UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
For the transition period from N/A to N/A |
Commission File No. 000-28745
Cipherloc Corporation
(Name of small business issuer as specified in its charter)
(formerlyFormerly National Scientific Corporation)
Texas | 86-0837077 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
1291 Galleria Drive, Suite 200
Henderson, NV 89014
(Address of principal executive offices) (Zip Code)
(702) 818-9011
Registrant’stelephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required 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][X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [x][X] No [ ]
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | [ ] | Accelerated filer | [ ] |
Non–Accelerated filer | [ ] | Smaller reporting company | [ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act).
Yes [ ] No [x][X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at | |
Common stock, $0.01 par value |
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A amends the Quarterly Report on Form 10-Q of Cipherloc Corporation (the “Company”) for the quarter ended June 30, 2014December 31, 2015, as originally filed with the Securities and Exchange Commission on August 12, 2014February 22, 2016 (the “Original Filing”).
This Form 10-Q/A amends the Original Filing, to reflect a retrospective restatement of our financial information. The Company determined that the criteria forstatements as a result of improper revenue recognition had notand a change to gain recognition related to a discontinued operations. Revenues under the Company’s software license and support arrangements should have been met for revenue previously recognized. The Company is amendingrecognized ratably over the Consolidated Balance Sheets, Statementsterm of Operationsthe agreement once delivery and Statements of Cash Flows. acceptance was deemed completed by the parties.
We also made adjustments to the Notes to Consolidated Financial Statements, specifically, Notes 2 and 36 to support the changes made to the Consolidated Balance Sheet.financial statements . These changes include a restatement of revenue that is described in Note 2, and also to a change in gain recognition for a discontinued operation that is explained in Note 6.
This amendment also contains changes to Part II – Other information. These changes are as follows:
Item 2. Management’s Discussion and Analysisanalysis of Financial Conditionfinancial condition and Resultsresults of Operationsoperations has been amended by updating changes in resultsResults of operations and liquidityLiquidity and capital resources.Capital Resources.
No other changes have been made to the originally filed Form 10-Q.
CIPHERLOC CORPORATION
INDEX TO FORM 10-Q/A FILING
FOR THE THREE AND NINE MONTHS ENDED JUNE 30,DECEMBER 31, 2015 AND 2014 AND 2013
PAGE | ||||
PART I - FINANCIAL INFORMATION | ||||
Item 1. | ||||
| 1 | |||
| 2 | |||
3 | ||||
Notes to | 4 | |||
Item 2. | Management Discussion & Analysis of Financial Condition and Results of Operations | 8 | ||
Item 4. | Controls and Procedures | 10 |
| ||||
PART II - OTHER INFORMATION | ||||
Item 6. | Exhibits | 21 | ||
CERTIFICATIONS |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. |
32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act. |
32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act. |
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Item 1. | Financial Statements |
The accompanying interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q/A.10-Q. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders' equity in conformity with generally accepted accounting principles. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2013.2015. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the ninethree months ended June 30, 2014December 31, 2015 are not necessarily indicative of the results that can be expected for the year ending September 30, 2014.2016.
CIPHERLOC CORPORATION | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
(UNAUDITED) | ||||||||
June 30, | September 30, | |||||||
2014 | 2013 | |||||||
(Restated) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash | $ | 828,501 | $ | 8,587 | ||||
Accounts receivable | 6,901 | 8,338 | ||||||
Total current assets | 835,402 | 16,925 | ||||||
Software, net | 640,456 | 817,921 | ||||||
TOTAL ASSETS | $ | 1,475,858 | $ | 834,846 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable and accrued expenses | 547,487 | $ | 361,994 | |||||
Stock payable | 177,300 | — | ||||||
Liabilities attributed to discontinued operations | 44,939 | 35,356 | ||||||
Lines of credit | 62,612 | 9,796 | ||||||
Deferred revenue | 1,125,000 | — | ||||||
Total current liabilities | 1,957,338 | 407,146 | ||||||
TOTAL LIABILITIES | 1,957,338 | 407,146 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS' EQUITY (DEFICIT): | ||||||||
Preferred stock, $0.01 par value, 4,000,000 shares authorized; 4,000,000 issued and outstanding | 40,000 | 40,000 | ||||||
Common stock, $0.01 par value, 650,000,000 shares authorized; 280,286,722 and 214,624,216 issued and outstanding | 2,802,867 | 2,146,242 | ||||||
Additional paid-in capital | 25,659,571 | 24,783,723 | ||||||
Accumulated deficit | (28,983,918 | ) | (26,542,265 | ) | ||||
Total stockholders' equity (deficit) | (481,480 | ) | 427,700 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $ | 1,475,858 | $ | 834,846 |
The accompanying notes are an integral part of these unaudited financial statements.
