(1)

Based on 2,317,797 shares of common stock outstanding as of December 31, 2013 as adjusted by our 1:1,500 reverse stock split. As illustrated, the number of shares of common stock issuable upon conversion of our secured convertible debentures will increase if the market price of our stock declines, which will cause dilution to our existing stockholders. The closing price of our common stock on December 31, 2013 was $0.1493.

(2)

Based on 4,883,251 shares of common stock outstanding as of April 1, 2014. As illustrated, the number of shares of common stock issuable upon conversion of our secured convertible debentures will increase if the market price of our stock declines, which will cause dilution to our existing stockholders. The closing price of our common stock on April 1, 2014 was $0.153.

(3)

As adjusted by our 1:1,500 reverse stock split adopted on March 6, 2014.

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THE SALES OF COMMON STOCK BY INVESTORS AFTER DELIVERY OF A CONVERSION NOTICE COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK. IN ADDITION, WE DO NOT INTEND TO DISCLOSE THE TIMING OF ANY CONVERSION NOTICES WHICH WE MAY RECEIVE FROM THE INVESTORS, UNTIL WE FILE OUR FORM 10-Q AND FORM 10-K, AND AS A RESULT, YOU WILL HAVE NO KNOWLEDGE OF WHEN THE INVESTORS ARE CONVERTING INTO SHARES OF OUR COMMON STOCK UNTIL WE FILE OUR FORM 10-Q AND FORM 10-K.

While the securities purchase agreements with DART/Citco Global contain provisions prohibiting them from engaging in short sales, the investors may, nevertheless, engage in the sale of escrowed shares after delivering a conversion notice to us but before actual delivery of the shares. In the event that DART/Citco Global was to engage in any such sales, this may create downward pressure on the price of our common stock and could result in higher levels of volatility. Further, any resulting decline in the price of our stock could result in increased dilution due to the fact that we could be required to issue greater numbers of shares upon receiving future conversion notices. In addition, not only the sale of shares issued upon conversion of secured debentures, but also the mere perception that these sales could occur, may adversely affect the market price of the common stock. In addition, we do not intend to disclose the timing of conversion notices which we may receive from DART/Citco Global until we file our Form 10-Q and 10-K. As a result, you will have no knowledge of when the investors are converting until we file our Form 10-Q and 10-K. Further, you will not know that the investors have shares of our common stock that they may be imminently selling, or that the investors have sold such shares, all of which may have a depressive effect on the price of our common stock until we file our Form 10-Q and 10-K.

THE ISSUANCE OF SHARES OF OUR COMMON STOCK UPON CONVERSION OF THE SECURED CONVERTIBLE DEBENTURES MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS.

The issuance of shares of our common stock upon conversion of the secured convertible debentures may result in substantial dilution to the interests of other stockholders since the selling stockholders may ultimately convert and sell the full amount issuable on conversion. There is no upper limit on the number of shares that may be issued which will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock.

IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE DEBENTURES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE DEBENTURES, IF REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THESALE OF SUBSTANTIALLY ALL OF OUR ASSETS, CURRENTLY PLEDGED UNDER A UNIFORM COMMERICAL CODE (UCC) FILING IN THE STATE OF NEW JERSEY.

Any event of default in our obligations to the holders of the secured convertible debentures such as our failure to repay the principal or interest when due, our failure to issue shares of common stock upon conversion by the holder, our failure to timely file a registration statement or have such registration statement declared effective, breach of any covenant, representation or warranty in the securities purchase agreements for such secured convertible debentures or in the secured convertible debentures, the commencement of a bankruptcy, insolvency, reorganization or liquidation proceeding against us and the delisting of our common stock could require the early repayment of the secured convertible debentures if the default is not cured with the specified grace period. We anticipate that the full amount of the secured convertible debentures, together with accrued interest, will be converted into shares of our common stock, in accordance with the terms of the secured convertible debentures. If we were required to repay the secured convertible debentures, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the secured debentures when required, the debenture holders could commence legal action against us and foreclose on all of our assets to recover the amounts due. Any such actions would require us to severely limit operations or to file for protection under United States Bankruptcy laws.

OUR SECURITY AGREEMENTS WITH CITCO GLOBAL CUSTODY NV CONTAIN NEGATIVE COVENANTS WHICH RESTRICT OUR ABILITY TO CREATE SECURITY INTERESTS, CHANGE MANAGEMENT, DECLARE DIVIDENDS, MAKE LOANS AND INCUR ADDITIONAL INDEBTEDNESS, WITHOUT CITCO GLOBAL’S AND PMI’S PRIOR WRITTEN CONSENT. SUCH RESTRICTIONS COULD IMPEDE OUR ABILITY TO OBTAIN ADDITIONAL FUNDING TO FINANCE OUR ONGOING OPERATIONS, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR INVESTMENT.

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In connection with the securities purchase agreements for our secured convertible debentures with DART/Citco Global, we granted DART/Citco Global a secured interest in all of our assets. In accordance with such agreement, we may not, without DART/Citco Global’s written consent, directly or indirectly:

·

permit to exist any assignment, transfer, pledge, mortgage, security interest or other lien or encumbrance in or against any part of the pledged property;

·

materially change our ownership, executive staff or management, including Mark L. Kay;

·

declare or pay any dividend of any kind, in cash or in property, on any class of our capital stock, or make any distribution of any kind in respect thereof;

·

make any loan, advance or extension of credit to any person other than in the normal course of our business; or to create, incur, or assume any additional indebtedness of any description whatsoever in an aggregate amount in excess of $25,000.

These restrictions could impede our ability to obtain additional funding to finance our ongoing operations, which would have a negative impact on our business and the value of your investment.

THE PATENT APPLICATION MOBILETRUST®MOBILETRUSTÒ TECHNOLOGY IS PENDING AND THERE IS NO ASSURANCE THAT THIS APPLICATIONS WILL BE GRANTED. FAILURE TO OBTAIN THE PATENT FOR THE APPLICATION COULD PREVENT US FROM SECURING REVENUES IN THE FUTURE. TWOTHREE PATENT APPLICATIONS FOR THE PROTECTID®PROTECTIDÒ TECHNOLOGY AND ONETHREE FOR GUARDEDID®GUARDEDIDÒ HAVE BEEN GRANTED. TWOONE PATENT APPLICATIONSAPPLICATION FOR THE PROTECTID®PROTECTIDÒ TECHNOLOGY AND TWO FOR GUARDEDID® AREIS PENDING.

In November 2010, we received notice that the United States Patent and Trademark Office (“USPTO”("USPTO") hashad issued an official Notice of Allowance for the patent application for the technology relating to our ProtectID®ProtectIDÒ product, titled "Multi-Channel Device Utilizing a Centralized Out-of-Band Authentication System". In January 2011, we received notice that the USPTO issued to us Patent No. 7,870,599. The “Out-of-Band Patent”This "Out-of-Band" Patent went through a USPTO Re-Examination process starting on August 16, 2011 and concluded on December 27, 2011, with all of our patent claims remaining in-tactintact and eight additional Company patent claims being added. InSince 2011, we submitted an additional continuation patentpatents on the “Out-of-Band” Patent, with approximately forty additional Company claims, that was granted"Out-of-Band" Patent. The keystroke encryption technology we developed and use in July 2013 as Patent No. 8,484,698.  our GuardedIDÒ product is protected by three patents and one continuation pending.

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In JulyJanuary 2013, we were assigned the entire right, title and interest in and to the “Out-of-Band”"Out-of-Band" patent byfrom NetLabs, with the approvalagreement of the developer, and the assignment was recorded with the USPTO.

In February 2013, our patent attorneys filedwe executed a second “Out of Band” continuation patent that we received in March 2014 as a Notice of Allowance. We then submitted another continuation application, which is now patent pending. We are workingretainer agreement with our patent attorneys to aggressively enforce our patent rights peras "Out-of-Band Authentication" is becoming the terms ofstandard for authenticating consumers in the financial market. In February 2013, our patent attorneys submitted a retainer agreement executednew "Out-of-Band" Patent continuation, which has been granted.

In March 2013, our patent attorneys submitted a new "Methods and Apparatus for securing user input in February 2013.a mobile device" Patent, which is now patent pending. Our MobileTrustÒ product is the invention supporting the patent pending.

The technologyIn July 2013, we developed and use inreceived notice that the USPTO had added 54 additional patent claims for our GuardedID® and MobileTrust® products are the subject of aOut-of-Band patent we were grantedreceived in October 2013,January 2011, by issuing to us Patent No. 8,566,608. 8,484,698 thereby strengthening our position with clients and our current and potential lawsuits.

In October 2013, we submittedreceived notice that the USPTO issued to us Patent No. 8,566,608 "Methods and apparatus for securing keystrokes from being intercepted between the keyboard and a third pending patent application for whichbrowser." This protects our GuardedIDÒ product and the keystroke encryption portion of our MobileTrustÒ products.

In February 2014, we received a Notice of Allowance from the USPTO for our third patent relating to our "Multi-Channel Device Utilizing a Centralized Out-of-Band Authentication System" Patent No. 7,870,599. Upon receipt of this Out-of-Band patent we filed another continuation patent.

