UNITED STATES
SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
UNITED STATES
SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-Q
FORM 10-Q
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2017
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ____________ to _____________
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
| |
For the quarterly period ended June 30, 2022 |
| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to |
ZERIFY, INC. |
(Exact name of registrant as specified in its Charter) |
Wyoming |
| 000-55012 |
| 22-3827597 | |
(State or other jurisdiction of incorporation or organization) | (Commission file number) |
| (
|
(I.R.S. Employer
Identification No.)
1090 King Georges Post Road, Suite 603
Edison, NJ08837
(Address of Principal Executive Offices)
(732) 661-9641
(Issuer’s telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class |
| Name of each exchange on which registered | ||
N/A | N/A |
|
Securities registered pursuant to Section 12(g)12(b) of the Exchange Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.0001 par value | ZRFY | OTCQB |
Common stock, $0.0001 par value
TitleIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of Classthe Act. ☐ Yes No ☒
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x ☒ No o☐
Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such a shorter period that the registrant was required to submit and post such files). Yes x ☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-212b–2 of the Exchange Act.
Large accelerated |
| Accelerated filer |
| |
|
| Smaller reporting company |
| |
| Emerging growth company |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)7(a)(2)(B) of the ExchangeSecurities Act. ¨☐
Indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Act.) Yes ¨☐ No x☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class |
| Outstanding at |
Common stock, $0.0001 par value |
|
|
Indicate the number of shares outstanding of each of the issuer’s classes of preferred stock, as of the latest practicable date.
Class |
| Outstanding at |
Preferred stock, Series A, no par value |
| 3 |
Class |
| Outstanding at |
Preferred stock, Series B, $0.10 par value |
|
|
Transitional Small Business Disclosure Format Yes ¨☐ No x☒
Documents Incorporated By Reference
None
STRIKEFORCE TECHNOLOGIES,ZERIFY, INC.
(formerly known as Strikeforce Technologies, Inc.)
INDEX TO FORM 10-Q FILING
SEPTEMBERJUNE 30, 20172022
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| Condensed Consolidated Balance Sheets at June 30, 2022 (unaudited) and December 31, 2021 | F-1 | |||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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EX-31.1 | Management Certification |
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EX-32.1 | Sarbanes-Oxley Act |
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2 |
| Table of Contents |
PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
General
The accompanying unaudited condensed interim financial statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders’ deficit in conformity with generally accepted accounting principles. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the condensed financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2016. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that can be expected for the year ending December 31, 2017.
CONDENSED BALANCE SHEETS September 30, 2017 December 31, 2016 (Unaudited) ASSETS Current Assets: Cash Accounts receivable Prepaid expenses Total current assets Property and equipment, net Other assets Total Assets LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Accounts payable Convertible notes payable, net Convertible notes payable - related parties Current maturities of notes payable, net Current maturities of notes payable - related parties Accrued interest (including $1,115,993 and $939,654 due to related parties, respectively) Contingent payment obligation Derivative liabilities Accrued expenses Accrued salaries and payroll taxes Due to factor Total Current Liabilities Stockholders' Deficit Series A Preferred stock, no par value; 100 shares authorized; 3 shares issued and outstanding Series B Preferred stock par value $0.10: 100,000,000 shares authorized; 103,335 and 50,001 shares issued and outstanding, respectively Preferred stock series not designated par value $0.10: 10,000,000 shares authorized; none issued or outstanding Common stock par value $0.0001: 5,000,000,000 shares authorized; 2,319,706,386 and 2,319,683,886 shares issued and outstanding, respectively Additional paid-in capital Accumulated deficit Total Stockholders' Deficit Total Liabilities and Stockholders' Deficit $ 902,792 $ 804,130 61,298 152,009 11,067 9,265 975,157 965,404 8,799 8,926 20,999 22,539 $ 1,004,955 $ 996,869 $ 874,906 $ 890,799 1,438,100 1,447,100 355,500 355,500 1,788,824 1,703,824 742,513 742,513 3,912,060 3,805,158 1,500,000 - 591,887 262,185 - 9,539 - 10,549 - 209,192 11,203,790 9,436,359 987,000 987,000 10,333 5,000 - - 231,972 231,970 25,497,797 24,655,363 (36,925,937 ) (34,318,823 ) (10,198,835 ) (8,439,490 ) $ 1,004,955 $ 996,869
See accompanying notes to the condensed financial statements.
CONDENSED STATEMENTS OF OPERATIONS For the Three Months Ended For the Nine Months Ended September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue Cost of revenue Gross margin Operating expenses: Compensation Professional fees Selling, general and administrative expenses Research and development Total operating expenses Loss from operations Other income (expense): Interest expense Debt discount amortization Private placement costs Change in fair value of derivative liabilities Extinguishment of derivative liabilities Income tax expense Forgiveness of debt Litigation settlement Fees related to litigation settlement Other income (expense) Other income (expense), net Net income (loss) Deemed dividend on convertible preferred stock Net income (loss) attributable to common stockholders Earnings (loss) per common share - basic and diluted -Basic -Diluted Weighted average common shares outstanding -Basic -Diluted $ 76,342 $ 183,029 $ 218,946 $ 392,628 3,168 888 9,547 4,852 73,174 182,141 209,399 387,776 137,008 124,282 490,586 345,000 67,499 45,883 249,822 521,742 74,586 312,896 967,785 558,456 123,750 125,654 402,532 378,874 402,843 608,715 2,110,725 1,804,072 (329,669 ) (426,574 ) (1,901,326 ) (1,416,296 ) (561,854 ) (95,481 ) (744,177 ) (1,022,178 ) - - (4,000 ) (34,293 ) (88,455 ) - (222,949 ) - (90,895 ) 23,776 (289,580 ) 96,765 557,827 - 557,827 635,600 (452 ) - (71,318 ) - - 180,587 86,140 485,372 - - - 9,750,000 - - - (4,187,257 ) 28 181 47 (1,357 ) (183,801 ) 109,063 (688,010 ) 5,722,652 (513,470 ) (317,511 ) (2,589,336 ) 4,306,356 - - (17,778 ) - $ (513,470 ) $ (317,511 ) $ (2,607,114 ) $ 4,306,356 $ - $ - $ - $ - $ - $ - $ - $ - 2,319,701,359 2,284,590,677 2,319,693,932 1,699,727,344 2,319,701,359 2,284,590,677 2,319,693,932 1,700,489,249
See accompanying notes to the condensed financial statements.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 (Unaudited) Series A Preferred stock, no par value Series B Preferred stock, par value $0.10 Common stock, par value $0.0001 Additional Paid-in Accumulated Total Stockholders' Shares Amount Shares Amount Shares Amount Capital Deficit Deficit Balance at December 31, 2016 Sale of shares of series B preferred stock Deemed dividend on convertible preferred stock Fair value of common stock issued for services Fair value of vested options Net loss Balance at September 30, 2017 3 $ 987,000 50,001 $ 5,000 2,319,683,886 $ 231,970 $ 24,655,363 $ (34,318,823 ) $ (8,439,490 ) - - 53,334 5,333 - - 74,667 - 80,000 - - - - - - 17,778 (17,778 ) - - - - - 22,500 2 451 - 453 - - - - - - 749,538 - 749,538 - - - - - - - (2,589,336 ) (2,589,336 ) 3 $ 987,000 103,335 $ 10,333 2,319,706,386 $ 231,972 $ 25,497,797 $ (36,925,937 ) $ (10,198,835 )
ZERIFY, INC. | ||||||||
(formerly known as Strikeforce Technologies, Inc.) | ||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||
|
|
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|
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| ||
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||
|
| (Unaudited) |
|
|
|
| ||
ASSETS |
|
|
|
|
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| ||
Current Assets: |
|
|
|
|
|
| ||
Cash (includes VIE balances of $1,000 and $1,000, respectively) |
| $ | 579,000 |
|
| $ | 2,084,000 |
|
Accounts receivable, net |
|
| 13,000 |
|
|
| 24,000 |
|
Prepaid expenses |
|
| 9,000 |
|
|
| 13,000 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
| 601,000 |
|
|
| 2,121,000 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
| 36,000 |
|
|
| 0 |
|
Operating lease right-of-use asset |
|
| 81,000 |
|
|
| 107,000 |
|
Other assets |
|
| 11,000 |
|
|
| 12,000 |
|
|
|
|
|
|
|
|
|
|
Total Assets |
| $ | 729,000 |
|
| $ | 2,240,000 |
|
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LIABILITIES AND STOCKHOLDERS' DEFICIT |
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Current Liabilities: |
|
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Accounts payable and accrued expenses (includes VIE balances of $2,000 and $2,000, respectively) |
| $ | 1,071,000 |
|
| $ | 996,000 |
|
Convertible notes payable (including $895,000 and $895,000 in default) |
|
| 1,348,000 |
|
|
| 1,398,000 |
|
Convertible notes payable - related parties |
|
| 268,000 |
|
|
| 268,000 |
|
Notes payable (including $1,934,000 and $1,972,000 in default, respectively) |
|
| 1,934,000 |
|
|
| 1,972,000 |
|
(includes VIE balances of$285,000 and $310,000, respectively) |
|
|
|
|
|
|
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Notes payable - related parties |
|
| 693,000 |
|
|
| 693,000 |
|
Accrued interest (including $1,557,000 and $1,497,000 due to related parties, respectively) |
|
| 5,669,000 |
|
|
| 5,477,000 |
|
(includes VIE balances of $125,000 and $120,000, respectively) |
|
|
|
|
|
|
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|
Contingent payment obligation |
|
| 1,500,000 |
|
|
| 1,500,000 |
|
VIE Financing obligation |
|
| 1,263,000 |
|
|
| 1,263,000 |
|
Operating lease liability, current portion |
|
| 56,000 |
|
|
| 39,000 |
|
|
|
|
|
|
|
|
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Total current liabilities |
|
| 13,802,000 |
|
|
| 13,606,000 |
|
|
|
|
|
|
|
|
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|
Notes payable, long-term portion |
|
| 150,000 |
|
|
| 150,000 |
|
Operating lease liability, long-term portion |
|
| 29,000 |
|
|
| 73,000 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
| 13,981,000 |
|
|
| 13,829,000 |
|
|
|
|
|
|
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Commitments and Contingencies |
|
|
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|
|
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Stockholders' Deficit |
|
|
|
|
|
|
|
|
Series A Preferred stock, no par value; 100 shares authorized; 3 shares issued and outstanding |
|
| 987,000 |
|
|
| 987,000 |
|
Series B Preferred stock par value $0.10: 100,000,000 shares authorized; 36,667 shares issued and outstanding |
|
| 4,000 |
|
|
| 4,000 |
|
Preferred stock series not designated par value $0.10: 10,000,000 shares authorized; none issued or outstanding |
|
| 0 |
|
|
| 0 |
|
Common stock par value $0.0001: 4,000,000,000 shares authorized; 1,013,111,161 and 955,380,225 shares issued and outstanding, respectively |
|
| 101,000 |
|
|
| 96,000 |
|
Additional paid-in capital |
|
| 63,850,000 |
|
|
| 59,788,000 |
|
Accumulated deficit |
|
| (77,312,000 | ) |
|
| (71,595,000 | ) |
Total Zerify, Inc. stockholders' deficit |
|
| (12,370,000 | ) |
|
| (10,720,000 | ) |
Noncontrolling interest in consolidated subsidiary |
|
| (882,000 | ) |
|
| (869,000 | ) |
|
|
|
|
|
|
|
|
|
Total Stockholders' Deficit |
|
| (13,252,000 | ) |
|
| (11,589,000 | ) |
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Deficit |
| $ | 729,000 |
|
| $ | 2,240,000 |
|
See accompanying notes to the condensed consolidated financial statements.
