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: March 31, 2018

 

 

¨

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   ¨ No  x

 

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 ¨

 

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, 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 filer

¨

Accelerated filer

¨

Non-accelerated filer

¨

Smaller reporting company

x

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 7(a)(2)(B) of the Securities Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 May 16, 2018

Common stock, $0.0001 par value

 

2,335,850,741

 

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 May 16, 2018

Preferred stock, Series A, no par value

 

3

 

Class

 

Outstanding at May 16, 2018

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

MARCH 31, 2018

 

TABLE OF CONTENTS

 

 

Page Number

 

 

 

 

 

PART I Financial Information

 

 

 

 

 

Item 1.

Financial Information

 

3

 

 

 

 

Condensed Consolidated Balance Sheets at March 31, 2018 (unaudited) and December 31, 2017

 

4

 

 

 

 

Condensed Consolidated Statements of Operations for the Three months ended March 31, 2018 and 2017 (unaudited)

 

5

 

 

 

 

Condensed Consolidated Statement of Changes in Stockholders’ Deficit for the Three months ended March 31, 2018 (unaudited)

 

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2018 and 2017 (unaudited)

 

7

 

 

 

 

Notes to the Condensed Consolidated Financial Statements for the Three months ended March 31, 2018 and 2017 (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

 

23

 

 

 

Item 3.

Defaults Upon Senior Securities

 

23

 

 

 

Item 4.

Mine Safety Disclosures

 

23

 

 

 

Item 5.

Other Information

 

23

 

 

 

Item 6.

Exhibits

 

24

 

 

 

 

SIGNATURES

 

25

 

 

 

 

EX-31.1

 Management Certification

 

 

 

 

 

EX-32.1

 Sarbanes-Oxley Act

 

 

 

 
2
 

 

PART I

 

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

 

General

 

The accompanying unaudited condensed consolidated 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 financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2017. 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 months ended March 31, 2018 are not necessarily indicative of the results that can be expected for the year ending December 31, 2018.

 
 
3
 
Table of Contents

 

STRIKEFORCE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

March 31,

2018

 

 

December 31,

2017

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash

 

$ 387,968

 

 

$ 455,484

 

Accounts receivable, net

 

 

28,817

 

 

 

47,454

 

Prepaid expenses

 

 

11,430

 

 

 

9,098

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

428,215

 

 

 

512,036

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

6,647

 

 

 

7,676

 

Other assets

 

 

19,972

 

 

 

20,485

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$ 454,834

 

 

$ 540,197

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$ 877,566

 

 

$ 935,979

 

Convertible notes payable (net of discount of $125,726 and $0, respectively;

 

 

 

 

 

 

 

 

$1,438,100 in default at March 31, 2018 and December 31, 2017 , respectively)

 

 

1,442,374

 

 

 

1,438,100

 

Convertible notes payable - related parties

 

 

355,500

 

 

 

355,500

 

Notes payable (net of discount of $333,764 and $0, respectively;

 

 

 

 

 

 

 

 

$1,638,824 in default at March 31, 2018 and December 31, 2017, respectively)

 

 

1,702,060

 

 

 

1,713,824

 

Notes payable - related parties, net of discount of $32,110 and $0, respectively

 

 

750,403

 

 

 

742,513

 

Accrued interest (including $1,175,378 and $1,145,941 due to related parties, respectively)

 

 

4,092,702

 

 

 

4,002,811

 

Contingent payment obligation

 

 

1,500,000

 

 

 

1,500,000

 

Financing obligation

 

 

437,000

 

 

 

-

 

Derivative liabilities

 

 

642,201

 

 

 

623,195

 

Accrued expenses

 

 

-

 

 

 

9,521

 

Accrued salaries and payroll taxes

 

 

-

 

 

 

11,940

 

 

 

 

 

 

 

 

 

 

Total Current Liabilities

 

 

11,799,806

 

 

 

11,333,383

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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;

 

 

 

 

 

 

 

 

70,001 and 70,001 shares issued and outstanding, respectively

 

 

7,000

 

 

 

7,000

 

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;

 

 

 

 

 

 

 

 

2,335,850,741 and 2,335,843,241 shares issued and outstanding, respectively

 

 

233,585

 

 

 

233,584

 

Additional paid-in capital

 

 

25,708,315

 

 

 

25,522,331

 

Accumulated deficit

 

 

(38,162,569 )

 

 

(37,543,101 )

Total StrikeForce Technologies, Inc. stockholders' deficit

 

 

(11,226,669 )

 

 

(10,793,186 )

Noncontrolling interest in consolidated subsidiary

 

 

(118,303 )

 

 

-

 

 

 

 

 

 

 

 

 

 

Total Stockholders' Deficit

 

 

(11,344,972 )

 

 

(10,793,186 )

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders' Deficit

 

$ 454,834

 

 

$ 540,197

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 
4
 
Table of Contents

 

STRIKEFORCE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

For the Three

Months Ended

 

 

 

 

March 31,

2018

 

 

March 31,

2017

 

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Revenue

 

 

$ 64,693

 

 

$ 83,869

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

 

6,754

 

 

 

2,626

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

 

57,939

 

 

 

81,243

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Compensation

 

 

 

157,934

 

 

 

148,049

 

Professional fees

 

 

 

190,531

 

 

 

63,035

 

Selling, general and administrative expenses

 

 

 

264,216

 

 

 

841,387

 

Research and development

 

 

 

123,750

 

 

 

125,031

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

 

736,431

 

 

 

1,177,502

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

 

(678,492 )

 

 

(1,096,259 )

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

(166,236 )

 

 

(90,458 )

Debt discount amortization

 

 

 

(4,274 )

 

 

-

 

Private placement costs

 

 

 

(194,016 )

 

 

-

 

Change in fair value of derivative liabilities

 

 

 

305,010

 

 

 

(208,908 )

Other income

 

 

 

237

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

 

(59,279 )

 

 

(299,350 )

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

(737,771 )

 

 

(1,395,609 )

Net loss attributable to noncontrolling interest

 

 

 

118,303

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common shareholders of StrikeForce Technologies, Inc.