In March 2014, we received Notice of Allowance from the USPTO for our second patent and infirst continuation of our Keystroke Encryption patent, which only furthers our protection for all mobile devices when utilizing any keyboard for data entry. Upon receipt of this Notice, we also filed another continuation patent for Patent No. 8,566,608.

In April 2014, we filedwere granted our third patent pending. In addition we have another patent pending specifically for MobileTrust®. Our firewall product, which was in the research and design phase is no longer being developed, therefore the pending provisional patent (acquired from NetLabs) application was allowed to expire. A fourth patent application relating to our ProtectID®"Multi-Channel Device Utilizing a Centralized Out-of-Band Authentication System" Patent No. 8,713,701.

In September 2014, we filed an International Patent for MobileTrustÒ (PCT/US20114/029905).

In March 2015, we received our third patent from the USPTO, Patent No. 8,973,107, of our Keystroke Encryption patent. This enhances our position for our Keystroke Encryption product, was combinedGuardedIDÒ, and our MobileTrustÒ product.

We completed the development of our ProtectIDÒ platform at the end of June 2006, we completed the core development of our keyboard encryption and anti-keylogger product, GuardedIDÒ, in December 2006 and commenced deployment of our new mobile product, MobileTrustÒ into the mobile stores in 2014, of which the first ProtectID® patent applicationtwo are currently being sold and distributed. Our suite of products is targeted to the financial, e-commerce, corporate, government, healthcare, legal, insurance, technology and retail sectors. We seek to locate customers in a variety of ways. These primarily include contracts 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 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 distributors and resellers. 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. These pricing models provide our company with one-time, monthly, quarterly and annual recurring revenues with volume discounts. 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 concluded and implemented during the fourth application was allowed to lapse. quarter of 2014, primarily in the retail and insurance sectors. To date the MobileTrust®MobileTrustÒ patent application has not yet been granted. We cannot be certain that this patent will be granted nor can we be certain that other companies have not filed for patent protection for these technologies. In the event the patents were granted for the MobileTrust®MobileTrustÒ technology, there is no assurance that we will be in a position to enforce the patent rights. Failure to be granted patent protection for the technology could result in greater competition or in limited payments. This could result in inadequate revenue and cause us to cease operations.

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WE WILL FACE INTENSE COMPETITION FROM COMPETITORS THAT HAVE GREATER FINANCIAL, TECHNICAL AND MARKETING RESOURCES. THESE COMPETITIVE FORCES MAY IMPACT OUR PROJECTED GROWTH AND ABILITY TO GENERATE REVENUES AND PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR INVESTMENT.

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We likely will face competition from alternate security software programs and services. As is typical of a new industry, demand and market acceptance for recently introduced services are subject to a high level of uncertainty and risk. In addition, the software industry is characterized by frequent innovation. As the market for computer security products evolves, it will be necessary for us to continually modify and enhance our existing products and develop new products. We believe that our competitors will enhance existing product lines and introduce new products. If we are unable to update our software to compete or to meet announced schedules for improvements and enhancements, it is likely that our sales will suffer and that potential customers will be lost to a competing company’scompany's product.

Because the market for our services is new and evolving, it is difficult to predict the future growth rate, if any, and the size of this market. Substantial marketing activities have been implemented and will continue to be required to meet our revenue and profit goals. There can be no assurance we will be successful in such marketing efforts. There can be no assurance either that the market for our services will develop or become sustainable. Further, other companies may decide to provide services similar to ours. These companies may be better capitalized than us and we could face significant competition in pricing and services offered.

IF WE DO NOT ADEQUATELY PROTECT THE INTELLECTUAL PROPERTY RIGHTS, WE MAY EXPERIENCE A LOSS OF REVENUE AND OUR OPERATIONS MAY BE MATERIALLY IMPAIRED.

We rely upon confidentiality agreements signed by our employees, consultants and third parties to protect the intellectual property. These agreements generally provide that the individual must keep confidential and not disclose to other parties any confidential information developed or learned by the individual during the course of the individual's relationship with us except in limited circumstances. These agreements generally also provide that we shall own all inventions conceived by the individual in the course of rendering services to us. These agreements may not effectively prevent disclosure of confidential information or result in the effective assignment to us of intellectual property, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information or other breaches of the agreements. In addition, others may independently discover trade secrets and proprietary information that have been licensed to us or that we own, and in such case we could not assert any trade secret rights against such party.

We cannot assure that we can adequately protect the intellectual property or successfully prosecute potential infringement of the intellectual property rights. Also, we cannot assure that others will not assert rights in, or ownership of, trademarks and other proprietary rights of ours or that we will be able to successfully resolve these types of conflicts to our satisfaction. Failure to protect the intellectual property rights would result in a loss of revenue and could adversely affect our operations and financial condition. In December 2011, we executed an exclusive agreement with a firm to defend and protect our “Out-of-Band”"Out-of-Band" Patent No. 7,870,599, which now includes Patent No. 8,484,698. We terminated that exclusive agreement in September 2012. In8,484,698 and 8,713,701.In January 2013, we were assigned the entire right, title and interest in and to the “Out-of-Band”"Out-of-Band" patent by NetLabs.NetLabs, with approval by the developer, and the assignment was recorded with the USPTO. We are working with our patent attorneys to aggressively enforce our Out-of-Band Authentication patent rights per the terms of a retainer agreement executed in February 2013.

OUR INABILITY TO RETAIN OUR KEY EXECUTIVE OFFICERS WOULD IMPEDE OUR BUSINESS PLAN AND GROWTH STRATEGIES, WHICH COULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR INVESTMENT.

Our success depends, to a critical extent, on the continued efforts and services of our Chief Executive Officer, Mark L. Kay, our Chief Technical Officer and Inventor, Ramarao Pemmaraju, and our Executive Vice President and Head of Marketing, George Waller. Were we to lose two or more of these key executive officers, we would be forced to expend significant time and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the diversion of limited working capital. We can give you no assurance that we can find satisfactory replacements for these key executive officers at all, or on terms that are not unduly expensive or burdensome to our Company. Only one of our executive officers (CEO) had an employment agreement providing for his continued service to us, which is now expired.  We do not currently carry key-man life insurance policies on any of our employees, which would assist us in recouping our costs in the event of the loss of those officers.

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THE INABILITY TO MANAGE OUR GROWTH COULD IMPEDE OUR ABILITY TO GENERATE REVENUES AND PROFITS AND TO OTHERWISE IMPLEMENT OUR BUSINESS PLAN AND GROWTH STRATEGIES, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR INVESTMENT.

We plan to grow rapidly, which will place strains on our management team and other Company resources to both implement more sophisticated managerial, operational and financial systems, procedures and controls and to hire, train and manage the personnel necessary to implement those functions. Our staff is currently comprised of seven people and we believe that in order for us to achieve our goals, it will be necessary to further expand our personnel, particularly in the area of sales, support services, technology development and client support. As we grow, we also expect to increase detailed and pertinent internal and administrative controls and procedures, require further product enhancements and customization of our existing products for specific clients, as well as enter new geographic markets. We do not presently have in place the corporate infrastructure common to larger organizations. We do not, for example, have a separate human resources department or purchasing department designed for a larger organization. Some of our key personnel do not have experience managing large numbers of personnel. Substantial expansion of our organization will require the acquisition of additional information systems and equipment, a larger physical space and formal management of human resources. It will require that we expand the number of people within our organization providing additional administrative support (or consider outsourcing) and to develop and implement additional internal controls appropriate for a larger organization. Our experience to date in managing the minimal growth of our Company has been positive, without product failures or breakdowns of internal controls. 

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The time and costs to effectuate our business development process may place a significant strain on our management personnel, systems and resources, particularly given the limited amount of financial resources and skilled employees that may be available at the time. There can be no assurance that we will integrate and manage successfully new systems, controls and procedures for our business, or that our systems, controls, procedures, facilities and personnel, even if successfully integrated, will be adequate to support our projected future operations. There can be no assurance that any expenditure incurred during this expansion will ever be recouped. Any failure to implement and maintain such changes could have a material adverse effect on our business, financial condition and results of operations.

OUR RESULTS OF OPERATIONS MAY HIGHLY FLUCTUATE FROM QUARTER TO QUARTER AS WE CONTINUE TO GROW. THEREFORE, THESE RESULTS CANNOT BE USED TO PREDICT HOW WE MAY PERFORM IN THE FUTURE.

As a result of our limited operating history, we have limited historical financial data in which to base our planned operating expenses. Our expense levels are expected to gradually increase as our monthly revenues increase. It is anticipated that as we mature, our sales and operating results will fluctuate from quarter to quarter and from year to year due to a combination of factors, including, among other things:

·

We Will Incur Expenses in Marketing Our Products

Our products are not widely recognized or distributed in the marketplace and in order to introduce them effectively, we will have to continue to develop and market them aggressively. We will compete in our marketing efforts with other competitors, many of which are well-established. It is likely that in order to compete effectively, we may need to spend more money on marketing our products relative to our sales volume than do the more established companies. These expenses may make it more difficult for us to become a profitable company and reduce our profitability in the short term and are likely to negatively affect our net income.

