Zerify, Inc. - Quarter Report: 2016 September (Form 10-Q)

UNITED STATES

SECURITIES EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2016

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

For the transition period from ___________ to ___________

1090 King Georges Post Road, Suite 603

Edison, NJ08837

(Address of Principal Executive Offices)

(732) 661-9641

(Issuer’s telephone number)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common stock, $0.0001 par value

Title of Class

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such a shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act. Yes ¨ No x 

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

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

Transitional Small Business Disclosure Format Yes ¨ No x

Documents Incorporated By Reference

None

STRIKEFORCE TECHNOLOGIES, INC.

INDEX TO FORM 10-Q FILING

SEPTEMBER 30, 2016

TABLE OF CONTENTS

PART I

ITEM 1. FINANCIAL STATEMENTS AND NOTES TO INTERIM FINANCIAL STATEMENTS

See accompanying notes to the condensed financial statements

See accompanying notes to the condensed financial statements 

See accompanying notes to the condensed financial statements 

See accompanying notes to the condensed financial statements 

StrikeForce Technologies, Inc.

Three Months and Nine Months Ended September 30, 2016 and 2015

Notes to the Condensed Financial Statements

(Unaudited)

Note 1 - Organization and Summary of Significant Accounting Policies

StrikeForce Technical Services Corporation was incorporated in August 2001 under the laws of the State of New Jersey. On September 3, 2004, the Company changed its name to StrikeForce Technologies, Inc. (the “Company”). On November 15, 2010, the Company was re-domiciled under the laws of the State of Wyoming. The Company’s operations are based in Edison, New Jersey.

The Company is a software development and services company that offers a suite of integrated computer network security products using proprietary technology. In 2003, the Company acquired certain intellectual property rights and patent pending technology from NetLabs.com, Inc. (“NetLabs”) including the rights to further develop and sell their principal technology. In addition, certain officers of NetLabs joined our company as officers and directors of the Company. The Company’s ongoing strategy is developing and marketing its suite of network security products to the corporate, financial, healthcare, legal, government, technology, insurance, e-commerce and consumer sectors.

Liquidity and Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, for the nine months ended September 30, 2016, the Company incurred a loss from operations of $1,416,296 and at September 30, 2016, the Company had a stockholders’ deficit of $7,621,534. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2015 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

The Company’s ability to continue as a going concern is dependent upon its ability to continue to implement its business plan. Currently, management is attempting to increase revenues and improve gross margins by redirecting its sales focus from direct sales to domestic and international sales channels, primarily selling through a channel of distributors, value added resellers, strategic partners and original equipment manufacturers. While the Company believes in the viability of its strategy to increase revenues, there can be no assurances to that effect. The Company’s ability to continue as a going concern is dependent upon its ability to continually increase its customer base and realize increased revenues from recently signed contracts. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, if needed, it may contain undue restrictions on its operations, in the case of debt financing, or cause substantial dilution for its stock holders, in the case of equity financing.

Basis of Presentation-Unaudited Interim Financial Information

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the rules and regulations of the United States Securities and Exchange Commission to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. The results of operations for the nine months ended September 30, 2016 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2016. These financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2015 and notes thereto contained in the Annual Report on Form 10-K of the Company as filed with the United States Securities and Exchange Commission (“SEC”) on April 14, 2016.

Reverse Stock Splits

In March 2014, the Company effected a 1:1,500 reverse stock split of the Company's issued and outstanding shares of common stock. 

In February 2015, the Company effected a 1:650 reverse stock split of the Company's issued and outstanding shares of common stock.

In August 2015, the Company effected a 1:1,000 reverse stock split of the Company's issued and outstanding shares of common stock.

All share and per share amounts have been adjusted, on a retroactive basis, to reflect the reverse stock splits adopted by the Company as if the reverses stock splits had occurred at the beginning of the earliest period presented.

Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to accounting for potential liabilities and the assumptions made in valuing stock instruments issued for services and derivative liabilities. Actual results could differ from those estimates.

Revenue

The Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer and there are no significant uncertainties surrounding acceptance by the customer, (iii) the sales price is fixed and determinable, and (iv) collectability is reasonably assured. When the Company recognizes revenue, no provisions are made for returns because, historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.

Revenue from hardware sales is recognized when the product is shipped to the customer and there are either no unfulfilled obligations by the Company, or any obligations that will not affect the customer's final acceptance of the arrangement. All costs of these obligations are accrued when the corresponding revenue is recognized.

