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SFOR > SEC Filings for SFOR > Form 10-K on 14-Apr-2014All Recent SEC Filings

Show all filings for STRIKEFORCE TECHNOLOGIES INC.

Form 10-K for STRIKEFORCE TECHNOLOGIES INC.


14-Apr-2014

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

Our MD&A is comprised of significant accounting estimates made in the normal course of its operations, overview of our business conditions, results of operations, liquidity and capital resources and contractual obligations. We did not have any off balance sheet arrangements as of December 31, 2012 or 2013.

The discussion and analysis of our 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 $434,657 for the year ended December 31, 2013, compared to $805,312 for the year ended December 31, 2012, 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, 2013 COMPARED TO THE YEAR ENDED DECEMBER 31,
2012

Revenues for the year ended December 31, 2013 were $434,657 compared to $805,312 for the year ended December 31, 2012, a decrease of $370,655 or 46.0%. The decrease in revenues was primarily due to one-time credits of $44,092 applied to our revenues as a result of the downsizing of one client causing a delay in the processing of their maintenance fees and due to the decrease in the sales of our GuardedIDŽ keyboard encryption (anti-keylogger) technology caused by our initiated litigation with one of our channel partners, WhiteSky, Inc. ("WhiteSky"), the delays in completing some of our pilots and in the delayed rollout of our new mobile security technologies. We have opportunities through our sales channel and current pilots that we expect, but cannot guarantee, will increase revenues throughout 2014, especially with the addition of our new mobile security products and new multi-marketing partners.

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, 2013 were $8,624 compared to $6,068 for the year ended December 31, 2012, an increase of $2,556. The increase in hardware revenues was primarily due to the increase in our sales of our one-time-password token key-fobs. Software, services and maintenance sales for the year ended December 31, 2013 were $426,033 compared to $799,244 for the year ended December 31, 2012, a decrease of $373,211. The decrease in software, services and maintenance revenues was primarily due to one-time credits applied to first quarter revenues and due to the decrease in the sales of our GuardedIDŽ keyboard encryption (anti-keylogger) technology caused by our initiated litigation with WhiteSky, the delays in completing some of our pilots and in the delayed rollout of our new mobile security technologies.

Cost of revenues for the year ended December 31, 2013 was $16,967 compared to $14,513 for the year ended December 31, 2012, an increase of $2,454, or 16.9%. The increase resulted primarily from the increase in the sales of our GuardedIDŽ keyboard encryption (anti-keylogger) technology. Cost of revenues as a percentage of total revenues for the year ended December 31, 2013 was 3.9% compared to 1.8% for the year ended December 31, 2012. The percentage increase resulted primarily from the overall decrease in our total revenues.

Gross profit for the year ended December 31, 2013 was $417,690 compared to $790,799 for the year ended December 31, 2012, a decrease of $373,109, or 47.2%. The decrease in gross profit was primarily due to the decrease in the sales of our GuardedIDŽ keyboard encryption (anti-keylogger) technology caused by our initiated litigation with WhiteSky, the delays in completing some of our pilots and in the delayed rollout of our new mobile security technologies.


Research and development expenses for the year ended December 31, 2013 were $340,600 compared to $339,300 for the year ended December 31, 2012, an immaterial increase of $1,300, or 0.4%. The salaries, benefits and overhead costs of personnel conducting research and development of our software products comprise research and development expenses, which primarily focused on our new mobile security products.

Selling, general and administrative ("SGA") expenses for the year ended December 31, 2013 were $1,310,594 compared to $1,096,033 for the year ended December 31, 2012, an increase of $214,561 or 19.6%. The increase was due primarily to the increase in legal fees we expensed in the fiscal year. 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, 2013 was $1,177,422 as compared to $521,335 for the year ended December 31, 2012, representing an increase in other expense of $656,087, or 126%. The increase was primarily due to an increase in interest expense.

Our net loss for the year ended December 31, 2013 was $2,410,926 compared to a net loss of $1,167,908 for the year ended December 31, 2012, an increase of $1,243,018, or 106%. The increase in our net loss was due primarily to the one-time credits applied to first quarter revenues, the decrease in the sales of our GuardedIDŽ keyboard encryption (anti-keylogger) technology relating to our initiated litigation with WhiteSky, the delays of completing some of our pilots and valuations and the delays of completing the rollouts of our new mobile security technologies.