CIPHERLOC CORPORATION | ||||||||||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||
(UNAUDITED) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(Restated) | (Restated) | |||||||||||||||
REVENUES | $ | 1,725 | $ | 137,941 | $ | 224,400 | $ | 461,512 | ||||||||
COST OF REVENUES | 61,155 | 61,155 | 183,465 | 182,315 | ||||||||||||
GROSS PROFIT | (59,430 | ) | 76,786 | 40,935 | 279,197 | |||||||||||
OPERATING EXPENSES: | ||||||||||||||||
Selling, general and administrative | 1,079,306 | 202,005 | 2,447,524 | 537,830 | ||||||||||||
Research and development | — | 58,044 | 20,000 | 153,044 | ||||||||||||
Impairment of assets | — | 6,000 | — | 6,000 | ||||||||||||
Total operating expenses | 1,079,306 | 266,049 | 2,467,524 | 696,874 | ||||||||||||
OPERATING LOSS | (1,138,736 | ) | (189,263 | ) | (2,426,589 | ) | (417,677 | ) | ||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Interest expense | (1,656 | ) | (15 | ) | (2,171 | ) | (211 | ) | ||||||||
Gain on the disposal of assets | — | — | — | 1,353 | ||||||||||||
Total other income (expense) | (1,656 | ) | (15 | ) | (2,171 | ) | 1,142 | |||||||||
LOSS FROM CONTINUING OPERATIONS | (1,140,392 | ) | (189,278 | ) | (2,428,760 | ) | (416,535 | ) | ||||||||
INCOME (LOSS) FROM DISCONTINUED OPERATIONS | (5,376 | ) | 1,138 | (12,893 | ) | 60,084 | ||||||||||
NET LOSS | $ | (1,145,768 | ) | $ | (188,140 | ) | $ | (2,441,653 | ) | $ | (356,451 | ) | ||||
NET LOSS PER COMMON SHARE: | ||||||||||||||||
Basic and diluted | ||||||||||||||||
Continuing operations | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.00 | ) | ||||
Discontinued operations | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | $ | 0.00 | ||||||
Total | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.00 | ) | ||||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | ||||||||||||||||
Basic and diluted | 268,945,677 | 214,211,293 | 236,086,498 | 213,052,263 |
CIPHERLOC CORPORATION | ||||||||
BALANCE SHEETS | ||||||||
(UNAUDITED) as Amended | ||||||||
Dec 31, 15 | Sep 30, 15 | |||||||
(Restated) | ||||||||
ASSETS | ||||||||
Cash | $ | 1,131,206 | $ | 1,993,406 | ||||
Assets attributable to discontinued operations | 3,232 | 3,232 | ||||||
Total Current Assets | 1,134,438 | 1,996,638 | ||||||
Proprietary Technology | 7,217 | — | ||||||
TOTAL ASSETS | $ | 1,141,655 | $ | 1,996,638 | ||||
LIABILITIES & EQUITY | ||||||||
Liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 405,779 | $ | 1,100,945 | ||||
Due to related party | 1,205 | — | ||||||
Liabilities attributable to disco ops | 18 | 18 | ||||||
Deferred Revenue | 1,121,185 | 1,125,000 | ||||||
Total Liabilities | 1,528,187 | 2,225,963 | ||||||
Equity | ||||||||
Series A Convertible Preferred Stock, $0.01 par value, 10,000,000 shares authorized; 10,000,000 outstanding As of December 31, 2015 and September 30, 2015 | 100,000 | 100,000 | ||||||
Common Stock, $0.01 par value, 650,000,000 shares authorized; 4,494,421 issued and outstanding as of December 31, 2015 and 4,356,741 issued and outstanding as of September 30, 2015 | 44,942 | 43,567 | ||||||
Other Equity | (50,000 | ) | (50,000 | ) | ||||
Additional Paid-In Capital | 43,107,060 | 42,815,934 | ||||||
Accumulated deficit | (43,588,534 | ) | (43,138,826 | ) | ||||
Total Equity | (386,532 | ) | (229,325 | ) | ||||
TOTAL LIABILITIES & EQUITY | $ | 1,141,655 | $ | 1,996,638 |
The accompanying notes are an integral part of these unaudited financial statements.