·

Product Defects or Service Quality Problems Could Affect Our Sales

Although we consider our principal products ready for commercial production and are actively marketing them to potential customers, we do not have significant experience with the use of our products on a large scale. We have not experienced any product defects that are material to the performance of our products, but there can be no assurance that there will not be product defects in the future. Likewise, we cannot be certain that the security provided by our products cannot be circumvented, now or in the future, although we are unaware of anyone having successfully defeated the technology. Our products are complex and may contain undetected errors or defects or may contain errors or defects in new versions that we attempt to release. Errors and defects that occur in the future could result in adverse product reviews and a loss of, or delay in, market acceptance of our products. We have, however, received a number of independent endorsements of GuardedID® and ProtectID® from recognized, well known third party security product lab testers and reviewers (PCMagazine.com for GuardedID® and SCMagazineUS.com for ProtectID®).

CURRENT ADVERSE ECONOMIC CONDITIONS HAVE HAD A NEGATIVE IMPACT ON OUR ABILITY TO OBTAIN ADDITIONAL FINANCING. OUR INABILITY TO OBTAIN ADDITIONAL FINANCING WOULD HAVE A SIGNIFICANT ADVERSE EFFECT ON OUR OPERATIONS.

In early 2008, as the United States economy began to weaken and there were increased doubts about the ability of borrowers to pay debts. Housing values began to fall and marginal loans were first to default, triggering the sub-prime lending crisis. Financial institutions responded by tightening their lending policies with respect to counterparties determined to have sub-prime mortgage risk. This tightening of institutional lending policies led to the failure of major financial institutions late in the third quarter of 2008. Continued failures, losses, and write-downs at major financial institutions through 2012 intensified concerns about credit and liquidity risks and have resulted in a sharp reduction in overall market liquidity. The global credit crisis threatens the stability of the global economy and has adversely impacted consumer confidence and spending. We believe this global credit crisis has also had a negative impact on our ability to obtain additional financing. As discussed above, our inability to obtain additional financing would have a significant adverse effect on our operations, results and financial condition.

REPORTING REQUIREMENTS MAY UTILIZE A SUBSTANTIAL PORTION OF OUR CASH AND REDUCE THE PERIOD OF TIME WE CAN SURVIVE ON OUR AVAILABLE CASH RESERVES PRIOR TO GENERATING REVENUE.

We will incur ongoing costs and expenses for SEC reporting and compliance. To be eligible for quotation on the OTC.QB, issuers must remain current in their filings with the SEC.  Market Makers are not permitted to begin quotation of a security whose issuer does not meet this filing requirement.  Securities already quoted on the OTC.QB that become delinquent in their required filings will be removed following a 30 day grace period if they do not make their required filing during that time. In order for us to remain in compliance we will require future revenues to cover the cost of these filings, which could comprise a substantial portion of our available cash resources.

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THE REGULATION OF PENNY STOCKS BY SEC AND FINRA (FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC.) MAY DISCOURAGE THE TRADABILITY OF OUR SECURITIES AND THEREBY MAKE IT HARD FOR INVESTORS TO SELL THEIR SHARES AT THE TIME AND PRICES THEY MIGHT OTHERWISE EXPECT.

We are a "penny stock" company. We are subject to a Securities and Exchange Commission rule that imposes special sales practice requirements upon broker-dealers who sell such securities to persons other than established customers or accredited investors. For purposes of the rule, the phrase "accredited investors" means, in general terms, institutions with assets in excess of $5,000,000, or individuals having a net worth in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, when combined with a spouse's income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination of the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Effectively, this discourages broker-dealers from executing trades in penny stocks. Consequently, the rule will affect the ability of purchasers in this offering to sell their securities in any market that might develop, because it imposes additional regulatory burdens on penny stock transactions.

In addition, the Securities and Exchange Commission has adopted a number of rules to regulate "penny stocks". Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, and 15g-9 under the Securities and Exchange Act of 1934, as amended. Because our securities constitute "penny stocks" within the meaning of the rules, the rules would apply to us and to our securities. The rules will further affect the ability of owners of shares to sell their securities in a market that might develop for them because it imposes additional regulatory burdens on penny stock transactions.

Shareholders should be aware that, according to the Securities and Exchange Commission Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) "boiler room" practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, leaving investors with losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.

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RULE 144 SALES IN THE FUTURE MAY HAVE A DEPRESSIVE EFFECT ON OUR STOCK PRICE AS AN INCREASE IN SUPPLY OF SHARES FOR SALE, WITH NO CORRESPONDING INCREASE IN DEMAND WILL CAUSE PRICES TO FALL.

All of the outstanding shares of common stock held by the present officers, directors, and affiliate stockholders are "restricted securities" within the meaning of Rule 144 under the Securities Act of 1933, as amended. As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Act and as required under applicable state securities laws. Rule 144 provides in essence that a person who is an affiliate or officer or director who has held restricted securities for six months may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1.0% of a company's outstanding common stock. There is no limit on the amount of restricted securities that may be sold by a non-affiliate after the owner has held the restricted securities for a period of six months if the company is a current reporting company under the 1934 Act. A sale under Rule 144 or under any other exemption from the Act, if available, or pursuant to subsequent registration of shares of common stock of present stockholders, may have a depressive effect upon the price of the common stock in any market that may develop.

FINRA SALES PRACTICE REQUIREMENTS MAY ALSO LIMIT A STOCKHOLDER'S ABILITY TO BUYTOBUY AND SELL OUR STOCK.

In addition to the “penny stock”"penny stock" rules described above, the Financial Industry Regulatory Authority (FINRA) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

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BECAUSE WE ARE QUOTED ON THE OTC.QBOTCMarkets.com PINK SHEETS INSTEAD OF AN EXCHANGE OR NATIONAL QUOTATION SYSTEM, OUR INVESTORS MAY HAVE A MORE DIFFICULT TIME SELLING THEIR STOCK OR EXPERIENCE NEGATIVE VOLATILITY ON THE MARKET PRICE OF OUR STOCK.

Our common stock is traded on the OTC.QB.OTCMarkets.com Pink Sheets. The OTC.QBOTCMarkets.com Pink Sheets is often highly illiquid. There is a greater chance of volatility for securities that trade on the OTC.QBOTCMarkets.com Pink Sheets as compared to a national exchange or quotation system. This volatility may be caused by a variety of factors, including the lack of readily available price quotations, the absence of consistent administrative supervision of bid and ask quotations, lower trading volume, and market conditions. Investors in our common stock may experience high fluctuations in the market price and volume of the trading market for our securities. These fluctuations, when they occur, have a negative effect on the market price for our securities. In addition, the OTC Markets has announced that the OTCQB market will require a $0.01 minimum to continue trading on the OTC.QB, starting after our 2014 fiscal year.  While we currently meet the criteria, if our stock price falls below the threshold, we may trade on the OTC Pink Sheets.- Accordingly, for the reasons above, our stockholders may not be able to realize a fair price from their shares when they determine to sell them or may have to hold them for a substantial period of time until the market for our common stock improves.

FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND OPERATING RESULTS.

It may be time consuming, difficult and costly for us to develop and implement the additional internal controls, processes and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal auditing and other finance staff in order to develop and implement appropriate additional internal controls, processes and reporting procedures.

If we fail to comply in a timely manner with the requirements of Section 404 of the Sarbanes-Oxley Act regarding internal control over financial reporting or to remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our common stock.

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Pursuant to Section 404 of the Sarbanes-Oxley Act and current SEC regulations, we are required to prepare assessments regarding internal controls over financial reporting and, furnish a report by our management on our internal control over financial reporting. We have begun the process of documenting and testing our internal control procedures in order to satisfy these requirements, which is likely to result in increased general and administrative expenses and may shift management time and attention from revenue-generating activities to compliance activities. While our management is expending significant resources in an effort to complete this important project, there can be no assurance that we will be able to achieve our objective on a timely basis. Failure to achieve and maintain an effective internal control environment or complete our Section 404 certifications could have a material adverse effect on our stock price.

In addition, in connection with our on-going assessment of the effectiveness of our internal control over financial reporting, we may discover “material weaknesses”"material weaknesses" in our internal controls as defined in standards established by the Public Company Accounting Oversight Board, or the PCAOB. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The PCAOB defines “significant deficiency”"significant deficiency" as a deficiency that results in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented or detected.

In the event that a material weakness is identified, we will employ qualified personnel and adopt and implement policies and procedures to address any material weaknesses that we identify. However, the process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that the measures we will take will remediate any material weaknesses that we may identify or that we will implement and maintain adequate controls over our financial process and reporting in the future.

Any failure to complete our assessment of our internal control over financial reporting, to remediate any material weaknesses that we may identify or to implement new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of the periodic management evaluations of our internal controls and, in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404 of the Sarbanes-Oxley Act. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

21

WE DO NOT INTEND TO PAY DIVIDENDS

We do not anticipate paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally pay dividends. Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors our board of directors may consider relevant. There is no assurance that we will pay any dividends in the future, and, if dividends are rapid, there is no assurance with respect to the amount of any such dividend.

