Quarterly Report (10-q)

Date : 11/19/2018 @ 2:23PM
Source : Edgar (US Regulatory)
Stock : Strikeforce Technologies, Inc. (PC) (SFOR)
Quote : 0.0045  0.0005 (12.50%) @ 8:59PM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

For the quarterly period ended September 30, 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 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, every Interactive Data File required to be submitted 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 November 16, 2018

Common stock, $0.0001 par value

 

2,360,004,303

 

Indicate the number of shares outstanding of each of the issuer’s classes of preferred stock, as of the latest practicable date.

 

Class

 

Outstanding at November 16, 2018

Preferred stock, Series A, no par value

 

3

 

Class

 

Outstanding at November 16, 2018

Preferred stock, Series B, $0.10 par value

 

36,667

 

Transitional Small Business Disclosure Format Yes ¨ No x

 

Documents Incorporated By Reference

None

 

 
 
 
 

STRIKEFORCE TECHNOLOGIES, INC.

 

INDEX TO FORM 10-Q FILING

SEPTEMBER 30, 2018

 

TABLE OF CONTENTS

 

 

Page Number

 

 

 

 

PART I

Financial Information

 

 

 

 

 

Item 1.

Financial Information

 

3

 

 

 

 

Condensed Consolidated Balance Sheets at September 30, 2018 (unaudited) and December 31, 2017

 

4

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine months ended September 30, 2018 and 2017 (unaudited)

 

5

 

 

 

 

Condensed Consolidated Statement of Changes in Stockholders’ Deficit for the Nine months ended September 30, 2018 (unaudited)

 

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 2018 and 2017 (unaudited)

 

7

 

 

 

 

Notes to the Condensed Consolidated Financial Statements for the Nine months ended September 30, 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

 

24

 

 

 

Item 1A.

Risk Factors

 

24

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

25

 

 

 

Item 3.

Defaults Upon Senior Securities

 

25

 

 

 

Item 4.

Mine Safety Disclosures

 

25

 

 

 

Item 5.

Other Information

 

25

 

 

 

Item 6.

Exhibits

 

26

 

 

 

 

SIGNATURES

 

27

 

 

 

 

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 and nine months ended September 30, 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

 

 

 

 

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash

 

$ 186,078

 

 

$ 455,484

 

Accounts receivable, net

 

 

43,028

 

 

 

47,454

 

Prepaid expenses

 

 

19,763

 

 

 

9,098

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

248,869

 

 

 

512,036

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

8,960

 

 

 

7,676

 

Other assets

 

 

18,945

 

 

 

20,485

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$ 276,774

 

 

$ 540,197

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$ 916,287

 

 

$ 957,440

 

Convertible notes payable (net of discount of $312,014 and $0, respectively;

 

 

 

 

 

 

 

 

$1,438,100 in default at September 30, 2018 and December 31, 2017 , respectively)

 

 

1,581,086

 

 

 

1,438,100

 

Convertible notes payable - related parties

 

 

355,500

 

 

 

355,500

 

Notes payable (net of discount of $391,122 and $0, respectively;

 

 

 

 

 

 

 

 

$1,638,824 in default at September 30, 2018 and December 31, 2017, respectively)

 

 

2,023,202

 

 

 

1,713,824

 

Notes payable - related parties

 

 

742,513

 

 

 

742,513

 

Accrued interest (including $1,236,225 and $1,145,941 due to related parties, respectively)

 

 

4,315,591

 

 

 

4,002,811

 

Contingent payment obligation

 

 

1,500,000

 

 

 

1,500,000

 

Financing obligation

 

 

775,500

 

 

 

-

 

Derivative liabilities

 

 

839,960

 

 

 

623,195

 

 

 

 

 

 

 

 

 

 

Total Current Liabilities

 

 

13,049,640

 

 

 

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;

 

 

 

 

 

 

 

 

36,667 and 70,001 shares issued and outstanding, respectively

 

 

3,667

 

 

 

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;

 

 

 

 

 

 

 

 

2,349,290,986 and 2,335,843,241 shares issued and outstanding, respectively

 

 

234,929

 

 

 

233,584

 

Additional paid-in capital

 

 

25,976,715

 

 

 

25,522,331

 

Accumulated deficit

 

 

(39,506,558 )

 

 

(37,543,101 )

Total StrikeForce Technologies, Inc. stockholders' deficit

 

 

(12,304,247 )

 

 

(10,793,186 )

Noncontrolling interest in consolidated subsidiary

 

 

(468,619 )

 

 

-

 

 

 

 

 

 

 

 

 

 

Total Stockholders' Deficit

 

 

(12,772,866 )

 

 

(10,793,186 )

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders' Deficit

 

$ 276,774

 

 

$ 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

 

 

For the Nine Months Ended

 

 

 

September 30,

2018

 

 

