15
Interest expense for notes payable for the three months ended March 31, 2012 and 2011 was $59,634 and $60,574, respectively.
The total long term portion of all funded debt is due as follows: 2013-$50,000; 2015-$30,000.
Note 7 - Notes Payable – Related Parties
Notes payable – related parties at March 31, 2012 and December 31, 2011 consisted of the following:
| | | | |
| | March 31, 2012 | | December 31, 2011 |
(1) Promissory notes executed with the CEO bearing interest at an amended rate of 8% per annum which matured on April 30, 2011. In April 2012, the notes were extended to December 31, 2012. | $ | 504,000 | $ | 504,000 |
(2) Promissory note executed with the CEO bearing interest at 9% per annum which matured on April 30, 2011. The Company issued 20,000 warrants with an exercise price of $1.30 per share and an expiration date of May 25, 2011. The fair value of the warrants issued was $24,300. In April 2012, the note was extended to December 31, 2012. | | 100,000 | | 100,000 |
(3) Promissory note with the CEO bearing interest at 8% per annum which matured on April 30, 2011. The Company issued 8,800 warrants with an exercise price of $0.50 per share and an expiration date of February 21, 2012. The fair value of the warrants issued was $3,758. In April 2012, the note was extended to December 31, 2012. | | 22,000 | | 22,000 |
(4) Two 10% promissory notes, with the CEO, of $25,000 and 50,000 restricted shares of the Company’s common stock, at market price, for a total of 100,000 shares, which matured on April 30, 2011. In April 2012, the note was extended to December 31, 2012. | | 50,000 | | 50,000 |
(5) Promissory notes with the CEO, non-interest bearing, which matured on April 30, 2011. Partial payments of $6,580 were made against the notes in August and September 2010 and $2,700 in February 2011. In April 2012, the notes were extended to December 31, 2012. | | 31,420 | | 34,120 |
(6) In October 2010, the Company assigned the proceeds of six open receivables invoices, totaling $20,761, to its CEO. The assignment was non-interest bearing and fee free with a due date of November 20, 2010. Partial repayments were made in October 2010 for $4,218 and November 2010 for $4,125. In April 2012, the note was extended to December 31, 2012 (see Note 10). | | 12,418 | | 12,418 |
(7) Promissory note executed in March 2011 with the CEO, non-interest bearing, which matured on April 1, 2011. In April 2012, the note was extended to December 31, 2012. | | 2,800 | | 2,800 |
| $ | 722,638 | $ | 722,638 |
Interest expense for notes payable - related parties for the interim period ended March 31, 2012 and 2011 was $13,982 and $13,848, respectively.
Note 8 – Derivative Financial Instruments
The Company accounts for derivative financial instruments in accordance with ASC 815, which requires that all derivative financial instruments be recorded in the balance sheets either as assets or liabilities at fair value.
As of March 31, 2012, the Company’s derivative financial instruments are embedded derivative associated with the Company’s secured and unsecured convertible notes. The Company’s secured convertible debentures issued to YA Global and Highgate in 2005, further assigned to Citco Global (“Citco Global Notes”), and unsecured convertible debentures issued to the investor firm on December 5, 2011, January 3 2012, January 31, 2012 and March 2, 2012(“ICG Notes”), are hybrid instruments, which individually warrant separate accounting as a derivative instrument. The embedded derivative feature has been bifurcated from the debt host contract, referred to as the "Compound Embedded Derivative Liability", which resulted in a reduction of the initial carrying amount (as unamortized discount) of the notes. The unamortized discount is amortized to interest expense using the effective interest method over the life of the notes, or 12 months. The embedded derivative feature includes the conversion feature within the notes and an early redemption option. The compound embedded derivatives within the convertible notes have been recorded at fair value at the date of issuance; and are marked-to-market each reporting period with changes in fair value recorded to the Company’s statement of operations as Change in fair value of derivative liabilities.
Valuation of Derivative Financial Instruments
(1)
Valuation Methodology
The Company has utilized a third party valuation consultant to fair value the compound embedded derivatives using a multinomial lattice models that values the derivative liabilities within the convertible notes based on a probability weighted discount cash flow model.
16
(2)
Valuation Assumptions- Change in Fair Value of Derivative Liability Related to Citco Global Notes
The following assumptions were used for the valuation of the derivative liability related to the Citgo Global Notes:
·
The principal balance of the 2005 Notes as of 3/31/12 is $532,395;
·
The stock price of $0.0175 based market data as of 3/31/12;
·
The projected volatility curve for each valuation period was based on the Company’s historical volatility :
·
An event of default would occur 1% of the time, increasing 0.10% per month to a maximum of 10%;
·
Alternative financing would be initially available to redeem the note 10% of the time and increase monthly by .1% to a maximum of 20%.
·
The monthly trading volume would average $345,172 over a year and would increase at 1% per period; and
·
The Holder would automatically convert the notes at a stock price of $0.13 (the higher of: 2 times the conversion price or 1.5 times the stock price) if the registration was effective and the company was not in default.
As of March 31, 2012, the estimated fair value of derivative liabilities on secured convertible notes of Citco Global was $211,700.
(3)
Valuation Assumptions- Fair Value on Issuance Date for Derivative Liabilities Related to ICG Notes
The following assumptions were used for the valuation of the derivative liability related to the issuance of the ICG Notes:
·
The notes convert with an initial conversion price of 60% of the lowest bid out of the 10 previous days (effective rates of 51.33% as of 12/5/2011; 52.01% as of 1/3/2012; 52.34% as of 1/31/2012; and 50.86% as of 3/2/2012).
·
The projected volatility curve for each valuation period was based on the historical volatility of the company:
| | | | | |
| 1 year | 2 year | 3 year | 4 year | 5 year |
12/05/11 | 271% | 461% | 582% | 832% | 875% |
12/31/11 | 271% | 461% | 582% | 832% | 875% |
1/3/12 | 325% | 484% | 738% | 840% | 877% |
1/31/12 | 302% | 475% | 707% | 838% | 877% |
3/2/12 | 273% | 466% | 669% | 835% | 877% |
3/31/12 | 248% | 462% | 639% | 834% | 876% |
·
An event of default would occur 1% of the time, increasing 1.00% per month to a maximum of 10%;
·
The company would redeem (at 115% in the 1st 180 days) the notes projected initially at 0% of the time and increase monthly by 2.0% to a maximum of 10.0% (from alternative financing being available for a Redemption event to occurred); and
·
The Holder would automatically convert the note at the maximum of 2 times the conversion price if the company was not in default. With the target exercise price dropping as maturity approaches.
Based on relevant information available, the estimated fair value for the derivatives as of issuance on the four ICG Notes is as following:
| | | | |
Valuation Date: | 12/5/2011 | 1/3/2012 | 1/31/2012 | 3/2/2012 |
Notional Amount | 75,000 | 75,000 | 75,000 | 75,000 |
Note Balance | 75,000 | 75,000 | 75,000 | 75,000 |
Derivative Value - Notes | 73,679 | 76,421 | 77,011 | 73,141 |
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(4)
Valuation Assumptions- Change on Fair Value of Derivative Liabilities Related to ICG Notes
On March 31, 2012, the four existing derivative instruments from ICG were valued. The following assumptions were used for the valuation of the derivative liability related to the ICG Notes:
·
The notes face amount as of 3/31/12 is $300,000 with an initial conversion price of 60% of the lowest bid out of the 10 previous days (effective rates of 51.32%).
·
The projected volatility curve for each valuation period was based on the historical volatility of the company;
·
An event of default would occur 1% of the time, increasing 1.00% per month to a maximum of 10%;
·
The company would redeem (at 115% in the 1st 180 days) the notes projected initially at 0% of the time and increase monthly by 2.0% to a maximum of 10.0% (from alternative financing being available for a Redemption event to occurred); and
·
The Holder would automatically convert the note at the maximum of 2 times the conversion price if the company was not in default. With the target exercise price dropping as maturity approaches.
As of March 31, 2012, the estimated fair value of derivative liabilities on the unsecured convertible notes from ICG was $282,531.
Summary of Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the balance sheets:
| | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurement Using |
| | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Total |
Derivative warrant liabilities | | $ | 494,231 | | | $ | - | | $ | - | | $ | 494,231 | | | $ | 494,231 |
Summary of the Changes in Fair Value of Level 3 Financial Liabilities
The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2012 and the year ended December 31, 2011:
| | | | |
| | Fair Value Measurement Using Level 3 Inputs |
| | Derivative warrants | |
Total |
Balance, December 31, 2010 | $ | 424,671 | $ | 424,671 |
Total gains or losses (realized/unrealized) | | | | |
Included in net (income) loss | | (163,745) | | (163,745) |
Included in other comprehensive income | | - | | - |
Purchases, issuances and settlements | | 73,679 | | 73,679 |
Transfers in and/or out of Level 3 | | - | | - |
Balance, December 31, 2011 | | 334,605 | | 334,605 |
Total gains or losses (realized/unrealized) | | | | |
Included in net (income) loss | | (66,947) | | (66,947) |
Included in other comprehensive income | | - | | - |
Purchases, issuances and settlements | | 226,573 | | 226,573 |
Transfers in and/or out of Level 3 | | - | | - |
Balance, March 31, 2012 | $ | 494,231 | $ | 494,231 |
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Note 9 - Convertible Secured Notes Payable
Convertible secured notes payable consisted of the following at March 31, 2012 and December 31, 2011:
| | | | | | |
| | March 31, 2012 | | December 31, 2011 |
Citco Global Custody NV (assigned from YA Global/Highgate) | | $ | 542,588 | | $ | 542,588 |
| | | | | | |
Total convertible secured notes payable | | $ | 542,588 | | $ | 542,588 |
At March 31, 2012, the Company's outstanding convertible secured notes payable are secured through the note holder's claim on the Company's intellectual property.
The Citco Global secured convertible debentures are fully matured. The Company has been in contact with the note holder who has indicated that it has no present intention of exercising its right to convert the debentures into restricted shares of the Company's common stock.
Conversions to Common Stock
For the three months ended March 31, 2012 and 2011, Citco Global had no conversions.
Note 10 - Commitments and Contingencies
Payroll Taxes
At December 31, 2011, the Company recorded $53,901 of payroll taxes, of which approximately $45,000 were delinquent from the year ended December 31, 2003. The Company had also recorded $32,462 of related estimated penalties and interest on the delinquent payroll taxes. In March 2012, the Company determined to re-examine the nature and amounts of this accrued liability.
Section 105 HRA Plan
In September 2011, the Company enacted a Section 105 HRA Plan, effective with the 2011 payroll year, with an outside plan administrator. Per the terms of the plan, the Company will contribute plan dollars of $1,500 per plan year for employees with single health plan coverage and $3,000 per plan year for employees with family health plan coverage into the plan. The plan dollars will be reimbursed to the employees to offset the cost of health care expenses.
