 11 – Stockholders’ Deficit
Common Stock
During the nine months ended September 30, 2020, the Company issued an aggregate of 55,649,216 shares of its common stock as follows:
|
·
|
The Company issued 109,406 shares of its common stock for services, with a fair value of $20,211.
|
|
·
|
The Company issued 43,954,085 shares of common stock upon conversion of convertible notes payable and accrued interest (see Note 2).
|
|
·
|
The Company issued 11,585,725 shares of common stock upon conversion of debt settlement (see Note 8).
|
Warrants
In January and July 2020, in connection with the issuance of two convertible notes that aggregated $100,000 (See Note 2), the Company issued warrants to purchase 638,235 shares of the Company's common stock. The warrants were exercisable immediately, at an exercise price of $0.75 and $0.085 per share, and expire in 5 years. The warrants are classified within stockholders’ deficit, and the proceeds were allocated between the convertible note and warrants based on their relative fair value. The relative fair value of the warrants was determined to be $52,667 and was recorded as debt discount and additional paid-in-capital.
The table below summarizes the Company’s warrant activities for the nine months ended September 30, 2020:
|
|
Number of
Warrant
Shares
|
|
|
Exercise
Price
Range
Per Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2020
|
|
|
100,575
|
|
|
$
|
0.75-2.90
|
|
|
$
|
1.1185
|
|
Granted
|
|
|
638,235
|
|
|
|
0.0.85-0.75
|
|
|
|
0.1371
|
|
Canceled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, September 30, 2020
|
|
|
738,810
|
|
|
$
|
0.085-2.90
|
|
|
$
|
0.2707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance exercisable, September 30, 2020
|
|
|
738,810
|
|
|
$
|
0.085-2.90
|
|
|
$
|
0.2707
|
|
At September 30, 2020, there was no intrinsic value of the warrants.
The following table summarizes information concerning outstanding and exercisable warrants as of September 30, 2020:
|
|
|
Warrants Outstanding and Exercisable
|
|
Range of Exercise Prices
|
|
|
Number Outstanding
|
|
|
Average
Remaining
Contractual
Life
(in years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.085
|
|
|
|
588,235
|
|
|
|
5.00
|
|
|
$
|
0.085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.75
|
|
|
|
133,333
|
|
|
|
5.00
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.90
|
|
|
|
17,242
|
|
|
|
5.00
|
|
|
$
|
2.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.75 - $2.90
|
|
|
|
738,810
|
|
|
|
5.00
|
|
|
$
|
0.2707
|
|
Note 12 - Stock-Based Compensation
At September 30, 2020, the Company had options exercisable into 633,000 shares of the Company’s common stock, with remaining estimated lives of approximately eight years. The options had been issued in 2017 and 2019 with a total fair value of approximately $475,000. The options have exercise prices generally ranging from $2.05 to $3.10 per share, and the fair value of the options is amortized over vesting terms which ranged from three to six months.
For the nine months ended September 30, 2020 and 2019, the Company recognized compensation costs of $216,426 and $1,912, respectively, related to the fair value of vested options. At September 30, 2020, there was no unamortized fair value of options to be recognized as compensation in future periods.
The table below summarizes the Company’s stock option activities for the period January 1, 2020 to September 30, 2020:
|
|
Number of
Options
Shares
|
|
|
Exercise
Price Range
Per Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2020
|
|
|
633,000
|
|
|
$
|
2.05-3.125
|
|
|
$
|
2.93
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, September 30, 2020
|
|
|
633,000
|
|
|
$
|
2.05-3.125
|
|
|
$
|
2.93
|
|
Balance exercisable, September 30, 2020
|
|
|
633,000
|
|
|
$
|
2.05-3.125
|
|
|
$
|
2.93
|
|
At September 30, 2020, the intrinsic value of outstanding options was zero.
The following table summarizes information concerning the Company’s stock options as of September 30, 2020:
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.85
|
|
|
|
126,000
|
|
|
|
10.00
|
|
|
$
|
2.85
|
|
|
|
126,000
|
|
|
|
8.00
|
|
|
$
|
2.85
|
|
$
|
2.05
|
|
|
|
115,000
|
|
|
|
10.00
|
|
|
$
|
2.05
|
|
|
|
115,000
|
|
|
|
8.00
|
|
|
$
|
2.05
|
|
$
|
3.125
|
|
|
|
392,000
|
|
|
|
10.00
|
|
|
$
|
3.125
|
|
|
|
392,000
|
|
|
|
8.00
|
|
|
$
|
3.125
|
|
$
|
0.0041 - 975,000,000
|
|
|
|
633,000
|
|
|
|
10.00
|
|
|
$
|
2.93
|
|
|
|
633,000
|
|
|
|
8.00
|
|
|
$
|
2.93
|
|
Note 13 - Commitments and Contingencies
Legal Proceedings
On March 14, 2017, the Company initiated additional patent litigation against two major competitors in the U.S. District Court for the Eastern District of Virginia, for infringement of United States Patent Nos. 7,870,599, 8,484,698 and 8,713,701. This litigation is ongoing. On June 13, 2017, one of the competitors initiated a lawsuit against the Company in the U.S. District Court for the District of New Jersey for patent infringement (which the Company believes is without merit and will defend vigorously). This litigation is ongoing.