CIPHERLOC CORPORATION | ||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
(UNAUDITED) | ||||||||
NINE MONTHS ENDED | ||||||||
June 30, | ||||||||
2014 | 2013 | |||||||
(Restated) | ||||||||
Net loss | $ | (2,441,653 | ) | $ | (356,451 | ) | ||
Income(loss) from discontinued operations | (12,893 | ) | 60,084 | |||||
Loss from continuing operations | (2,428,760 | ) | (416,535 | ) | ||||
Adjustments to reconcile net loss from continuing operations to net cash from operating activities: | ||||||||
Depreciation and amortization | 183,465 | 182,315 | ||||||
Share-based compensation | 1,623,369 | 31,829 | ||||||
Common stock issued for software sales | 5,700 | 12,313 | ||||||
Impairment of assets | — | 6,000 | ||||||
Gain on the disposal of assets | — | (1,353 | ) | |||||
Changes in operating assets and liabilities: | — | — | ||||||
Accounts receivable | 1,437 | 132 | ||||||
Accounts payable and accrued liabilities | 241,887 | 145,256 | ||||||
Deferred revenue | 1,125,000 | — | ||||||
Net cash provided by (used in) operating activities | 752,098 | (40,043 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of intangible asset | — | (11,500 | ) | |||||
Proceeds from the sale of assets | — | 1,353 | ||||||
Net cash provided by investing activities | — | (10,147 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Advances from officer | 8,299 | — | ||||||
Repayment of advances from officer | (8,299 | ) | (25,591 | ) | ||||
Proceeds from line of credit | 103,529 | 5,664 | ||||||
Repayment of line of credit | (50,713 | ) | (22,427 | ) | ||||
Common stock issued for cash | 15,000 | 141,000 | ||||||
Net cash provided by financing activities | 67,816 | 98,646 | ||||||
INCREASE IN CASH | 819,914 | 48,456 | ||||||
CASH, BEGINNING OF PERIOD | 8,587 | 51,356 | ||||||
CASH, END OF PERIOD | $ | 828,501 | $ | 99,812 | ||||
SUPPLEMENTAL DISCLOSURES | ||||||||
Interest paid | $ | — | $ | — | ||||
Taxes paid | $ | — | $ | — | ||||
NONCASH OPERATING, INVESTING, AND FINANCING ACTIVITIES | ||||||||
Write-off of related party debt to additional paid-in capital | $ | 59,704 | $ | — | ||||
Common stock issued for purchase of intangible assets | $ | 6,000 | $ | 21,800 | ||||
Accrual of software acquisition costs | $ | — | $ | 11,500 |
CIPHERLOC CORPORATION | ||||||||
STATEMENTS OF OPERATIONS | ||||||||
(UNAUDITED) As Amended | ||||||||
Three Months Ended December 31, | ||||||||
2015 | 2014 | |||||||
(Restated) | ||||||||
Revenue | $ | 3,814 | $ | — | ||||
Cost of Revenues | — | — | ||||||
Gross Profit | 3,814 | — | ||||||
Operating Expenses: | ||||||||
General and administrative | 298,767 | 176,325 | ||||||
Research and development | 154,650 | 17,431 | ||||||
Total Operating Expenses | 453,417 | 193,756 | ||||||
Operating Loss | (449,603 | ) | (193,756 | ) | ||||
Other Expenses | ||||||||
Interest expense | (106 | ) | (1,024 | ) | ||||
(Loss) from Continuing Operations | (449,709 | ) | (194,780 | ) | ||||
Gain (Loss) from Discontinued Operations | — | (68,353 | ) | |||||
Net Loss | $ | (449,709 | ) | $ | (263,133 | ) | ||
Net Loss per Common Share - Basic and diluted: | ||||||||
Continuing operations | $ | (0.10 | ) | $ | (0.07 | ) | ||
Discontinued operations | $ | 0.00 | $ | (0.02 | ) | |||
Total | $ | (0.10 | ) | $ | (0.09 | ) | ||
Weighted Average Number of Common Shares Outstanding | ||||||||
Basic and diluted | 4,476,659 | 2,833,265 |
The accompanying notes are an integral part of these unaudited financial statements.