| Table of Contents |
CONDENSED STATEMENTS OF CASH FLOWS For the Nine Months Ended For the Nine Months Ended 2017 2016 (Unaudited) (Unaudited) Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization Amortization of discount on notes payable Discount on notes payable recorded as interest expense Fair value of common stock issued for interest on conversion notes Fair value of common stock issued for services Fair value of vested options Forgiveness of debt Change in fair value of derivative liabilities Private placement costs Extinguishment of derivative liabilities Changes in operating assets and liabilities: Accounts receivable Prepaid expenses Accounts payable Accrued expenses Accrued interest Accrued salaries and payroll taxes Net cash provided by (used in) operating activities Cash flows from investing activities: Purchases of property and equipment Cash flows from financing activities: Proceeds from contingent payment obligation Proceeds from convertible note payable Proceeds from sale of Series B preferred stock Proceeds from notes payable Repayment of convertible notes payable Repayment of notes payable Net cash provided by (used in) financing activities Net increase (decrease) in cash Cash at beginning of the period Cash at end of the period Supplemental disclosure of cash flow information: Interest paid Income tax paid Non-cash investing and financing activities: Deemed dividend on convertible preferred stock Note payable in exchange for due to factor and accrued interest Common stock issued for conversion of debt and accrued interest Forgiveness of accrued officers salaries recorded as capital contribution Common stock issued for conversion of Series B preferred stock Common stock issued for exercise of warrants September 30, September 30, $ (2,589,336 ) $ 4,306,356 4,981 3,823 4,000 34,293 371,000 - - 386,351 453 186,037 749,538 269,250 (86,140 ) (485,372 ) 289,580 (96,765 ) 222,949 - (557,827 ) (635,600 ) 90,711 (251,321 ) (1,802 ) (7,049 ) (15,893 ) (416,600 ) (9,539 ) (7,616 ) 193,850 78,668 (10,549 ) (585,497 ) (1,344,024 ) 2,778,958 (3,314 ) (1,499 ) 1,500,000 - 375,000 - 80,000 - - 75,000 (384,000 ) (686,738 ) (125,000 ) (978,985 ) 1,446,000 (1,590,723 ) 98,662 1,186,736 804,130 37,153 $ 902,792 $ 1,223,889 $ 86,310 $ 233,973 71,318 - $ 17,778 $ - 210,000 - - 3 - 762,275 - 12,534 - 12
ZERIFY, INC. | ||||||||||||||||
(formerly known as Strikeforce Technologies, Inc.) | ||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||
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| For the Three Months Ended |
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| For the Six Months Ended |
| ||||||||||
|
| June 30, 2022 |
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| June 30, 2021 |
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| June 30, 2022 |
|
| June 30, 2021 |
| ||||
|
| (Unaudited) |
|
| (Unaudited) |
|
| (Unaudited) |
|
| (Unaudited) |
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Revenue |
| $ | 24,000 |
|
| $ | 67,000 |
|
| $ | 56,000 |
|
| $ | 113,000 |
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Operating expenses: |
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|
|
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|
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|
|
|
|
|
|
|
|
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Cost of revenue |
|
| 12,000 |
|
|
| 8,000 |
|
|
| 22,000 |
|
|
| 11,000 |
|
Selling, general and administrative expenses |
|
| 2,451,000 |
|
|
| 1,820,000 |
|
|
| 5,087,000 |
|
|
| 7,448,000 |
|
Research and development |
|
| 158,000 |
|
|
| 129,000 |
|
|
| 312,000 |
|
|
| 274,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total operating expenses |
|
| 2,621,000 |
|
|
| 1,957,000 |
|
|
| 5,421,000 |
|
|
| 7,733,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Loss from operations |
|
| (2,597,000 | ) |
|
| (1,890,000 | ) |
|
| (5,365,000 | ) |
|
| (7,620,000 | ) |
|
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Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (including $60,000 and $61,000 to related parties, respectively) |
|
| (100,000 | ) |
|
| (114,000 | ) |
|
| (199,000 | ) |
|
| (242,000 | ) |
Debt discount amortization |
|
| 0 |
|
|
| (29,000 | ) |
|
| 0 |
|
|
| (52,000 | ) |
Financing costs |
|
| (165,000 | ) |
|
| (3,330,000 | ) |
|
| (165,000 | ) |
|
| (6,569,000 | ) |
Change in fair value of derivative liabilities |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (219,000 | ) |
Gain/(loss) on extinguishment of debt, net |
|
| 0 |
|
|
| 321,000 |
|
|
| 0 |
|
|
| (286,000 | ) |
Other expense |
|
| (1,000 | ) |
|
| (1,000 | ) |
|
| (1,000 | ) |
|
| (1,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
| (266,000 | ) |
|
| (3,153,000 | ) |
|
| (365,000 | ) |
|
| (7,369,000 | ) |
|
|
|
|
|
|
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|
|
|
|
|
|
|
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Net loss |
|
| (2,863,000 | ) |
|
| (5,043,000 | ) |
|
| (5,730,000 | ) |
|
| (14,989,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interest |
|
| 6,000 |
|
|
| 10,000 |
|
|
| 13,000 |
|
|
| 17,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Zerify, Inc. |
| $ | (2,857,000 | ) |
| $ | (5,033,000 | ) |
| $ | (5,717,000 | ) |
| $ | (14,972,000 | ) |
|
|
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Net loss per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Basic and diluted |
| $ | (0.00 | ) |
| $ | (0.01 | ) |
| $ | (0.01 | ) |
| $ | (0.02 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding -Basic and diluted |
|
| 984,334,754 |
|
|
| 847,638,243 |
|
|
| 969,980,079 |
|
|
| 812,551,868 |
|
See accompanying notes to the condensed consolidated financial statements.
| Table of Contents |
ZERIFY, INC. (formerly known as Strikeforce Technologies, Inc.) | ||||||||||||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT | ||||||||||||||||||||||||||||||||||||||||
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (Unaudited) | ||||||||||||||||||||||||||||||||||||||||
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Three months ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
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| Series A Preferred stock, no |
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| Series B Preferred stock, par |
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| Common stock, par value |
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| Additional |
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| Total |
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| par value |
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| value $0.10 |
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| $0.0001 |
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| Paid-in |
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| Accumulated |
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| Noncontrolling |
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| Stockholders' |
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| Shares |
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| Amount |
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| Shares |
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| Amount |
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| Shares |
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| Amount |
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| Capital |
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| Deficit |
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| Interest |
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| Deficit |
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Balance at April 1, 2022 |
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| 3 |
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| $ | 987,000 |
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| 36,667 |
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| $ | 4,000 |
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| 955,515,078 |
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| $ | 96,000 |
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| $ | 61,430,000 |
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| $ | (74,455,000 | ) |
| $ | (876,000 | ) |
| $ | (12,814,000 | ) |
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Common stock issued for cash |
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| - |
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| 0 |
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| - |
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| 0 |
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| 50,000,000 |
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| 5,000 |
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| 935,000 |
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| 0 |
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| 0 |
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| 940,000 |
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Fair value of common stock issued for services |
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| - |
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| 0 |
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| - |
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| 0 |
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| 7,596,083 |
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| 0 |
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| 163,000 |
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| 0 |
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| 0 |
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| 163,000 |
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Fair value of vested options |
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| - |
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| 0 |
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| - |
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| 0 |
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| - |
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| 0 |
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| 1,322,000 |
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| 0 |
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| 0 |
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| 1,322,000 |
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Net loss |
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| - |
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| 0 |
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| - |
|
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| 0 |
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| - |
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| 0 |
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| 0 |
|
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| (2,857,000 | ) |
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| (6,000 | ) |
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| (2,863,000 | ) |
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Balance at June 30, 2022 (unaudited) |
|
| 3 |
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| $ | 987,000 |
|
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| 36,667 |
|
| $ | 4,000 |
|
|
| 1,013,111,161 |
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| $ | 101,000 |
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| $ | 63,850,000 |
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| $ | (77,312,000 | ) |
| $ | (882,000 | ) |
| $ | (13,252,000 | ) |
Six months ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
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| Series A Preferred stock, no |
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| Series B Preferred stock, par |
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| Common stock, par value |
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| Additional |
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| Total |
| |||||||||||||||||||
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| per value |
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| value $0.10 |
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| $0.0001 |
|
| Paid-in |
|
| Accumulated |
|
| Noncontrolling |
|
| Stockholders' |
| |||||||||||||||||||
|
| Shares |
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| Amount |
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| Shares |
|
| Amount |
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| Shares |
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| Amount |
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| Capital |
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| Deficit |
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| Interest |
|
| Deficit |
| ||||||||||
Balance at January 1, 2022 |
|
| 3 |
|
| $ | 987,000 |
|
|
| 36,667 |
|
| $ | 4,000 |
|
|
| 955,380,225 |
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| $ | 96,000 |
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| $ | 59,788,000 |
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| $ | (71,595,000 | ) |
| $ | (869,000 | ) |
| $ | (11,589,000 | ) |
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Common stock issued for cash |
|
| - |
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| 0 |
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| - |
|
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| 0 |
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| 50,000,000 |
|
|
| 5,000 |
|
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| 935,000 |
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| 0 |
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| 0 |
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| 940,000 |
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Fair value of common stock issued for services |
|
| - |
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| 0 |
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| - |
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| 0 |
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| 7,730,936 |
|
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| 0 |
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| 168,000 |
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| 0 |
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| 0 |
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| 168,000 |
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Fair value of vested options |
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| - |
|
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| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 2,959,000 |
|
|
| 0 |
|
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| 0 |
|
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| 2,959,000 |
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Net loss |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| (5,717,000 | ) |
|
| (13,000 | ) |
|
| (5,730,000 | ) |
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Balance at June 30, 2022 (unaudited) |
|
| 3 |
|
| $ | 987,000 |
|
|
| 36,667 |
|
| $ | 4,000 |
|
|
| 1,013,111,161 |
|
| $ | 101,000 |
|
| $ | 63,850,000 |
|
| $ | (77,312,000 | ) |
| $ | (882,000 | ) |
| $ | (13,252,000 | ) |
See accompanying notes to the condensed consolidated financial statements.
| F-3 |
| Table of Contents |
ZERIFY, INC. (formerly known as StrikeForce Technologies, Inc.) | ||||||||||||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT | ||||||||||||||||||||||||||||||||||||||||
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (Unaudited) | ||||||||||||||||||||||||||||||||||||||||
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| ||||||||||
Three months ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
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| ||||||||||
|
| Series A Preferred stock, no |
|
| Series B Preferred stock, par |
| Common stock, par value |
|
| Additional |
|
|
|
|
|
|
|
| Total |
| ||||||||||||||||||||
|
| par value |
|
| value $0.10 |
|
| $0.0001 |
|
| Paid-in |
|
| Accumulated |
|
| Noncontrolling |
|
| Stockholders' |
| |||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Interest |
|
| Deficit |
| ||||||||||
Balance at April 1, 2021 |
|
| 3 |
|
| $ | 987,000 |
|
|
| 36,667 |
|
| $ | 4,000 |
|
|
| 807,277,505 |
|
| $ | 81,000 |
|
| $ | 50,862,000 |
|
| $ | (64,335,000 | ) |
| $ | (830,000 | ) |
| $ | (13,231,000 | ) |
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Common stock issued for cash |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 27,750,000 |
|
|
| 3,000 |
|
|
| 1,315,000 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,318,000 |
|
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Fair value of common stock issued for services |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 573,184 |
|
|
| 0 |
|
|
| 41,000 |
|
|
| 0 |
|
|
| 0 |
|
|
| 41,000 |
|
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Fair value of vested options |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 1,157,000 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,157,000 |
|
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Fair value of common stock issued as a financing cost |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 28,219,063 |
|
|
| 3,000 |
|
|
| 3,327,000 |
|
|
| 0 |
|
|
| 0 |
|
|
| 3,330,000 |
|
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Common stock issued upon cashless exercise of warrants |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 12,349,726 |
|
|
| 1,000 |
|
|
| (1,000 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
|
|
|
|
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|
|
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|
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|
|
Net loss |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| (5,033,000 | ) |
|
| (10,000 | ) |
|
| (5,043,000 | ) |
|
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Balance at June 30, 2021 (Unaudited) |
|
| 3 |
|
| $ | 987,000 |
|
|
| 36,667 |
|
| $ | 4,000 |
|
|
| 876,169,478 |
|
| $ | 88,000 |
|
| $ | 56,701,000 |
|
| $ | (69,368,000 | ) |
| $ | (840,000 | ) |
| $ | (12,428,000 | ) |
Six months ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
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| ||||||||||
|
| Series A Preferred stock, no par |
|
| Series B Preferred stock, par |
| Common stock, par |
|
| Additional |
|
|
|
|
|
|
|
| Total |
| ||||||||||||||||||||
|
| value |
|
| value $0.10 |
|
| value $0.0001 |
|
| Paid-in |
|
| Accumulated |
|
| Noncontrolling |
|
| Stockholders' |
| |||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Interest |
|
| Deficit |
| ||||||||||
Balance at January 1, 2021 |
|
| 3 |
|
| $ | 987,000 |
|
|
| 36,667 |
|
| $ | 4,000 |
|
|
| 718,263,338 |
|
| $ | 72,000 |
|
| $ | 39,814,000 |
|
| $ | (54,396,000 | ) |
| $ | (823,000 | ) |
| $ | (14,342,000 | ) |
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for cash |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 65,866,450 |
|
|
| 6,000 |
|
|
| 2,761,000 |
|
|
| 0 |
|
|
| 0 |
|
|
| 2,767,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of common stock issued for services |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 701,711 |
|
|
| 0 |
|
|
| 57,000 |
|
|
| 0 |
|
|
| 0 |
|
|
| 57,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of vested options |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 6,387,000 |
|
|
| 0 |
|
|
| 0 |
|
|
| 6,387,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of common stock issued as a financing cost |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 45,150,500 |
|
|
| 5,000 |
|
|
| 6,564,000 |
|
|
| 0 |
|
|
| 0 |
|
|
| 6,569,000 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Common stock issued upon cashless exercise of warrants |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 12,349,726 |
|
|
| 1,000 |
|
|
| (1,000 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon cashless exercise of options |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 17,208,335 |
|
|
| 2,000 |
|
|
| (2,000 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon conversion of notes and accrued interest |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 16,168,589 |
|
|
| 2,000 |
|
|
| 1,033,000 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,035,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon conversion of debt settlement |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 460,829 |
|
|
| 0 |
|
|
| 88,000 |
|
|
| 0 |
|
|
| 0 |
|
|
| 88,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| (14,972,000 | ) |
|
| (17,000 | ) |
|
| (14,989,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2021 (Unaudited) |
|
| 3 |
|
| $ | 987,000 |
|
|
| 36,667 |
|
| $ | 4,000 |
|
|
| 876,169,478 |
|
| $ | 88,000 |
|
| $ | 56,701,000 |
|
| $ | (69,368,000 | ) |
| $ | (840,000 | ) |
| $ | (12,428,000 | ) |
See accompanying notes to the condensed consolidated financial statements.
