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STRIKEFORCE TECHNOLOGIES INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) CAUTION REGARDING FORWARD-LOOKING INFORMATION
Included in this Report are "forward-looking" statements, within the meaning of
the Private Securities Litigation Reform Act of 1995 ("PSLRA") as well as
historical information. 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: demand for payment of our
convertible notes outstanding under which we are currently in default, our
inability to obtain adequate financing to repay the convertible notes, our
ability to continue financing our operations either through debt or equity
offerings, 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; prospective changes to financing options due to the Jobs Act of
2012, fluctuations and difficulty in forecasting operating results; changes in
business strategy or development plans; business disruptions; the ability to
attract and retain qualified personnel; the ability to protect technology; and
other factors referenced in this filing.
Consequently, all of 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 except as required by the federal
securities laws.
Unless otherwise noted, references in this Form 10-Q to "StrikeForce" "we",
"us", "our", "SFT", and the "Company" means StrikeForce Technologies, Inc., a
Wyoming corporation.
Background
StrikeForce Technologies, Inc. is a software development and services company
that offers a suite of integrated computer network security products using
proprietary technology. StrikeForce Technical Services Corporation was
incorporated in August 2001 under the laws of the State of New Jersey. On
September 3, 2004, the stockholders approved an amendment to the Certificate of
Incorporation to change the name to StrikeForce Technologies, Inc. On November
15, 2010, we redomiciled under the laws of the State of Wyoming. We initially
conducted operations as an integrator and reseller of computer hardware and
telecommunications equipment and services until December 2002. In December
2002, and formally memorialized in September 2003, we acquired certain
intellectual property rights and patent pending technology from NetLabs.com
including the rights to further develop and sell their principal technology. In
addition, certain officers of NetLabs.com joined our company as officers and
directors of our company. We subsequently changed our name to StrikeForce
Technologies, Inc., under which we have conducted our business since August
2003. Our strategy is to develop and market our suite of network security
products to the corporate, financial, healthcare, government, technology,
insurance, e-commerce and consumer sectors. We plan to grow our business
primarily through our globally expanding network and internally generated sales,
rather than by acquisitions. We have no subsidiaries and we conduct our
operations from our corporate office in Edison, New Jersey.
We own the exclusive right to license and develop various identification
protection software products to protect computer networks from unauthorized
access and to protect network owners and users from identity theft. We have
developed a suite of products partly based upon this exclusive license that is
targeted to the financial, e-commerce, corporate, government, healthcare,
insurance,, technology and consumer sectors.
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We began our operations in 2001 as a reseller and integrator of computer
hardware and iris biometric technology. From the time we started our operations
through the first half of 2003, we derived the majority of our revenues as an
integrator. In December 2002, upon the acquisition of the licensing rights to
certain intellectual property and patent pending technology from NetLabs.com, we
shifted the focus of our business to developing and marketing our own suite of
security products. Based upon the acquired licensing rights and additional
research and development, we have developed various identification protection
software products to protect computer networks from unauthorized access and to
protect network owners and users from identity theft. In November 2010, we
received notice that the United States Patent Office ("USTPO") had issued an
official Notice of Allowance for the patent application for the technology
relating to our ProtectID® product, titled "Multi-Channel Device Utilizing a
Centralized Out-of-Band Authentication System". In January 2011, we received
notice that the United States Patent Office issued the Company Patent No.
7,870,599. The "Out-of-Band" Patent went through a USTPO Re-Examination process
starting on August 16, 2011 and concluded on December 27, 2011, with all of our
patent claims remaining intact and seven additional Company patent claims being
added. In 2011, we submitted an additional continuation patent on the
"Out-of-Band" Patent, with another sixty-six additional Company claims now
pending. The technology we developed and use in our GuardedID® product is the
subject of a pending patent application. In December 2011, we executed an
exclusive agreement with an agent to represent us in enforcing the "Out-of-Band"
Patent. We terminated that exclusive agreement in September 2012. We shall be
enforcing our patent rights and our management has taken the initial steps
concerning such enforcement as recommended by our patent attorneys.