OPERATING HISTORY AND LACK OF PROFITS COULD LEAD TO WIDE FLUCTUATIONS IN OUR SHARE PRICE. THE PRICE AT WHICH YOU PURCHASE OUR COMMON SHARES MAY NOT BE INDICATIVE OF THE PRICE THAT WILL PREVAIL IN THE TRADING MARKET. YOU MAY BE UNABLE TO SELL YOUR COMMON SHARES AT OR ABOVE YOUR PURCHASE PRICE, WHICH MAY RESULT IN SUBSTANTIAL LOSSES TO YOU.  THE MARKET PRICE FOR OUR COMMON SHARES IS PARTICULARLY VOLATILE GIVEN OUR STATUS AS A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY TRADED PUBLIC FLOAT.

The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.

Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.

VOLATILITY IN OUR COMMON SHARE PRICE MAY SUBJECT US TO SECURITIES LITIGATION, THEREBY DIVERTING OUR RESOURCES THAT MAY HAVE A MATERIAL EFFECT ON OUR PROFITABILITY AND RESULTS OF OPERATIONS.

As discussed in the preceding risk factors, the market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’smanagement's attention and resources.

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IF WE ARE UNABLE TO CONTINUE AS A GOING CONCERN, INVESTORS MAY FACE A COMPLETE LOSS OF THEIR INVESTMENT.

The independent auditor’s report on our financial statements contains explanatory language that substantial doubt exists about our ability to continue as a going concern. The report states that we depend on the continued contributions of our executive officers to work effectively as a team, to execute our business strategy and to manage our business. The loss of key personnel, or their failure to work effectively, could have a material adverse effect on our business, financial condition, and results of operations. If we are unable to obtain sufficient financing in the near term or achieve profitability, then we would, in all likelihood, experience severe liquidity problems and may have to curtail our operations. If we curtail our operations, we may be placed into bankruptcy or undergo liquidation, the result of which will adversely affect the value of our common shares.

COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE WILL RESULT IN ADDITIONAL EXPENSES AND POSE CHALLENGES FOR OUR MANAGEMENT TEAM.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated thereunder, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the U.S. public markets. Our management team will need to devote significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.

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SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED.

Special Note Regarding Forward-Looking Statements

This annual report contains forward-looking statements about our business, financial condition and prospects that reflect our management’smanagement's assumptions and good faith beliefs based on information currently available. We can give no assurance that the expectations indicated by such forward-looking statements will be realized. If any of our assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, our actual results may differ materially from those indicated by the forward-looking statements.

The key factors that are not within our control and that may have a direct bearing on operating results include, but are not limited to, acceptance of our proposed services and the products we expect to market, our ability to establish a customer base, managements’managements' ability to raise capital in the future, the retention of key employees and changes in the regulation of our industry.

There may be other risks and circumstances that management may be unable to predict. When used in this filing, words such as, “believes,” “expects,” “intends,” “plans,” “anticipates,” “estimates”"believes," "expects," "intends," "plans," "anticipates," "estimates" and similar expressions are intended to identify and qualify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions.

ITEM 1B. UNRESOLVED STAFF COMMENTS

This Item is not applicable to us as we are not an accelerated filer, a large accelerated filer, or a well-seasoned issuer; however, we have not received written comments from the Commission staff regarding our periodic or current reports under the Securities Exchange Act of 1934 within the last 180 days before the end of our last fiscal year.

ITEM 2. PROPERTIES

We operate from leased offices located at 1090 King Georges Post Road, Suite #603, Edison, New Jersey 08837. We do not hold any material investments in other real or personal property other than office equipment. We anticipate these facilities will be adequate for the immediate future but that if we are successful in introducing our products, we will need to seek larger or additional office quarters. We pay a monthly base rent of $3,807 which commenced on July 1, 2009, with an extended lease termination date of January 31, 2016. In November 2015, the lease was extended for three years to January 31, 2019. We will pay a monthly base rent of $4,067 from February 2016 thru January 2017, $4,190 from February 2017 thru January 2018 and $4,316 from February 2018 thru January 2019. The landlord holds the sum of $8,684 as our security deposit. The lease requires us to pay costs such as maintenance and insurance.

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ITEM 3. LEGAL PROCEEDINGS

On March 25,28, 2013 we filed a complaint In The United States District Court For The District Of New Jersey (case no: 13-cv-01895 (SRC)(CLW)) vs. WhiteSky, Inc (an existing channel partner). We filed claims that WhiteSky effectuated multiple contract breaches, misappropriationinitiated patent litigation against an outside party. As of trade secrets, breach of Intellectual Property,March 31, 2015, the case was in full discovery, the pre-trial hearing was held, and disclosure of confidential information in commencing attempts to replace our “GuardedID® Customized Desktop Product” with a third party's product since November 2012, even though the contractual agreement expiresdeliberations were continuing. Mediation took place in May 2014. In July 2013,2015 to discuss a potential settlement, and on January 15, 2016, the parties reached a settlement in the matter. As part of the settlement, we filed an amended complaint based onwill receive a payment of $4.9 million, net of legal fees, which will be recorded as other income in the Court’s rulings on the motions, which required some minor adjustments and strengthening based on what we learned through early admissible discovery. We are aggressively litigating this matter and anticipate a successful outcome. To date, allfirst quarter of WhiteSky’s arguments against our complaints have been denied by the Court. As of mid-November 2013 the case is in Discovery, which is actively progressing and limited to a certain number of months. As of early 2014 settlement discussions are in progress, with no certainty that they will succeed. If we are unsuccessful, the costs and results associated with these legal proceedings could be significant and could negatively affect the results of future operations.2016.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’SREGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

(A) MARKET INFORMATION

Our Small Business registration statement on Form SB-2 was declared effective by the SEC in August 2005 and our shares were approved for listing on the OTC Bulletin Board by the National Association of Securities Dealers, Inc. (“NASD” now referred to as the Financial Industry Regulatory Authority (FINRA)) in December 2005. Prior to December 2005, there was no public market for the common stock. Our common stock is currently quoted on the OTC Electronic Bulletin Board maintained by OTCMarkets.com under the symbol “SFOR.OB”"SFOR.PK". It has been traded in the over-the-counter market on a limited basis. The following sets forth high and low bid price quotations for each calendar quarter during the last fiscal years that trading occurred or quotations were available, as adjusted bycalculated based on the result post-prior reverse splits of our 1:1,500 stock split.common stock. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

Quarter Ended:		Low:				High:
March 31, 2014		$	91,000.00			$	117,000.00
June 30, 2014		$	21,450.00			$	35,750.00
September 30, 2014		$	1,690.00			$	2,210.00
December 31, 2014		$	6.50			$	1,300.00
March 31, 2015		$	0.0025			$	70.00
June 30, 2015		$	0.0001			$	4.50
September 30, 2015		$	0.008			$	0.07
December 31, 2015		$	0.0005			$	0.0084

The closing bid price for our shares of common stock on April 1, 20148, 2016 was $0.1530.$0.0017.

Our common stock is considered a low priced security under the “Penny Stock”"Penny Stock" rules promulgated by the Securities and Exchange Commission. Under these rules, broker-dealers participating in transactions in these securities must first deliver a risk disclosure document which describes risks associated with these stocks, broker-dealers’broker-dealers' duties, customers’customers' rights and remedies, market and other information, and make suitability determinations approving the customers for these stock transactions based on financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing, provide monthly account statements to customers, and obtain specific written consent of each customer. With these restrictions, the likely effect of designation as a low priced stock is to decrease the willingness of broker-dealers to make a market for the stock, to decrease the liquidity of the stock and increase the transaction cost of sales and purchases of these stocks compared to other securities.

(B) HOLDERS

As of April 1, 2014,8, 2016, there were approximately 421454 holders of the common stock on record with our transfer agent (several holders of record are brokerage firms often through CEDE & Co., which handle accounts for individual investors).agent.

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(C) DIVIDENDS

We have not previously paid any cash dividends on common stock and do not anticipate or contemplate paying dividends on common stock in the foreseeable future. Our present intention is to utilize all available funds to develop and expand our business. The only restrictions that limit the ability to pay dividends on common equity, or that are likely to do so in the future, are those restrictions imposed by law and those restrictions imposed under contractual obligation. Under Wyoming corporate law, no dividends or other distributions may be made which would render a company insolvent or reduce assets to less than the sum of liabilities plus the amount needed to satisfy outstanding liquidation preferences.

Any future determination to pay cash dividends will be at the discretion of our board of directors, and will be dependent upon our financial condition, results of operations, capital requirements and other factors as our board may deem relevant at that time.

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(D) RECENT ISSUANCES OF UNREGISTERED SECURITIES

In October 2015, note holders converted an aggregate of $4,318 of principal and $692 of accrued interest into 2,316,868 shares of the Company's common stock at conversion prices ranging from $0.001972 to $0.003 per share.

In October 2013,November 2015, note holders converted an aggregate of $7,030 of principal and $3,093 of accrued interest into 7,700,229 shares of the Company's common stock at conversion prices ranging from $0.000928 to $0.002073 per share.

In December 2015, note holders converted an aggregate of $1,942 of principal and $1,243 of accrued interest into 7,851,722 shares of the Company's common stock at conversion prices ranging from $0.00024 to $0.000638 per share.

In December 2015, we issued 390 restricteda total of 7,500 shares of ourrestricted common stock, as adjusted by our 1:1,500 reverse stock split, valued at $750, to a consultant $4, relating to a public relationsDecember 2009 retainer agreement we executed with the consultant in March 2013.