| F-4 |
| Table of Contents |
ZERIFY, INC. (formerly known as Strikeforce Technologies, Inc.) | ||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
|
|
|
|
|
|
| ||
|
| For the Six Months |
|
| For the Six Months |
| ||
|
| Ended |
|
| Ended |
| ||
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||
|
| (Unaudited) |
|
| (Unaudited) |
| ||
| Cash flows from operating activities: |
|
|
|
|
|
| ||
Net loss |
| $ | (5,730,000 | ) |
| $ | (14,989,000 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 1,000 |
|
|
| 3,000 |
|
Amortization of discount |
|
| 0 |
|
|
| 52,000 |
|
Amortization of right-of-use asset |
|
| 26,000 |
|
|
| 25,000 |
|
Fair value of common stock issued for services |
|
| 168,000 |
|
|
| 57,000 |
|
Fair value of vested options |
|
| 2,959,000 |
|
|
| 6,387,000 |
|
Fair value of common stock issued for financing services |
|
| 0 |
|
|
| 6,569,000 |
|
Change in fair value of derivative liabilities |
|
| 0 |
|
|
| 219,000 |
|
Loss on extinguishment of debt, net |
|
| 0 |
|
|
| 286,000 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 11,000 |
|
|
| 8,000 |
|
Prepaid expenses |
|
| 4,000 |
|
|
| (6,000 | ) |
Accounts payable and accrued expenses |
|
| 75,000 |
|
|
| (1,000 | ) |
Accrued interest |
|
| 192,000 |
|
|
| 144,000 |
|
Operating lease liability |
|
| (27,000 | ) |
|
| (25,000 | ) |
Net cash used in operating activities |
|
| (2,321,000 | ) |
|
| (1,271,000 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (36,000 | ) |
|
| 0 |
|
Net cash used in investing activities |
|
| (36,000 | ) |
|
| 0 |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
| 940,000 |
|
|
| 2,767,000 |
|
Proceeds from notes payable |
|
| 0 |
|
|
| 177,000 |
|
Repayment of convertible note payable |
|
| (50,000 | ) |
|
| 0 |
|
Repayment of notes payable |
|
| (38,000 | ) |
|
| (198,000 | ) |
Repayment of convertible notes payable-related parties |
|
| 0 |
|
|
| (30,000 | ) |
Repayment of notes payable-related parties |
|
| 0 |
|
|
| (259,000 | ) |
Net cash provided by financing activities |
|
| 852,000 |
|
|
| 2,457,000 |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
| (1,505,000 | ) |
|
| 1,186,000 |
|
|
|
|
|
|
|
|
|
|
| Cash at beginning of the period |
|
| 2,084,000 |
|
|
| 162,000 |
|
|
|
|
|
|
|
|
|
|
| Cash at end of the period |
| $ | 579,000 |
|
| $ | 1,348,000 |
|
|
|
|
|
|
|
|
|
|
| Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
| $ | 8,000 |
|
| $ | 76,000 |
|
Income tax paid |
| $ | 1,000 |
|
| $ | 0 |
|
|
|
|
|
|
|
|
|
|
| Supplemental disclosure of non-cash investing and financing transactions |
|
|
|
|
|
|
|
|
Common stock issued for conversion of notes and accrued interest |
| $ | 0 |
|
| $ | 1,035,000 |
|
Common stock issued upon conversion of debt settlement |
| $ | 0 |
|
| $ | 88,000 |
|
StrikeForceSee accompanying notes to the condensed consolidated financial statements.
| F-5 |
| Table of Contents |
Zerify, Inc.
(formerly known as Strikeforce Technologies, Inc.)
Three Months and Nine Months Ended September 30, 2017 and 2016
Notes to the Condensed Consolidated Financial Statements
(Unaudited)Three and six months ended June 30, 2022 and 2021
Note 1 - Organization and Summary of Significant Accounting Policies
Zerify, Inc. (formerly known as StrikeForce Technologies, Inc.) (the “Company”) is a software development and services company that offers a suite of integrated computer network security products using proprietary technology. The Company’s ongoing strategy is developing and marketing its suite of network security products to the corporate, financial, healthcare, legal, government, technology, insurance, e-commerce and consumer sectors. The Company’s operations are based in Edison, New Jersey.
Going ConcernOn April 26, 2022, the Company applied for the Zerify trademark. ZERIFY™ which is intended to cover the categories of downloadable or recorded computer software for encryption; downloadable or recorded computer software for cyber security assessment and protection; anti-spyware software; downloadable or recorded computer application software for mobile devices, namely, software for protecting people from identity theft; downloadable or recorded computer software for guarding users of computers and remote access devices from identity theft, featuring various software tools, namely, anti-keyboard logger and keyboard stroke encryption.
On June 14, 2022, the Board of Directors and holders of a majority of the voting power approved a resolution to change the Company’s name from StrikeForce Technologies, Inc. to Zerify, Inc. The accompanying condensed financial statements have been prepared on a going concern basis, which contemplatesBoard of Directors believes that the realizationname change will better reflect the business plans of assets and the settlement of liabilities and commitments in the normal course of business. AsCompany reflected in the accompanying condensed financial statements,current cyber security software products and in the name Zerify which emphasizes the Company’s mission to ensure Zero-Trust for the nine months ended September 30, 2017,most secure collaborative communications and that every participant is verified prior to entering a video conference.
On August 1, 2022, pursuant to the Company incurred a net loss of $2,607,114 and used cash in operating activities of $1,344,024, and at September 30, 2017, the Company had a stockholders’ deficit of $10,198,835. 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. In addition, the Company’s independent registered public accounting firm, in its reportapproval from FINRA, our Common Stock is now quoted on the Company’s December 31, 2016 financial statements, has expressed substantial doubt aboutOTCQB Market under the Company’s ability to continue as a going concern. The condensed financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.symbol “ZRFY” (formerly “SFOR”).
At September 30, 2017, the Company had cash on hand in the amount of $902,792. Management estimates that the current funds on hand will be sufficient to continue operations through the next twelve months. The Company’s ability to continue as a going concern is dependent upon its ability to continue to implement its business plan. Currently, management is attempting to increase revenues by redirecting its sales focus from direct sales to domestic and international sales channels, primarily selling through a channel of distributors, value added resellers, strategic partners and original equipment manufacturers. While the Company believes in the viability of its strategy to increase revenues, there can be no assurances to that effect. The Company’s ability to continue as a going concern is dependent upon its ability to 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.
Basis of Presentation-Unaudited Interim Financial Informationpresentation and principles of consolidation
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 ninesix months ended SeptemberJune 30, 20172022 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2017.2022. These financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 20162021 and notes thereto contained in the Annual Report on Form 10-K of the Company as filed with the United States Securities and Exchange Commission (“SEC”)SEC on April 14, 2017.2022.
The condensed 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 June 30, 2022, 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 eliminated in consolidation. At June 30, 2022 and December 31, 2021, the amount of VIE cash on the accompanying condensed consolidated balance sheets 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.
Going Concern
We have yet to establish any history of profitable operations. During the six months ended June 30, 2022, the Company incurred a net loss of $5,730,000 and used cash in operating activities of $2,321,000, and at June 30, 2022, the Company had a stockholders’ deficit of $13,252,000. In addition, we are in default on notes payable and convertible notes payable in the aggregate amount of $2,829,000. These factors raise substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report published on our December 31, 2021 year-end financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. The Company’s financial statements do not include any adjustments that might result from the outcome of this uncertainty should we be unable to continue as a going concern.
Management estimates that the current funds on hand will be sufficient to continue operations through the next six months. Our ability to continue as a going concern is dependent upon our ability to continue to implement our business plan. Currently, management is attempting to increase revenues by selling through a channel of distributors, value added resellers, strategic partners and original equipment manufacturers. While we believe in the viability of its strategy to increase revenues, there can be no assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to increase our 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 us. Even if we are able to obtain additional financing, if needed, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.
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.
During the six months ended June 30, 2022 and the year ended December 31, 2021, the Company believes the COVID-19 pandemic did impact its operating results. For the six months ended June 30, 2022 and the year ended December 31, 2021, sales to customers decreased by 50% and 7%, respectively, as compared to the prior 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.
| F-6 |
| Table of Contents |
The Company has been following the recommendations of health authorities to minimize exposure risk for its team members during the pandemic, including the temporary closure of its corporate office and having team members work remotely. During the second quarter of 2021, the Company reopened its corporate office while continuing to adhere to the guidelines issued by health authorities. Many customers and vendors have transitioned to electronic submission of invoices and payments.
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. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, and other factors that management believes to be reasonable. In addition, the Company has considered the potential impact of the pandemic, as well as certain macroeconomic factors, including inflation, rising interest rates, and recessionary concerns, on its business and operations.
Significant estimates include those related to accounting for potential liabilities,financing obligations, assumptions used in valuing stock instruments issued for services, assumptions used in valuing derivative liabilities, and the valuation allowance for deferred income taxes.tax assets, and the accrual of potential liabilities. Actual results could differ from those estimates.
Stock CompensationRevenue Recognition
The Company periodically issues stock optionsfollows 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 warrants to employees and non-employees in non-capital raising transactions for services and for financing costs.(5) recognizing revenue as each performance obligation is satisfied. The Company accountsonly 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 stock optionthe services it transfers to its clients.
The Company’s revenue consists of revenue from sales and warrant grants issuedsupport of our software products. Revenue primarily consists of sales of software licenses of our ProtectID®, GuardedID®, MobileTrust® and vesting to employeesSafeVchat™ products. The Company recognizes subscription revenue over a one-month period 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-employeesa typical monthly renewal cycle in accordance with its customer agreement terms. For service contracts, 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 aCompany’s 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-employeesobligations 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 recordedsatisfied, and the then current value on the date of vesting. In certain circumstances where thererelated revenue is recognized, as services 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 Instrumentsrendered.
The Company evaluates its financial instrumentsoffers no discounts, rebates, rights of return, or other allowances 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 changesclients which would result in the fair value reported in the statementsestablishment of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. At each reportingreserves against service revenue. Additionally, to date, the Company reviews its convertible securities to determine that their classification is appropriate.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 |
| |||||
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||
Software |
| $ | 24,000 |
|
| $ | 64,000 |
|
Service |
|
| 0 |
|
|
| 3,000 |
|
Total revenue |
| $ | 24,000 |
|
| $ | 67,000 |
|
|
| Six months ended |
| |||||
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||
Software |
| $ | 56,000 |
|
| $ | 109,000 |
|
Service |
|
| 0 |
|
|
| 4,000 |
|
Total revenue |
| $ | 56,000 |
|
| $ | 113,000 |
|
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'sCompany’s assumptions.
The Company is required to use of observable market data if such data is available without undue cost and effort.
As of September 30,2017 and December 31, 2016,The Company believes the Company’scarrying amounts reported in the balance sheets included the fair value of derivative liabilities of $591,887 and $262,185, respectively, which were based on Level 2 measurements.
The recorded amountssheet for accounts receivable, accounts payable, accrued expenses, convertible notes, and notes payables approximate theirfair values because of the short-term nature of these financial instruments.
| F-7 |
| Table of Contents |
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 dueand 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 their short-term nature.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 the trinomial/binomial valuation 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. All outstanding derivative financial instruments were extinguished during fiscal year 2021.
Income (loss)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 income (loss)loss per share is computed by dividing net income (loss)loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income (loss)loss per share reflectsis 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 dilution,common shares had been issued 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)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 treasury stock method assumes that outstanding options, warrants, and convertible preferred stock are exercised and the proceeds areshares 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.calculate diluted earnings per share as their inclusion would be anti-dilutive:
|
| Six months ended |
| |||||
|
| June 30, 2022 |
|
| June 30, 2021 |
| ||
Options to purchase common stock |
|
| 83,133,001 |
|
|
| 40,633,001 |
|
Warrants to purchase common stock |
|
| 68,375,757 |
|
|
| 14,965,221 |
|
Convertible notes |
|
| 21 |
|
|
| 21 |
|
Convertible Series B Preferred stock |
|
| 2,347,752 |
|
|
| 1,040,756 |
|
Total |
|
| 153,856,531 |
|
|
| 56,638,999 |
|
Concentrations
For the ninesix months ended SeptemberJune 30, 2017, the dilutive impact2022, sales to two customers comprised 42% and 30% of stock options exercisable into 196,000,001 shares of common stock, convertible Series B Preferred stock that can convert into 19,292,137 shares of common stock, and notes payable that can convert into 25 shares of common stock have been excluded because their impact on the loss per share is anti-dilutive.
revenues. For the ninesix months ended SeptemberJune 30, 2016, the calculations of diluted earnings per share included stock options exercisable into 197,000,001 shares of common stock, convertible Series B Preferred stock that can convert into 14,097,838 shares of common stock and notes payable that can convert into 25 shares of common stock.