September 30,

2017

 

 

September 30,

2018

 

 

September 30,

2017

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$ 120,831

 

 

$ 76,342

 

 

$ 356,475

 

 

$ 218,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

1,755

 

 

 

3,168

 

 

 

11,212

 

 

 

9,547

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

119,076

 

 

 

73,174

 

 

 

345,263

 

 

 

209,399

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

160,501

 

 

 

137,008

 

 

 

473,942

 

 

 

490,586

 

Professional fees

 

 

104,936

 

 

 

67,499

 

 

 

451,572

 

 

 

249,822

 

Selling, general and administrative expenses

 

 

145,842

 

 

 

74,586

 

 

 

827,429

 

 

 

967,785

 

Research and development

 

 

123,750

 

 

 

123,750

 

 

 

371,250

 

 

 

402,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

535,029

 

 

 

402,843

 

 

 

2,124,193

 

 

 

2,110,725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(415,953 )

 

 

(329,669 )

 

 

(1,778,930 )

 

 

(1,901,326 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(117,675 )

 

 

(561,854 )

 

 

(320,974

)

 

 

(744,177 )

Debt discount amortization

 

 

(283,140 )

 

 

-

 

 

 

(553,364 )

 

 

(4,000 )

Private placement costs

 

 

(19,602 )

 

 

(88,455 )

 

 

(398,851 )

 

 

(222,949 )

Change in fair value of derivative liabilities

 

 

73,998

 

 

 

(90,895 )

 

 

628,769

 

 

 

(289,580 )

Extinguishment of derivative liabilities

 

 

-

 

 

 

557,827

 

 

 

-

 

 

 

557,827

 

Loss on extinguishment of debt

 

 

(8,964 )

 

 

-

 

 

 

(8,964 )

 

 

-

 

Forgiveness of debt

 

 

-

 

 

 

-

 

 

 

-

 

 

 

86,140

 

Income tax expense

 

 

-

 

 

 

(452 )

 

 

-

 

 

 

(71,318 )

Other income

 

 

4

 

 

 

28

 

 

 

241

 

 

 

47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

(355,379 )

 

 

(183,801 )

 

 

(653,146 )

 

 

(688,010 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(771,332 )

 

 

(513,470 )

 

 

(2,432,076 )

 

 

(2,589,336 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deemed dividend on convertible preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(17,778 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(771,332 )

 

 

(513,470 )

 

 

(2,432,076 )

 

 

(2,607,114 )

Net loss attributable to noncontrolling interest

 

 

160,741

 

 

 

-

 

 

 

468,619

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$ (610,591 )

 

$ (513,470 )

 

$ (1,963,457 )

 

$ (2,607,114 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-Basic and diluted

 

$ -

 

 

$ -

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-Basic and diluted

 

 

2,344,480,002

 

 

 

2,319,701,359

 

 

 

2,339,215,840

 

 

 

2,319,693,932

 

 

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 NINE MONTHS ENDED SEPTEMBER 30, 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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

22,500

 

 

 

3

 

 

 

345

 

 

 

-

 

 

 

 

 

 

 

348

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of vested options

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

356,143

 

 

 

-

 

 

 

 

 

 

 

356,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Common stock issued upon conversion of notes and interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,091,745

 

 

 

509

 

 

 

95,394

 

 

 

-

 

 

 

 

 

 

 

95,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued upon conversion of Series B preferred stock

 

 

-

 

 

 

-

 

 

 

(33,334 )

 

 

(3,333 )

 

 

8,333,500

 

 

 

833

 

 

 

2,500

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,963,457 )

 

 

(468,619 )

 

 

(2,432,076 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2018 (unaudited)

 

 

3

 

 

$ 987,000

 

 

 

36,667

 

 

$ 3,667

 

 

 

2,349,290,986

 

 

$ 234,929

 

 

$ 25,976,715

 

 

$ (39,506,558 )

 

$ (468,619 )

 

$ (12,772,866 )

 

See accompanying notes to the condensed consolidated financial statements.

 

 
6
 
Table of Contents

 

STRIKEFORCE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

For the Nine

Months

 

 

For the Nine

Months

 

 

 

Ended

 

 

Ended

 

 

 

September 30,

2018

 

 

September 30,

2017

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$ (2,432,076 )

 

$ (2,589,336 )

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,715

 

 

 

4,981

 

Amortization of discount on notes payable

 

 

553,361

 

 

 

4,000

 

Discount on notes payable recorded as interest expense

 

 

-

 

 

 

371,000

 

Fair value of common stock issued for services

 

 

348

 

 

 

453

 

Fair value of vested options

 

 

356,143

 

 

 

749,538

 

Forgiveness of debt

 

 

-

 

 

 

(86,140 )

Change in fair value of derivative liabilities

 

 

(628,769 )

 

 

289,580

 

