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EX-31.2 - CERTIFICATION - StrikeForce Technologies Inc.sfor_ex312.htm
EX-32.2 - CERTIFICATION - StrikeForce Technologies Inc.sfor_ex322.htm
EX-32.1 - CERTIFICATION - StrikeForce Technologies Inc.sfor_ex321.htm
EX-31.1 - CERTIFICATION - StrikeForce Technologies Inc.sfor_ex311.htm

 

UNITED STATES

SECURITIES EXCHANGE COMMISSION

Washington, D.C. 20549

 

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 _____________

 

STRIKEFORCE TECHNOLOGIES, 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, NJ 08837

(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) of the Exchange Act:

 

Common stock, $0.0001 par value

Title of Class

 

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” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

  

Large accelerated file

¨

Accelerated filer 

¨

Non-Accelerated filer

¨

Smaller reporting company

x

(Do not check if a 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) of the Exchange Act. ¨

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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 November 13, 2017

Common stock, $0.0001 par value

 

2,335,835,741

 

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 November 13, 2017

Preferred stock, Series A, no par value

 

3

 

Class

 

Outstanding at November 13, 2017

Preferred stock, Series B, $0.10 par value

 

70,001

 

Transitional Small Business Disclosure Format Yes ¨    No x

 

Documents Incorporated By Reference

None

 

 
 
 

STRIKEFORCE TECHNOLOGIES, INC.

 

INDEX TO FORM 10-Q FILING

SEPTEMBER 30, 2017

 

TABLE OF CONTENTS

 

 

 

 

Page

Number

 

 

 

 

 

 

PART I Financial Information

 

 

 

 

 

Item 1.

Financial Information

 

 

3

 

 

 

 

Condensed Balance Sheets at September 30, 2017 (unaudited) and December 31, 2016

 

 

4

 

 

 

 

 

 

 

Condensed Statements of Operations for the Three and Nine months ended September 30, 2017 and 2016 (unaudited)

 

 

5

 

 

 

 

 

 

 

Condensed Statement of Changes in Stockholders’ Deficit for the Nine months ended September 30, 2017 (unaudited)

 

 

6

 

 

 

 

 

 

 

 

Condensed Statements of Cash Flows for the Nine months ended September 30, 2017 and 2016 (unaudited)

 

 

7

 

 

 

 

 

Notes to the Condensed Financial Statements for the Three and Nine months ended September 30, 2017 and 2016 (unaudited)

 

 

8

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

17

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

22

 

 

 

 

Item 4.

Controls and Procedures

 

 

22

 

 

 

 

 

PART II Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

 

23

 

 

 

 

Item 1A.

Risk Factors 

 

 

23

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

24

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

 

24

 

 

 

 

Item 4.

Mine Safety Disclosures

 

 

24

 

 

 

 

Item 5.

Other Information

 

 

24

 

 

 

 

Item 6.

Exhibits

 

 

25

 

 

 

 

 

SIGNATURES

 

 

26

 

 

 

 

 

EX-31.1

Management Certification

 

 

 

 

 

 

 

 

EX-32.1

Sarbanes-Oxley Act

 

 

 

 

 

 
2
 
 

 

PART I

     

ITEM 1. CONDENSED FINANCIAL STATEMENTS AND NOTES TO INTERIM CONDENSED 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.

     

 
3
 
Table of Contents

     

STRIKEFORCE TECHNOLOGIES, INC.

CONDENSED BALANCE SHEETS

 

 

 

 

 

 

 

September 30,

2017

 

 

December 31,

2016

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash

 

$ 902,792

 

 

$ 804,130

 

Accounts receivable

 

 

61,298

 

 

 

152,009

 

Prepaid expenses

 

 

11,067

 

 

 

9,265

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

975,157

 

 

 

965,404

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

8,799

 

 

 

8,926

 

Other assets

 

 

20,999

 

 

 

22,539

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$ 1,004,955

 

 

$ 996,869

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$ 874,906

 

 

$ 890,799

 

Convertible notes payable, net

 

 

1,438,100

 

 

 

1,447,100

 

Convertible notes payable - related parties

 

 

355,500

 

 

 

355,500

 

Current maturities of notes payable, net

 

 

1,788,824

 

 

 

1,703,824

 

Current maturities of notes payable - related parties

 

 

742,513

 

 

 

742,513

 

Accrued interest (including $1,115,993 and $939,654 due to related parties, respectively)

 

 

3,912,060

 

 

 

3,805,158

 

Contingent payment obligation

 

 

1,500,000

 

 

 

-

 

Derivative liabilities

 

 

591,887

 

 

 

262,185

 

Accrued expenses

 

 

-

 

 

 

9,539

 

Accrued salaries and payroll taxes

 

 

-

 

 

 

10,549

 

Due to factor

 

 

-

 

 

 

209,192

 

 

 

 

 

 

 

 

 

 

Total Current Liabilities

 

 

11,203,790

 

 

 

9,436,359

 

 

 

 

 

 

 

 

 

 

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;

 

 

 

 

 

 

 

 

103,335 and 50,001 shares issued and outstanding, respectively

 

 

10,333

 

 

 

5,000

 

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

 

 

231,972

 

 

 

231,970

 

Additional paid-in capital

 

 

25,497,797

 

 

 

24,655,363

 

Accumulated deficit

 

 

(36,925,937 )

 

 

(34,318,823 )

 

 

 

 

 

 

 

 

 

Total Stockholders' Deficit

 

 

(10,198,835 )

 

 

(8,439,490 )

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders' Deficit

 

$ 1,004,955

 

 

$ 996,869

 

   

See accompanying notes to the condensed financial statements.