The following tables set forth the computation of basic and diluted earnings (loss) per share:
Nine months ended September 30, 2017 2016 Income (Loss) per share – Basic: Income (Loss) for the period Basic average common stock outstanding Net earnings (loss) per share $ (2,607,114 ) $ 4,306,356 2,319,693,932 1,699,727,344 $ - $ -
Nine months ended September 30, 2017 2016 Income (Loss) per share – Diluted: Income (Loss) for the period Basic average common stock outstanding Diluted effect of outstanding stock options, warrants, notes and Series B Preferred stock Diluted average common stock outstanding Net earnings (loss) per share $ (2,607,114 ) $ 4,306,356 2,319,693,932 1,699,727,344 - 761,905 2,319,693,932 1,700,489,249 $ - $ -
Significant Concentrations
For the nine months ended September 30, 2017,2021, sales to three customers comprised 51%39%, 10%31% and 10%16% of revenues, respectively. For the nine months ended Septemberrevenues. At June 30, 2016, sales to three2022, two customers comprised 45%, 29%61% and 12% of revenues, respectively. At September 30, 2017, four customers comprised 32%, 24%, 20% and 15% of accounts receivable, respectively. At December 31, 2016, one customer comprised 82%16% of accounts receivable.
The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. At June 30, 2022, the Company had cash deposits that exceeded the federally insured limit of $250,000 per account. The Company believes that no significant concentration of credit risk exists with respect to its cash balances because of its assessment of the creditworthiness and financial viability of the financial institution.
Segments
The Company operates in one segment for the development and distribution of our software products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base, single sales team, marketing department, customer service department, operations department, finance and accounting department to support its operations and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements.
| F-8 |
| Table of Contents |
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, ASU 2016-20, and ASU 2017-05, 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 FebruaryJune 2016, the FASB issued ASU No. 2016-02, Leases. This update2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”). The standard significantly changes how entities will requiremeasure credit losses for most financial assets, including accounts and notes receivables. The standard will replace today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the recognition of a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, for all leases with terms longer than 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability will be classifiedstandard’s provisions as a financing activity while the interest component will be included in the operating sectioncumulative-effect adjustment to retained earnings as of the statement of cash flows. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliestfirst reporting period presentedin which the guidance is effective. As a small business filer, ASU 2020-06 will be effective January 1, 2024, for the Company and the provisions of this update can be adopted using aeither the modified retrospective approach. The Companymethod or a fully retrospective method. Management is currently evaluatingassessing the impact of adopting this standard on the adoption of ASU 2016-02 on itsCompany’s financial statements and related disclosures.
In July 2017,May 2021, the FASB issued ASU 2017-11, 2021-04, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity, Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 480);718), and Derivatives and Hedging (Topic 815)– Contracts in Entity’s Own Equity (Subtopic 815-40): (Part I)Issuer’s Accounting for Certain Financial Instruments with Down Round Features, (Part II) ReplacementModifications or Exchanges of Freestanding Equity – Classified Written Call Options (a consensus of the Indefinite DeferralFASB Emerging Issues Task Force).” The ASU addresses how an issuer should account for Mandatorily Redeemable Financial Instrumentsmodifications or an exchange of Certain Nonpublic Entitiesfreestanding written call options classified as equity that is not within the scope of another Topic. For both public and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.private companies, the ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. The guidance in ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption2021. Transition is permitted, and the guidance is to be applied using a full or modified retrospective approach.prospective. The Company has elected early adoption of ASU 2017-11 is not expected to have a material impact on the Company’s financial statements because the embedded conversion feature of the Company’s convertible notes have features other than down round provisions that require the current accounting and classification as derivative liabilities.2021-04.
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'sCompany’s present or future consolidated financial statements.
Note 2 - Convertible Notes Payable
Convertible notes payable consisted of the following:
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||
Secured |
|
|
|
|
|
| ||
(a) Convertible notes due to AL-Bank |
| $ | 453,000 |
|
| $ | 503,000 |
|
|
|
|
|
|
|
|
|
|
Unsecured |
|
|
|
|
|
|
|
|
(b) Convertible notes with fixed conversion features, in default |
|
| 895,000 |
|
|
| 895,000 |
|
Total Convertible notes, net of discount |
| $ | 1,348,000 |
|
| $ | 1,398,000 |
|
September 30, 2017 December 31, 2016 Secured (a) DART Unsecured (b) Convertible notes with fixed conversion features (c) Convertible notes with adjustable conversion features Total convertible notes $ 542,588 $ 542,588 895,512 910,512 - - $ 1,438,100 $ 1,447,100
(a) | During fiscal 2005, the Company issued notes | |
|
| |
During the six months ended June 30, 2022, the Company made principal payments of $50,000. | ||
At June 30, 2022, the outstanding balance of the secured convertible notes payable | ||
(b) | During fiscals 2005 through 2007, the Company issued notes payable in the |
|
|
| |
At |
Note 3 - Convertible Notes Payable – Related Parties
At September 30, 2017 and December 31, 2016,In prior years, the Company issued unsecured 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’sits Chief Executive Officer at(CEO) in exchange for cash and/or services rendered. The notes have a compounded interest rate of 8% per annum; twoannum and will mature on December 31, 2022, as amended. The aggregate notes totaling $57,000 are due toconvertible by 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 spousenote holders into less than one share of the Company’s Chief Technology Officercommon stock at a compounded interest ratefixed conversion prices adjusted for applicable reverse stock splits. As of 8% per annum. $33,000June 30, 2022 and December 31, 2021, the outstanding balance of the notes are convertible at a fixed conversion price of $7,312,500 per share and $322,500 of the notes are convertible at a fixed conversion price of $9,750,000,000 per share, as defined in the note agreements.payable amounted to $268,000.
| F-9 |
|
| Table of Contents |
Note 4 - Notes Payable
Notes payable consisted of the following:
September 30, 2017 December 31, 2016 Unsecured (a) Promissory notes (b) Promissory notes – StrikeForce Investor Group (c) Promissory note Notes payable, current maturities $ 413,824 $ 413,824 1,245,000 1,290,000 130,000 - $ 1,788,824 $ 1,703,824
|
| June 30, 2022 |
|
| December 31, 2021 |
| ||
Unsecured notes |
|
|
|
|
|
| ||
(a) Notes payable- $1,639,000 - in default |
| $ | 1,639,000 |
|
| $ | 1,639,000 |
|
(b) Notes payable issued by BST - in default |
|
| 285,000 |
|
|
| 310,000 |
|
(c) Note payable-EID loan |
|
| 150,000 |
|
|
| 150,000 |
|
|
|
|
|
|
|
|
|
|
Secured notes payable |
|
|
|
|
|
|
|
|
(d) Notes payable - in default |
|
| 10,000 |
|
|
| 23,000 |
|
Total notes payable principal outstanding |
|
| 2,084,000 |
|
|
| 2,122,000 |
|
Less current portion of notes payable, net of discount |
|
| (1,934,000 | ) |
|
| (1,972,000 | ) |
Long term notes payable |
| $ | 150,000 |
|
| $ | 150,000 |
|
(a) | In previous years, the Company issued notes payable | |
|
| |
(b) | In fiscal 2018, the Company’s consolidated subsidiary BlockSafe, issued promissory notes in exchange for cash. The notes are unsecured, bearing interest at a rate of 8% per annum, and matured in September 2019. At December 31, |
|
| |
(c) | On May 15, 2020, the | |
|
| |
Outstanding balance of the note payable as of June 30, 2022 and December 31, 2021 amounted to $150,000, respectively. The Company | ||
(d) | In fiscal 2019 and 2020, the Company | |
During the six months ended June 30, 2022, the Company made principal payments of $13,000. | ||
At June 30, 2022, the outstanding balance of the secured notes payable was $10,000 and is in default. The Company and the note |
At September 30, 2017 and December 31, 2016, accrued interest due for all notes payable above was $1,809,612 and $1,839,429, respectively, and is included in accrued interest in the accompanying balance sheets. Interest expense for notes payable for the nine months ended September 30, 2017 and 2016 was $127,962 and $169,276, respectively.
Note 5 - Notes Payable – Related Party
Notes payable- relatedpayable-related party consist of 18notes represent unsecured notes payable to the Company’s Chief Executive Officer (CEO) ranging in interest rates of 0% per annum to 10% per annum. The notes are unsecuredannum and have extended due dates ofwill mature on December 31, 2017. At September2022, as amended. The outstanding balance of these notes payable at June 30, 20172022 and December 31, 2016,2021 amounted to $693,000, respectively.
Note 6 - VIE Financing Obligation
The Company is in the balance due under theseprocess of developing Coins or Tokens which are an envisioned virtual currency. In fiscal 2018, the Company’s consolidated subsidiary BlockSafe, issued promissory notes $742,513.to unrelated parties aggregating $776,000. As part of issuance, the Company agreed to pay a financing obligation to the note holders equal to the note principal in tokens, as defined, to be issued by BlockSafe. In addition, the Company also agreed to issue tokens to an unrelated party in exchange for cash of $50,000.
During the year ended December 31, 2019, BlockSafe agreed to issue tokens to unrelated parties in exchange for cash of $122,000. In addition, certain note holders of promissory notes issued by BlockSafe agreed to exchange $315,000 of outstanding principal and accrued interest into the financing obligation to be paid by tokens to be issued by BlockSafe.
At June 30, 2022 and December 31, 2016, accrued interest due2021, the outstanding balance of financing obligations amounted to $1,263,000, respectively, to be paid in tokens, as defined. At June 30, 2022 and through the date of filing, BlockSafe has not developed or issued any tokens and there is no assurance as to whether, or at what amount, or on what terms, tokens will be available to be issued, if ever. At June 30, 2022, as the tokens do not exist, and any amounts received for tokens are not considered equity or revenue, management determined that 100% of the notes payable – related party was $591,784. Duringobligation of $1,263,000 is a liability to be settled by BlockSafe, through the nine months ended September 30, 2017, interest expenseissuance of $41,945 was accrued. At September 30, 2017, accrued interest due for the notes payable – related party was $633,729. During the nine months ended September 30, 2016, interest expense of $42,098 was recorded.tokens, or through other means if tokens are never issued.
Note 6 –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 10).patents. In exchange, the Funders are entitled to receive, after the payment of legal fees, the first $1,500,000 from the gross proceeds of any claims awarded, 10% of any additional claim proceeds until the Funders have received an additional $7,500,000, and 2.5% of any claim proceeds thereafter. The Funders shall be paid only in the event that the Company achieves recoveries of claim proceeds. The terms of the litigation funding agreement allow for additional funding of $1,500,000 between February 1, 2018 to January 31, 2019, which would require the Company to repay the funders an additional $5,000,000, plus a percentage of any claim proceeds thereafter.
Note 7 – Derivative Financial Instruments
At September 30, 2017, the Company had convertible promissory notes outstanding that are convertible into shares of common stock of the Company at the option of the holder at a price per share discount of 20% 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 conversion feature of these notes is recorded as a derivative liability. Accordingly, the conversion feature of the notes was separated from the host contract (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, 2016, the balance of the derivative liabilities was $262,185. During the nine months ended September 30, 2017, the Company recorded additions of $597,949 (see Note 2), a change in fair value of derivatives of $289,580, and an extinguishment of $557,827. At September 30, 2017, the balance of the derivative liabilities was $591,887.
| Table of Contents |
The derivative liability was valued at the following dates using a probability weighted Black-Scholes-Merton model with the following assumptions:
September 30, 2017 June, July 2017 (dates issued) December 31, 2016 Conversion feature: Risk-free interest rate Expected volatility 152%-157 % 75 % Expected life (in years) 1 year 1 year 1 year Expected dividend yield Fair Value: Conversion feature 0.13 % 0.16 % 0.16 % 147 % - - - $ 591,887 $ 597,949 $ 262,185
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 thatAt June 30, 2022 and December 31, 2021, the Company has not customarily paid dividends to its common stockholders inreflected the past and does not expect to pay dividends to its common stockholders in$1,500,000 received from the future.
Note 8– Stockholders’ Deficit
Series A Preferred Stock
In 2011, the Company issued three shares of non-convertible Series A Preferred Stock valued at $329,000 per share, or $987,000 in aggregate to three members of the management team. The Series A Preferred Stock are convertible into four times the total number of common shares plus the total number of shares of Series B preferred stock issued and outstanding at the time of conversion, and have voting rights equal to eighty percent of the total issued and outstanding shares of the Company's common stock. This effectively provided the management team, upon retention of their Series A Preferred Stock, voting control on matters presented to the shareholders of the Company. The shareholders of the Series A Preferred Stock have each irrevocably waived their conversion rights relating to the Series A Preferred Stock issued.
Series B Preferred Stock
The Series B Preferred Stock has preferential liquidation rights in the event of any liquidation, dissolution or winding up of the Company, such liquidation rightsFunders as a contingent payment obligation 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,only if ever, the Series B Preferred Stockclaim proceeds are listed on a secondary and/or public exchange.recovered.
Note 8 - Operating Lease
In January 2017,2019, the Company sold subscriptionsentered into a noncancelable operating lease for its office headquarters office requiring payments of approximately $4,000 per month, payments increasing 3% each year, and ending on January 31, 2024. We determine if an arrangement is a lease at inception. Lease assets are presented as operating lease right-of-use assets and the related liabilities are presented as lease liabilities in our consolidated balance sheets pursuant to two individualsASC 842, 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 purchaselease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Generally, the implicit rate of 53,334 sharesinterest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of its Series B Preferred Stock at $1.50 per share, or an aggregatelease payments. The operating lease ROU asset includes any lease payments made and excludes lease incentives.
