UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X)[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 20162019
OR
( )[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period fromN/A toN/A
Commission File Number:000-28745
Cipherloc Corporation
(Name of small business issuer as specified in its charter)
| Texas | 86-0837077 | |
| State of Incorporation | IRS Employer Identification No. |
825 Main Street, Suite 100
Buda, TX 78610
(Address of principal executive offices)
(512) 772-4237649-7700
(Issuer’sRegistrant’s telephone number)number, including area code)
Securities registered underpursuant to Section 12(b) of the Exchange Act:
NoneNone.
Securities registered underpursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value per share
$0.01
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ][X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | [ ] | Accelerated filer | [ ] |
| Non–Accelerated filer | [ | Small reporting company | [X] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act). Yes [ ] No [X]
AggregateOn March 29, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stockCommon Stock held by non-affiliates: $15,617,469 asnon-affiliates of the registrant was $22,051,118 based onupon the closing price of the stock on January 26, 2017. The voting stock held by non-affiliates on that date consisted of 4,579,903 sharesthe common stock of common stock.the registrant on the OTCQB Venture Market of $0.85.
As of February 2, 2017,January 10, 2020, there were 5,877,67340,792,510 shares of the issuer’s common stock, par value $0.01 per share, and 10,000,0001,000,000 shares of preferred stock, par value $0.01 per share, issued and outstanding.
Documents Incorporated by Reference: None
Cipherloc CorporationCIPHERLOC CORPORATION
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEARYEARS ENDED SEPTEMBER 30, 2016 and 20152019 AND 2018
TABLE OF CONTENTS
Special Note Regarding Forward-Looking Statements
Some of our statements under “Business,” “Properties,” “Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”” the Notes to Financial Statements and elsewhere in this reportAnnual Report on Form 10-K constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.statements.” In some cases, forward-looking statements are identified by terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “approximates,” “predicts,” “potential” or “continue” or the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in these forward-looking Forward-looking statements are reasonable, it cannot guaranteeusually relate to future results, levelsevents and anticipated revenues, earnings, cash flows or other aspects of activity, performanceour operations or achievements. Moreover, neither we nor anyone else assumes responsibility for the accuracy and completeness of suchoperating results. Forward-looking statements and is under no duty to update any of the forward-lookinggenerally include statements after the date of this report.
General
Cipherloc is a data security solutions company. Our highly innovative products - based on our patented polymorphic encryption technology - are designed to enable an iron-clad layer of protection to be added to existing solutions. Cipherloc has developed technology that:containing:
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| ● | our opinions, views or beliefs about the effects of current or future events, circumstances or performance. |
You should view these statements with caution. Those statements are not guarantees of future performance, circumstances or events. They are based on facts and circumstances known to us as of the date the statements are made. All phases of our business are subject to uncertainties, risks and other influences, many of which we do not control. Any of these factors either alone or taken together, could have a material adverse effect on us and could change whether any forward-looking statement ultimately turns out to be true. Additionally, we assume no obligation to update any forward-looking statement as a result of future events, circumstances or developments.
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Overview
Cipherloc Corporation (the “Company” or “Cipherloc”) was incorporated in the State of Texas on June 22, 1953 as American Mortgage Company. On March 15, 2015,Effective August 27, 2014, the Company changed its name to Cipherloc Corporation. Our headquarters are located at 825 Main Street, Suite 100, Buda, Texas. Our website iswww.cipherloc.net. The name change became effective by the Amended Certificate as of March 23, 2015. The name change and the 1-100 reverse split were announced March 20, 2015 in the Daily List and became effectiveinformation contained, or referred to, on March 23, 2015. The financial statements as to shares and earnings per share are restated as if the reverse split occurred on the first day of the first period being reported.
In the year ended September 30, 2011, the Company introduced Cloud-MD. On September 29, 2015, the Company decided to sell Cloud-MD. It was sold to an employee for $250,000 as set out in an Asset Purchase Agreement and Promissory Note attached to this report as an exhibit. The sale of Cloud MD closed on October 1, 2015. Asour website is not part of this time, the Company has not received a payment from the purchaser, and a full allowance has been recorded.
Item 1. Description of BusinessAnnual Report on Form 10-K unless expressly noted.
Products and ServicesBusiness Strategy
CipherLoc is a data security solutions company. Our highly innovative
We are developing products - based on ourand services around its patented polymorphic encryption technology - are designed to enable an iron-clada more efficient and stronger layer of protection to be added to existing solutions.solutions which we believe could be the industry’s first “Polymorphic Cipher Engine”, which we call Cipherloc has developed technology that:
CipherLoc Marketing®. We anticipate offering the first secure commercially viable advanced “Polymorphic Key Progression Algorithmic Cipher Engine” (“PKPA”). We believe this morphing cipher can be used in any commercial data security industry and/or in sensitive applications.
The foundation of modern security relies on encryption technology to protect sensitive information and maintain user privacy. However, modern encryption algorithms are “broken” – the massive amounts of computing horsepower available today have compromised existing algorithms and made them susceptible to attacks. CipherLoc is a data security solutions company. Our innovative and patented polymorphic technology can be used to overcomeeliminates the flaws and inadequacies associated with today’s encryption algorithms. Instead of dealing with large monolithic blocks of data, our approach decomposes the information to be protected into multiple segments. These individual segments each have a unique encryption key, utilize different encryption algorithms, are randomly grouped into different lengths, and can be further re-encrypted. Since segments are independent from each other and are individually protected, our technology is not susceptible to computational attacks. In fact, the strength of our technology improves as compute power increases.
Products and Services
During 2019 and 2018, the Company attempted to market several products, services and solutions. The initial solution suite was marketed under several product names. CipherLoc EDGE, a solution to be installed on mobile/handset devices, EDGE was to enable data to be securely sent between any two mobile devices. CipherLoc ENTERPRISE, a solution to be installed on desktops, laptops and tablet computers, ENTERPRISE was to enable data to be securely sent between any two platforms. CipherLoc GATEWAY, a solution to be installed on servers, GATEWAY was to enable end-to-end data protection to and from servers, computers, tablets, and/or mobile devices via the GATEWAY-protected servers. CipherLoc SHIELD, a solution to be used as a data storage platform.
During 2019 and 2018, there were forward-looking public announcements by the Company’s then-management of product names or segments that were not delivered to the market and are not presently available to customers. Current management is reassessing all those previous public claims. Looking forward, the Company will be investing material resources only with products and services that are deliverable, have viable economic potential, and may be publicly disclosed without adversely affecting the Company's competitive position. The core of the Company’s product and service offerings will continue to be built around its patents and its polymorphic encryption technology which is a highly secure, quantum-safe data protection technology carrying FIPS 140-2 (Federal Information Processing Standard 140-2) validation certificate #3381 for the “CipherLoc Polymorphic Encryption Engine Core” solution by the National Institute of Standards and Technology (NIST).
Research and Development
Our research and development expenditures for the years ended September 30, 2019 and 2018 were $1,744,480 and $873,107, respectively. During December 2019, management determined that the maturity of the Company’s patented technology justified a cessation of academic research activity and the elimination of the chief scientist’s role leading academic efforts. Cost savings from those actions are now allocated entirely to product development, product engineering, and revenue-generating sales activity.
Competition
The encryption software market sector is highly competitive, subject to rapid change, and significantly affected by new product introductions and other activities of market participants.
Some of our competitors in ordercertain markets have greater financial, technical, sales, marketing and other resources than we do. Because of these and other factors, competitive conditions in these industries are likely to fullycontinue to intensify in the future. Increased competition could result in price reductions, reduced net revenue and securelyprofit margins and loss of market share, any of which could harm our business.
We believe that our future results depend largely upon our ability to better serve customers and by offering new product enhancements whether by internal development or acquisition. We also believe we must continue to provide existing product offerings that compete favorably with respect to ease of use, reliability, performance, range of useful features, reputation, and price.
Some of our competitors have substantially greater financial, technical, sales, marketing, personnel, and other resources, as well as greater name recognition and a larger customer base than we do. We anticipate we will face increasing pricing pressures from competitors in the future. Given that there are low barriers to entry into the software market and that the market is subject to rapid technological change, we believe that competition will persist and intensify in the future.
Intellectual Property
Protective Measures
Our intellectual property is an important and vital asset of our company that enables us to develop, market, and sell our products and services and enhance our competitive position. Intellectual property includes our proprietary business and technical know-how, inventions, works of authorship, and confidential information. To protect our intellectual property, we rely primarily upon legal rights in trade secrets, patents, copyrights, and trademarks, in addition to company policies and procedures, security practices, contracts, and relevant operational measures.
We protect the world’s data.confidentiality of proprietary information by entering into non-disclosure agreements with our employees, contractors, and channel and business partners, and we enter into license agreements with respect to our software and proprietary information that include confidentiality terms. These agreements are generally non-transferable and have either a perpetual or time-limited term. We also employ access controls and associated security measures to protect our facilities, equipment, and networks.
Patents, Copyrights, Trademarks, and Licenses
Our products, particularly our software and related documentation, are protected under U.S. and international copyright laws and laws related to the protection of intellectual property and proprietary rights. Currently, we have 5 patents, with approximately 3 patents pending with the U.S. Patent and Trademark Office. We employ procedures to label copyrightable works with the appropriate proprietary rights notices, and we actively enforce these rights in the U.S. and abroad. However, these measures may not provide adequate protection, and our intellectual property rights may be challenged.
Cipherloc, and associated logo, is a registered trademark of the Company in the U.S. In the U.S., we are generally able to maintain our trademark rights and renew trademark registrations for as long as the trademarks are in use.
Government Regulations
Export Control Regulations. It is expected that all our products will be subject to U.S. export control laws and applicable foreign government import, export and/or use requirements. The level of control generally depends on the nature of the goods and services in question. For example, the level of control is impacted by the nature of the software and encryption incorporated into our products. Where controls apply, the export of our products may require an export license or authorization or that the transaction qualifies for a license exception or the equivalent and may also be subject to corresponding reporting requirements. For the export of some of our products, we may be subject to various post-shipment reporting requirements. Minimal U.S. export restrictions apply to all our products, whether or not they perform encryption functions. In the event we become a Department of Defense contractor, there are certain registration requirements that may be triggered by our sales. In addition, certain of our items and/or transactions may be subject to the International Traffic in Arms Regulations (ITAR) if our software or services are specifically designed or modified for defense purposes. Companies engaged in manufacturing or exporting ITAR-controlled goods and services (even if these companies do not export such items) are required to register with the U.S. State Department.
Enhancements to existing products may, and new products will, be subject to review under the Export Administration Act to determine what export classification they will receive. In light of the ongoing discussions regarding anti-terrorism legislation in the U.S. Congress, there continues to be discussions regarding the correct level of export control. Export regulations may be modified at any time. Modifications to the export regulations could reduce or eliminate our ability to export some or all of our products from the U.S. without a license in the future, which could put us at a disadvantage in competing for international sales compared to companies located outside of the U.S. that would not be subject to these restrictions. Modifications to the export regulations could prevent us from exporting our existing and future products in an unrestricted manner without a license or make it more difficult to receive the desired classification. If export regulations were to be modified in such a way, we may be put at a competitive disadvantage with respect to selling our products internationally. We will complete technical reviews on any new products that we acquire or develop that may be subject to these regulations before we can export them.
Privacy Laws. We may be subject to various international, federal and state regulations regarding the treatment and protection of personally identifying and other regulated information. Applicable laws may include, without limitation, U.S. federal laws and implementing regulations such as the GLBA and HIPAA, as well as state laws and regulations, and international laws and regulations including the European Union General Data Protection Regulation, or the GDPR, which replaced the European Union Data Protection Directive in May 2018. Additionally, some of these laws have requirements on the transmittal of data from one jurisdiction to another. In the event our systems are compromised by an unauthorized party, many of these privacy laws require that we provide notices to our customers whose personally identifiable data we reasonably believe may have been compromised. Additionally, if we transfer data in violation of these laws, we could be subjected to substantial fines. To mitigate the risk of compromised information, we use encryption and other security to protect our databases.
Personnel
As of the date of this report,Annual Report on Form 10-K, we have nine11 full-time employees.
WHERE YOU CAN FIND MORE INFORMATION
You are advised to read this Form 10-K 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 and Current Reports on Form 8-K that we file from time to time. You may obtain copies of these reports directly from us or from the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers at its website http://www.sec.gov.
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In an effort
Outlined below are some of the risks that we believe could affect our business and financial statements. An investment in our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this Annual Report on Form 10-K, before investing in our common stock. If any of the events anticipated by the risks described below occur, our results of operations and financial condition could be adversely affected which could result in a decline in the market price of our common stock, causing you to keeplose all or part of your investment.
Because our common stock is quoted on the OTCQB instead of national exchange, our investors may have a difficulty selling their stock or may experience negative volatility on the market price of our common stock.
Our common stock is traded on the OTCQB Venture Market (“OTCQB”) operated by the OTC Markets Group. The OTCQB is often highly illiquid, in part because it does not have a national quotation system by which potential investors can follow the market price of shares except through information received and generated by a limited number of broker-dealers that make markets in particular stocks. There is a greater chance of volatility for securities that trade on the OTCQB as compared to a national exchange or quotation system. This volatility may be caused by a variety of factors, including the lack of readily available price quotations, the absence of consistent administrative supervision of bid and ask quotations, lower trading volume, and market conditions. Investors in our common stock may experience high fluctuations in the market price and volume of the trading market for our securities. These fluctuations, when they occur, have a negative effect on the market price for our securities. Accordingly, our stockholders may not be able to realize a fair price from their shares when they determine to sell them or may have to hold them for a substantial period of time until the market for our common stock improves.
We depend significantly upon the continued involvement of our present management.
The Company’s success depends significantly upon the involvement of our present management, who are in charge of our strategic planning and operations. We may need to attract and retain additional talented individuals in order to carry out our business objectives. The competition for individuals with expertise in this industry could be intense and there are no assurances that these individuals will be available to us.
Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses and pose challenges for our management.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated there under, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty for public informed aboutcompanies and significantly increased the costs and risks associated with accessing the U.S. public markets. Our management team will need to devote significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
Members of our board of directors own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
Members of our board of directors, together with our officers, beneficially own approximately 35.88% of our common stock. Accordingly, these stockholders have and will continue to have significant influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, a merger, the consolidation or sale of all or substantially all our assets or any other significant corporate transaction. The interests of these stockholders may not be the same as or may even conflict with our other investors’ interests. For example, these stockholders could delay or prevent a change in control of us, even if such a change in control would benefit our other stockholders, which could deprive our stockholders of an opportunity to receive a premium for their Common Stock as part of a sale of the Company or our assets. The significant concentration of stock ownership may negatively impact the value of our Common Stock due to potential investors’ perception that conflicts of interest may exist or arise.
Risks Related To Our Industry
We face intense competition.
We expect to experience intense competition across all markets for our products and services. Although we believe our business weand product portfolio will be a competitive advantage, our competitors that are focused on narrower product lines may make “forward-looking statements.” Forward-looking statements usually relatebe more effective in devoting technical, marketing, and financial resources to future eventscompete with us. In addition, barriers to entry in our businesses generally are low, and anticipated revenues, earnings, cash flows or other aspectsproducts, once developed, can be distributed broadly and quickly at a relatively low cost. Open source software vendors are devoting considerable efforts to developing software that mimics the features and functionality of our operations anticipated products. These competitive pressures may result in decreased sales volumes, price reductions, and/or increased operating results. As indicated previously, forward-looking statementscosts, such as for marketing and sales incentives, resulting in lower revenue, gross margins, and operating income.
Our business depends on our ability to attract and retain talented employees.
Our business is based on successfully attracting and retaining talented employees. The market for highly skilled workers and leaders in our industry is extremely competitive. If we are often identified by words, “will”, “may”, “should”, “continue”, “anticipate”, “believe”, “expect”, “plan”, “forecast”, “project”, “estimate”, “intend”less successful in our recruiting efforts, or if we are unable to retain key employees, our ability to develop and wordsdeliver successful products and services may be adversely affected. Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of similar nature. Forward-looking statements generally include statements containing:knowledge and smooth transitions involving key employees could hinder our strategic planning and execution.
Delays in product development schedules may adversely affect our revenues.
The development of software products is a complex and time-consuming process. New products can require long development and testing periods. Our increasing focus on innovative and new software presents new and complex development issues. Significant delays in new product releases or significant problems in creating new products could adversely affect our revenue.
Acquisitions and joint ventures may have an adverse effect on our business.
We expect to make acquisitions or entering into joint ventures as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, that we don’t realize a satisfactory return on our investment, or that we experience difficulty in the integration of new employees, business systems, and technology, or diversion of management’s attention from our other businesses. These events could harm our operating results or financial condition.
Risks Related to Our Securities
The market price for our common stock may be volatile, and you may not be able to sell our stock at a favorable price or at all.
Many factors could cause the market price of our common stock to rise and fall, including:
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Substantial sales of our common stock, or the perception that such sales might occur, could depress the market price of our common stock.
You should viewWe cannot predict whether future issuances of our common stock or resale in the open market will not decrease the market price of our common stock. The consequence of any such issuances or resale of our common stock on our market price may be increased as a result of the fact that our common stock is thinly, or infrequently, traded. The exercise of any options, or the vesting of any restricted stock that we may grant to directors, executive officers and other employees in the future, the issuance of common stock in connection with acquisitions and other issuances of our common stock, may decrease the market price of our common stock.
Holders of our common stock have a risk of potential dilution if we issue additional shares of common stock in the future.
The exercise of options and warrants and/or the conversion of preferred stock will dilute the shareholder’s ownership percentage. We may issue options to purchase or grant up to an aggregate of 3,000,000 shares of common stock under our 2019 Stock Grant/Option Plan. We also have outstanding warrants to purchase 24,290,866 shares of our common stock. In the future, we may grant additional stock options, warrants, or convertible securities. The exercise or conversion of stock options, warrants, preferred stock, or convertible securities will dilute the ownership percentage of our other stockholders. The dilutive effect of the exercise or conversion of these securities may adversely affect our ability to obtain additional capital. The holders of these securities may be expected to exercise or convert their securities when we are able to obtain additional equity capital on terms more favorable than these securities.
We do not intend to pay cash dividends to our stockholders, so you will not receive any return on your investment in our Company prior to selling your interest in the Company.
The Company has never paid any cash dividends to our stockholders. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any cash dividends in the foreseeable future. As a result, you will not receive any return on your investment prior to selling your shares in our Company, and for the other reasons discussed in this “Risk Factors” section, you may not receive any return on your investment even when you sell your shares in our Company.
Certain shares of our common stock are restricted from immediate resale. The lapse of those statementsrestrictions, coupled with caution. Those statementsthe sale of the related shares in the market, or the market’s expectation of such sales, could result in an immediate and substantial decline in the market price of our common stock.
Most of our shares of common stock are not guaranteesrestricted from immediate resale in the public market. The restricted shares are restricted in accordance with Rule 144, which states that if unregistered, restricted securities are to be sold, a minimum of future performance, circumstances or events. They are based on facts and circumstances known to us asone year must elapse between the later of the date of acquisition of the statements are made. All phasessecurities from the issuer or from an affiliate of the issuer, and any resale of those securities in reliance on Rule 144. The Rule 144 restrictive legend remains on the stock until the holder of the stock holds the stock for longer than six months (unless an affiliate) and meets the other requirements of Rule 144 to have the restriction removed. The sale or resale of those shares in the public market, or the market’s expectation of such sales, may result in an immediate and substantial decline in the market price of our business areshares. Such a decline will adversely affect our investors and make it more difficult for us to raise additional funds through equity offerings in the future.
Our common stock is subject to uncertainties, risksrestrictions on sales by broker-dealers and penny stock rules, which may be detrimental to investors.
Our common stock is subject to Rules 15g-1 through 15g-9 under the Exchange Act, which imposes certain sales practice requirements on broker-dealers who sell our common stock to persons other influences, manythan established customers and “accredited investors” (as defined in Rule 501(a) of the Securities Act). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. This rule adversely affects the ability of broker-dealers to sell our common stock and purchasers of our common stock to sell their shares of our common stock.
Additionally, our common stock is subject to SEC regulations applicable to “penny stocks.” Penny stocks include any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions. The regulations require that prior to any non-exempt buy/sell transaction in a penny stock; a disclosure schedule proscribed by the SEC relating to the penny stock market must be delivered by a broker-dealer to the purchaser of such penny stock. This disclosure must include the amount of commissions payable to both the broker-dealer and the registered representative and current price quotations for our common stock. The regulations also require that monthly statements be sent to holders of a penny stock that disclose recent price information for the penny stock and information of the limited market for penny stocks. These requirements adversely affect the market liquidity of our common stock.
Our Articles of Incorporation allow us to issue preferred stock without shareholder approval.
Our board of directors has “blank check” authority to issue up to 10,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any additional vote or action by our shareholders. The rights of the holders of the common stock will be subject to, and could be materially adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. For example, we could issue preferred stock that has superior rights to dividends or is convertible into shares of common stock. This might adversely affect the market price of the common stock.
If we experience delays and/or defaults in customer payments, we could be unable to recover all expenditures.
Because of the nature of our contracts, at times we commit resources to projects prior to receiving payments from the customer in amounts sufficient to cover expenditures on projects as they are incurred. Delays in customer payments may require us to make a working capital investment. If a customer defaults in making their payments on a project in which we do not control. Any of these factors either alone or taken together,have devoted resources, it could have a material adversenegative effect on our working capital and results of operations.
If we do not effectively manage our growth, our existing infrastructure may become strained, and we may be unable to increase revenue growth.
Our past growth that we have experienced, and in the future may experience, may provide challenges to our organization, requiring us to expand our personnel and our operations. Future growth may strain our infrastructure, operations and other managerial and operating resources. If our business resources become strained, our earnings may be adversely affected, and we may be unable to increase revenue growth. Further, we may undertake contractual commitments that exceed our labor resources, which could change whether any forward-looking statement ultimately turns outalso adversely affect our earnings and our ability to increase revenue growth.
The future issuance of equity or of other securities that are convertible into equity may dilute your investment and reduce your equity interest.