Revenue from time and service contracts is recognized as the services are provided. Revenue from delivered elements of one-time charge licensed software is recognized at the inception of the license term, provided we have vendor-specific objective evidence of the fair value of each delivered element. Revenue is deferred for undelivered elements. The Company recognizes revenue from the sale of software licenses when the four criteria discussed above are met. If the Company determines that collection of a fee is not reasonably assured, it defers the fee and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. Revenue from monthly software licenses is recognized on a subscription basis.

The Company offers an Application Service Provider (ASP) hosted cloud service whereby customer usage transactions are invoiced monthly on a cost per transaction basis.

Stock Compensation

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (FASB) whereas the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Options granted to non-employees are revalued each reporting period to determine the amount to be recorded as an expense in the respective period. As the options vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current value on the date of vesting. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

The fair value of the Company’s stock option and warrant grants are estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.

Derivative Financial Instruments

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

To determine the number of authorized but unissued shares available to satisfy outstanding convertible securities, the Company uses a sequencing method to prioritize its convertible securities as prescribed by ASC 815-40-35. At each reporting date, the Company reviews its convertible securities to determine that their classification is appropriate.

Fair Value of Financial Instruments

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

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

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

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

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

As of September 30, 2016 and December 31, 2015, the Company’s balance sheets included the fair value of derivative liabilities of $256,654 and $989,019, respectively, which were based on Level 2 measurements. 

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

Income (loss) per Share

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

For the three months ended September 30, 2016 and 2015, the dilutive impact of outstanding stock options for 197,000,001 shares and 1,000,001 shares, respectively; outstanding warrants for 0 shares and 30 shares, respectively; preferred stock that can convert into 14,097,838 shares and 32,875,063 shares of our common stock, respectively, and notes payable that can convert into 25 shares and 432,232 shares of our common stock, respectively, have been excluded because their impact on the loss per share is anti-dilutive.

For the nine months ended September 30, 2015, the dilutive impact of outstanding stock options for 1,000,001 shares, outstanding warrants for 30 shares, preferred stock that can convert into 32,875,063 shares of our common stock and notes payable that can convert into 432,232 shares of our common stock have been excluded because their impact on the loss per share is anti-dilutive.

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

Significant Concentrations

For the interim period ended September 30, 2016, sales to three customers comprised 45%, 29% and 12% of revenues, respectively. For the interim period ended September 30, 2015, sales to one customer comprised 64% of revenues. At September 30, 2016, two customers comprised 65%, and 16% of accounts receivable, respectively.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the expected impact that the standard could have on its financial statements and related disclosures.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statement presentation or disclosures.

Note 2 - Convertible Notes Payable

Convertible notes payable consisted of the following:

At September 30, 2016 and December 31, 2015, accrued interest due for all convertible notes was $967,776 and $1,230,507, respectively, and is included in accrued interest in the accompanying balance sheets. Interest expense for all convertible notes payable for the interim periods ended September 30, 2016 and 2015 was $73,598 and $161,756, respectively.

Note 3 - Convertible Notes Payable - Related Parties

Convertible notes payable - related parties consisted of twelve unsecured convertible notes payable. Six notes totaling $268,000 are due to the Company’s Chief Executive Officer, at a compounded interest rate of 8% per annum; two notes totaling $57,000 are due to the Company’s VP of Technology, interest at prime plus 2% and prime plus 4% per annum; and four notes totaling $30,000 are due to the spouse of the Company’s Chief Technology Officer at a compounded interest rate of 8% per annum. All of the notes are convertible at a fixed conversion price of $9,750,000,000 per share, as defined in the agreements, and have extended due dates of December 31, 2016. At September 30, 2016 and December 31, 2015, the balance of the outstanding convertible notes payable - related parties was $355,500, respectively.

At December 31, 2015, accrued interest due for the convertible notes - related parties was $391,001. During the interim period ended September 30, 2016, interest of $41,289 was accrued and at September 30, 2016, accrued interest due on convertible notes payable - related parties was $432,290.

Note 4 - Notes Payable

Notes payable consisted of the following:

At September 30, 2016 and December 31, 2015, accrued interest due for all notes payable above was $1,874,736 and $1,731,874, respectively, and is included in accrued interest in the accompanying balance sheets. Interest expense for notes payable for the interim periods ended September 30, 2016 and 2015 was $169,276 and $143,943, respectively.