The components of $80,000. lease expense and supplemental cash flow information related to leases for the period are as follows:
|
| Six months ended June 30, 2022 |
|
| Six months ended June 30, 2021 |
| ||
Lease Cost |
|
|
|
|
|
| ||
Operating lease cost (included in general and administration in the Company’s statement of operations) |
| $ | 28,000 |
|
| $ | 28,000 |
|
|
|
|
|
|
|
|
|
|
Other Information |
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities for the six months ended June 30, 2022 and 2021 |
| $ | 28,000 |
|
| $ | 25,000 |
|
Weighted average remaining lease term – operating leases (in years) |
|
| 1.6 |
|
|
| 2.6 |
|
Average discount rate – operating leases |
|
| 10.0 | % |
|
| 10.0 | % |
The shares of Series B Preferred Stock are convertible into sharessupplemental balance sheet information related to leases for the period is as follows:
|
| At June 30, 2022 |
| |
Operating leases |
|
|
| |
Long-term right-of-use assets |
| $ | 81,000 |
|
|
|
|
|
|
Short-term operating lease liabilities |
| $ | 56,000 |
|
Long-term operating lease liabilities |
|
| 29,000 |
|
Total operating lease liabilities |
| $ | 85,000 |
|
Maturities of the Company’s common stock at a 25% discount to current market value,lease liabilities are as defined, with a minimum conversion price set byfollows:
Year Ending |
| Operating Leases |
| |
2022 (6 months) |
|
| 29,000 |
|
2023 |
|
| 59,000 |
|
2024 |
|
| 5,000 |
|
Total lease payments |
|
| 93,000 |
|
Less: Imputed interest/present value discount |
|
| (8,000 | ) |
Present value of lease liabilities |
| $ | 85,000 |
|
Lease expenses were $28,000 and $28,000 during 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. For the ninesix months ended SeptemberJune 30, 2017, the Company recorded a deemed dividend for the beneficial conversion feature of $17,778 relating to the issuance of the Series B Preferred Stock.2022 and 2021, respectively.
Note 9 - Stockholders’ Deficit
Common Stock
During the ninesix months ended SeptemberJune 30, 2017,2022, the Company issued an aggregate of 15,0007,730,936 shares of its common stock for consulting services, with a fair value of $168,000. These shares of common stock were valued at $452.based on the closing price of the Company’s common stock on the date of the issuance or the date the Company entered into the agreement related to the issuance.
Warrants
On May 5, 2022, we entered into Inducement Offer to Exercise Common Stock Purchase Warrants Letter Agreements (the “Exercise Agreements”) with certain of the holders of the Existing Warrants, The Special Equities Opportunity Fund, LLC and Gregory Castaldo, to purchase an aggregate of 50,000,000 shares of Common Stock (the “Exercising Holders”). Pursuant to the Exercise Agreements, the Exercising Holders and the Company agreed that, subject to any applicable beneficial ownership limitations, the Exercising Holders would exercise their Existing Warrants (the “Investor Warrants”) for shares of Common Stock underlying such Existing Warrants (the “Exercised Shares”) at a reduced exercise price of $0.02 per share of Common Stock. In order to induce the Exercising Holders to cash exercise the Investor Warrants, the Exercise Agreements provide for the issuance of new warrants to purchase up to an aggregate of 50,000,000 shares of Common Stock (the “New Warrants”), with such New Warrants to be issued in an amount equal to the number of the Exercised Shares underlying any Investor Warrants. The New Warrants are exercisable after issuance, provide for a cashless exercise provision if the shares of Common Stock underlying the New Warrants are not registered and terminate on the date that is five years following the issuance of the New Warrants. The New Warrants have an exercise price per share of $0.05. The New Warrants and the shares of Common Stock issuable upon the exercise of the New Warrants are not being registered under the Securities Act of 1933 and are being offered pursuant to the exemption provided in Section 4(a)(2) under the Securities Act of 1933. The Exercised Shares are registered for resale on effective registration statements previously filed with the Securities and Exchange Commission.
As a result, these warrant holders exercised their warrants and the Company issued 50 million shares of common stock for cash proceeds of $940,000, net of direct fees and commission.
| Table of Contents |
During the nine months ended September 30, 2016, the Company issued an aggregate of 2,295,964,462 shares of its common stock as follows:
Note 9 - Options
In September 2016,May 2022, the Company issued options to purchase 196,000,000 sharespaid a warrant holder, Crown Bridge Partners, $165,000 in exchange for cancellation of its common stock to its management teamtwo warrant agreements, from November 2019 and employees withJuly 2020, for a total fair value of $1,568,000 determined using605,477 warrant shares. The Company recorded the Black-Scholes Option Pricing model. The options are exercisable at $0.00625 per share, vest in 6 months, and expire in September 2026. During the nine months ended September 30, 2017, the Company recognized compensation costs of $749,538 based on the fair value of options that vested.payment as financing expense.
The table below summarizes the Company’s 2004 Incentive Plan and 2012 Stock Incentive Planwarrant activities for the period January 1, 2017 to Septembersix months ended June 30, 2017:2022:
Number of Options Shares Exercise Price Range Per Share Weighted Average Exercise Price Balance, January 1, 2017 0.0023-975,000,000 Granted Exercised Expired Balance, September 30, 2017 0.0023-975,000,000 Vested and exercisable, September 30, 2017 0.0023-975,000,000 Unvested, September 30, 2017 196,000,001 $ $ 0.00625 - $ - $ - - $ - $ - - $ - $ - 196,000,001 $ $ 0.00625 196,000,001 $ $ 0.00625 - $ - $ -
|
| Number of Warrant Shares |
|
| Exercise Price Range Per Share |
|
| Weighted Average Exercise Price |
| |||
|
|
|
|
|
|
|
|
|
| |||
Balance, January 1, 2022 |
|
| 68,981,234 |
|
| $ | 0.0045-2.90 |
|
| $ | 0.042647 |
|
Granted |
|
| 50,000,000 |
|
|
| 0.05 |
|
|
| 0.05 |
|
Canceled/Expired |
|
| (605,477 | ) |
| 0.085-2.90 |
|
|
| 1.49 |
| |
Exercised |
|
| (50,000,000 | ) |
|
| 0.02 |
|
|
| 0.02 |
|
Balance, June 30, 2022 |
|
| 68,375,757 |
|
| $ | 0.0045-0.75 |
|
| $ | 0.041562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding and exercisable, June 30, 2022 |
|
| 68,375,757 |
|
| $ | 0.0045-0.75 |
|
| $ | 0.041562 |
|
As of SeptemberAt June 30, 2017, 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 September 30, 2017 and December 31, 2016,2022, the intrinsic value of outstanding options was zero.the warrants amounted to $207,000.
The following table summarizes information concerning 2004 Incentive planoutstanding and 2012 Stock Incentive Planexercisable warrants as of SeptemberJune 30, 2017:2022:
|
|
| Warrants Outstanding and Exercisable |
| ||||||||||
Range of Exercise Prices |
|
| Number Outstanding |
|
| Average Remaining Contractual Life (in years) |
|
| Weighted Average Exercise Price |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
| $ | 0.0045 |
|
|
| 13,333,333 |
|
|
| 4.00 |
|
| $ | 0.0045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 0.05 |
|
|
| 55,000,000 |
|
|
| 5.00 |
|
| $ | 0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 0.75 |
|
|
| 42,424 |
|
|
| 3.00 |
|
| $ | 0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 0.0045 - $0.75 |
|
|
| 68,375,757 |
|
|
| 4.00 |
|
| $ | 0.041562 |
|
Note 10 – Stock Options
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 0.00625 0.00625 - 975,000,000 $ 1 1.00 $ 975,000,000 1 1.00 $ 975,000,000 $ 196,000,000 10.00 $ 0.00625 196,000,000 10.00 $ 0.00625 $ 196,000,001 10.00 $ 0.00625 196,000,001 10.00 $ 0.00625
|
| Number of Options Shares |
|
| Exercise Price Range Per Share |
|
| Weighted Average Exercise Price |
| |||
|
|
|
|
|
|
|
|
|
| |||
Balance, January 1, 2022 |
|
| 83,133,001 |
|
| 0.005-1,121,250,000 |
|
| $ | 0.0274 |
| |
|
|
|
|
|
|
|
|
|
|
|
| |
Granted |
|
| - |
|
|
| - |
|
|
| - |
|
Exercised |
|
| - |
|
|
| - |
|
|
| - |
|
Expired |
|
| - |
|
|
| - |
|
|
| - |
|
Balance outstanding, June 30, 2022 |
|
| 83,133,001 |
|
| $ | 0.005-1,121,250,000 |
|
| $ | 0.0274 |
|
Balance exercisable, June 30, 2022 |
|
| 83,133,001 |
|
| $ | 0.005-1,121,250,000 |
|
| $ | 0.0274 |
|
At June 30, 2022, the intrinsic value of outstanding options was $263,000.
Note 10 - Commitments and ContingenciesThe following table summarizes information concerning the Company’s stock options as of June 30, 2022:
Asset Sale and Licensing Agreement
|
|
| 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 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
| $ | 1,121,250,000 |
|
|
| 1 |
|
|
| 2 |
|
| $ | 1,121,250,000 |
|
|
| 1 |
|
|
| 1 |
|
| $ | 1,121,250,000 |
|
| $ | 2.85 |
|
|
| 126,000 |
|
|
| 7 |
|
|
| 2.85 |
|
|
| 126,000 |
|
|
| 6 |
|
|
| 2.85 |
|
| $ | 3.125 |
|
|
| 392,000 |
|
|
| 6 |
|
|
| 3.125 |
|
|
| 392,000 |
|
|
| 5 |
|
|
| 3.125 |
|
| $ | 2.05 |
|
|
| 115,000 |
|
|
| 9 |
|
|
| 2.05 |
|
|
| 115,000 |
|
|
| 8 |
|
|
| 2.05 |
|
| $ | 0.0375 |
|
|
| 65,000,000 |
|
|
| 10 |
|
|
| 0.0375 |
|
|
| 65,000,000 |
|
|
| 10 |
|
|
| 0.0375 |
|
| $ | 0.005 |
|
|
| 17,500,000 |
|
|
| 10 |
|
|
| 0.005 |
|
|
| 17,500,000 |
|
|
| 10 |
|
|
| 0.005 |
|
| $ | 0.005 – 1,121,250,000 |
|
|
| 83,133,001 |
|
|
| 6.8 |
|
| $ | 0.03704 |
|
|
| 83,133,001 |
|
|
| 6.8 |
|
| $ | 0.0274 |
|
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 has the option to buy the Company’s GuardedID® patent for $9,000,000 that expires on September 30, 2020. The Company anticipates Cyber Safety will make the purchase by September 30, 2020. Cyber Safety will also resell the Company’s GuardedID® and MobileTrust® products, for which the Company will receive a royalty, while the Company retains an unlimited license to resell those products. Cyber Safety also licensed the Malware Suite until September 30, 2020 and agreed to pay the Company 15% to 20% of the net amount Cyber Safety receives from this product. During the nine months ended September 30, 2017 and 2016, the Company did not receive any royalty or license payments from 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) (a procedure for challenging the validity of a United States patent before the United States Patent and Trademark Office) against the Company’s second Patent No. 8,484,698.
On March 14, 2017, the Company initiated additional patent litigation against two major competitors in the U.S. District Court for the District of Massachusetts, for infringement of United States Patent Nos. 7,870,599, 8,484,698 and 8,713,701. This litigation is ongoing.
On March 14, 2017, the Company initiated additional patent litigation against two major competitors in the U.S. District Court for the Eastern District of Virginia, for infringement of United States Patent Nos. 7,870,599, 8,484,698 and 8,713,701. This litigation is ongoing. On June 13, 2017, one of the competitors initiated a lawsuit against the Company in the U.S. District Court for the District of New Jersey for patent infringement (which the Company believes is without merit and will defend vigorously). This litigation is ongoing.
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. As of December 31, 2016, the balance due to the factor was $209,192 including interest.
In July 2017, the Company executed an exchange agreement with the factor which transferred the amount due to the factor into a promissory note for $210,000, non-interest bearing, and maturing on February 7, 2018 (see Note 4).
Note 11 – Subsequent EventEvents
In October 2017, one holderSubsequent to June 30, 2022, the Company issued notes payable aggregating $275,000. The notes bear interest at a rate starting from 4% to 57% per annum, each agreement secured by substantially all of the Company’s Series B Preferred Stock converted 33,334 Series B Preferred shares into 16,129,355 sharestangible and intangible assets of the Company’s common stock at a conversion price of $0.0031 per share.Company, and maturing starting January 2024 through July 2024.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Included in this interim report are "forward-looking"“forward-looking” statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"(“PSLRA”) as well as historical information. Some of our statements under "Business”“Business”, "Properties”“Properties”, "Legal“Legal Proceedings”, "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations”,"” the Notes to Condensed Consolidated Financial Statements” and elsewhere in this report constitute "forward-looking statements"“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that the expectations reflected in these forward-looking statements will prove to be correct. Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors, including matters described in the section titled "Risk“Risk Factors."” Forward-looking statements include those that use forward-looking terminology, such as the words "anticipate," "believe," "estimate," "expect," "intend," "may," "project," "plan," "will," "shall," "should,"“anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,” “plan,” “will,” “shall,” “should,” and similar expressions, including when used in the negative. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements involve risks and uncertainties and we cannot assure you that actual results will be consistent with these forward-looking statements. We claim the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.