CIPHERLOC CORPORATION | ||||||||
STATEMENT OF CASH FLOWS | ||||||||
(UNAUDITED) As Amended | ||||||||
Three Months Ended December 31, | ||||||||
2015 | 2014 | |||||||
(Restated) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (449,709 | ) | $ | (263,133 | ) | ||
(Gain) Loss from discontinued operations | — | 68,353 | ||||||
Net loss from continuing operations | (449,709 | ) | (194,780 | ) | ||||
Adjustments to reconcile net loss from continuing operations: | ||||||||
to net cash (used in) provided by operating activities: | ||||||||
Depreciation and amortization | — | — | ||||||
Stock-based compensation | 27,500 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | — | — | ||||||
Deferred revenue | (3,814 | ) | — | |||||
Accounts payable and accrued liabilities | (691,934 | ) | (138,879 | ) | ||||
Net cash (used in) operating activities | (1,117,957 | ) | (333,659 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Deposit with others | (10,449 | ) | — | |||||
Net cash from investing activities | (10,449 | ) | — | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Advances from officer | 1,205 | — | ||||||
Subscribed stock | — | (4,739 | ) | |||||
Common stock issued for cash | 265,001 | — | ||||||
Net cash provided by financing activities | 266,206 | (4,739 | ) | |||||
CASH FLOWS FROM DISCONTINUED OPERATIONS: | ||||||||
Operating | — | 1,249 | ||||||
Net decrease in cash from discontinued operations | — | 1,249 |
(DECREASE) INCREASE IN CASH | (862,200 | ) | (337,149 | ) | ||||
CASH, BEGINNING OF PERIOD | 1,993,406 | 545,650 | ||||||
CASH, END OF PERIOD | $ | 1,131,206 | $ | 208,501 | ||||
CASH PAID FOR: | ||||||||
Interest | $ | 107 | $ | 1,111 | ||||
Taxes | $ | — | $ | — | ||||
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING AND FINANCING ACTIVITIES: | ||||||||
Common stock rescinded for purchase of software | $ | — | $ | (6,000 | ) | |||
Cancellation of common stock | $ | — | $ | — |
The accompanying notes are an integral part of these unaudited financial statements.
3 |
CIPHERLOC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30,DECEMBER 31, 2015 AND 2014 AND 2013
(Unaudited)
NOTE 1- DESCRIPTION OF BUSINESS
Cipherloc Corporation (the “Company”) was incorporated in Texas on June 22, 1953 as American Mortgage Company. On May 16, 1996, the Company changed its name to National Scientific Corporation. On April 3, 2012,March 15, 2015, the Company changed its name to Cipherloc Corporation.The name change became effective through the Amended Certificate as of March 23, 2015.
In the year ended September 30, 2011, Cloud-MD introduced the Cloud-MD Office,
CipherLoc is a “Cloud Based”, 5010 readydata 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:
• Dramatically enhances data security
• Can be easily added to existing products
• Is scalable and ICD-10 compliant, fully integratedfuture-proof
Our solutions are not a replacement of existing encryption technologies but rather an enhancement to them. Our mobile, desktop, and interoperable suite of medicalserver software solutions are specifically designed to be added to any third-party application, service, or product. With a highly flexible and services, designed by experienced healthcare analysts and programmers for healthcare providers,modular technology that produces “Actionable Information” to help Independent Physician Practices, New Care Delivery Models (ACO), Healthcare Systems and Billing Services optimizecan be easily added other software solutions, CipherLoc can support a wide range of business processes resulting in Increased Profits, Higher Quality, Greater Efficiency, Noticeable Cost Reductionsuse cases including any-to-any security (mobile-to-mobile, mobile-to-desktop, desktop-to-cloud, etc.), dynamically-created VPNs (where no provisioning is necessary), and Better Patient Care. Current software product offerings include Practice Management, Electronic Medical Records, Revenue Management, Patient Financial Solutions, Medical and Pharmaceutical Supply Management, Claims Management and PHI Exchange.
In the year ended September 30, 2012, Cloud-MD launched Cloud-MD Billing Services which provides management of medical claims from posting physician charges and payments into our medical billing software. The software uses a continuous insurance claim follow-up system to track and research all rejected or denied medical claims; a Comprehensive Reporting module that includes monthly financial statements sent to our clients so they can see how their practice is performing and a variety of detailed reports giving our clients the necessary information and tools used to assist in the increased production which leads to more profit; and patient account inquiries and support to assist patients with their billing and insurance questions.
On November 21, 2012, the Company purchased from CipherSmith, LLC a complete source code, intellectual property rights, all computer software or algorithm licensed or sold under CipherSmith, and appropriate copy rights, patents, mask works, trademarks, service marks, internet domain names or world wide web URS. Since 2012 the Company has tested the software application and created a commercial product for distribution of its encryption technology. The Company is presently, developing more applications for consumer usage in the future.many others.
NOTE 2 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company has restated its consolidated interim financial statements as of June 30, 2014, and for the three and nine months then ended. The restatements reflectrestatement reflects adjustments to correct errors identified by management during the Company’s regularly scheduled audit. The restatements reflect adjustmentsrelated to correct errors for the Company’s revenue recognition of a transaction in 2014.that occurred during the quarter ended December 31, 2015. The effect of the restatement was material on the Company’s Balance Sheets, Income Statement and Statement of Cash Flows. The nature and impact of these adjustments are described below.
Gain recognition on the sale of certain assets of discontinued operations needed to be deferred and will be discussed in detail in Note 6.