 

 

$ (619,468 )

 

$ (1,395,609 )

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share - basic and diluted

 

 

 

 

 

 

 

 

 

-Basic and diluted

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

-Basic and diluted

 

 

 

2,335,845,741

 

 

 

2,319,686,386

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 
5
 
Table of Contents

 

STRIKEFORCE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT

FOR THE THREE MONTHS ENDED MARCH 31, 2018

(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

 

 

Noncontrolling

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Interest

 

 

Deficit

 

Balance at December 31, 2017

 

 

3

 

 

$ 987,000

 

 

 

70,001

 

 

$ 7,000

 

 

 

2,335,843,241

 

 

$ 233,584

 

 

$ 25,522,331

 

 

$ (37,543,101 )

 

$ -

 

 

$ (10,793,186 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of common stock issued for services

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,500

 

 

 

1

 

 

 

81

 

 

 

-

 

 

 

 

 

 

 

82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of vested options

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

185,903

 

 

 

-

 

 

 

 

 

 

 

185,903

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(619,468 )

 

 

(118,303 )

 

 

(737,771 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018 (unaudited)

 

 

3

 

 

$ 987,000

 

 

 

70,001

 

 

$ 7,000

 

 

 

2,335,850,741

 

 

$ 233,585

 

 

$ 25,708,315

 

 

$ (38,162,569 )

 

$ (118,303 )

 

$ (11,344,972 )

 

See accompanying notes to the condensed consolidated financial statements.

 

 
6
 
Table of Contents

 

STRIKEFORCE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

For the Three Months

 

 

For the Three Months

 

 

 

Ended

 

 

Ended

 

 

 

March 31,

2018

 

 

March 31,

2017

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$ (737,771 )

 

$ (1,395,609 )

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,542

 

 

 

1,675

 

Amortization of discount on notes payable

 

 

75,400

 

 

 

-

 

Fair value of common stock issued for services

 

 

82

 

 

 

236

 

Fair value of vested options

 

 

185,903

 

 

 

749,538

 

Change in fair value of derivative liabilities

 

 

(305,010 )

 

 

208,908

 

Private placement costs

 

 

194,016

 

 

 

-

 

Beneficial conversion feature of preferred B stock

 

 

-

 

 

 

17,778

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

18,637

 

 

 

(32,595 )

Prepaid expenses

 

 

(2,332 )

 

 

2,196

 

Accounts payable

 

 

(58,413 )

 

 

(25,900 )

Accrued expenses

 

 

(9,521 )

 

 

(9,539 )

Accrued interest

 

 

89,891

 

 

 

18,818

 

Accrued salaries and payroll taxes

 

 

(11,940 )

 

 

(10,549 )

Net cash used in operating activities

 

 

(559,516 )

 

 

(475,043 )

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from convertible note payable

 

 

130,000

 

 

 

-

 

Proceeds from notes payable

 

 

397,000

 

 

 

-

 

Proceeds from note payable - related parties

 

 

40,000

 

 

 

-

 

Repayment of notes payable

 

 

(75,000 )

 

 

(40,000 )

Proceeds from sale of Series B preferred stock

 

 

-

 

 

 

80,000

 

Repayment of convertible notes payable

 

 

-

 

 

 

(6,500 )

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

492,000

 

 

 

33,500

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

(67,516 )

 

 

(441,543 )

 

 

 

 

 

 

 

 

 

Cash at beginning of the period

 

 

455,484

 

 

 

804,130

 

 

 

 

 

 

 

 

 

 

Cash at end of the period

 

$ 387,968

 

 

$ 362,587

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$ 5,000

 

 

$ 71,639

 

Income tax paid

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing transactions

 

 

 

 

 

 

 

 

Fair value of derivative created upon issuance of convertible debt recorded as debt discount

 

$ 130,000

 

 

$ 71,639

 

Fair value of financing obligation recorded as debt discount

 

$ 437,000

 

 

$ -

 

Net loss attributable to noncontrolling interest

 

$ 118,303

 

 

$ -

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 
7
 
Table of Contents

 

March 31, 2018 and 2017

Notes to the Condensed Consolidated 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.

 

Basis of Presentation - Unaudited Interim Financial Information

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2018. These financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2017 and notes thereto contained in the Annual Report on Form 10-K of the Company as filed with the SEC on March 30, 2018.

 

Going Concern

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, for the three months ended March 31, 2018, the Company incurred a net loss attributable to common shareholders of $619,468 and used cash in operating activities of $559,516, and at March 31, 2018, the Company had a stockholders’ deficit of $11,344,972. In addition, the Company is in default on notes payable and convertible notes payable in the aggregate amount of $3,076,924. 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, 2017 financial statements, has expressed substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

At March 31, 2018, the Company had cash on hand in the amount of $387,968. In April 2018, the Company executed a convertible note payable for $135,000 and received a net disbursement of $130,000. Management estimates that the current funds on hand will be sufficient to continue operations through the next three 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 increase its customer base and realize increased revenues. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, if needed, it may contain undue restrictions on its operations, in the case of debt financing, or cause substantial dilution for its stock holders, in the case of equity financing.

 

BlockSafe Technologies, Inc.