Private placement costs

 

 

398,851

 

 

 

222,949

 

Loss on extinguishment of debt

 

 

8,964

 

 

 

-

 

Extinguishment of derivative liabilities

 

 

-

 

 

 

(557,827 )

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,574 )

 

 

90,711

 

Prepaid expenses

 

 

(10,665 )

 

 

(1,802 )

Accounts payable and accrued expenses

 

 

(31,153 )

 

 

(35,981 )

Accrued interest

 

 

315,402

 

 

 

193,850

 

Net cash used in operating activities

 

 

(1,470,450 )

 

 

(1,344,024 )

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(4,456 )

 

 

(3,314 )

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from convertible note payable

 

 

505,000

 

 

 

375,000

 

Proceeds from notes payable

 

 

775,500

 

 

 

-

 

Repayment of notes payable

 

 

(75,000 )

 

 

(125,000 )

Proceeds from contingent payment obligation

 

 

-

 

 

 

1,500,000

 

Proceeds from sale of Series B preferred stock

 

 

-

 

 

 

80,000

 

Repayment of convertible notes payable

 

 

-

 

 

 

(384,000 )

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

1,205,500

 

 

 

1,446,000

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 

(269,406 )

 

 

98,662

 

 

 

 

 

 

 

 

 

 

Cash at beginning of the period

 

 

455,484

 

 

 

804,130

 

 

 

 

 

 

 

 

 

 

Cash at end of the period

 

$ 186,078

 

 

$ 902,792

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$ 5,000

 

 

$ 86,310

 

Income tax paid

 

$ -

 

 

$ 71,318

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing transactions

 

 

 

 

 

 

 

 

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

 

$ 505,000

 

 

$ -

 

Fair value of financing obligation recorded as debt discount

 

$ 775,500

 

 

$ -

 

Deemed dividend on convertible preferred stock

 

$ -

 

 

$ 17,778

 

Common stock issued for conversion of debt and accrued interest

 

 

52,622

 

 

 

210,000

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 
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StrikeForce Technologies, Inc.

September 30, 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 nine months ended September 30, 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 nine months ended September 30, 2018, the Company incurred a net loss of $2,432,07 3 and used cash in operating activities of $1,470,450, and at September 30, 2018, the Company had a stockholders’ deficit of $12,772,86 5 . 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 September 30, 2018, the Company had cash on hand in the amount of $186,078. In October 2018, the Company issued an unsecured convertible promissory note for $140,000, bearing interest at 10% per annum, and maturing in October 2019. Management estimates that the current funds on hand will be sufficient to continue operations through the next six months. The Company’s ability to continue as a going concern is dependent upon its ability to continue to implement its business plan. Currently, management is attempting to increase revenues 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 nine months ended September 30, 2018, BlockSafe received $775,500 from the issuance of unsecured notes payable (see Note 4). As of September 30, 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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In June 2018, the former CEO of BlockSafe resigned, and the Board of Directors appointed two members of the Company’s management team to serve as BlockSafe’s CEO and Chief Technical Officer, respectively. Additionally, the Company’s CEO was appointed as Chairman and President of BlockSafe.

 

In June 2018, the Company and BlockSafe amended their management agreement. Pursuant to the terms of the amended agreement, BlockSafe shall remit a management fee of $36,000 per month to the Company, retroactive to January 1, 2018 and for a three-year term. Once BlockSafe reaches a milestone of $1,000,000 in financing, an additional management fee of $5,000,000 shall be owed to the Company by BlockSafe in the form of a monthly payment of $138,889 for a period of three years. Additionally, the Company retains the right to use and market BlockSafe’s patent pending Blockchain Defender™ product, perpetually, for a royalty fee of 15%. For the nine months ended September 30, 2018, the Company has received $324,000 in management fees from BlockSafe.

 

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 September 30, 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

 

Effective January 1, 2018, the Company adopted the guidance of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts . The implementation of ASC 606 did not have a material impact on the Company’s consolidated financial statements. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients.

 

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

 

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

 

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

 

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

 

The following tables present our revenue disaggregated by major product and service lines:

 

 

 

Three Months Ended

 

 

 

September 30,

2018

(Unaudited)

 

 

September 30,

2017

(Unaudited)

 

Software

 

$ 58,925

 

 

$ 72,790

 

Service

 

 

61,906

 

 

 

3,552

 

Total revenue

 

$ 120,831

 

 

$ 76,342

 

 

 
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Nine months ended

 

 

 

September 30,

2018

(Unaudited)

 

 

September 30,

2017

(Unaudited)

 

Software

 

$ 169,310

 

 

$ 175,262

 

Service

 

 

187,165

 

 

 

43,684

 

Total revenue

 

$ 356,475

 

 

$ 218,946

 

 

Fair Value of Financial Instruments

 

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

 

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

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

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

 

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

 

As of September 30, 2018 and December 31, 2017, the Company’s balance sheets included the fair value of derivative liabilities of $839,960 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 nine months ended September 30, 2018 and 2017, the dilutive impact of stock options exercisable into 259,500,002 and 196,000,001 shares of common stock, respectively, convertible Series B Preferred stock that can convert into 2,743,297 and 11,575,282 shares of common stock, respectively, and notes payable that can convert into 40,858,491 and 26,666,692 shares of common stock, respectively, have been excluded because their impact on the loss per share is anti-dilutive.