We completed the development of our ProtectID® platform at the end of June 2006
and we completed the core development of our keyboard encryption and
anti-keylogger product, GuardedID®, in December 2006, with continuous
enhancements, which is currently being sold and distributed. We seek to locate
customers in a variety of ways. These include contracts primarily with value
added resellers and distributors (both inside the United States and
internationally), direct sales calls initiated by our internal staff,
exhibitions at security and technology trade shows, through the media, through
consulting agreements, and through our own and agent relationships. Our sales
generate revenue either as an Original Equipment Manufacturer ("OEM") model,
through a Hosting/License agreement, bundled with other company's products or
through direct purchase by customers. We price our products for cloud consumer
transactions based on the number of transactions in which our software products
are utilized. We also price our products for business applications based on the
number of users. We believe that these pricing models provide our company with
one-time, monthly, quarterly and yearly recurring revenues. We are also
generating revenues from annual maintenance contracts, renewal fees and expect,
but cannot guarantee, an increase in revenues based upon the execution of
various agreements that we have recently closed and are being implemented.
In October 2010, we executed an agreement to pursue a funding opportunity
through a consulting company that, through an executed Memorandum of
Understanding, purports to provide funding to us over time, necessary to sustain
the Company while current contracts for business revenues develop and increase
to a sustainable level. Other multiple alternative funding options had not
progressed to viable proposals or did not close because of their expressed high
risk level associated with our secured lenders, large debt positions and low
revenues. A requirement of this funding source, utilizing an equity funding
approach, required us to re-domicile in the State of Wyoming in order for this
project to move forward in a necessary timeframe and at a necessary low cost to
the Company. In November 2010, we received the corporate registration, amended
articles of incorporation and by-laws as a result of our re-domiciling in the
State of Wyoming.
We generated all of our revenues of $642,596, for the nine months ended
September 30, 2012, compared to $286,695 for the nine months ended September 30,
2011, from the sales of our security products. We market our products globally
to financial service firms, healthcare related companies, e-commerce companies,
government agencies, the enterprise market in general and with virtual private
network companies, as well as technology service companies that service all the
above markets. We seek such sales through our own direct efforts and primarily
through distributors, resellers and third party agents internationally. We are
also seeking to license the technology as original equipment with computer
hardware and software manufacturers. We are engaged in production installations
and pilot projects with various distributors, resellers and direct customers, as
well as having reached additional reseller agreements with strategic vendors
internationally, including South America, Europe, Asia, Africa and the Pacific
Rim. Our GuardedID® product is also being sold directly to consumers, primarily
through the Internet as well as distributors, resellers, third party agents and
potential OEM agreements by bundling GuardedID® with their products (providing a
value-add to their own products and offerings).
We have incurred substantial losses since our inception. Our management believes
that our products provide a cost-effective, more secure and technologically
competitive solution to address the problems of network security and identity
theft in general. However, there can be no assurance that our products will
continue to gain increased acceptance and continue to grow in the commercial
marketplace or that one of our competitors will not introduce technically
superior products.
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 7 employees.
Our Company's website is www.strikeforcetech.com. We are not including the
information contained in our website as part of, or incorporating it by
reference into, this Report on Form 10-Q.
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Business Model
We are focusing primarily on developing sales through "channel" relationships in
which our products are offered by other manufacturers, distributors, value-added
resellers and agents, internationally. In 2010, we added and publicly announced
a major channel distributor who provides a presence for us in London, England,
representing us in the European Union. We also sell our suite of security
products directly from our Edison, NJ office, which also augments our channel
partner relationships. It is our strategy that these "channel" relationships
will provide the greater percentage of our revenues ongoing, as was the case in
2011. Examples of the channel relationships that we are seeking include already
established original equipment manufacturer ("OEM") and bundled relationships
with other security technology and software providers that would integrate or
bundle the enhanced security capabilities of ProtectID® and or GuardedID® into
their own product lines, thereby providing greater value to their clients. These
would include providers of networking software and manufacturers of computer and
telecommunications hardware and software that provide managed services, as well
as all markets interested in increasing the value of their products and
packages, such as financial services software, anti-virus, government
integrators and identity theft product companies.