We may choose to raise additional capital in the future, depending on market conditions, strategic considerations and operational requirements. To the extent that additional capital is raised through the issuance of shares of our common stock or other securities convertible into shares of our common stock, our stockholders’ ownership interests in our Company will be true. Additionally, we assume no obligationdiluted. Future issuances of our common stock, other equity securities or other securities convertible into shares of our common stock or other equity securities, the exercise of currently outstanding or future options or warrants for our common stock, or the perception that such sales or exercises may occur, could adversely affect the prevailing market price of our common stock and impair our ability to update any forward-looking statement as a resultraise capital through future offerings of future events, circumstancesequity or developments.equity-linked securities.
Outlined below are some of the risks that we believe could affect our business and financial statements. An investment in our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this Annual Report on Form 10-K, before investing in our common stock. If any of the events anticipated by the risks described below occur, our results of operations and financial condition could be adversely affected which could result in a decline in the market price of our common stock, causing you to lose all or part of your investment.
The report of our independent registered public accounting firm contains explanatory language that substantial doubt exists about our ability to continue as a going concern.
The independent auditor’s report on our financial statements for the year ended September 30, 2016 contains explanatory language that substantial doubt exists about our ability to continue as a going concern. We have an accumulated deficit at September 30, 2016 of $45,780,569 and need additional cash flows to maintain our operations. We depend upon equity financing provided by our active Private Placement Memorandum (PPM) and product sales to finance our operations and need to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resources for the further development and marketing of our products and business. If we are unable to obtain sufficient financing in the near term or achieve profitability, then we would, in all likelihood, experience severe liquidity problems and may have to curtail or cease our operations altogether. If we curtail our operations or cease our operations, we may be placed into bankruptcy or undergo liquidation, the result of which will adversely affect the value of our common shares.
Because we are quoted on the OTC Markets formerly known as “Pinks Sheets” instead of an exchange or national quotation system, our investors may have a tougher time selling their stock or experience negative volatility on the market price of our stock.
Our common stock is traded on the OTCQB “OTC Markets”. The OTCQB “OTC Markets” is often highly illiquid, in part because it does not have a national quotation system by which potential investors can follow the market price of shares except through information received and generated by a limited number of broker-dealers that make markets in particular stocks. There is a greater chance of volatility for securities that trade on the OTCQB “OTC Markets”as compared to a national exchange or quotation system. This volatility may be caused by a variety of factors, including the lack of readily available price quotations, the absence of consistent administrative supervision of bid and ask quotations, lower trading volume, and market conditions. Investors in our common stock may experience high fluctuations in the market price and volume of the trading market for our securities. These fluctuations, when they occur, have a negative effect on the market price for our securities. Accordingly, our stockholders may not be able to realize a fair price from their shares when they determine to sell them or may have to hold them for a substantial period of time until the market for our common stock improves.
We depend significantly upon the continued involvement of our present management.
The Company’s success depends significantly upon the involvement of our present management, who is in charge of our strategic planning and operations. We may need to attract and retain additional talented individuals in order to carry out our business objectives. The competition for individuals with expertise in this industry could be intense and there are no assurances that these individuals will be available to us.
Our common stock is subject to penny stock regulation.
Our shares are subject to the provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), commonly referred to as the “penny stock” rule. Section 15(g) sets forth certain requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act. The Commission generally defines penny stock to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. Rule 3a51-1 provides that any equity security is considered to be penny stock unless that security is: registered and traded on a national securities exchange meeting specified criteria set by the Commission; authorized for quotation on the NASDAQ Stock Market; issued by a registered investment company; excluded from the definition on the basis of price (at least $5.00 per share) or the registrant’s net tangible assets; or exempted from the definition by the Commission. Since our shares are deemed to be “penny stock”, trading in the shares will be subject to additional sales practice requirements on broker/dealers who sell penny stock to persons other than established customers and accredited investors.
Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses and pose challenges for our management.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated there under, the Sarbanes-Oxley Act and SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the U.S. public markets. Our management team will need to devote significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
The Company’s directors and officers may control the outcome of most matters submitted to a vote of shareholders.
The President/CEO, Director Mr. De La Garza controls 90% (9,000,000) of the Series A Preferred Stock. Each share of the Preferred Stock has 150 votes on all matters presented to be voted by the holders of common stock. The holders of the Series A Preferred Stock can only convert the shares to common shares, on a 1 to 1.5 basis, upon the agreement by 50.1% vote of all preferred shareholders.
Also, the officers and directors have changes in control provisions that allows for the full payment of salary and stock in case the company is taken over by a third party. In addition to the ability of these directors and officers of the Company to vote, shares represent a significant majority of the total voting power of the Company’s common shares. (See the officer employment agreements).
Under Texas law, common shares of the Company owned by the officers and directors may be voted in a manner in which those votes are determined by the directors, Michael De La Garza, Gino Mauriello and Eric Marquez. Those directors, should they choose to act together, will be able to control substantially all matters affecting the Company, and block a number of matters relating to any potential change of control of the Company. See Item 12–Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Risks Relating To Our Industry
We face intense competition.
We continue to experience intense competition across all markets for our products and services. Although we believe our business and product portfolio is a competitive advantage, our competitors that are focused on narrower product lines may be more effective in devoting technical, marketing, and financial resources to compete with us. In addition, barriers to entry in our businesses generally are low and products. Open source software vendors are devoting considerable efforts to developing software that mimics the features and functionality of our products. These competitive pressures may result in decreased sales volumes, price reductions, and/or increased operating costs, such as for marketing and sales incentives, resulting in lower revenue, gross margins, and operating income.
Our business depends on our ability to attract and retain talented employees.
Our business is based on successfully attracting and retaining talented employees. The market for highly skilled workers and leaders in our industry is extremely competitive. We are limited in our ability to recruit internationally by restrictive domestic immigration laws. If we are less successful in our recruiting efforts, or if we are unable to retain key employees, our ability to develop and deliver successful products and services may be adversely affected. Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution.
Delays in product development schedules may adversely affect our revenues.
The development of software products is a complex and time-consuming process. New products and enhancements to existing products can require long development and testing periods. Our increasing focus on innovative and new software presents new and complex development issues. Significant delays in new product releases or significant problems in creating new products could adversely affect our revenue.
Acquisitions and joint ventures may have an adverse effect on our business.
We expect to continue making acquisitions or entering into joint ventures as part of our long-term business strategy. These transactions involve significant challenges and risks including that the transaction does not advance our business strategy, that we don’t realize a satisfactory return on our investment, or that we experience difficulty in the integration of new employees, business systems, and technology, or diversion of management’s attention from our other businesses. These events could harm our operating results or financial condition.
Risks Related to our Securities
The market price for our common stock may be volatile, and you may not be able to sell our stock at a favorable price or at all.
Many factors could cause the market price of our common stock to rise and fall, including:
Substantial sales of our common stock, or the perception that such sales might occur, could depress the market price of our common stock.
We cannot predict whether future issuances of our common stock or resale in the open market will decrease the market price of our common stock. The consequence of any such issuances or resale of our common stock on our market price may be increased as a result of the fact that our common stock is thinly, or infrequently, traded. The exercise of any options, or the vesting of any restricted stock that we may grant to directors, executive officers and other employees in the future, the issuance of common stock in connection with acquisitions and other issuances of our common stock, may decrease the market price of our common stock.
Holders of our common stock have a risk of potential dilution if we issue additional shares of common stock in the future.
Although our Board of Directors intends to utilize its reasonable business judgment to fulfill its fiduciary obligations to our then existing stockholders in connection with any future issuance of our common stock, the future issuance of additional shares of our common stock would cause immediate, and potentially substantial, dilution to the net tangible book value of those shares of common stock that are issued and outstanding immediately prior to such transaction. Any future decrease in the net tangible book value of our issued and outstanding shares could have a material adverse effect on the market value of our shares.
We do not intend to pay cash dividends to our stockholders, so you will not receive any return on your investment in our Company prior to selling your interest in the Company.
The Company has never paid any cash dividends to our stockholders. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any cash dividends in the foreseeable future. As a result, you will not receive any return on your investment prior to selling your shares in our Company and, for the other reasons discussed in this “Risk Factors” section, you may not receive any return on your investment even when you sell your shares in our Company.
Certain shares of our common stock are restricted from immediate resale. The lapse of those restrictions, coupled with the sale of the related shares in the market, or the market’s expectation of such sales, could result in an immediate and substantial decline in the market price of our common stock.
Most of our shares of common stock are restricted from immediate resale in the public market. The restricted shares are restricted in accordance with Rule 144, which states that if unregistered, restricted securities are to be sold, a minimum of one year must elapse between the later of the date of acquisition of the securities from the issuer or from an affiliate of the issuer, and any resale of those securities in reliance on Rule 144. The Rule 144 restrictive legend remains on the stock until the holder of the stock holds the stock for longer than six months (unless an affiliate) and meets the other requirements of Rule 144 to have the restriction removed. The sale or resale of those shares in the public market, or the market’s expectation of such sales, may result in an immediate and substantial decline in the market price of our shares. Such a decline will adversely affect our investors, and make it more difficult for us to raise additional funds through equity offerings in the future.
Our common stock is subject to restrictions on sales by broker-dealers and penny stock rules, which may be detrimental to investors.
Our common stock is subject to Rules 15g-1 through 15g-9 under the Exchange Act, which imposes certain sales practice requirements on broker-dealers who sell our common stock to persons other than established customers and “accredited investors” (as defined in Rule 501(a) of the Securities Act). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. This rule adversely affects the ability of broker-dealers to sell our common stock and purchasers of our common stock to sell their shares of our common stock.
Additionally, our common stock is subject to SEC regulations applicable to “penny stocks.” Penny stocks include any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions. The regulations require that prior to any non-exempt buy/sell transaction in a penny stock; a disclosure schedule proscribed by the SEC relating to the penny stock market must be delivered by a broker-dealer to the purchaser of such penny stock. This disclosure must include the amount of commissions payable to both the broker-dealer and the registered representative and current price quotations for our common stock. The regulations also require that monthly statements be sent to holders of a penny stock that disclose recent price information for the penny stock and information of the limited market for penny stocks. These requirements adversely affect the market liquidity of our common stock.
Our Articles of Incorporation allow us to sell preferred stock without shareholder approval.
Our Board of Directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any additional vote or action by our shareholders. The rights of the holders of the common stock will be subject to, and could be materially adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. For example we could issue preferred stock that has superior rights to dividends or is convertible into shares of common stock. This might adversely affect the market price of the common stock.
If we experience delays and/or defaults in customer payments, we could be unable to recover all expenditures.
Because of the nature of our contracts, at times we commit resources to projects prior to receiving payments from the customer in amounts sufficient to cover expenditures on projects as they are incurred. Delays in customer payments may require us to make a working capital investment. If a customer defaults in making their payments on a project in which we have devoted resources, it could have a material negative effect on our results of operations.
If we do not effectively manage our growth, our existing infrastructure may become strained, and we may be unable to increase revenue growth.
Our past growth that we have experienced, and in the future may experience, may provide challenges to our organization, requiring us to expand our personnel and our operations. Future growth may strain our infrastructure, operations and other managerial and operating resources. If our business resources become strained, our earnings may be adversely affected and we may be unable to increase revenue growth. Further, we may undertake contractual commitments that exceed our labor resources, which could also adversely affect our earnings and our ability to increase revenue growth.
SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED
ITEM 1B. UNRESOLVED STAFF COMMENTS
This Item is not applicable to us as we are not an accelerated filer, a large accelerated filer, or a well-seasoned issuer.Not applicable.
Starting in August 2016, the Company setup a newWe lease office space at 825 Main Street, Suite 100, Buda, Texas 78610.for our headquarters. In February 2019, we entered into a lease agreement with our landlord for approximately 1,302 square feet. The Company still maintainslease was effective February 1, 2019 and has a shared office withthree-year term. The initial monthly rent is $2,566, and the lease agreement provides for annual rent increases of approximately 2.7%. The lease automatically renews for a shareholder at 1291 Galleria Drive, Suite 200, Henderson, Nevada 89014. The office is of no costthree-year term, unless either party to the Company.lease agreement notifies the other of the intent to terminate the lease in writing at least 180 days prior to the expiration of the current term. The amount of future payments guaranteed is $74,388.
ITEM 3. LITIGATIONLEGAL PROCEEDINGS
AsSee “Litigation” in Note 7 – Commitments and Contingencies of September 30, 2016, the Company is not involvedNotes to the Financial Statements in any material litigation.Part II, Item 8 of this Annual Report on Form 10-K.
The Company has settled all litigation in which it was involved. The matter that was pending in the United States Federal District Court for the Southern District of Mississippi was settled and dismissed on July 12, 2016 and the matter pending in Chancery Court of Rankin County Mississippi was settled and dismissed on July 18, 2016. The Company repurchased its stock with the $45,580 it held in escrow as the Company’s contribution to the settlements and all other expenses and costs were covered by the Company’s insurance carrier. The repurchased stock had a fair market value of $61,281 resulting in a gain on settlement.ITEM 4. MINE SAFETY DISCLOSURES
ITEM 4. NOT APPLICABLENot applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is traded inon the over-the-counter market and quoted on the Over the Counter Bulletin Board and can be accessed on the Internet at OTCQB markets.comVenture Market run by OTC Markets Group under the symbol “CLOK.”
At September 30, 2016,As of January 9, 2020, there were 5,268,85940,792,510 shares of common stock of the Company issued and outstanding, and there were 963 shareholders1,189 holders of the Company’s common stock.
The following table sets forth for the periods indicated the high and low bid quotations for CipherLoc’s common stock. These quotations represent inter-dealer quotations, without adjustment for retail markup, markdown or commission and may not represent actual transactions.
| Periods | High | Low | ||||||
| Fiscal Year 2016 | ||||||||
| First Quarter (October – December 2015) | $ | 5.80 | $ | 2.00 | ||||
| Second Quarter (January – March 2016) | $ | 4.00 | $ | 1.70 | ||||
| Third Quarter (April - June 2016) | $ | 4.07 | $ | 2.48 | ||||
| Fourth Quarter (July – September 2016) | $ | 3.20 | $ | 2.60 | ||||
| Fiscal Year 2015 | ||||||||
| First Quarter (October – December 2014) | $ | 3.10 | $ | 0.80 | ||||
| Second Quarter (January – March 2015) | $ | 4.03 | $ | 0.88 | ||||
| Third Quarter (April - June 2015) | $ | 5.00 | $ | 2.70 | ||||
| Fourth Quarter (July – September 2015) | $ | 7.25 | $ | 3.23 | ||||
Dividends
We did not declare any dividends for the year ended September 30, 2016.2019. Our Board of Directors does not intend to declare dividends in the nearforeseeable future. The declaration, payment, and amount of any future dividends will be made at the discretion of the Board of Directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the Board of Directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.
Transfer Agent
CipherLoc’sCipherloc’s Transfer Agent and Registrar for the common stock is Pacific Stock Transfer Corporation located in Las Vegas, Nevada.
Recent salesSales of Unregistered Securities
Fiscal Year Ended September 30, 2016
Stock Issued for Cash
During the year ended September 30, 2016, through the utilization2019, there was no stock issued for cash.
Stock and Stock Options Issued to Board of a Private Placement MemorandumDirectors and upon receipt of executed Subscription Agreements, the Company issued 513,500 shares of common stock for $946,320 in net cash proceeds pursuant to the exemption from the registration provisions of the Securities Act of 1933, as amended (the “Act”), afforded by Rule 506 of Regulation D.
Officers
Stock Issued in Connection with acquisition of Software
During the year ended September 30, 2016,2019, the Company issued 5,0009,346 shares of common stock valued at $27,500 based on the market price on the datewith a fair value of grant for the acquisition$11,216 to its employees as part of software.their compensation. The software was expensed as there was not technical feasibility for useCompany also issued 1,100,000 stock options to members of the software.board of directors and officers with a Black Scholes value of $862,000 to vest ratably over a three-year period. Stock compensation expense for $45,942 was recognized in the period.
Stock Issued for Services
During the year ended September 30, 2016,2019, the Company issued 75,000 shares of common stock for legal services with a fair value of $210,000 and was recorded on the date of grant. The Company issued 28,000 shares of common stock to BrokerBank Securities having a market value of $56,000 as the stock portion of the fees due pursuant to the fee agreement. BrokerBank Securities is a registered broker dealer in connection with sales of securities. The Company issued 10,67720,000 shares of common stock with a fair value of $32,138 at date of grant$40,000 to Michael Salas as a quarterly bonus. The Company also issued 800 shares of common stock to Pamela Kafka to design a company logo which had a fair value of $1,600 at date of grant.
Preferred Stock
The Company has authorized 10,000,000 shares of Series A Preferred Stock, at $0.01 par value and all are issued and outstanding as of September 30, 2016. Each share of the preferred stock has 150 votes on all matters presented to be voted by the holders of our common stock. The CEO has been granted 9,000,000 shares of the preferred stock. The holders of the Preferred A shares can only convert the shares if agreed upon by 50.1% vote of all preferred shareholders.
The issuance of preferred stock by our board of directors could adversely affect the rights of holders of the common stock by, among other things, establishing preferential dividends, liquidation rights or voting powers. See “Risk Factors” above.
Common Stock
On April 11, 2011, the Company amended its articles of incorporation to increase the authorized shares to 650,000,000 shares, at $0.01 par value. On March 23, 2015, the common stock was reverse split on a 1Pycnocline, LLC for 100 basis. There were 5,268,859 shares issued and outstanding as of September 30, 2016. The holders of our common stock are entitled to receive such dividends, if any, as may be declared by our board of directors from time to time out of legally available funds. The dividend rights of our common stock are junior to any preferential dividend rights of any outstanding shares of preferred stock. The holders of our common stock also are entitled to receive distributions upon our liquidation, dissolution or winding up of our assets that are legally available for distribution, after payment of all debt and other liabilities and distribution in full of preferential amounts, if any, to be distributed to holders of our preferred stock.consulting services rendered.
The holders of our common stock are not entitled to preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of our common stock are subject to, and may be adversely affected by, the rights of any series of preferred stock that we may designate and issue in the future.
Fiscal Year Ended September 30, 2015
During the year ended September 30, 2015, through the utilization of a Private Placement Memorandum and upon receipt of executed Subscription Agreements, the Company issued 1,147,500 shares of common stock for $2,283,000 in net cash proceeds pursuant to the exemption from the registration provisions of the Securities Act of 1933, as amended (the “Act”), afforded by Rule 506 of Regulation D.
Stock Issued in Connection with acquisition of Software Licensing
During the year ended September 30, 2015, the Company issued 50,000 shares of common stock valued at $194,500 based on the market price on the date of grant in regards to the purchase of a software license known as XPSS in accordance with the Software Licensing Agreement. Each of the two owners received 25,000 shares.
Stock Issued for Services
During the year ended September 30, 2015, the Company issued 161,654 shares of common stock as compensation, which includes a performance bonus of 2,084 shares to Dr. Carlson. The fair value of the shares was $994,665 including stock that vested immediately and a performance base grant valued at $10,733, and was recorded at the market price on the date of grant.
Stock Issued for Performance
Dr. Carlson shall be entitled to a performance bonus of 50,000 shares of Cipherloc stock to be paid at such time as the CipherLoc Polymorphic Hardware Engine can be demonstrated to function as a working, complete, product capable of being manufactured in facilities that would normally produce standard Field Programmable Gate Array chips. Management had determined that it was probable that the award will vest. Accordingly, the Company recognized 2,084 shares during 2015 and compensation expense of $10,733 during the year ended September 30, 2015. The unvested portion of the award was to be recognized over the implied service period of twenty-four months. During the year ended September 20, 2016, it was determined that technological feasibility had not yet been reached and no additional expense was recognized during the year.
Stock Issued for Services Related Party
On September 18, 2015, the Company granted 140,000 common shares to its President/CEO, Michael De La Garza. The fair value of the shares was $838,600 and was recorded at the market price on the date of grant. During the fiscal year, Mr. De La Garza was issued 6 million shares of preferred stock. These 6 million shares were valued at $9,900,000.
Warrants and Options
There are no issued and outstanding options or warrants to purchase common stock or any other security.
ITEM 6. SELECTED FINANCIAL DATA
This ItemThe Company is not required for smallerto provide the information required by this Item as it is a “smaller reporting companies and the company, has elected to omit this information.” as defined in Rule 229.10(f)(1).
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this Report.
The following information contains certain forward-looking statements of our management. Forward-looking statements are statements that estimate the happening of future events and are not basedAnnual Report on historical fact. Forward-looking statements may be identified by the use of forward-looking terminology, such as “may,” “could,” “expect,” “estimate,” “anticipate,” “PLAN,” “predict,” “probable,” “possible,” “should,” “continue,” or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.Form 10-K.
Our Business
Cipherloc is a data security solutions company. Our highly innovativeWe are developing products - based on ourand services around its patented polymorphic encryption technology - are designed to enable an iron-clada more efficient and stronger layer of protection to be added to existing solutions. Cipherloc has developed technology that:
The Company has introduced an innovative and revolutionary new type of encryption technology with five international patents and three US patents pending and is the industry’s first “Polymorphic Cipher Engine”, called CipherLocwhich we call Cipherloc®. It isWe anticipate offering the first secure commercially viable advanced “Polymorphic Key Progression Algorithmic Cipher Engine” (PKPA)(“PKPA”). ThisWe believe this morphing cipher can be used in any commercial data security industry and/or in sensitive applications.
Our innovative and patented polymorphic technology eliminates the flaws and inadequacies associated with today’s encryption algorithms. Instead of dealing with large monolithic blocks of data, our approach decomposes the information to be protected into multiple segments. These individual segments each have a unique encryption key, utilize different encryption algorithms, are randomly grouped into different lengths, and can be further re-encrypted. Since segments are independent from each other and are individually protected, our technology is not susceptible to computational attacks. In fact, the strength of our technology improves as compute power increases.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.
The methods, estimates, and judgment we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The SEC has defined “critical accounting policies” as those accounting policies that are most important to the portrayal of our financial condition and results, and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based upon this definition, our most critical estimates are litigation.accounting for convertible debt and embedded derivatives, software revenue recognition, and stock issued to employees and non-employees. Our most critical accounting policies applicable to the periods presented are noted below. For additional information see Note 3,2, “Significant Accounting Policies” in the notes to our financial statements appearing elsewhere in this report. Although we believe that our estimates and assumptions are reasonable, they are based upon information presently available, and actual results may differ significantly from these estimates.