 

Concentrations

 

For the nine months ended September 30, 2018, sales to two customers comprised 63% and 23% of revenues, respectively. For the nine months ended September 30, 2017, sales to three customers comprised 52%, 13% and 11% of revenues, respectively. At September 30, 2018, four customers comprised 31%, 21%, 20% and 15% 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 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 its cash balances because of its assessment of the creditworthiness and financial viability of the financial institution.

 

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. In July 2018, the FASB issued ASU 2018-11, Targeted Improvements , which allows for a cumulative-effect adjustment in the period the new lease standard is adopted and will not require restatement of prior periods. The Company is in the process of evaluating the impact of ASU 2016-02 and ASU 2018-11 on the Company’s financial statements and disclosures.

 

 
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In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” The ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently assessing the effect that the ASU will have on our financial position, results of operations, and 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:

  

 

 

September 30,

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

 

 

455,000

 

 

 

-

 

Total convertible notes principal outstanding

 

 

1,893,100

 

 

 

1,438,100

 

Debt discount

 

 

(312,014 )

 

 

-

 

Convertible notes, net of discount

 

$ 1,581,086

 

 

$ 1,438,100

 

  

(a) At September 30, 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 nine months ended September 30, 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 nine months ended September 30, 2018, the Company did not obtain DART/Citco Global’s written consent related to any of its financing agreements.

 

 

(b) At September 30, 2018 and December 31, 2017, convertible notes payable with fixed conversion features (“fixed convertible notes”) consisted of 13 unsecured convertible notes convertible at a fixed amount into 13 shares of the Company’s common stock, at fixed conversion prices ranging from $1,950,000 to $9,750,000,000 per share, as defined in the agreements and adjusted for applicable reverse stock splits. The notes bear interest at 8% to 18% per annum and were due on various dates from March 2008 to March 2015. All of the fixed convertible notes are currently in default and the Company is pursuing settlements with certain of the holders. During the nine months ended September 30, 2018, there were no additional notes issued or any repayments of note principal.

 

 

At December 31, 2017, the balance of the accrued interest on the fixed convertible notes was $1,004,631. During the nine months ended September 30, 2018, interest of $56,195 was accrued. At September 30, 2018, the balance of accrued interest on the fixed convertible notes was $1,060,826.

 

 
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(c) During the nine months ended September 30, 2018, the Company issued four convertible notes payable for an aggregate of $505,000, bearing interest at 10% per annum, and maturing through September 2019. During the nine months ended September 30, 2018, interest of $17,474 was accrued. At the option of the holder, each of the notes 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 during the twenty days preceding a conversion notice. The variable conversion price is not considered predominately based on a fixed monetary amount settleable with a variable number of shares due to the volatility and trading volume of the Company’s common stock. 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 derivative liabilities upon issuance. The Company determined that upon issuance of the convertible notes in March, April, June and September 2018, the initial fair value of the embedded conversion feature totaled $903,851 (see Note 8), of which $505,000 was recorded as debt discount offsetting the face amount of the convertible notes, and the remainder of $398,851 was recorded as private placement costs. During the nine months ended September 30, 2018, debt discount amortization of $168,986 was recorded in interest expense, $24,000 of debt discount was removed related to debt that was converted, and the balance of the unamortized discount at September 30, 2018 was $312,014.

 

 

During the nine months ended September 30, 3018, a note holder elected to convert one note for $50,000 plus interest of $2,622 (total of $52,622) into 5,091,745 shares of the Company’s common stock at conversion prices ranging from $0.010266 to $0.01044 per share. On the dates of conversion, the closing price of the Company’s common stock ranged from $0.0184 to $0.0195 per share, or total fair value of shares of $95,903. The Company followed the general extinguishment model to record the settlement of the debt. The debt and accrued interest of $52,622, an unamortized discount of ($24,000), and the bifurcated conversion option derivatives after a final mark-up to $58,317, were removed at their carrying amounts aggregating $86,939, and the shares issued were measured at their fair value of $95,903. The difference of $8,964 was recorded as loss on settlement of debt. 

 

At September 30, 2018 and December 31, 2017, accrued interest due for all convertible notes was $1,075,678 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 nine months ended September 30, 2018 and 2017 was $73,669 and $39,814, respectively.