Our primary target markets include financial services such as banks, insurance
companies, e-commerce based services companies, telecommunications and cellular
carriers, technology software companies, healthcare related companies,
government agencies and consumers. For the near term, we are focusing our
concentration on the identity theft and data breach strategic problem areas,
such as where compliance with government regulations are key and stolen
passwords are used to acquire private information illegally. In the fourth
quarter of 2011, we executed a multi-year contract with a major US financial
lender who utilizes our ProtectID® solution for its over 12,000,000 employees,
administrators and consumers. The contract became revenue producing in the
fourth quarter of 2011. In the first quarter of 2012, we executed a multi-year
contract with a healthcare facility who utilizes our ProtectID® solution for its
employees and administrators. The contract became revenue producing in the first
quarter of 2012. In addition, we signed a major contract during the second
quarter of 2012 with a branded digital signature service company with clients in
financial services and technology services for the government, that is required
to include two-factor authentication with a bias on Out-of-Band Authentication.
This implementation is planned, but not guaranteed, to be revenue producing in
2012 with increasing recurring revenues.
Because we are now experiencing a continual recurring 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.
We seek to generate revenue through fees for ProtectID® based on consumer usage
in the financial and healthcare services markets, as well as enterprises in
general, through our Cloud Service, plus one-time and annual per person fees in
the enterprise markets which often are for local installations of our product,
and set-up and recurring transaction fees when the product is accessed in our
Cloud Service, along with yearly maintenance fees, and other one-time and
recurring fees. We also intend to generate revenues through sales of our
GuardedID® product. GuardedID® pricing is for an annual license and we discount
for volume purchases. GuardedID® pricing models, especially when bundling
through OEM contracts, include monthly and quarterly recurring revenues. As more
agreements are reached by our distributors, we are experiencing monthly
increasing sales growth, through the execution of GuardedID® bundled OEM
agreements. We also provide our clients a choice of operating our ProtectID®
software internally by licensing it or through our hosted Cloud Service or a
hybrid that some clients have implemented. GuardedID® requires a download on
each and every computer it protects, whether for employees or consumers. We have
three GuardedID® products, (i) a standard version which protects browser data
entry only, (ii) a premium version which protects almost all the applications
running under Microsoft Windows on the desktop, including Microsoft Office Suite
and (iii) an Enterprise version which provides the Enterprise administrative
rights and the use of Microsoft's Enterprise tools for the product's deployment.
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 and now being enforced as of
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.
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Marketing
Our multi-channel marketing strategy includes:
1. Direct sales to enterprise and commercial customers. In this effort, we are
purchasing marketing programs, a new strategy for us, and we are looking at
other inside sales alternatives in order to respond aggressively to inquiries
relating to our products.
2. The global addition of resellers, agents & distributors (our strategic sales
channel) who distribute and resell our products and services to enterprise and
commercial customers (technology and software product distributors, systems
integrators, managed service companies, other security technology and software
vendors, telecom companies, identity theft related product companies, etc.).
3. Application Service Provider (ASP) Partners: Our certified SAS 70 third party
service provides a hosting platform that facilitates faster implementations at
competitive prices for our Cloud Service option.
4. Original Equipment Manufacturers (OEM): SFT products are sold to other
security technology vendors that integrate ProtectID® and GuardedID® into their
products (bundling) and services providing for monthly increasing recurring
revenues.
5. Internet sites that sell GuardedID® to consumers and small enterprises, such
as affiliates.
Our hosting service provider is Host My Site and we have been under contract
with them since December 2007 when we executed an agreement with a nationwide
premier data center and co-location services provider who functions as an
Application Service Provider for our ProtectID product, which requires a
secondary server used for the "Out-of-Band" two-factor authentication
technology. We believe that this relationship improves the implementation time,
reduces the cost and training requirements, and allows for ease of scalability
on an as needed basis. The hosting site is also SAS 70 (Statement on Auditing
Standards (SAS) No. 70,) certified, which is critical to providing a secure
compliant service that is required by most of our clients. Our agreement with
the services provider was for a one-year (1) term, initially ending in December
2008 and renewing automatically for one-year (1) terms, and is still in effect.
The relationship can be terminated by either party on sixty days written notice.
The hosting service is compensated by our Company based on a flat monthly fee
per the terms of the contract that can increase as we require additional
services.