Such risks include, among others, the following: international, national and local general economic and market conditions: our ability to sustain, manage or forecast our growth; material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the current inflation rate and supply chain disruptions; the implications and consequences of the COVID-19 pandemic on our business and on our clients’ business and on the effectiveness and distributions of vaccines and boosters, domestically and internationally, to limit the impact of COVID-19, and the transitioning from a pandemic to an endemic; the ability to attract and retain qualified personnel; the ability to protect technology; and other factors referenced in this filing.
Consequently, all the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business operations. We undertake no obligation to update or revise these forward-looking statements, whether to reflect events or circumstances after the date initially filed or published, to reflect the occurrence of unanticipated events or otherwise.
Additional information concerning these and other risks and uncertainties is contained in our filings with the Securities and Exchange Commission, including the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.
Unless otherwise noted, references in this Form 10-Q to “StrikeForce”“Zerify”, “we”, “us”, “our”, “SFT”, “our company”, and the “Company” means StrikeForce Technologies,Zerify, Inc., a Wyoming corporation.
Background
We are a software development and services company that offers a suite of integrated computer network security products using proprietary technology. Our ongoing strategy is developing and marketing our suite of network security products to the corporate, financial, healthcare, legal, government, technology, insurance, e-commerce and consumer sectors. We plan to continue to grow our business primarily through our globally expanding sales channel and internally generated sales, rather than by acquisitions. We have no subsidiarieshold a 49% interest in BlockSafe Technologies, Inc., and we conduct our operations from our corporate officea 100% interest in Edison, New Jersey.Cybersecurity Risk Solutions, LLC.
On September 6, 2017, we entered into a Litigation Funding Agreement with two parties (the “Funders”)April 26, 2022, the Company applied for the purposeZerify trademark. ZERIFY™. The trademark registration is intended to cover the categories of fundingdownloadable or recorded computer software for encryption; downloadable or recorded computer software for cyber security assessment and protection; anti-spyware software; downloadable or recorded computer application software for mobile devices, namely, software for protecting people from identity theft; downloadable or recorded computer software for guarding users of computers and remote access devices from identity theft, featuring various software tools, namely, anti-keyboard logger and keyboard stroke encryption.
On June 14, 2022, the enforcementBoard of certain patents relatingDirectors and holders of a majority of the voting power approved a resolution to change our name from StrikeForce Technologies, Inc. to Zerify, Inc.
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The Board of Directors believes that the reason for the name change, among other reasons, is that it will better reflect the business plans of the Company reflected in the current cyber security software and in the name Zerify which emphasizes the Company’s mission to ensure Zero-Trust for the most secure collaborative communications and that every participant is verified prior to entering a video conference. Learn more at www.zerify.com (which website is expressly not incorporated into this Information Statement)
On August 1, 2022, pursuant to the process of providing dual channel authentication against several infringers. Our management believes that this Litigation Funding Agreement will allow us to pursue litigation against any infringementapproval from FINRA, our Common Stock is now quoted on our patents.the OTCQB Market under the symbol “ZRFY” (formerly “SFOR”).
Our executive office is located at 1090 King Georges Post Road, Suite 603, Edison, NJ 08837. Our telephone number is (732) 661-9641. We have 8At June 30, 2022, we had 15 employees. Our Company’s website is www.strikeforcetech.comwww.zerify.com (we are not including the information contained in our website as part of, nor should the information be relied upon or incorporated by reference into, this report on Form 10-Q).
Intellectual Property
COVID-19
In March 2020, the World Health Organization declared the spread of COVID-19 a pandemic. This outbreak continues to spread throughout the U.S. and around the world. As a result, authorities continue to implement numerous measures to try to contain the virus, including restrictions on travel, quarantines, shelter-in-place orders, business restrictions and complete shutdowns. We are workingnot considered an “essential business” due to the industries and customers we serve. As of, and subsequent to, June 30, 2022, we have been following the recommendations of the CDC and state/local health authorities to minimize exposure risk for our team members during the pandemic, including the temporary closure of our corporate office and having our team members work remotely. During the second quarter of 2021, we reopened our corporate office while continuing to adhere to the guidelines issued by health authorities. Many customers and vendors have transitioned to electronic submission of invoices and payments. The COVID-19 pandemic has resulted in longer response times from potential new customers and certain existing customers. We cannot anticipate the effect that the impairments caused by the COVID-19 pandemic will have on our fiscal 2022 or 2023 results, or the effectiveness and distributions of vaccines, boosters, and their distribution in 2022 and 2023, or the consequences of transitioning from a pandemic to an endemic. The pandemic has significantly impacted the economic conditions both in the United States and worldwide, with two patent attorney firmsaccelerated effects through the date of this report, as federal, state and local governments react to aggressivelythe public health crisis, creating significant uncertainties in both the worldwide and the United States economies. The situation is rapidly changing, including the onset of the ongoing subsequent waves of the virus caused by the possibility of various variants over time, and additional impacts to our business may arise that we are not aware of currently. We cannot predict whether, when or the manner in which, the conditions surrounding COVID-19 will change including the timing of lifting any restrictions or office closure requirements. We will continue to enforceevaluate the nature and extent of COVID-19’s impact to our patent rights. We currentlybusiness, consolidated results of operations, financial condition and liquidity, and our results presented herein are not necessarily indicative of the results to be expected for future periods.
During the six months ended June 30, 2022, we believe the COVID-19 pandemic did impact our operating results as sales to customers were down 50% as compared from the six months ended June 30, 2021. However, we have three patents grantednot observed any impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic. At this time, it is not possible for us for Out-of-Band ProtectID® (Patent Nos.: 7,870,599, 8,484,698to predict the duration or magnitude of the adverse results of the outbreak and 8,713,701). In March 2013,its effects on our patent attorneys submitted a new “Methods and Apparatus for securing user input in a mobile device” Patent, which is now patent pending. Our MobileTrust® product is the invention supporting the patent pending. In September 2014, we filed an International Patent for MobileTrust® (PCT/US20114/029905) which is pending.
business or results of operations, financial condition, or liquidity.
We have four trademarks that have been approved and registered: ProtectID®, GuardedID®, MobileTrust® and CryptoColor®. A portionfollowing the recommendations of health authorities to minimize exposure risk for our team members, including the temporary closure of our softwarecorporate office and having team members work remotely. Most customers and vendors have transitioned to electronic submission of invoices and payments.
Management believes that cyber security is licenseda growing requirement as the pandemic continues, and that more people are working or, as businesses reopen at their physical location, we continue to work remotely as well as using digital forms on a regular basis. Consequently, the market demand, in our estimation, is increasing. However, our company is also experiencing the impact of the ongoing pandemic. Currently our management is not working from third partiesour office location and it impedes our ability to take full advantage of the increasing market demand. Many of our current clients have experienced a dramatic slowdown in their business, limiting their ability to have the resources to pay for our services. We still generate revenues and we anticipate, but cannot guarantee, we will have the resources to advance our video conferencing tool, SafeVchat™ and PrivacyLoK™, that provides authentication and encryption (using our existing products), for which we believe there will be great interest in the market. During the six months ended June 30, 2022 and the remainder is developed by our own teamyear ended December 31, 2021, we earned revenues of developers while leveraging some external consultant expertise as necessitated. We rely upon confidentiality agreements signed by our employees, consultants$6,000 and third parties to protect the intellectual property rights.$74,000, respectively, from Zerify™ Meet (formerly SafeVchat™) , Zerify™ Defender and Zerify™ API (formerly PrivacyLoK™) and overall revenues of $56,000 and $193,000, respectively.
Downturns in economic conditions, or other macroeconomic factors more generally, including inflation, could have adverse effects on our results of operations.
While we make our strategic planning decisions based on the assumption that the markets we are targeting will grow in the long term, our business is dependent, in large part on, and directly affected by, business cycles and other factors affecting the economy generally. Our industry depends on general economic conditions and other factors, including consumer spending and preferences, changes in inflation rates, supply chain issues and impediments should they arise for us, as the U.S. and various other major economies are now experiencing, consumer confidence, fuel costs, fuel availability, environmental impact, governmental incentives and regulatory requirements, and political volatility, especially in cybersecurity growth markets.
In addition, the outbreak of hostilities between Russia and Ukraine and global reactions thereto have increased U.S. domestic and global energy prices. Oil supply disruptions related to the Russia-Ukraine conflict, and sanctions and other measures taken by the U.S. and its allies, could lead to higher costs for gas, food, and goods in the U.S. and other geographies and exacerbate the inflationary pressures on the worldwide economy, with potentially adverse impacts on our customers and on our business, results of operations and financial condition.
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| Table of Contents |
Results of Operations
FOR THE THREE MONTHS ENDED SEPTEMBERJUNE 30, 20172022 COMPARED TO THE THREE MONTHS ENDED SEPTEMBERJUNE 30, 20162021
Revenues for the three months ended SeptemberJune 30, 20172022 were $76,342$24,000 compared to $183,029$67,000 for the three months ended SeptemberJune 30, 2016,2021, a decrease of $106,687$43,000 or 58.3%64.2%. The decrease in revenues was due to the decrease in our sales. Software, services, support, and maintenance sales for the three months ended September 30, 2017 were $76,342 compared to $182,029 for the three months ended September 30, 2016, a decrease of $105,687. The decrease in software, services, support, and maintenance revenues was primarily due to thea decrease in the salesrevenues relating to our ProtectID®, GuardedID® and support of our software products. Hardware sales for the three months ended September 30, 2017 were $0 compared to $1,000 for the three months ended September 30, 2016. The decrease in hardware revenues was dueMobileTrust® and Zerify™ Meet products, as affected by impairments related to the decrease in saleseconomic consequences of our one-time-password token key-fobs, as we move towards our phone based one-time-password.the COVID-19 pandemic. Revenues are derived from software and services.
Cost of revenues for the three months ended SeptemberJune 30, 20172022 was $3,168$12,000 compared to $888$8,000 for the three months ended SeptemberJune 30, 2016,2021, an increase of $2,280,$4,000 or 257%50.0%. The increase resulted from thein cost of revenues was primarily due to an increase in third party processingthe fees related to our revenues.product offerings. Cost of revenues are fees and key fobs related to our revenues, and as a percentage of total revenues for the three months ended SeptemberJune 30, 20172022 was 4.2%50.0% compared to 0.5%11.9% for the three months ended SeptemberJune 30, 2016.
Gross profit for the three months ended September 30, 2017 was $73,174 compared to $182,141 for the three months ended September 30, 2016, a decrease of $108,967, or 59.8%. The decrease in gross profit was due to the decrease in our hardware, software, services, maintenance, and support sales resulting from several delayed revenue transactions. No assurances can be provided that the revenue transactions will occur.2021.
Research and development expenses for the three months ended SeptemberJune 30, 20172022 were $123,750$157,000 compared to $125,654$129,000 for the three months ended SeptemberJune 30, 2016, a decrease of $1,904, or 1.5%. The decrease in research and development expenses was due to a nominal decrease in the purchase of peripherals for testing purposes. The salaries, benefits and overhead costs of personnel conducting research and development of our software products primarily comprises our research and development expenses.
Compensation, professional fees, and selling, general and administrative (collectively, “SGA”) expenses for the three months ended September 30, 2017 were $279,093 compared to $483,061 for the three months ended September 30, 2016, a decrease of $203,968 or 42.2%. The decrease was due primarily to decreased expenses relating to vesting of options granted to employees in September 2016. SG&A expenses consist primarily of salaries, benefits and overhead costs for executive and administrative personnel, insurance, fees for professional services, including consulting, legal, and accounting fees, plus travel costs and non-cash stock compensation expense for the issuance of stock options to employees and other general corporate expenses.
Other income (expense) for the three months ended September 30, 2017 was expense of ($183,801) as compared to income of $109,063 for the three months ended September 30, 2016, representing a decrease in other income of $292,864, or 269%. The decrease was primarily due to an increase in private placement costs, an increase in interest expense, an increase in the fair value of derivative liabilities, and a decrease in forgiveness of debt, offset by an increase in the extinguishment of derivative liabilities.
Our net loss for the three months ended September 30, 2017 was $513,470 compared to $317,511 for the three months ended September 30, 2016,2021, an increase of $195,959,$28,000 or 61.7%21.7%. The increase was primarily due to the decrease in revenues, an increase in private placement costs, an increase in interest expense, an increase in the fair value of derivative liabilities, and a decrease in forgiveness of debt, offset by an increase in the extinguishment of derivative liabilities.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2016
Revenues for the nine months ended September 30, 2017 were $218,946 compared to $392,628 for the nine months ended September 30, 2016, a decrease of $173,682 or 44.2%. The decrease in revenues was due to the decrease in our sales. Software, services, support, and maintenance sales for the nine months ended September 30, 2017 were $217,847 compared to $389,388 for the nine months ended September 30, 2016, a decrease of $171,541. The decrease in software, services, support, and maintenance revenues was primarily due to the decrease in the sales and support of our software products. Hardware sales for the nine months ended September 30, 2017 were $1,099 compared to $3,240 for the nine months ended September 30, 2016, a decrease of $2,141. The decrease in hardware revenues was due to the decrease in sales of our one-time-password token key-fobs, as we move towards our phone based one-time-password
Cost of revenues for the nine months ended September 30, 2017 was $9,547 compared to $4,852 for the nine months ended September 30, 2016, an increase of $4,695, or 96.8%. The increase resulted from the increase in third party processing fees related to our revenues. Cost of revenues as a percentage of total revenues for the nine months ended September 30, 2017 was 4.4% compared to 1.2% for the nine months ended September 30, 2016.