   

 
4
 
Table of Contents

 

STRIKEFORCE TECHNOLOGIES, INC.

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

 

$ 76,342

 

 

$ 183,029

 

 

$ 218,946

 

 

$ 392,628

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

3,168

 

 

 

888

 

 

 

9,547

 

 

 

4,852

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

73,174

 

 

 

182,141

 

 

 

209,399

 

 

 

387,776

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

137,008

 

 

 

124,282

 

 

 

490,586

 

 

 

345,000

 

Professional fees

 

 

67,499

 

 

 

45,883

 

 

 

249,822

 

 

 

521,742

 

Selling, general and administrative expenses

 

 

74,586

 

 

 

312,896

 

 

 

967,785

 

 

 

558,456

 

Research and development

 

 

123,750

 

 

 

125,654

 

 

 

402,532

 

 

 

378,874

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

402,843

 

 

 

608,715

 

 

 

2,110,725

 

 

 

1,804,072

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(329,669 )

 

 

(426,574 )

 

 

(1,901,326 )

 

 

(1,416,296 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(561,854 )

 

 

(95,481 )

 

 

(744,177 )

 

 

(1,022,178 )

Debt discount amortization

 

 

-

 

 

 

-

 

 

 

(4,000 )

 

 

(34,293 )

Private placement costs

 

 

(88,455 )

 

 

-

 

 

 

(222,949 )

 

 

-

 

Change in fair value of derivative liabilities

 

 

(90,895 )

 

 

23,776

 

 

 

(289,580 )

 

 

96,765

 

Extinguishment of derivative liabilities

 

 

557,827

 

 

 

-

 

 

 

557,827

 

 

 

635,600

 

Income tax expense

 

 

(452 )

 

 

-

 

 

 

(71,318 )

 

 

-

 

Forgiveness of debt

 

 

-

 

 

 

180,587

 

 

 

86,140

 

 

 

485,372

 

Litigation settlement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,750,000

 

Fees related to litigation settlement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,187,257 )

Other income (expense)

 

 

28

 

 

 

181

 

 

 

47

 

 

 

(1,357 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

(183,801 )

 

 

109,063

 

 

 

(688,010 )

 

 

5,722,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

(513,470 )

 

 

(317,511 )

 

 

(2,589,336 )

 

 

4,306,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deemed dividend on convertible preferred stock

 

 

-

 

 

 

-

 

 

 

(17,778 )

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$ (513,470 )

 

$ (317,511 )

 

$ (2,607,114 )

 

$ 4,306,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share - basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-Basic

 

$ -

 

 

$ -

 

 

$ -

 

 

$ -

 

-Diluted

 

$ -

 

 

$ -

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-Basic

 

 

2,319,701,359

 

 

 

2,284,590,677

 

 

 

2,319,693,932

 

 

 

1,699,727,344

 

-Diluted

 

 

2,319,701,359

 

 

 

2,284,590,677

 

 

 

2,319,693,932

 

 

 

1,700,489,249

 

     

See accompanying notes to the condensed financial statements.

     

 
5
 
Table of Contents

   

STRIKEFORCE TECHNOLOGIES, INC.

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

 

 

3

 

 

$ 987,000

 

 

 

50,001

 

 

$ 5,000

 

 

 

2,319,683,886

 

 

$ 231,970

 

 

$ 24,655,363

 

 

$ (34,318,823 )

 

$ (8,439,490 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sale of shares of series B preferred stock

 

 

-

 

 

 

-

 

 

 

53,334

 

 

 

5,333

 

 

 

-

 

 

 

-

 

 

 

74,667

 

 

 

-

 

 

 

80,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deemed dividend on convertible preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,778

 

 

 

(17,778 )

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of common stock issued for services

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

22,500

 

 

 

2

 

 

 

451

 

 

 

-

 

 

 

453

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of vested options

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

749,538

 

 

 

-

 

 

 

749,538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,589,336 )

 

 

(2,589,336 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2017

 

 

3

 

 

$ 987,000

 

 

 

103,335

 

 

$ 10,333

 

 

 

2,319,706,386

 

 

$ 231,972

 

 

$ 25,497,797

 

 

$ (36,925,937 )

 

$ (10,198,835 )

 

See accompanying notes to the condensed financial statements.

 

 
6
 
Table of Contents

STRIKEFORCE TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

For the Nine

Months Ended

 

 

For the Nine

Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

 2017

 

 

2016

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$ (2,589,336 )

 

$ 4,306,356

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,981

 

 

 

3,823

 

Amortization of discount on notes payable

 

 

4,000

 

 

 

34,293

 

Discount on notes payable recorded as interest expense

 

 

371,000

 

 

 

-

 

Fair value of common stock issued for interest on conversion notes

 

 

-

 

 

 

386,351

 

Fair value of common stock issued for services

 

 

453

 

 

 

186,037

 

Fair value of vested options

 

 

749,538

 

 

 

269,250

 

Forgiveness of debt

 

 

(86,140 )

 

 

(485,372 )

Change in fair value of derivative liabilities

 

 

289,580

 

 

 

(96,765 )