 

In December 2017, the Company formed a subsidiary, BlockSafe Technologies, Inc. (“BlockSafe”). BlockSafe is owned 49% by the Company and 31% by three executive officers of the Company, which combined represents an 80% controlling interest in BlockSafe. BlockSafe plans to focus on providing security solutions to protect blockchain and cryptocurrencies. Additionally, BlockSafe plans to create its own cryptocurrency tokens. During the three months ended March 31, 2018, BlockSafe received $437,000 from the issuance of unsecured notes payable (see Notes 4 and 5). As of March 31, 2018, BlockSafe had no operating activities and no cryptocurrency tokens have been developed. There is no assurance as to whether, or at what amount, or on what terms, tokens will be available, if ever. Moreover, there can be no assurance how such technology will function, which could expose the Company to legal and regulatory issues. In addition, legal and regulatory developments could render the technology impermissible, which could have a material adverse effect on the Company.

 
 
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Principles of Consolidation

 

The condensed consolidated unaudited financial statements include the accounts of the Company and its controlled subsidiary, BlockSafe. Intercompany balances and transactions have been eliminated in consolidation.

 

At March 31, 2018, noncontrolling interests represents 51% of BlockSafe that the Company does not directly own.

 

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.

 

Revenue Recognition

 

In 2014, the FASB issued guidance on revenue recognition (“ASC 606”), with final amendments issued in 2016. The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with a customer, (2) identifying the Company’s performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients. The Company has concluded that the new guidance did not require any significant change to its revenue recognition processes.

 

The Company’s revenue consists of revenue from sales and support of our software products.

 

Revenue primarily consists of sales of software licenses of our ProtectID®, GuardedID® and MobileTrust® products. We recognize revenue from these arrangements ratably over the contractual service period. For service contracts, the Company’s performance obligations are satisfied, and the related revenue is recognized, as services are rendered.

 

The Company offers no discounts, rebates, rights of return, or other allowances to clients which would result in the establishment of reserves against service revenue. Additionally, to date, the Company has not incurred incremental costs in obtaining a client contract.

 

The Company adopted the guidance of ASC 606 on January 1, 2018, and the implementation of ASC 606 did not have a material impact on the Company’s consolidated financial statements.

 

Cost of revenue includes direct costs and fees related to the sale of our products.

 

The following table presents our revenue disaggregated by major product and service lines:

 

 

 

Three Months Ended

 

 

 

March 31,

2018

(Unaudited)

 

 

March 31,

2017

(Unaudited)

 

Software

 

$ 56,889

 

 

$ 52,507

 

Service

 

 

7,804

 

 

 

31,362

 

Total revenue

 

$ 64,693

 

 

$ 83,869

 

 

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.

 
 
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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 March 31, 2018 and December 31, 2017, the Company’s balance sheets included the fair value of derivative liabilities of $642,201 and $623,195, respectively, which were based on Level 2 measurements. 

 

The recorded amounts for accounts receivable, accounts payable, accrued expenses, convertible notes, and notes payables approximate their fair value due to their short-term nature.

 

Income (loss) per Share

 

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

 

For the three months ended March 31, 2018 and 2017, the dilutive impact of stock options exercisable into 259,000,001 and 196,000,001 shares of common stock, respectively, convertible Series B Preferred stock that can convert into 6,045,987 and 7,964,162 shares of common stock, respectively, and notes payable that can convert into 19,714,918 and 25 shares of common stock, respectively, have been excluded because their impact on the income and (loss) per share is anti-dilutive.

 

The following tables set forth the computation of basic and diluted earnings (loss) per share:

 

 

 

Three months

ended March 31,

 

 

 

2018

 

 

2017

 

 

 

 (Unaudited)

 

 

(Unaudited)  

 

Income (Loss) per share – Basic and Diluted:

 

 

 

 

 

 

Income (Loss) for the period

 

$ (737,771 )

 

$ (1,395,609 )

Net (income) loss attributable to noncontrolling interest

 

 

118,303

 

 

 

-

 

Net income (loss) attributable to common shareholders

 

 

(619,468 )

 

 

(1,395,609 )

Basic average common stock outstanding

 

 

2,335,845,741

 

 

 

2,319,686,386

 

Net earnings (loss) per share

 

$ -

 

 

$ -

 

 

Concentrations

 

For the three months ended March 31, 2018, sales to three customers comprised 61%, 22% and 11% of revenues, respectively. For the three months ended March 31, 2017, sales to three customers comprised 44%, 21% and 18% of revenues, respectively. At March 31, 2018, three customers comprised 41%, 27% and 19% of accounts receivable, respectively. At December 31, 2017, four customers comprised 30%, 29%, 19% and 14% of accounts receivable, respectively.

 

The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. At March 31, 2018 and December 31, 2017, the Company had cash deposits that exceeded the federally insured limit of $250,000. The Company believes that no significant concentration of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness and financial viability of the financial institution.

 
 
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Segments

 

The Company operates in one segment for the development and distribution of our software products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements.

 

Recent Accounting Pronouncements

 

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.

 

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:

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Secured

 

 

 

 

 

 

(a) DART, in default

 

$ 542,588

 

 

$ 542,588

 

 

 

 

 

 

 

 

 

 

Unsecured

 

 

 

 

 

 

 

 

(b) Convertible notes with fixed conversion features, in default

 

 

895,512

 

 

 

895,512

 

(c) Convertible notes with adjustable conversion features

 

 

130,000

 

 

 

-

 

Debt discount

 

 

(125,726 )

 

 

-

 

Total convertible notes

 

$ 1,442,374

 

 

$ 1,438,100

 

______________

(a) At March 31, 2018 and December 31, 2017, $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. Beginning in 2009, the note holder agreed to the forbearance of any further interest on the notes payable to DART/Citco Global. The adjustable conversion features of the notes are accounted for as derivative liabilities (see Note 8). DART/Citco Global did not process any conversions of notes into shares of common stock during the three months ended March 31, 2018 or 2017. 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 three months ended March 31, 2018, the Company did not obtain DART/Citco Global’s written consent related to any of its financing agreements.