Note 5 - Notes Payable - Related Party

Notes payable- related party consist of eighteen unsecured notes payable to the Company’s Chief Executive Officer ranging in interest rates of 0% per annum to 10% per annum. The notes have extended due dates of December 31, 2016, with the exception of one note for $19,875 due in January 2017, and all are shown as current liabilities. The balance of the outstanding notes payable - related party was $742,513 and $742,513 as of September 30, 2016 and December 31, 2015, respectively.

At September 30, 2016 and December 31, 2015, accrued interest due for the notes - related party was $590,751 and $548,653, respectively, and is included in accrued interest in the accompanying balance sheets. Interest expense for notes payable - related parties for the interim periods ended September 30, 2016 and 2015 was $42,098 and $41,945, respectively.

Note 6 - Derivative Financial Instruments

Under authoritative guidance issued by the FASB, instruments which do not have fixed settlement provisions, are deemed to be derivative instruments. The conversion feature of certain of the Company’s convertible notes payable (see Note 2) did not have fixed settlement provisions because the ultimate determination of shares to be issued could exceed current available authorized shares.

In accordance with the FASB authoritative guidance, the conversion feature of the financial instruments was separated from the host contract and recognized as a derivative instrument. The conversion feature of the financial instruments has been characterized as a derivative liability and was re-measured at the end of every reporting period with the change in value reported in the statement of operations.

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

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected volatility is based on the historical volatility of a group of comparable public companies. The expected life of the conversion feature of the notes was based on the remaining terms of the related notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.

At December 31, 2015, the balance of the derivative liabilities was $989,019. During the nine months ended September 30, 2016, convertible notes and accrued interest totaling $1,087,707 were converted into shares of common stock or paid off in cash, and the Company recorded a gain of $635,600 related to the extinguishment of the corresponding derivative liabilities. Also during the nine months ended September 30, 2016, the Company recorded a change in fair value of derivatives of $96,765. At September 30, 2016, the balance of the derivative liabilities was $256,654.

Note 7 - Stockholders’ Deficit

Common Stock

During the nine month period ended September 30, 2016, the Company issued an aggregate of 2,295,964,462 shares of its common stock as follows:

Capital Contribution

In January 2016, the Company’s officers forgave an aggregate total of $762,275 of accrued payroll due to them from the Company. The Company recorded the forgiveness of accrued payroll as a capital contribution.

Note 8 - Warrants

The table below summarizes the Company’s warrant activities at September 30, 2016:

In April 2016, the Company executed a settlement agreement with an investor relating to outstanding warrant agreements issued in conjunction with convertible notes that were repaid by the Company in January 2016. Per the terms of the settlement, the investor processed a cashless exercise of 30 warrant shares into 125,000 shares of the Company’s common stock, valued at $150, and recorded as financing expense. The investor received an additional 154,875,000 shares of the Company’s common stock as modification consideration, valued at $185,850, and recorded in general and administrative expenses on the accompanying statement of operations.

Note 9 - Options

In November 2012, the stockholders approved the 2012 Stock Incentive Plan effective January 3, 2013. The number of shares authorized for issuance under the plan was 100,000,000.The number of shares authorized for issuance under the Incentive Plan was increased to 200,000,000 in September 2016 by unanimous consent of the Board of Directors.

In August 2015, the Company awarded options to purchase 1,000,000 shares of its common stock to an unrelated consultant, exercisable at $0.0005 per share.

In September 2016, the Company awarded options to purchase 196,000,000 shares of its common stock to its management team and employees, exercisable at $0.00625 per share, expiring ten (10) years from the date of grant and vesting over a six-month period.

Fair value of vested options was $269,250 in the interim period ended September 30, 2016, and included as part of operating expenses on the statement of operations.

The table below summarizes the Company’s 2004 Incentive Plan and 2012 Stock Incentive Plan activities through September 30, 2016:

As of September 30, 2016, options to purchase an aggregate of 197,000,001 shares of common stock were outstanding under the 2004 incentive plan and 2012 Stock Incentive Plan and there were 9,500,000 shares remaining available for issuance. At September 30, 2016, the intrinsic value of outstanding options was zero.

The following table summarizes information concerning 2004 Incentive plan and 2012 Stock Incentive Plan as of September 30, 2016: