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SFOR > SEC Filings for SFOR > Form 10-K on 4-Apr-2013All Recent SEC Filings

Show all filings for STRIKEFORCE TECHNOLOGIES INC.

Form 10-K for STRIKEFORCE TECHNOLOGIES INC.


4-Apr-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The following is management's discussion and analysis (|MD&A") of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words "believes," "anticipates," "may," "will," "should," "expect," "intend," "estimate," "continue," and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

The following discussion and analysis should be read in conjunction with our financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-K

The Company's MD&A is comprised of significant accounting estimates made in the normal course of its operations, overview of the Company's business conditions, results of operations, liquidity and capital resources and contractual obligations. The Company did not have any off balance sheet arrangements as of December 31, 2011 or 2012.

The discussion and analysis of the Company's financial condition and results of operations is based upon its financial statements, which have been prepared in accordance with generally accepted accounting principles generally accepted in the United States (or "GAAP"). The preparation of those financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities at the date of its financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Background

We are a software development and services company that offers a suite of integrated computer network security products (patented and patent pending) using proprietary technology.

We generated all of our revenues of $805,312 for the year ended December 31, 2012, compared to $448,127 for the year ended December 31, 2011, from the sales of our security software products.

We have incurred substantial losses since our inception. Our management believes that our products provide a cost-effective and technologically competitive solution to address the problems of network security and identity theft in general. Updated guidance for the Federal Financial Institutions Examination Council ("FFIEC") regulations include the requirement for solutions that have Two-Factor Out-of-Band Authentication and products that stop keylogging malware, real time, which our management believes our proprietary products uniquely and directly address. This new updated guidance went into effect as of January 1, 2012. Based on this new requirement in the latest FFIEC update that was published in June 2011 with enforcement commencing in January 2012, we have recently experienced a growing increase in sales orders and inquiries. However, there can be no assurance that our products will continue to gain acceptance and continue to grow in the commercial marketplace or that one of our competitors will not introduce technically superior products.

Because we are now experiencing a continual growing market demand, we are developing a sizeable global reseller and distribution channel as a strategy to generate, manage and fulfill demand for our products across market segments, minimizing the requirement for an increase in our staff. We have minimized the concentration on our initial direct sales efforts as our distribution and reseller channels continue to grow internationally and require appropriate levels of support.


Results of Operations

FOR THE YEAR ENDED DECEMBER 31, 2012 COMPARED TO THE YEAR ENDED DECEMBER 31,
2011

Revenues for the year ended December 31, 2012 were $805,312 compared to $448,127 for the year ended December 31, 2011, an increase of $357,185 or 79.7%. The increase in revenues was primarily due to the increase in the sales of our GuardedIDŽ keyboard encryption (anti-keylogger) technology and our ProtectIDŽ ("Out-of-Band") technology.

Revenues generated consisted of hardware and software sales, services and maintenance sales, revenue from sign on fees, and recurring transaction revenues. Hardware sales for the year ended December 31, 2012 were $6,068 compared to $11,374 for the year ended December 31, 2011, a decrease of $5,306. The decrease in hardware revenues was primarily due to the decrease in our sales of our one-time-password token key-fobs. Software, services and maintenance sales for the year ended December 31, 2012 were $799,244 compared to $431,153 for the year ended December 31, 2011, an increase of $368,091. The increase in software, services and maintenance revenues was primarily due to the increase in the sales of our GuardedIDŽ keyboard encryption (anti-keylogger) technology and our ProtectIDŽ ("Out-of-Band") technology. Sign on fees for access to our cloud hosted service provider to utilize our Application Service Provider ("ASP") transaction model amounted to $0 for the year ended December 31, 2012 compared to $5,600 for the year ended December 31, 2011, a decrease of $5,600. The decrease was primarily due the decrease in signing up new clients for our cloud hosted service.

Cost of revenues for the year ended December 31, 2012 was $14,513 compared to $25,426 for the year ended December 31, 2011, a decrease of $10,913, or 42.9%. The decrease resulted primarily from the overall increase in our software product revenues which entail a reduced cost of sales as compared with revenues that include hardware purchases and the decrease in the sales of our one-time-password token key-fobs. Cost of revenues as a percentage of total revenues for the year ended December 31, 2012 was 1.8% compared to 5.7% for the year ended December 31, 2011. The decrease resulted primarily from the overall increase in our software product revenues which entail a reduced cost of sales as compared with revenues that include hardware purchases.

Gross profit for the year ended December 31, 2012 was $790,799 compared to $422,701 for the year ended December 31, 2011, an increase of $368,098, or 87.1%. The increase in gross profit was primarily due to the increase in the sales of our GuardedIDŽ keyboard encryption (anti-keylogger) technology and our ProtectIDŽ ("Out-of-Band") technology.