In October 2013, the Company executed a convertible promissory note with an unrelated party in the amount of $55,000. The note bears interest at 12% per annum with principal due October 18, 2014.  In connection with the convertible promissory note, the Company issued warrants exercisable in the aggregate into 61,112 shares of the Company’s common stock, as adjusted by our 1:1,500 reverse stock split, to the unrelated party at an exercise price of $600.00 per share, as adjusted by our 1:1,500 reverse stock split.  The warrants are exercisable for a period of five years from issuance.attorney.

In October 2013, we issued 33,334 shares of our common stock, as adjusted by our 1:1,500 reverse stock split, to an investor firm that converted $14,500 of a convertible note, dated April 22, 2013 into unrestricted shares of our common stock. The conversion price was $0.435 per share, as adjusted by our 1:1,500 reverse stock split.

In October 2013, we issued 11,112 shares of our common stock, as adjusted by our 1:1,500 reverse stock, split to an investor firm that converted $7,500 of a convertible note, dated February 19, 2013 into unrestricted shares of our common stock. The conversion price was $0.675 per share, as adjusted by our 1:1,500 reverse stock split.

In October 2013, we issued 58,028 shares of our common stock, as adjusted by our 1:1,500 reverse stock split, to an investor firm that converted $25,000 of a convertible note, and $1,112 of accrued interest, dated April 23, 2013 into unrestricted shares of our common stock. The conversion price was $0.45 per share, as adjusted by our 1:1,500 reverse stock split.

In October 2013, we issued 161,022 shares of our common stock, as adjusted by our 1:1,500 reverse stock, split to an investor firm that converted $71,299 of convertible notes originally issued to non-related third parties on January 23, 2009, and sold to the investor firm with no additional consideration to the Company, into unrestricted shares of our common stock. The conversion prices ranged from $0.36 per share to $0.99 per share, as adjusted by our 1:1,500 reverse stock split.

In October 2013, we issued 124,899 shares of our common stock, as adjusted by our 1:1,500 reverse stock split, to an investor firm that converted $57,250 of convertible notes, and $750 in legal fees, originally issued to non-related third parties on February 29, 2008, and sold to the investor firm with no additional consideration to the Company, into unrestricted shares of our common stock. The conversion prices ranged from $0.4125 per share to $0.5775 per share, as adjusted by our 1:1,500 reverse stock split.

In November 2013, we issued 90,601 shares of our common stock, as adjusted by our 1:1,500 reverse stock split, to an investor firm that converted $28,000 of a convertible note, and $1,700 of accrued interest, dated April 22, 2013 into unrestricted shares of our common stock. The conversion prices ranged from $0.255 per share to $0.405 per share, as adjusted by our 1:1,500 reverse stock split.

In November 2013, we issued 17,907 shares of our common stock, as adjusted by our 1:1,500 reverse stock, split to an investor firm that converted $7,500 of a convertible note, and $1,308 of accrued interest, dated February 19, 2013 into unrestricted shares of our common stock. The conversion price was $0.45 per share, as adjusted by our 1:1,500 reverse stock split.

In November 2013, we issued 71,974 shares of our common stock, as adjusted by our 1:1,500 reverse stock split, to an investor firm that converted $18,785 of convertible notes originally issued to a non-related third party on June 9, 2006, and sold to the investor firm with no additional consideration to the Company, into unrestricted shares of our common stock. The conversion price was $0.261 per share, as adjusted by our 1:1,500 reverse stock split.

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In December 2013, we issued 134,445 shares of our common stock, as adjusted by our 1:1,500 reverse stock split, to an investor firm that converted $22,400 of a convertible note dated June 4, 2013 into unrestricted shares of our common stock. The conversion prices ranged from $0.15 per share to $0.18 per share, as adjusted by our 1:1,500 reverse stock split.

In December 2013, we issued 58,334 shares of our common stock, as adjusted by our 1:1,500 reverse stock split, to an investor firm that converted $15,750 of a convertible note, dated May 28, 2013 into unrestricted shares of our common stock. The conversion price was $0.27 per share, as adjusted by our 1:1,500 reverse stock split.

In December 2013, we issued 330,861 shares of our common stock, as adjusted by our 1:1,500 reverse stock split, to an investor firm that converted $50,498 of a convertible note, dated June 4, 2013 into unrestricted shares of our common stock. The conversion prices ranged from $0.09 per share to $0.45 per share, as adjusted by our 1:1,500 reverse stock split.

In December 2013, we issued 109,334 shares of our common stock, as adjusted by our 1:1,500 reverse stock split, to an investor firm that converted $22,272 of convertible notes originally issued to a non-related third party on June 9, 2006, and sold to the investor firm with no additional consideration to the Company, into unrestricted shares of our common stock. The conversion prices ranged from $0.087 per share to $0.261 per share, as adjusted by our 1:1,500 reverse stock split.

In December 2013, we issued 203,031 shares of our common stock, as adjusted by our 1:1,500 reverse stock split, to an investor firm that converted $16,750 of a convertible note originally issued to a non-related third party on February 29, 2008, and sold to the investor firm with no additional consideration to the Company, into unrestricted shares of our common stock. The conversion price was $0.0405 per share, as adjusted by our 1:1,500 reverse stock split.

All of the above offerings and sales, except the afore-mentioned shares issued pursuant to a conversion of convertible notes, were made in reliance upon the exemption from registration under Rule 506 of Regulation D promulgated under the Securities Act of 1933 and/or Section 4(2) of the Securities Act of 1933, based on the following: (a) the investors confirmed to us that they were “accredited"accredited investors,”" as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933 and had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to the offering; (c) the investors were provided with certain disclosure materials and all other information requested with respect to our company; (d) where applicable, the investors acknowledged that all securities being purchased were “restricted securities”"restricted securities" for purposes of the Securities Act of 1933, and agreed to transfer such securities only in a transaction registered under the Securities Act of 1933 or exempt from registration under the Securities Act; and (e) where applicable, a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequent registered under the Securities Act of 1933or transferred in a transaction exempt from registration under the Securities Act of 1933.

Issuer Purchases of Equity Securities

None.

ITEM 6. SELECTED FINANCIAL DATA.

While not required under Regulation S-K for "smaller reporting companies," we are providing this information. The following information has been summarized from financial information included elsewhere and should be read in conjunction with such financial statements and notes thereto.

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Summary of Statements of Operations of StrikeForce

26

Statement of Operations Data:
		For the Years Ended December 31,
		2015				2014
Revenues		$	271,559			$	324,807
Cost of Sales			(8,441	)			(9,658	)
Operating and Other Expenses			(2,070,363	)			(3,665,379	)
Net Loss		$	(1,807,245	)		$	(3,350,230	)
Balance Sheet Data:
		December 31,
		2015				2014
Current Assets		$	60,409			$	70,424
Total Assets			89,187				104,095
Current Liabilities			13,570,808				12,205,751
Non Current Liabilities			242,866				97,404
Total Liabilities			13,813,674				12,303,155
Working Capital (Deficit)			(13,510,399	)			(12,135,327	)
Shareholders' Equity (Deficit)		$	(13,724,487	)		$	(12,199,060	)

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

Forward-Looking Statements

The following is management’smanagement's discussion and analysis (|MD&A”&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,”"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-K10-K.

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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, 20122014 or 2013.2015.

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.

27Background

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$271,559 for the year ended December 31, 2013,2015, compared to $805,312$324,807 for the year ended December 31, 2012,2014, 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 theFederal Financial Institutions Examination Council (“FFIEC” ("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.

In February 2014, a 1:1,500 reverse stock split of our issued and outstanding shares of common stock was ratified, effective upon the filing of an amendment to our Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in March 2014. In December 2014, a 1:650 reverse stock split of our issued and outstanding shares of common stock was ratified, effective upon the filing of an amendment to our Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in January 2015. In June 2015, a 1:1,000 reverse stock split of our issued and outstanding shares of common stock was ratified, effective upon the filing of an amendment to our Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in July 2015.

All shares and per share amounts in the financial statements have been adjusted to give retroactive effect to the reverse stock splits adopted by us as if the reverse had occurred at the beginning of the earliest period presented.

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Results of Operations

FOR THE YEAR ENDED DECEMBER 31, 20132015 COMPARED TO THE YEAR ENDED DECEMBER 31, 20122014

Revenues for the year ended December 31, 20132015 were $434,657$271,559 compared to $805,312$324,807 for the year ended December 31, 2012,2014, a decrease of $370,655$53,248 or 46.0%16.4%. 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 thehardware sales, of our GuardedID® keyboard encryption (anti-keylogger) technology caused by our initiated litigation with one of our channel partners, WhiteSky, Inc. ("WhiteSky"), themaintenance sales and revenue from sign on fees. We have experienced delays in completingrealizing anticipated revenues from some of our pilotsnew distributor's clients, and in the delayed rollout of our new mobile security technologies. We have opportunities, through our sales channel andchannels, including 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.in 2016. We anticipate, but cannot guarantee, revenues will increase as we currently rollout MobileTrustÒ.