Private placement costs

 

 

222,949

 

 

 

-

 

Extinguishment of derivative liabilities

 

 

(557,827 )

 

 

(635,600 )

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

90,711

 

 

 

(251,321 )

Prepaid expenses

 

 

(1,802 )

 

 

(7,049 )

Accounts payable

 

 

(15,893 )

 

 

(416,600 )

Accrued expenses

 

 

(9,539 )

 

 

(7,616 )

Accrued interest

 

 

193,850

 

 

 

78,668

 

Accrued salaries and payroll taxes

 

 

(10,549 )

 

 

(585,497 )

Net cash provided by (used in) operating activities

 

 

(1,344,024 )

 

 

2,778,958

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3,314 )

 

 

(1,499 )

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from contingent payment obligation

 

 

1,500,000

 

 

 

-

 

Proceeds from convertible note payable

 

 

375,000

 

 

 

-

 

Proceeds from sale of Series B preferred stock

 

 

80,000

 

 

 

-

 

Proceeds from notes payable

 

 

-

 

 

 

75,000

 

Repayment of convertible notes payable

 

 

(384,000 )

 

 

(686,738 )

Repayment of notes payable

 

 

(125,000 )

 

 

(978,985 )

Net cash provided by (used in) financing activities

 

 

1,446,000

 

 

 

(1,590,723 )

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

98,662

 

 

 

1,186,736

 

 

 

 

 

 

 

 

 

 

Cash at beginning of the period

 

 

804,130

 

 

 

37,153

 

 

 

 

 

 

 

 

 

 

Cash at end of the period

 

$ 902,792

 

 

$ 1,223,889

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$ 86,310

 

 

$ 233,973

 

Income tax paid

 

 

71,318

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Deemed dividend on convertible preferred stock

 

$ 17,778

 

 

$ -

 

Note payable in exchange for due to factor and accrued interest

 

 

210,000

 

 

 

-

 

Common stock issued for conversion of debt and accrued interest

 

 

-

 

 

 

3

 

Forgiveness of accrued officers salaries recorded as capital contribution

 

 

-

 

 

 

762,275

 

Common stock issued for conversion of Series B preferred stock

 

 

-

 

 

 

12,534

 

Common stock issued for exercise of warrants

 

 

-

 

 

 

12

 

    

See accompanying notes to the condensed financial statements.

   

 
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StrikeForce Technologies, Inc.

Three Months and Nine Months Ended September 30, 2017 and 2016

Notes to the Condensed Financial Statements

(Unaudited)

 

Note 1 - Organization and Summary of Significant Accounting Policies

 

StrikeForce Technologies, Inc. (the “Company”) is a software development and services company that offers a suite of integrated computer network security products using proprietary technology. The Company’s 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 Concern

 

The accompanying condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed financial statements, for the nine months ended September 30, 2017, 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 report on the Company’s December 31, 2016 financial statements, has expressed substantial doubt about 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.

  

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 Information

 

The accompanying unaudited condensed 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 to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. The results of operations for the nine months ended September 30, 2017 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2017. These financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2016 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”) on April 14, 2017.

 

Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to accounting for potential liabilities, assumptions used in valuing stock instruments issued for services, assumptions used in valuing derivative liabilities, and the valuation allowance for deferred income taxes. Actual results could differ from those estimates.

 

 
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Stock Compensation

 

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (FASB) whereas the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Options granted to non-employees are revalued each reporting period to determine the amount to be recorded as an expense in the respective period. As the options vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current value on the date of vesting. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

 

The fair value of the Company’s stock option and warrant grants are estimated using the Black-Scholes-Merton option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.

 

Derivative Financial Instruments

 

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. At each reporting date, the Company reviews its convertible securities to determine that their classification is appropriate.

 

Fair Value of Financial Instruments

 

The Company follows the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

Level 3—Unobservable inputs based on the Company's assumptions.

 

The Company is required to use of observable market data if such data is available without undue cost and effort.

 

As of September 30,2017 and December 31, 2016, the Company’s 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 amounts for accounts receivable, accounts payable, accrued expenses, convertible notes, and notes payables approximate their fair value due to their short-term nature.

 

Income (loss) per Share

 

Basic income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share reflects the potential dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income (loss) of the Company. In computing diluted income (loss) per share, the treasury stock method assumes that outstanding options, warrants, and convertible preferred stock are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options, warrants, and convertible preferred stock may have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants.

 

 
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For the nine months ended September 30, 2017, the dilutive impact 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.

 

For the nine months ended September 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

 

$ (2,607,114 )

 

$ 4,306,356

 

Basic average common stock outstanding

 

 

2,319,693,932

 

 

 

1,699,727,344

 

Net earnings (loss) per share

 

$ -

 

 

$ -

 

 

 

 

Nine months ended

September 30,

 

 

 

2017

 

 

2016

 

Income (Loss) per share – Diluted:

 

 

 

 

 

 

Income (Loss) for the period

 

$ (2,607,114 )

 

$ 4,306,356

 

Basic average common stock outstanding

 

 

2,319,693,932

 

 

 

1,699,727,344

 

Diluted effect of outstanding stock options, warrants, notes and Series B Preferred stock

 

 

-

 

 

 

761,905

 

Diluted average common stock outstanding

 

 

2,319,693,932

 

 

 

1,700,489,249

 

Net earnings (loss) per share

 

$ -

 

 

$ -

 

 

Significant Concentrations

 

For the nine months ended September 30, 2017, sales to three customers comprised 51%, 10% and 10% of revenues, respectively. For the nine months ended September 30, 2016, sales to three customers comprised 45%, 29% 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% of accounts receivable.