Research and development expenses for the year ended December 31, 2012 were $339,300 compared to $352,670 for the year ended December 31, 2011, a decrease of $13,370, or 3.8%. The decrease was primarily attributable to the decrease in time expended by our research and development personnel. The salaries, benefits and overhead costs of personnel conducting research and development of our software products comprise research and development expenses.

Selling, general and administrative ("SGA") expenses for the year ended December 31, 2012 were $1,096,033 compared to $5,152,834 for the year ended December 31, 2011, a decrease of $4,056,801 or 78.7%. The decrease was due primarily to the non-recurrence of one-time expense in stock based compensation through the issuance of preferred stock in the first fiscal quarter of 2011 in the amount of $987,000 and expenses in stock based compensation through the issuance of employee and non-employee stock options in 2011 in the amount of $2,468,375. The parties receiving the irrevocably preferred stock waived all conversion rights to such preferred stock. Selling, general and administrative 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 to non-employees and other general corporate expenses.

Other (income) expense for the year ended December 31, 2012 was $521,335 as compared to $404,250 for the year ended December 31, 2011, representing an increase in other expense of $117,085, or 29.0%. The increase was primarily due to an increase in interest expense and the change in the fair value of the derivatives relating to a portion of our secured and unsecured convertible debenture balance.

Our net loss for the year ended December 31, 2012 was $1,167,908 compared to a net loss of $5,487,053 for the year ended December 31, 2011, a decrease of $4,319,145, or 78.7%. The decrease in our net loss was due primarily to the non-recurrence of one-time expense in stock based compensation through the issuance of preferred stock in the first fiscal quarter of 2011 and expenses in stock based compensation through the issuance of employee and non-employee stock options in the first fiscal quarter of 2011, in addition to increased gross profit in fiscal 2012. The parties receiving the irrevocable preferred stock waived all conversion rights to such preferred stock.


Liquidity and Capital Resources

Our total current assets at December 31, 2012 were $286,516, which included cash of $133,279, as compared with $87,744 in total current assets at December 31, 2011, which included cash of $0. Additionally, we had a stockholders' deficit in the amount of $10,484,588 at December 31, 2012 compared to a stockholders' deficit of $10,262,227 at December 31, 2011. 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. The liabilities include a computed liability for the fair value of derivatives of $375,634, which will only be realized on the conversion of the derivatives, or settlement of the debentures.

We financed our operations during the year ended December 31, 2012 primarily through the sale and issuance of debt in the aggregate amount of $455,750, through the sale of our common stock, in the aggregate amount of $455,000, and through recurring revenues from our ProtectIDŽ, and GuardedIDŽ technology, in the aggregate amount of $805,312. Management anticipates that we will continue to rely on equity and debt financing, at least in the near future, to finance our operations. While management believes that there will be a substantial percentage of our sales generated from our GuardedIDŽ product and there are an increasing number of customers for our patented ProtectIDŽ product, we will continue to have customer concentrations. Inherently, as time progresses and corporate exposure in the market continues to grow, with increasing marketing efforts, management believes, but cannot guarantee, we will continue to attain greater numbers of customers and the concentrations could decrease over time. Until this is accomplished, management will continue to attempt to secure additional financing through both the public and private market sectors to meet our continuing commitments of expenditures and until our sales revenue can provide greater liquidity.

Our number of common shares outstanding increased from 221,388,354 shares at the year ended December 31, 2011 to 362,808,206 at the year ended December 31, 2012, an increase of 63.9%. The increase in the number of common shares outstanding was due to common shares issued related to the issuance, conversion and settlement of debt, equity financing and consulting obligations, which, consequently, reduced our total outstanding debt.

We have historically incurred losses and we anticipate, but cannot guarantee, that we will not generate any significant revenues until the second quarter of 2013 or later. Our operations presently require funding of approximately $110,000 per month. Management believes, but cannot provide assurances, that we will be cash flow positive by the end of 2013, or shortly thereafter, based on recently executed and announced contracts and potential contracts that we anticipate closing throughout 2013 in the financial industry, technology, insurance, enterprise, healthcare, government, and consumer sectors in the United States, Latin America, Europe, Africa and the Pacific Rim. There can be no assurance, however, that the sales anticipated will materialize or that we will achieve the profitability we have forecasted. Management also recognizes the consequences of the current world economic developments and the possible volatile effect on currency rates resulting from revenues derived from foreign markets.

DRAWDOWN EQUITY FINANCING AGREEMENT

On April 13, 2012, we entered into a Drawdown Equity Financing Agreement, together with a Registration Rights Agreement, with Auctus Private Equity Fund, LLC ("Auctus"), the selling stockholder. In October 2012, we elected to withdraw our Form S-1/A registration statement and terminate the Drawdown Equity Financing Agreement with Auctus.