Intellectual Property
In December 2011, we executed an exclusive agreement with an agent to represent
us in enforcing the "Out-of-Band" patent. We terminated that exclusive agreement
in September 2012. We shall be enforcing our patent rights and our management
has taken the initial steps concerning such enforcement as recommended by our
patent attorneys.
Our firewall product, which was in the research and design phase, is no longer
being developed; therefore, the pending provisional patent application was
allowed to expire. A fourth patent application relating to our ProtectID®
product was combined into the first ProtectID® patent application and the fourth
application was allowed to lapse.
We have three trademarks that have been approved and registered: ProtectID®,
GuardedID® and CryptoColor®. We have two trademarks that are in the application
process: ID Genie™ and MobileTrust™. A portion of our software is licensed from
third parties and the remainder is developed by our own team of developers while
leveraging some limited external consultant expertise as necessitated. We rely
upon confidentiality agreements signed by our employees, consultants and third
parties to protect the intellectual property rights.
We license technology from third parties, including software that is integrated
with internally developed software and used in our products to perform key
functions. We anticipate that we will continue to license technology from third
parties in the future. Although we are not substantially dependent on any
individual licensed technology, some of the software that we license from third
parties could be difficult for us to replace. The effective implementation of
our products depends upon the successful operation of third-party licensed
products in conjunction with our suite of products, and therefore any undetected
errors in these licensed products could create delays in the implementation of
our products, impair the functionality of our products, delay new product
introductions, damage our reputation, and/or cause us to provide substitute
products.
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Business Strategy
We expect to incur significant additional costs before we become profitable. We
anticipate that most of the costs that we incur will be related to salaries,
professional fees, marketing, sales and research & design. We anticipate that we
will increase our sales force by approximately one full-time employee and our
technology staff by approximately two employees during the next twelve months.
At the present time, our monthly cash expenditure burn rate is approximately
$110,000 per month. We expect that our monthly cash usage for operations will
increase in the future due to contracted and anticipated increased volumes and
the preceding additions. We anticipate that the area in which we will experience
the greatest increase in operating expenses is in marketing, selling,
advertising, payroll related to sales and product support, technology and global
strategic business consulting subject to cash availability.
Our primary strategy over the next 12 months is to focus on the growth and
support of our channel partners, including distributors, resellers and original
equipment manufacturers (OEMs). Secondly, our internal sales team will target
potential direct sales in industries that management believes provides the
greatest potential for sales. These include small to medium sized financial
institutions, government agencies, e-commerce, healthcare and enterprise
businesses. We are also executing agreements with strategic resellers and
distributors for marketing, selling and supporting our products internationally.
It is our intention to ultimately utilize distributors, resellers and agents to
generate the bulk of our sales internationally, realizing that this strategy
will take time to nurture. There can be no assurance, however, that we will
succeed in implementing our sales strategy. Although management believes that
there is an increasingly strong market for our products, we have not generated
substantial revenue from the sale of our principal products and there is no
assurance we can secure a market sufficient to permit us to achieve
profitability in the next twelve months.
Competition
The software development and services market is characterized by innovation and
competition. There are several well-established companies within this market
that offer network security systems and newer companies with emerging
technologies. We believe that our patented "Out-of-Band" two-factor identity
authentication product is an innovative, secure, adaptable, competitively
priced, integrated network authentication system. The main features of
ProtectID® include: an open architecture "Out-of-Band" platform for user
authentication; operating system independence; biometric layering; mobile
authentication; secure website logon; Virtual Private Network ("VPN") access;
domain authentication and multi-level authentication. Unlike other techniques
for increased network security, ProtectID® does not rely on a specific
authentication device or method (e.g., phone, tokens, smart cards, digital
certificates or biometrics, such as a retinal or fingerprint scan). Rather
ProtectID® has been developed as an "open platform" that incorporates many
authentication devices and methods. For example, once a user has been identified
to a computer network, a system deploying our ProtectID® authentication system
permits the "Out-of-Band" authentication of that user by a telephone, iPhone,
iPad, Blackberry, PDA, email, hard token, SSL client software, a biometric
device such as a fingerprint scan, or others, before that user is permitted to
access the network. By using "Out-of-Band" authentication methods, management
believes that ProtectID® provides a competitive product for customers with
security requirements greater than typical name and password schemes for virtual
private networks and computer systems with multiple users at remote locations,
as examples. We also believe that our keystroke encryption product, GuardedID®,
offers an additional competitive edge for network security and e-commerce
applications that should provide greater levels of security and the ability to
evolve over time based on newer technologies when made available. Both products
have limited competition based on our product's ability to protect individual
identities and computers/devices.