 

Note 3 - Convertible Notes Payable – Related Parties

 

At September 30, 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 and adjusted for applicable reverse stock splits.

 

At December 31, 2017, accrued interest due for the convertible notes – related parties was $498,077. During the nine months ended September 30, 2018, interest of $48,339 was accrued. At September 30, 2018, accrued interest due for the convertible notes – related parties was $546,416.

 

Note 4 - Notes Payable

 

Notes payable consisted of the following:

 

 

 

September 30,

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 issued by BlockSafe

 

 

775,500

 

 

 

-

 

Total notes payable principal outstanding

 

 

2,414,324

 

 

 

1,713,824

 

Debt discount

 

 

(391,122 )

 

 

-

 

Notes payable, net of discount

 

$ 2,023,202

 

 

$ 1,713,824

 

 

 
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(a) Notes payable consists of various unsecured promissory notes with interest from 8% to 14% per annum. The notes were due on various dates from December 2011 to July 2017 and are currently in default, The Company is currently pursuing settlements with certain of the note holders. At September 30, 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 nine months ended September 30, 2018, $34,073 of interest was accrued. At September 30, 2018, accrued interest on the notes payable-various was $493,971.

 

 

(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 nine months ended September 30, 2018, the Company repaid $5,000 of principal and at September 30, 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 nine months ended September 30, 2018, $91,626 of interest was accrued and $5,000 of accrued interest was paid. At September 30, 2018, accrued interest on the notes payable-SIG was $1,483,967.

 

 

(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 nine months ended September 30, 2018, BlockSafe (see Note 1) issued an aggregate of $775,500 of unsecured promissory notes to nineteen unrelated parties, including a former executive of BlockSafe, bearing interest at 8% per annum, and maturing through September 2019. During the nine months ended September 30, 2018, interest of $30,750 was accrued. Contemporaneously with the issuance of 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 $775,500 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 nine months ended September 30, 2018, debt discount amortization of $384,378 was recorded and the balance of the unamortized discount at September 30, 2018 was $391,122.

 

At September 30, 2018 and December 31, 2017, accrued interest due for all notes payable above was $2,003,688 and $1,852,239, respectively, and is included in accrued interest in the accompanying balance sheets. Interest expense for notes payable for the nine months ended September 30, 2018 and 2017 was $151,449 and $85,004, respectively.

 

Note 5 - Notes Payable – Related Parties

 

Notes payable- related parties consisted of the following:

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Unsecured

 

 

 

 

 

 

(a) Promissory notes

 

$ 742,513

 

 

$ 742,513

 

Notes payable, current maturities

 

$ 742,513

 

 

$ 742,513

 

 

(a) Promissory notes represent eighteen 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 September 30, 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 nine months ended September 30, 2018, interest of $41,945 was accrued. At September 30, 2018, accrued interest due for the notes was $689,809.

 

 
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Note 6 – Financing Obligation

 

Between January 2018 and September 2018, BlockSafe issued promissory notes payable to nineteen unrelated parties aggregating $775,500 (see Note 4). 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 September 30, 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 $775,500, is probable of being settled. Accordingly, the Company recorded a liability for $775,500 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. The Company received no additional funding during the nine months ended September 30, 3018. At September 30, 2018 and December 31, 2017, the Company has reflected the $1,500,000 received from the Funders as a contingent payment obligation to be paid only if claim proceeds are recovered. On May 22, 2018, the Company was notified by Therium Inc. of the assignment of the debt to Therium Luxembourg.

 

Note 8 – Derivative Financial Instruments

 

At September 30, 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 price per share discounts ranging from 20% to 58% of the Company’s common stock market price, as defined in the note agreements. As the ultimate determination of shares to be issued upon conversion of these notes could exceed the current number of available authorized shares, the Company determined that the conversion features of the convertible notes were not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as derivative liabilities. Accordingly, the conversion features of the notes were separated from the host contracts (i.e. the notes) and characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

 

At December 31, 2017, the balance of the derivative liabilities was $623,195. During the nine months ended September 30, 2018, the Company recorded additions of $903,851 related to the conversion features of notes issued during the period (see Note 2), a reduction of the fair value of derivatives of $58,317 related to notes that were converted into shares of common stock (see Note 2), and a decrease in fair value of derivatives of $628,769. At September 30, 2018, the balance of the derivative liabilities was $839,960.

 

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

 

 

 

September 30,

2018

 

 

March to

September 2018

(dates of inception)

 

 

December 31,

2017

 

Conversion feature:

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

 

0.26 %

 

0.23%-0.25

%

 

 

0.18 %

Expected volatility

 

 

122 %

 

124%-138

%

 

 

147 %

Expected life (in years)

 

1 year

 

 

1 year

 

 

1 year

 

Expected dividend yield

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value:

 

 

 

 

 

 

 

 

 

 

 

 

Conversion feature

 

$ 839,960

 

 

$ 903,851

 

 

$ 623,195

 

 

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.