SUMMARY OF OUR OUTSTANDING DART SECURED CONVERTIBLE DEBENTURES

At December 31, 2012, $542,588 in aggregate principal amount of the DART Limited ("DART"), custodian for Citco Global Custody NV ("Citco Global") as of July 2012, debentures, as assigned by YA Global and Highgate in April 2009, were issued and outstanding.

During the year ended December 31, 2012, DART had no conversions.

The DART secured convertible debentures are fully matured. We have 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 restricted shares of our common stock. The note holder has advised us that it currently is willing to wait until it receives a buyout offer from us.


During the year ended December 31, 2012, we issued unsecured convertible notes in an aggregate total of $455,750 to three unrelated parties per the terms of term sheets executed with investor firms in at various times during 2012. Additionally, during the year ended December 31, 2012, two investor firms converted $161,953 of convertible notes and $4,537 of accrued interest into 72,754,365 unrestricted shares of our common stock pursuant to an exemption provided under Regulation D of the Securities Act of 1933, as discussed above. The conversion prices ranged from $0.0012 per share to $0.005622 per share. Since the unsecured convertible notes arose greater than six months and, as no additional consideration was paid in the notice of conversions by the investor firms, the conversions were tacked back to the original date of the issuance of the notes as the holding period under SEC Rule 144(d)(3)(ii) resulting in the issuance of unrestricted shares. Additionally, during the year ended December 31, 2012, we repaid a total of $2,000 of unsecured convertible notes to one unrelated party.

During the year ended December 31, 2012, we repaid a total of $24,626 of unsecured notes to two unrelated parties and we settled a total of $70,000 of unsecured notes held by one unrelated party in exchange for unrestricted shares of our common stock.

Summary of Funded Debt

As of December 31, 2012, our Company's open unsecured promissory note balance was $2,360,690, net of discount on promissory notes of $1,448, listed as follows:

ˇ

$6,550 to an unrelated individual - current portion

ˇ

$275,000 to an unrelated individual - current portion

ˇ

$83,088 to an unrelated company - current portion

ˇ

$210,000 to an unrelated company - current portion

ˇ

$1,650,000 to twenty unrelated individuals through term sheet with the StrikeForce Investor Group - current portion

ˇ

$137,500 to an unrelated company - current portion

As of December 31, 2012, our Company's open unsecured related party promissory note balances were $722,638, listed as follows:

ˇ

$722,638 to our CEO - current portion

As of December 31, 2012, our Company's open convertible secured note balances were $542,588, listed as follows:

ˇ

$542,588 to DART (custodian for Citco Global and as assigned in 04/09 by YA Global and Highgate House Funds, Ltd.)

As of December 31, 2012 our Company's open convertible note balances were $1,367,012, net of discount on convertible notes of $199,052, listed as follows:

ˇ

$235,000 to an unrelated company (03/05 unsecured debenture) - current portion

ˇ

$7,000 to an unrelated company (06/05 unsecured debenture) - current portion

ˇ

$10,000 to an unrelated individual (06/05 unsecured debenture) - current portion

ˇ

$40,000 to three unrelated individuals (07/05 unsecured debentures) - current portion

ˇ

$5,000 to an unrelated individual (09/05 unsecured debenture) - current portion

ˇ

$46,755 to an unrelated individual (01/06 unsecured debenture) - current portion

ˇ

$200,000 to an unrelated individual (06/06 unsecured debenture) - current portion

ˇ

$150,000 to an unrelated individual (09/06 unsecured debenture) - current portion

ˇ

$3,512 to an unrelated individual (02/07 unsecured debenture) - current portion

ˇ

$100,000 to an unrelated individual (05/07 unsecured debenture) - current portion

ˇ

$100,000 to an unrelated individual (06/07 unsecured debentures) - current portion

ˇ

$100,000 to an unrelated individual (07/07 unsecured debenture) - current portion

ˇ

$120,000 to three unrelated individuals (08/07 unsecured debentures) - current portion

ˇ

$50,000 to two unrelated individuals (12/09 unsecured debentures) - current portion

ˇ

$30,000 to an unrelated company (03/10 unsecured debenture) - long term portion

ˇ

$140,047 to un unrelated company (01/12 unsecured debentures) - current portion

ˇ

$75,000 to un unrelated company (03/12 unsecured debenture) - current portion

ˇ

$8,500 to un unrelated company (05/12 unsecured debenture) - current portion

ˇ

$42,500 to un unrelated company (07/12 unsecured debenture) - current portion

ˇ

$32,500 to un unrelated company (11/12 unsecured debenture) - current portion

ˇ

$27,750 to un unrelated company (11/12 unsecured debenture) - current portion

ˇ

$42,500 to un unrelated company (12/12 unsecured debenture) - current portion


As of December 31, 2012 our Company's open convertible note balances - related parties were $355,500, listed as follows:

ˇ

$268,000 to our CEO - current portion

ˇ

$57,500 to our VP of Technical Services - current portion

ˇ

$30,000 to a relative of our CTO & one of our Software Developers - current portion

Based on present revenues and expenses, we are unable to generate sufficient funds internally to sustain our current operations. We must raise additional capital or determine other borrowing sources to continue our operations. It is management's plan to seek additional funding through the sale of common stock, the sale and settlement of trade payables and debentures, and the issuance of notes and debentures, including notes and debentures convertible into common stock. If we issue additional shares of common stock, the value of shares of existing stockholders is likely to be diluted.