Our critical accounting policies and estimates are those related to revenue recognition, deferred income taxes, accounting for share-based payments, and litigation.
Software Revenue Recognition. We adopted the new accounting revenue standard for revenue recognition effective October 1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as of October 1, 2018. Results for reporting periods beginning after October 1, 2018 are presented under this new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under previous revenue guidance. See Note (1) Summary of Significant Accounting Policies.
Software licenseWe recognize revenue is generally recognizedin accordance with the authoritative guidance issued by the FASB on revenue recognition when a signed contract or other persuasive evidence of an arrangement exists, the software has been electronically delivered, the license fee is fixed or is measured on a paid user basis;determinable, delivery has occurred, and collection of the resulting receivable is deemed probable. WhenProducts delivered to a customer on a trial basis are not recognized as revenue until the trial period has ended and acceptance has occurred by the customer. Reseller and distributor customers typically send us a purchase order when they have an end user identified.
The Company’s contracts containwith customers often include promises to transfer multiple elements wherein Vendor-Specific Objective Evidenceproducts and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.
Judgment is required to determine the standalone selling price (“VSOE”SSP”) exists for all undelivered elements, we account for the delivered elements in accordance with the “Residual Method.” VSOE of fair value foreach distinct performance obligation. For products and services aside from maintenance and support, the Company estimates SSP by adjusting the list price by historical discount percentages. SSP for software and hardware maintenance and support fees is established bybased on the stated percentages of the fees charged for the respective products.
The Company’s perpetual and term software licenses have significant standalone functionality and therefore revenue allocated to these performance obligations are recognized at a stated renewal rate, if substantive, includedpoint in time upon electronic delivery of the download link and the license arrangement or rates charged in stand-alone sales of maintenance and support. Revenue from subscription license agreements, which include software, rights to unspecified future products and maintenance,keys. For certain arrangements revenue is recognized based on usage or ratably over the term of the subscription period.arrangement.
Product maintenance and support services are satisfied over time as they are stand-ready obligations throughout the support period. As a result, revenues associated with maintenance services are deferred and recognized as revenue ratably over the term of the contract.
Provided all other revenue criteria are met, the upfront, minimum, non-refundable license fees from customers are generally recognized upon delivery and on-going royalty fees are generally recognized upon reports of new licenses issued. If there is significant uncertainty about the project completion or receipt of payment forRevenues associated with professional services revenueare recognized at a point in time upon customer acceptance.
Accounting for Share-Based Payments. As discussed further in Note (10) Share-Based Payment Arrangements, to our consolidated financial statements, we account for share-based awards in accordance with the authoritative guidance issued by the FASB on stock compensation.
We have used and expect to continue to use the Black-Scholes option-pricing model to compute the estimated fair value of share-based compensation expense. The Black-Scholes option-pricing model includes assumptions regarding dividend yields, expected volatility, expected option term and risk-free interest rates. The assumptions used in computing the fair value of share-based compensation expense reflect our best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control. We estimate expected volatility based primarily on historical daily price changes of our stock and other factors. The expected option term is deferred until the uncertaintynumber of years that we estimate that the stock options will be outstanding prior to exercise. The estimated expected term of the stock awards issued has been determined pursuant to SEC Staff Accounting Bulletin SAB No. 110. If other assumptions or estimates had been used, the share-based compensation expense that was recorded for the years ended September 30, 2019 and 2018 could have been materially different. Furthermore, if different assumptions or estimates are used in future periods, share-based compensation expense could be materially impacted in the future.
Accounting for Convertible Debt and Embedded Derivatives.Convertible debt is sufficiently resolved. VSOEaccounted for under the guidelines established by Accounting Standards Topic (“ASC”) 470-20,Debt with Conversion and Other Options. ASC 470-20 governs the calculation of an embedded beneficial conversion feature, a derivative instrument, which is treated as an additional discount to the instruments where derivative accounting does not apply. This applies during the period for which embedded conversion features are either fixed, contingently convertible, or cash or net settlement is in control of the Company. When equity instruments, such as warrants, are issued with convertible debt, the net proceeds from the transaction are allocated to the convertible debt and equity instruments based on their relative fair values. The proceeds allocated to the equity instruments may reduce the carrying value of the convertible debt, and such discount is amortized to interest expense over the term of the debt. The amount of the warrants and beneficial conversion feature will reduce the carrying value of the debt instrument to zero, but no further. The discount relating to the initial recording of the original issue discounts, issue costs, warrants and beneficial conversion feature are accreted, together with the premium, over the estimated term of the debt.
The excess of fair value of servicesthe embedded conversion feature, together with the original issue discounts, warrants, and issue costs over the face value of the debt, is based upon stand-alone salesrecorded as an immediate charge in the accompanying statements of those services.operations and cash flows. Each reporting period, the Company will compute the estimated fair value of derivatives and record changes to operations.
Results of Operations
Stock issued to employees and non-employees
The Company measures the compensation cost using the fair value based method. This method uses the fair value at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Grants to vendors are recorded at fair value at each reporting period.
RESULTS OF OPERATIONS
Fiscal Year Ended September 30, 2016,2019 Compared to Fiscal Year Ended September 30, 2015 (as restated)2018
Revenue is $341,478decreased to $46,600 from $316,248 for the years ended September 30, 2019 compared with the same period in 2018. Conversely, the cost of revenue decreased to zero from $89,230 for the years ended September 30, 2019 compared with 2018. The decrease in the cost of revenues resulted from limited licensing income earned from the Company requiring no cost of revenues. The decrease in revenues resulted from expiration in the prior year of a four-year software license sold in 2014.
General and administrative expenses increased to $3,372,047 from $1,844,903 for the years ended September 30, 2019 compared with the same period in 2018. The increases in general and administrative expenses primarily resulted from higher professional fees, including for legal and accounting, higher consulting and contract services, higher salaries and higher rent expense. Payroll tax expense increased by $244,000 related to both employer and employee expense associated with historical stock grants issued to employees. Additionally, general and administrative expenses include payments totaling $416,000 to Quality Healthcare International, Inc. (“QHI”) and Noun Energy which are currently under investigation.
Sales and marketing expenses increased to $1,772,197 from $545,250 for the years ended September 30, 2019 compared with the same period in 2018. Sales and marketing expenses increased primarily due to payments made to Ageos during 2019 as well as the hiring of individual sales consultants under contract with the Company.
Research and development expenses increased to $1,744,480 from $873,107 for the years ended September 30, 2019 compared with the same period in 2018. Research and development expenses increased primarily as a result higher salaries and consulting costs.
Settlement expense was $0 for the year ended September 30, 2016; no revenues were realized in 2015. The revenues in 2016 are related a five-year license agreement for certain source code which we will support over the contract. Delivery occurred in late December 2015, so we are recording revenues over the remaining term of the agreement of 30 months from the delivery date. Cost of revenue was $90,9002019, as compared to $81,000 for the year ended September 30, 2016. We include certain salaries of technical support staff and related costs.
General and administrative expenses decreased to $1,167,466 the year ended September 30, 2016 from $12,842,6782018. Settlement expense for the year ended September 30, 2015. The decrease in our general and administrative expenses is largely2018 was due to the $10.7 million in stock-based compensation to our Chief Executive Officer during the year ended September 30, 2015.
We incurred settlement expenses of $763,469 to settle litigation and for the termination of software licenses related to seven separate licenses in that the software usage would possibly interfere with the Company’s future software development. The software license settlements were satisfied through the issuance of 327,50050,000 shares of common stock at fair value on date of grant, which are presented net of 20,359 shares returned in the litigation settlement.
Sales and marketing expenses were $218,722 for the year ended September 30, 2016 and $43,524 for the year ended September 30, 2015. We hired Mike Salas as VP of Sales and Marketing during the current year to lead our sales and marketing efforts. We also updated and re-launched our company website to more accurately show our enhanced business focus.settle a legal claim.
Research and development costs increasedTotal other expenses, net, decreased to $755,159$8,101 from $227,650$(1,303,541) for the years ended September 30, 20162019 and 2015,2018, respectively. Our research and development costs increase is relatedThe decrease was due to an increase in research and development payroll. Our research and development staff is working on the utilization of our software on multiple platforms with varying specifications.following expenses from 2018:
Interest expense, net of interest income, increased to $47,117 in 2016 from $2,722in 2015 for the years ended September 30, 2016 and 2015, respectively. Our interest expense increased as a result of interest expensed towards unpaid accrued benefits and salaries related to the former Chief Financial Officer of the Company in accordance with the employment agreement.
Net Loss
The net loss in the year ended September 30, 2016 was $2,641,743 compared to net loss during the year ended September 30, 2015 of $13,758,100. The decrease in the net loss is primarily due to a decrease in our general and administrative expenses. The net loss will continue to be reduced in that our research and developments will be less and anticipated revenues will be realized in the year ending September 30, 2017.
| 1. | Net loss on extinguishment of convertible notes totaling $317,268. The Company recognized a $358,038 loss on extinguishment related to the amendment of the convertible note with FirstFire Global Opportunities Fund, LLC (“FirstFire”) in December 2017, as well as a $153,621 loss on extinguishment related to the redemption of the convertible note with Peak One Opportunity Fund LP (“Peak One”) in April 2018. These losses were partially offset by a $194,391 gain on extinguishment related to the settlement of the amended FirstFire convertible note in March 2018. | |
| 2. | The Company recognized a loss of $486,745 in December 2017, resulting from the excess fair value of the embedded conversion feature in the Peak One convertible note and of the equity instruments issued with the Peak One convertible note. | |
| 3. | Changes in the fair value of the embedded conversion features in the FirstFire and Peak One convertible notes during the year ended September 30, 2018, totaling $8,536. | |
| 4. | An increase in interest income (expense), net, to $8,101 from $(490,992) for the years ended September 30, 2019 and 2018, respectively, due to interest incurred on the Company’s convertible notes with FirstFire and Peak One that were outstanding during the year ended September 30, 2018 and interest income earned on excess cash equivalents during the year ended September 30, 2019. |
Liquidity and Capital Resources
We have an accumulated deficit at September 30, 20162019 of ($45,780,569).$61,456,536. We expect to incur substantial expenses and generate continued operating losses until we generate revenues sufficient to meet our obligations. At September 30, 2016,2019, the Company had cash of $344,138.$7,839,472. We believe that our existing cash balances are insufficientsufficient to fund future operations for the next 12 months. These factors raise doubt about the Company’s ability to continue as a going concern.
We depend upon the continued participation of our active Private Placement Memorandum (PPM) to finance our operations and need to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resources for the further development and marketing of our products and business. The Company has raised money in the form of a private placement memorandum total $946,320. In addition, subsequent to September 30, 2016, the Company has raised $784,520 in equity financing, net of offering costs.
There is no assurance that such funding, if required will be available to us or, if available, will be available upon terms favorable to us. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our independent auditors have included an explanatory paragraph in their opinion regarding substantial doubt about the ability to continue as a going concern.
Cash FlowFlows
The following table summarizes, for the periods indicated, selected items in our Statements of Cash Flows:
| Year Ended September 30, | Year Ended September 30, | |||||||||||||||
| 2016 | 2015 | 2019 | 2018 | |||||||||||||
| Net cash provided by (used in): | ||||||||||||||||
| Net cash (used in) provided by: | ||||||||||||||||
| Operating activities | $ | (2,567,341 | ) | $ | (749,050 | ) | $ | (6,139,815 | ) | $ | (2,299,459 | ) | ||||
| Investing activities | $ | (28,247 | ) | $ | - | $ | (37,059 | ) | $ | (14,429 | ) | |||||
| Financing activities | $ | 946,320 | $ | 2,229,388 | $ | (40,000 | ) | $ | 16,142,838 | |||||||
Operating Activities
Our cashCash used in operating activities was $2,567,341$6,139,815 and $749,050$2,299,459 for the years ended September 30, 20162019 and 2015,2018, respectively. The increase in cash used in operationsfor operating activities was primarily attributable to an increase in legal costs, salaries, marketing and office costs.net operating loss net of noncash items of $5,176,984, a favorable increase in prepaid expense of $116,719, offset by an unfavorable increase in liabilities of $1,453,348.
Investing Activities
Our cashCash used in investing activities was $28,247$37,059 and $0$14,429 for the years ended September 30, 20162019 and 2015. Our2018, respectively. The increase in cash used infor investing activities is relatedwas due to equipment, leasehold improvements, and lease deposit.an increase in fixed asset purchases.
Financing Activities
Cash providedused by financing activities was $946,320 and $2,229,388$40,000 versus cash provided of $16,142,838 for the years ended September 30, 20162019 and 2015,2018, respectively. We receivedThe decrease in cash netprovided by financing activities was due to a payout related to an oversubscription on a capital raise as opposed to last year increase due to the issuances of offering costs from the sale of our common stock of $946,320 and $2,283,000 for the years ended September 30, 2016 and 2015, respectively. During the year ended September 30, 2015, we repaid our lines of credit of $53,612.cash.
Off-Balance Sheet Arrangements
We did not have noduring the periods presented, nor do we currently have, any off-balance sheet arrangements including arrangements that would affect the liquidity, capital resources, market risk support and credit risk support or other benefits.as defined under applicable SEC rules.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We doThe Company is not hold any derivative instruments and do not engagerequired to provide the information required by this Item as it is a “smaller reporting company,” as defined in any hedging activities.Rule 229.10(f)(1).
| 12 |
CIPHERLOC CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Board of Directors and Stockholders
Stockholders of Cipherloc Corporation
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Cipherloc Corporation (the “Company”) as of September 30, 2016,2019, and the related statements of operations, stockholders’ deficitequity, and cash flows for the year then ended. These financial statements areended September 30, 2019, and the responsibility ofrelated notes (collectively referred to as the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States)“financial statements”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2016,2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As more fully explained in Note 2 to the financial statements, the Company has incurred losses and has a working capital deficit as of September 30, 2016. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans with respect to these factors are also described on Note 2. The Company’s financial statements do not include any adjustments that might result from the outcome of these uncertainties should the Company be unable to continue as a going concern.
dbbmckennon
Newport Beach, California
February 2, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRMBasis for Opinion
The Board of Directors and Stockholders
Cipherloc Corporation
Buda, Texas
We have audited the accompanying balance sheet of Cipherloc Corporation (the “Company”) as of September 30, 2015, and the related statements of operations, stockholders’ deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audit, included considerationwe are required to obtain an understanding of internal control over financial reporting, as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An
Our audit also includesincluded performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audit provides a reasonable basis for our opinion.
| /s/ Briggs & Veselka Co. | |
| We have served as the Company’s auditor since2019. | |
| Houston, Texas | |
| January10, 2020 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Cipherloc Corporation
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Cipherloc Corporation (the “Company”) as of September 30, 2018, and the related statements of operations, stockholders’ equity, and cash flows for the year ended September 30, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2015,2018, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanyingBasis for Opinion
These financial statements have been prepared assuming thatare the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company will continue as a going concern. As discussed in Note 2accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the Company has a working capital deficit and has incurred recurring losses, which raises substantial doubt about its abilitypurpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to continue as a going concern. Management’s plans in regard to this matter are also described in Note 2. Theassess the risks of material misstatement of the financial statements, do not include any adjustmentswhether due to error or fraud, and performing procedures that might result fromrespond to those risks. Such procedures included examining, on a test basis, evidence regarding the outcomeamounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of this uncertainty.the financial statements. We believe that our audit provides a reasonable basis for our opinion.
| /s/ | |
December 31, 2018 |
| 15 |
CIPHERLOC CORPORATION
| September 30, | ||||||||
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 344,138 | $ | 1,993,406 | ||||
| Accounts receivable, net of allowance of $10,000 | - | - | ||||||
| Assets attributable to discontinued operations | - | 3,232 | ||||||
| Prepaid officer compensation | 44,788 | - | ||||||
Other prepaid expenses | 2,500 | - | ||||||
| Total current assets | 391,426 | 1,996,638 | ||||||
| Other assets | 12,218 | - | ||||||
| Fixed assets, net | 13,897 | - | ||||||
| Total assets | $ | 417,541 | $ | 1,996,638 | ||||
| LIABILITIES & STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 62,270 | $ | 69,194 | ||||
| Accrued compensation | 420,334 | 1,031,751 | ||||||
| Deferred revenue-current | 442,000 | 341,000 | ||||||
| Liabilities attributable to discontinued operations | - | 18 | ||||||
Total current liabilities | 924,604 | 1,441,963 | ||||||
| Long term liabilities: | ||||||||
| Deferred revenue, net of current portion | 341,522 | 784,000 | ||||||
| Total long term liabilities | 341,522 | 784,000 | ||||||
| Total liabilities | 1,266,126 | 2,225,963 | ||||||
COMMITMENTS AND CONTINGENCIES (NOTE 6) | ||||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| Series A Convertible Preferred stock, $0.01 par value, 10,000,000 shares authorized; 10,000,000 issued and outstanding as of September 30, 2016 and 2015, respectively | 100,000 | 100,000 | ||||||
| Common stock, $0.01 par value, 650,000,000 shares authorized; 5,268,859 and 4,356,741 issued and outstanding as of September 30, 2016 and 2015, respectively | 52,688 | 43,567 | ||||||
| Additional paid-in capital | 44,779,296 | 42,815,934 | ||||||
| Stock subscription receivable | - | (50,000 | ) | |||||
| Accumulated deficit | (45,780,569 | ) | (43,138,826 | ) | ||||
| Total stockholders’ deficit | (848,585 | ) | (229,325 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 417,541 | $ | 1,996,638 | ||||
As of September 30, | ||||||||
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 7,839,472 | $ | 14,056,346 | ||||
| Prepaid expenses | 121,371 | — | ||||||
| Total current assets | 7,960,843 | 14,056,346 | ||||||
| Other assets | 7,566 | 12,218 | ||||||
| Fixed assets, net | 40,182 | 20,050 | ||||||
| Total assets | $ | 8,008,591 | $ | 14,088,614 | ||||
| LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 650,681 | $ | 52,043 | ||||
| Accrued compensation | 142,293 | 72,489 | ||||||
| Deferred revenue-current | 28,400 | — | ||||||
| Total current liabilities | 821,374 | 124,532 | ||||||
| Total liabilities | 821,374 | 124,532 | ||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 7) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Series A convertible preferred stock, $0.01 par value, 10,000,000 shares authorized; 1,000,000 and 1,000,000 issued and outstanding as of September 30, 2019 and 2018, respectively | 10,000 | 10,000 | ||||||
| Common stock, $0.01 par value, 681,000,000 shares authorized; 40,792,510 and 40,743,917 issued and outstanding as of September 30, 2019 and 2018, respectively | 407,925 | 407,438 | ||||||
| Additional paid-in capital | 68,225,828 | 68,169,157 | ||||||
| Accumulated deficit | (61,456,536 | ) | (54,622,513 | ) | ||||
| Total stockholders’ equity | 7,187,217 | 13,964,082 | ||||||
| Total liabilities and stockholders’ equity | $ | 8,008,591 | $ | 14,088,614 | ||||
The accompanying notes are an integral part of these financial statements.
| 16 |
CIPHERLOC CORPORATION
| Year Ended | ||||||||
| September 30, | ||||||||
| 2016 | 2015 | |||||||
| Revenues | $ | 341,478 | $ | - | ||||
| Cost of revenues | 90,900 | - | ||||||
| Gross profit | 250,578 | - | ||||||
| Operating expenses : | ||||||||
| General and administrative (includes stock-based expense of $211,600 for 2016 and $11,733,265 for 2015) | 1,167,466 | 12,842,678 | ||||||
| Sales and marketing (includes stock-based expense of $54,803 and $0 for 2015) | 218,722 | 43,524 | ||||||
| Settlement expenses | 763,469 | - | ||||||
| Research and development (includes stock-based expense of $46,291 for 2016 and $194,500 for 2015) | 755,159 | 227,650 | ||||||
| Total operating expenses | 2,904,816 | 13,113,852 | ||||||
| Operating loss | (2,654,238 | ) | (13,113,852 | ) | ||||
| Other income and (expenses): | ||||||||
| Gain on extinguishment | 59,612 | - | ||||||
| Net interest expense | (47,117 | ) | (2,722 | ) | ||||
| Total other income (expenses) | 12,495 | (2,722 | ) | |||||
| Loss from continuing operations | (2,641,743 | ) | (13,116,574 | ) | ||||
| Loss from discontinued operations | - | (641,526 | ) | |||||
| Net loss | $ | (2,641,743 | ) | $ | (13,758,100 | ) | ||
| Net loss per common share - Basic and diluted: | ||||||||
| Continuing operations | $ | (0.56 | ) | $ | (4.22 | ) | ||
| Discontinued operations | $ | - | $ | (0.21 | ) | |||
| Total | $ | (0.56 | ) | $ | (4.43 | ) | ||
| Weighted average common shares outstanding - Basic and diluted | 4,744,815 | 3,105,738 | ||||||
| For The Year Ended | ||||||||
| September 30, | ||||||||
| 2019 | 2018 | |||||||
| Revenues | $ | 46,600 | $ | 316,248 | ||||
| Cost of revenues | — | 89,230 | ||||||
| Gross profit | 46,600 | 227,018 | ||||||
| Operating expenses: | ||||||||
| General and administrative | 3,372,047 | 1,844,903 | ||||||
| Sales and marketing | 1,772,197 | 545,250 | ||||||
| Research and development | 1,744,480 | 873,107 | ||||||
| Settlement expenses | — | 81,000 | ||||||
| Total operating expenses | 6,888,724 | 3,344,260 | ||||||
| Operating loss | (6,842,124 | ) | (3,117,242 | ) | ||||
| Other (expenses) income: | ||||||||
| Loss on extinguishment of convertible notes | — | (317,268 | ) | |||||
| Excess fair value of derivatives in convertible note | — | (486,745 | ) | |||||
| Change in fair value of embedded conversion features in convertible notes | — | (8,536 | ) | |||||
| Interest income (expense), net | 8,101 | (490,992 | ) | |||||
| Total other expenses, net | 8,101 | (1,303,541 | ) | |||||
| Net loss | $ | (6,834,023 | ) | $ | (4,420,783 | ) | ||
| Net loss per common share - Basic and diluted: | $ | (0.17 | ) | $ | (0.20 | ) | ||
| Weighted average common shares outstanding - Basic and diluted | 40,792,510 | 22,502,166 | ||||||
The accompanying notes are an integral part of these financial statements.