Although we believe that our suite of products offer competitive advantages,
there is no assurance that any of these products will gain acceptance in the
marketplace. Our competitors include established software and hardware companies
that are likely to be better financed and to have established sales channels.
Due to the high level of innovation in the software development industry, it is
also possible that a competitor will introduce a product that provides a higher
level of security than the ProtectID® products or which can be offered at prices
that are more advantageous to the customer.
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Results of Operations
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2011
Our revenues for the three months ended September 30, 2012 were $289,515
compared to $137,535 for the three months ended September 30, 2011, an increase
of $151,980 or 111%. The increase in revenues was primarily due to the increase
in the sales of our GuardedID® keyboard encryption (anti-keylogger) technology
and our ProtectID® ("Out-of-Band") technology.
Our revenues generated consisted of hardware and software sales, services and
maintenance sales, revenues from sign on fees, and recurring transaction
revenues. Hardware sales for the three months ended September 30, 2012 were $0
compared to $5,211 for the three months ended September 30, 2011, a decrease of
$5,211. The decrease in hardware revenues was primarily due to the decrease in
the sales of our one-time-password token key-fobs. Software, services and
maintenance sales for the three months ended September 30, 2012 were $289,515
compared to $132,324 for the three months ended September 30, 2011, an increase
of $157,191. The increase in software, services and maintenance revenues was
primarily due to the increase in the sales of our GuardedID® keyboard encryption
(anti-keylogger) technology and our ProtectID® ("Out-of-Band") technology.
Our cost of revenues for the three months ended September 30, 2012 was $1,029
compared to $5,179 for the three months ended September 30, 2011, a decrease of
$4,150, or 80.1%. 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 three months ended September 30, 2012 was 0.36% compared to
3.8% for the three months ended September 30, 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.
Our gross profit for the three months ended September 30, 2012 was $288,486
compared to $132,356 for the three months ended September 30, 2011, an increase
of $155,950, or 118%. The increase in gross profit was primarily due to the
increase in the sales of our GuardedID® keyboard encryption (anti-keylogger)
technology and our ProtectID® ("Out-of-Band") technology.
Our research and development expenses for the three months ended September 30,
2012 were $78,000 compared to $97,500 for the three months ended September 30,
2011, a decrease of $19,500, or 20.0%. 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.
Our selling, general and administrative ("SGA") expenses for the three months
ended September 30, 2012 were $258,578 compared to $1,065,892 for the three
months ended September 30, 2011, a decrease of $807,314 or 75.7%. The decrease
was due primarily to expenses in stock based compensation through the issuance
of employee and non-employee stock options in the third fiscal quarter of 2011
in the amount of $823,875. 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.
Our other expense for the three months ended September 30, 2012 was $214,010 as
compared to $100,799 for the three months ended September 30, 2011, representing
an increase in other expense of $113,211, or 112%. 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 three months ended September 30, 2012 was $262,102 compared
to a net loss of $1,131,835 for the three months ended September 30, 2011, a
decrease of $869,733, or 76.8%. The decrease in our net loss was due primarily
to expenses in stock based compensation through the issuance of employee and
non-employee stock options in the third fiscal quarter of 2011, in addition to
increased gross profit in the third fiscal quarter of 2012.
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2011
Our revenues for the nine months ended September 30, 2012 were $642,596 compared
to $286,695 for the nine months ended September 30, 2011, an increase of
$355,901 or 124%. The increase in revenues was primarily due to the increase in
the sales of our GuardedID® keyboard encryption (anti-keylogger) technology and
our ProtectID® ("Out-of-Band") technology.