Revenue Recognition
DuringSoftware license revenue is generally recognized when a signed contract or other persuasive evidence of an arrangement exists, the three months endedsoftware 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 30, 2014, the Company recordedentered 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; the only remaining undelivered element was post contract support services, and accordingly, the revenues will be recognized on a pro rata basis prospectively over the remaining 30 months of the related contracts. Deferred revenue results from fees billed to or collected from customers for which revenue has not yet been recognized.
4 |
During the quarter ended December 31, 2015, the Company had retrospectively restated software revenue related to the sale of a license for its Cipherloc software to a customer.third-party. Management subsequently determined that a lackthere was an error in calculating the correct amount of adequate communication and delivery documentation betweenrevenue based upon ratable accounting to recognize during the Company and the customer did not allow for revenue recognition during 2014.quarter ended December 31, 2015. The Company has corrected the classification of this amount ($3,814) as a reduction to software revenue and an increase to deferred revenue. The amount of $1,125,000 has been classified as a reduction to revenue.revenue.
For the quarter ended December 31, 2015
The results of the restatements are summarized as follows:
Consolidated Balance Sheet as of June 30, 2014:December 31, 2015:
As reported | Adjustment | As restated | ||||||||||
Deferred revenue | $ | — | $ | 1,125,000 | $ | 1,125,000 | ||||||
Accumulated deficit | $ | (27,858,918 | ) | $ | (1,125,000 | ) | $ | (28,983,918 | ) |
As reported | Restatement Adjustment | As restated | ||||||||||
Deferred revenue | $ | 691,406 | $ | 429,779 | $ | 1,121,185 | ||||||
Current liabilities | 1,098,408 | 429,779 | 1,528,187 | |||||||||
Accumulated deficit | (42,908,755 | ) | (429,779 | ) | (43,338,534 | ) |
Consolidated
Statement of Operations for the three months ended June 30, 2014:December 31, 2015:
As reported | Adjustment | As restated | As reported | Restatement Adjustment | As restated | |||||||||||||||||||
Revenue | $ | 1,126,725 | $ | (1,125,000 | ) | $ | 1,725 | $ | 433,594 | $ | (429,780 | ) | $ | 3,814 | ||||||||||
Loss from continuing operations | $ | (15,392 | ) | $ | (1,125,000 | ) | $ | (1,140,392 | ) | (19,929 | ) | (429,780 | ) | (449,709 | ) | |||||||||
Net loss | $ | (20,768 | ) | $ | (1,125,000 | ) | $ | (1,145,768 | ) | |||||||||||||||
Basic and diluted loss per common share | $ | (0.00 | ) | $ | — | $ | (0.00 | ) | ||||||||||||||||
Consolidated Statement of Operations for the nine months ended June 30, 2014:
As reported | Adjustment | As restated | ||||||||||
Revenue | $ | 1,349,400 | $ | (1,125,000 | ) | $ | 224,400 | |||||
Loss from continuing operations | $ | (1,303,760 | ) | $ | (1,125,000 | ) | $ | (2,428,760 | ) | |||
Net loss | $ | (1,316,653 | ) | $ | (1,125,000 | ) | $ | (2,441,653 | ) | |||
Basic and diluted loss per common share | $ | (0.01 | ) | $ | — | $ | (0.01 | ) |
Consolidated Statement of Cash Flows for the ninethree months ended June 30, 2014:December 31, 2015:
As reported | Adjustment | As restated | ||||||||||
Net loss | $ | (1,316,653 | ) | $ | (1,125,000 | ) | $ | (2,441,653 | ) | |||
Adjustments to reconcile net loss from continuing operations to net cash from operating activities: | ||||||||||||
Deferred revenue | $ | — | $ | 1,125,000 | $ | 1,125,000 | ||||||
Net cash provided by operating activities | $ | 752,098 | $ | — | $ | 752,098 |
As reported | Restatement Adjustment | As restated | ||||||||||
Net loss | $ | 230,071 | $ | (679,780 | ) | $ | (449,709 | ) | ||||
Revenue | (433,594) | 429,780 | (3,814 | ) |
NOTE 3 – BASIS OF PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The accompanying interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
Operating results for the ninethree months ended June 30, 2014December 31, 2015 are not necessarily indicative of the results that may be expected for the year ending September 30, 2014.2016. Notes to the unaudited interim consolidated financial statements that would substantially duplicate the disclosures contained in the audited consolidated financial statements forthe year ended September 30, 20132015 have been omitted; this report should be read in conjunction with the audited consolidated financial statements and the footnotes thereto for the fiscal year ended September 30, 20132015 included within the Company’s Form 10-K, as amended, as filed with the Securities and Exchange Commission.
Segment reporting change
With the placement into service of the Company’s encryption technology, the Company began a segment reporting structure to match the new operating structure and how the Company’s management views the business and allocates resources, beginning in the quarter ended June 30, 2014. Reclassifications of prior period financial information have been made to conform to the current period presentation. This change does not impact previously reported condensed consolidated financial statements of the Company. See Note 12 for additional information on our segment reporting change.