 

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.

 

 
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In February 2016, the FASB issued ASU No. 2016-02, Leases. This update will require 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 classified as a financing activity while the interest component will be included in the operating section 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 earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its financial statements and related disclosures.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. 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 adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach. The 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.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

 

Note 2 - Convertible Notes Payable

 

Convertible notes payable consisted of the following:

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Secured

 

 

 

 

 

 

(a) DART

 

$ 542,588

 

 

$ 542,588

 

 

 

 

 

 

 

 

 

 

Unsecured

 

 

 

 

 

 

 

 

(b) Convertible notes with fixed conversion features

 

 

895,512

 

 

 

910,512

 

(c) Convertible notes with adjustable conversion features

 

 

-

 

 

 

-

 

Total convertible notes

 

$ 1,438,100

 

 

$ 1,447,100

 

 

(a) At September 30, 2017 and December 31, 2016, $542,588 of notes payables are due to DART/Citco Global. The notes are convertible into shares of the Company’s common stock based on adjustable conversion prices, are secured by all of the Company’s assets, were due in 2010, and are currently in default. The adjustable conversion features of the notes are accounted for as derivative liabilities (see Note 7). DART/Citco Global did not process any conversions of notes into shares of common stock during the nine months ended September 30, 2017 or 2016. The Company has been in contact with the note holder who has indicated that it has no present intention of exercising its right to convert the debentures into shares of the Company's common stock. Under the terms of the secured debentures, the Company is restricted in its ability to issue additional securities as long as any portion of the principal or interest on the secured debentures remains outstanding. During the nine months ended September 30, 2017, the Company did not obtain DART/Citco Global’s written consent related to any of its financing agreements.

 

 

(b) Convertible notes payable consisted of 13 unsecured convertible notes convertible at a fixed amount (“fixed convertible notes”) into 13 shares of the Company’s common stock, at fixed prices ranging from $1,950,000 to $9,750,000,000 per share, as defined in the agreements. The notes bear interest at 8% to 18% per annum, and were due on various dates from March 2008 to July 2015. All of the fixed convertible notes are currently in default and the Company is pursuing settlements with certain of the holders. During the nine months ended September 30, 2017, there were no additional notes issued and the Company repaid $9,000 of note principal.

         

 
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At December 31, 2016, the balance of the accrued interest on the fixed convertible notes was $936,639. During the nine months ended September 30, 2017, the Company paid $8,500 of accrued interest and interest expense of $58,316 was accrued. At September 30, 2017, the balance of accrued interest on the fixed convertible notes was $986,455. During the nine months ended September 30, 2016, interest expense of $60,320 was recorded.

 

 

(c) At December 31, 2016, there were no convertible notes with adjustable conversion features outstanding. During the nine months ended September 30, 3017, the Company issued two convertible notes payable for an aggregate of $375,000, bearing interest at 10% per annum, and maturing through July 2018. Both notes were paid in full in September 2017, including $98,625 of accrued and premium interest. At the option of the holder, beginning seven months from the date issued, the notes were convertible into shares of common stock of the Company at a price per share discount of 42% of the lowest closing market price of the Company’s common stock for the twenty days preceding a conversion notice. As a result, the Company determined that the conversion feature of the convertible notes were not considered indexed to the Company’s own stock and characterized the fair value of the conversion feature as a derivative liability upon issuance. The Company determined that upon issuance of the convertible notes in June and July 2017, the initial fair value of the embedded conversion features was $597,949 (see Note 7), of which $375,000 was recorded as debt discount offsetting the face amount of the convertible notes, and the remainder of $222,949 was recorded as private placement costs. During the nine months ended September 30, 2017 the Company amortized $4,000 of the valuation discount and recorded the balance of $371,000 to interest expense when the convertible notes were paid off.

 

At September 30, 2017 and December 31, 2016, accrued interest due for all convertible notes was $986,455 and $936,639, respectively, and is included in accrued interest in the accompanying balance sheets. Interest expense for all convertible notes payable for the nine months ended September 30, 2017 and 2016 was $64,487 and $73,598, respectively.

   

Note 3 - Convertible Notes Payable – Related Parties

 

At September 30, 2017 and December 31, 2016, convertible notes payable - related parties consist of 12 convertible notes payable in the aggregate of $355,500. The notes are unsecured and due December 31, 2017. Six notes totaling $268,000 are due to the Company’s Chief Executive Officer, at a compounded interest rate of 8% per annum; two notes totaling $57,000 are due to the Company’s VP of Technology, interest at prime plus 2% and prime plus 4% per annum; and four notes totaling $30,000 are due to the spouse of the Company’s Chief Technology Officer at a compounded interest rate of 8% per annum. $33,000 of the notes are convertible at 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.

 

At December 31, 2016, accrued interest due for the convertible notes – related parties was $437,305. During the nine months ended September 30, 2017, interest expense of $44,959 was accrued. At September 30, 2017, accrued interest due for the convertible notes – related parties was $482,264. During the nine months ended September 30, 2016, interest expense of $41,289 was recorded.