On December 1, 2017, The United States District Court for the Central District of California issued an opinion in the StrikeForce Technologies, Inc. v. SecureAuth Corp. case, which invalidated claims of U.S. Patent Nos. 7,870,599, 8,484,698 and 8,713,701 under 35 U.S.C. §101. The Company strongly disagreed with the Court’s decision and an appeal was filed by its attorney in July 2019. In October 2019, the Supreme Court of the United States denied the Company’s petition for a writ of certiorari in StrikeForce Technologies, Inc. v. SecureAuth Corp (19-103). Thus, the claims asserted against SecureAuth in the Central District of California, case no. 2:17-cv-04314-JAK-SK, remain invalid under 35 U.S.C. 101. The Company’s three patents contain a total of 108 claims, 43 claims were deemed invalid, however, 65 claims are still valid. Despite the Supreme Court’s decision, the Company’s Protect ID® products still retain patent protection and management intends to further expand those protections with new patents in the coming months. In the meantime, the Company continues to monitor the Federal Courts because there are several cases (i.e. Berkheimer v. HP), whereby a decision for Berkheimer could change the appellate landscape for 101 motion cases. Additionally, U.S. Senators Thom Tillis (R-NC) and Chris Coons (D-DE), along with several other Senators have released a bipartisan, bicameral draft bill that would reform Section 101 of the Patent Act in a manner the Company’s believes would be beneficial to it although the attainment of such reform may have been affected by the 2020 election results and incoming/outgoing Senators (although both sponsoring Senators won re-election). Management cannot guarantee that any pending claims or legislation will result in favorable decisions.
Asset Sale and Licensing Agreement
On August 24, 2015, the Company entered into an agreement with Cyber Safety, Inc., a New York corporation (“Cyber Safety”) for Cyber Safety to license, and retain an option to purchase, the patents and intellectual property related to the GuardedID® and MobileTrust® software. Cyber Safety had the option to buy the Company’s GuardedID® patent for $10,000,000 that expires on September 30, 2021. If the purchase price is not paid by September 30, 2021, it will increase to $11,000,000 and be due September 30, 2022. The Company believes, but cannot guarantee, Cyber Safety will exercise its option to purchase GuardedID® based on ongoing constructive discussions with Cyber Safety. There have been no new negotiations with them in regard to the exercise of the option, but there are continuing discussions with them regarding some of their large contracts. The option remains open until September 30, 2022 and Cyber Safety, to the Company’s knowledge, is still contemplating the exercise of the option. Cyber Safety also licensed the Malware Suite until September 30, 2020 and agreed to pay the Company 15% to 20% of the net amount Cyber Safety receives from this product. During the nine months ended September 30, 2020 and 2019, the Company recorded revenue of $380 and $280,000, respectively, from Cyber Safety.
Note 14 – Subsequent Events
Subsequent to September 30, 2020, the Company issued two unsecured convertible promissory notes aggregating $81,000, bearing interest at 8% per annum, and maturing in twelve months through October 2021. At the option of the holder, the notes are convertible into shares of common stock of the Company at a price per share discount of 61% of the market price of the Company’s common stock, as defined, for 15 days preceding a conversion notice.
Subsequent to September 30, 2020, the Company issued one unsecured promissory note of $60,000, bearing interest at 12% per annum, maturing in November 2021. The note was issued with two warrant agreements to purchase 13,333,333 shares of the Company’s common stock with an exercise price of $0.0045 and a five-year term, for each agreement. In the event the Company repays the note on or prior to the maturity date, then one of the two warrant agreements shall automatically expire.
Subsequent to September 30, 2020, the Company issued two secured promissory notes, aggregating $32,000, bearing interest at 15% to 25% per annum, each agreement is secured by substantially all of the assets of the Company, and the notes mature through January 2021.
Subsequent to September 30, 2020, convertible notes aggregating $103,768 of principal and $25,828 of accrued interest and fees were converted into 98,214,212 shares of common stock at conversion prices ranging from $0.0009 to $0.002542 per share.
Subsequent to September 30, 2020, the Company issued 24,381,509 shares of common stock with a fair value of $127,424 to pay off $75,881 of the debt settlement obligation.
On November 13, 2020, the Company’s filing of an Offering Circular on Form 1-A, pursuant to Regulation A (File Number: 024-11267) was qualified by the Securities and Exchange Commission. The Company registered 668,449,198 shares of common stock maximum proceeds of $2,315,000 (after deducting the maximum broker discount and costs of the offering). In November 2020, the Company sold subscriptions for $37,400 and issued 10,000,000 shares of its common stock to an investor.