NOTE 4 - GOING CONCERN
The accompanying consolidated 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 recurringincurred losses from operations, andhas an accumulated deficit at June 30, 2014December 31, 2015 of $28,983,918$43,588,534 and needs additional cash to maintain its operations.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated 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 5 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are as follows:
Use of Estimates and Assumptions
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“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 consolidated 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 consolidated financial statements; accordingly, actual results could differ from these estimates. The Company’s most significant estimates relate to the valuation of its proprietary technology and its valuation of its common stock.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At June 30,December 31, 2015 and 2014, cash and cash equivalents include cash on hand and cash in the bank andbank. 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.
Impairment of 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 acquired software technologies are reviewed annually for impairment.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts payable and accrued expenses, and debt. 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:
The following table summarizes fair value measurements by level at June 30, 2014 and September 30, 2013 for assets measured at fair value on a recurring basis:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
At June 30, 2014 | ||||||||||||||||
Software | $ | — | $ | — | $ | 640,456 | $ | 640,456 | ||||||||
Total Software | $ | — | $ | — | $ | 640,456 | $ | 640,456 | ||||||||
At September 30, 2013 | ||||||||||||||||
Software | $ | — | $ | — | $ | 817,921 | $ | 817,921 | ||||||||
Total Software | $ | — | $ | — | $ | 817,921 | $ | 817,921 |
Accounts Receivable and Allowance for Uncollectible Accounts
Substantially all At December 31, 2015, $871,111 of the Company’s accounts receivablecash balance is related to trade receivables. Trade accounts receivable are recorded at the invoiced amount and dowas uninsured. The Company has not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable creditexperienced any losses in its existing accounts receivable. The Company will maintain allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments for services. Accounts with known financial issues are first reviewed and specific estimates are recorded. The remaining accounts receivable balances are then grouped in categories by the number of days the balance is past due, and the estimated loss is calculated as a percentage of the total category based upon past history. Account balances are charged against the allowance when it is probable the receivable will not be recovered. As of June 30, 2014 and 2013, the Company had no valuation allowance for the Company’s accounts receivable.such accounts.
Income Taxes
Revenue Recognition
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-forwards 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 recognizing and measuring 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's tax positions and tax benefits, which may require periodic adjustments. At June 30, 2014, the Company did not record any liabilities for uncertain tax positions.
Revenue Recognition
Medical Licensing Agreement
License revenue consists principally of revenue earned under softwareSoftware license agreements. The Company sells its software to a medical practitioner for direct payment or through a third party leasing company for direct payment to the Company. The third party lease agreement is a non-recourse debt and the Company is not responsible for the default of the medical practitioner. 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.
Provided all other revenue criteria are met, When 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 for professional services, revenue is deferred until the uncertainty is sufficiently resolved. VSOE of fair value of services is based upon stand-alone salesVSOE of those services.
Subscription revenue is generated from bandwidth and information storage. Inpost contract customer support cannot be determined, the first year and each year thereafter, the software is purchased and installed the purchaser will pay an annual fee of $1,200, $1,500, $1,800, and $2,400, respectively. Subscription revenue is recognized ratably over the termcontract 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 agreement.
Transaction revenue is generated fromuse of the followinglicense was not achieved until December 2015; the only remaining undelivered element was post contract support services, and accordingly, the revenues will be recognized whenon a transaction occurs:
The Company had not received any transaction revenues in the threehas deferred revenue from one customer of $1,121,185 as of December 31, 2015 and nine months ended June$1,125,000 as of September 30, 2014.2015.
CipherLoc Licensing Agreement
License revenue also consists of revenue earned under a CipherLoc License Agreement. 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.
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 for professional services, revenue is deferred until the uncertainty is sufficiently resolved. VSOE of fair value of services is based upon stand-alone sales of those services.
Cost of License and Subscription Revenues
Cost of license revenue is primarily comprised of the license-based royalties to third parties and production and distribution costs for initial product licenses. No costs were incurred for license-based royalties during the nine months ended June 30, 2014 and 2013.
Cost of subscription revenue is primarily comprised of the costs associated with the customer support personnel that provide maintenance, enhancement and support services to customers. No costs were incurred for customer support during the nine months ended June 30, 2014 and 2013.