| 17 |
CIPHERLOC CORPORATION
STATEMENTS OF STOCKHOLDERS’ DEFICITEQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 20162019 AND 20152018
| Preferred Stock | Common Stock | Additional | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Subscription Receivable | Paid-in Capital | Accumulated Deficit | Stockholders' Deficit | |||||||||||||||||||||||||
| Balance at September 30, 2014 | 4,000,000 | $ | 40,000 | 2,834,737 | $ | 28,347 | $ | - | $ | 28,635,141 | $ | (29,380,726 | ) | $ | (677,238 | ) | ||||||||||||||||
| Preferred stock issued to officers | 6,000,000 | 60,000 | - | - | - | 9,840,000 | - | 9,900,000 | ||||||||||||||||||||||||
| Common stock rescinded for purchase of asset | - | - | (2,000 | ) | (20 | ) | - | (4,732 | ) | - | (4,752 | ) | ||||||||||||||||||||
| Cancellation of stock | - | - | (150 | ) | (2 | ) | - | 2 | - | - | ||||||||||||||||||||||
| Common stock issued for cash, net of offering costs | - | - | 1,147,500 | 11,475 | - | 2,271,525 | - | 2,283,000 | ||||||||||||||||||||||||
| Common stock issued for subscription receivable | - | - | 25,000 | 250 | (50,000 | ) | 49,750 | - | - | |||||||||||||||||||||||
| Common stock issued for services | - | - | 161,654 | 1,617 | - | 993,048 | - | 994,665 | ||||||||||||||||||||||||
| Common stock issued to officers | - | - | 140,000 | 1,400 | - | 837,200 | - | 838,600 | ||||||||||||||||||||||||
| Common stock issued for software licensing | - | - | 50,000 | 500 | - | 194,000 | - | 194,500 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (13,758,100 | ) | (13,758,100 | ) | ||||||||||||||||||||||
| Balance at September 30, 2015 | 10,000,000 | $ | 100,000 | 4,356,741 | 43,567 | (50,000 | ) | 42,815,934 | (43,138,826 | ) | (229,325 | ) | ||||||||||||||||||||
| Common stock issued to officers | - | - | 16,477 | 165 | - | 102,529 | - | 102,694 | ||||||||||||||||||||||||
| Common stock issued for cash | - | - | 513,500 | 5,135 | - | 941,185 | - | 946,320 | ||||||||||||||||||||||||
| Common stock issued for license termination | - | - | 307,141 | 3,071 | - | 760,398 | - | 763,469 | ||||||||||||||||||||||||
| Common stock issued for legal services | - | - | 75,000 | 750 | - | 209,250 | - | 210,000 | ||||||||||||||||||||||||
| Reversal of subscription receivable | - | - | - | - | 50,000 | (50,000 | ) | - | - | |||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (2,641,743 | ) | (2,641,743 | ) | ||||||||||||||||||||||
| Balance at September 30, 2016 | 10,000,000 | $ | 100,000 | 5,268,859 | $ | 52,688 | $ | - | $ | 44,779,296 | $ | (45,780,569 | ) | $ | (848,585 | ) | ||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Stockholders’ Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance at September 30, 2017 | 10,000,000 | $ | 100,000 | 6,635,127 | $ | 66,351 | $ | 49,378,447 | $ | (50,201,730 | ) | $ | (656,932 | ) | ||||||||||||||
| Common stock issued for cash, net of offering costs of $2,356,662 | — | — | 18,909,900 | 189,099 | 16,436,139 | — | 16,625,238 | |||||||||||||||||||||
| Common stock issued to officers and employees | — | — | 766,033 | 7,660 | 1,464,941 | — | 1,472,601 | |||||||||||||||||||||
| Common stock issued for services | — | — | 10,000 | 100 | 14,900 | — | 15,000 | |||||||||||||||||||||
| Common stock issued for legal settlement | — | — | 50,000 | 500 | 80,500 | — | 81,000 | |||||||||||||||||||||
| Common stock issued for warrant exercise | — | — | 388,928 | 3,889 | (3,889 | ) | — | — | ||||||||||||||||||||
| Convertible notes – issuance of common stock | — | — | 362,500 | 3,625 | 498,875 | — | 502,500 | |||||||||||||||||||||
| Convertible note – issuance of warrants | — | — | — | — | 90,345 | — | 90,345 | |||||||||||||||||||||
| Convertible note – amendment of existing warrants | — | — | — | — | 74,041 | — | 74,041 | |||||||||||||||||||||
| Settlement of convertible note | — | — | 121,429 | 1,214 | 179,858 | — | 181,072 | |||||||||||||||||||||
| Related party conversion of preferred stock | (9,000,000 | ) | (90,000 | ) | 13,500,000 | 135,000 | (45,000 | ) | — | — | ||||||||||||||||||
| Net loss | — | — | — | — | — | (4,420,783 | ) | (4,420,783 | ) | |||||||||||||||||||
| Balance at September 30, 2018 | 1,000,000 | $ | 10,000 | 40,743,917 | $ | 407,438 | $ | 68,169,157 | $ | (54,622,513 | ) | $ | 13,964,082 | |||||||||||||||
| Common stock issued to an employee | — | — | 9,346 | 94 | 11,122 | — | 11,216 | |||||||||||||||||||||
| Stock option expense issued to directors and officers | — | — | — | — | 45,942 | — | 45,942 | |||||||||||||||||||||
| Common stock issued for services | — | — | 20,000 | 200 | 39,800 | — | 40,000 | |||||||||||||||||||||
| Correction of shares outstanding | — | — | 19,247 | 193 | (193 | ) | — | — | ||||||||||||||||||||
| Refund of oversubscription | — | — | — | — | (40,000 | ) | — | (40,000 | ) | |||||||||||||||||||
| Net loss | — | — | — | — | — | (6,609,867 | ) | (6,834,023 | ) | |||||||||||||||||||
| Balance at September 30, 2019 | 1,000,000 | $ | 10,000 | 40,792,510 | $ | 407,925 | $ | 68,225,828 | $ | (61,456,536 | ) | $ | 7,187,217 | |||||||||||||||
The accompanying notes are an integral part of these financial statements.
CIPHERLOC CORPORATION
| Year Ended | ||||||||
| September 30, | ||||||||
| 2016 | 2015 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (2,641,743 | ) | $ | (13,758,100 | ) | ||
| Loss from discontinued operations | - | 641,526 | ||||||
| Net loss from continuing operations | (2,641,743 | ) | (13,116,574 | ) | ||||
| Adjustments to reconcile net loss from continuing operations to net cash (used in) provided by operating activities: | ||||||||
| Depreciation | 2,132 | - | ||||||
| Stock-based compensation | 312,694 | 11,733,265 | ||||||
| Stock issued with licensing agreement | - | 194,500 | ||||||
| Gain on settlements | (59,612 | ) | (4,752 | ) | ||||
| Termination of software license | 763,469 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts payable and accrued liabilities | (558,747 | ) | 451,511 | |||||
Prepaid officer compensation | (44,788 | ) | ||||||
Other prepaid expenses | 732 | (7,000 | ) | |||||
| Deferred revenue | (341,478 | ) | - | |||||
| Net cash used in operating activities | (2,567,341 | ) | (749,050 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Other assets | (12,218 | ) | - | |||||
| Equipment purchases | (16,029 | ) | - | |||||
| Net cash used in investing activities | (28,247 | ) | - | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayment of line of credit | - | (53,612 | ) | |||||
| Common stock issued for cash, net of offering costs | 946,320 | 2,283,000 | ||||||
| Net cash provided by financing activities | 946,320 | 2,229,388 | ||||||
| CASH FLOWS FROM DISCONTINUED OPERATIONS | ||||||||
| Operating | - | (32,582 | ) | |||||
| Net cash flows from discontinued operations | - | (32,582 | ) | |||||
| INCREASE (DECREASE) IN CASH | (1,649,268 | ) | 1,447,756 | |||||
| CASH, BEGINNING OF YEAR | 1,993,406 | 545,650 | ||||||
| CASH, END OF YEAR | $ | 344,138 | $ | 1,993,406 | ||||
| CASH PAID FOR: | ||||||||
| Interest paid | $ | - | $ | 2,836 | ||||
| Income taxes paid | $ | - | $ | - | ||||
| SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING AND FINANCING ACTIVITIES: | ||||||||
| Cancellation of common stock | $ | - | $ | 150 | ||||
| Stock subscription receivable | $ | - | $ | 50,000 | ||||
| For The Year Ended | ||||||||
| September 30, | ||||||||
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (6,834,023 | ) | $ | (4,420,783 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 16,927 | 5,548 | ||||||
| Stock-based compensation | 57,158 | 1,472,601 | ||||||
| Stock issued for services | 40,000 | 15,000 | ||||||
| Settlement expenses | — | 81,000 | ||||||
| Loss on extinguishment of convertible notes | — | 317,268 | ||||||
| Termination of software license | — | — | ||||||
| Excess fair value of derivatives in convertible note | — | 486,745 | ||||||
| Change in fair value of embedded conversion features in convertible notes | — | 8,536 | ||||||
| Debt discount amortization | — | 491,132 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other assets | (116,719 | ) | — | |||||
| Accounts payable and accrued liabilities | 598,638 | (7,720 | ) | |||||
| Accrued compensation | 69,804 | (432,538 | ) | |||||
| Deferred revenue | 28,400 | (316,248 | ) | |||||
| Net cash used in operating activities | (6,139,815 | ) | (2,299,459 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of fixed assets | (37,059 | ) | (14,429 | ) | ||||
| Net cash used in investing activities | (37,059 | ) | (14,429 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Common stock issued for cash, net of offering costs of $2,356,662 | — | 16,625,238 | ||||||
| Repayment of oversubscription | (40,000 | ) | — | |||||
| Proceeds from convertible notes, net | — | 242,600 | ||||||
| Repayment of convertible notes | — | (725,000 | ) | |||||
| Net cash used/provided by financing activities | (40,000 | ) | 16,142,838 | |||||
| INCREASE (DECREASE) IN CASH | (6,216,874 | ) | 13,828,950 | |||||
| CASH, BEGINNING OF YEAR | 14,056,346 | 227,396 | ||||||
| CASH, END OF YEAR | $ | 7,839,472 | $ | 14,056,346 | ||||
| NON-CASH FINANCING ACTIVITIES: | ||||||||
| Issuance of common stock with convertible notes | $ | — | $ | 502,500 | ||||
| Issuance of warrants with convertible note | $ | — | $ | 90,345 | ||||
| Amendment of warrants issued with convertible note | $ | — | $ | 74,041 | ||||
| Settlement of convertible note | $ | — | $ | 181,072 | ||||
The accompanying notes are an integral part of these financial statements.
CIPHERLOC CORPORATION
FOR THE YEARS ENDED SEPTEMBER 30, 20162019 AND 20152018
NOTE 1- DESCRIPTION OF BUSINESS
Cipherloc Corporation (the “Company” or “Cipherloc”) was incorporated in Texas on June 22, 1953 as American Mortgage Company. On March 15, 2015,Effective August 27, 2014, the Company changed its name to Cipherloc Corporation. The name change became effective through the Amended Certificate as of March 23, 2015.
Cipherloc is a data security solutions company. Our highly innovative products - based on our patented polymorphic encryption technology - are designed to enable an iron-clad layer of protection to be added to existing solutions.
On September 30, 2015, the Company decided to sell Cloud MD. Cloud MD was a business segment that provided cloud based medical software and services, designed for healthcare providers. The details of the sale were finalized in October 2015. By selling Cloud MD, the Company will allocate all resources towards the Cipherloc encryption development. The Cloud MD component is presented as a discontinued operation as more fully described in Note 3.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has incurred losses from operations, has an accumulated deficit at September 30, 2016 of ($45,780,569) and needs additional cash to maintain its operations.
These factors raise doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s continued existence is dependent upon management’s ability to develop profitable operations, continued contributions from the Company’s executive officers to finance its operations and the ability to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resources for the further development and marketing of the Company’s products and business.
NOTE 32 – SIGNIFICANT ACCOUNTING POLICIES
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America.America (“U.S. GAAP”). Significant accounting policies are as follows:
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”)U.S. GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net revenues and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates. The Company’s most significant estimates relateestimate relates to the valuation of its proprietary technology and the valuation of its common stock.convertible note.
Legal
The Company is subject to legal proceedings, claims and liabilities which arise in the ordinary course of business. The Company accrues for losses associated with legal claims when such losses are probable and can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Legal fees are charged to expense as they are incurred.
Consolidation of Financial Statements
The Company is presenting the years ended September 30, 2016 and 2015 without consolidation of financial activity, as there has been no activity in any subsidiaries.
Reclassifications
Certain reclassifications have been made to conform the 2015 amounts to the 2016 classifications for comparative purposes.
Cash and Cash Equivalents and Concentration of Credit Risk
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents as of September 30, 2019 and 2018. At September 30, 20162019 and 2015,2018, cash and cash equivalents includeincludes cash on hand and cash in the bank. The Company maintains its cash in accounts held by large, globally recognized banks which, at times, may exceed federally insured limits as guaranteed by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures these deposits up to $250,000. AtAs of September 30, 2016, approximately $94,1382019, $7,339,472 of the Company’s cash balance was uninsured. The Company has not experienced any losses in such accounts.on cash.
Website and Software Costs
The Company’s accounting for software development costs complies with ASC 985-20, Costs of Software to be Sold, Leased or Marketed, whereby capitalization begins when the Company has a working prototype and has been tested, thereby achieving technological feasibility. This occurs very late in the development stage of the software product. The Company has determined the software costs do not fall under ASC 350-40, Internal-Use Software, based on the guidance in ASC 985-605-55-119 through 125 which covers guidance for hosting agreements. The Company’s product will generally not be hosted and will reside on the technology platform available to the user.
Fixed Assets
Fixed assets are recorded at cost and depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. TheEquipment and furniture are depreciated over an estimated useful life of equipment is three (3) to five (5) years. The estimated life of our leaseholdLeasehold improvements isare depreciated over the lesser of the term of the related lease andterm or a useful life.life of ten (10) years. Software is depreciated over an estimated useful life of three (3) years.
Long-Lived Assets
Long-lived assets are evaluated for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted future cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value. The Company impaired software in the amount of $347,477 associated with discontinued operationsThere was no impairment recorded during the yearyears ended September 30, 2015.2019 and 2018.
Fair Value of Financial Instruments
The Company'sCompany’s financial instruments consisted primarily of cash, accounts payable and accrued expenses, and debt.deferred revenue, convertible note payable, as well as embedded conversion features. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.
Fair value is focused on an exit price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Within the measurement of fair value, the use of market-based information is prioritized over entity specific information and a three-level hierarchy for fair value measurements is used based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.
The three-level hierarchy for fair value measurements is defined as follows:
| ● | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; |
| ● | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly, including inputs in markets that are not considered to be active; | |
| ● | Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The fair values of the embedded conversion features in the Company’s convertible notes and of the warrants issued by the Company were determined using level 2 measurements and are discussed in further detail in Notes 5 and 8, respectively.
Convertible Debt
Convertible debt is accounted for under the guidelines established by ASC 470-20,Debt with Conversion and Other Options. ASC 470-20 governs the calculation of an embedded beneficial conversion, a derivative instrument, which is treated as an additional discount to the instruments where derivative accounting does not apply. This applies during the period for which embedded conversion features are either fixed or not yet available to the holder. The amount of the beneficial conversion feature may reduce the carrying value of the instrument. The discounts relating to the initial recording of the derivatives or beneficial conversion features are accreted over the term of the debt.
When equity instruments, such as common stock and/or warrants, are issued with convertible debt, the net proceeds from the transaction are allocated to the convertible debt and equity instruments based on their relative fair values. The proceeds allocated to the equity instruments may reduce the carrying value of the convertible debt, and such discount is amortized to interest expense over the term of the debt.
In the event a convertible note has an embedded conversion feature which, among other features, allows an unlimited number of common shares to be issued upon conversion since the conversion price is based on the quoted market price of the Company’s common stock, the Company records a derivative liability, which is marked to market at each reporting period and charged to the statement of operations in accordance with ASC 815,Accounting for Derivative Financial Instruments and Hedging Activities.
Customer Concentration
During the yearyears ended September 30, 2016,2019 and 2018, one customer accounted for 100% of revenues. The loss of this customer would not have a significant impact on operations.
Revenue Recognition
The Company derives its revenue from sales of its products, support and services. Product revenue consists of the Company’s software sold as complete turn-key integrated solutions, as stand-alone software applications or sold on a subscription or consumption basis. Depending on the nature of the arrangement revenue, related to turn-key solutions and stand-alone software applications are generally recognized upon shipment and delivery of license keys. For certain arrangements revenue is recognized based on usage or ratably over the term of the arrangement. Support and services revenue consist of both maintenance revenues and professional services revenues. Revenue is recorded net of applicable sales taxes.
In accordance with the authoritative guidance issued by the FASB on revenue recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, the fee is fixed or determinable, delivery has occurred, and collection of the resulting receivable is deemed probable. Products delivered to a customer on a trial basis are not recognized as revenue until the trial period has ended and acceptance has occurred by the customer. Reseller and distributor customers typically send the Company a purchase order when they have an end user identified.
Nature of Products and Services
Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where the license is being modified at the direction of the customer the revenue is being recognized ratably over the term of the arrangement. Revenue allocated to software maintenance and support services is recognized ratably over the contractual support period.
Professional services are primarily related to software implementation services and associated revenue is recognized upon customer acceptance.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a contract asset or receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For perpetual licenses with multi-year product maintenance agreements, the Company generally invoices customers at the beginning of the coverage period. For multi-year subscription licenses, the Company generally invoices customers annually at the beginning of each annual coverage period. The Company records a contract asset related to revenue recognized for multi-year on-premises licenses as its right to payment is conditioned upon providing product support and services in future years.
There were no accounts receivable balances at September 30, 2019 and 2018. There was no adjustment needed to accounts receivable for the cumulative effect of applying ASC 606 under the modified retrospective method. There was no impact on the opening balance contract assets and liabilities, for the cumulative effect of applying ASC 606 under the modified retrospective method as of October 1, 2018.
Deferred revenue is comprised mainly of unearned revenue related maintenance and technical support on term and perpetual licenses. Maintenance and technical support revenue are recognized ratably over the coverage period. Deferred revenue also includes contracts for professional services to be performed in the future which are recognized as revenue when the company delivers the related service pursuant to the terms of the customer arrangement.
Changes in deferred revenue were as follows:
| Twelve Months Ended September 30, 2019 | ||||
| Balance at September 30, 2018 | $ | - | ||
| Cumulative effect of applying ASC 606 under the modified retrospective method* | - | |||
| Deferral of revenue | 75,000 | |||
| Recognition of revenue | (46,600 | ) | ||
| Balance at September 30, 2019 | $ | 28,400 | ||
*See Note (1) Summary of Significant Accounting Policies, section(s) to our Financial Statements for further information.
Deferred revenue includes invoiced revenue allocated to remaining performance obligations that has not yet been recognized and will be recognized as revenue in future periods. Deferred revenue was $28,400 as of September 30, 2019, of which the Company expects to recognize 100% of the revenue over the next 12 months.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 90 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined its contracts generally do not include a significant financing component. The primary purpose of the Company’s invoicing terms is to provide customers with simplified and predictable ways of purchasing its products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with maintenance and support revenue recognized ratably over the contract period, and multi-year on-premises licenses that are invoiced annually with product revenue recognized upon delivery.
Significant Judgments
The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.
Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. For products and services aside from maintenance and support, the Company estimates SSP by adjusting the list price by historical discount percentages. SSP for software and hardware maintenance and support fees is based on the stated percentages of the fees charged for the respective products. The Company’s perpetual and term software licenses may have significant standalone functionality and therefore revenue allocated to these performance obligations are recognized at a point in time upon electronic delivery of the download link and the license keys. In cases where the license is being modified at the direction of the customer the revenue is being recognized ratably over the term of the arrangement. Product maintenance and support services are satisfied over time as they are stand-ready obligations throughout the support period. As a result, revenues associated with maintenance services are deferred and recognized as revenue ratably over the term of the contract.
Revenues associated with professional services are recognized at a point in time upon customer acceptance.
Assets Recognized from Costs to Obtain a Contract with a Customer
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The Company has determined that its sales commission program meets the requirements for cost capitalization. Total capitalized costs to obtain a contract were immaterial during the periods presented. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less.
Software license revenue is generally recognized when a signed contract or other persuasive evidence of an arrangement exists, the software has been electronically delivered, the license fee is fixed or is measured on a paid user basis, and collection of the resulting receivable is probable. When contracts contain multiple elements wherein Vendor-Specific Objective Evidence (“VSOE”) exists for all undelivered elements, we account for the delivered elements in accordance with the “Residual Method.” VSOE of fair value for maintenance and support is established by a stated renewal rate, if substantive, included in the license arrangement or rates charged in stand-alone sales of maintenance and support. Revenue from subscription license agreements, which include software, rights to unspecified future products and maintenance, is recognized ratably over the term of the subscription period. When the fair value of VSOE of post contract customer support cannot be determined, the revenue is recognized ratably over the contract period. In June 2014, the Company entered into an agreement to provide software and support to a third party for which no VSOE for any elements is known. Delivery of the use of the license was not achieved until December 2015; theThe only remaining undelivered element was post contract support services, and accordingly, the revenues will bewere recognized on a pro rata basis prospectively over the remaining 30 monthsterms of the related contracts. Deferred revenue results from fees billed to or collected from customers for which revenue has not yet been recognized.
Deferred Revenue
Deferred revenue result from fees billed to customers for which revenue has not yet been recognized.
The Company hashad deferred revenue of $783,522$28,400 and $1,125,000$0 as of September 30, 20162019 and 2015,2018, respectively.
Research and Development and Software Development Costs
Capitalization of certain software development costs are recorded after the determination of technological feasibility. Based on our product development process, technological feasibility is determined upon the completion of a working model. To date, costs incurred by us from the completion of the working model to the point at which the product is ready for general release do not have technological feasibility. Accordingly, we have chargedThe Company expenses all such costs to research and development expense in the period incurred.costs, including patent and software development costs. Our research and development costs incurred in our continuing operations for the years ended September 30, 20162019 and 20152018 were $755,159$1,744,480 and $227,650,$873,107, respectively.