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, 20132015 were $426,033$267,205 compared to $799,244$318,376 for the year ended December 31, 2012,2014, a decrease of $373,211.$51,171. 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 GuardedID® keyboard encryption (anti-keylogger) technology caused byproducts.Hardware sales for the year ended December 31, 2015 were $4,354 compared to $6,431 for the year ended December 31, 2014, a decrease of $2,077. The decrease in hardware revenues was primarily due to the decrease in our initiated litigation with WhiteSky, the delays in completing somesales of our pilots and in the delayed rollout of our new mobile security technologies.   one-time-password token key-fobs.

Cost of revenues for the year ended December 31, 20132015 was $16,967$8,441 compared to $14,513$9,658 for the year ended December 31, 2012, an increase2014, a decrease of $2,454,$1,217, or 16.9%12.6%. The increasedecrease resulted primarily from the increasedecrease in processing fees relating to our ProtectIDÒ product and due to the decrease in our sales of our GuardedID® keyboard encryption (anti-keylogger) technology.one-time-password token key-fobs. Cost of revenues as a percentage of total revenues for the year ended December 31, 20132015 was 3.9%3.1% compared to 1.8%2.9% for the year ended December 31, 2012.2014. The percentage increasedecrease resulted primarily from the overall decrease in our totalhardware sales, resulting in lower cost of revenues.

Gross profit for the year ended December 31, 20132015 was $417,690$263,118 compared to $790,799$315,149 for the year ended December 31, 2012,2014, a decrease of $373,109,$52,031, or 47.2%16.5%. The decrease in gross profit was primarily due to the decrease in the sales of our GuardedID® 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. revenues.

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Research and development expenses for the year ended December 31, 20132015 were $340,600$262,973 compared to $339,300$287,646 for the year ended December 31, 2012, an immaterial increase2014, a decrease of $1,300,$24,673, or 0.4%8.6%. The decrease in research and development expenses was primarily due to the elimination of one staff member through attrition. 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.expenses.

Selling,Compensation, professional fees, and selling, general and administrative (“SGA”(collectively, "SGA") expenses for the year ended December 31, 20132015 were $1,310,594$1,111,679 compared to $1,096,033$1,294,882 for the year ended December 31, 2012, an increase2014, a decrease of $214,561$183,203 or 19.6%14.2%. The increasedecrease was due primarily to the increasedecrease in legalprofessional fees we expensed in the fiscal year. Selling, general and administrativeexpensed. SG&A expenses consist primarily of salaries, benefits and overhead costs for executive and administrative personnel, insurance, fees for professional services, including consulting, legal, and accounting fees, plus travel costs and non-cash stock compensation expense for the issuance of stock to non-employees and other general corporate expenses.

Other (income) expense for the year ended December 31, 20132015 was $1,177,422$695,711 as compared to $521,335$2,082,851 for the year ended December 31, 2012,2014, representing an increasea decrease in other expense of $656,087,$1,387,140, or 126%66.6%. The increasedecrease was primarily due to an increasethe settlement of a lawsuit with one of our channel partners, WhiteSky, Inc. ("WhiteSky") which was settled on March 9, 2015 with mutually agreed upon terms (subsequently amended on June 26, 2015), a decrease in changes in fair value of derivative liabilities, and a decrease in interest expense.

Our net loss for the year ended December 31, 20132015 was $2,410,926$1,807,245 compared to a net loss of $1,167,908$3,350,230 for the year ended December 31, 2012, an increase2014, a decrease in the net loss of $1,243,018,$1,542,985, or 106%46.1%. The increasedecrease in our net loss was due primarily to the one-time credits applied to first quarter revenues,increase in other income caused by the settlement of the WhiteSky lawsuit, as amended, a decrease in professional fees, decreases in the saleschange in fair value of our GuardedID® keyboard encryption (anti-keylogger) technology relating to our initiated litigation with WhiteSky, the delays of completing some of our pilotsderivative liabilities and valuations and the delays of completing the rollouts of our new mobile security technologies.a decrease in interest expense.

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Liquidity and Capital Resources

Our total current assets at December 31, 20132015 were $78,300,$60,409, which included cash of $7,559,$37,153, as compared with $286,516$70,424 in total current assets at December 31, 2012,2014, which included cash of $133,279.$13,129. Additionally, we had astockholders’astockholders' deficit in the amount of $11,013,902$13,724,487 at December 31, 20132015 compared to a stockholders’stockholders' deficit of $10,484,588$12,199,060 at December 31, 2012.2014. 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,$989,019, 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, 20132015 primarily through the sale and issuance of debt in the aggregate amount of $689,250 and$951,599, through recurring revenues from our ProtectID® and GuardedID® technologies,products in the aggregate amount of $432,101.$271,559, and through proceeds of the sale of Series B preferred stock in the amount of $25,000. Post 2015 year end, our company received funds through a legal settlement (see Subsequent Event below) . Management anticipates that we will continue to rely on equityour revenues and debt financing, at least duringthe proceeds from the one-time lump sum net payment we received in the first halfquarter of 2014,2016, as a result of the settlement of litigation, to finance our operations.operations in 2016 and 2017. While management believes that there will be a substantial percentage of our sales generated from our GuardedID®GuardedIDÒ and new mobile products and there are an increasing number of customers for our patented ProtectID®ProtectIDÒ 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.  customers.

Our number of common shares outstanding increased from 241,8722,454 shares at the year ended December 31, 20122014 to 2,317,79722,711,924 at the year ended December 31, 2013, as adjusted by our 1:1,500 reverse stock split,2015, an increase of 858%925,406%. The increase in the number of common shares outstanding was due to common shares issued related to the issuance, conversion and settlement of debt, the exercise of warrant agreements, or equity financing and consulting obligations which, consequently, reducedin order to reduce our total outstanding debentures.

Our number of shares of Series B Preferred Stock issued and outstanding increased from 142,004 shares at the year ended December 31, 2014 to 175,338 at the year ended December 31, 2015. The increase in the number of shares of Series B Preferred Stock issued and outstanding was due to the sale of shares of Series B Preferred Stock, through subscription agreements, related to equity financing.

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. Ourour operations presently require funding of approximately $110,000$130,000 per month. Management believes, but cannot provide assurances, that we will be cash flow positive byfrom operations in the endfirst half of 2014, or shortly thereafter,2016, based on recently executed and announced contracts and potential contracts that we anticipate closing throughout 2014closed in the fourth quarter of 2015 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.

Going Concern

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We have yet to establish any history of profitable operations. For the year ended December 31, 2015, we incurred a net loss of $1,807,245, used cash in operations of $856,806, and at December 31, 2015, had a stockholders' deficit of $13,724,487. These factors raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2015 with respect to this uncertainty. This going concern opinion could materially limit our ability to raise additional funds through the issuance of new debt or equity securities or otherwise, and future reports on our financial statements may also include an explanatory paragraph with respect to our ability to continue as a going concern.

DRAWDOWN EQUITY FINANCING AGREEMENT

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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, $542,5882015, we had cash on hand in aggregate principalthe amount of $37,153. Management estimates that the DART Limitedcurrent funds on hand will be sufficient to continue operations through the next twelve months. Our ability to continue as a going concern is dependent upon our ability to raise additional funds and implement our business plan. Management is currently seeking additional funds, primarily through the issuance of debt and equity securities for cash to operate our business. Currently, management is attempting to increase revenues and improve gross margins by a revised sales strategy. We are redirecting our sales focus from direct sales to domestic and international sales channel, where we are primarily selling through a channel of Distributors, Value Added Resellers, Strategic Partners and Original Equipment Manufacturers. While we believe in the viability of our strategy to increase revenues and in our ability to raise additional funds, there can be no assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to continually increase our customer base and realize increased revenues from recently signed contracts. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in the case of equity financing.

Subsequent Events

In January 2016, our litigation with an outside party was settled. As part of the settlement, we will receive a payment of $4.9 million, net of legal fees, which will be recorded as other income in the first quarter of 2016.

On August 24, 2015, we entered into an asset purchase and licensing agreement with Cyber Safety, Inc., a New York corporation ("DART"Cyber Safety") to license and retain an option to purchase the patents and Intellectual Property related to the GuardedIDÒ and MobileTrustÒ software (the "Asset Purchase Agreement"). Effective January 28, 2016, Cyber Safety, finalized the purchase of the option to buy the keystroke encryption patents and Intellectual Property related to the GuardedIDÒ and MobileTrustÒ software pursuant to the terms and conditions of the Asset Purchase Agreement for a purchase price of Nine Million Dollars ($9,000,000), custodianwhich may be paid in the form of a promissory note due by and no later than September 30, 2020. Pursuant to the terms and conditions of the Asset Purchase Agreement, our license granted to Cyber Safety does not affect or impact existing distributor relationships. We, directly and through our distribution channel, will maintain the right to sell in the retail space in perpetuity. As a condition of the Asset Purchase Agreement, Cyber Safety will license the Malware Suite (as defined in the Asset Purchase Agreement) up to and until September 30, 2020. Pursuant to this license, Cyber Safety shall compensate us with fifteen percent (15%) of the net amount Cyber Safety receives (defined as the amount received by Cyber Safety from the sale or licensing of the Malware Suite), which amount may be increased to twenty percent (20%) under certain conditions for Citco Global Custody NV (“Citco Global”) asProtectIDÒ, and is subject to reduction for commissions and support costs that Cyber Safety will be obligated to pay StrikeForce.