The amortization of acquired technology for products acquired through business combinations are considered as the cost of revenues. The acquired software technologies are amortized over their useful lives of 5 years
Deferred Revenue
Deferred revenue result from fees billed to customers for which revenue has not yet been recognized or for which the conditions of the arrangement have been modified. The Company recognizes revenue to provide up-front capitalization to Cloud-MD for each provider added to the solution set. The Company also recognizes annual subscription fees for virtual servers and subscription and small usage fees and those revenues are based on a 48-month lease, Cloud-MD would amortize the revenue over the life of the agreement of 48 months. In addition, it features incremental monthly revenue, for the duration of the lease (48 months) based on fees assessed for transactions such as eligibility claims processing, etc.
The Company has deferred revenue of $1,125,000 as of June 30, 2014.
Sales Commissions
The Company pays commissions, including sales bonuses, to the direct sales force related to revenue transactions under sales compensation plans which are established annually. The commission payments are typically paid in full in the month or quarter following execution of the customer contracts. The Company paid commissions of $0 and $10,000 for the three months ended June 30, 2014 and 2013, respectively, and $35,650 and $50,260 for the nine months ended June 30, 2014 and 2013, respectively.
Research and Development and Software Development Costs
Capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on our product development process, technological feasibility is established 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 have been insignificant. Accordingly, we have charged all such costs to research and development expense in the period incurred. The Company recorded research and development costs of $0 and $58,044 for the three months ended June 30, 2014 and 2013, respectively, and $20,000 and $153,044 for the nine months ended June 30, 2014 and 2013, respectively.
Share-Based Compensation
The Company measures the cost of services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. Compensation cost is recognized over the vesting or requisite service period.
Basic and Diluted Net Income (Loss) per Common Share
Basic income (loss) per share is computed by dividing net income (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.
The Company has 4,000,000 preferred shares that can be converted subject to the limitation of the Company’s authorized shares at 1 preferred share for 150 common shares. The conversion can only take place with the approval of the Board of Directors. At June 30, 2014, the preferred shares could be converted into 600,000,000 of common shares resulting in dilution of common shareholders. The preferred shares are anti-dilutive since the losses the Company has incurred for the periods ended June 30, 2014 and 2013.
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.
Concentration of Credit Risk
All of the Company’s cash and cash equivalents are maintained in regional and national financial institutions. The Company has exposure to credit risk to the extent that its cash and cash equivalents exceed amounts covered by the U.S. federal deposit insurance; however, the Company has not experienced any losses in such accounts. In management’s opinion, the capitalization and operating history of the financial institutions are such that the likelihood of material loss is remote. Presently the bank accounts held by Chase bank exceeds the $250,000 FDIC insurance by $608,201.
Subsequent Events
The Company has evaluated all transactions occurring between June 30, 2014 and the date of issuance of the consolidated financial statements for subsequent event disclosure consideration.
Recent Accounting Pronouncements
No accounting standards or interpretations issued recently are expected to a have a material impact on the Company’s financial position, operations or cash flows.
NOTE 6 – SOFTWARE
The following is a detail of software at June 30, 2014 and September 30, 2013:
June 30, 2014 | September 30, 2013 | |||||||
Source Code License – Antree Systems Limited | $ | 6,000 | $ | — | ||||
Encryption Software Code | 15,800 | 15,800 | ||||||
Source Code License – MediSouth, LLC | 2,500 | 2,500 | ||||||
Acquisition of Doctor’s Network of America | 10,000 | 10,000 | ||||||
Software License | 1,200,106 | 1,200,106 | ||||||
EMR Certification | 23,000 | 23,000 | ||||||
Total intangible assets | 1,257,406 | 1,251,406 | ||||||
Accumulated amortization of intangible assets | (606,950 | ) | (423,485 | ) | ||||
Accumulated impairment of assets | (10,000 | ) | (10,000 | ) | ||||
Total intangible assets | $ | 640,456 | $ | 817,921 |
The Company’s software was placed into service starting in the second quarter of fiscal year ended September 30, 2012. The amortization expense was $61,155 for the three months ended June 30, 2014 and 2013, respectively. The Company recognized a $0 and $10,000 for impairment of software acquired from Doctors Network of America (“DNA”) operating in Flowood, Mississippi during the nine months ended June 30, 2014 and the year ended September 30, 2013, respectively. The Company is currently in litigation with the sellers of DNA relating to the collection of certain medical billings owed to the Company. As a result of the litigation, the Company deemed the assets to be impaired.
Source Code License
In October 2013, the Company through a purchase agreement with Antree Systems Limited has purchased a complete source code, intellectual property rights, all computer software, patents, or formulas, algorithm licensed or sold under a project known as Compass Rose and appropriate copyrights, patents, mask works, trademarks, service marks, internet domain names and world wide web uniform resource locators (“URLs”) from Antree Systems Limited. The Company issued 200,000 shares of its common stock as consideration for the purchase. The fair value of the consideration and the assets acquired is based on the fair value of the common stock issued in exchange for the software. The total fair value, based on the market price on the date of grant, was $6,000. The Company evaluated this acquisition and determined that it did not meet the definition of a significant business acquisition.