 

Note 4 - Notes Payable

 

Notes payable consisted of the following:

 

 

 

September 30,

2017

 

 

December 31,

2016

 

 

 

 

 

 

 

 

Unsecured

 

 

 

 

 

 

(a) Promissory notes

 

$ 413,824

 

 

$ 413,824

 

(b) Promissory notes – StrikeForce Investor Group

 

 

1,245,000

 

 

 

1,290,000

 

(c) Promissory note

 

 

130,000

 

 

 

-

 

Notes payable, current maturities

 

$ 1,788,824

 

 

$ 1,703,824

 

 

(a) Notes payable consists of various unsecured promissory notes with interest from 8% to 14% per annum. $413,824 of the notes were due on various dates from December 2011 to July 2017 and are currently in default, The Company is currently pursuing settlements with certain of the note holders. At September 30, 2017 and December 31, 2016, the balance due under these notes was $413,824.

 

 

At December 31, 2016, the balance of the accrued interest on the notes payable-various was $414,342. During the nine months ended September 30, 2017, $34,073 of interest expense was accrued. At September 30, 2017, accrued interest on the notes payable was $448,415. During the nine months ended September 30, 2016, $37,001 of interest expense was recorded.

 

 
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(b) Notes payable to StrikeForce Investor Group (SIG), made up of various investors with unsecured notes, interest at 10% per annum, originally due in 2011, and currently in default. At December 31, 2016, the balance of notes payable-SIG was $1,290,000. During the nine months ended September 30, 2017, one note holder assigned a delinquent note totaling $25,000, to an unrelated party, who agreed to extend payment of the note to February 2018. During the nine months ended September 30, 2017, the Company repaid $45,000 of principal and at September 30, 2017, the balance of notes payable-SIG was $1,245,000. The Company is currently pursuing extensions on the remaining delinquent notes.

 

 

At December 31, 2016, the balance of the accrued interest on the notes payable-SIG was $1,425,087. During the nine months ended September 30, 2017, $93,889 of interest expense was accrued, $71,639 of accrued interest was paid, and $86,140 of accrued interest was forgiven and written-off. At September 30, 2017, accrued interest on the notes payable-SIG was $1,361,197. During the nine months ended September 30, 2016, $108,664 of interest expense was recorded.

 

 

(c) In July 2017, the Company executed an exchange agreement with a factor which transferred the amount due to the factor of approximately $209,000 into a promissory note for $210,000, non-interest bearing, and maturing on February 7, 2018. Per the terms of the note, the Company shall make seven payments as follows: $60,000 in August 2017 and $20,000 in September 2017, which have been paid, $20,000 per month from October 2017 to January 2018, and $50,000 in February 2018. In the event of a default of the payment terms, the outstanding balance shall increase to 120% of the note balance. Additionally, if the note is not paid in full by the maturity date, the revised outstanding balance shall be convertible at the note holders option into shares of common stock of the Company at a price per share discount of 20% of the lowest trading market price of the Company’s common stock for the twenty days preceding a conversion notice. As of September 30, 2017, the balance due on the promissory note was $130,000

 

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- related party consist of 18 unsecured notes payable to the Company’s Chief Executive Officer ranging in interest rates of 0% per annum to 10% per annum. The notes are unsecured and have extended due dates of December 31, 2017. At September 30, 2017 and December 31, 2016, the balance due under these notes $742,513.

 

At December 31, 2016, accrued interest due for the notes payable – related party was $591,784. During the nine months ended September 30, 2017, interest expense 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.

 

Note 6 – Contingent Payment Obligation

 

On September 6, 2017, the Company entered into a litigation funding agreement with Therium Inc. 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). 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.

 

 
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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

 

 

0.13 %

 

 

0.16 %

 

 

0.16 %

Expected volatility

 

 

147 %

 

152%-157

%

 

75

%

Expected life (in years)

 

1 year

 

 

1 year

 

 

1 year

 

Expected dividend yield

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value:

 

 

 

 

 

 

 

 

 

 

 

 

Conversion feature

 

$ 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 that the Company has not customarily paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.

 

Note 8– Stockholders’ Deficit

 

Series A Preferred Stock

 

In 2011, the Company issued three shares of non-convertible Series A Preferred Stock valued at $329,000 per share, or $987,000 in aggregate to three members of the management team. The Series A Preferred Stock are convertible into four times the total number of common shares plus the total number of shares of Series B preferred stock issued and outstanding at the time of conversion, and have voting rights equal to eighty percent of the total issued and outstanding shares of the Company's common stock. This effectively provided the management team, upon retention of their Series A Preferred Stock, voting control on matters presented to the shareholders of the Company. The shareholders of the Series A Preferred Stock have each irrevocably waived their conversion rights relating to the Series A Preferred Stock issued.

 

Series B Preferred Stock

 

The Series B Preferred Stock has preferential liquidation rights in the event of any liquidation, dissolution or winding up of the Company, such liquidation rights to be paid from the assets of the Company not delegated to parties with greater priority at $1.00 per share or, in the event an aggregate subscription by a single subscriber of the Series B Preferred Stock is greater than $100,000,000, $0.997 per share. The Series B Preferred Stock shall be convertible to a number of shares of common stock equal to the price of the Series B Preferred Stock divided by the par value of the Series B Preferred Stock. The option to convert the shares of Series B Preferred Stock may not be exercised until three months following the issuance of the Series B Preferred Stock to the recipient shareholder. The Series B Preferred Stock shall have ten votes on matters presented to the shareholders of the Company for one share of Series B Preferred Stock held. The initial price of the Series B Preferred Stock shall be $2.50, (subject to adjustment by the Company’s Board of Directors) until such time, if ever, the Series B Preferred Stock are listed on a secondary and/or public exchange.