Changes in Authorized Shares

In February 2014, a 1:1,500 reverse stock split of July 2012, debentures, as assigned by YA Global and Highgate in April 2009, wereour issued and outstanding.outstanding shares of common stock was ratified, effective upon the filing of an amendment to our Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in March 2014.

In February 2014, a decrease of the authorized shares of our common stock from six billion seven hundred fifty million (6,750,000,000) to one billion, five hundred million (1,500,000,000), $0.0001 par value, was ratified, effective upon the filing of an amendment to our Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in March 2014.

In December 2014, an increase of the authorized shares of our common stock from one billion, five hundred million (1,500,000,000) to nine billion (9,000,000,000), $0.0001 par value, was ratified, effective upon the filing of an amendment to our Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in December 2014.

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In December 2014, a 1:650 reverse stock split of our issued and outstanding shares of common stock was ratified, effective upon the filing of an amendment to our Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in January 2015.

In December 2014, a decrease of the authorized shares of our common stock from nine billion (9,000,000,000) to three billion (3,000,000,000), $0.0001 par value, was ratified, effective upon the filing of an amendment to our Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in January 2015.

In June 2015, a 1:1,000 reverse stock split of our issued and outstanding shares of common stock was ratified, effective upon the filing of an amendment to our Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in July 2015.

All shares and per share amounts in the financial statements have been adjusted to give retroactive effect to the reverse stock splits adopted by us as if the reverse had occurred at the beginning of the earliest period presented.

In June 2015, an increase of the authorized shares of our common stock from three billion (3,000,000,000) to five billion (5,000,000,000), $0.0001 par value, was ratified, effective upon the filing of an amendment to our Certificate of Incorporation with the Wyoming Secretary of State. The amendment was adopted in July 2015.

SUMMARY OF FUNDED DEBT TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31, 2015

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, 2013,2015, we issued unsecured convertible notes in an aggregate total of $667,000$67,000 to seventwo unrelated parties pursuant to the terms and conditions of term sheets executed with investor firms at various times during 2013.2015. Additionally, during the year ended December 31, 2013,2015, we settled and transferred $153,255 of unsecured convertible note balances and $361,814$25,000 of unsecured note balances plus accrued interest of $70,598, to threeone unrelated partiesparty in the form of twelvea convertible notesnote for $555,492. Accrued interest of $31,175 was forgiven.$25,000. Additionally, during the year ended December 31, 2013, eight2015, twelve investor firms converted $935,107$245,040 of convertible notes, $13,111and $13,195 of accrued interest, and $1,025 of legal fees into 2,074,990 unrestricted22,691,904 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$0.00024 per share to $2.61$39.00 per share, as adjusted by our 1:1,500 reverse stock split.share.

During the year ended December 31, 2015, we issued unsecured notes in an aggregate total of $581,724 to four unrelated parties, of which $25,000 was used to pay down an open unsecured convertible note. Additionally, during the year ended December 31, 2013,2015, we repaid a total of $3,500$68,414 of three unsecured convertible notes to onean unrelated party.

During the year ended December 31, 2013,2015, we repaid aissued an unsecured note in an aggregate total of $8,220 of unsecured notes and $5,650 of accrued interest$19,875 to two unrelated parties.one related party.

Summary of Funded Debt

As of December 31, 2013,2015, our company’scompany's open secured note balances were $289,973, net of discount on notes of $20,027, listed as follows:

·

$310,000 to an unrelated company - current portion = $103,333; long term portion = $206,667

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As of December 31, 2015, our company's open unsecured promissory note balance was $1,992,500,$2,385,809, listed as follows:

·

$95,000 to an unrelated individual – current portion

·

	·	$50,000 to an unrelated individual - current term portion
	·	$210,000 to an unrelated company - current portion
	·	$1,475,000 to twenty unrelated individuals through term sheet with the StrikeForce Investor Group - current portion
	·	$137,500 to an unrelated company - current portion
	·	$12,000 to an unrelated company - current portion
	·	$41,785 to an unrelated company - current portion
	·	$16,324 to an unrelated company - long term portion
	·	$408,000 to an unrelated company - current portion
	·	$35,200 to an unrelated company - current portion

·

$1,550,000 to twenty unrelated individuals through term sheet with the StrikeForce Investor Group – current portion

·

$137,500 to an unrelated company - current portion

As of December 31, 2013,2015, our company’s company'sopen unsecured related party promissory note balances were $722,638,$742,513, listed as follows:

·

$722,638 to our CEO – current portion

	·	$722,638 to our CEO - current portion
	·	$19,875 to our CEO - long term portion

As of December 31, 2013,2015, our company’scompany'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.)

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

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As of December 31, 2013,2015, our company’scompany's open convertible note balances were $1,140,467,$1,721,107, net of discount on convertible notes of $528,477,$14,266, listed as follows:follows (month/year):

·

	·	$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
	·	$5,000 to an unrelated individual (09/05 unsecured debenture) - current portion
	·	$10,000 to an unrelated individual (12/05 unsecured debenture) - current portion
	·	$30,000 to an unrelated individual (06/06 unsecured debenture) - current portion
	·	$70,000 to an unrelated individual (09/06 unsecured debenture) - current portion
	·	$3,512 to an unrelated individual (02/07 unsecured debenture) - current portion

·

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

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·

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

·

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

·

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

·

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

·

$80,000 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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

$40,000 to an unrelated individual (12/13 unsecured debenture) – long term 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) - current portion
	·	$103,387 to an unrelated company (01/12 unsecured debentures) - current portion
	·	$75,000 to an unrelated company (03/12 unsecured debenture) - current portion
	·	$36,500 to an unrelated company (11/13 unsecured debenture) - current portion
	·	$50,000 to an unrelated company (12/13 unsecured debenture) - current portion
	·	$40,000 to an unrelated company (12/13 unsecured debenture) - current portion
	·	$83,851 to an unrelated company (03/14 unsecured debenture) - current portion
	·	$16,440 to an unrelated company (04/14 unsecured debenture) - current portion
	·	$6,511 to an unrelated company (04/14 unsecured debenture) - current portion
	·	$15,860 to an unrelated company (04/14 unsecured debenture) - current portion
	·	$7,500 to an unrelated company (05/14 unsecured debenture) - current portion
	·	$85,078 to an unrelated company (05/14 unsecured debenture) - current portion
	·	$56,001 to an unrelated company (06/14 unsecured debenture) - current portion
	·	$32,685 to an unrelated company (07/14 unsecured debenture) - current portion
	·	$24,862 to an unrelated company (08/14 unsecured debenture) - current portion
	·	$27,376 to an unrelated company (10/14 unsecured debenture) - current portion
	·	$26,250 to an unrelated company (10/14 unsecured debenture) - current portion
	·	$78,750 to an unrelated company (10/14 unsecured debenture) - current portion
	·	$7,070 to an unrelated company (10/14 unsecured debenture) - current portion
	·	$9,740 to an unrelated company (02/15 unsecured debenture) - current portion
	·	$42,000 to an unrelated company (02/15 unsecured debenture) - current portion

As of December 31, 2013,2015, our company’scompany's open convertible note balances - related parties were $355,500, listed as follows:

·

$268,000 to our CEO –

	·	$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

·

$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

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’smanagement's plan to seek additional funding through the sale of commonCommon and preferred seriesSeries B stock,Preferred 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.

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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.

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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, resultsresult 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 Americaaccounting 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.

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Our significant Significant estimates and assumptions include the fair value of financial instruments; allowancethose related to accounting for doubtful accounts; the carrying value, recoverability and impairment, if any, of long-lived assets, including the values assigned topotential liabilities and the estimated useful lives of propertyassumptions made in valuing stock instruments issued for services 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.

derivative liabilities. 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:

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

The carrying amounts of our financial assets and liabilities, such as cash, accounts receivable, prepayments and other current assets, accounts payable, accrued expenses, payroll taxes payable, and due to factor, approximate their fair values because of the short maturity of these instruments.

Our notes payable, convertible notes payable, convertible secured notes payable, and capital leases payable approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to us for similar financial arrangements at December 31, 2013 and 2012.

Our Level 3 financial liabilities consist of the derivative financial instruments for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation.  We valued the automatic conditional conversion, re-pricing/down-round, change of control; default and follow-on offering provisions using a lattice model, with the assistance of a valuation specialist, for which management understands the methodologies. These models incorporate transaction details such as Company stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.

Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist.  Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.

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Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis

Level 3 Financial Liabilities – Derivative Financial Instruments

We use Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalue our derivative liability at the end of every reporting period and recognizes gains or losses in the Statements of Operations that are attributable to the change in the fair value of the derivative liability.

Carrying Value, Recoverability and Impairment of Long-Lived Assets

We have adopted paragraph 360-10-35-17 of the FASB Accounting Standards Codification for our long-lived assets. Our long-lived assets, which include property and equipment, patents, and website development costs are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

We assess the recoverability of our long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.  Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.  When long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.

We consider the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in our overall strategy with respect to the manner or use of the acquired assets or changes in our overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in our stock price for a sustained period of time; and (vi) regulatory changes.  We evaluate acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.

The key assumptions used in management’s estimates of projected cash flow deal largely with forecasts of sales levels, gross margins, and operating costs of the manufacturing facilities.  These forecasts are typically based on historical trends and take into account recent developments as well as management’s plans and intentions.  Any difficulty in manufacturing or sourcing raw materials on a cost effective basis would significantly impact the projected future cash flows of our manufacturing facilities and potentially lead to an impairment charge for long-lived assets.  Other factors, such as increased competition or a decrease in the desirability of our products, could lead to lower projected sales levels, which would adversely impact cash flows.  A significant change in cash flows in the future could result in an impairment of long lived assets.

The impairment charges, if any, is included in operating expenses in the accompanying statements of operations.

Cash Equivalents

We consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts.  We follow paragraph 310-10-50-9 of the FASB Accounting Standards Codification to estimate the allowance for doubtful accounts.  We perform on-going credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information; and determine the allowance for doubtful accounts based on historical write-off experience, customer specific facts and economic conditions.

Pursuant to paragraph 310-10-50-2 of the FASB Accounting Standards Codification account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.  We have adopted paragraph 310-10-50-6 of the FASB Accounting Standards Codification and determine when receivables are past due or delinquent based on how recently payments have been received.

Outstanding account balances are reviewed individually for collectability.  The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. Bad debt expense is included in general and administrative expenses, if any.

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We do not have any off-balance-sheet credit exposure to our customers.

Property and Equipment

Property and equipment are recorded at cost.  Expenditures for major additions and betterments are capitalized.  Maintenance and repairs are charged to operations as incurred.  Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful lives.  Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of operations.

Leasehold improvements, if any, are amortized on a straight-line basis over the term of the lease or their estimated useful lives, whichever is shorter.  Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

Leases

Lease agreements are evaluated to determine whether they are capital leases or operating leases in accordance with applicable paragraph 840-10-25-1 of the FASB Accounting Standards Codification (“Paragraph 840-10-25-1”). Pursuant to Paragraph 840-10-25-1 A lessee and a lessor shall consider whether alease meets any of the following four criteria as part of classifying the lease at its inception under the guidance in theLessees Subsection of this Section (for the lessee) and theLessors Subsection of this Section (for the lessor): a.Transfer of ownership. The lease transfers ownership of the property to the lessee by the end of thelease term.This criterion is met in situations in which the lease agreement provides for the transfer of title at or shortly after the end of the lease term in exchange for the payment of a nominal fee, for example, the minimum required by statutory regulation to transfer title. b. Bargain purchase option. The lease contains a bargain purchase option. c. Lease term. The lease term is equal to 75 percent or more of theestimated economic life of the leased property. d. Minimum lease payments. The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor atlease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor. In accordance with paragraphs 840-10-25-29 and 840-10-25-30, if at itsinception a lease meets any of the four lease classification criteria in Paragraph840-10-25-1, the lease shall be classified by the lessee as acapital lease; andif none of the four criteria in Paragraph840-10-25-1 are met, the lease shall be classified by the lessee as anoperating lease. Pursuant to Paragraph 840-10-25-31 a lessee shall compute the present value of the minimum lease payments using the lessee'sincremental borrowing rate unlessboth of the following conditions are met, in which circumstance the lessee shall use the implicit rate: a. It is practicable for the lessee to learn the implicit rate computed by the lessor. b. The implicit rate computed by the lessor is less than the lessee's incremental borrowing rate.  Capital lease assets are depreciated on a straight-line basis over the capital lease assets' estimated useful lives consistent with our normal depreciation policy for tangible assets, but generally not exceeding the term of the lease. Interest charges are expensed over the term of the lease in relation to the carrying value of the capital lease obligation.

Operating leases primarily relate to our leases of office spaces. When the terms of an operating lease include tenant improvement allowances, periods of free rent, rent concessions, and/or rent escalation amounts, we establish a deferred rent liability for the difference between the scheduled rent payment and the straight-line rent expense recognized, which is amortized over the underlying lease term on a straight-line basis as a reduction of rent expense.

Intangible Assets Other Than Goodwill

We have adopted Subtopic 350-30 of the FASB Accounting Standards Codification for intangible assets other than goodwill.  Under the requirements, we amortize the acquisition costs of intangible assets other than goodwill on a straight-line basis over or their estimated useful lives, the terms of the exclusive licenses and/or agreements, or the terms of legal lives of the patents, whichever is shorter.  Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

Patents

For acquired patents we record the costs to acquire patents as patent and amortizes the patent acquisition cost over its remaining legal life, or estimated useful life, or the term of the contract, whichever is shorter. For internal developed patents, all costs incurred to the point when a patent application is to be filed are expended as incurred as research and development expense; patent application costs, generally legal costs, thereafter incurred are capitalized, which are to be amortized once the patents are granted or expended if the patent application is rejected. We amortize the internal developed patents over the shorter of the expected useful lives or the legal lives of the patents, which are generally 17 to 20 years for domestic patents and 5 to 20 years for foreign patents from the date when the patents are granted. The costs of defending and maintaining patents are expended as incurred. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

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Website Development Costs

We have adopted Subtopic 350-50 of the FASB Accounting Standards Codification for website development costs.  Under the requirements of Sections 350-50-15 and 350-50-25, we capitalize costs incurred to develop a website as website development costs, which are amortized on a straight-line basis over the estimated useful lives of three (3) years. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

Discount on Debt

We allocate the proceeds received from convertible debt instruments between the liability component and equity component, and records the conversion feature as a liability in accordance with subtopic 470-20 of the FASB Accounting Standards Codification (“Subtopic 470-20”). The conversion feature and certain other features that are considered embedded derivative instruments, such as a conversion reset provision, a penalty provision and redemption option, have been recorded at their fair value as its fair value can be separated from the convertible note and its conversion is independent of the underlying note value. The conversion liability is marked to market each reporting period with the resulting gains or losses shown in the Statement of Operations. We have also recorded the resulting discount on debt related to the warrants and conversion feature and is amortizing the discount using the effective interest rate method over the life of the debt instruments.

Derivative Instruments and Hedging Activities

We account for derivative instruments and hedging activities in accordance with paragraph 810-10-05-4 of the FASB Accounting Standards Codification (“Paragraph 810-10-05-4”). Paragraph 810-10-05-4 requires companies to recognize all derivative instruments as either assets or liabilities in the balance sheet at fair value.  The accounting for changes in the fair value of a derivative instrument depends upon: (i) whether the derivative has been designated and qualifies as part of a hedging relationship, and (ii) the type of hedging relationship.  For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument based upon the exposure being hedged as either a fair value hedge, cash flow hedge or hedge of a net investment in a foreign operation.

Derivative Warrant Liability

We evaluate our convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 810-10-05-4 and Section 815-40-25 of the FASB Accounting Standards Codification.  The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability.  In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations and comprehensive income (loss) as other income or expense.  Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then that the related fair value is reclassified to equity.

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.  Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.

We mark to market the fair value of the remaining embedded derivative warrants at each balance sheet date and records the change in the fair value of the remaining embedded derivative warrants as other income or expense in the consolidated statements of operations and comprehensive income (loss).

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We utilize the Lattice model that values the liability of the derivative warrants based on a probability weighted discounted cash flow model with the assistance of the third party valuation firm.  The reason we pick the Lattice model is that in many cases there may be multiple embedded features or the features of the bifurcated derivatives may be so complex that a Black-Scholes valuation does not consider all of the terms of the instrument.  Therefore, the fair value may not be appropriately captured by simple models.  In other words, simple models such as Black-Scholes may not be appropriate in many situations given complex features and terms of conversion option (e.g., combined embedded derivatives).  The Lattice model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the exercise and full reset features.  Based on these features, there are two primary events that can occur; the Holder exercises the Warrants or the Warrants are held to expiration. The Lattice model analyzed the underlying economic factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e. stock price, exercise price, volatility, etc.).  Projections were then made on the underlying factors which led to potential scenarios.  Probabilities were assigned to each scenario based on management projections.  This led to a cash flow projection and a probability associated with that cash flow.  A discounted weighted average cash flow over the various scenarios was completed to determine the value of the derivative warrants.

Embedded Beneficial Conversion Feature of Convertible Instruments

We recognize and measure the embedded beneficial conversion feature of applicable convertible instruments by allocating a portion of the proceeds from the convertible instruments equal to the intrinsic value of that feature to additional paid-in capital. The intrinsic value of the embedded beneficial conversion feature is calculated at the commitment date as the difference between the conversion price and the fair value of the securities into which the convertible instruments are convertible. We recognize the intrinsic value of the embedded beneficial conversion feature of the convertible notes so computed as interest expense.

From time to time, we transfer the liability under the indenture instrument to a third party in certain circumstances.

Related Parties

We follow subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

Pursuant to Section 850-10-20 the related parties include a. our affiliates; b. entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c. trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d. our principal owners; e. our management; f. other parties with which we may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g. other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include:  a. the nature of the relationship(s) involved; b. a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

Commitment and Contingencies

We follow subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to us but which will only be resolved when one or more future events occur or fail to occur.  We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment.  In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, we evaluate the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

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If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our consolidated financial statements.  If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.  Management does not believe, based upon information available at this time, that these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect our business, financial position, and results of operations or cash flows.