Liquidity and Capital Resources

Our total current assets at December 31, 2013 were $78,300, which included cash of $7,559, as compared with $286,516 in total current assets at December 31, 2012, which included cash of $133,279. Additionally, we had a stockholders' deficit in the amount of $11,013,902 at December 31, 2013 compared to a stockholders' deficit of $10,484,588 at December 31, 2012. 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 $519,433, 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, 2013 primarily through the sale and issuance of debt in the aggregate amount of $689,250 and through recurring revenues from our ProtectIDŽ and GuardedIDŽ technologies, in the aggregate amount of $432,101. Management anticipates that we will continue to rely on equity and debt financing, at least during the first half of 2014, to finance our operations. While management believes that there will be a substantial percentage of our sales generated from our GuardedIDŽ and new mobile products 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 and project to be cash flow positive by the end of 2014. 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 241,872 shares at the year ended December 31, 2012 to 2,317,797 at the year ended December 31, 2013, as adjusted by our 1:1,500 reverse stock split, an increase of 858%. The increase in the number of common shares outstanding was due to common shares issued related to the issuance, conversion and settlement of debt or equity financing and consulting obligations, which, consequently, reduced our total outstanding debentures.

We have historically incurred losses and we anticipate, but cannot guarantee, that we will not generate any significant revenues until the second quarter of 2014 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 2014, or shortly thereafter, based on recently executed and announced contracts and potential contracts that we anticipate closing throughout 2014 in the financial industry, technology, insurance, enterprise, healthcare, government, legal, 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, 2013, $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, 2013, DART had no conversions.

The DART secured convertible debentures are fully matured. We remain 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, 2013, we issued unsecured convertible notes in an aggregate total of $667,000 to seven unrelated parties pursuant to the terms and conditions of term sheets executed with investor firms at various times during 2013. Additionally, during the year ended December 31, 2013, we settled and transferred $153,255 of unsecured convertible note balances and $361,814 of unsecured note balances, plus accrued interest of $70,598, to three unrelated parties in the form of twelve convertible notes for $555,492. Accrued interest of $31,175 was forgiven. Additionally, during the year ended December 31, 2013, eight investor firms converted $935,107 of convertible notes, $13,111 of accrued interest and $1,025 of legal fees into 2,074,990 unrestricted shares of our common stock, as adjusted by our 1:1,500 reverse stock split, pursuant to an exemption provided under Rule 144 of the Securities Act of 1933. The conversion prices ranged from $0.0405 per share to $2.61 per share, as adjusted by our 1:1,500 reverse stock split. Additionally, during the year ended December 31, 2013, we repaid a total of $3,500 of unsecured convertible notes to one unrelated party.

During the year ended December 31, 2013, we repaid a total of $8,220 of unsecured notes and $5,650 of accrued interest to two unrelated parties.

Summary of Funded Debt

As of December 31, 2013, our company's open unsecured promissory note balance was $1,992,500, listed as follows:

ˇ

$95,000 to an unrelated individual - current portion

ˇ

$210,000 to an unrelated company - current portion

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$1,550,000 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, 2013, 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, 2013, 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, 2013, our company's open convertible note balances were $1,140,467, net of discount on convertible notes of $528,477, 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

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$10,000 to an unrelated individual (12/05 unsecured debenture) - current portion

ˇ

$80,000 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

$103,387 to an unrelated company (01/12 unsecured debentures) - current portion

ˇ

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

ˇ

$17,000 to an unrelated company (05/13 unsecured debenture) - current portion

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$29,602 to two unrelated companies (06/13 unsecured debentures) - current portion

ˇ

$73,000 to two unrelated companies (07/13 unsecured debentures) - current portion

ˇ

$37,500 to an unrelated company (08/13 unsecured debenture) - current portion

ˇ

$129,250 to three unrelated companies (10/13 unsecured debentures) - current portion

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$65,443 to an unrelated company (11/13 unsecured debentures) - current portion

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$58,250 to two unrelated companies (12/13 unsecured debentures) - current portion

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$40,000 to an unrelated individual (12/13 unsecured debenture) - long term portion

As of December 31, 2013, 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

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$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 and preferred series B 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 $10,981,093 and $10,481,937 and deficits in stockholders' equity of $11,013,902 and $10,484,588 at December 31, 2013 and 2012, respectively, and net losses of $2,410,926 and $1,167,908 and net cash used in operating activities of $802,147 and $731,364 for each of the years ended December 31, 2013 and 2012, respectively. These factors raise substantial doubt about our ability to continue as a going concern.

Currently, management is attempting to increase revenues. In principle, we are focusing on domestic and international channel sales, where we are primarily selling through our well developed sales channel including 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.

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.


Our 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, website and 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 we 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.

Fair Value of Financial Instruments

We follow applicable accounting guidance for disclosures about fair value of our financial instruments. U.S. GAAP establishes a framework for measuring fair value, and requires disclosures about fair value measurements. To provide consistency and comparability in fair value measurements and related disclosures, U.S. GAAP establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair value hierarchy are described below:

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