Share-BasedStock-Based Compensation
The Company measures the cost of services provided by employees and non-employees in exchange for an award of an equity instrument based on the grant-date fair value of the award. CompensationThere were both fully vested stock grants and stock options granted to employees and non-employees during the year ended September 30, 2019. As such, compensation cost was recognized for grant as well as a ratable portion for the stock options vesting over a three-year time frame. All equity awards granted to employees and non-employees during the year ended September 30, 2018 were fully vested upon grant. As such, compensation cost was recognized at the time of the grant.
The Company accounts for share-based payments in accordance with the authoritative guidance issued by the FASB on share-based compensation, which establishes the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Under the provisions of the authoritative guidance, share-based compensation expense is recognized overmeasured at the vesting or requisite service period. The Black-Scholes option-pricing model is used to estimategrant date, based on the fair value of options or warrants granted. Performance-based grants should bethe award, and is recognized prior to completion ifas an expense over the assessment is that it is probable thatrequisite employee service period (generally the performance condition will be met. There were no options or warrants issued by thevesting period), net of actual forfeitures. The Company during the years ended September 30, 2016 and 2015.
For non-employees, the Company usesestimates the fair value at each reporting dateof share-based payments using the Black-Scholes option-pricing model. Additionally, share-based awards to non-employees are expensed over the service period in which is usually the vesting period.related services are rendered at their fair value. All share-based awards are expected to be fulfilled with new shares of common stock.
Income Taxes
The Company utilizes the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry-forwardscarryforwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that the value of such assets will be realized.
The Company uses the two-step approach to recognizingrecognize and measuringmeasure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating the Company'sCompany’s tax positions and tax benefits, which may require periodic adjustments. The Company did not record any liabilities for uncertain tax positions forduring the years ended September 30, 20162019 or 2015.2018.
Basic and Diluted Net Loss per Common Share
Basic income (loss)loss per share is computed by dividing net income (loss)loss available to common shareholders by the weighted average number of common shares outstanding during the reporting period. The weighted average number of shares is calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding. Diluted earnings per share reflects the potential dilution that could occur if stock options, warrants, and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. As of September 30, 20162019, and 2015,2018, the Company had 10,000,0001,000,000 shares of preferred stock outstanding, which are convertible into 15,000,0001,500,000 shares of common stock.
Diluted loss per share is the same as basic loss per share during periods where net losses are incurred since the inclusion of the potential common stock equivalents would be anti-dilutive as a result of the net loss.
Discontinued Operations During the years ended September 30, 2019 and 2018, 24,290,866 warrants, 1,100,000 stock options, and 1,000,000 shares of convertible preferred stock were excluded from the calculation of diluted loss per share because their effect would be anti-dilutive.
Cloud MD SaleLiquidity and Going Concern Considerations
The Company’s Board of Directors believed that it was inCompany feels the best interest ofcash on hand is sufficient to enable the Company to discontinue the former businesscontinue in operation Cloud MD. During September 2015, the Cloud MD business segment was discontinued and a plan of sale of the segment was approved. The Cloud MD sale occurred in October 2015 as a $250,000 note payable from the buyer. Accordingly, the assets, which had a net book value of zero as of September 30, 2015, qualified as held for sale and the Company has presented Cloud MD as discontinued operations. As of September 30, 2016, the Company has not received any payments towards the note payable from the buyer, and a full allowance has been recorded.
Details of the classifications for revenues, operating expenses and discontinued operations are shown below.
| Year ended September 30, | ||||||||
| 2016 | 2015 | |||||||
| Revenues | $ | - | $ | - | ||||
| Operating expenses | - | (641,526 | ) | |||||
Lossfrom discontinued operations | $ | - | $ | (641,526 | ) | |||
There were no significant assets of discontinued operations during the periods presented.through January 2021.
Recent Accounting Announcements
The Financial Accounting Standards Board (“FASB”) issues Accounting Standards Updates (“ASU”) to amend the authoritative literature in the Accounting Standards Codification (“ASC”).ASC. There have been a number ofseveral ASUs to date that amend the original text of ASC. Thethe ASCs. Other than those discussed below, the Company believes those updatesASUs issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.
In August 2018, the FASB issued ASU 2018-13,Fair Value Measurements (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, to modify the disclosure requirements for fair value measurements. The ASU removes certain disclosure requirements related to transfers between fair value hierarchy levels and valuation processes for Level 3 fair value measurements. It modifies certain disclosure requirements for investments in entities that calculate net asset value. It adds certain disclosure requirements regarding gains and losses for recurring Level 3 fair value measurements and unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently in the process of evaluating the effect this guidance will have on its financial statements and related disclosures.
In June 2018, the FASB issued ASU 2018-07,Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting, to expand the scope of Topic 718,Compensation – Stock Compensation, which currently only includes share-based payments to employees, to include share-based payments issued to nonemployees for goods or services. Thus, accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently in the process of evaluating the effect this guidance will have on its financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,Leases (Topic 840), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this standard are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for a public entity. Early adoption of the amendments in this standard is permitted for all entities, and the Company mustmay recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU 2018-11,Leases (Topic 840): Targeted Improvements, to provide a new transition method and practical expedient for separating components of a contract. The amendments in this standard are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently in the process of evaluating the effect this guidance will have on its financial statements and related disclosures.
In May 2014,NOTE 3 – FIXED ASSETS, NET
As of September 30, 2019, and 2018, fixed assets consisted of the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers” (Topic 606). Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard will be effectivefollowing:
| September 30, | ||||||||
| 2019 | 2018 | |||||||
| Equipment and furniture | $ | 37,875 | $ | 11,042 | ||||
| Leasehold improvements | 17,630 | 10,542 | ||||||
| Software | 12,676 | 9,538 | ||||||
| 68,181 | 31,122 | |||||||
| Accumulated depreciation | (27,999 | ) | (11,072 | ) | ||||
| Fixed assets, net | $ | 40,182 | $ | 20,050 | ||||
Depreciation expense for the Company beginning January 1, 2018. The Company is currently evaluating the effect that the updated standard will have on its financial statementsyears ended September 30, 2019 and related disclosures.
In August 2014, the FASB issued ASU No. 2014-15 "Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern"” (Subtopic 205-40), which requires management to evaluate, at each annual2018 was $16,927 and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU No. 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Early application is permitted. The Company is currently evaluating the effect that the updated standard will have on its financial statements and related disclosures.$5,548, respectively.
In November 2015, the FASB issued ASU No. 2015-17 “Income Taxes: Balance Sheet Classification of Deferred Taxes” (Topic 740), which requires deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. ASU No. 2015-17 will align the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards. The new standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those annual years, and early application is permitted. The Company is currently evaluating the effect that the updated standard will have on its financial statements and related disclosures.
NOTE 4 – SOFTWARE LICENSES
GawkSoundFi – Software License Agreement
The Company entered into a one-year agreement renewable for up to 4 years for an annual $50,000 Shield license fee and $25,000 watermark base license fee with SoundFi LLC (“SoundFi”). Residual income to the Company is earned based on the number of audio files downloaded per year with residual earnings of $.012 per download exceeding 3,000,001 and scaling up to $.00075 per download exceeding 100,000,000. During the year ended September 30, 2019, the Company recognized $46,600 in licensing revenue. The Company has determined the best method for measuring licensing revenue to be the passage of time and more specifically on a monthly basis because the customer can request modifications over the term of the arrangement. The recognition of residual income occurs on an annual basis based on download volume provided by Soundfi. A download is defined as an audio file downloaded to a mobile device from the Soundfi servers.
Gawk
On June 14, 2014, the Company entered into a license agreement with Gawk to use the CipherLocCipherloc engine for $1,125,000 for a period of four (4) years. This customer licensed the CipherShop-CipherLocCipherShop-Cipherloc encryption software technology and support services. The Company was not required to make significant modifications at the time the contract was executed. ThePrior to this, the Company hashad never sold or licensed the CipherShop-CipherLocCipherShop-Cipherloc encryption software, nor any support services for such. Under the license agreement, the Company iswas to provide access to its software on an operational basis and provide training. The Company willwould also provide unspecified upgrades, if and when available, and 24/7 support over the license term. No Vendor-Specific Objective EvidenceVSOE was known for any of the elements. After the agreement was executed, the licensee requested modifications to the software because they could not otherwise use the software with the requested modifications.software. The Company made the newly requested modifications to the software. Managementsoftware and delivered the finished product in late December 2015,2015; thus, delivery had not deemed to have occurred until such date. The contract termination date was not extended beyond the initial date of June 2018. Revenues are beingwere recorded from the date of delivery over the remaining term of the agreement or approximately 30 months. For these reasons, revenue is recognized proratablyratably from December 2015 until June 2018. During the year ended September 30, 2016,2018, the Company recognized revenues of $341,478 and had a deferred revenue balance of $783,522.$316,248.
GoSecuredNOTE 5 – CONVERTIBLE NOTES PAYABLE
FirstFire Global Opportunities Fund, LLC
On September 26, 2017, the Company issued a convertible note payable to FirstFire Global Opportunities Fund, LLC (“FirstFire”) with a principal amount of $330,000, which included an original issue discount of $30,000. The Company signedincurred $8,500 in debt issuance costs. The note accrued interest at 5% per annum and was to mature on March 26, 2018. The note was convertible at $2.00 per share, subject to adjustment due to ratchet or down round protection, among other adjustments. The Company also issued 50,000 shares of its common stock, as well as warrants to purchase an additional 165,000 shares of common stock at $4.50 per share with a licenseterm of two years. The note was amended on December 20, 2017, which reduced the conversion price of the note from $2.00 to $1.00 per share and the exercise price of the warrants from $4.50 to $2.00. The amendment also required the Company to issue an additional 87,500 shares of common stock to FirstFire. The Company also received the right to prepay the convertible note at any time from the 151st through the 180th day following September 26, 2017, then the Company could repay FirstFire at 130% multiplied by the outstanding principal amount plus accrued and unpaid interest.
The reduction of the conversion price from $2.00 to $1.00 was deemed to create a beneficial conversion feature, therefore, the Company accounted for the amendment of the FirstFire note using ASC 815,Derivatives and Hedging, and recognized a loss on extinguishment of $358,038 during the three months ended December 31, 2017. The Company also recognized a beneficial conversion feature derivative liability of $320,312 as of the note’s amendment date. The Company valued the beneficial conversion feature derivative liability with the Black-Scholes-Merton valuation model on the date of the amendment using an expected life of one (1) year, volatility of 150%, and risk-free rate of 1.87%.
During the year ended September 30, 2018, the Company recognized a gain of $11,234 related to the change in fair value of the FirstFire beneficial conversion feature derivative liability. The Company valued the beneficial conversion feature derivative liability with the Black-Scholes-Merton valuation model as of March 21, 2018, immediately prior to the settlement of the note as described below, using an expected life of 0.78 years, volatility of 150%, and risk-free rate of 1.71%.
Additionally, upon the December 20, 2017 amendment of the FirstFire note, the Company recorded a debt discount of $330,000. The Company amortized $312,813 of the debt discount to interest expense during the year ended September 30, 2018. Total interest expense related to the FirstFire note, including the debt discount amortization, was $453,700 for the year ended September 30, 2018.
On March 21, 2018, the Company entered into a settlement agreement with GoSecuredFirstFire, under which FirstFire converted $77,500 of the note payable into 50,000 shares of common stock, and the Company paid $350,000 to satisfy the convertible note payable in full. In connection with the settlement of the FirstFire note, the Company recognized a gain on September 15, 2016extinguishment of $194,391.
Peak One Opportunity Fund LP
On December 14, 2017, the Company issued a convertible note payable to provide GoSecuredPeak One Opportunity Fund LP (“Peak One”) with a non-exclusive, non-transferable licenseprincipal amount of $300,000. The Company incurred $27,400 in debt issuance costs. The note was to use multiple versionsmature on December 14, 2020. The note was convertible at $1.00 per share. The Company also issued 275,000 shares of CipherLoc encryption software. GoSecured is to pay a $10,000 license and maintenance fee,its common stock, as well as warrants to purchase an additional 75,000 shares of common stock at $2.00 per share with a royalty (three to ten percentterm of gross sales)five years at the time of note issuance.
The Company accounted for each end user agreement, dependent upon the originationPeak One note using ASC 815,Derivatives and Hedging, and recognized a beneficial conversion feature derivative liability of $267,750 as of the end user agreement. Tonote’s issuance date. The Company valued the beneficial conversion feature derivative liability with the Black-Scholes-Merton valuation model on the date no amounts have been received orof issuance using an expected life of 1.25 years, volatility of 150%, and risk-free rate of 1.82%. The Company also recognized a loss of $486,745 resulting from the excess fair value of the beneficial conversion feature derivative in the Peak One note and of the equity instruments issued with the convertible note.
During the year ended September 30, 2018, the Company recognized a loss of $19,770 related to the change in fair value of the beneficial conversion feature derivative liability. The Company valued the beneficial conversion feature derivative liability with the Black-Scholes-Merton valuation model as of April 30, 2018, immediately prior to the redemption of the note as described below, using an expected life of 1.17 years, volatility of 150%, and risk-free rate of 1.65%.
Additionally, upon issuance of the Peak One note, the Company recorded as revenues under this contract.a debt discount of $300,000. The Company amortized $37,432 of the debt discount to interest expense during the year ended September 30, 2018.
On April 30, 2018, the Company settled the Peak One note for $375,000 and issued 71,429 shares of common stock with a fair value of $103,572 to Peak One. The Company recognized a loss on extinguishment of $153,621.
NOTE 56 – RELATED PARTY TRANSACTIONS
Employment ContractsEmployees related to Ex Chief Executive Officer
Skylar, Olivia and Robin De La Garza earned $52,278, $47,176 and $53,000, respectively, in compensation for the year ended September 30, 2019. In August 2019, Robin and Skylar De La Garza were terminated as employees of the Company. The Company entered into an employment agreement with itsalso paid $11,394 in educational costs of Skylar De La Garza and $6,200 in moving expenses of Olivia De La Garza
Notes Payable to Ex Chief Executive Officer on January 1, 2013. The employment agreement will expire on January 1, 2018 and shall automatically renew for another five years unless terminated in accordance with the provisions of the employment agreement. The employment agreement provides for:
In September 2017, the Company’s Chief Executive Officer (“CEO”) issued four notes with an aggregate principal amount of $70,000 to the Company. The notes bore interest at 3% per annum and matured one year from the issuance date. The Company has removed other provisions from the original employment agreement.
During the years endedrepaid all four notes in full during September 30, 2016 and 2015, cash compensation amounted to $397,854 and $684,098, including benefits, respectively. During the years ended September 30, 2016 and 2015, stock-based compensation amounted to zero and $10,738,600, respectively.2018. As of September 30, 2015, the Chief Executive Officer was due $778,087, which is included within accrued compensation on the accompanying balance sheet. The Chief Executive Officer was prepaid $44,788 to be offset against 2017 payments. In addition, as of September 30, 2016, payroll taxes of $34,5572018, there were included within accrued liabilities on the accompanying balance sheet. Payments madeno outstanding notes payable to the Chief Executive Officer were made on a gross basis with the Chief Executive Officer assuming responsibility for the remittance of the tax to the appropriate tax authorities.CEO.
Other than the employment contract with our CEO, we have employment agreements with Michael Salas and Michael Hufnagel (the “Agreements”). The Agreements areSee Note 8 for a term of one year, with Mr. Salas’s Agreement commencing on April 25, 2016 and expiring on April 24, 2017, and Mr. Hufnagel’s commencing on June 27, 2016 and expiring on June 26, 2017. Both Agreements have three successive one year extensions. Mr. Salas has an annual salary of $175,000 and quarterly stock issuances equal to $125,000 per year. Mr. Hufnagel has an annual salary of $145,000, an initial sign-on bonus of $10,000 and quarterly stock issuances equal to $60,000 per year. As of September 30, 2016, these individuals were owed $13,333 which is included within accrued compensation on the accompanying balance sheet. As of September 30, 2016, these individuals were owed common shares for services, but for which shares have not yet been issued. An accrual has been recorded to equity totaling $41,456 to accrue the common shares earned.additional related party transactions.
The Agreement provides that, in addition to receiving paid vacation in accordance with the Company’s policies as well as other customary benefits and provisions, Mr. Salas and Mr. Hufnagel shall receive an annual base salary, a signing bonus and a stock grant. If, at any time during the term of the Agreement, Mr. Salas or Mr. Hufnagel is terminated “without cause,” they will be entitled to receive a cash payment equal to the aggregate compensation payable to them during the remaining term of the Agreement.
Terminated Employment Agreement
We previously had an employment agreement with our Chief Financial Officer which terminated in 2015. There were amounts that were accrued and unpaid as of September 30, 2016 and 2015, totaling $291,715 and $253,665, respectively, According to the original agreement, the unpaid salaries were to accrue interest at 15%, which has been accrued at each reporting date. Interest expense was $38,050 and $23,915 during the years ended September 30, 2016 and 2015, respectively. Management believes that such amounts were previously satisfied though the issuance of common stock, and does not intend to pay such amounts.
NOTE 67 – COMMITMENTS AND CONTINGENCIES
Litigation
As of September 30, 2016, theThe Company is currently not involved in any litigation that it believes could have a material litigation.adverse effect on its financial condition or results of operations.
A disgruntled former consultant has brought an action in Texas state court against the Company and its former chief executive officer, alleging fraud and misrepresentation pertaining to stock and payments alleged to be owed to the consultant. The Company believes it has settledmade all required payments and delivered the stock to the consultant. The consultant has also included a claim of partial ownership of certain of the Company’s patents, which management believes is without merit. The case is currently being defended by the Company and costs relating thereto have been submitted to the Company’s insurance carrier.
In August 2019, the Board of Directors formed a special committee of independent directors (“Special Committee”) to investigate certain activities of Michael De La Garza (“De La Garza”). The Special Committee has retained legal counsel, and is authorized to retain forensic accountants, to assist the investigation.
In August 2019, the Company initiated litigation against its former Chief Executive Officer, De La Garza in whichorder to stop him from misappropriating the company’s trade secrets, depleting its monies and other assets, damaging the value of the company in the marketplace, and holding himself out as the company’s CEO. On September 25, 2019, the Court entered a temporary injunction against De La Garza enjoining him from numerous acts including representing himself as CipherLoc’s CEO and from interfering with the current CEO’s running the company. This litigation is ongoing, and its resolution is unknown. The Special Committee is investigating certain activities of the former CEO including the Ageos, LLC Operating Agreement, the QHCI/Noun note receivable, an advance/bonus, personal expenditures, and other items. All amounts expended have been expensed as of September 30, 2019. No amounts have been recorded in these financial statements as expected recoveries.
On July 26, 2019, the Board of Directors accepted the resignation of Michael De La Garza as Chief Executive Officer and appointed Tom Wilkinson as Interim Chief Executive Officer. Mr. De La Garza was subsequently terminated as an employee on August 11, 2019. On August 14, 2019, the Board of Directors formed an Executive Committee, as allowed by the Bylaws, consisting of Mr. Wilkinson, Mr. Ambrose, Dr. Carlson and Dr. Davis. In accordance with the bylaws, the Executive Committee is empowered to execute all business on behalf of the Board of Directors to the fullest extent permitted under Texas law.
On August 8, 2019, the operating agreement with Ageos was terminated.
In August 2019, it was involved. The matterdetermined that was pendingthe previously disclosed note receivable from QHI would not be collectible. While the note receivable had been presented to the board for approval, a vast majority of the funds had been paid to Noun Energy, rather than to QHI. Noun Energy is a company doing business in the United States Federal District CourtArab Emirates that is believed to be controlled by Mr. De La Garza’s brother. This agreement and the funding are part of an ongoing investigation related to the litigation against Mr. De La Garza discussed in Note 4. The note receivable has been written off as a loss for the Southern Districtquarter ended June 30, 2019 and is included in general and administrative expenses on the statements of Mississippi was settled and dismissed on July 12, 2016 and the matter pending in Chancery Court of Rankin County Mississippi was settled and dismissed on July 18, 2016. The Company repurchased its stock with the $45,580 it held in escrow as the Company’s contribution to the settlements and all other expenses and costs were covered by the Company’s insurance carrier. The repurchased stock had a fair market value of $61,281 resulting in a gain on settlement.
Commission Agreement
The Company entered into an agreement with BrokerBank Securities, Inc. to raise up to $40 million from the issuance of common stock. In connection therewith, the Company agreed to pay a commission of 9%, payable 5% in cash and 4% in common stock. During the year ended September 30, 2016, the Company paid cash commissions of $20,680 and 28,000 shares of common stock. These amounts were netted against the proceeds received as described in Note 7 below. After September 30, 2016, the Company revised the commission to be paid to 8% in cash.operations.
Leases
In March 2019, the Company guaranteed a lease on behalf of Ageos, LLC in McLean, Virginia. The Company leased 3,906lease has a term of three years for 4,359 square feet of space in McClean, Virginia. The initial rent cost is $7,991 per month and the lease agreement provides for annual rent increases of approximately 4.0%. The amount of future payments guaranteed is $267,389. The agreement with Ageos was terminated in August 2019 and the Company has made an unwritten offer to assume the lease. No amounts have been accrued for this commitment as of September 30, 2019.
In February 2019, the Company and the landlord for its leased office space in Buda, Texas.Texas entered into a new lease agreement, and the Company reduced its rented space from approximately 3,900 to 1,302 square feet. The new lease was effective February 1, 2019 and has a three-year term. The initial monthly rent is $2,566, and the lease agreement provides for annual rent increases of approximately 2.7%. The lease automatically renews for the Buda facility began on April 1, 2016 and continues until March 31, 2019. The current rental rate of $7,216 continues until March 31, 2017, and then increases to $7,379 from April 1, 2017 until March 31, 2018. On April 1, 2018, the rent goes to $7,542 and ends on March 31, 2019. The lease shall be automatically renewed for two one-year periods, $7,705 per month through March 31, 2020and $7,867 per month until March 31, 2021)a three-year term, unless either Landlord or Customer (the Company)party to the lease agreement notifies the other of the intent to terminate the lease in writing at least 180 days prior to the expiration of the current term. The amount of future payments guaranteed is $74,388.