 

 
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(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 three months ended March 31, 2018, there were no additional notes issued and the Company repaid $9,000 of note principal.

 

 

At December 31, 2017, the balance of the accrued interest on the fixed convertible notes was $1,004,631. During the three months ended March 31, 2018, interest expense of $18,527 was accrued. At March 31, 2018, the balance of accrued interest on the fixed convertible notes was $1,023,158.

 

 

(c) During the three months ended March 31, 2018, the Company issued one convertible note payable for an aggregate of $130,000, bearing interest at 10% per annum, and maturing through March 2019. At the option of the holder, the note is convertible into shares of common stock of the Company at a price per share discount of 58% 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 note was 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 note in March 2018, the initial fair value of the embedded conversion feature was $324,016 (see Note 8), of which $130,000 was recorded as debt discount offsetting the face amount of the convertible notes, and the remainder of $194,016 was recorded as private placement costs. During the three months ended March 31, 2018, debt discount amortization of $4,274 was recorded and interest expense of $427 was accrued.

 

At March 31, 2018 and December 31, 2017, accrued interest due for all convertible notes was $1,023,585 and $1,004,631, respectively, and is included in accrued interest in the accompanying balance sheets. Interest expense for all convertible notes payable for the three months ended March 31, 2018 and 2017 was $18,954 and $19,644, respectively.

 

Note 3 - Convertible Notes Payable – Related Parties

 

At March 31, 2018 and December 31, 2017, convertible notes payable - related parties consist of 12 convertible notes payable in the aggregate of $355,500. The notes are unsecured and have extended due dates of December 31, 2018. 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, 2017, accrued interest due for the convertible notes – related parties was $498,077. During the three months ended March 31, 2018, interest expense of $14,978 was accrued. At March 31, 2018, accrued interest due for the convertible notes – related parties was $513,055.

 

Note 4 - Notes Payable

 

Notes payable consisted of the following:

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Unsecured

 

 

 

 

 

 

(a) Promissory notes-in default

 

$ 413,824

 

 

$ 413,824

 

(b) Promissory notes – StrikeForce Investor Group-in default

 

 

1,225,000

 

 

 

1,230,000

 

(c)  Promissory note

 

 

-

 

 

 

70,000

 

(d)  Promissory notes - BlockSafe

 

 

397,000

 

 

 

-

 

Debt discount

 

 

(333,764 )

 

 

-

 

Notes payable, current maturities

 

$ 1,702,060

 

 

$ 1,713,824

 

____________

(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 March 31, 2018 and December 31, 2017, the balance due under these notes was $413,824.

 

 

 

At December 31, 2017, the balance of the accrued interest on the notes payable-various was $459,898. During the three months ended March 31, 2018, $11,233 of interest expense was accrued. At March 31, 2018, accrued interest on the notes payable was $471,131.

 

 
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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, 2017, the balance of notes payable-SIG was $1,230,000. During the three months ended March 31, 2018, the Company repaid $5,000 of principal and at March 31, 2018, the balance of notes payable-SIG was $1,225,000. The Company is currently pursuing extensions on the remaining delinquent notes.

 

 

At December 31, 2017, the balance of the accrued interest on the notes payable-SIG was $1,392,341. During the three months ended March 31, 2018, $30,208 of interest expense was accrued and $5,000 of accrued interest was paid. At March 31, 2018, accrued interest on the notes payable-SIG was $1,417,549.

 

 

(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. As of December 31, 2017, the balance due on the promissory note was $70,000. The remaining balance was paid off in January 2018, for $20,000, and February 2018, for $50,000.

 

 

(d) During the three months ended March 31, 2018, BlockSafe issued an aggregate of $397,000 of unsecured promissory notes to eleven unrelated parties, bearing interest at 8% per annum, and maturing through March 2019. During the three months ended March 31, 2018, interest expense of $5,059 was accrued. Contemporaneously with the promissory notes, BlockSafe entered into an obligation to pay the same parties a fixed amount equal to the face amount of the promissory notes in tokens, as defined (see Note 6) as a financing obligation. The value of the financing obligation was determined to be $397,000 and was recorded as a liability and as a discount to the promissory notes. The discount will be amortized over the term of the promissory notes. During the three months ended March 31, 2018, interest expense of $63,236 was recorded for amortization of the discount. The balance of the unamortized discount at March 31, 2018 was $333,764.

 

At March 31, 2018 and December 31, 2017, accrued interest due for all notes payable above was $1,893,739 and $1,852,239, respectively, and is included in accrued interest in the accompanying balance sheets. Interest expense for notes payable for the three months ended March 31, 2018 and 2017 was $46,500 and $42,482, respectively.

 

Note 5 - Notes Payable – Related Parties

 

Notes payable- related parties consisted of the following:

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Unsecured

 

 

 

 

 

 

(a) Promissory notes

 

$ 742,513

 

 

$ 742,513

 

(b) Promissory notes - BlockSafe

 

 

40,000

 

 

 

-

 

Debt discount

 

 

(32,110 )

 

 

-

 

Notes payable, current maturities

 

$ 750,403

 

 

$ 742,513

 

____________

(a) 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, 2018. At March 31, 2018 and December 31, 2017, the balance due under these notes was $742,513. At December 31, 2017, accrued interest due for the notes was $647,864. During the three months ended March 31, 2018, interest expense of $13,828 was accrued. At March 31, 2018, accrued interest due for the notes was $661,692.