 

In January 2017, the Company sold subscriptions to two individuals for the purchase of 53,334 shares of its Series B Preferred Stock at $1.50 per share, or an aggregate of $80,000. The shares of Series B Preferred Stock are convertible into shares of the Company’s common stock at a 25% discount to current market value, as defined, with a minimum conversion price set by the Company's Board of Directors of $0.001 per share. The Series B Preferred Stock can be converted at any time into shares of common stock after twelve months from acceptance by the Company of the subscription agreements, but only once every 30 days. For the nine months ended September 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.

 

Common Stock

 

During the nine months ended September 30, 2017, the Company issued an aggregate of 15,000 shares of its common stock for services valued at $452.

 

 
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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:

 

 

· Convertible note holders converted $143,123 of principal, $49,560 of accrued interest and $386,352 of additional interest, or a total of $579,035, into 2,105,237,983 shares of common stock at conversion prices ranging from $0.000058 to $0.0008 per share.

 

 

 

 

· Four holders of the Company’s Series B Preferred Stock converted 125,337 Series B Preferred shares into 35,703,979 shares of the Company’s common stock at conversion prices ranging from $0.00383 to $0.00532 per share.

 

 

 

 

· An investor processed a cashless exercise of 30 warrant shares into 125,000 shares of the Company’s common stock. The investor received an additional 154,875,000 shares of the Company’s common stock as modification consideration, valued at $185,850, and recorded as the fair value of shares issued for services in general and administrative expenses.

 

 

 

 

· The Company issued 22,500 shares of common stock for services, valued at $188.

 

Note 9 - Options

 

In September 2016, the Company issued options to purchase 196,000,000 shares of its common stock to its management team and employees with a total fair value of $1,568,000 determined using the Black-Scholes Option Pricing model. The options are exercisable at $0.00625 per share, vest in 6 months, and 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.

 

The table below summarizes the Company’s 2004 Incentive Plan and 2012 Stock Incentive Plan activities for the period January 1, 2017 to September 30, 2017:

    

 

 

Number of

Options

Shares

 

 

Exercise

Price

Range

Per Share

 

 

Weighted

Average

Exercise

Price

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2017

 

 

196,000,001

 

 

$

0.0023-975,000,000

 

 

$ 0.00625

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

-

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

-

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expired

 

 

-

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2017

 

 

196,000,001

 

 

$

0.0023-975,000,000

 

 

$ 0.00625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and exercisable, September 30, 2017

 

 

196,000,001

 

 

$

0.0023-975,000,000

 

 

$ 0.00625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unvested, September 30, 2017

 

 

-

 

 

$ -

 

 

$ -

 

 

As of September 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, the intrinsic value of outstanding options was zero.

 

The following table summarizes information concerning 2004 Incentive plan and 2012 Stock Incentive Plan as of September 30, 2017:

 

 

 

 

Options Outstanding

 

 

Options Exercisable

 

Range of Exercise Prices

 

 

Number Outstanding

 

 

Average Remaining Contractual Life (in years)

 

 

Weighted Average Exercise Price

 

 

Number Exercisable

 

 

Average Remaining Contractual Life (in years)

 

 

Weighted Average Exercise Price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

975,000,000

 

 

 

1

 

 

 

1.00

 

 

$ 975,000,000

 

 

 

1

 

 

 

1.00

 

 

$ 975,000,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

0.00625

 

 

 

196,000,000

 

 

 

10.00

 

 

$ 0.00625

 

 

 

196,000,000

 

 

 

10.00

 

 

$ 0.00625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

0.00625 - 975,000,000

 

 

 

196,000,001

 

 

 

10.00

 

 

$ 0.00625

 

 

 

196,000,001

 

 

 

10.00

 

 

$ 0.00625

 

 

 
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Note 10 - Commitments and Contingencies

 

Asset Sale and Licensing Agreement

 

On August 24, 2015, the Company entered into an agreement with Cyber Safety, Inc., a New York corporation (“Cyber Safety”) for Cyber Safety to license, and retain an option to purchase, the patents and Intellectual Property related to the GuardedID® and MobileTrust® software. Cyber Safety 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 Event

 

In October 2017, one holder of the Company’s Series B Preferred Stock converted 33,334 Series B Preferred shares into 16,129,355 shares of the Company’s common stock at a conversion price of $0.0031 per share.

   

 
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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" statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA") as well as historical information. Some of our statements under "Business”, "Properties”, "Legal Proceedings”, "Management's Discussion and Analysis of Financial Condition and Results of Operations”," the Notes to Condensed Financial Statements” and elsewhere in this report constitute "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 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," 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 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”, “we”, “us”, “our”, “SFT”, “our company”, and the “Company” means StrikeForce Technologies, Inc., a Wyoming corporation.

   

 
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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 subsidiaries and we conduct our operations from our corporate office in Edison, New Jersey.

 

On September 6, 2017, we entered into a Litigation Funding Agreement with two parties (the “Funders”) for the purpose of funding the enforcement of certain patents relating 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 infringement on our patents.