 

 
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Note 9 – Stockholders’ Deficit

 

Common Stock

 

During the nine months ended September 30, 2018, the Company issued an aggregate of 13,447,745 shares of its common stock as follows:

 

 

· The Company issued 22,500 shares of its common stock for services, valued at $348.

 

· The Company issued 8,333,500 shares of its common stock in exchange for conversion of 33,334 shares of Series B Preferred Stock at a conversion price of $0.004 per share.

 

· A convertible note holder converted $50,000 of principal and $2,622 of accrued interest into 5,091,745 shares of common stock at conversion prices ranging from $0.010266 to $0.01044 per share.

 

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 nine months ended September 30, 2018 and 2017, the Company recognized compensation costs of $355,277 and $749,538, respectively, related to the amortization of the fair value of options that vested.

 

In July 2018, the Company issued options to purchase an aggregate of 500,001 shares of its common stock to a consulting firm with a total fair value of $3,855 determined using the Black-Scholes Option Pricing model. The options are exercisable at $0.016 per share, vest in 12 months, and expire in July 2019. During the nine months ended September 30, 2018, the Company recognized non-employee compensation costs of $866 related to the amortization of the fair value of options that vested.

 

The table below summarizes the Company’s stock option activities for the period January 1, 2016 to September 30, 2018:

 

 

 

Number of

Options Shares

 

 

Exercise Price Range

Per Share

 

 

Weighted Average Exercise Price

 

Balance, January 1, 2018

 

 

259,000,001

 

 

$

0.0057-2,242,500

 

 

$ 0.00625

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

500,001

 

 

$ 0.016

 

 

$ 0.016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

-

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expired

 

 

-

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding, September 30, 2018

 

 

259,500,002

 

 

$

0.0057-2,242,500

 

 

$ 0.0062

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance exercisable, September 30, 2018

 

 

259,112,330

 

 

$

0.0057-2,242,500

 

 

$ 0.0062

 

 

At September 30, 2018 and 2017, the intrinsic value of outstanding options was zero.

 

 
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The following table summarizes information concerning the Company’s stock options as of September 30, 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

 

 

 

63,000,000

 

 

 

10.00

 

 

$ 0.0057

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

0.016

 

 

 

500,001

 

 

 

1.00

 

 

$ 0.016

 

 

 

112,329

 

 

 

1.00

 

 

$ 0.016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

0.00625

 

 

 

196,000,000

 

 

 

10.00

 

 

$ 0.0062

 

 

 

196,000,000

 

 

 

10.00

 

 

$ 0.0062

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

0.00625 - 975,000,000

 

 

 

259,500,002

 

 

 

10.00

 

 

$ 0.0062

 

 

 

259,112,330

 

 

 

10.00

 

 

$ 0.0062

 

 

Note 11 - Commitments and Contingencies

 

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 1, 2017, The United States District Court for the Central District of California issued an opinion in the StrikeForce Technologies, Inc. v. SecureAuth Corp . case, which invalidated claims of U.S. Patent Nos. 7,870,599, 8,484,698 and 8,713,701 under 35 U.S.C. §101. The Company strongly disagrees with the Court’s decision and an appeal has been prepared by the Company’s attorney. The Company has agreed to stay its patent litigations in the District of New Jersey against Centrify Corp. and Duo Security Inc. pending the appeal. The Company believes that the litigations currently pending in the District of Massachusetts should also be stayed pending appeal and is discussing such a motion with the defendants in that case. The Company expects the Court will rule on the appeal in early 2019. However, the Company cannot guarantee that the appeal will be ruled upon in that time frame, or of the outcome of the ruling.

 

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.

 

Asset Sale and Licensing Agreement

 

On August 24, 2015, the Company entered into an agreement with Cyber Safety, Inc., a New York corporation (“Cyber Safety”) for Cyber Safety to license, and retain an option to purchase, the patents and Intellectual Property related to the GuardedID® and MobileTrust® software. Cyber Safety has the option to buy the Company’s GuardedID® patent for $9,000,000 that expires on September 30, 2020. The Company anticipates Cyber Safety will make the purchase by September 30, 2020. Cyber Safety will also resell the Company’s GuardedID® and MobileTrust® products, for which the Company will receive a royalty, while the Company retains an unlimited license to resell those products. Cyber Safety also licensed the Malware Suite until September 30, 2020 and agreed to pay the Company 15% to 20% of the net amount Cyber Safety receives from this product. During the nine months ended September 30, 2018 and 2017, the Company received $162 and $0, respectively, in license payments from Cyber Safety.

 

Note 12 – Subsequent Events

 

In October 2018, the Company issued an unsecured convertible promissory note for $140,000, bearing interest at 10% per annum, and maturing in October 2019. The note is convertible at a 58% discount to the price of the Company’s common stock, as defined.