 

 

(b) During the three months ended March 31, 2018, BlockSafe issued one unsecured note payable, for $40,000, to a related executive of BlockSafe, bearing interest at 8% per annum and maturing on January 18, 2019. During the three months ended March 31, 2018, interest expense of $631 was accrued. Contemporaneously with the promissory note, BlockSafe entered into an obligation to pay the same party a fixed amount equal to the face amount of the promissory note in tokens, as defined (see Note 6) as a financing obligation. The value of the financing obligation was determined to be $40,000 and was recorded as a liability and as a discount to the promissory note. The discount will be amortized over the term of the promissory note. During the three months ended March 31, 2018, interest expense of $7,890 was recorded for amortization of the discount. The balance of the unamortized discount at March 31, 2018 was $32,110.

 

At December 31, 2017, accrued interest due for the notes payable – related parties was $647,864. During the three months ended March 31, 2018, interest expense of $14,459 was accrued. At March 31, 2018, accrued interest due for the notes payable – related parties was $662,323.

 

 
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Note 6 – Financing Obligation

 

Between January 2018 and March 2018, BlockSafe issued 12 promissory notes payable aggregating $437,000 (including one note for $40,000 to a related party) (see Notes 4 and 5). The notes mature one year from the date of issuance, are unsecured, and bear interest at 8% per annum. As part of each promissory note agreement BlockSafe agreed to pay a financing obligation to the note holders equal to the note principal in cryptocurrency tokens to be issued by BlockSafe. At March 31, 2018 and through the date of filing, BlockSafe has not developed or issued any tokens and there is no assurance as to whether, or at what amount, or on what terms, tokens will be available to be issued, if ever. Nonetheless, management determined an obligation is bundled with the note agreements and determined that 100% of the face amount of the promissory notes, or $437,000, is probable of being settled. Accordingly, the Company recorded a liability for $437,000 as a financing obligation.

 

Note 7 – 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 11). 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. At March 31, 2018 and December 31, 2017, the Company has reflected the $1,500,000 as a contingent payment obligation to be paid only if claim proceeds are recovered.

 

Note 8 – Derivative Financial Instruments

 

At March 31, 2018, 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. Also, in March 2018, the Company issued a convertible note payable (see Note 2) that was convertible into shares of common stock of the Company at a price per share discount of 58% of the lowest closing market price, a 42% discount, of the Company’s common stock for the 20 days preceding a conversion notice. As a result, the Company determined that the conversion features of the convertible notes were not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as a derivative liability. 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 features of these notes are 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, 2017, the balance of the derivative liabilities was $623,195. During the three months ended March 31, 2018, the Company recorded additions of $324,016 related to the conversion features of notes issued during the period (see Note 2) and a decrease in fair value of derivatives of $305,010. At March 31, 2018, the balance of the derivative liabilities was $642,201.

 

The derivative liability was valued at the following dates using a probability weighted Black-Scholes-Merton model with the following assumptions:

 

 

 

March 31,

2018

 

 

March 19, 2018

(date issued)

 

 

December 31,

2017

 

Conversion feature:

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

 

0.21 %

 

 

0.21 %

 

 

0.18 %

Expected volatility

 

 

140 %

 

 

138 %

 

 

147 %

Expected life (in years)

 

1 year

 

 

1 year

 

 

1 year

 

Expected dividend yield

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value:

 

 

 

 

 

 

 

 

 

 

 

 

Conversion feature

 

$ 642,201

 

 

$ 324,016

 

 

$ 623,195

 

 
 
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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 9 – Stockholders’ Deficit

 

Common Stock

 

During the three months ended March 31, 2018, the Company issued an aggregate of 7,500 shares of its common stock for services valued at $82.

 

Note 10 - Options

 

In November 2012, the stockholders approved the 2012 Stock Option Plan for our employees, effective January 3, 2013. The number of shares authorized for issuance under the plan was 100,000,000 and was increased to 400,000,000 in November 2017 by unanimous consent of the Board of Directors.

 

In September 2016 and December 2017, the Company issued options to purchase an aggregate of 259,000,000 shares of its common stock to management and employees with a total fair value of $1,946,000 determined using the Black-Scholes Option Pricing model. The options are exercisable at $0.0057 to $0.00625 per share, vest in 6 months, and expire through December 2027.

 

During the three months ended March 31, 2018 and 2017, the Company recognized compensation costs of $185,903 and $749,538, respectively, related to the amortization of the fair value of options that vested.

 

The table below summarizes the Company’s 2012 Stock Incentive Plan activities for the period January 1, 2016 to March 31, 2018:

 

 

 

Number of

Options Shares

 

 

Exercise Price Range

Per Share

 

 

Weighted Average Exercise Price

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2017

 

 

196,000,001

 

 

$

0.00625-2,242,500

 

 

$

0.00625

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

63,000,000

 

 

$ 0.0057

 

 

$

0.0057

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

-

 

 

$ -

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Expired

 

 

-

 

 

$ -

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2018

 

 

259,000,001

 

 

$

0.0057-2,242,500

 

 

$

0.0062

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

-

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

-

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expired

 

 

-

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2018

 

 

259,000,001

 

 

$

 0.0057-2,242,500

 

 

$ 0.0062

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and exercisable, March 31, 2018

 

 

230,770,493

 

 

$

 0.0057-2,242,500

 

 

$ 0.0062

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unvested, March 31, 2018

 

 

28,229,508

 

 

$ 0.0057

 

 

$ 0.0057

 

 

As of March 31, 2018, options to purchase an aggregate of 259,000,001 shares of common stock were outstanding under the 2012 Stock Incentive Plan and there were 140,999,999 shares remaining available for issuance. At March 31, 2018 and 2017, the intrinsic value of outstanding options was zero.