In October 2018, the Company leased approximately 3,900 square feet of office space on North Scottsdale Road in Scottsdale, Arizona. The lease for this facility began on October 4, 2018 and continues until October 31, 2021. Annual rent of $77,180 was prepaid for the first year from November 1, 2018 to October 31, 2019, and the lease agreement provides for annual rent increases of approximately 5.0%. The amount of future payments guaranteed is $172,369.
Future annual minimum lease obligations at September 30, 20162019 are as follows:
| Year Ending September 30, | Amount | |||
| 2017 | $ | 87,570 | ||
| 2018 | $ | 89,520 | ||
| 2019 | $ | 45,252 | ||
| TOTAL: | $ | 222,342 | ||
| Year Ending September 30, | Amount | |||
| 2020 | $ | 112,074 | ||
| 2021 | 87,433 | |||
| 2022 | 47,249 | |||
| $ | 246,756 | |||
Line of CreditRent expense totaled $150,575 and $99,209 for the years ended September 30, 2019 and 2018, respectively.
Ageos, LLC – Operating Agreement
An operating agreement was entered into with Ageos, LLC and the Company on April 18, 2019. Ageos, LLC agreed to hire competent professionals, establish and maintain an approved government facility and guide engineers to customize the Company’s base products for governmental agency use. The Company does not have any lines of credit. Prioragreed to advance Ageos, LLC $1,600,000 commiserate with the responsibilities and operating expense budget provided by Ageos, LLC on a periodic basis. The Company had advanced $974,188 through September 30, 2015,2019. Under the operating agreement, Ageos, LLC was to reimburse the Company from the sale of the software by applying 50% of net revenues earned to repay the advanced operating expenses. The operating agreement was terminated on August 8, 2019.
In August 2019, it was determined that the previously disclosed note receivable from Quality Healthcare International, Inc. (“QHI”) would not be collectible. While the note receivable had been presented to the board for approval, a linevast majority of credit that was unsecured and wasthe funds had been paid in fullto Noun Energy, rather than to QHI. Noun Energy is a company doing business in the amountUnited Arab Emirates that is believed to be controlled by Mr. De La Garza’s brother. This agreement and the funding are part of $53,612.an ongoing investigation related to the litigation against Mr. De La Garza discussed in Note 4. The note receivable has been written off as a loss for the quarter ended June 30, 2019 and is included in general and administrative expenses on the statements of operations.
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NOTE 78 - STOCKHOLDERS’ DEFICITEQUITY (DEFICIT)
Common Stock
As of September 30, 20162019, and 2015,2018, the Company had 5,268,85940,792,510 and 4,356,74140,743,917 shares of common stock outstanding, respectively, and waswere authorized to issue 650,000,000681,000,000 shares of common sharesstock at a par value of $0.01. The Company issued 25,000 shares of stock
Common Stock Issued for a subscription receivable for $50,000 duringCash
During the year ended September 30, 2015.2019, the Company refunded $40,000 for an oversubscription of common stock made by an investor related to the private placement of shares in fiscal year 2018. The subscription receivablerefund was removed duringmade in lieu of an issuance of shares.
During the year ended September 30, 2016 due2018, through the utilization of Private Placement Memorandums (PPMs) and upon receipt of executed Subscription Agreements, the Company issued 18,909,900 shares of common stock for $16,625,238 in net cash proceeds pursuant to non-payment.the exemption from the registration provisions of the Securities Act, as amended, afforded by Rule 506 of Regulation D.
Common Stock and Stock Options Issued to Directors and Offices
During the year ended September 30, 2019, the Company issued 9,346 vested shares of common stock with a fair value of $11,216 to an employee, which was recorded as stock-based compensation expenses in research and development expense in the statement of operations.
During the year ended September 30, 2019, the Company issued 1,100,000 shares of stock options to the Board of Directors and officers with a fair value of $862,000, of which $42,942 was recorded as stock-based compensation expenses in research and development and general administration expense. Options will vest over a three-year period ratably. Of the 1,100,000, 1,000,000 options have a strike price of $0.85 and the remaining 100,000 have a strike price of $0.75.
During the year ended September 30, 2018, the Company issued 766,033 fully vested shares of common stock with a fair value of $1,472,601 to its officers and other employees as part of their compensation. Of this amount, $950,056 was recorded in general and administrative expenses, $279,500 was recorded in sales and marketing expenses, and $243,045 was recorded in research and development expenses.
Common Stock Issued for Services
During the year ended September 30, 2019, the Company issued 20,000 shares of common stock with a fair value of $40,000 to Pycnocline, LLC for management consulting services, which was recorded in research and development expense.
During the year ended September 30, 2018, the Company issued 10,000 shares of fully vested common stock with a fair value of $15,000 to Magnolia Investor Relations for investor relations services rendered.
Common Stock Issued for Settlement
During the year ended September 30, 2018, the Company issued 50,000 shares of fully vested common stock with a fair value of $81,000 for to settle a legal matter by two shareholders who claimed that they were entitled to 125,000 shares of common stock because of funds allegedly paid to the Company and promises allegedly made by the Company. The Company denied these allegations and settled the matter for 50,000 shares of common stock.
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Common Stock Issued with Convertible Notes
During the year ended September 30, 2018, the Company issued 275,000 and 71,429 shares of fully vested common stock in connection with the issuance and redemption, respectively, of the Peak One note. The Company also issued 87,500 and 50,000 shares of common stock in connection with the amendment and conversion, respectively, of the FirstFire note. Refer to Note 5 for further discussion.
Preferred Stock
As of September 30, 20162019, and 2015,2018, the Series A Preferred StockCompany had 1,000,000 and 1,000,000 shares of restricted preferred stock outstanding, respectively, and was authorized to issue 10,000,000 shares of preferred stock at a par value of $0.01. Each share of preferred stock is convertible into the Company’s common stock at a rate of 1one (1) preferred share to 1.5 common shares. As of November 11, 2016, there are a total of 10,000,000 shares of the Series A Preferred Stock authorized and outstanding which are convertible into a total of 15,000,000 shares of common stock. Each share of the Preferred Stockpreferred stock has 1501.5 votes on all matters presented to be voted by the holders of common stock. The holders of the Preferred A sharespreferred stock can only convert the shares if agreed uponto by 50.1% votethe Board of allDirectors. If declared by the Board of Directors, holders of preferred shareholders. On February 5, 2015,stock are entitled to receive dividends prior and in preference to any declaration or payment of any dividend on the common stock of the Company. In the event of liquidation or dissolution of the Company, issued 6,000,000 sharesholders of its Series A Preferred Stockpreferred stock shall be paid out of the assets of the Company prior and in preference to its CEO. Asany payment or distribution to holders of September 30, 2015, the Series A Preferred Stock is convertible into the Company’s common stock at a rate of 1 to 1.5 common shares. The Company recorded $9,900,000 as stock compensation based on the market value of the Company’s common stock on the date of grant.Company.
Fiscal Year Ended September 30, 2016
Stock Issued for Cash
During the year ended September 30, 2016, through2018, the utilizationCompany’s Chief Executive Officer converted 9,000,000 shares of a Private Placement Memorandum and upon receipt of executed Subscription Agreements, the Company issued 513,500preferred stock into 13,500,000 shares of common stock for $946,320, net of offering costs of $80,680.stock.
Stock Issued for ServicesWarrants
During the year ended September 30, 2016,2018, the Company issued 10,677warrants to purchase 75,000 shares of common stock in connection with the Peak One convertible note discussed in Note 5. These warrants were issued with an exercise price of $2.00 and a term of five years. The Company valued these warrants at $32,138$90,345 with the Black-Scholes-Merton valuation model using an expected life of five years, volatility of 150%, and accrued earnedrisk-free rate of 2.14%.
Additionally, in connection with shares sold through a PPM, the Company issued warrants to purchase 144,000 shares of common stock. These warrants were issued with an exercise price of $4.50 and a term of two years. The Company valued these warrants at $93,198 with the Black-Scholes-Merton valuation model using an expected life of two years, volatility of 150%, and risk-free rates ranging from 1.89% to 2.27%.
Lastly, in connection with shares sold through an additional PPM, the Company issued warrants to purchase 18,837,900 shares of common stock. These warrants were issued with an exercise price of $1.20 and a term of five years. The company issued warrants to purchase an additional 5,398,970 shares of common stock amounting to $41,456 as compensation to certain officers pursuant to their employment agreements. In addition, the Companyits underwriters. These warrants were issued 800 shares for marketing services valued at $1,600, and 5,000 shares issued for software development valued at $27,500. The Company also issued 75,000 shares for legal services valued at $210,000. The shares for these issuances were valued using the closing marketwith an exercise price of the Company's common stock on the commitment date.$1.00 and a term of ten years.
Stock Issued for Settlements
The Company issued stock to terminate software licenses. The Company incurred settlement expenses of $763,469Warrant activity for the termination of software licenses related to seven separate licenses in that the software usage would possibly interfere with the Company’s future software development. The settlements were satisfied through the issuance of 307,141 shares of common stock at fair value on date of grant.
Stock Issued for Subscription Receivable
The Company issued stock for an interested Private Placement Memorandum party. The individual’s payment did not clear the bank account, and, the stock was never received by the individual. The Company has not received the money and is in the process of cancelling the issued stock.
Fiscal Year Endedyears ended September 30, 20152019 and 2018 is as follows:
Stock Issued for Cash
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Life | ||||||||||
| Outstanding at September 30, 2017 | 725,000 | $ | 4.50 | 2.00 | ||||||||
| Granted | 25,033,366 | 1.18 | 5.99 | |||||||||
| Exercised | (742,500 | ) | 1.20 | 1.50 | ||||||||
| Canceled/Forfeited | — | — | — | |||||||||
| Outstanding at September 30, 2018 | 25,015,866 | 1.27 | 5.83 | |||||||||
| Granted | — | — | — | |||||||||
| Exercised | — | — | — | |||||||||
| Canceled/Forfeited | (725,000 | ) | 4.50 | — | ||||||||
| Outstanding at September 30, 2019 | 24,290,866 | $ | 1.14 | 4.84 | ||||||||
During the year ended September 30, 2015, through the utilization of a Private Placement Memorandum and upon receipt of executed Subscription Agreements, the Company issued 1,147,500 shares of common stock for $2,283,000 in net cash proceeds pursuant to the exemption from the registration provisions of the Securities Act of 1933, as amended (the “Act”), afforded by Rule 506 of Regulation D.
Stock Issued in Connection with acquisition of Software Licensing
During the year ended September 30, 2015, the Company issued 50,000 shares of common stock valued at $194,500 based on the market price on the date of grant in regards to the purchase of a software license known as XPSS in accordance with the Software Licensing Agreement. Each of the two owners received 25,000 shares.
Stock Issued for Services
During the year ended September 30, 2015, the Company issued 161,654shares of common stock as compensation, which includes 2,084 shares issued for performance to Dr. Carlson. The fair value of the shares was $994,665 including stock that vested immediately and a performance base grant valued at $10,733, and was recorded at the market price on the date of grant.
Stock Issued for Performance
Dr. Carlson shall be entitled to a performance bonus of 50,000 shares of Cipherloc stock to be paid at such time as the CipherLoc Polymorphic Hardware Engine can be demonstrated to function as a working, complete, product capable of being manufactured in facilities that would normally produce standard Field Programmable Gate Array chips. Management has determined that it is probable that the award will vest. Accordingly, the Company recognized 2,084 shares during 2015 and compensation expense of $10,733 during the year ended September 30, 2015. The unvested portion of the award will be recognized over the implied service period of 24 months. During the year ended September 20, 2016, it was determined that technological feasibility had not yet been reached and no additional expense was recognized during the year.
Stock Issued for Services Related Party
On September 18, 2015, the Company granted 140,000 common shares to its President/CEO, Michael De La Garza. The fair value of the shares was $838,600 and was recorded at the market price on the date of grant. In addition, on February 5, 2015, the Company issued 6,000,000 shares of its Series A Preferred Stock to its CEO, valued at $9.9 million. The Company recorded $10.7 million as stock compensation for the combined value of all preferred and common stock, based upon the market value of the Company’s common stock on the date of grant.
| 31 |
NOTE 89 - INCOME TAXES
The provision (benefit) for income taxes from continued operations for the years ended September 30, 20162019 and 20152018 consist of the following:
| September 30, | ||||||||
| 2016 | 2015 | |||||||
| Current: | ||||||||
| Federal | $ | - | $ | - | ||||
| State | - | - | ||||||
| $ | - | $ | - | |||||
| Deferred: | ||||||||
| Federal | $ | (603,753) | $ | (435,391) | ||||
| State | - | - | ||||||
| (603,753) | (435,391) | |||||||
| Valuation allowance | 603,753 | 435,391 | ||||||
| Provision (benefit) for income taxes, net | $ | - | $ | - | ||||
| September 30, | ||||||||
| 2019 | 2018 | |||||||
| Current: | ||||||||
| Federal | $ | — | $ | — | ||||
| State | — | — | ||||||
| $ | — | $ | — | |||||
| Deferred: | ||||||||
| Federal | $ | (1,301,000 | ) | $ | (2,558,000 | ) | ||
| State | — | — | ||||||
| (1,301,000 | ) | (2,558,000 | ) | |||||
| Valuation allowance | 1,301,000 | 2,558,000 | ||||||
| Provision (benefit) for income taxes, net | $ | — | $ | — | ||||
The difference between income tax expense computed by applying the federal statutory corporate tax rate and actual income tax expense is as follows:
| September 30, | September 30, | |||||||||||||||
| 2016 | 2015 | 2019 | 2018 | |||||||||||||
| Statutory federal income tax rate | 34.0 | % | 34.0 | % | 21.0 | % | 21.0 | % | ||||||||
| State income taxes and other | 0.0 | 0.0 | ||||||||||||||
| Non-deductible stock-based compensation | (0.07 | ) | (7.0 | ) | ||||||||||||
| Change in statutory tax rate | (13.0 | ) | (19.0 | ) | ||||||||||||
| Valuation allowance | (34.0 | ) | (34.0 | ) | (20.93 | ) | 5.0 | |||||||||
| Effective tax rate | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
Deferred income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes. The tax effect of these temporary differences representing deferred tax asset and liabilities result principally from the following:
| September 30, | ||||||||
| 2016 | 2015 | |||||||
| Net operating loss carry forward | $ | 11,597,828 | $ | 9,822,083 | ||||
| Valuation allowance | (11,597,828) | (9,822,083) | ||||||
| Deferred income tax asset | $ | - | $ | - | ||||
| September 30, | ||||||||
| 2019 | 2018 | |||||||
| Net operating loss carry forward | $ | 4,778,000 | $ | 3,536,000 | ||||
| Deferred compensation | 3,806,000 | 3,747,000 | ||||||
| Valuation allowance | (8,584,000 | ) | (7,283,000 | ) | ||||
| Deferred income tax asset | $ | — | $ | — | ||||
The Company has a net operating loss carry forward of approximately $11.6$22.7 million available to offset future taxable income. Of which, $2.6 million will expire within the next five years, and the remaining $20.13 million will expire thereafter. For income tax reporting purposes, the Company’s aggregate unused net operating losses were subject to the limitations of Section 382 of the Internal Revenue Code, as amended. UnderThe Company has adjusted the Tax Reform Act of 1986, the benefits from net operating losses carried forward may be impaired or limited on certain circumstances. Management has determined that there is a cumulative ownership change of more than 50% over a three-year period.incurred prior to 2015 to reflect only the losses not subject to limitation. The Company has provided for a valuation reserve against the full amount of the net operating loss benefit, because in the opinion of management based upon the earning history of the Company; it is more likely than not that the benefits will not be realized. For income tax reporting purposes, Management has determined that net operating losses prior to February 5, 2015 are subject to an annual limitation of approximately $600,000.$525,000.
For the years ended September 30, 20162019 and 2015,2018, the difference between the amounts of income tax expense or benefit that would result from applying the statutory rates to pretax income to the reported income tax expense of $0 is the result of the net operating loss carry forward and the related valuation allowance.
allowance, as well as non-deductible stock-based compensation.
The Company anticipates it will continue to record a valuation allowance against the losses of certain jurisdictions, primarily federal and state, until such time as it is able to determine it is “more-likely-than-not” the deferred tax asset will be realized. Such position is dependent on whether there will be sufficient future taxable income to realize such deferred tax assets. The Company’s effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to federal, state or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates, deductibility of certain costs and expenses by jurisdiction.
The Company has not filedis current on all its federal income tax filings since 2012, which is throughfilings. An extension will be filed for the fiscal year ending September 30, 2013.2019 tax return.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law in the U.S. The Company is preparingTax Act has resulted in significant changes to the 2013U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and 2014 filings, which report activity throughcredits, and limitations on the fiscal years ending September 30, 2014deductibility of interest expense and 2015. The September 30, 2016 tax return is not due at this time. The Company intends to remediate the lack of filing timely tax returnsimmediately.executive compensation. These changes were effective beginning in 2018.
NOTE 910 - SUBSEQUENT EVENTS
The following individuals were awarded commonOn November 14, 2019, the Company terminated Olivia De La Garza’s employment and was given one month’s severance On November 21, 2019, the Company issued stock bearing a restrictive legend pursuantoptions 140,000 shares to Rule 144: Michael Hufnagel was issued 10,000 sharesemployees with strike price to be determined.
Effective November 25, 2019, the board of common stockdirectors appointed Andrew Borene as a quarterly employee bonus. Robert LeBlanc was issued 25,000 sharesChief Executive Officer of common for patent work.the Company. Mr Borene replaces Tom Wilkinson, the Company’s interim Chief Executive Officer, who will remain as chairman of the board. Effective December 13, 2019, Gino Mauriello was issued 20,000 sharesresigned from his position as Chief Financial Officer. On December 13, 2019, the Company terminated the members of common stock for his tenure as a Board Director.the R&D team On December 17, 2019, Albert Carlson, was issued 50,000 shares of common stockPh.D., resigned from his position as an annual bonus. Eric Marquez was issued 70,000 shares of common stock for his tenure as a Board DirectorChief Scientific Officer and as a CFO stock award. Michael De La Garza was issued 300,000 shares of common stock for his tenure as Chairmanmember of the Board and as a CEO stock award. The fair valueboard of all 475,000 shares is $2,579,250 and will be recorded in fiscal 2017.
The Company has continued to raise equity financing through a Private Placement Memorandum. After September 30, 2016,directors of the Company. On December 20, 2019, the board of directors of the Company has sold 406,500 shares of common shares at $2.00 per share and received $784,520, net of offering costs.
The Company issued 25,000 shares for software termination settlement. The fair valueappointed Andrew Borene, the Company’s Chief Executive Officer, a member of the shares on December 6, 2016 was $106,250.board.
On November 28, 2016, the Company entered into an independent sales contract for a period of six months commencing December 1, 2016. In connection therewith, the Company will pay $5,000 draw per month to be offset against future commissions from the licensing of its technology. The Company will pay a commission on licenses as follows:
| Sales Amount | Commission to be Paid | |||||
| $ | 50,000 | 20 | % | |||
| $ | 100,000 | 18 | % | |||
| $ | 500,000 | 16 | % | |||
| $ | 1,000,000 | 14 | % | |||
| $ | 2,000,000 | 12 | % | |||
| $ | 3,000,000 | 10 | % | |||
| $ | 4,000,000 | 8 | % | |||
| $ | 5,000,000 | 6 | % | |||
| $ | 10,000,000 | 4 | % | |||
| $ | 15,000,000+ | TBD | ||||
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NoneNone.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) rules and forms and that such information is accumulated and communicated to our Chief Executive Officer and ChiefPrincipal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures werehave not been formally designed and evaluated to provide reasonable assurance that the controls and procedures would meet their objectives.
As required by SEC Rule 13a-15(b), our Chief Executive Officer and ChiefPrincipal Financial Officer need to carry out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and ChiefPrincipal Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2016,2019, due to 1) no formal evaluation has been performed by us and 2) the existence of the material weaknesses in internal control over financial reporting described below (which we view as an integral part of our disclosure controls and procedures). Based on the performance of additional procedures designed to ensure the reliability of our financial reporting, we believe that the financial statements included in this Annual Report fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented, in conformity with U.S. GAAP.
Management’s Report on Internal Control over Financial Reporting
Our Chief Executive Officer and the ChiefPrincipal Financial Officer are responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of our internal control over financial reporting. Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d(f) under the Exchange Act) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, (c) provide reasonable assurance that receipts and expenditures are being made only in accordance with appropriate authorization of management and the Board of Directors, and (d) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
In connection with the preparation of ourthis Annual Report on Form 10-K for the year ended September 30, 2016,2019, our Chief Executive Officer and ChiefPrincipal Financial Officer evaluated the effectiveness of our internal control over financial reporting as of September 30, 2016,2019 and concluded that we didhave not maintainimplemented effective internal control over financial reporting as of September 30, 2016, due toduring the identification of material weaknesses.reporting year.
Management has still identified a number ofsome deficiencies in the design and operating effectiveness of the Company’s internal controls as of September 30, 20162019 that represent material weaknesses in our internal control over financial reporting. These deficiencies are the result of management’s failure to design, implement and maintain adequate operational and internal controls and processes, including a lack of sufficient accounting staff which resulted in inadequate segregation of duties, the inability to prove delivery of software, an insufficient number of personnel familiar with financial and SEC reporting requirements, inadequate monitoring and review controls over financial reporting and disclosures, as well asleading to a delinquent quarterly filing, inadequate monitoring and review controls over transaction processing, the inability to prove delivery of software, and insufficient written policies and procedures for accounting and financial reporting.
Remediation Plan
Management is in the process of executingexecuted a remediation plan intended to address the material weaknesses discussed above. These remediation efforts are focused on:
| ● | ||
| ● | Enhancing review and approval controls around transaction processing; | |
| ● | Enhancing controls around proving the delivery of software; | |
| ● | Enhancing and maintaining written policies and procedures for accounting and financial reporting. |
During the year endedSubsequent to September 30, 2016,2019, management engaged additional resources to support the remediation efforts outlined above.designed and implemented review and approval controls around transaction processing, including written policies and procedures. In addition, management has continued to train key accounting staff to improve controls that will ultimately eliminate the material weaknesses discussed above, as well as improve the accounting and financial reporting process.