 

In October 2018 and November 2018, convertible note holders converted $80,000 of principal and $4,526 of accrued interest into 10,713,317 shares of common stock at conversion prices ranging from $0.007018 to $0.008526 per share.

 

 
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Included in this interim report are "forward-looking" statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA") as well as historical information. Some of our statements under "Business”, "Properties”, "Legal Proceedings”, "Management's Discussion and Analysis of Financial Condition and Results of Operations”," the Notes to Condensed 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; impact and marketplace perception as a result of enforcement matters promulgated by the Securities and Exchange Commission against bad actors in the cyrptocurrency field and policy papers by the Securities and Exchange Commission on cyrptocurrency; 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. We 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 or 2019.

 

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.

 

Recently Executed Distribution Agreements

 

In November 2018, we executed two distribution agreements for our security products in the insurance and hospitality marketplaces, respectively. We anticipate that both agreements will result in a substantial increase in revenues in 2019, although there can be no assurances of the anticipated results.

 

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 September 30, 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 and conditions, 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 . This standard has been adopted, in various forms, in numerous other jurisdictions.

 

 
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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.

 

In June 2018, two members of our management team, George Waller, our Executive Vice President and Ramarao Pemmaraju, our Chief Technical Officer, were appointed to BlockSafe to serve as the Chief Executive Officer and Chief Technical Officer, respectively. Additionally, our Chief Executive Officer, Mark L. Kay, also an appointee to the Board of Directors of BlockSafe, was appointed as Chairman and President of BlockSafe.

 

Results of Operations

 

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2018 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2017

 

Revenues for the three months ended September 30, 2018 were $120,831 compared to $76,342 for the three months ended September 30, 2017, an increase of $44,489 or 58.3%. The increase in revenues was primarily due to management fees we charged to the non-controlling interest of our subsidiary, BlockSafe. Revenues are derived from software, keyfobs and services, which include the management fees in 2018.

 

Cost of revenues for the three months ended September 30, 2018 was $1,755 compared to $3,168 for the three months ended September 30, 2017, a decrease of $1,413, or 44.6%. The decrease resulted from the decrease in fees resulting from efficiencies implemented related to our revenues. Cost of revenues as a percentage of total revenues for the three months ended September 30, 2018 was 1.5% compared to 4.2% for the three months ended September 30, 2017.

 

Gross profit for the three months ended September 30, 2018 was $119,076 compared to $73,174 for the three months ended September 30, 2017, an increase of $45,902, or 62.7%. The increase in gross profit was due to the increase in our revenues.

 

Research and development expenses for the three months ended September 30, 2018 were $123,750 compared to $123,750 for the three months ended September 30, 2017. The salaries, benefits and overhead costs of personnel conducting research and development of our software products primarily comprises our research and development expenses.

 

Compensation, professional fees, and selling, general and administrative (collectively, “SGA”) expenses for the three months ended September 30, 2018 were $411,279 compared to $279,093 for the three months ended September 30, 2017, an increase of $132,186 or 47.4%. The increase was due primarily to increased expenses in our subsidiary, BlockSafe, which began operations in January 2018. 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 September 30, 2018, other expense was ($355,379) as compared to other expense of ($183,801) for the three months ended September 30, 2017, representing an increase in other expense of $171,578, or 93.8%. The increase was primarily due to increased interest expenses in our subsidiary, BlockSafe, which began operations in December 2017.

 

Our net loss for the three months ended September 30, 2018 was $771,332 compared to $513,470 for the three months ended September 30, 2017, an increase of $257,862, or 50.2%. The increase was primarily due to increased expenses in our subsidiary, BlockSafe, which began operations in December 2017.

 

The net loss attributable to the non-controlling interest in our subsidiary for the three months ended September 30, 2018 was $160,641. These results are due to the net loss recorded by our subsidiary, BlockSafe, which began operations in December 2017.

 

 
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2017

 

Revenues for the nine months ended September 30, 2018 were $356,475 compared to $218,946 for the nine months ended September 30, 2017, an increase of $137,529 or 62.8%. The increase in revenues was primarily due to management fees we charged to the non-controlling interest of our subsidiary, BlockSafe. Revenues are derived from software, keyfobs and services, which include the management fees in 2018.

 

Cost of revenues for the nine months ended September 30, 2018 was $11,212 compared to $9,547 for the nine months ended September 30, 2017, an increase of $1,665, or 17.4%. The increase resulted from the increase in third party fees related to our revenues. Cost of revenues as a percentage of total revenues for the nine months ended September 30, 2018 was 3.2% compared to 4.4% for the nine months ended September 30, 2017.