 
 
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The following table summarizes information concerning the 2012 Stock Incentive Plan as of March 31, 2018:

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

0.0057

 

 

 

63,000,000

 

 

 

10.00

 

 

$ 0.0057

 

 

 

34,770,492

 

 

 

10.00

 

 

$ 0.0057

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

0.00625

 

 

 

196,000,000

 

 

 

10.00

 

 

$ 0.0062

 

 

 

196,000,000

 

 

 

10.00

 

 

$ 0.0062

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

0.00625 - 975,000,000

 

 

 

259,000,001

 

 

 

10.00

 

 

$ 0.0062

 

 

 

230,770,493

 

 

 

10.00

 

 

$ 0.0062

 

 

Note 11 – 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 three months ended March 31, 2018 and 2017, 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.

 

On December 4, 2017,  StrikeForce Technologies, Inc. v. Trustwave Holdings, Inc.,  Civil Action No. 2:16-cv-03573-JMV-MF which was pending in the United States District Court for the District of New Jersey, was settled. Trustwave’s infringing sales were made as an OEM of Duo Security Incorporated. The Company agreed to dismiss its claims against Trustwave because they were essentially duplicative of its claims against Duo Security Incorporated pursuant to  StrikeForce Technologies, Inc v. Duo Security Incorporated , Civil Action No. 2:16-cv-03571.

 

Note 12 – Subsequent Events

 

In April 2018, the Company issued an unsecured convertible promissory note for $135,000, bearing interest at 10% per annum, and maturing in April 2019. The note is convertible at a 42% discount to the price of the Company’s common stock, as defined.

 

In April 2018, our subsidiary BlockSafe executed two promissory notes for an aggregate of $40,000 with two unrelated parties, bearing interest at 8% per annum, and maturing in April 2019. Contemporaneously with the promissory notes, BlockSafe entered into an obligation to pay the same parties a fixed amount equal to the face amount of the promissory notes in tokens, as defined.

 

 
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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 Consolidated 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; rules and regulation related to cryptocurrency, both domestic and foreign; liquidity of cyrptocurrency; the development of the cyrptocurrency market; 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, 2017.

 

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

 

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 9 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, since we have successfully settled our first major patent lawsuit, in January 2016. Our patent attorneys filed our fourth “Out of Band” continuation patents. 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 cannot provide assurances that the latter patent will be granted in fiscal 2018.

 

We are also working with two patent attorney firms to plan our strategy to aggressively enforce the patent rights relating to our granted Keystroke Encryption patents that help protect our GuardedID® and MobileTrust® products. We were granted three related keystroke encryption patents for which we received the most recent patent on March 3, 2015 (Patent Nos.: 8,566,608, 8,732,483 and 8,973,107).

 

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.

 

On September 6, 2017, we entered into a Litigation Funding Agreement with two parties 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, but cannot guarantee, that this Litigation Funding Agreement will allow us to pursue litigation against any infringement on our patents.

 

BlockSafe Technologies, Inc.

 

BlockSafe Technologies, Inc. (“BlockSafe”) was formed on December 1, 2017 in the State of Wyoming. BlockSafe is in the business of providing total cyber security solutions and is the licensee from our company of our desktop anti-malware product called “GuardedID ® ” and a one of a kind mobile application called “MobileTrust®”. BlockSafe is intended to be developed as an enterprise focusing on using our licensed technology in the field of cryptocurrency and its use of blockchains. No revenues have been generated to date as BlockSafe is still in the developmental stage. There can be no assurances on the success of this project or any profitability arising from BlockSafe. At March 31, 2018 and through the date of filing, BlockSafe has not developed or issued any tokens and there is no assurance as to whether, or at what amount, or on what terms, tokens will be available to be issued, if ever. The Securities and Exchange Commission has, in its dissemination of information to the public, expressed that tokens in the United States would be treated as securities pursuant to the Howey Test .

 

At present, we hold 49% of the issued and outstanding BlockSafe common stock, with Mark L. Kay, Ramarao Pemmaraju, and, George Waller, our Directors, each a member of the BlockSafe Advisory Board and individually holding 10.3% of the issued and outstanding common stock of BlockSafe, each, for a combined total of 31%. Mark L. Kay, our CEO, is currently the sole member of the BlockSafe Board of Directors but does not serve as an officer.

 

As a result of our 49% ownership and our Directors’ combined 31% ownership of the issued and outstanding BlockSafe common stock, we are effectively able to influence all matters requiring BlockSafe shareholder action, including significant corporate transactions. Therefore, BlockSafe’s financial results have been consolidated with our financial results. During the three months ended March 31, 2018, BlockSafe received $437,000 from the issuance of unsecured notes payable (see Notes 4 and 5 of the financial statements).

 
 
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Results of Operations

 

FOR THE THREE MONTHS ENDED MARCH 31, 2018 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2017

 

Revenues for the three months ended March 31, 2018 were $64,693 compared to $83,869 for the three months ended March 31, 2017, a decrease of $19,176 or 22.9%. The decrease in revenues was due to the decrease in the sales and support of our software products. Revenue from software and services for the three months ended March 31, 2018 were $64,693 compared to $83,337 for the three months ended March 31, 2017, a decrease of $18,644. The decrease in software and services revenues was primarily due to the decrease in the sales and support of our software products.

 

Cost of revenues for the three months ended March 31, 2018 was $6,754 compared to $2,626 for the three months ended March 31, 2017, an increase of $4,128, or 157%. The increase resulted from the increase in fees related to our revenues. Cost of revenues as a percentage of total revenues for the three months ended March 31, 2018 was 10.4% compared to 3.1% for the three months ended March 31, 2017.

 

Gross profit for the three months ended March 31, 2018 was $57,939 compared to $81,243 for the three months ended March 31, 2017, a decrease of $23,304, or 28.7%. The decrease in gross profit was due to the decrease in our revenues and the increase in our cost of revenues.

 

Research and development expenses for the three months ended March 31, 2018 were $123,750 compared to $125,031 for the three months ended March 31, 2017, a decrease of $1,281, or 1.0%. The decrease in research and development expenses was due to a nominal decrease in the purchase of peripherals for testing purposes. The salaries, benefits and overhead costs of personnel conducting research and development of our software products primarily comprises our research and development expenses.