For the three months ended March 31, 2012 and 2011, the Company contributed plan dollars of $797 and $0, respectively.
Lease Agreements
The Company operates from a leased office in New Jersey. Per the terms of the lease agreement entered with the landlord, the Company pays a monthly base rent of $3,807 commencing on July 1, 2009 through the lease termination date of January 31, 2013. The landlord holds the sum of $8,684 as the Company’s security deposit.
Consulting Agreements
In December 2009, the Company entered into a retainer agreement with an attorney, whereby the attorney will act as house counsel for the Company with respect to all general corporate matters. The agreement is at will and required a payment of 100,000 shares of common stock, valued at $0.05 per share, upon execution. Commencing on January 1, 2010, the fee structure also includes a monthly cash fee of $1,000 and the monthly issuance of 2,500 shares of common stock, valued at market (see Note 11).
In April 2011, the Company entered into a marketing advisory and financial agreement with a marketing firm whereby the consultant serves as a marketing and financial advisor to the Company. The agreement terminated on April 1, 2012. For acting in this role, the consultant received 5,000,000 shares of the Company’s common stock in April 2011. The consultant also received warrants to purchase 6,500,000 shares of the Company’s common stock in April 2011. The warrants are exercisable at $0.06 per share for 2,000,000 shares, $0.11 per share for 2,000,000 shares, $0.16 per share for 1,500,000 shares and $0.26 per share for 1,000,000 shares. The warrants are only exercisable if certain contractual thresholds are met as of June 1, 2012 (see Note 11).
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In July 2011, the Company entered into a consulting agreement with an investor services firm whereby the consultant serves as an investment consultant to the Company. The term of the agreement is one year. For acting in this role, the consultant received 1,250,000 shares of the Company’s common stock in July 2011. The Company also agreed to issue warrants to purchase 625,000 shares of the Company’s common stock, exercisable at $0.06 per share, and warrants to purchase 625,000 shares of the Company’s common stock, exercisable at $0.11 per share, to the consultant. The warrants have a three year term (see Note 11). The warrants were issued in October 2011.
In November 2011, the Company entered into a consulting agreement with a firm whereby the consultant will receive a success fee, in the form of restricted shares of the Company’s common stock, of 6% of all monies invested in the Company as a result of a term sheet the Company executed with an investor firm in November 2011 (see Notes 10 below and 11).
In December 2011, the Company executed an exclusive agreement with an agent to represent the Company in enforcing its “Out-of-Band” patent No. 7,870,599. The agent will receive a commission of 50% of the net proceeds resulting from their services (see Note 2). As of March 31, 2012, no commissions were paid to the agent relating to the agreement.
In December 2011, the Company executed a joint venture agreement with a marketing firm whereby the parties will develop and execute marketing strategies for the Company’s products. The parties will share revenues resulting from the efforts of the joint venture at 50% each. As of March 31, 2012, no revenues were attributed to the agreement.
In December 2011, the Company executed a business development agreement with a consulting firm, which was amended in December 2011, having a six month term. In consideration of the agreement, the Company, at its sole discretion, will issue up to 5,000,000 restricted shares of its common stock, at the conclusion of the agreement, providing the Company is satisfied with the consultant’s performance relating to the agreement. At its sole discretion, the Company may issue half of the above shares after 90 days of the agreement date and the shares would be placed in escrow for the consultant. As of March 31, 2012, no shares were issued to the consultant relating to the agreement.
In January 2012, the Company entered into a consulting agreement with a firm whereby the consultant will assist the Company in obtaining clients and investors. The consultant will receive a fee of $5,000 per month and warrants to purchase 150,000 shares of the Company’s common stock, exercisable at $0.03 per share. The consultant also received warrants to purchase 150,000 shares of the Company’s common stock, exercisable at $0.03 per share, upon execution of the agreement. The warrants have a three year term. The term of the agreement was one month. The agreement was amended and extended for February and March 2012. The amendments reduced the exercise price of the warrants to $0.02 per share. In April 2012, the agreement was amended for an additional one month extension and the Company issued warrants to purchase 150,000 shares of the Company’s common stock, exercisable at $0.02 per share. The warrants have a three year term (see Notes 11 and 14).
In January 2012, the Company entered into a consulting agreement with a firm whereby the consultant will assist the Company in obtaining investors. The consultant will receive a commission of 5% of all financing raised as a result of the consultant’s efforts. The consultant will also receive, as a commission, 10% of all financing raised as a result of the consultant’s efforts in the form of warrants to purchase shares of the Company’s common stock, exercisable at $0.02 per share. The warrants have a three year term. The term of the agreement is two years. As of March 31, 2012, no financing was raised relating to the agreement.
In February 2012, the Company entered into a consulting agreement with a firm whereby the consultant will assist the Company in obtaining clients. The consultant will receive a commission of 50% of all contracted revenues and 50% of the first renewal of all contracted revenues, for new clients, and 25% of all contracted revenues for existing clients, recorded as a result of the consultant’s efforts. In March 2012, the agreement was amended to increase the 25% commission rate to 35%. The parties may elect to remit commissions in the form of restricted shares of the Company’s common stock, with a maximum amount of shares issued in one year not to exceed 5,000,000 shares. The agreement also includes performance incentives whereby the consultant will receive bonus restricted shares of the Company’s common stock at the end of the agreement term as follows: one million shares if contracted revenues exceed $1,000,000, two million shares if contracted revenues exceed $2,000,000, three million shares if contracted revenues exceed $3,000,000 and four million shares if contracted revenues exceed $4,000,000. At the end of the first year of the agreement, the consultant will also have the option to purchase restricted shares of the Company’s common stock directly from the Company at a 25% discount of the then current market price on the last day of the contract, up to a maximum of 5,000,000 shares. The term of the agreement is one year with automatic renewals. As of March 31, 2012, no revenues were recorded relating to the agreement.
20
Term Sheet
In November 2011, the Company executed a term sheet with an investor firm whereby the firm will invest in the Company up to $450,000, in tranches of $75,000 per month for six months, in the form of convertible promissory notes, bearing interest at 4% per year, with maturity dates of 12 months from the date issuance (see Notes 4, 9 and 10 above). A broker fee of 12% will be deducted from each tranche and the notes will include a 15% prepayment penalty. The investor firm may process conversions after six months from the date of each closing. Conversions will include a 40% discount to the lower of (i) the average closing bid price of the Company’s common stock for the previous ten days of a conversion notice or (ii) the closing bid price on the date of the conversion notice. In December 2011, the Company received the first tranche of $66,000, net of the $9,000 broker fee, and executed a convertible promissory note and securities purchase agreement per the terms of the term sheet (see Note 4). Additional closings, for the same amounts, were held in January (two closings) and March (one closing) 2012. The debentures contain an embedded derivative feature (see Note 9). In March 2012, the investor firm notified the Company that it has elected to terminate the term sheet and no further closings will occur.
In March 2012, the Company executed a term sheet with an investor firm whereby the firm will invest in the Company $53,000 in the form of a convertible promissory notes, bearing interest at 8% per year, with a maturity date 9 months from the date issuance. A closing fee of 3% will be deducted from the tranche and the note will include a tiered prepayment penalty. The investor firm may process conversions after six months from the date of the closing. Conversions will include a 42% discount to the average closing bid price of the Company’s common stock for the previous ten days of a conversion notice, using the average of the three lowest trading prices. In April 2012, the Company received the tranche of $50,000, net of the $3,000 closing fee, and executed a convertible promissory note and securities purchase agreement per the terms of the term sheet (see Note 14).
Transfer of Aged Debt
In September 2011, the Company formalized a debt settlement agreement with a consultant whereby the Company transferred $1,000,000 of debentures and aged debt to the consultant. The Company satisfied the debt sold to the consultant by issuing shares of the Company’s common stock to the consultant at a price of $0.005 per share for the first $100,000, $0.01 per share for the next $100,000, $0.015 per share for the third $100,000 and $0.01 per share for the remainder of the $1,000,000 of aged debt. In July 2011, the Company satisfied promissory notes of $50,000, plus accrued interest, in August 2011, the Company satisfied promissory notes of $32,500, plus accrued interest and in October 2011, the Company satisfied a related party convertible note of $10,000, plus accrued interest (see Notes 4 and 6). In consideration of the debt transferred, the consultant received 6,500,000 shares, 4,112,500 shares and 3,133,746 shares of the Company’s unrestricted common stock in July, September and October 2011, respectively (see Note 11).
The Company also made available to the note holders the opportunity to offer financing to the Company through the sale of a total of 35,000,000 two year commitment warrants exercisable into shares of the Company's common stock at $0.02 per share for 15,000,000 warrants, $0.03 per share for 10,000,000 warrants and $0.04 per share for 10,000,000 warrants. For the year ended December 31, 2011, the Company sold warrants for cash in the amount of $43,000 in September 2011 and $20,000 in October 2011 (see Note 11). The Company used a portion of the proceeds to redeem the Steeltown debentures in 2011 (see Note 8).
The consultant had also agreed to purchase $100,000 of additional restricted shares of the Company’s common stock commencing in October 2011, at $20,000 per tranche. The Company plans to use the proceeds of the sale of the stock solely to reduce accrued payroll and related payroll taxes. As of March 31, 2012, no additional shares have been purchased.
21
Settlement Agreements
In April 2009, the Company executed a settlement agreement with its former President whereby the Company agreed to make monthly payments of $7,500, beginning in June 2009, in order to repay promissory notes, accrued interest, deferred payroll and expenses in the amount of $139,575 owed to its former President. The Company paid an initial installment payment of $12,500 to its former President in April 2009. The company paid an installment payment of $7,500 to its former President in September 2009. In September 2009, the Company executed an amendment to the settlement agreement whereby the payment terms and amount were revised. Effective September 2009, the Company was to make a $2,500 payment to its former President per Company payroll period. In the event the Company does not process a full payroll, the Company is to pay a proportionate percentage of the payment owed equal to the percentage of the total Company net payroll amount paid. For the years ended December 31, 2011 and 2010, the Company paid $10,000 and $28,600, respectively, to its former President per the terms of the agreement and amendment. All of the 2010 payments and $3,900 in payments made in the year ended December 31, 2011, made in accordance with the agreement and subsequent amendment, were applied to the February 2008 promissory note balance owed to the Company’s former President. As of March 31, 2011, the note balance was paid in full. Payments made in the year ended December 31, 2011, made in accordance with the agreement and subsequent amendment, totaling $24,273 were applied to the open payables balance and $24,327 were applied to accrued interest owed to the Company’s former President. In January 2012, the Company and its former President agreed to settle the remaining balance due of $20,975 in exchange for the issuance of 1,498,214 restricted shares of the Company’s common stock, valued at $0.014 per share (see Note 11).
In August 2011, the Company executed a debt settlement agreement with a trade vendor whereby the Company has agreed to issue restricted shares of its common stock to the vendor, at market price, as settlement of the balance owed to the vendor of $54,000. The Company issued 900,000 shares of common stock, valued at $0.03 per share, in September 2011 for settlement of $27,000 of the balance owed. The remaining balance was settled by the issuance of shares in March 2012 (see Note 11).
Loan Repayment Agreement
In April 2009, the Company signed an agreement whereby two promissory notes executed with a distributor of its products were to be repaid from the proceeds of sales of the Company’s products sold by the distributor for the Company. In September 2009, the Company executed an additional promissory note with the distributor that is included in the loan repayment agreement. In May 2010, the Company executed an additional promissory note with the distributor that is included in the loan repayment agreement. For the three months ended March 31, 2012 and 2011, sales proceeds of $3,922 and $7,719, respectively, were applied to the balance of the notes (see Notes 6 and 11).
Assignment
In October 2010, the Company assigned the proceeds of six of the Company’s open receivables invoices, in the total amount of $20,761, to its CEO. The assignment was non-interest bearing and fee free with a due date for repayment of November 20, 2010. Partial repayments of the assignment were made in October 2010 for $4,218 and November 2010 for $4,125. The due date of the assignment has been extended to December 31, 2012 (see Note 7).
Due to Factor
In March 2007, the Company entered into a sale and subordination agreement with a factoring firm whereby the Company sold its rights to two invoices, from February 2007 and March 2007, totaling $470,200 to the factor. Upon signing the agreement and providing the required disclosures, the factor remitted 65%, or $144,440, of the February 2007 invoice and a certain percentage of $53,010 of the March 2007 invoice to the Company. The Company paid a $500 credit review fee to the factor relating to the agreement. Per the terms of the agreement, once the Company’s client remits the invoice amount to the factor, the factor deducts a discount fee from the remaining balance of the factored invoices and forwards the net proceeds to the Company. The discount fee is computed as a percentage of the face amount of the invoice as follows: 2.25% fee for invoices paid within 30 days of the down payment date with an additional 1.125% for each 15 day period thereafter. In September 2007, the February 2007 factored invoice was deemed uncollectible and was written off as bad debt expense. In December 2007, the March 2007 factored invoice was deemed uncollectible and was written off as bad debt expense. In February 2008, the Company and the factor agreed to a total settlement amount of $75,000, which was scheduled to be paid by the Company to the factor in September 2008 unless both parties mutually agreed to extend the due date. In September 2008, the Company and the factor reached a verbal agreement to extend the due date to December 31, 2008. The Company is pursuing a further extension. As of March 31, 2012, the balance due to the factor by the Company was $209,192 including interest.
22
Note 11 - Stockholders’ Deficit
Preferred Stock
On October 21, 2010, the Company amended its Articles of Incorporation in New Jersey to authorize 10,000,000 shares of preferred stock, par value $0.10. The designations, rights, and preferences of such preferred stock are to be determined by the Board of Directors. On November 15, 2010, the Company changed its domicile from the state of New Jersey to the state of Wyoming.
In addition to the 10,000,000 shares of preferred stock authorized, on January 10, 2011, 100 shares of preferred stock were designated as Series A Preferred Stock and 100,000,000 shares were designated as Series B Preferred Stock. The bylaws under the Wyoming Incorporation were amended to reflect the rights and preferences of each additional new designation.
The Series A Preferred Stock collectively has voting rights equal to eighty percent of the total current issued and outstanding shares of common stock. If at least one share of Series A Preferred Stock is outstanding, the aggregate shares of Series A Preferred Stock shall have voting rights equal to the number of shares of common stock equal to four times the sum of the total number of shares of common stock issued and outstanding, plus the number of shares of Series B Preferred Stock (or other designated preferred stock) which are issued and outstanding.
The Series B Preferred Stock shall have preferential liquidation rights in the event of any liquidation, dissolution or winding up of the Company, such liquidation rights to be paid from the assets of the Company not delegated to parties with greater priority at $1.00 per share or, in the event an aggregate subscription by a single subscriber of the Series B Preferred Stock is greater than $100,000,000, $0.997 per share. The Series B Preferred Stock shall be convertible to a number of shares of common stock equal to the price of the Series B Preferred Stock divided by the par value of the Series B Preferred Stock. The option to convert the shares of Series B Preferred Stock may not be exercised until three months following the issuance of the Series B Preferred Stock to the recipient shareholder. The Series B Preferred Stock shall have ten votes on matters presented to the shareholders of the Company for one share of Series B Preferred Stock held. The initial price of the Series B Preferred Stock shall be $2.50, (subject to adjustment by the Company’s Board of Directors) until such time, if ever, the Series B Preferred Stock are listed on a secondary and/or public exchange. As of March 31, 2012, no shares of Series B Preferred Stock have been issued.
Issuance of Series A Preferred Stock
In February 2011, the Company issued three shares of non-convertible Series A preferred stock valued at $329,000 per share, or $987,000 in aggregate, for voting purposes only, to the three members of the management team at one share each. The issued and outstanding shares of the Series A preferred stock have voting rights equal to eighty percent of the total issued and outstanding shares of the Company's common stock (see Note 10). This effectively provided them, upon retention of their Series A Preferred Stock, voting control on matters presented to the shareholders of the Company. The Company expensed $987,000 in stock based compensation expense related to the issuance of the shares in 2011.
Common Stock
In February 2011, an increase of the authorized shares of the Company’s common stock from one hundred million (100,000,000) to five hundred million (500,000,000), $0.0001 par value, was ratified, effective upon the filing of an amendment to the Company’s Certificate of Incorporation with the Wyoming Secretary of State.
Issuance of Common Stock for Services
In December 2009, the Company entered into a retainer agreement with an attorney, whereas the attorney acts as house counsel for the Company with respect to all general corporate matters. The agreement is at will and required a payment of 100,000 shares of common stock, valued at $0.05 per share, due upon execution. Commencing on January 1, 2010, the fee structure also includes a monthly cash fee of $1,000 and the monthly issuance of 2,500 shares of common stock, valued at market. For the three months ended March 31, 2012 and 2011, the Company issued 7,500 shares of common stock, valued at $113, and 7,500 shares of common stock, valued at $263, respectively, all of which have been expensed as legal fees, related to the agreement.
23
In November 2011, the Company entered into a consulting agreement with a firm whereby the consultant will receive a success fee, in the form of restricted shares of the Company’s common stock, of 6% of all monies invested in the Company as a result of a term sheet the Company executed with an investor firm in November 2011 (see Note 10). In December 2011, the consultant received 343,511 shares of the Company’s common stock, valued at $4,500 and all of which has been expensed as consulting fees, as a result of the first investor tranche of $75,000. In December 2011, the consultant received 343,511 shares of the Company’s common stock, valued at $4,500, as a result of the first investor tranche of $75,000. In January 2012, the consultant received 264,705 shares of the Company’s common stock, valued at $4,500, as a result of the second investor tranche of $75,000. In February 2012, the consultant received 276,073 shares of the Company’s common stock, valued at $4,500, as a result of the third investor tranche of $75,000. In March 2012, the consultant received 321,428 shares of the Company’s common stock, valued at $4,500, as a result of the fourth investor tranche of $75,000 (see Note 10). The value of all of the shares issued has been expensed as consulting fees.
In December 2011, the Company issued 2,000,000 restricted shares of its common stock to a consultant in consideration of the consultant’s past support of the Company through several areas of assistance. The shares were valued at $37,200, all of which has been expensed as consulting fees.
In January 2012, the Company issued 2,000,000 restricted shares of its common stock to a consultant in consideration of the consultant’s past support of the Company through several areas of assistance. The shares were valued at $36,000, all of which has been expensed as consulting fees.
Issuance of Common Stock for Financing
In January 2009, the Company executed a promissory note for $225,000, bearing interest at 10% per annum, maturing on January 23, 2012. Per the terms of the promissory note, the note holder of a $100,000 convertible note, executed in July 2008, rolled the convertible note balance and accrued interest owed into a purchase of nine units with each unit consisting of a 10% promissory note of $25,000 for a total of $225,000 and 82,000 shares of the Company’s common stock, valued at $0.06, for a total of 738,000 shares of common stock. An additional loan to the Company, in January 2009, of $100,000 by the note holder was included as part of the purchase of the nine units (see Note 6). The shares were issued in February 2009. For the three months ended March 31, 2012 and 2011, the Company expensed $0 and $5,535, respectively, of financing expenses related to the shares.
In March 2009, the Company executed a promissory note for $50,000, bearing interest at 10% per annum, maturing on March 20, 2012. Per the terms of the promissory note, the note holder purchased two units with each unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Company’s common stock, at market price, for a total of 100,000 shares of common stock. The shares were issued in April 2009. For the three months ended March 31, 2012 and 2011, the Company expensed $417 and $417, respectively, of financing expenses related to the shares (see Notes 6 and 10).
In April 2009, the Company executed a promissory note for $50,000, bearing interest at 10% per annum, maturing on April 10, 2012. Per the terms of the promissory note, the note holder purchased two units with each unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Company’s common stock, at market price, for a total of 100,000 shares of common stock. For the three months ended March 31, 2012 and 2011, the Company expensed $417 and $417, respectively, of financing expenses related to the shares (see Notes 6 and 10).
In May 2009, the Company executed a promissory note for $50,000, bearing interest at 10% per annum, maturing on May 27, 2012. Per the terms of the promissory note, the note holder purchased two units with each unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Company’s common stock, at market price, for a total of 100,000 shares of common stock. The shares were issued in June 2009. For the three months ended March 31, 2012 and 2011, the Company expensed $250 and $250, respectively, of financing expenses related to the shares (see Note 6).
In June 2009, the Company executed a promissory note for $25,000, bearing interest at 10% per annum, maturing on June 8, 2012. Per the terms of the promissory note, the note holder purchased one unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Company’s common stock, at market price. The shares were issued in June 2009. For the three months ended March 31, 2012 and 2011, the Company expensed $125 and $125, respectively, of financing expenses related to the shares (see Note 6).
In June 2009, the Company executed a promissory note for $75,000, bearing interest at 10% per annum, maturing on June 12, 2012. Per the terms of the promissory note, the note holder purchased three units with each unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Company’s common stock, at market price, for a total of 150,000 shares of common stock. The shares were issued in August 2009. For the three months ended March 31, 2012 and 2011, the Company expensed $500 and $500, respectively, of financing expenses related to the shares (see Note 6).
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In July 2009, the Company executed a promissory note for $35,000, bearing interest at 10% per annum, maturing on July 14, 2012. Per the terms of the promissory note, the note holder purchased 1.4 units with each unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Company’s common stock, at market price, for a total of 70,000 shares of common stock. The shares were issued in August 2009. For the three months ended March 31, 2012 and 2011, the Company expensed $233 and $233, respectively, of financing expenses related to the shares (see Note 6).
In August 2009, the Company executed a promissory note for $25,000, bearing interest at 10% per annum, maturing on August 18, 2012. Per the terms of the promissory note, the note holder purchased one unit consisting of a 10% promissory note of $25,000 and 75,000 restricted shares of the Company’s common stock, at market price. The shares were issued in August 2009. For the three months ended March 31, 2012 and 2011, the Company expensed $250 and $250, respectively, of financing expenses related to the shares (see Note 6).
In September 2009, the Company executed a promissory note for $50,000, bearing interest at 10% per annum, maturing on September 2, 2012. Per the terms of the promissory note, the note holder purchased two units with each unit consisting of a 10% promissory note of $25,000 and 50,000 restricted shares of the Company’s common stock, at market price, for a total of 100,000 shares of common stock. For the three months ended March 31, 2012 and 2011, the Company expensed $458 and $458, respectively, of financing expenses related to the shares (see Notes 6 and 10).
In October 2009, the Company executed a promissory note for $50,000, bearing interest at 10% per annum, maturing on October 20, 2012. Per the terms of the promissory note, the note holder purchased two units with each unit consisting of a 10% promissory note of $25,000 and 82,000 restricted shares of the Company’s common stock, valued at $0.10 per share, for a total of 164,000 shares of common stock. The shares were issued in November 2009. For the three months ended March 31, 2012 and 2011, the Company expensed $0 and $1,367, respectively, of financing expenses related to the shares (see Note 6).
In October 2009, the Company executed a promissory note for $18,750, bearing interest at 10% per annum, maturing on October 27, 2012. Per the terms of the promissory note, the note holder purchased three/fourths of one unit with each unit consisting of a 10% promissory note of $25,000 and 133,333 restricted shares of the Company’s common stock, valued at $0.10 per share, for a total of 100,000 shares of common stock. For the three months ended March 31, 2012 and 2011, the Company expensed $0 and $833, respectively, of financing expenses related to the shares (see Note 6).
In December 2009, the Company executed a promissory note for $7,500, bearing interest at 10% per annum, maturing on December 4, 2012. As consideration for executing the note, the Company issued 150,000 shares of restricted common stock, valued at $0.10 per share, to the note holder. For the three months ended March 31, 2012 and 2011, the Company expensed $1,250 and $1,250, respectively, of financing expenses related to the shares (see Note 6).
In May 2010, the Company executed a promissory note for $50,000, bearing interest at 10% per annum, maturing on May 21, 2013. As consideration for executing the note, the Company issued 200,000 shares of restricted common stock, valued at $0.009 per share, to the note holder. For the three months ended March 31, 2012 and 2011, the Company expensed $150 and $150, respectively, of financing expenses related to the shares (see Notes 6 and 10).
Issuance of Common Stock for Settlement of Trade Payables
In August 2011, the Company issued 900,000 shares of its common stock, valued at $0.03 per share, to a vendor for settlement of trade payables. In March 2012, the remaining payables balance was settled and the Company issued 1,800,000 shares of its common stock, valued at $0.015 per share, to the vendor (see Note 10).
Issuance of Common Stock for the Sale and Settlement of Aged Debt
Per the terms of a debt purchase agreement that the Company formalized with a consultant in September 2011, the Company issued 6,500,000 unrestricted shares of its common stock, valued at $0.005 per share, in July 2011, 4,112,500 unrestricted shares of its common stock, valued at $0.005 per share, in September 2011, and 3,133,746 unrestricted shares of its common stock, valued at $0.005 per share, in October 2011 to the consultant for the sale and retirement of certain promissory notes and convertible related party promissory notes (see Notes 4, 6 and 10).
Per the terms of a settlement agreement that the Company executed with the estate of a deceased note holder in November 2011, the Company issued 1,344,086 restricted shares of its common stock, valued at $0.0186 per share, in December 2011, to two beneficiaries of the estate for the settlement of a promissory note (see Notes 6 and 10).
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Per the terms of a settlement agreement that the Company executed with its former President in January 2012, the Company issued 1,498,214 restricted shares of its common stock, valued at $0.014 per share to its former President for settlement of a accrued interest owed (see Note 10).
Per the terms of a settlement agreement that the Company executed with a note holder in January 2012, the Company issued 5,058,060 restricted shares of its common stock, valued at $0.0165 per share to the note holder for settlement of a promissory note (see Notes 6 and 10).
Sale of Shares of Common Stock
In June 2011, the Company sold to two individuals certain units which contained common stock. The Company issued 3,000,000 shares of its common stock at $0.02 per share.
In August 2011, the Company sold to one individual certain units which contained common stock and warrants. The Company issued 1,000,000 shares of its common stock at $0.03 per share and warrants to purchase 500,000 shares of the Company’s common stock, exercisable at $0.04 per share that expire in August 2014 (see Note 11 below).
In September 2011, the Company sold to three individuals certain units which contained common stock. The Company issued 5,000,000 shares of its common stock at $0.02 per share for 4,000,000 shares and $0.025 per share for 1,000,000 shares.
In October 2011, the Company sold subscriptions to one individual for certain units containing common stock and warrants. The units were for 1,000,000 shares of its common stock at $0.025 per share and warrants to purchase 500,000 shares of the Company’s common stock, exercisable at $0.04 per share that expire three years from the date of issuance. The shares and warrants were formally issued in March 2012. The Company recorded the value of the shares as common stock to be issued at December 31, 2011 and included them into loss per share purposes for 2011 (see Note 11 below).
In November 2011, the Company sold to two individual certain units which contained common stock and warrants. The Company issued 2,000,000 shares of its common stock at $0.025 per share, 1,000,000 shares to each individual, and warrants to purchase a total of 1,500,000 shares of the Company’s common stock, exercisable at $0.04 per share that expire in October 2014 (see Note 11 below).
In January 2012, the Company sold to subscriptions to one individual for certain units containing common stock and warrants. The Company issued 3,418,804 shares of its common stock at $0.017 per share and warrants to purchase a total of 1,709,402 shares of the Company’s common stock, exercisable at $0.03 per share that expire in January 2015 (see Note 11 below).
In February 2012, the Company sold to subscriptions to one individual for certain units containing common stock and warrants. The Company issued 4,444,444 shares of its common stock at $0.016 per share and warrants to purchase a total of 2,222,222 shares of the Company’s common stock, exercisable at $0.03 per share that expire in February 2015 (see Note 11 below).
In March 2012, the Company sold to subscriptions to one individual for certain units containing common stock and warrants. The Company issued 2,717,391 shares of its common stock at $0.015 per share and warrants to purchase a total of 1,358,696 shares of the Company’s common stock, exercisable at $0.03 per share that expire in February 2015 (see Note 11 below).
Sale of Warrants for Cash and Exercise of Warrants
In January 2011, the Company sold warrants to purchase 5,333,333 shares of common stock to one unrelated individual for $14,000 in cash. The warrants are exercisable at $0.03 per share and expire in January 2016.
In February 2011, the Company sold warrants to purchase 37,714,285 shares of common stock to two unrelated individuals for $99,000 in cash. The warrants are exercisable at $0.03 per share and expire in February 2016.
In March 2011, the Company sold warrants to purchase 12,250,000 shares of common stock to four unrelated individuals for $76,563 in cash. The warrants are exercisable at $0.03 per share and expire in March 2016.
In April 2011, the Company sold warrants to purchase 5,000,000 shares of common stock to an unrelated party for $31,250 in cash. The warrants are exercisable at $0.03 per share and expire in April 2016.
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In April 2011, in accordance with a warrant purchase agreement executed with a consulting group, the Company issued warrants to purchase 50,000,000 shares of common stock to three unrelated parties for cash considerations in the amount of $445,000, of which the company received $131,000 in April 2011, $57,500 in May 2011, $74,000 in June 2011 and $14,000 in July 2011. Each party received warrants exercisable at $0.02 per share for 10,000,000 shares, $0.04 per share for 10,000,000 shares, $0.08 per share for 10,000,000 shares, $0.12 per share for 10,000,000 and $0.15 per share for 10,000,000 shares. All of the warrants expire in April 2014.
In April 2011, the Company issued 800,000 restricted shares of its common stock, valued at $0.025 per share, to an individual for the exercise of warrants for cash.
In September 2011, in accordance with a debt settlement agreement executed with a consulting firm, the Company issued warrants to purchase 35,000,000 shares of common stock to the consultant for cash considerations in the amount of $315,000, of which the company received $43,000 in September 2011 and $20,000 in October 2011. The warrants are exercisable at $0.02 per share for 15,000,000 shares, $0.03 per share for 10,000,000 shares and $0.04 per share for 10,000,000 shares. All of the warrants expire in September 2013 (see Note 10).
Issuance of Warrants for Financing and Acquiring Services
In connection with consulting agreements, the Company issued warrants for 13,525,950 shares to consultants, all of which were deemed earned upon issuance, as of March 31, 2012. The fair value of these warrants granted, estimated on the date of grant using the Black-Scholes option-pricing model, was $515,578, which has been recorded as consulting expenses.
The table below summarizes the Company’s warrant activities through March 31, 2012:
| | | | | | | | | | |
| | Number of Warrant Shares | | Exercise Price Range Per Share | | Weighted Average Exercise Price | | Fair Value at Date of Issuance Contractual Term | | Intrinsic Value (in thousands) |
Balance, January 1, 2011 | | 122,968,467 | $ | 0.004 - $ 10.00 | $ | 0.039 | $ | 1,312,645 | $ | --- |
Granted | | 118,000,000 | $ | 0.02 - $ 0.50 | $ | 0.062 | $ | 1,430,013 | $ | --- |
Exercised | | - | $ | - | $ | - | $ | - | $ | --- |
Balance, December 31, 2011 | | 240,968,467 | $ | 0.004 - $ 10.00 | $ | 0.05 | $ | 2,742,658 | $ | --- |
Granted | | 6,390,320 | $ | 0.02 - $0.04 | $ | 0.03 | $ | 77,822 | $ | --- |
Exercised | | - | $ | - | $ | - | $ | - | $ | --- |
Balance, March 31, 2012 | | 247,358,787 | $ | 0.004 - $ 10.00 | $ | 0.05 | $ | 2,820,480 | $ | --- |
Earned and Exercisable, March 31, 2012 | | 247,358,787 | $ | 0.004 - $ 10.00 | $ | 0.05 | $ | 2,820,480 | $ | --- |
The following table summarizes information concerning outstanding and exercisable warrants as of March 31, 2012:
| | | | | | | | | | | | | | | |
| | Warrants Outstanding | | Warrants Exercisable |
Range of Exercise Prices | | Number Outstanding | | Average Remaining Contractual Life (in years) | | Weighted- Average Exercise Price | | Number Exercisable | | Weighted- Average Exercise Price |
$10.00 | | | 8,050 | | | 2.46 | | $ | 10.000 | | | 8,050 | | $ | 10.000 |
$1.00 - $5.50 | | | 281,417 | | | 0.00 | | | 2.444 | | | 281,417 | | | 2.444 |
$0.02 - $0.80 | | | 247,069,320 | | | 2.96 | | | 0.047 | | | 247,069,320 | | | 0.042 |
| | | | | | | | | | | | | | | |
| | | 247,358,787 | | | 2.95 | | $ | 0.050 | | | 247,358,787 | | $ | 0.050 |
Note 12 - Stock Based Compensation
2004 Equity Incentive Plan
In September 2004, the stockholders approved the Equity Incentive Plan for the Company’s employees (“Incentive Plan”), effective April 1, 2004. The number of shares authorized for issuance under the Incentive Plan was increased to 10,000,000 in September 2006, 15,000,000 in March 2007, 20,000,000 in June 2007, 100,000,000 in December 2007 and 200,000,000 in April 2011, by unanimous consent of the Board of Directors prior to 2011 and by majority consent of the Board of Directors in 2011.
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Option shares totaling 142,500 vested equally over a three year period beginning one-year from the date of grant, option shares totaling 200,000 vested in one-third increments of six months each over an eighteen month period from the date of grant, option shares totaling 1,084,797 vested over a one year period from the date of grant, option shares totaling 5,750,012 vested over a three month period from the date of grant, option shares totaling 125,000,000 vest over an eight month period and option shares totaling 7,850,000 vested upon issuance. At March 31, 2012, 59,972,691 shares were available for future issuance.
Shares and Options Awarded during 2012
The fair value of each option grant estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| | |
| March 31, 2012 | March 31, 2011 |
Risk-free interest rate | 2.14% | 1.6 – 2.1% |
Dividend yield | 0.00% | 0.00% |
Expected volatility | 313% | 290% - 307% |
Expected option life | 3 years – 10 years | 3 years – 10 years |
The table below summarizes the Company’s Incentive Plan stock option activities through March 31, 2012:
| | | | | | | | | | | | |
| | Number of Option Shares | | Fair Value at the date of Grant | | Exercise Price Range Per Share | | Weighted Average Exercise Price | | Weighted Average Remaining (in years) Contractual Term | | Intrinsic Value (in thousands) |
Balance, January 1, 2011 | | 70,027,309 | $ | 1,184,621 | $ | 0.0025 - $ 10.00 | $ | 0.018 | | 3.7 | $ | --- |
Granted | | 70,000,000 | $ | 2,030,000 | $ | $0.01 | $ | 0.01 | | 4.3 | $ | --- |
Cancelled | | - | $ | - | $ | - | $ | - | | - | $ | --- |
Balance, December 31, 2011 | | 140,027,309 | $ | 3,214,621 | $ | 0.0025 - $10.00 | $ | 0.014 | | 4.0 | $ | --- |
Granted | | - | $ | - | $ | - | $ | - | | - | $ | --- |
Balance, March 31, 2012 | | 140,027,309 | $ | 3,214,621 | $ | 0.0025 - $10.00 | $ | 0.014 | | 3.75 | $ | --- |
Vested and Exercisable, March 31, 2012 | | 140,027,309 | $ | 3,214,621 | $ | 0.0025-$10.00 | $ | 0.014 | | 3.75 | $ | --- |
As of March 31, 2012, an aggregate of 140,027,309 options were outstanding under the incentive plan.
The following table summarizes information concerning outstanding and exercisable Incentive Plan options as of March 31, 2012:
| | | | | | | | | | | | | | |
| Options Outstanding | | Options Exercisable |
Range of Exercise Prices | Number Outstanding | | Average Remaining Contractual Life (in years) | | Weighted-Average Exercise Price | | Number Exercisable | | Weighted-Average Exercise Price |
$10.000 | | 37,500 | | | 2.41 | | $ | 10.000 | | | 37,500 | | $ | 10.000 |
$1.000 | | 105,000 | | | 4.26 | | | 1.000 | | | 105,000 | | | 1.000 |
$0.0025 - $0.375 | | 139,884,809 | | | 3.75 | | | 0.014 | | | 139,884,809 | | | 0.014 |
| | | | | | | | | | | | | | |
| | 140,027,309 | | | 3.75 | | $ | 0.014 | | | 140,027,309 | | $ | 0.018 |
Non-Incentive Plan Stock Option Grants
As of March 31, 2012, an aggregate of 2,761,889 non-plan, non-qualified options for non-employees were outstanding. The exercise price for 2,000,000 options (granted in December 2010) is $0.006, for 760,000 options is $3.60 and for 1,889 options is $9.00, yielding a weighted average exercise price of $1.001.
At March 31, 2012, there were 2,761,889 vested non-plan, non-qualified stock options outstanding of which 2,000,000 options are exercisable at $0.006, 760,000 options are exercisable at $3.60 and 1,889 options are exercisable at $9.00.
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Note 13 - Concentration of Credit Risk
Customers and Credit Concentrations
Revenue concentrations for the three months ended March 31, 2012 and 2011 and the accounts receivables concentrations at March 31, 2012 and December 31, 2011 are as follows:
| | | | | | | | | | | | | | | |
| Net Sales for the Three Months Ended | | | Accounts receivable At | |
| March 31, 2012 | | | March 31, 2011 | | | March 31, 2012 | | | December 31, 2011 | |
Customer A | | 58.0 | % | | | 51.8 | % | | | 65.4 | % | | | 78.0 | % |
Customer B | | 21.6 | % | | | - | % | | | 24.4 | % | | | - | % |
Customer C | | 11.6 | % | | | 16.4 | % | | | 4.5 | % | | | 9.1 | % |
Customer D | | - | % | | | - | % | | | 3.9 | % | | | 8.4 | % |
| | 91.2 | % | | | 68.2 | % | | | 98.2 | % | | | 95.5 | % |
A reduction in sales from or loss of such customers would have a material adverse effect on the Company’s results of operations and financial condition.
Note 14 - Subsequent Events
The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued. The Management of the Company determined that there were certain reportable subsequent events to be disclosed as follows:
Convertible Notes Payable
The Company executed a convertible note in April 2012 for $53,000, bearing interest at 8% per annum, maturing on January 16, 2013, per a term sheet executed in March 2012 with an investor firm. A closing fee of 3% was deducted from the tranche and the note includes a tiered prepayment penalty. The investor firm may process conversions after six months from the date of the closing. Conversions will include a 42% discount to the average closing bid price of the Company’s common stock for the previous ten days of a conversion notice, using the average of the three lowest trading prices. (see Note 10).
Sale of Shares of Common Stock
In April 2012, the Company sold to three individuals certain units which contained common stock and warrants. The Company issued 2,252,252 shares of its common stock at $0.0148 per share each to two of the investors and 2,469,136 shares of its common stock at $0.010125 per share to the remaining investor. The Company also issued warrants to purchase 1,126,126 shares of the Company’s common stock, exercisable at $0.02 per share that expire in April 2015 to one investor,warrants to purchase 1,126,126 shares of the Company’s common stock, exercisable at $0.03 per share that expire in April 2015 to one investor and warrants to purchase 1,234,568 shares of the Company’s common stock, exercisable at $0.02 per share that expire in April 2015 to the remaining investor.
Issuance of Warrants for Services
In April 2012, Company amended a consulting agreement entered into in January 2012 to extend the agreement for an additional month and the Company issued warrants to purchase 150,000 shares of the Company’s common stock, exercisable at $0.02 per share, to the consultant. The warrants have a three year term (see Notes 10 and 11).
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Commitments and Contingencies
In May 2012, the Company finalized an equity facility with an investor firm, whereby the parties entered into (i) a drawdown equity financing agreement (the “Equity Agreement”) and (ii) a registration rights agreement (the “Registration Rights Agreement”). Pursuant to the terms of the Equity Agreement, for a period of up to thirty six (36) months commencing on the date of effectiveness of the Registration Statement, the investor firm shall commit to purchase up to $6,000,000 of the Company’s common stock, par value $0.0001 per share (the “Shares”), pursuant to an Advance Request (as defined in the Equity Agreement) contained in a drawdown notice, covering the Registrable Securities. The Company, at its discretion, but no less than five (5) trading days between a subsequent Drawdown Notice and a prior closing, can request from the investor firm a drawdown, which shall not exceed the lesser of: One Hundred and Fifty Thousand Dollars ($150,000) or the value of two hundred percent (200%) of the average daily volume for the prior ten (10) trading days multiplied by the average of the closing best bid prices for the prior ten (10) trading days. The number of shares delivered to the investor firm under each drawdown shall be determined based on the price calculated at ninety percent (90%) of the lowest closing best bid price for the five days following the Clearing Date associated with a Drawdown Notice (subject to the terms, conditions and restrictions defined in the Equity Agreement). The investor firm shall immediately cease reselling any Shares within a Pricing Period if the per share price falls below a minimum floor set in such notice by the Company, at its sole discretion, which, as a result, will reduce the amount of the drawdown.
Under the Registration Rights Agreement, the Company has committed to file a Registration Statement with the U.S. Securities and Exchange Commission within forty five (45) days of the execution of the Equity Agreement, covering the Registrable Securities.
As further consideration for entering into and structuring the Equity Facility, the Company shall pay to the investor firm a non-refundable origination fee equal to the value of $15,000, consisting of $3,000 already paid, $3,000 in a stock or cash combination thirty (30) days after the Form S-1 registration statement is declared effective, and 562,500 shares of common stock, valued at $0.016 per share and issued in May 2012, which shares shall be included in the registration statement.
The Company will determine the amount of each drawdown pursuant to the terms, conditions, and limitations specified in the Equity Agreement. Company management intends to use the Equity Facility on an as needed basis for marketing, advertising and growth.No assurances can be provided as to the amount the Company will drawdown, if any. As of the filing date of the Company's Form 10-Q for March 31, 2012, the Company was able to cover expenses from operating cash flow and did not exercise any part of the financing arrangement.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTION REGARDING FORWARD-LOOKING INFORMATION
Included in this Report are "forward-looking" statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA") as well as historical information. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that the expectations reflected in these forward-looking statements will prove to be correct. Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors, including matters described in the section titled "Risk Factors." Forward-looking statements include those that use forward-looking terminology, such as the words "anticipate," "believe," "estimate," "expect," "intend," "may," "project," "plan," "will," "shall," "should," and similar expressions, including when used in the negative. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements involve risks and uncertainties and we cannot assure you that actual results will be consistent with these forward-looking statements. We claim the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.
Such risks include, among others, the following: demand for payment of our convertible notes outstanding under which we are currently in default, our inability to obtain adequate financing to repay the convertible notes, our ability to continue financing the operations either through debt or equity offerings, international, national and local general economic and market conditions: our ability to sustain, manage or forecast our growth; material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other factors referenced in this filing.
Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business operations. We undertake no obligation to update or revise these forward-looking statements, whether to reflect events or circumstances after the date initially filed or published, to reflect the occurrence of unanticipated events or otherwise.
Unless otherwise noted, references in this Form 10-Q to “StrikeForce” “we”, “us”, “our”, “SFT”, and the “Company” means StrikeForce Technologies, Inc., a Wyoming corporation.
Background
StrikeForce Technologies, Inc. is a software development and services company that offers a suite of integrated computer network security products using proprietary technology. StrikeForce Technical Services Corporation was incorporated in August 2001 under the laws of the State of New Jersey. On September 3, 2004, the stockholders approved an amendment to the Certificate of Incorporation to change the name to StrikeForce Technologies, Inc. On November 15, 2010, we redomiciled under the laws of the State of Wyoming. We initially conducted operations as an integrator and reseller of computer hardware and telecommunications equipment and services until December 2002. In December 2002, and formally memorialized in September 2003, we acquired certain intellectual property rights and patent pending technology from NetLabs.com including the rights to further develop and sell their principal technology. In addition, certain officers of NetLabs.com joined our company as officers and directors of our company. We subsequently changed our name to StrikeForce Technologies, Inc., under which we have conducted our business since August 2003. Our strategy is to develop and market our suite of network security products to the corporate, financial, healthcare, government, insurance, e-commerce and consumer sectors. We plan to grow our business primarily through internally generated sales, rather than by acquisitions. We have no subsidiaries and we conduct our operations from our corporate office in Edison, New Jersey.
We own the exclusive right to license and develop various identification protection software products to protect computer networks from unauthorized access and to protect network owners and users from identity theft. We have developed a suite of products partly based upon this exclusive license that is targeted to the financial services, e-commerce, corporate, government, healthcare and consumer sectors.
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We began our operations in 2001 as a reseller and integrator of computer hardware and iris biometric technology. From the time we started our operations through the first half of 2003, we derived the majority of our revenues as an integrator. In December 2002, upon the acquisition of the licensing rights to certain intellectual property and patent pending technology from NetLabs.com, we shifted the focus of our business to developing and marketing our own suite of security products. Based upon the acquired licensing rights and additional research and development, we have developed various identification protection software products to protect computer networks from unauthorized access and to protect network owners and users from identity theft. In November 2010, we received notice that the United States Patent Office (“USTPO”) has issued an official Notice of Allowance for the patent application for the technology relating to our ProtectID® product, titled "Multi-Channel Device Utilizing a Centralized Out-of-Band Authentication System". In January 2011, we received notice that the United States Patent Office issued the Company Patent No. 7,870,599. The “Out-of-Band” Patent went through a USTPO Re-Examination process starting on August 16, 2011 and concluded on December 27, 2011, with all of our patent claims remaining in-tact and seven additional Company patent claims being added. In 2011, we submitted an additional continuation patent on the “Out-of-Band” Patent, with another sixty-six additional Company claims now pending. The technology we developed and use in our GuardedID® product is the subject of a pending patent application. In December 2011, we executed an exclusive agreement with an agent to represent us in enforcing the “Out-of-Band” Patent.
We completed the development of our ProtectID® platform at the end of June 2006 and we completed the core development of our keyboard encryption and anti-keylogger product, GuardedID®, in December 2006, with continuous enhancements, which is currently being sold and distributed. We seek to locate customers in a variety of ways. These include contracts primarily with value added resellers and distributors (both inside the United States and internationally), direct sales calls initiated by our internal staff, exhibitions at security and technology trade shows, through the media, through consulting agreements, and through our own and agent relationships. Our sales generate revenue either as an Original Equipment Manufacturer (“OEM”) model, through a Hosting/License agreement, bundled with other company’s products or through direct purchase by customers. We price our products for cloud consumer transactions based on the number of transactions in which our software products are utilized. We also price our products for business applications based on the number of users. We believe that these pricing models provide our company with one-time, monthly, quarterly and yearly recurring revenues. We are also generating revenues from annual maintenance contracts, renewal fees and expect, but cannot guarantee, an increase in revenues based upon the execution of various agreements that we have recently closed and are being implemented.
In October 2010, we executed an agreement to pursue a funding opportunity through a consulting company that, through an executed Memorandum of Understanding, purports to provide funding to us over time, necessary to sustain the Company while current contracts for business revenues develop and increase to a sustainable level. Other multiple alternative funding options had not progressed to viable proposals or did not close because of their expressed high risk level associated with our secured lenders, large debt positions and low revenues. A requirement of this funding source, utilizing an equity funding approach, required us to re-domicile in the State of Wyoming in order for this project to move forward in a necessary timeframe and at a necessary low cost to the Company. In November 2010, we received the corporate registration, amended articles of incorporation and by-laws as a result of our re-domiciling in the State of Wyoming.
We generated all of our revenues of $184,654, for the three months ended March 31, 2012, and $100,805, for the three months ended March 31, 2011, from the sales of our security products. We market our products to financial service firms, healthcare related companies, e-commerce companies, government agencies, the enterprise market in general and with virtual private network companies, as well as technology service companies that service all the above markets. We seek such sales through our own direct efforts and primarily through distributors, resellers and third party agents internationally. We are also seeking to license the technology as original equipment with computer hardware and software manufacturers. We are engaged in production installations and pilot projects with various distributors, resellers and direct customers, as well as having reached additional reseller agreements with strategic vendors internationally, including South America, Europe, Asia and the Pacific Rim. Our GuardedID® product is also being sold directly to consumers, primarily through the Internet as well as distributors, resellers, third party agents and potential OEM agreements by bundling GuardedID® with their products (providing a value-add to their own products and offerings).
We have incurred substantial losses since our inception. Our management believes that our products provide a cost-effective, more secure and technologically competitive solution to address the problems of network security and identity theft in general. However, there can be no assurance that our products will continue to gain increased acceptance and continue to grow in the commercial marketplace or that one of our competitors will not introduce technically superior products.
Our executive office is located at 1090 King Georges Post Road, Suite 603, Edison, NJ 08837. Our telephone number is (732) 661-9641. We have 7 employees. Our Company’s website is www.strikeforcetech.com. We are not including the information contained in our website as part of, or incorporating it by reference into, this report on Form 10-Q.
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Business Model
We are focusing primarily on developing sales through “channel” relationships in which our products are offered by other manufacturers, distributors, value-added resellers and agents, internationally. In 2010, we added and publicly announced a major channel distributor who provides a presence for us in London, England, representing us in the European Union. We also sell our suite of security products directly from our Edison, NJ office, which also augments our channel partner relationships. It is our strategy that these “channel” relationships will provide the greater percentage of our revenues ongoing, as was the case in 2011. Examples of the channel relationships that we are seeking include already established original equipment manufacturer (“OEM”) and bundled relationships with other security technology and software providers that would integrate or bundle the enhanced security capabilities of ProtectID® and or GuardedID® into their own product lines, thereby providing greater value to their clients. These would include providers of networking software and manufacturers of computer and telecommunications hardware and software that provide managed services, as well as all markets interested in increasing the value of their products and packages, such as financial services software, anti-virus, government integrators and identity theft product companies.
Our primary target markets include financial services such as banks, insurance companies, e-commerce based services companies, telecommunications and cellular carriers, technology software companies, healthcare related companies, government agencies and consumers. For the near term, we are focusing our concentration on the identity theft and data breach strategic problem areas, such as where compliance with government regulations are key and stolen passwords are used to acquire private information illegally. In the fourth quarter of 2011, we executed a multi-year contract with a major US financial lender who utilizes our ProtectID® solution for its over 12,000,000 employees, administrators and consumers. The contract became revenue producing in the fourth quarter of 2011. In the first quarter of 2012, we executed a multi-year contract with a healthcare facility who utilizes our ProtectID® solution for its employees and administrators. The contract became revenue producing in the first quarter of 2012.
We seek to generate revenue through fees for ProtectID® based on consumer usage in the financial and healthcare services markets, as well as enterprises in general, through our Cloud Service, plus one-time and annual per person fees in the enterprise markets which often are for local installations of our product, and set-up and recurring transaction fees when the product is accessed in our Cloud Service, along with yearly maintenance fees, and other one-time and recurring fees. We also intend to generate revenues through sales of our GuardedID® product. GuardedID® pricing is for an annual license and we discount for volume purchases. GuardedID® pricing models, especially when bundling through OEM contracts, include monthly and quarterly recurring revenues. As more agreements are reached by our distributors, we are experiencing monthly increasing sales growth, through the execution of GuardedID® bundled OEM agreements. We also provide our clients a choice of operating our ProtectID® software internally by licensing it or through our hosted Cloud Service. GuardedID® requires a download on each and every computer it protects, whether for employees or consumers. We have three GuardedID® products, (i) a standard version which protects browser data entry only, (ii) a premium version which protects almost all the applications running under Microsoft Windows on the desktop, including Microsoft Office Suite and (iii) an Enterprise version which provides the Enterprise administrative rights and the use of Microsoft’s Enterprise tools for the product’s deployment.
Our management believes that our products provide a cost-effective and technologically competitive solution to address the problems of network security and identity theft in general. Updated guidance for theFederal Financial Institutions Examination Council (“FFIEC”) regulations include the requirement for solutions that have Two-Factor Out-of-Band Authentication and products that stop keylogging malware, real time, which our management believes our proprietary products uniquely and directly address. This new updated guidance went into effect as of January 1, 2012. Based on this new requirement in the latest FFIEC update that was published in June 2011 and now being enforced as of January 2012, we have recently experienced a growing increase in sales orders and inquiries. However, there can be no assurance that our products will continue to gain acceptance and continue to grow in the commercial marketplace or that one of our competitors will not introduce technically superior products.
Because we are now experiencing a continual recurring growing market demand, we are developing a sizeable global reseller and distribution channel as a strategy to generate, manage and fulfill demand for our products across market segments, minimizing the requirement for an increase in our staff. We have minimized the concentration on our initial direct sales efforts as our distribution and reseller channels continue to grow internationally and require appropriate levels of support.
Results of Operations
FOR THE THREE MONTHS ENDED MARCH 31, 2012 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2011
Our revenues for the three months ended March 31, 2012 were $184,654 compared to $100,805 for the three months ended March 31, 2011, an increase of $83,849 or 83.2%. The increase in revenues was primarily due to the increase in sales of our software products as a result of the implementation of several new contracts executed in the first quarter of 2012.
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Our 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 three months ended March 31, 2012 were $0 compared to $5,094 for the three months ended March 31, 2011, a decrease of $5,094. The decrease in hardware revenues was primarily due to the decrease in the sales of our one-time-password token key-fobs. Software, services and maintenance sales for the three months ended March 31, 2012 were $184,654 compared to $95,711 for the three months ended March 31, 2011, an increase of $88,943. The increase in software, services and maintenance revenues was primarily due to the increase in the sales of our GuardedID® keyboard encryption (anti-keylogger) technology and our ProtectID® (“Out-of-Band”) technology.
Our cost of revenues for the three months ended March 31, 2012 was $2,986 compared to $8,088 for the three months ended March 31, 2011, a decrease of $5,102, or 63.1%. The decrease resulted primarily from the decrease in the sales of our one-time-password token key-fobs, resulting in lower purchases. Cost of revenues as a percentage of total revenues for the three months ended March 31, 2012 was 1.6% compared to 8.0% for the three months ended March 31, 2011. The decrease reflects the lower cost of purchases resulting from the decrease in the sales of our one-time-password token key-fobs.
Our gross profit for the three months ended March 31, 2012 was $181,668 compared to $92,717 for the three months ended March 31, 2011, an increase of $88,951, or 95.9%. The increase in gross profit was primarily due to the increase in sales of our software products as a result of the execution of several new contracts executed in 2011 and the first quarter of 2012, and the decrease in cost of revenues resulting from the decrease in the sales of our one-time-password token key-fobs.
Our research and development expenses for the three months ended March 31, 2012 were $84,500 compared to $83,200 for the three months ended March 31, 2011, an increase of $1,300, or 1.6%.
Our selling, general and administrative (“SGA”) expenses for the three months ended March 31, 2012 were $337,439 compared to $1,735,002 for the three months ended March 31, 2011, a decrease of $1,397,563 or 80.6%. The decrease was due primarily to a one-time expense in stock based compensation through the issuance of preferred stock in the first fiscal quarter of 2011 and expenses in stock based compensation through the issuance of employee and non-employee stock options in the first fiscal quarter of 2011. Selling, general and administrative expenses consist primarily of salaries, benefits and overhead costs for executive and administrative personnel, insurance, fees for professional services, including consulting, legal, and accounting fees, plus travel costs and non-cash stock compensation expense for the issuance of stock to non-employees and other general corporate expenses.
Our other (income) expense for the three months ended March 31, 2012 was $57,672 as compared to $204,153 for the three months ended March 31, 2011, representing a decrease in other expense of $146,481, or 71.8%. The decrease was primarily due to the change in the fair value of the derivatives relating to a portion of our secured and unsecured convertible debenture balance.
Our net loss for the three months ended March 31, 2012 was $297,943 compared to a net loss of $1,929,638 for the three months ended March 31, 2011, a decrease of $1,631,695, or 84.6%. The decrease in our net loss was due primarily to a one-time expense in stock based compensation through the issuance of preferred stock in the first fiscal quarter of 2011 and expenses in stock based compensation through the issuance of employee and non-employee stock options in the first fiscal quarter of 2011, in addition to increased gross profit in the first fiscal quarter of 2012.
Liquidity and Capital Resources
Our total current assets at March 31, 2012 were $262,915, which included cash of $85,356, as compared with $87,744 in total current assets at December 31, 2011, which included cash of $0. Additionally, we had astockholders’ deficit in the amount of $10,223,235 at March 31, 2012 compared to a stockholders’ deficit of $10,226,227 at December 31, 2012. We have historically incurred recurring losses and have financed our operations through loans, principally from affiliated parties such as our directors, and from the proceeds of debt and equity financing. The liabilities include a computed liability for the fair value of derivatives of $494,231, which will only be realized on the conversion of the derivatives, or settlement of the debentures.
We financed our operations during the three months ended March 31, 2012 primarily through the sale and issuance of debt and debentures, recurring revenues from our ProtectID® hosting platform and license fees, and sales of our GuardedID® keystroke encryption technology. Management anticipates that we will continue to rely on equity and debt financing, at least in the near future, to finance our operations. While management believes that there will be a substantial percentage of our sales generated from our GuardedID® product and there are an increasing number of customers for our ProtectID® product, we will continue to have customer concentrations. Inherently, as time progresses and corporate exposure in the market continues to grow, with increasing marketing efforts, management believes, but cannot guarantee, we will continue to attain greater numbers of customers and the concentrations could decrease over time. Until this is accomplished, management will continue to attempt to secure additional financing through both the public and private market sectors to meet our continuing commitments of expenditures and until our sales revenue can provide greater liquidity.
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Our number of common shares outstanding increased from 116,374,591 shares at the three months ended March 31, 2011 to 244,194,973 at the three months ended March 31, 2012, an increase of 110%. The increase in the number of common shares outstanding was due to common shares issued related to the issuance, conversion and settlement of debt, equity financing and consulting obligations, which, consequently, reduced our total debt.
We have historically incurred losses and we anticipate that we will not generate any significant revenues until the fourth quarter of 2012 or later. Our operations presently require funding of approximately $110,000 per month. Management believes, but cannot provide assurances, that we will be cash flow positive by the end of 2012 based on recently executed and announced contracts and potential contracts that we anticipate closing throughout 2012 in the financial industry, technology, insurance, enterprise, healthcare, government, and consumer sectors in the United States, Latin America, Europe and Asia. 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.
SUMMARY OF OUR OUTSTANDING SECURED CONVERTIBLE DEBENTURES
At March 31, 2012, $542,588 in aggregate principal amount of the Citco Global Custody NV (“Citco Global”) debentures, as assigned by YA Global and Highgate in April 2009, were issued and outstanding.
During the three months ended March 31, 2012, Citco Global had no conversions.
The Citco Global secured convertible debentures are fully matured. We have been in contact with the note holder who has indicated that it has no present intention of exercising its right to convert the debentures into restricted shares of our common stock. The note holder has advised us that it currently is willing to wait until it receives a buyout offer from us.
During the three months ended March 31, 2012, we issued unsecured convertible notes in an aggregate total of $225,000 to one unrelated party per the terms of a term sheet executed with an investor firm in November 2011.
During the three months ended March 31, 2012, we repaid a total of $3,922 of unsecured notes to one unrelated party and we settled a total of $70,000 of unsecured notes held by one unrelated party in exchange for unrestricted shares of our common stock.
Summary of Funded Debt
As of March 31, 2012, our Company’s open unsecured promissory note balance was $2,371,978, net of discount on promissory notes of $10,865, listed as follows:
·
$18,750 to an unrelated individual - current portion
·
$275,000 to an unrelated individual – current portion
·
$91,593 to an unrelated company - current portion of $45,514 and long term portion of $50,000
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$210,000 to an unrelated company - current portion
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$1,650,000 to twenty unrelated individuals through term sheet with the StrikeForce Investor Group – current portion
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$137,500 to an unrelated company - current portion
As of March 31, 2012, our Company’s open unsecured related party promissory note balances were $722,638, listed as follows:
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$722,638 to our CEO – current portion
As of March 31, 2012, our Company’s open convertible secured note balances were $542,588, listed as follows:
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$542,588 to Citco Global (as assigned in 04/09 by YA Global and Highgate House Funds, Ltd.)
As of March 31, 2012 our Company’s open convertible note balances were $1,218,766, net of discount on convertible notes of $275,501, listed as follows:
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$235,000 to an unrelated company (03/05 unsecured debenture) - current portion
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$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
·
$48,755 to an unrelated individual (01/06 unsecured debenture) – current portion
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·
$200,000 to an unrelated individual (06/06 unsecured debenture) – current portion
·
$150,000 to an unrelated individual (09/06 unsecured debenture) – current portion
·
$3,512 to an unrelated individual (02/07 unsecured debenture) – current portion
·
$100,000 to an unrelated individual (05/07 unsecured debenture) – current portion
·
$100,000 to an unrelated individual (06/07 unsecured debentures) – current portion
·
$100,000 to an unrelated individual (07/07 unsecured debenture) – current portion
·
$120,000 to three unrelated individuals (08/07 unsecured debentures) – current portion
·
$50,000 to two unrelated individuals (12/09 unsecured debentures) - current portion
·
$30,000 to an unrelated company (03/10 unsecured debenture) – long term portion
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$75,000 to un unrelated company (12/11 unsecured debenture) - current portion
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$150,000 to un unrelated company (01/12 unsecured debenture) - current portion
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$75,000 to un unrelated company (03/12 unsecured debenture) - current portion
As of March 31, 2012 our Company’s open convertible note balances - related parties were $360,500, listed as follows:
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$268,000 to our CEO – current portion
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$57,500 to our VP of Technical Services – current portion
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$30,000 to a relative of our CTO & one of our Software Developers – current portion
·
$5,000 to a relative of our former CFO – current portion
Based on present revenues and expenses, we are unable to generate sufficient funds internally to sustain our current operations. We must raise additional capital or determine other borrowing sources to continue our operations. It is management’s plan to seek additional funding through the sale of common stock, the sale and settlement of trade payables and debentures, and the issuance of notes and debentures, including notes and debentures convertible into common stock. If we issue additional shares of common stock, the value of shares of existing stockholders is likely to be diluted.
However, the terms of the convertible secured debentures issued to certain of the existing stockholders require that we obtain the consent of such stockholders prior to our entering into subsequent financing arrangements. No assurance can be given that we will be able to obtain additional financing, that we will be able to obtain additional financing on terms that are favorable to us or that the holders of the secured debentures will provide their consent to permit us to enter into subsequent financing arrangements.
Our future revenues and profits, if any, will primarily depend upon our ability, and that of our distributors and resellers, to secure sales of our suite of network security and anti-malware products. We do not presently generate significant revenue from the sales of our products. Although management believes that our products are competitive for customers seeking a high level of network security, we cannot forecast with any reasonable certainty whether our products will gain acceptance in the marketplace and if so by when.
Except for the limitations imposed upon us respective to the convertible secured debentures of Citco Global (as assigned by YA Global and Highgate House Funds, Ltd.), there are no material or known trends that will restrict either short term or long-term liquidity.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.
Going Concern
The Report of Our Independent Registered Public Accounting Firm on Our Annual Financial Statements Contains Explanatory Language That Substantial Doubt Exists About Our Ability To Continue As A Going Concern
The accompanying condensed financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the accompanying condensed financial statements, we had a working capital deficiency of $10,163,330 and $10,177,078 and deficits in stockholders’ equity of $10,223,235 and $10,262,227 at March 31, 2012 and December 31, 2011, respectively, and net losses of $297,943 and $1,929,638 and net cash used in operating activities of $305,010 and $219,174 for each of the three months then ended. These factors raise substantial doubt about our ability to continue as a going concern.