We expect that remediation, including testing of related controls, will be completed byduring the end of2020 fiscal 2017.
year.
Changes in Internal Control over Financial Reporting
ThereDuring the year ended September 30, 2019, there were no changes in our internal control over financial reporting during the year ended September 30, 2016 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting, other than the remediation actions discussed above.
Inherent Limitations on Internal Controls
It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the control system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Limitations inherent in any control system include the following:
| ● | Judgments in decision-making can be faulty, and control and process breakdowns can occur because of simple errors or mistakes; | |
| ● | Controls can be circumvented by individuals, acting alone or in collusion with others, or by management override; | |
| ● | The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; | |
| ● | Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures; and | |
| ● | The design of a control system must reflect the fact that resources are constrained, and the benefits of controls must be considered relative to their costs. |
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
There are no events required to be disclosed by the Item.None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Directors and Executive Officers
Set forth below is information regarding the Company’s current directors and executive officers. There are no family relationships between any of our directors or executive officers. The directors are elected annually by our stockholders. The executive officers serve at the pleasure of the Board of Directors.
| Name | Age | Title | ||
| Tom Wilkinson | 50 | Chairman of the Board of Directors | ||
| Anthony Ambrose | 58 | Director | ||
| Andrew Borene | 44 | Chief Executive Officer and Director | ||
| David Chasteen | 42 | Director | ||
| Sammy Davis DrPH | 73 | Director | ||
| Michael De La Garza | ||||
| Director | ||||
| Zeynep Young | 49 | Director | ||
| 57 | Chief |
The Chief Executive Officer, Chief Financial Officer, directors and officers of the Company will hold office until additional members or officers are duly elected and qualified. The background and principal occupations of the sole officerdirectors and directorexecutive officers of the Company are as follows:
Board of Directors
Tom Wilkinson– Chairman of the Board of Directors
Mr. Wilkinson serves as the Company’s Chairman of the Board of Directors. He is a licensed CPA in Texas and Colorado. From 2014 to October of 2015 he was the Chief Financial Officer of Amherst Holdings, LLC. Mr. Wilkinson joined Xplore Technologies Corp., a NASDAQ traded company, in 2015 where he served as the Chief Financial Officer until 2017 when he took on the position of Chief Executive Officer until the sale of the company to Zebra Technologies in August 2018. He presently owns and operates Wilkinson & Company, a financial and business consulting firm focused on emerging growth pre-IPO and public companies. Mr. Wilkinson has also been a member of the board of directors of Astrotech Corporation (NASDAQ: ASTC) since October 2018. He received his Bachelor of Business Administration and Master of Professional Accounting from the University of Texas in 1992. We believe Mr. Wilkinson is qualified to serve on our board of directors based on his financial experience.
Anthony Ambrose– Director
Mr. Ambrose serves a director of the Company. Mr. Ambrose has served as a director, President and Chief Executive Officer of Data I/O, the leading global provider of advanced data and security programming solutions, and a NASDAQ listed company (NASDAQ: DAIO). Prior to Data I/O, Mr. Ambrose was Owner and Principal of Cedar Mill Partners, LLC, a strategy consulting firm since 2011. From 2007 to 2011, he was Vice President and General Manager at RadiSys Corporation, a leading provider of embedded wireless infrastructure solutions, where he established the telecom platform business and grew it to over $125M in annual revenues. He was previously general manager and held several other progressively responsible positions at Intel Corporation, where he led development and marketing of standards-based communications platforms and grew the industry standard server business to over $1B in revenues. Mr. Ambrose has a Bachelor of Science degree in Engineering from Princeton University.We believe Mr. Ambrose is qualified to serve on our board of directors based on his data security and industry experience.
Andrew Borene– Chief Executive Officer and Director
Andrew Borene serves as the Company’s Chief Executive Officer and a director. Mr. Borene has experience leading advanced technology, high risk, and rapid growth initiatives for companies. Immediately prior to joining the Company, Mr. Borene was the Senior Director leading Symantec Corporation’s National Security Group since April 2019. From May 2018 to April 2019, he was a management consultant supporting private clients. From August 2016 to May 2018, Mr. Borene was a Senior Advisor to the Intelligence Advanced Research Projects Activity (IARPA) for Booz Allen Hamilton, a management consulting firm. From December 2014 to August 2016, Mr. Borene was a Federal Business Manager with IBM. From January 2014 to December 2014, Mr. Borene was an attorney with Steptoe & Johnson LLP in cybersecurity and national security practice. In previous federal government roles, Mr. Borene served as an Associate Deputy General Counsel at the U.S. Department of Defense and as a U.S. Marine Corps intelligence officer. Mr. Borene holds a B.A. in Economics from Macalester College and a J.D. from the University of Minnesota Law School. He completed an executive education program in international development finance at Harvard University. He is a licensed attorney in Washington, D.C. and a Certified Information Systems Security Professional.
David Chasteen– Director
Mr. Chasteen serves as a director of the Company. Since 2018, Mr. Chasteen has been the Chief Information Security Officer for the City and County of San Francisco Police Department. From 2015 to 2018, Mr. Chasteen was a Threat Intelligence Strategist for the City and County of San Francisco where he was responsible for managing city, state and federal intelligence relationships and managing cybersecurity operations for the City and County of San Francisco. From 2015 to 2016 Mr. Chasteen was the Western Regional Director for Iraq and Afghanistan Veterans of America. From 2006 to 2014 Mr. Chasteen worked for the Central Intelligence Agency as a Collection Management Officer, Specialized Skills Officer, and finally an Executive Officer, Covert Action Staff. Mr. Chasteen received a B.S. in Political Science from Ball State University in 2000. We believe Mr. Chasteen is qualified to serve on our board of directors based on his cybersecurity and industry experience.
Sammy Davis DrPH– Director
Dr. Davis serves as a director of the Company. Dr. Davis has over 20 years’ experience in operations, finance, budgeting, financial reporting, revenue cycle management, inventory, payroll, accounts receivable and payable, and information systems in the healthcare industry. Since 2009 Dr. Davis has been a Senior Marketing Liaison with Physician Reliance Corporation. From 2005 to 2009, Dr. Davis was the Chief Executive officer of Renaissance Hospital in the Dallas/Fort Worth Area. From 2004 to 2005, Dr. Davis was the interim Chief Executive Officer of Transition Health Care LTAC in Corpus Christi, TX. Dr. Davis holds a Doctor of Public Health degree from the University of Texas. We believe Dr. Davis is qualified to serve on our board of directors based on his leadership experience.
Michael De La Garza, 58 years– Director
Mr. De La Garza serves as a director of agethe Company. Mr. De La Garza has 2625 years’ experience in the software industry as an executive officer and founder of numerous companies both private and publicly traded. His career started in 1991 as the COO of a medical imaging company and subsequently founded or co-founded three other software companies where he served as President and/or CEO. Michael studied computer science at Southwest Texas State University and received a Computer Science Technical degree from Danforth Technical College in 1980.
Zeynep Young–Director
Ms. Young serves as a director of the Company. Since 2017, Ms. Young has been a Venture Partner with Next Coast Ventures, a venture capital firm focused on providing early-stage capital to high-growth startups. In 2017 Ms. Young served as interim chief executive officer of Milk & Honey, a wellness and beauty company with a portfolio of day spas, salons and products in the organic, luxury market. From 2009 to 2016, Ms. Young was the Founder and Chief Executive Officer of Double Line, Inc., a management consulting firm. Ms. Young received a B.A. in Economics and Sociology from Rice University in 1992 and an M.B.A. from Northwestern University – Kellogg School of Management in 1997. We believe Ms. Young is qualified to serve on our board of directors based on her business and leadership experience.
Executive Officers
Eric MarquezMilton Mattox, 47 years – Chief Operating Officer
Milton Mattox serves as the Company’s Chief Operating Officer. Mr. Mattox is an experienced, senior technology executive with an extensive background in software engineering, application development, IT infrastructure, and offshore research and development team management. His accomplishments include transforming and accelerating technology development and delivery in alignment with worldwide business goals. His professional experience includes an executive vice president position at Lucent Technologies with executive-level experience at Intuit, Mitel, SHPS, Narus India, Signa, and CGI. Mr. Mattox holds a Doctorate in Organization and Leadership from the University of age, has been involved in finance, accounting, businessSan Francisco, an MBA from City University of Seattle, and tax advisory services to various businesses and individuals for more than 17 years. He is a graduate of Appalachian State University, with a Bachelor of Science in Business Administration in Finance, EconomicsElectronic Engineering Technology from DeVry University.
Family Relationships and Banking. Other Arrangements
There are no transactions involving the Chief Financial Officer thatfamily relationships among our directors and executive officers. Other than Mr. Borene’s appointment as a director in connection with his employment agreement, there are reportable under Item 404(a) of Regulation S-K.no arrangements or understandings between or among our executive officers and directors pursuant to which any director or executive officer was or is to be selected as a director or executive officer.
Gino Mauriello, 41 years of age, is a CPABoard Leadership Structure and graduated with a Bachelor of ScienceRole in Business Administration with an emphasis in Accounting, from University of Nevada, Las Vegas. He is a Certified Public Accountant with an emphasis in tax for individuals and their companies. He performs audits for clients in specific industries. There are no transactions involving the Director that are reportable under Item 404(a) of Regulation S-K.Risk Oversight
Albert Carlson, PhD, 57 yearsOur Board has established an audit committee, a compensation committee, and a nominating and corporate governance committee, each of agewhich operate pursuant to a charter adopted by our Board. Each committee has the composition and on September 1, 2015 was appointed Chief Scientistresponsibilities described below. Our Board may establish other committees from time to time.
The following table identifies the current members of each of our committees:
| Name | Executive Committee | Audit | Compensation | Corporate Governance/ Nominating | ||||
| Tom Wilkinson | X* | |||||||
| Anthony Ambrose | X | X | X | X | ||||
| Andrew Borene | ||||||||
| David Chasteen | X | X | X | X | ||||
| Sammy Davis DrPH | X | X | X | X | ||||
| Zeynep Young | X | X | X | X | ||||
| Michael De La Garza |
* Chairman of the Company. Dr. Carlson oversees the developmentcommittee
Director Independence
Our Board has determined that a majority of the Company’s CipherLoc® suiteBoard consists of productsmembers who are currently “independent” as that term is defined under the rules of the Nasdaq Stock Market LLC. As our common stock is traded over-the-counter on the OTCQB, we are not required to comply with such requirements. Nevertheless, the Board considers Ms. Young, Mr. Chasteen, Dr. Davis, and reports directlyMr. Ambrose to the President/CEO. Dr. Carlson created and led teams advancing the state-of-the-art in more than six embedded, computer, and electrical engineering sectors, creating new markets, products, and value for exploitation. He has extensive experience in on-time design to delivery while remainingbe “independent” under budget at all levels of engineering. Additionally, he has worked in many areas of engineering and has focused extensive world knowledge, as well as deep algorithmic, set theory, mathematical, and design expertise. Dr. Carlson holds a PhD in Computer Science from the University of Idaho. There are no transactions involving the Chief Scientist that are reportable under Item 404(a) of Regulation S-K.such rules.
Audit Committee
Messrs. Ambrose, Chasteen, Davis and Ms. Young serve on the Audit Committee, which is chaired by Mr. Ambrose.
The Company does not have an audit committee.committee’s responsibilities include:
| ● | appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm; | |
| ● | pre-approving auditing and permissible non-audit services, and the terms of such services, to be provided by our independent registered public accounting firm; |
| ● | reviewing the overall audit plan with our independent registered public accounting firm and members of management responsible for preparing our financial statements; | |
| ● | reviewing and discussing with management and our independent registered public accounting firm our annual and quarterly financial statements and related disclosures as well as critical accounting policies and practices used by us; | |
| ● | coordinating the oversight and reviewing the adequacy of our internal control over financial reporting; | |
| ● | establishing policies and procedures for the receipt and retention of accounting-related complaints and concerns; | |
| ● | recommending based upon the audit committee’s review and discussions with management and our independent registered public accounting firm whether our audited financial statements will be included in our Annual Reports on Form 10-K; | |
| ● | monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to our financial statements and accounting matters; | |
| ● | preparing the audit committee report required by SEC rules to be included in our annual proxy statement; | |
| ● | reviewing all related person transactions for potential conflict of interest situations and approving all such transactions; and | |
| ● | reviewing quarterly earnings releases. |
Compensation Committee
Messrs. Ambrose, Chasteen, Davis and Ms. Young serve on the Compensation Committee, which is chaired by Mr. Ambrose.
The compensation committee’s responsibilities include:
| ● | annually reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer; | |
| ● | evaluating the performance of our chief executive officer considering such corporate goals and objectives and determining the compensation of our chief executive officer; | |
| ● | reviewing and approving the compensation of our other executive officers; | |
| ● | reviewing and establishing our overall management compensation, philosophy and policy; | |
| ● | overseeing and administering our compensation and similar plans; | |
| ● | evaluating and assessing potential and current compensation advisors in accordance with the independence standards identified in the applicable Nasdaq rules; | |
| ● | retaining and approving the compensation of any compensation advisors; | |
| ● | reviewing and making recommendations to our Board about our policies and procedures for the grant of equity-based awards; | |
| ● | evaluating and making recommendations to the Board about director compensation; | |
| ● | preparing the compensation committee report required by SEC rules, if and when required, to be included in our annual proxy statement; and | |
| ● | reviewing and approving the retention or termination of any consulting firm or outside advisor to assist in the evaluation of compensation matters. |
Corporate Governance/Nominating Committee
Messrs. Ambrose, Chasteen, Davis and Ms. Young serve on the Corporate Governance/Nominating Committee, which is chaired by Mr. Ambrose.
The nominating and corporate governance committee’s responsibilities include:
| ● | developing and recommending to the Board criteria for board and committee membership; | |
| ● | establishing procedures for identifying and evaluating board of director candidates, including nominees recommended by stockholders; | |
| ● | reviewing the size and composition of the Board to ensure that it is composed of members containing the appropriate skills and expertise to advise us; | |
| ● | identifying individuals qualified to become members of the Board; | |
| ● | recommending to the Board the persons to be nominated for election as directors and to each of the board’s committees; | |
| ● | developing and recommending to the Board a code of business conduct and ethics and a set of corporate governance guidelines; and | |
| ● | overseeing the evaluation of our Board and management. |
Conflicts of Interest
Members of our management are associated with other firms involved in a range of business activities. Consequently, there are potential inherent conflicts of interest in their acting as officers and directors of our company. Although the directors are engaged in other business activities, we anticipate they will devote an important amount of time to our affairs.
Our officers and directors are now and may in the future become shareholders, officers or directors of other companies, which may be formed for the purpose of engaging in business activities similar to ours. Accordingly, additional direct conflicts of interest may arise in the future with respect to such individuals acting on behalf of us or other entities. Moreover, additional conflicts of interest may arise with respect to opportunities which come to the attention of such individuals in the performance of their duties or otherwise. Currently, we do not have a right of first refusal pertaining to opportunities that come to their attention and may relate to our business operations.
Our officers and directors are, so long as they are our officers or directors, subject to the restriction that all opportunities contemplated by our plan of operation which come to their attention, either in the performance of their duties or in any other manner, will be considered opportunities of, and be made available to us and the companies that they are affiliated with on an equal basis. A breach of this requirement will be a breach of the fiduciary duties of the officer or director. If we or the companies with which the officers and directors are affiliated both desiredesires to take advantage of an opportunity, then said officers and directors would abstain from negotiating and voting upon the opportunity. However, all directors may still individually take advantage of opportunities if we should decline to do so. Except as set forth above, we have not adopted any other conflict of interest policy with respect to such transactions.
Compliance with Section 16(A) Of the Exchange Act 9.A. Directors and Executive Officers, Promoters, and Control Persons:
As of September 30, 2016, the Company is aware that all filings of Form 4 and 5 required of Section 16(a) of the Exchange Act of Directors, Officers or holders of 10% of the Company’s prior management and board of directors have not filed the requirements timely.
Code of Ethics
We have adopted a codeformal Code of ethics that appliesEthics applicable to all Board members, officers and employees. A copy of our executive officers, directors and employees. Code of ethics codifies the business and ethical principles that govern all aspects of our business. This document willEthics may be made available in print, free ofobtained without charge upon written request to any shareholder requesting a copy in writing from the Company. A form of the code of conduct and ethics was filed as Exhibit 14.1 to the Annual Report on Form 10-K for the year ended September 30, 2004.Secretary, Cipherloc Corporation, 825 Main St., Suite 100, Buda, TX 78610.
ITEM 11. EXECUTIVE COMPENSATION
Executive Officers and Directors
Summary Compensation Table
The following tables set forth certain information concerning all compensation paid, earned or accrued for service by (i) our Principal Executive Officer and Principal Financial Officer and (ii) all other executive officers who earned in excess of $100,000 in the fiscal years ended September 30, 20162019 and 2015,2018, and each of the other two most highly compensated executive officers of the Company who served in such capacity at the end of the fiscal year whose total salary and bonus exceeded $100,000 (collectively, the “Named Executive Officer”Officers”):
2016 and 2015 and 2014 SUMMARY COMPENSATION TABLE
| Name and Position | Year | Salary ($) | Bonus ($) | Stock awards ($) | All other compensation ($) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | Total ($) | |||||||||||||||||||||
| Michael De | ||||||||||||||||||||||||||||
| La Garza | 2016 | $ | 360,000 | (ii) | - | - | $ | 37,854 | (i) | - | $ | 397,854 | ||||||||||||||||
| CEO, | 2015 | $ | 348,098 | $ | 300,000 | $ | 10,738,600 | $ | 36,000 | (i) | - | $ | 11,422,698 | |||||||||||||||
| President & | ||||||||||||||||||||||||||||
| Chairman | ||||||||||||||||||||||||||||
| Eric Marquez | ||||||||||||||||||||||||||||
| CFO, | 2016 | $ | 90,000 | - | - | - | - | $ | 90,000 | |||||||||||||||||||
| Secretary | 2015 | $ | 7,500 | - | - | - | - | $ | 7,500 | |||||||||||||||||||
| Treasurer & | - | |||||||||||||||||||||||||||
| Director | ||||||||||||||||||||||||||||
| Gino | 2016 | - | - | - | - | - | - | |||||||||||||||||||||
| Mauriello | 2015 | - | - | - | - | - | - | |||||||||||||||||||||
| Director | - | |||||||||||||||||||||||||||
| Dr. Albert | 2016 | $ | 150,000 | - | - | - | - | $ | 150,000 | |||||||||||||||||||
| Carlson, | 2015 | $ | 12,500 | - | - | - | - | $ | 12,500 | |||||||||||||||||||
| CSO | - | |||||||||||||||||||||||||||
| Name and Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | All Other Compensation ($)(1) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | Total ($) | |||||||||||||||||||||
| Tom Wilkinson | ||||||||||||||||||||||||||||
| Chairman of the Board & Principal Financial Officer | 2019 | $ | 25,000 | — | $ | 96,500 | $ | 10,000 | (1) | — | $ | 131,500 | ||||||||||||||||
| Executive Officer | 2018 | — | — | — | — | — | — | |||||||||||||||||||||
| Michael De La Garza | ||||||||||||||||||||||||||||
| Chairman & | 2019 | $ | 413,137 | — | — | $ | 50,217 | — | $ | 463,354 | ||||||||||||||||||
| Chief Executive | 2018 | $ | 360,000 | $ | 60,000 | $ | 600,000 | $ | 40,200 | — | $ | 1,060,200 | ||||||||||||||||
| Officer(2) | ||||||||||||||||||||||||||||
| Gino Mauriello | 2019 | $ | 93,750 | — | — | — | — | $ | 93,750 | |||||||||||||||||||
| Chief Financial | 2018 | — | — | — | — | — | — | |||||||||||||||||||||
| Officer | ||||||||||||||||||||||||||||
| Albert Carlson, PhD | ||||||||||||||||||||||||||||
| Director & | 2019 | $ | 200,833 | — | $ | 57,900 | — | — | $ | 258,733 | ||||||||||||||||||
| Chief Scientific | 2018 | $ | 150,000 | $ | 20,000 | $ | 100,000 | — | — | $ | 270,000 | |||||||||||||||||
| Officer | ||||||||||||||||||||||||||||
| Milton Mattox | 2019 | $ | 185,417 | — | $ | 19,300 | — | — | $ | 204,717 | ||||||||||||||||||
| Chief Operating | 2018 | $ | 30,000 | — | — | — | — | $ | 30,000 | |||||||||||||||||||
| Officer | ||||||||||||||||||||||||||||
(i)(1) All other compensation consists primarily of remunerations for auto and health insurance costs.
(ii) Excludes $44,788 of prepaid compensation which will be offset against 2017 compensation.(2) Mr. De La Garza was terminated as Chief Executive Officer on August 11, 2019.
2016 and 2015 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
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Compensation of Directors
Our currentThe company change the compensation policy for directors is to compensate them through commoninclude quarterly fees as well as stock as considerationoptions. Annual director compensation will be $60,000 for their joining our board and/or providing continued services as a director. We do not currently provide ourthe Chairman of the Board and Lead Independent Director, $40,000 for directors with cash compensation, although we do reimburse their expenses, with exceptionan additional $4,000 for a chairman ofadditional committees. During the board. No additional amounts are payable toyear ended September 30, 2019, the Company’s directors for committee participation or special assignments. There are no other arrangements pursuant to which any directors were compensated during the Company’s last completed fiscal year for any service provided except as follows:company paid $40,000 in board fees.
Employment Contracts
Borene Employment Agreement
We entered into an Employment Agreement with Andrew Borene (the “Borene Employment Agreement”), our Chief Executive Officer, on November 25, 2019, pursuant to which he receives a base annual salary of $350,000, payable in accordance with the Company’s standard payroll schedule, and other customary benefits. Mr. Borene also received options to purchase up to 500,000 shares of the Company’s common stock (the “Borene Options”). The Borene Options have an exercise price of $0.75 per share and vest as follows: 166,666 shares vest on November 26, 2020, 166,667 shares vest on November 26, 2021, and 166,667 shares vest on November 26, 2022. Additionally. Mr. Borene received a signing bonus in the amount of $150,000 which is payable in equal installments at the end of each of the first three months of his employment.