 

Compensation, professional fees, and selling, general and administrative (collectively, “SGA”) expenses for the three months ended March 31, 2018 were $612,681 compared to $1,052,471 for the three months ended March 31, 2017, a decrease of $439,790 or 41.8%. The decrease was due primarily to decreased expenses relating to the previous vesting of options in the three months ended March 31, 2017 that were 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.

 

For the three months ended March 31, 2018, other expense was ($59,279) as compared to other expense of ($299,350) for the three months ended March 31, 2017, representing a decrease in other expense of $240,071, or 80%. The decrease was primarily due to decrease in the change in the in the fair value of derivative liabilities, offset by an increase in private placement costs and interest expense.

 

Our net loss for the three months ended March 31, 2018 was $737,771 compared to $1,395,609 for the three months ended March 31, 2017, a decrease of $657,838, or 47%. The decrease was primarily due to decreased expenses relating to previous vesting of options granted to employees in September 2016, and the decrease in the change in the in the fair value of derivative liabilities, offset by an increase in private placement costs and interest expense.

 

The net loss attributable to the noncontrolling interest in our subsidiary for the three months ended March 31, 2018 was $118,303. These results are due to the net loss recorded by BlockSafe Technologies, Inc., which was formed in December 2017.

 

Liquidity and Capital Resources

 

Our total current assets at March 31, 2018 were $428,215, which included cash of $387,968, as compared with $512,036 in total current assets at December 31, 2017, which included cash of $455,484. Additionally, we had a total stockholders’ deficit in the amount of $11,344,972 at March 31, 2018 compared to a stockholders’ deficit of $10,793,186 at December 31, 2017. 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 three months ended March 31, 2018 primarily from the issuance of a convertible debenture of $130,000 and the issuance of promissory notes payable of $437,000 by our subsidiary, BlockSafe.

 
 
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Going Concern

 

We have yet to establish any history of profitable operations. For the three months ended March 31, 2018, we incurred a loss attributable to common shareholders of $619,468 and used cash in operating activities of $559,516, and at March 31, 2018, we had a stockholders’ deficit of $11,344,972. These factors raise substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report published on our December 31, 2017 year end financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. The Company’s financial statements do not include any adjustments that might result from the outcome of this uncertainty be necessary should we be unable 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. Management anticipates, but cannot provide assurances, that additional financing will arise from the license granted to BlockSafe once BlockSafe becomes revenue producing. 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 channel, where we are primarily selling through a channel of 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.

 

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

 

In 2014, the FASB issued guidance on revenue recognition (“ASC 606”), with final amendments issued in 2016. The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with a customer, (2) identifying the Company’s performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients. The Company has concluded that the new guidance did not require any significant change to its revenue recognition processes.

 

The Company’s revenue consists of revenue from sales and support of our software products.

 

Revenue primarily consists of sales of software licenses of our ProtectID®, GuardedID® and MobileTrust® products. We recognize revenue from these arrangements ratably over the contractual service period. For service contracts, the Company’s performance obligations are satisfied, and the related revenue is recognized, as services are rendered.

 
 
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The Company offers no discounts, rebates, rights of return, or other allowances to clients which would result in the establishment of reserves against service revenue. Additionally, to date, the Company has not incurred incremental costs in obtaining a client contract.

 

The Company adopted the guidance of ASC 606 on January 1, 2018, and the implementation of ASC 606 did not have a material impact on the Company’s consolidated financial statements.

 

Cost of revenue includes direct costs and fees related to the sale of our products.

 

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.

 

Recently Issued Accounting Pronouncements

 

Refer to Note 1 in the accompanying condensed consolidated 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.

 
 
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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 March 31, 2018. 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 March 31, 2018. 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 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.

 

On December 4, 2017,  StrikeForce Technologies, Inc. v. Trustwave Holdings, Inc.,  Civil Action No. 2:16-cv-03573-JMV-MF which was pending in the United States District Court for the District of New Jersey, was settled. Trustwave’s infringing sales were made as an OEM of Duo Security Incorporated. We agreed to dismiss our claims against Trustwave because they were essentially duplicative of our claims against Duo Security Incorporated pursuant to  StrikeForce Technologies, Inc v. Duo Security Incorporated , Civil Action No. 2:16-cv-03571.

 

ITEM 1A. RISK FACTORS

 

Not required under Regulation S-K for “smaller reporting companies.”

 

Information about risk factors for the interim period ended March 31, 2018, does not differ materially from that set forth in Part I, Item 1A of our 2017 Annual Report on Form 10-K.

 

ITEM 2. RECENT ISSUANCES OF UNREGISTERED SECURITIES

 

In March 2018, we issued a total of 7,500 shares of restricted common stock, valued at $82, relating to a December 2009 retainer agreement with our SEC attorney.

 

The above offering was 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 consolidated financial statements.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 
 
23
 
Table of Contents

 

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

 

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

3.3

 

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

3.4

 

Amended By-laws of StrikeForce Technologies, Inc. (19)

3.5

 

Articles of Amendment of StrikeForce Technologies, Inc. (2)

3.6

 

Amendments to Articles of Incorporation (6)

3.7

 

Amendments to Articles of Incorporation (7)

3.8

 

Registration of Classes of Securities (8)

3.9

 

Amendments to Articles of Incorporation (9)

3.10

 

Registration of Classes of Securities (10)

3.11

 

Amendments to Articles of Incorporation (11)

3.12

 

Registration of Classes of Securities (12)

3.13

 

Amendments to Articles of Incorporation (13)

3.14

 

Amendments to Articles of Incorporation (14)

3.15

 

Amendments to Articles of Incorporation (15)

3.16

 

Amendments to Articles of Incorporation (16)

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 (4)

10.3

 

Irrevocable Waiver of Conversion Rights of Ramarao Pemmaraju (4)

10.4

 

Irrevocable Waiver of Conversion Rights of George Waller (4)

10.5

 

CFO Consultant Agreement with Philip E. Blocker (4)

10.6

 

2012 Stock Option Plan (5)

10.7

 

Asset Purchase Agreement between StrikeForce Technologies, Inc. and Cyber Safety, Inc., dated August 24, 2015 (17)

10.8

 

Amendment to the Asset Purchase Agreement and Distributor and Reseller Agreement between StrikeForce Technologies, Inc. and Cyber Safety, Inc. (18)

10.9

 

Execution of Litigation Funding Agreement (20)

10.10

 

BlockSafe Technologies, Inc. Intellectual Property License Agreement (3)

10.11

 

BlockSafe Technologies, Inc. Management Agreement (3)

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 February 4, 2011 and incorporated herein by reference.

(3) Filed herewith.

(4) Filed as an exhibit to the Registrant’s Form S-1/A dated July 31, 2012 and incorporated herein by reference.

(5) Filed in conjunction with the Registrant’s Form 14A filed October 5, 2012 and incorporated herein by reference.

(6) Filed as an exhibit to the Registrant’s Form 8-K dated February 5, 2013 and incorporated herein by reference.

(7) Filed as an exhibit to the Registrant’s Form 8-K dated May 14, 2013 and incorporated herein by reference.

(8) Filed as an exhibit to the Registrant’s Form 8-A dated July 29, 2013 and incorporated herein by reference.

(9) Filed as an exhibit to the Registrant’s Form 8-K dated August 22, 2013 and incorporated herein by reference.

(10) Filed as an exhibit to the Registrant’s Form 8-A dated October 3, 2013 and incorporated herein by reference.

(11) Filed as an exhibit to the Registrant’s Form 8-K dated October 3, 2013 and incorporated herein by reference.

(12) Filed as an exhibit to the Registrant’s Form 8-A dated December 31, 2013 and incorporated herein by reference.

(13) Filed as an exhibit to the Registrant’s Form 8-K dated December 31, 2013 and incorporated herein by reference.

(14) Filed as an exhibit to the Registrant’s Form 8-K dated March 18, 2014 and incorporated herein by reference.

(15) Filed as an exhibit to the Registrant’s Form 8-K dated December 22, 2014 and incorporated herein by reference.

(16) Filed as an exhibit to the Registrant’s Form 8-K dated February 13, 2015 and incorporated herein by reference.

(17) Filed as an exhibit to the Registrant’s Form 8-K dated August 28, 2015 and incorporated herein by reference.

(18) Filed as an exhibit to the Registrant’s Form 8-K dated February 2, 2016 and incorporated herein by reference.

(19) Filed as an exhibit to the Registrant’s Form 8-K dated May 19, 2017 and incorporated herein by reference.

(20) Filed as an exhibit to the Registrant’s Form 8-K dated September 11, 2017 and incorporated herein by reference.

 
 
24
 
Table of Contents

 

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: May 21, 2018

By:

/s/ Mark L. Kay

 

 

Mark L. Kay

 

 

Chief Executive Officer

 

 

 

Dated: May 21, 2018

By:

/s/ Philip E. Blocker

 

 

Philip E. Blocker

 

 

Chief Financial Officer and

Principal Accounting Officer

 

 

 

25

 

  EXHIBIT 10.10

 

 

 

 

 
1
 

 

 

 
2
 

 

 

 
3
 

 

 

 
4
 

 

 

 
5
 

 

 

 
6
 

 

 

 
7
 

 

 

 
8
 

 

 

 
9
 

 

 

 
10
 

 

 

 
11
 

 

 

 
12
 

 

 

 
13
 

 

 

 

14

 

EXHIBIT 10.11

 

 

 

 

 
 
 

 

 

 
 
 

 

 

 
 
 

 

 

 
 
 

 

 

 
 
 

 

 

 
 
 

 

 

 

 

 

EXHIBIT 31.1

 

CERTIFICATION

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULES 13A-14 AND 15D-14

OF THE SECURITIES EXCHANGE ACT OF 1934

 

I, Mark L. Kay, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of StrikeForce Technologies, Inc.;

 

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

 

 

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

 

 

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

 

 

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

 

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

 

 

 

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

       

Dated: May 21, 2018

By:

/s/ Mark L. Kay

 

 

Mark L. Kay,

Chief Executive Officer

 

EXHIBIT 31.2

 

CERTIFICATION

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO RULES 13A-14 AND 15D-14

OF THE SECURITIES EXCHANGE ACT OF 1934

 

I, Philip E. Blocker, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of StrikeForce Technologies, Inc.;

 

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

 

 

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

 

 

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

 

 

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

 

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

 

 

 

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

       

Dated: May 21, 2018

By:

/s/ Philip E. Blocker

 

 

Philip E. Blocker,

Chief Financial Officer

 

EXHIBIT 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

--------------------------------------------------------------------

 

In connection with the Quarterly Report of StrikeForce Technologies, Inc. (the "Company") on Form 10-Q for the quarter ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark L. Kay, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2001, that:

 

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

       

Dated: May 21, 2018

By:

/s/ Mark L. Kay

 

 

Mark L. Kay,

Chief Executive Officer

 

EXHIBIT 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

--------------------------------------------------------------------

 

In connection with the Quarterly Report of StrikeForce Technologies, Inc. (the "Company") on Form 10-Q for the quarter ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Philip E. Blocker, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2001, that:

 

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

       

Dated: May 21, 2018

By:

/s/ Philip E. Blocker

 

 

Philip E. Blocker,

Chief Financial Officer