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Currently, management is attempting to increase revenues and improve gross margins by a revised sales strategy. In principle, we are redirecting our sales focus from direct sales to domestic and international channel sales, where we are primarily selling through a channel of Distributors, Value Added Resellers, Strategic Partners and Original Equipment Manufacturers. While we believe in the viability of our strategy to increase revenues and in its ability to raise additional funds, there can be no assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to continually increase our customer base and realize increased revenues from recently signed contracts.
The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Critical Accounting Policies
See Notes to the Condensed Financial Statements.
Recently Issued Accounting Pronouncements
Refer to Note 2 in the accompanying condensed interim financial statements.
Additional Information
You are advised to read this Form 10-Q in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and Current Reports on Form 8-K that we file from time to time. You may obtain copies of these reports directly from us or from the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers at its website http://www.sec.gov.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold any derivative instruments and do not engage in any hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) require public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation, with the participation of our management, including our Chief Executive Officer (“CEO”), of the effectiveness our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of March 31, 2012. Based upon that evaluation, our CEO concluded that our disclosure controls and procedures are not effective at the reasonable assurance level due to the material weaknesses described below.
In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following four material weaknesses which have caused management to conclude that, as of March 31, 2012, our disclosure controls and procedures were not effective at the reasonable assurance level:
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1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us as of and for the three months ending March 31, 2012. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
2. The Company’s board of directors has no audit committee, independent director or member with financial expertise which causes ineffective oversight of our external financial reporting and internal control over financial reporting.
3. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Remediation of Material Weaknesses
We intend to remediate the material weaknesses in our disclosure controls and procedures identified above by adding independent director or member with financial expertise or hiring a full-time CFO, with SEC reporting experience, in the future when working capital permits and by working with our independent registered public accounting firm and refining our internal procedures. To date, we have not been successful in reducing the number of audit adjustments, but will continue our efforts in the coming fiscal year.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently a party to, nor is any of its property currently the subject of, any material legal proceeding. None of the Company’s directors, officers or affiliates is involved in a proceeding adverse to the Company’s business or has a material interest adverse to the Company’s business.
ITEM 1A. RISK FACTORS
Information about risk factors for the three months ended March 31, 2012, does not differ materially from that set forth in Part I, Item 1A of the Company’s 2011 Annual Report on Form 10-K.
ITEM 2. RECENT ISSUANCES OF UNREGISTERED SECURITIES
In January 2012, we issued 264,705 restricted shares of our common stock, valued at $4,500, to a consultant for a success fee earned from our receipt of the second investment tranche from an investment firm related to a term sheet we executed in November 2011.
In January 2012, we issued 5,058,060 unrestricted shares of our common stock, valued at $0.0165 per share, to a note holder per the terms of a settlement agreement that we executed with the note holder in for the retirement of a $70,000 promissory note.
In January 2012, we issued 1,498,214 restricted shares of our common stock, valued at $0.014 per share, to our former President per the terms of a settlement agreement that we executed with our former President for the retirement of the remaining balance owed to him of $20,975 in accrued interest.
In January 2012, we issued 2,000,000 restricted shares of our common stock to a consultant in consideration of the consultant’s past support to us through several areas of assistance. The shares were valued at $36,000.
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In January 2012, we sold to one individual certain units which contained common stock and warrants. We issued 3,418,804 restricted shares of our common stock at $0.017 per share, and warrants to purchase a total of 1,709,402 shares of our common stock, exercisable at $0.03 per share, that expire in January 2015.
In January 2012, we issued warrants to purchase 300,000 shares of our common stock, exercisable at $0.03 per share, per the terms of a consulting agreement we executed in January 2012. The warrants expire in January 2015.
In February 2012, we issued 276,073 restricted shares of our common stock, valued at $4,500, to a consultant for a success fee earned from our receipt of the third investment tranche from an investment firm related to a term sheet we executed in November 2011.
In February 2012, we sold to two individuals, jointly, certain units which contained common stock and warrants. We issued 4,444,444 restricted shares of our common stock at $0.016 per share, and warrants to purchase a total of 2,222,222 shares of our common stock, exercisable at $0.03 per share, that expire in February 2015.
In February 2012, we issued warrants to purchase 150,000 shares of our common stock, exercisable at $0.02 per share, per the terms of a consulting agreement we executed in January 2012, and amended and extended in February 2012. The warrants expire in February 2015.
In March 2012, we issued 321,428 restricted shares of our common stock, valued at $4,500, to a consultant for a success fee earned from our receipt of the fourth investment tranche from an investment firm related to a term sheet we executed in November 2011.
In March 2012, we issued 1,800,000 restricted shares of our common stock, valued at $0.015 per share, to a former consultant per the terms of a settlement agreement that we executed with the former consultant for the retirement of the remaining balance owed to him of $27,000 in trade payables.
In March 2012, we sold to one individual certain units which contained common stock and warrants. We issued 2,717,391 restricted shares of our common stock at $0.015 per share, and warrants to purchase a total of 1,358,696 shares of our common stock, exercisable at $0.03 per share, that expire in February 2015.
In March 2012, we issued restricted shares of our common stock and warrants for subscriptions sold to one individual in October 2011. We issued 1,000,000 restricted shares of our common stock, at $0.011 per share, and warrants to purchase 500,000 shares of our common stock, exercisable at $0.04 per share, that expire in March 2015.
In March 2012, we issued warrants to purchase 150,000 shares of our common stock, exercisable at $0.02 per share, per the terms of a consulting agreement we executed in January 2012, and amended and extended in March 2012. The warrants expire in March 2015.
In March 2012, we issued 7,500 restricted shares of our common stock, valued at $0.015 per share, to a law firm as compensation for general counsel legal services rendered.
All of the above offerings and sales 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 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) the investors acknowledged that all securities being purchased were “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) 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company has not made various principal and interest payments on many of its debt obligations. It continues to seek work-out arrangements and applicable refinancing with new or revised debt or equity instruments. See Notes 4, 6, and 9 to the condensed financial statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. OTHER INFORMATION.
There is no information with respect to which information is not otherwise called for by this form.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
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Exhibit Number | Description |
3.1 | Amended and Restated Certificate of Incorporation of StrikeForce Technologies, Inc.(1) |
3.2 | Amended Articles of Incorporation of StrikeForce Technologies, Inc. (5) |
3.3 | By-laws of StrikeForce Technologies, Inc. (1) |
3.4 | Amended By-laws of StrikeForce Technologies, Inc. (5) |
10.1 | 2004 Stock Option Plan. (1) |
10.2 | Securities Purchase Agreement dated December 20, 2004, by and among StrikeForce Technologies, Inc. and YA Global Investments, LP. (1) |
10.3 | Secured Convertible Debenture with YA Global Investments, LP. (1) |
10.4 | Investor Registration Rights Agreement dated December 20, 2004, by and between StrikeForce Technologies, Inc. and YA Global Investments, LP in connection with the Securities Purchase Agreement.(2) |
10.5 | Escrow Agreement, dated December 20, 2004, by and between StrikeForce Technologies, Inc. and YA Global Investments, LP in connection with the Securities Purchase Agreement. (2) |
10.6 | Security Agreement dated December 20, 2004, by and between StrikeForce Technologies, Inc. and YA Global Investments, LP in connection with the Securities Purchase Agreement. (1) |
10.7 | Secured Convertible Debenture with YA Global Investments, LP dated January 18, 2005. (1) |
10.8 | Royalty Agreement with NetLabs.com, Inc. and Amendments. (1) |
10.9 | Employment Agreement dated as of May 20, 2003, by and between StrikeForce Technologies, Inc. and Mark L. Kay. (1) |
10.10 | Amended and Restated Secured Convertible Debenture with YA Global Investments, LP dated April 27, 2005. (1) |
10.11 | Amendment and Consent dated as of April 27, 2005, by and between StrikeForce Technologies, Inc. and YA Global Investments, LP. (1) |
10.12 | Securities Purchase Agreement dated as of April 27, 2005 by and between StrikeForce Technologies, Inc. and Highgate House Funds, Ltd. (1) |
10.13 | Investor Registration Rights Agreement dated as of April 27, 2005 by and between StrikeForce Technologies, Inc. and Highgate House Funds, Ltd. (2) |
10.14 | Secured Convertible Debenture with Highgate House Funds, Ltd. dated April 27, 2005. (2) |
10.15 | Escrow Agreement dated as of April 27, 2005 by and between StrikeForce Technologies, Inc., Highgate House Funds, Ltd. and Gottbetter & Partners, LLP. (1) |
10.16 | Escrow Shares Escrow Agreement dated as of April 27, 2005 by and between StrikeForce Technologies, Inc., Highgate House Funds, Ltd. and Gottbetter & Partners, LLP. (1) |
10.17 | Security Agreement dated as of April 27, 2005 by and between StrikeForce Technologies, Inc. and Highgate House Funds, Ltd. (1) |
10.18 | Network Service Agreement with Panasonic Management Information Technology Service Company dated August 1, 2003 (and amendment). (1) |
10.19 | Client Non-Disclosure Agreement. (1) |
10.20 | Employee Non-Disclosure Agreement. (1) |
10.21 | Secured Convertible Debenture with Highgate House Funds, Ltd. dated May 6, 2005. (2) |
10.22 | Termination Agreement with YA Global Investments, LP dated February 19, 2005. (1) |
10.23 | Securities Purchase Agreement with WestPark Capital, Inc. (4) |
10.24 | Form of Promissory Note with WestPark Capital, Inc. (4) |
10.25 | Investor Registration Rights Agreement with WestPark Capital, Inc. (4) |
10.26 | Drawdown Equity Financing Agreement with Auctus Private Equity Fund, LLC, dated May 3, 2012. (6) |
10.27 | Registration Rights Agreement with Auctus Private Equity Fund, LLC, dated May 3, 2012. (6) |
31.1 | Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3) |
31.2 | Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3) |
32.1 | Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3) |
32.2 | Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3) |
(1)
Filed as an exhibit to the Registrant’s Form SB-2 dated as of May 11, 2005 and incorporated herein by reference.
(2)
Filed as an exhibit to the Registrant’s Amendment No. 1 to Form SB-2 dated as of June 27, 2005 and incorporated herein by reference.
(3)
Filed herewith.
(4)
Filed as an exhibit to the Registrant’s Form 8-K dated August 1, 2006 and incorporated herein by reference.
(5)
Filed as an exhibit to the Registrant’s Form 8-K dated December 23, 2010 and incorporated herein by reference.
(6)
Filed as an exhibit to the Registrant’s Form 8-K dated May 9, 2012 and incorporated herein by reference.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | |
| STRIKEFORCE TECHNOLOGIES, INC. |
| | |
Dated: May 21, 2012 | By: | /s/ Mark L. Kay |
| Mark L. Kay |
| Chief Executive Officer |
| | |
| |
Dated: May 21, 2012 | By: | /s/ Philip E. Blocker |
| Philip E. Blocker |
| Chief Financial Officer and Principal Accounting Officer |
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