Gross profit for the nine months ended September 30, 2017 was $209,399 compared to $387,776 for the nine months ended September 30, 2016, a decrease of $178,377, or 46.0%. The decrease in gross profit was due to the decrease in our hardware, software, services, maintenance, and support sales resulting from several delayed revenue transactions. No assurances can be provided that the revenue transactions will occur.
Research and development expenses for the nine months ended September 30, 2017 were $402,532 compared to $378,874 for the nine months ended September 30, 2016, an increase of $23,658, or 6.2%. The increase in research and development expenses was due to an overall increase in salaries and benefits of the testing of our mobile products, which required the purchase of peripherals for testing purposes.personnel conducting research and development. The salaries, benefits and overhead costs of personnel conducting research and development of our software products primarily comprises our research and development expenses.
Compensation, professional fees, and selling, general and administrative (collectively, “SGA”) expenses for the ninethree months ended SeptemberJune 30, 20172022 were $1,708,193$2,451,000 compared to $1,425,198$1,820,000 for the ninethree months ended SeptemberJune 30, 2016,2021, an increase of $282,995$631,000 or 19.9%34.7%. The increase was due primarily to the decreaseincreases in employee stock-based compensation, compensation/benefits expenses relating to vesting of options granted to employees in September 2016 and an increase in salaries and related payroll taxes resulting from retention bonuses paid to the Officers in April 2017, offset by a decrease in professional fees. SG&A expenses consist primarily of salaries, benefits and overhead costs for executive and administrative personnel, insurance, fees for professional services, including consulting, legal, and accounting fees, plus travel costs and non-cash stock compensation expense for the issuance of stock options to employees and other general corporate expenses.
Other income (expense) forFor the ninethree months ended SeptemberJune 30, 20172022, other expense was expense of ($688,010)$266,000 as compared to incomeother expense of $5,722,652$3,153,000 for the ninethree months ended SeptemberJune 30, 2016, representing2021, a decrease in other incomeexpense of $6,410,662,$2,887,000, or 112%916%. The decrease was primarily due to decreases in financing expense, interest expense, debt discount amortization, and the net settlementchange in the prior yearfair value of patent remediation litigation, which was settled in January 2016, slightly reducedderivative liabilities, offset by an increase in private placementthe loss on debt extinguishment. Our company’s derivative liabilities were fully extinguished in fiscal 2021.
Our net loss for the three months ended June 30, 2022 was $2,862,000 compared to $5,043,000 for the three months ended June 30, 2021, a decrease of $2,181,000, or 43.3%. The decrease was primarily due to decreases in financing expense, interest expense, debt discount amortization, and the change in the fair value of derivative liabilities, offset by increases in the loss on debt extinguishment, employee stock-based compensation, compensation/benefits expenses and professional fees.
FOR THE SIX MONTHS ENDED JUNE 30, 2022 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2021
Revenues for the six months ended June 30, 2022 were $56,000 compared to $113,000 for the six months ended June 30, 2021, a decrease of $57,000 or 50.4%. The decrease in revenues was primarily due to a decrease in revenues relating to our ProtectID®, GuardedID® and MobileTrust® and Zerify™ Meet products, as affected by impairments related to the economic consequences of the COVID-19 pandemic. Revenues are derived from software and services.
Cost of revenues for the six months ended June 30, 2022 was $22,000 compared to $11,000 for the six months ended June 30, 2021, an increase of $11,000 or 100%. The increase in cost of revenues was primarily due to an increase in the fees related to our product offerings. Cost of revenues are fees and key fobs related to our revenues, and as a percentage of total revenues for the six months ended June 30, 2022 was 39.3% compared to 9.7% for the six months ended June 30, 2021.
Research and development expenses for the six months ended June 30, 2022 were $312,000 compared to $274,000 for the six months ended June 30, 2021, an increase of $38,000 or 13.9%. The increase was primarily due to the overall increase in salaries and benefits of the personnel conducting research and development. The salaries, benefits and overhead costs of personnel conducting research and development of our software products primarily comprises our research and development expenses.
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Compensation, professional fees, and selling, general and administrative (collectively, “SGA”) expenses for the six months ended June 30, 2022 were $5,087,000 compared to $7,448,000 for the six months ended June 30, 2021, a decrease of $2,361,000 or 31.7%. The decrease was due primarily to a decrease in employee stock-based compensation, offset by an increase in compensation/benefits expenses and professional fees. SG&A expenses consist primarily of salaries, benefits and overhead costs for executive and administrative personnel, insurance, fees for professional services, including consulting, legal, and accounting fees, plus travel costs and non-cash stock compensation expense for the issuance of stock options to employees and other general corporate expenses.
For the six months ended June 30, 2022, other expense was $365,000 as compared to other expense of $7,369,000 for the six months ended June 30, 2021, a decrease in other expense of $7,004,000, or 95.1%. The decrease was primarily due to decreases in financing expense, interest expense, debt discount amortization, the change in the fair value of derivative liabilities and a decreasethe loss on debt extinguishment. Our company’s derivative liabilities were fully extinguished in forgiveness of debt, offset by a decrease in interest expense and an increase in the extinguishment of derivative liabilities.fiscal 2021.
Our net income (loss)loss for the ninesix months ended SeptemberJune 30, 20172022 was a net loss ($2,607,114)$5,730,000 compared to a net income of $4,306,356$14,989,000 for the ninesix months ended SeptemberJune 30, 2016,2021, a decrease in net income of $6,913,470,$9,259,000, or 161%61.8%. The decrease was primarily due to decreases in employee stock-based compensation, financing expense, interest expense, debt discount amortization, the net settlement of patent remediation litigation in the prior year, which was settled in January 2016, reduced by an increase in private placement costs, an increasechange in the fair value of derivative liabilities and a decrease in forgiveness ofthe loss on debt extinguishment, offset by a decrease in interest expenseincreases compensation/benefits expenses and an increase in the extinguishment of derivative liabilities.
professional fees.
Liquidity and Capital Resources
Our total current assets at SeptemberJune 30, 20172022 were $975,157,$601,000, which included cash of $902,792,$579,000, as compared with $965,404$2,121,000 in total current assets at December 31, 2016,2021, which included cash of $804,130.$2,084,000. Additionally, we had astockholders’ deficit in the amount of $10,198,835$13,252,000 at SeptemberJune 30, 20172022 compared to a stockholders’ deficit of $8,439,490$11,589,000 at December 31, 2016.2021. We have historically incurred recurring losses and have financed our operations through loans, principally from affiliated parties such as our directors, and from the proceeds of debt and equity financing.
We financed our operations during the ninesix months ended SeptemberJune 30, 20172022 primarily throughfrom the first tranche, for $1,500,000,cash balance from a litigation funding agreement executed on September 6, 2017. the year ended December 31, 2021.
In addition, we sold sharesapplied for funding pursuant to the Small Business Administration program. The Paycheck Protection Program provided forgivable funding for payroll and related costs as well as some non-payroll costs. We applied for funding and we received (on April 17, 2020) funding in the amount of Series B Preferred stock$313,000. In June 2021, the April 2020 PPP loan of $313,000 was forgiven by the SBA. Pursuant to ASC 470, Debt, we recorded a gain of $313,000 to extinguish the PPP loan and accrued interest of $4,000. The Economic Injury Disaster Loan provides low-interest, long-term financing. We applied for funding and received (on May 18, 2020) funding in January 2017the amount of $150,000. In March 2021, we applied for $80,000.funding and were approved for a second round of Paycheck Protection Program forgivable financing in the amount of $177,000. In November 2021, the March 2021 PPP loan of $177,000 was forgiven by the SBA. Pursuant to ASC 470, Debt, the Company recorded a gain of $177,000 to extinguish the PPP loan and accrued interest of $1,000.
On August 12, 2022, our registration statement on Form S-1 was declared effective by the Securities and Exchange Commission. This registration statement registered 50,000,000 shares underlying certain common stock purchase warrants which, if exercised (and there is no assurance of exercise), would provide an additional source of financing for our company.
Concentrations
For the six months ended June 30, 2022, sales to two customers comprised 42% and 30% of revenues. For the six months ended June 30, 2021, sales to three customers comprised 39%, 31% and 16% of revenues. At June 30, 2022, two customers comprised 61% and 16% of accounts receivable.
The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. At June 30, 2022, the Company had 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.
Going Concern
We have yet to establish any history of profitable operations. ForDuring the ninesix months ended SeptemberJune 30, 2017, we2022, the Company incurred a net loss from operations of $1,901,326$5,730,000 and used cash in operating activities of $1,344,024,$2,321,000, and at SeptemberJune 30, 2017, we2022, the Company had a stockholders’ deficit of $10,198,835.$13,252,000. In addition, we are in default on notes payable and convertible notes payable in the aggregate amount of $2,829,000. These factors raise substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. This going concern condition could materially limitIn addition, the Company’s independent registered public accounting firm, in its report published on our December 31, 2021 year-end financial statements, and Note 1 in our unaudited financial statements, raised substantial doubt about the Company’s ability to raise additional funds through the issuance of new debt or equity securities, or otherwise, and future reports on ourcontinue as a going concern. The Company’s financial statements may alsodo not include an explanatory paragraph with respect to our abilityany adjustments that might result from the outcome of this uncertainty should we be unable to continue as a going concern.
Management estimates that the current funds on hand will be sufficient to continue operations through the next six months. Our ability to continue as a going concern is dependent upon our ability to raise additional funds andcontinue to implement our business plan. Management is currently seeking additional funds, primarily through the issuance of debt and equity securities for cash to operate our business. Currently, management is attempting to increase revenues and improve gross margins by a revised sales strategy. We are redirecting our sales focus from direct sales to domestic and international sales channels, where we are primarily selling through Distributors, Value Added Resellers, Strategic Partnersa channel of distributors, value added resellers, strategic partners and Original Equipment Manufacturers.original equipment manufacturers. While we believe in the viability of ourits strategy to increase revenues, and in our ability to raise additional funds, there can be no assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to continually increase our customer base and realize increased revenues from recently signed contracts.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 us. Even if we are able to obtain additional financing, if needed, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stock holders,stockholders, in the case of equity financing.
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Cybersecurity Risk Solutions, LLC
On April 15, 2021, we formally finalized c a Member Interest Purchase Agreement in which we acquired all the Member Interests of Cybersecurity Risk Solutions, LLC, a New Jersey limited liability company. In April 2021, we issued 500,000 shares of common stock with a fair value of $36,000, for the purchase of Cybersecurity Risk Solutions, LLC. At the date of acquisition, Cybersecurity Risk Solutions, LLC had nominal assets and liabilities, no revenues and limited operating history. Furthermore, we also determined that the acquisition did not meet the requirement of a significant acquisition pursuant to the regulations of the Securities and Exchange Commission.
Cybersecurity Risk Solutions, LLC is a cybersecurity firm offering cyber, privacy & data protection services including a personal cyber risk assessment, the industry’s first cyber health score, report and custom action plan, as well as ongoing vulnerability scanning, hack monitoring and dark web intelligence monitoring. For more information, go to https://SecureCyberID.com (which website is expressly not included in this filing). Will Lynch, the prior sole member of Cybersecurity Risk Solutions, LLC was hired by Zerify as the Director of Channel Distribution and not as a Named Executive Officer. A Director of Channel Distribution develops, services, and grows relationships with clients. Mr. Lynch has an annual salary of $100,000 and will also receive 2% net of all Channel sales. Mr. Lynch reports to our Executive Vice President and Marketing Director.
Subsequent Events
Subsequent to June 30, 2022, the Company issued notes payable aggregating $275,000. The notes bear interest at a rate starting from 4% to 57% per annum, each agreement secured by substantially all of the assets of the Company, maturing between January 2024 and July 2024.
On August 12, 2022, our registration statement on Form S-1 was declared effective by the Securities and Exchange Commission. This registration statement registered 50,000,000 shares underlying certain common stock purchase warrants which, if exercised (and there is no assurance of exercise), would provide an additional source of financing for our company.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, result of operations, liquidity or capital expenditures.
Critical Accounting Policies
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. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, and other factors that management believes to be reasonable. In addition, the Company has considered the potential impact of the pandemic, as well as certain macroeconomic factors, including inflation, rising interest rates, and recessionary concerns, on its business and operations.
Significant estimates include those related to accounting for potential liabilities and thefinancing obligations, assumptions madeused in valuing stock instruments issued for services, assumptions used in valuing derivative liabilities, the valuation allowance for deferred tax assets, and derivativethe accrual of potential liabilities. Actual results could differ from those estimates.
Revenue Recognition Policy
We recognizeThe 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 realized or realizable and earned. We consider revenue realized or realizable and earned when all ofprobable that the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii)Company will collect the product has been shipped orconsideration it is entitled to in exchange for the services have been renderedit transfers to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. When we recognize 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.its clients.