Carlson Employment Agreement
We previously entered into an employment agreement with Albert Carlson as our Chief Scientist.Scientific Officer. Dr. Carlson resigned from his positions as Chief Scientific Officer and director on December 17, 2019. The Agreement isagreement was for a term of one year, commencing on September 1, 2015 and expiringinitially expired on August 31, 2016 with three one yearone-year extensions. The Agreement providesprovided that, in addition to receiving paid vacation in accordance with the Company’s policies as well as other customary benefits and provisions, Dr. Carlson shall receivereceived an annual base salary of $150,000. If, at any time during the term of the Agreement, Dr. Carlson iswas terminated “without cause,” he will bewas entitled to receive a cash payment equal to the aggregate compensation payable to him during the remaining term of the Agreement. The terms ofDuring the employment agreement are incorporated by reference andyear ended September 30, 2019, prior to his resignation, Dr. Carlson’s annual base salary was filed with our Form 8-K on September 4, 2015. increased to $300,000.
De La Garza Employment Agreement
The Company entered into an employment agreement with Michael De La Garza, its former Chief Executive Officer, on January 1, 2013. The employment agreement willwas initially set to expire on January 1, 2018 and shall automatically renewrenews for another 5five years unless Mr. De La Garza was terminated in accordance with the provisions of the employment agreement. The terms of the employment agreement are incorporated by reference andMr. De La Garza was filed with our Form 10-Kterminated on October 10, 2013. The Company has decided to amend parts of the agreement, including the interest provision.
August 11, 2019. The employment agreement providesprovided for:
| i. | A monthly salary of $20,833 per month subject to an annual increase of 10% per year and consistent with the Company policy applicable to other senior executives and officers and approval by the Board of Directors. During the year ended September 30, | |
| ii. | A cash bonus of 25% of his annual base salary each year if the Company reaches the following milestones: |
| a. | The Company posts annual gross revenues on a consolidated basis of at least $5,000,000; | ||
| b. | The Company’s earnings before the deduction of income taxes and amortization expenses (“EBITA”), including cash extraordinary items but before officer’s bonuses, on a consolidated basis for any year is at least $1,000,000; |
| An automobile allowance of $1,500 per month. | ||
| A medical insurance allowance of $1,500 per month. | ||
| In the event the executive’s employment is terminated without cause, he will receive the entire contract remaining on the agreement. |
The Company has removed other provisions from the originalMr. De La Garza was terminated in August 11, 2019 for cause. No future payments are expected under his former employment agreement.
contract.
| 42 |
2019 Stock Incentive Plan
Our Board adopted our 2019 Stock Incentive Plan on August 8, 2019. Our stockholders have not yet approved the adoption of the 2019 Stock Incentive Plan. Our 2019 Stock Incentive Plan is intended to align the interests of our stockholders and the recipients of awards under the 2019 Stock Incentive Plan, and to advance our interests by attracting and retaining directors, officers, employees and other service providers and motivating them to act in our long-term best interests. The material terms of the 2019 Stock Incentive Plan are as follows:
Plan term. The 2019 Stock Incentive Plan terminates on August 7, 2029 (the day before the tenth anniversary of the adoption of the plan), unless terminated earlier by our Board.
Eligible participants. All officers, directors, employees, consultants, agents and independent contractors, and persons expected to become officers, directors, employees, consultants, agents and independent contractors of our Company or any of our subsidiaries are eligible to receive awards under the 2019 Stock Incentive Plan. The compensation committee of our Board will determine the participants under the 2019 Stock Incentive Plan.
Shares authorized. 3,000,000 shares of common stock are available for awards granted under the 2019 Stock Incentive Plan, subject to adjustment for stock splits and other similar changes in capitalization. The number of available shares will be reduced by the aggregate number of shares that become subject to outstanding awards granted under the 2019 Stock Incentive Plan. To the extent that shares subject to an outstanding award granted under the 2019 Stock Incentive Plan are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or by reason of the settlement of an award in cash, then those shares will again be available under the 2019 Stock Incentive Plan. In addition, any shares covered by an award that have been surrendered in connection with the payment of the award exercise or purchase price or in satisfaction of tax withholding obligations incident to the grant, exercise, vesting or settlement of an award will be deemed not to have been issued for purposes of determining the maximum number of shares which may be issued pursuant to all awards under the 2019 Stock Incentive Plan.
Award types. Awards include options (non-qualified and incentive stock options) and restricted stock.
Administration. The compensation committee will interpret and administer the 2019 Stock Incentive Plan. The compensation committee’s interpretation, construction and administration of the 2019 Stock Incentive Plan and all its determinations thereunder will be conclusive and binding on all persons.
The compensation committee shall have the authority to determine the participants in the 2019 Stock Incentive Plan, the form, amount and timing of any awards, the performance goals, if any, and all other terms and conditions pertaining to any award. The compensation committee may take any action such that (i) any outstanding options become exercisable in part or in full, (ii) all or any portion of a restriction period on any restricted stock will lapse, (iii) all or a portion of any performance period applicable to any performance-based award will lapse and (iv) any performance measures applicable to any outstanding award will be deemed satisfied at the target level or any other level. Subject to the terms of the 2019 Stock Incentive Plan relating to grants to our executive officers and directors, the compensation committee may delegate some or all of its powers and authority to the Chief Executive Officer or other executive officer as the compensation committee deems appropriate.
Stock options. The 2019 Stock Incentive Plan provides for the grant of stock options. Stock options may be either tax-qualified incentive stock options or non-qualified stock options. The compensation committee will determine the terms and conditions to the exercisability of each option.
The period for the exercise of a non-qualified stock option will be determined by the compensation committee provided that no option may be exercised later than ten years after its date of grant. The exercise price of a non-qualified stock option will not be less than 100% of the fair market value of a share of our common stock on the date of grant.
Each incentive stock option will be exercisable for not more than 10 years after its date of grant, unless the optionee owns greater than 10% of the voting power of all shares of our capital stock, or a “ten percent holder,” in which case the option will be exercisable for not more than five years after its date of grant. The exercise price of an incentive stock option will not be less than the fair market value of a share of our common stock on its date of grant, unless the optionee is a ten percent holder, in which case the option exercise price will be the price required by the Internal Revenue Code of 1986, as amended, or the “Code,” currently 110% of fair market value.
Upon exercise, the option exercise price may be paid in cash, by the delivery of previously owned shares of our common stock, share withholding or through a cashless exercise arrangement, as permitted by the applicable award agreement. All of the terms relating to the exercise, cancellation or other disposition of an option upon a termination of employment, whether by reason of disability, retirement, death or any other reason, will be determined by the compensation committee.
The compensation committee, without stockholder approval, may (i) reduce the exercise price of any previously granted option, or (ii) cancel any previously granted option at a time when its exercise price exceeds the fair market value of the underlying shares, in exchange for another option, or other award or for cash.
Stock awards.The 2019 Stock Incentive Plan provides for the grant of stock awards. The compensation committee may grant a stock award as a restricted stock award and the compensation committee may determine that such award will be subject to the attainment of performance measures over an established performance period. All of the terms relating to the satisfaction of performance measures and the termination of a restriction period, or the forfeiture and cancellation of a stock award upon a termination of employment, whether by reason of disability, retirement, death or any other reason, will be determined by the compensation committee.
Unless otherwise set forth in a restricted stock award agreement, the holder of shares of restricted stock will have rights as our stockholder, including the right to vote and receive dividends with respect to the shares of restricted stock, except that distributions other than regular cash dividends and regular cash dividends with respect to shares of restricted stock subject to performance-based vesting conditions will be held by us and will be subject to the same restrictions as the restricted stock.
Performance goals. Under the 2019 Stock Incentive Plan, the vesting or payment of performance-based awards will be subject to the satisfaction of certain performance goals. The performance goals applicable to a particular award will be determined by the compensation committee at the time of grant. The performance goals may be one or more of the following corporate-wide or subsidiary, division, operating unit or individual measures, stated in either absolute terms or relative terms.
Individual Limits. With respect to non-employee directors, the maximum grant date fair value of shares that may be granted to an individual non-employee director during any fiscal year of the Company is $150,000. In connection with a non-employee director’s commencement of service with the Company, the per person limit set forth in the previous sentence will be $150,000.
Amendment or termination of the 2019 Stock Incentive Plan. Our Board may amend or terminate the 2019 Stock Incentive Plan as it deems advisable, subject to any requirement of stockholder approval required by law, rule or regulation.
Change in control. In the event there is a change in control and/or the Company is a party to a merger or acquisition or reorganization or Change in Control event or similar transaction, outstanding awards shall be subject to the merger agreement or other applicable transaction agreement. Such agreement may provide, without limitation, that subject to the consummation of the applicable transaction, for the assumption (or substitution) of outstanding awards by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting or for their cancellation with or without consideration, or for the mandatory exercise or conversion of awards into shares and/or cash whether by net exercise or otherwise, in all cases without the consent of a participant of the 2019 Stock Incentive Plan.
Additionally, in the event a change in control occurs and there is no assumption, substitution or continuation of awards, the compensation committee in its discretion may provide that all awards shall vest and become exercisable as of immediately before such change in control. The compensation committee may also in its discretion include in an award agreement a requirement that unless approval under Section 280G of the Code has been obtained, no acceleration of vesting shall occur with respect to an award to the extent that such acceleration would, after taking into account any other payments in the nature of compensation to which the participant would have a right to receive from the Company and any other person contingent upon the occurrence of such change in control, result in a “parachute payment” as defined under Code Section 280G.
Under the 2019 Stock Incentive Plan, a change of control will occur upon: (i) the consummation of an acquisition, a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entity’s securities outstanding immediately after such acquisition, merger, consolidation or other reorganization is owned by persons who in the aggregate owned less than 20% of the Company’s combined voting power represented by the Company’s outstanding securities immediately prior to such acquisition, merger, consolidation or other reorganization; (ii) A sale of more than fifty percent (50%) of the outstanding shares of each class of capital stock of the Company to a person, entity or group other than a person, entity or group affiliated with the Company, or (iii) he sale, transfer or other disposition of all or substantially all of the Company’s assets to a person, entity or group other than a person, entity or group affiliated with the Company.
New plan benefits. The benefits that might be received by officers, employees and non-employee directors cannot be determined at this time. All officers, employees and non-employee directors are eligible for consideration to participate in the 2019 Stock Incentive Plan.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table lists stocksets forth certain information regarding beneficial ownership of our Common Stockcommon stock as of February 2, 2017 based on 5,877,673January 9, 2020 by (i) each person (or group of affiliated persons) who is known by us to own more than five percent (5%) of the outstanding shares of our common stock, issued and outstanding on a fully diluted basis. The information includes beneficial ownership by (i) holders of more than 5% of our Common Stock, (ii) each of our directorsdirector and executive officersofficer, and (iii) all of our directors and executive officers as a group. As of January 9, 2020, there were 40,792,510 shares of our common stock issued and outstanding.
Except as notedotherwise indicated, the persons listed below to our knowledge, each person named in the table hashave sole voting and investment power with respect to all shares of our Common Stock beneficiallycommon stock owned by them.
| Name and Address of Beneficial Owners (1) | Nature of Beneficial Ownership (2) | Amount | Percent Ownership | |||||||
| Michael De La Garza (3) | Common Stock | 630,000 | 16.2 | % | ||||||
| Incl/MSR, LLC | Common Stock | 322,461 | ||||||||
| c/o Cipherloc | Preferred Stock | 9,000,000 | ||||||||
| 825 Main St, Suite 100 | ||||||||||
| Buda, TX 78610 | ||||||||||
| Gino Mauriello | Common Stock | 20,500 | <1 | % | ||||||
| c/o Cipherloc | ||||||||||
| 1291 Galleria Drive, Suite 200 | ||||||||||
| Henderson, NV 89014 | ||||||||||
| Eric Marquez | Common Stock | 70,000 | 1.2 | % | ||||||
| c/o Cipherloc | ||||||||||
| 825 Main St, Suite 100 | ||||||||||
| Buda, TX 78610 | ||||||||||
| Albert Carlson | Common Stock | 53,668 | <1 | % | ||||||
| c/o Cipherloc | ||||||||||
| 825 Main St, Suite 100 | ||||||||||
| Buda, TX 78610 | ||||||||||
| All Officers and Directors | ||||||||||
| As a Group (4 persons) | Common Stock | 1,096,629 | 18.7 | % | ||||||
1. C/o our address, 825 Main Street, Ste 100, Buda, TX 78610 unless otherwise noted.them, except to the extent that power may be shared with a spouse.
2. Except as otherwise indicated, we believe that the beneficial owners of common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with theSEC rules of the SEC and generally includes voting or investment power with respect to securities. SharesFor purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock subjectthat such person currently owns or has the right to acquire within 60 days of the date of this prospectus. With respect to options orand warrants, this would include options and warrants that are currently exercisable or exercisable within 60 days,days. With respect to convertible securities, this would include securities that are deemed outstanding for purposes of computingcurrently convertible within 60 days.
Except as indicated in footnotes to this table, we believe that the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person. Beneficial ownership is determinedstockholders named in accordance with the rules of the Securitiesthis table have sole voting and Exchange Commission and generally includes voting or investment power with respect to securities.all shares of common stock shown to be beneficially owned by them, based on information provided to us by such stockholders. Unless otherwise indicated, the address for each director and executive officer listed is: c/o Cipherloc Corporation, 825 Main Street, Suite 100, Buda, TX 78610.
3. Preferred stock has voting rights of 150 per share.
| Name and Address of Beneficial Owners | Amount | Percent Ownership | ||||||
| Tom Wilkinson | 15,200 | * | % | |||||
| Anthony Ambrose | — | — | % | |||||
| Andrew Borene | — | — | % | |||||
| David Chasteen | — | — | % | |||||
| Sammy Davis, DrPH | 10,000 | * | % | |||||
| Michael De La Garza(1) | 14,637,757 | 35.88 | % | |||||
| Zeynep Young | — | — | % | |||||
| Milton Mattox | — | — | % | |||||
| All Officers and Directors as a Group (8 persons) | 14,652,957 | 35.88 | % | |||||
| 5% or greater | % | |||||||
| Manchester Management PR, LLC(2) | 4,261,000 | 10.45 | % | |||||
* Less than 1%
(1) Includes 207,757 shares held by MSR, LLC, holds 3,000,000 of the 9,000,000 preferred shares that are allan entity controlled by MichaelMr. De La Garza.
Changes in Control
We are not aware(2) Solely based on the Company’s review of any arrangements that may result in a change in control ofpublic filings made with the Company.
DESCRIPTION OF SECURITIES
General
On April 11, 2011, the Company amended its articles of incorporation to increase the authorized commonSEC. Includes shares to 650,000,000 shares, at $0.01 par value. There were 5,268,859 shares of common stock issued and outstanding as of September 30, 2016.
Common Stock
The holders of our common stock are entitled to receive such dividends, if any, as may be declared by our board of directors from time to time out of legally available funds. The dividend rights of our common stock are junior to any preferential dividend rights of any outstanding shares of preferred stock. The holders of our common stock also are entitled to receive distributions upon our liquidation, dissolution or winding up of our assets that are legally available for distribution, after paymentdirectly owned by Manchester Explorer, L.P. The shares are indirectly beneficially owned by Manchester Management PR, LLC and Manchester Management Company, LLC as a result of all debthaving investment discretion over certain advisory accounts they manage. Manchester Management PR, LLC, a Puerto Rico limited liability company, provides investment management services to private individuals and other liabilities and distribution in full of preferential amounts, if any,institutions. The reported securities may also be deemed to be distributed to holdersindirectly beneficially owned by James E. Besser, as the Managing Member of our preferred stock.
Manchester Management PR, LLC and Manchester Management Company, LLC. The holders of our common stock are not entitled to preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of our common stock are subject to, and may be adversely affected by, the rights of any series of preferred stock that we may designate and issue in the future.
Preferred Stock
The Company has authorized 10,000,000 shares of preferred stock, at $0.01 par value and 10,000,000 are issued and outstanding as of September 30, 2016. The Corporation established and designates the rights and preferences of a Series A Convertible Preferred Stock. Each share of the Preferred Stock shall have 150 votes on all matters presented to be voted by the holders of our common stock. All 10,000,000 shares of preferred stock that were issued as follows; 3,000,000 to our CEO and 1,000,000 to a trust created by our former CFO on April 11, 2011 and 6,000,000 to our CEO on February 3, 2015. The shares were valued at the trading price of the common stock of $0.0095 on April 11, 2011 and recorded as an expense of $38,000. The shares issued on February 5, 2015 were valued at the trading price of the common stock of $1.10.
The issuance of preferred stock by our board of directors could adversely affect the rights of holders of the common stock by, among other things, establishing preferential dividends, liquidation rights or voting powers. See “Risk Factors” above.
Warrants and Options
All warrants and options issued have expired.
Voting Rights
Each holder of Common Stockprincipal business address for Manchester Management PR, LLC is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of stockholders. Preferred A shareholders are entitled to 150 votes per share.53 Palmeras Street, Caribe Plaza Building, 6th Floor, San Juan, Puerto Rico, 00901
Dividends
Subject to preferences that may be applicable to any then-outstanding shares of Preferred Stock, if any, and any other restrictions, holders of Common Stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by the Company’s board of directors out of legally available funds. The Company and its predecessors have not declared any dividends in the past. Further, the Company does not presently contemplate that there will be any future payment of any dividends on Common Stock.
Convertible Securities
The Company has no convertible securities as of September 30, 2016.
Amendment of our Bylaws
Our bylaws may be adopted, amended or repealed by the affirmative vote of a majority of our outstanding shares. Subject to applicable law, our bylaws also may be adopted, amended or repealed by our board of directors.
Transfer Agent
On August 31, 2011, the Company engaged Pacific Stock Transfer to serve in the capacity of transfer agent. Their mailing address and telephone number are as follows: Pacific Stock Transfer, 4045 South Spencer #403, Las Vegas, NV 89119, phone number is (702) 361-3033.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The Company repaid $0 and $95,211 of the advances from the Company’s CEO in the years ended September 30, 2016 and 2015, respectively. The advances from the CEO are due on demand and do not accrue interest. As of September 30, 2016 and 2015, there is $0 and $1,205 owed to the CEO for advances respectively.None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees billed to the Company byits principal accountants for each of the last two fiscal years were as follows:
| 2019 | 2018 | |||||||
| Audit fees | $ | 41,778 | $ | 136,374 | ||||
| Tax fees | $ | 18,500 | $ | — | ||||
| Total fees | $ | 60,278 | $ | 136,374 | ||||
Audit Fees.The aggregate fees billed by MaloneBriggs & Bailey, LLPVeselka for the audit of the Company’s annual financial statements were $5,000 for the fiscal year ended September 30, 20152019. The aggregate fees billed by Armanino, LLP of the Company’s interim financial statements were $48,000,$36,778 for the year ended September 30, 2019, and $8,500the audit fees of the Company’s annual financial statements were $76,165 for the fiscal year ended September 30, 2016.
30,2018. The aggregate fees expected to be billed by dbbMcKennon dbbmckennonfor the audit of the Company’s annual financial statements were $60,209 for the fiscal year ended September 30, 2016 were approximately $75,000.2018.
Audit-RelatedFees.The aggregate fees billed by dbbMcKennon,Briggs & Veselka, for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements for the fiscal yearsyear ended September 30, 2016 and 2015 and2019 that are not disclosed in the paragraph captioned “Audit Fees” above, were $0. The aggregate fees billed by Malone & Bailey, LLP, for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements for the fiscal years ended September 30, 2016 and that are not disclosed in the paragraph captioned “Audit Fees” above, were $3,500.$0.00.
Tax Fees.The aggregate fees billed by dbbMcKennon and Malone & Bailey,Eide Bailly LLP for professional services rendered for tax compliance, tax advice and tax planning for the fiscal years ended September 30, 2016 and 20152019 were $0.$18,500. There were no associated professional fees paid in 2018.
All Other Fees. The aggregate fees billed by dbbMcKennonBriggs & Veselka for products and services, other than the services described in the paragraphs “Audit Fees,” “Audit-Related Fees,” and “Tax Fees” above for the fiscal year ended September 30, 20162019 were $0.
The Board of Directors has received and reviewed the written disclosures and the letter from the Company’s independent registered public accounting firm required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and has discussed with its auditors its independence from the Company. The Board of Directors has considered whether the provision of services other than audit services is compatible with maintaining auditor independence.
Based on the review and discussions referred to above, the Board of Directors approved the inclusion of the audited financial statements be included in the Company’s Annual Report on Form 10-K for its 20162019 fiscal year for filing with the SEC.
The Board of Directors pre-approved all fees described above.
| 46 |
ExhibitsFINANCIAL STATEMENT SCHEDULES
| 3.1 | Articles of Incorporation | |
| 3.2 | ||
| 3.3 | ||
| August 30, 2019). | ||
| 10.1 | Employment Agreement | |
| 10.2 | |
| Employment Agreement of Dr. Albert Carlson | |
| 10.3 | 2019 Stock Incentive Plan, Effective as of August 8, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 12, 2019. | |
| Code of Ethics for Directors, Officers and | ||
| 31.1 | ||
| 31.2 | Certification of Principal Financial Officer Pursuant to the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act | ||
| 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
| Cipherloc Corporation | ||
| Date: | By: | /s/ |
| Chief Executive Officer | ||
| Date: | By: | /s/ |
Chairman of the Board of Directors (Principal Financial |
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
| Date: | By: | /s/ |
| Andrew Borene | ||
| Chief Executive Officer, Director |
| Date: January 10, 2020 | By: | /s/ Tom Wilkinson |
| Tom Wilkinson | ||
Chairman of the Board of Directors (Principal Financial Officer) |
| Date: January 10, 2020 | By: | /s/ Anthony Ambrose |
| Anthony Ambrose | ||
| Director |
| Date: January 10, 2020 | By: | /s/ David Chasteen |
| David Chasteen | ||
| Director |
| Date: January 10, 2020 | By: | /s/ Sammy Davis |
| Sammy Davis | ||
| Director |
| Date: | By: | |
| Michael De La Garza | ||
| Date: | By: | /s/ |
| Zeynep Young | ||
| Director |