Our revenues generated consisted of hardware and software sales, services and
maintenance sales, revenues from sign on fees, and recurring transaction
revenues. Hardware sales for the nine months ended September 30, 2012 were
$6,067 compared to $10,305 for the nine months ended September 30, 2011, a
decrease of $4,238. The decrease in hardware revenues was primarily due to the
decrease in the sales of our one-time-password token key-fobs. Software,
services and maintenance sales for the nine months ended September 30, 2012 were
$636,529 compared to $144,066 for the nine months ended September 30, 2011, an
increase of $492,463. The increase in software, services and maintenance
revenues was primarily due to the increase in the sales of our GuardedID®
keyboard encryption (anti-keylogger) technology and our ProtectID®
("Out-of-Band") technology.
Our cost of revenues for the nine months ended September 30, 2012 was $13,050
compared to $19,038 for the nine months ended September 30, 2011, a decrease of
$5,988, or 3.2%. 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 nine months ended September 30, 2012 was 2.0% compared to 6.6%
for the nine months ended September 30, 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.
Our gross profit for the nine months ended September 30, 2012 was $629,546
compared to $267,657 for the nine months ended September 30, 2011, an increase
of $361,889, or 135%. The increase in gross profit was primarily due to the
increase in the sales of our GuardedID® keyboard encryption (anti-keylogger)
technology and our ProtectID® ("Out-of-Band") technology.
Our research and development expenses for the nine months ended September 30,
2012 were $253,500 compared to $260,669 for the nine months ended September 30,
2011, a decrease of $7,169, or 2.8%. 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.
Our selling, general and administrative ("SGA") expenses for the nine months
ended September 30, 2012 were $855,541 compared to $4,297,635 for the nine
months ended September 30, 2011, a decrease of $3,442,094 or 80.1%. 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 the first,
second and third fiscal quarters of 2011 in the amount of $1,960,875. 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.
Our other expense for the nine months ended September 30, 2012 was $415,522 as
compared to $396,295 for the nine months ended September 30, 2011, representing
an increase in other expense of $19,227, or 4.9%. 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 nine months ended September 30, 2012 was $895,017 compared
to a net loss of $4,686,942 for the nine months ended September 30, 2011, a
decrease of $3,791,925, or 80.9%. 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.
40
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Liquidity and Capital Resources
Our total current assets at September 30, 2012 were $377,100, which included
cash of $228,884, 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 $10,481,556 at September 30, 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 $568,867, which will only be realized on the
conversion of the derivatives, or settlement of the debentures.
We financed our operations during the nine months ended September 30, 2012
primarily through the sale and issuance of debt, in the amount of $353,000,
through the sale of our common stock, in the amount of $430,000, and through
recurring revenues from our ProtectID® hosting platform and license fees, and
sales of our GuardedID® keystroke encryption technology, in the amount of
$642,596. 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 GuardedID® product and there are an increasing number of
customers for our ProtectID® 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 294,253,293 at the nine months ended September
30, 2012, an increase of 32.9%. 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 debt.
We have historically incurred losses and we anticipate that we will not generate
any significant revenues until the fourth quarter of 2012 or later. Our
operations presently require funding of approximately $110,000 per month.
Management believes we will be cash flow positive by the end of 2012, or shortly
thereafter, based on recently executed and announced contracts and potential
contracts that we anticipate closing throughout 2012 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 SECURED CONVERTIBLE DEBENTURES
At September 30, 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 nine months ended September 30, 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.
41
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During the nine months ended September 30, 2012, we issued unsecured convertible
notes in an aggregate total of $353,000 to two unrelated parties per the terms
of a term sheet executed with investor firms in November 2011, April 2012 and
July 2012. Additionally, during the nine months ended September 30, 2012, an
investor firm converted $40,000 of the convertible note dated December 5, 2011
into 10,243,847 unrestricted shares of our common stock pursuant to an exemption
provided under Regulation D of the Securities Act of 1933, as discussed below.
The conversion price was $0.005622 per share for 2,668,089 shares and $0.0033
per share for 7,575,758 shares. Since the unsecured convertible note arose
greater than six months and, as no additional consideration was paid in the
notice of conversion by the investor firm, the conversion was tacked back to the
original date of the issuance of the note as the holding period under SEC Rule
144(d)(3)(ii) resulting in the issuance of unrestricted shares. Additionally,
during the nine months ended September 30, 2012, we repaid a total of $500 of
unsecured convertible notes to one unrelated party.