However, the terms of the convertible secured debentures issued to certain of the existing stockholders require that we obtain the consent of such stockholders prior to our entering into subsequent financing arrangements. No assurance can be given that we will be able to obtain additional financing, that we will be able to obtain additional financing on terms that are favorable to us or that the holders of the secured debentures will provide their consent to permit us to enter into subsequent financing arrangements.

Our future revenues and profits, if any, will primarily depend upon our ability, and that of our distributors and resellers, to secure sales of our suite of network security and anti-malware products. We do not presently generate significant revenue from the sales of our products. Although management believes that our products are competitive for customers seeking a high level of network security, we cannot forecast with any reasonable certainty whether our products will gain acceptance in the marketplace and if so by when.

Except for the limitations imposed upon us respective to the convertible secured debentures of DART (custodian for Citco Global and as assigned by YA Global and Highgate House Funds, Ltd.), there are no material or known trends that will restrict either short term or long-term liquidity.

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, results of operations, liquidity or capital expenditures.

Going Concern

The Report of Our Independent Registered Public Accounting Firm Contains Explanatory Language That Substantial Doubt Exists About Our Ability To Continue As A Going Concern

The accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.

As reflected in the accompanying financial statements, we had a working capital deficiency of $10,481,937 and $10,177,078 and deficits in stockholders' equity of $10,484,588 and $10,262,227 at December 31, 2012 and 2011, respectively, and net losses of $1,167,908 and $5,487,053 and net cash used in operating activities of $731,364 and $982,453 for each of the years then ended. These factors raise substantial doubt about our ability to continue as a going concern.

Currently, management is attempting to increase revenues and improve gross margins by a revised sales strategy. In principle, we are focusing on domestic and international channel sales, 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 its 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.

The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.


Critical Accounting Policies

In accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), we record certain assets at the lower of cost or fair market value. In determining the fair value of certain of our assets, we must make judgments, estimates and assumptions regarding circumstances or trends that could affect the value of these assets, such as economic conditions. Those judgments, estimates and assumptions are based on information available to us at that time. Many of those conditions, trends and circumstances are outside our control and if changes were to occur in the events, trends or other circumstances on which our judgments or estimates were based, we may be required under U.S. GAAP to adjust those estimates that are affected by those changes. Changes in such estimates may require that we reduce the carrying value of the affected assets on our balance sheet (which are commonly referred to as "write downs" of the assets involved).

It is our practice to establish reserves or allowances to record adjustments or "write-downs" in the carrying value of assets, such as accounts receivable. Such write-downs are recorded as charges to income or increases in the expense in our Statement of Operations in the periods when such reserves or allowances are established or increased. As a result, our judgments, estimates and assumptions about future events can and will affect not only the amounts at which we record such assets on our balance sheet but also our results of operations.

In making our estimates and assumptions, we follow U.S. GAAP applicable to our business and those that we believe will enable us to make fair and consistent estimates of the fair value of assets and establish adequate reserves or allowances. Set forth below is a summary of the accounting policies that we believe are material to an understanding of our financial condition and results of operations.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

The Company's significant estimates and assumptions include the fair value of financial instruments; allowance for doubtful accounts; the carrying value, recoverability and impairment, if any, of long-lived assets, including the values assigned to and the estimated useful lives of property and equipment, patents; interest rate; underlying assumptions to estimate the fair value of beneficial conversion features, warrants and options; revenue recognized or recognizable; sales returns and allowances; income tax rate, income tax provision deferred tax assets and valuation allowance of deferred tax assets; and the assumption that the Company will continue as a going concern. Those significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.

Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, those estimates are adjusted accordingly, if deemed appropriate. Actual results could differ from those estimates.

Discount on Debt

The Company allocates the proceeds received from convertible debt instruments between the liability component and equity component and records the conversion feature as a liability. The conversion feature and certain other features that are considered embedded derivative instruments, such as a conversion reset provision, a penalty provision and redemption option, have been recorded at their fair value as its fair value can be separated from the convertible note and its conversion is independent of the underlying note value. The conversion liability is marked to market each reporting period with the resulting gains or losses shown in the Statement of Operations. The Company has also recorded the . . .

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