 

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 8 employees. Our Company’s website is www.strikeforcetech.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

 

We are working with two patent attorney firms to aggressively continue to enforce our patent rights. We currently have three patents granted to us for Out-of-Band ProtectID® (Patent Nos.: 7,870,599, 8,484,698 and 8,713,701). In March 2013, 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.

    

We have four trademarks that have been approved and registered: ProtectID®, GuardedID®, MobileTrust® and CryptoColor®. A portion of our software is licensed from third parties and the remainder is developed by our own team of developers while leveraging some external consultant expertise as necessitated. We rely upon confidentiality agreements signed by our employees, consultants and third parties to protect the intellectual property rights.

 

Results of Operations

 

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2016

 

Revenues for the three months ended September 30, 2017 were $76,342 compared to $183,029 for the three months ended September 30, 2016, a decrease of $106,687 or 58.3%. 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 the decrease in the sales 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 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 three months ended September 30, 2017 was $3,168 compared to $888 for the three months ended September 30, 2016, an increase of $2,280, or 257%. 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 three months ended September 30, 2017 was 4.2% compared to 0.5% for the three months ended September 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.

 

Research and development expenses for the three months ended September 30, 2017 were $123,750 compared to $125,654 for the three months ended September 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.

 

 
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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, an increase of $195,959, or 61.7%. 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 the testing of our mobile products, which required 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 nine months ended September 30, 2017 were $1,708,193 compared to $1,425,198 for the nine months ended September 30, 2016, an increase of $282,995 or 19.9%. The increase was due primarily to the decrease in 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.

 

 
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Other income (expense) for the nine months ended September 30, 2017 was expense of ($688,010) as compared to income of $5,722,652 for the nine months ended September 30, 2016, representing a decrease in other income of $6,410,662, or 112%. The decrease was primarily due to the net settlement in the prior year of patent remediation litigation, which was settled in January 2016, slightly reduced by an increase in private placement costs, an increase in the fair value of derivative liabilities and a decrease in forgiveness of debt, offset by a decrease in interest expense and an increase in the extinguishment of derivative liabilities.

     

Our net income (loss) for the nine months ended September 30, 2017 was a net loss ($2,607,114) compared to a net income of $4,306,356 for the nine months ended September 30, 2016, a decrease in net income of $6,913,470, or 161%. The decrease was primarily due to 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 increase in the fair value of derivative liabilities and a decrease in forgiveness of debt, offset by a decrease in interest expense and an increase in the extinguishment of derivative liabilities.

    

Liquidity and Capital Resources

  

Our total current assets at September 30, 2017 were $975,157, which included cash of $902,792, as compared with $965,404 in total current assets at December 31, 2016, which included cash of $804,130. Additionally, we had a stockholders’ deficit in the amount of $10,198,835 at September 30, 2017 compared to a stockholders’ deficit of $8,439,490 at December 31, 2016. 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 nine months ended September 30, 2017 primarily through the first tranche, for $1,500,000, from a litigation funding agreement executed on September 6, 2017. In addition, we sold shares of Series B Preferred stock in January 2017 for $80,000.

 

Going Concern

 

We have yet to establish any history of profitable operations. For the nine months ended September 30, 2017, we incurred a loss from operations of $1,901,326 and used cash in operating activities of $1,344,024, and at September 30, 2017, we had a stockholders’ deficit of $10,198,835. 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 limit our ability to raise additional funds through the issuance of new debt or equity securities, or otherwise, and future reports on our financial statements may also include an explanatory paragraph with respect to our ability to continue as a going concern.

 

Our ability to continue as a going concern is dependent upon our ability to raise additional funds and 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 Partners and Original Equipment Manufacturers. While we believe in the viability of our 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. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in the case of equity financing.

 

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.

 

 
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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. Significant estimates include those related to accounting for potential liabilities and the assumptions made in valuing stock instruments issued for services and derivative liabilities. Actual results could differ from those estimates.

 

Revenue Recognition Policy

 

We recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. When 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.

 

Revenue from hardware sales is recognized when the product is shipped to the customer and there are either no unfulfilled obligations by us, or any obligations that will not affect the customer's final acceptance of the arrangement. All costs of these obligations are accrued when the corresponding revenue is recognized.

 

Revenue from time and service contracts is recognized as the services are provided. Revenue from delivered elements of one-time charge licensed software is recognized at the inception of the license term, and determined by the fair value of each delivered element. Revenue is deferred for undelivered elements. We recognize revenue from 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.

     

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

  

We periodically issue stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. We account for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (FASB) whereas the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. We account for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Options granted to non-employees are revalued each reporting period to determine the amount to be recorded as an expense in the respective period. As the options vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current value on the date of vesting. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

    

The fair value of our stock option and warrant grants are estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.

   

Derivative Financial Instruments

   

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.

   

 
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Recently Issued Accounting Pronouncements

 

Refer to Note 1 in the accompanying condensed 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'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'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 September 30, 2017. 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 September 30, 2017. 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.

 

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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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On March 28, 2013, we initiated patent litigation against an outside party. On January 15, 2016, the parties reached a settlement 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 for the interim period ended September 30, 2017, does not differ materially from that set forth in Part I, Item 1A of our 2016 Annual Report on Form 10-K.