The Company’s revenue consists of revenue from sales and support of our software products. Revenue from hardwareprimarily consists of sales is recognized when the product is shipped to the customerof software licenses and there are either no unfulfilled obligations by us, or any obligations that will not affect the customer's final acceptancesubscriptions of the arrangement. All costs of these obligations are accrued when the corresponding revenue is recognized.
Revenue from timeour ProtectID®, GuardedID®, MobileTrust®, PrivacyLoK™ 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.SafeVchat™ products. We recognize revenue from these arrangements ratably over the contractual service period. For service contracts, the Company’s performance obligations are satisfied, and the related revenue is recognized, as services are rendered.
The Company offers no discounts, rebates, rights of return, or other allowances to clients which would result in the establishment of reserves against service revenue. Additionally, to date, the Company has not incurred incremental costs in obtaining a client contract.
Cost of revenue includes direct costs and fees related to the sale of software licenses when the four criteria discussed above are met. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. Revenue from monthly software licenses is recognized on a subscription basis.our products.
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Share-Based Payments
We offer an Application Service Provider (ASP) hosted cloud service whereby customer usage transactions are invoiced monthly on a cost per transaction basis.
Stock Compensation
WeThe Company periodically issueissues stock options, warrants, and warrantsshares of common stock as share-based compensation to employees and non-employees in non-capital raising transactions for services and for financing costs. We accountThe Company accounts for stock option and warrantsuch grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (FASB) whereasFASB 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. We account for stock option and warrant grants issued and vesting to non-employees in accordance withThe Company recognizes 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 our stock option and warrant grants are estimated usingstock-based compensation within its Statements of Operations with classification depending on the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected lifenature 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.services rendered.
Derivative Financial Instruments
We evaluate our 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, we use a sequencing method to prioritize its convertible securities as prescribed by ASC 815-40-35. At each reporting date, we review our convertible securities to determine their classification is appropriate.
Recently Issued Accounting Pronouncements
Refer to Note 1 in the accompanying condensedconsolidated financial statements.
Additional Information
You are advised to read this Form 10-Q in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K, and Current Reports on Form 8-K that we file from time to time. You may obtain copies of these reports directly from us or from the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers at its website http://www.sec.gov.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) require public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission'sCommission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer'sissuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation, with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (CFO) of the effectiveness our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of SeptemberJune 30, 2017.2022. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are not effective at the reasonable assurance level due to the following material weaknesses:
1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us as of and for the interim period ended SeptemberJune 30, 2017.2022. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
2. Our board of directors has no independent director or member with financial expertise which causes ineffective oversight of our external financial reporting and internal control over financial reporting.
3. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
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To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Remediation of Material Weaknesses
We intend to remediate the material weaknesses in our disclosure controls and procedures identified above by adding an independent director or member with financial expertise or hiring a full-time CFO with SEC reporting experience in the future when working capital permits and by working with our independent registered public accounting firm to refine our internal procedures.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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On March 28, 2013,None.
ITEM 1A. RISK FACTORS
The risk factors required pursuant to Regulation S-K, Item 503(c) are not required for smaller reporting companies. Accordingly, the Company has determined to provide particular risk factors at this time. The risks and uncertainties described below are not the only ones facing us. Other events that we initiated patent litigation against an outside party. On January 15, 2016, the parties reached a settlementdo not currently anticipate or that we currently deem immaterial also may affect our results of operations and financial condition. If any events described in the matter. As part of the settlement, we received a payment in January 2016 of $9,750,000 and incurred fees related to the settlement of $4,187,257.
On June 20, 2016, we 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 was filed by our patent attorneys, Blank Rome LLP, and is ongoing. On March 14, 2017, one of the parties initiated an inter parties review (IPR) (a procedure for challenging the validity of a United States patent before the United States Patent and Trademark Office) against our second Patent No. 8,484,698.
On March 14, 2017, we 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 was filed by our patent attorneys, Ropes and Gray LLP, and is ongoing.
On March 14, 2017, we 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 was filed by our patent attorneys, Ropes and Gray LLP, and is ongoing. On June 13, 2017, one of the competitors initiated a lawsuit against us in the U.S. District Court for the District of New Jersey for patent infringement (which we believe is without merit and will defend vigorously). This litigation is ongoing.
ITEM 1A. RISK FACTORS
Not required under Regulation S-K for “smaller reporting companies.”
Information about risk factors foractually occur, our business, operating results, prospects and financial condition could be materially harmed. In connection with the interim period ended September 30, 2017, does not differ materially fromforward-looking statements that set forthappear in Part I, Item 1A of our 2016 Annual Report on Form 10-K.10-K/A for the year ended December 31, 2021, which was filed with the Securities and Exchange Commission on July 18, 2022, you should also carefully review the cautionary statement referred to under “Special Note Regarding Forward Looking Statements.” The forward-looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
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ITEM 2. RECENT ISSUANCES OF UNREGISTERED SECURITIES
On May 5, 2022, we entered into Inducement Offer to Exercise Common Stock Purchase Warrants Letter Agreements (the “Exercise Agreements”) with certain of the holders of the Existing Warrants, The Special Equities Opportunity Fund, LLC and Gregory Castaldo, to purchase an aggregate of 50,000,000 shares of Common Stock (the “Exercising Holders”). Pursuant to the Exercise Agreements, the Exercising Holders and the Company agreed that, subject to any applicable beneficial ownership limitations, the Exercising Holders would exercise their Existing Warrants (the “Investor Warrants”) for shares of Common Stock underlying such Existing Warrants (the “Exercised Shares”) at a reduced exercise price of $0.02 per share of Common Stock. In order to induce the Exercising Holders to cash exercise the Investor Warrants, the Exercise Agreements provide for the issuance of new warrants to purchase up to an aggregate of 50,000,000 shares of Common Stock (the “New Warrants”), with such New Warrants to be issued in an amount equal to the number of the Exercised Shares underlying any Investor Warrants. The New Warrants are exercisable after issuance, provide for a cashless exercise provision if the shares of Common Stock underlying the New Warrants are not registered and terminate on the date that is five years following the issuance of the New Warrants. The New Warrants have an exercise price per share of $0.05. The New Warrants and the shares of Common Stock issuable upon the exercise of the New Warrants are not being registered under the Securities Act of 1933 and are being offered pursuant to the exemption provided in Section 4(a)(2) under the Securities Act of 1933. The Exercised Shares are registered for resale on effective registration statements previously filed with the Securities and Exchange Commission.
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As a result, these warrant holders exercised their warrants and the Company issued 50 million shares of common stock for cash proceeds of $940,000, net of direct fees and commission.
In September 2017, we issuedMay 2022, the Company paid a warrant holder, Crown Bridge Partners, $165,000 in exchange for the cancellation of two warrant agreements, from November 2019 and July 2020, for a total of 7,500 shares of restricted common stock, valued at $206, relating605,477 warrant shares. The Company recorded the payment amount to a December 2009 retainer agreement with our SEC attorney.financing expense.
All of theSubsequent issuances:
Subsequent to June 30, 2022, there were no issuances.
The above offerings, and sales, exceptapart from the afore-mentioned shares issuedofferings registered pursuant to a conversionthe Securities Act of convertible notes,1933, were made in reliance upon the exemption from registration under Rule 506 of Regulation D promulgated under the Securities Act of 1933 and/or Section 4(2) of the Securities Act of 1933, based on the following: (a) the investors confirmed to us that they were “accredited investors,” as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933 and had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to the offering; (c) the investors were provided with certain disclosure materials and all other information requested with respect to our company; (d) where applicable, the investors acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act of 1933, and agreed to transfer such securities only in a transaction registered under the Securities Act of 1933 or exempt from registration under the Securities Act; and (e) where applicable, a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequent registered under the Securities Act of 1933 or transferred in a transaction exempt from registration under the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
At June 30, 2022, the Company is in default on notes payable and convertible notes payable in the aggregate amount of $2,829,000. We have not made various principal and interest payments on many of our debt obligations. We continue to seek work-out arrangements and applicable refinancing with new or revised debt or equity instruments. See Notes 2 and 4 to the condensed consolidated financial statements.
ITEM 4. MINE SAFETY DISCLOSURESDISCLOSURES
Not applicable.
On September 8, 2017, our retail distributor, WYNIT Distribution, LLC, filed for Chapter 11 bankruptcy protection in the Minnesota Bankruptcy Court (Bankruptcy Petition #17-42726). WYNIT serves a wide range of customers, including large national retailers such as Home Shopping Network, Office Depot/Max, Best Buy Canada, Staples and others as well as smaller independent resellers. Our Management has or will file the appropriate forms, for our benefit, with the Minnesota Bankruptcy Court, but recognizes that we are an unsecured creditor.None.
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ITEM 6. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
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Amended and Restated Certificate of Incorporation of StrikeForce Technologies, Inc.(1) | ||
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| Irrevocable Waiver of Conversion Rights of Mark L. Kay | |
| Irrevocable Waiver of Conversion Rights of Ramarao Pemmaraju | |
| Irrevocable Waiver of Conversion Rights of George Waller | |
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BlockSafe Technologies, Inc. Intellectual Property License Agreement (21) | ||
BlockSafe Technologies, Inc. Amended Management Agreement (21) | ||
Cybersecurity Risk Solutions LLC Member Interest Purchase Agreement, dated April 15, 2021 (27) | ||
Inducement Offer to Exercise Common Stock Purchase Warrants, dated May 5, 2022 (29) | ||
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101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). (31) | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document. (31) | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. (31) | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. (31) | |
101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document. (31) | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. (31) | |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). (31) |
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(1) | Filed as an exhibit to the Registrant’s Form SB-2 dated as of May 11, 2005 and incorporated herein by reference. |
(2) | |
Filed as an exhibit to the Registrant’s Form 8-K dated February 4, 2011 and incorporated herein by reference. | |
(3) | Filed as an exhibit to the Registrant’s Form 10-Q dated December 13, 2010 and incorporated herein by reference. |
(4) | Filed as an exhibit to the Registrant’s Form S-1/A dated July 31, 2012 and incorporated herein by reference. |
(5) | Filed in conjunction with the Registrant’s Form 14A filed October 5, 2012 and incorporated herein by reference. |
(6) | Filed as an exhibit to the Registrant’s Form 8-K dated February 5, 2013 and incorporated herein by reference. |
(7) | Filed as an exhibit to the Registrant’s Form 8-K dated May 14, 2013 and incorporated herein by reference. |
(8) | Filed as an exhibit to the Registrant’s Form 8-A dated July 29, 2013 and incorporated herein by reference. |
(9) | Filed as an exhibit to the Registrant’s Form 8-K dated August 22, 2013 and incorporated herein by reference. |
(10) | Filed as an exhibit to the Registrant’s Form 8-A dated October 3, 2013 and incorporated herein by reference. |
(11) | Filed as an exhibit to the Registrant’s Form 8-K dated October 3, 2013 and incorporated herein by reference. |
(12) | Filed as an exhibit to the Registrant’s Form 8-A dated December 31, 2013 and incorporated herein by reference. |
(13) | Filed as an exhibit to the Registrant’s Form 8-K dated December 31, 2013 and incorporated herein by reference. |
(14) | Filed as an exhibit to the Registrant’s Form 8-K dated March 18, 2014 and incorporated herein by reference. |
(15) | Filed as an exhibit to the Registrant’s Form 8-K dated December 22, 2014 and incorporated herein by reference. |
(16) | Filed as an exhibit to the Registrant’s Form 8-K dated February 13, 2015 and incorporated herein by reference. |
(17) | Filed as an exhibit to the Registrant’s Form 8-K dated August |
(18) | Filed as an exhibit to the Registrant’s Form 8-K dated August 24, 2015 and incorporated herein by reference. |
(19) | Filed as an exhibit to the Registrant’s Form 8-K dated February 2, 2016 and incorporated herein by reference. |
(20) | Filed as an exhibit |
(21) | Filed as an exhibit to the Registrant’s Form 10-Q dated June 30, 2018 and incorporated herein by reference. |
(22) | Filed as an exhibit to the Registrant’s Form 8-K dated June 25, 2020 and incorporated herein by reference. |
(23) | Filed as an exhibit to the Registrant’s Form 1-A dated July 13, 2020 and incorporated herein by reference. |
(24) | Filed as an exhibit to the Registrant’s Form 1-A.1 dated September 11, 2020 and incorporated herein by reference. |
(25) | Filed as an exhibit to the Registrant’s Form 1-A.1 dated November 12, 2020 and incorporated herein by reference. |
(26) | Filed as an exhibit to the Registrant’s Form 8-K dated February 8, 2021 and incorporated herein by reference. |
(27) | Filed as an exhibit to the Registrant’s Form 8-K dated April 19, 2021 and incorporated herein by reference. |
(28) | Filed as an exhibit to the Registrant’s Form 1A/A- dated April 26, 2021 and incorporated herein by reference. |
(29) | Filed as an exhibit to the Registrant’s Form 8-K dates May 10, 2022 and incorporated herein by reference. |
(30) | Filed as an exhibit to the Registrant’s Form 8-K/A dated August 3, 2022 and incorporated herein by reference. |
(31) | Filed herewith. |
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| Table of Contents |
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Dated: | By: | /s/ Mark L. Kay |
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| Mark L. Kay |
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Chief Executive Officer |
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Dated: | By: | /s/ Philip E. Blocker |
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| Philip E. Blocker | ||
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| Chief Financial Officer and Principal Accounting Officer |
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