During the nine months ended September 30, 2012, we repaid a total of $10,401 of
unsecured notes to one unrelated party 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 September 30, 2012, our Company's open unsecured promissory note balance
was $2,374,765, net of discount on promissory notes of $1,598, listed as
follows:
·
$18,750 to an unrelated individual - current portion
·
$275,000 to an unrelated individual - current portion
·
$85,113 to an unrelated company - current portion
·
$210,000 to an unrelated company - current portion
·
$1,650,000 to twenty unrelated individuals through term sheet with the
StrikeForce Investor Group - current portion
·
$137,500 to an unrelated company - current portion
As of September 30, 2012, our Company's open unsecured related party promissory
note balances were $722,638, listed as follows:
·
$722,638 to our CEO - current portion
As of September 30, 2012, our Company's open convertible secured note balances
were $542,588, listed as follows:
·
$542,588 to DART (custodian for Citco Global and as assigned in 04/09 by YA
Global and Highgate House Funds, Ltd.)
As of September 30, 2012 our Company's open convertible note balances were
$1,308,942, net of discount on convertible notes of $272,825, listed as follows:
·
$235,000 to an unrelated company (03/05 unsecured debenture) - current portion
·
$7,000 to an unrelated company (06/05 unsecured debenture) - current portion
·
$10,000 to an unrelated individual (06/05 unsecured debenture) - current portion
·
$40,000 to three unrelated individuals (07/05 unsecured debentures) - current
portion
·
$48,255 to an unrelated individual (01/06 unsecured debenture) - current portion
·
$200,000 to an unrelated individual (06/06 unsecured debenture) - current
portion
·
$150,000 to an unrelated individual (09/06 unsecured debenture) - current
portion
·
$3,512 to an unrelated individual (02/07 unsecured debenture) - current portion
·
$100,000 to an unrelated individual (05/07 unsecured debenture) - current
portion
·
$100,000 to an unrelated individual (06/07 unsecured debentures) - current
portion
·
$100,000 to an unrelated individual (07/07 unsecured debenture) - current
portion
·
$120,000 to three unrelated individuals (08/07 unsecured debentures) - current
portion
·
$50,000 to two unrelated individuals (12/09 unsecured debentures) - current
portion
·
$30,000 to an unrelated company (03/10 unsecured debenture) - long term portion
·
$35,000 to un unrelated company (12/11 unsecured debenture) - current portion
·
$150,000 to un unrelated company (01/12 unsecured debenture) - current portion
·
$75,000 to un unrelated company (03/12 unsecured debenture) - current portion
·
$53,000 to un unrelated company (04/12 unsecured debenture) - current portion
·
$32,500 to un unrelated company (05/12 unsecured debenture) - current portion
·
$42,500 to un unrelated company (07/12 unsecured debenture) - current portion
42
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As of September 30, 2012 our Company's open convertible note balances - related
parties were $360,500, listed as follows:
·
$268,000 to our CEO - current portion
·
$57,500 to our VP of Technical Services - current portion
·
$30,000 to a relative of our CTO & one of our Software Developers - current
portion
·
$5,000 to a relative of our former CFO - 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, result of
operations, liquidity or capital expenditures.
Going Concern
The report of our independent registered public accounting firm on our annual
financial statements 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 the
Company 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 $10,477,624 and $10,177,078 and deficits in stockholders' equity
of $10,481,556 and $10,262,227 at September 30, 2012 and December 31, 2011,
respectively, and net losses of $895,017 and $4,686,942 and net cash used in
operating activities of $502,004 and $639,681 for each of the nine-month periods
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 redirecting our sales
focus from direct sales to 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.
43
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Critical Accounting Policies
See Notes to the Financial Statements.
Recently Issued Accounting Pronouncements
Refer to Note 2 in the accompanying interim 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,
Registration Statement on Form S-1 and Current Reports on Form 8-K that we file
from time to time. You may obtain copies of these reports directly from us or
from the SEC at the SEC's Public Reference Room at 100 F. Street, N.E.
Washington, D.C. 20549, and you may obtain information about obtaining access to
the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains information for electronic filers at its website http://www.sec.gov.
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