    

 
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ITEM 2. RECENT ISSUANCES OF UNREGISTERED SECURITIES

 

In September 2017, we issued a total of 7,500 shares of restricted common stock, valued at $206, relating to a December 2009 retainer agreement with our SEC attorney.

 

All of the above offerings and sales, except the afore-mentioned shares issued pursuant to a conversion of convertible notes, 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.

 

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 financial statements.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

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.

 

 
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ITEM 6. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

      

Exhibit Number

 

Description

3.1

 

Amended and Restated Certificate of Incorporation of StrikeForce Technologies, Inc.(1)

3.2

 

Amended Articles of Incorporation of StrikeForce Technologies, Inc. (2)

3.3

 

By-laws of StrikeForce Technologies, Inc. (1)

3.4

 

Amended By-laws of StrikeForce Technologies, Inc. (2)

3.5

 

Amended By-laws of StrikeForce Technologies, Inc. (4)

3.6

 

Amended By-laws of StrikeForce Technologies, Inc. (21)

3.7

 

Articles of Amendment of StrikeForce Technologies, Inc. (4)

3.8

 

Amendments to Articles of Incorporation (7)

3.9

 

Amendments to Articles of Incorporation (8)

3.10

 

Registration of Classes of Securities (9)

3.11

 

Amendments to Articles of Incorporation (10)

3.12

 

Registration of Classes of Securities (11)

3.13

 

Amendments to Articles of Incorporation (12)

3.14

 

Registration of Classes of Securities (13)

3.15

 

Amendments to Articles of Incorporation (14)

3.16

 

Amendments to Articles of Incorporation (15 )

3.17

 

Amendments to Articles of Incorporation (16)

3.18

 

Amendments to Articles of Incorporation (17)

3.19

 

Amendments to Articles of Incorporation (18)

10.1

 

Employment Agreement dated as of May 20, 2003, by and between StrikeForce Technologies, Inc. and Mark L. Kay. (1)

10.2

 

Irrevocable Waiver of Conversion Rights of Mark L. Kay (5)

10.3

 

Irrevocable Waiver of Conversion Rights of Ramarao Pemmaraju (5)

10.4

 

Irrevocable Waiver of Conversion Rights of George Waller (5)

10.5

 

CFO Consultant Agreement with Philip E. Blocker (5)

10.6

 

2012 Stock Option Plan (6)

10.7

 

Asset Purchase Agreement between StrikeForce Technologies, Inc. and Cyber Safety, Inc., dated August 24, 2015 (19)

108

 

Amendment to the Asset Purchase Agreement and Distributor and Reseller Agreement between StrikeForce Technologies, Inc. and Cyber Safety, Inc. (20)

10.9

 

Execution of Litigation Funding Agreement (22)

31.1

 

Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)

31.2

 

Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)

32.1

 

Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)

32.2

 

Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)

    

(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 December 23, 2010 and incorporated herein by reference.
(3) Filed herewith.
(4) Filed as an exhibit to the Registrant’s Form 8-K dated February 4, 2011 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant’s Form S-1/A dated July 31, 2012 and incorporated herein by reference.
(6) Filed in conjunction with the Registrant’s Form 14A filed October 5, 2012 and incorporated herein by reference.
(7) Filed as an exhibit to the Registrant’s Form 8-K dated February 5, 2013 and incorporated herein by reference.
(8) Filed as an exhibit to the Registrant’s Form 8-K dated May 14, 2013 and incorporated herein by reference.
(9) Filed as an exhibit to the Registrant’s Form 8-A dated July 29, 2013 and incorporated herein by reference.
(10) Filed as an exhibit to the Registrant’s Form 8-K dated August 22, 2013 and incorporated herein by reference.
(11) Filed as an exhibit to the Registrant’s Form 8-A dated October 3, 2013 and incorporated herein by reference.
(12) Filed as an exhibit to the Registrant’s Form 8-K dated October 3, 2013 and incorporated herein by reference.
(13) Filed as an exhibit to the Registrant’s Form 8-A dated December 31, 2013 and incorporated herein by reference.
(14) Filed as an exhibit to the Registrant’s Form 8-K dated December 31, 2013 and incorporated herein by reference.
(15) Filed as an exhibit to the Registrant’s Form 8-K dated March 18, 2014 and incorporated herein by reference.
(16) Filed as an exhibit to the Registrant’s Form 8-K dated December 22, 2014 and incorporated herein by reference.
(18) Filed as an exhibit to the Registrant’s Form 8-K dated February 13, 2015 and incorporated herein by reference.
(19) Filed as an exhibit to the Registrant’s Form 8-K dated August 28, 2015 and incorporated herein by reference.
(20) Filed as an exhibit to the Registrant’s Form 8-K dated February 2, 2016 and incorporated herein by reference.
(21) Filed as an exhibit to the Registrant’s Form 8-K dated May 19, 2017 and incorporated herein by reference.
(22) Filed as an disclosure to the Registrant’s Form 8-K dated September 11, 2017 and incorporated herein by reference.

   

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SIGNATURES

 

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.

 

 

STRIKEFORCE TECHNOLOGIES, INC.

 

 

 

Dated: November 15, 2017

By:

/s/ Mark L. Kay

 

 

Mark L. Kay

 

 

Chief Executive Officer

 

 

Dated: November 15, 2017

By:

/s/ Philip E. Blocker

 

 

Philip E. Blocker

 

 

Chief Financial Officer and

Principal Accounting Officer

 

 

 

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