 

Gross profit for the nine months ended September 30, 2018 was $345,263 compared to $209,399 for the nine months ended September 30, 2017, an increase of $135,864, or 64.5%. The increase in gross profit was due to the increase in our revenues offset by the increase in our cost of revenues.

 

Research and development expenses for the nine months ended September 30, 2018 were $371,250 compared to $402,532 for the nine months ended September 30, 2017, a decrease of $31,282, or 7.8%. The decrease in research and development expenses was due to a 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 nine months ended September 30, 2018 were $1,752,943 compared to $1,708,193 for the nine months ended September 30, 2017, a decrease of $44,750 or 2.6%. The decrease was due primarily to decreased expenses relating to the previous vesting of options in the nine months ended September 30, 2017 that were granted to employees in September 2016, offset by increased expenses in our subsidiary, BlockSafe, which began operations in December 2017. 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 nine months ended September 30, 2018, other expense was ($653,143) as compared to other expense and deemed dividend of ($705,788) for the nine months ended September 30, 2017, representing a decrease in other expense of $52,645, or 7.5%. The decrease was primarily due to a decrease in the change in the in the fair value of derivative liabilities, offset by an increase in private placement costs, an increase in debt discount amortization expenses and increased expenses from our subsidiary, BlockSafe, which began operations in December 2017.

 

Our net loss for the nine months ended September 30, 2018 was $2,432,073 compared to $2,607,114 for the nine months ended September 30, 2017, a decrease of $175,041, or 6.7%. The decrease was primarily due to a decrease in the change in the fair value of derivative liabilities, offset by an increase in private placement costs, an increase in debt discount amortization expenses, and increased expenses from our subsidiary, BlockSafe, which began operations in December 2017.

 

The net loss attributable to the non-controlling interest in our subsidiary for the nine months ended September 30, 2018 was $468,619. These results are due to the net loss recorded by our subsidiary, BlockSafe, which began operations in December 2017.

 

Liquidity and Capital Resources

 

Our total current assets at September 30, 2018 were $248,869, which included cash of $186,078, as compared with $512,036 in total current assets at December 31, 2017, which included cash of $455,484. Additionally, we had a current deficit in the amount of $12,772,865 at September 30, 2018 compared to a current 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 nine months ended September 30, 2018 primarily from the issuance of convertible debentures of $505,000 and the issuance of promissory notes of $775,500 by our subsidiary, BlockSafe.

 

 
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Going Concern

 

We have yet to establish any history of profitable operations. the nine months ended September 30, 2018, the Company incurred a net loss of $2,432,073 and used cash in operating activities of $1,470,450, and at September 30, 2018, the Company had a stockholders’ deficit of $12,772,865. 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 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 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, as well as management fees from BlockSafe. 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.

 

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.

 

 
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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.

 

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

 

 
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(a) Evaluation of Disclosure Controls and Procedures.

 

Regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) require public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

We carried out an evaluation, with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (CFO) of the effectiveness our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of September 30, 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 September 30, 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 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 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 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 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 1, 2017, The United States District Court for the Central District of California issued an opinion in the StrikeForce Technologies, Inc. v. SecureAuth Corp . case, which invalidated claims of U.S. Patent Nos. 7,870,599, 8,484,698 and 8,713,701 under 35 U.S.C. §101. We strongly disagree with the Court’s decision and an appeal has been prepared by our attorney. We have agreed to stay our patent litigations in the District of New Jersey against Centrify Corp. and Duo Security Inc. pending the appeal. We believe that the litigations currently pending in the District of Massachusetts should also be stayed pending appeal and are discussing such a motion with the defendants in that case. We expect the Court will rule on the appeal in early 2019. However, we cannot guarantee that the appeal will be ruled upon in that time frame, or of the outcome of the ruling.

 

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 September 30, 2018, does not differ materially from that set forth in Part I, Item 1A of our 2017 Annual Report on Form 10-K.

 

 
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ITEM 2. RECENT ISSUANCES OF UNREGISTERED SECURITIES

 

In September 2018, a convertible note holder converted $50,000 of principal and $2,622 of accrued interest into 5,091,745 shares of common stock at conversion prices ranging from $0.010266 to $0.01044 per share.

 

In September 2018, we issued a total of 7,500 shares of restricted common stock, valued at $144, 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.

 

 
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ITEM 6. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 

Exhibit Number

 

Description

3.1

 

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

3.2

 

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)

10.12

 

BlockSafe Technologies, Inc. Amended 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.

 

 
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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

STRIKEFORCE TECHNOLOGIES, INC.

 

 

 

 

Dated: November 19, 2018

By:

/s/ Mark L. Kay

 

 

Mark L. Kay

 

Chief Executive Officer

 

Dated: November 19, 2018

By:

/s/ Philip E. Blocker

 

 

Philip E. Blocker

 

 

Chief Financial Officer and

Principal Accounting Officer

 

 

 

27

 

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