Encryption Software Code
On November 21, 2012, the Company purchased from CipherSmith, LLC a complete source code, intellectual property rights, all computer software or algorithm licensed or sold under CipherSmith, and appropriate copy rights, patents, mask works, trademarks, service marks, internet domain names or world wide web URS. The Company issued 500,004 shares of its common stock as payment for the acquisition. The fair value of the consideration and the assets acquired is based on the aggregate fair value of the common stock issued in exchange for the software. The total fair value of the shares of common stock issued on the date of grant was $15,800.
Doctors Network of America
On June 22, 2012, the Company entered into an acquisition agreement that closed on March 16, 2013. The Company agreed to acquire DNA in Flowood, Mississippi from Krooss Medical Management Systems, LLC (“Krooss”) for 500,000 shares of common stock. As of September 30, 2012, 200,000 shares of common stock were issued as a deposit, which was valued at $4,000 based on the market value on the date of grant. At the closing of the transaction on March 16, 2013, the Company issued an additional 300,000 shares of common stock which were valued at $6,000 based on the market value on the date of grant.
Subsequent to the transaction closing on March 16, 2013, the sellers refused to pay for medical billing process transaction fees in accordance with their contracts in the amount of approximately $200,000. The Company and the sellers are currently in litigation over the disputed transaction fees of $200,000.
NOTE 7-6– DISCONTINUED OPERATIONS
Cloud MD Sale
The Company’s former Board of Directors believed that it was in the best interest of the Company to discontinue the former business operation Cloud MD. During September 2015, the Cloud MD business segment was discontinued and a plan of sale of the GPS operational device business. In 2011, this businesssegment was transferredapproved. The Cloud MD sale occurred in October 2015 as a $250,000 note payable from the buyer. The note receivable has five annual payments of $50,000 and carries interest of 3% a year. We reviewed the need for an allowance for loan loss and estimation of impairment of the note receivable based on professional relationship and experience with the buyer and the specifics of the agreements. As it was determined that collectability of the cash was not reasonably assured, the Company has fully reserved the receivable, and the Company will record revenue in the future when and if cash is received.
NOTE 7 – EQUITY
SinceSeptember 30, 2015, the Company has issued132,500restricted common shares through a Private Placement Memorandum for cash proceeds totaling $265,001.
NOTE 8 - SUBSEQUENT EVENTS
The Company hired Mike Salas as Vice President of Sales and Marketing on April 25, 2016. The employment contract grants an annual salary of $175,000.00 and restricted common stock with an annual value of $125,000. One quarter of the stock shall be granted at the end of the first quarter anniversary of employment and a like amount each quarter as long as the contract is in effect. The Company also executed a three-year lease agreement effective April 1, 2016 for a free standing building with annual rent of $86,596 for the first year increasing annual to National Scientific, LLC, a company owned by$90,502 for the third year. The lease is automatically renewable for two one year periods at the Company’s prior CEO, by prior managementoption. The building is located in which the Company’s former CEO was to pay $100,000 plus 2% of revenues for that technology. The former officer never paid the specific consideration for this transaction. Accordingly, the Company reclassified the assets, liabilities and operations related to its GPS operational device business as discontinued operations. Consequently, the accompanying consolidated financial statements reflect the assets, liabilities and operations of the GPS operational device business as net assets of discontinued operations, net liabilities of discontinued operations and results from discontinued operations.
Buda, Texas.
On March 16, 2013, the Company closed the acquisition with the final payment for DNA. Subsequent to the transaction closing, the sellers refused to pay the transaction fees for medical billing contracts that were processed. The Company filed a lawsuit against the sellers for Breach of Contract among other things in June of 2013. During that time, the Company believes the sellers began contacting all billing contract holders and interfered with the acquisition of all the assets from the transaction. Consequently, the accompanying consolidated financial statements reflect the assets, liabilities and operations of DNA as net assets of discontinued operations, net liabilities of discontinued operations and results from discontinued operations.
Details of the classifications for net assets, liabilities and operations are shown below.
June 30, 2014 | September 30, 2013 | |||||||
Net liabilities of discontinued operations: | ||||||||
Accounts payable | $ | 44,939 | $ | 35,356 | ||||
Net liabilities of discontinued operations | $ | 44,939 | $ | 35,356 |
Three Months Ended June 30, | ||||||||
2014 | 2013 | |||||||
Discontinued operations: | ||||||||
Revenues | $ | 45,555 | $ | 266,246 | ||||
Cost of sales | — | — | ||||||
Operating expenses | 50,931 | (265,108 | ) | |||||
Gain from write-off of debt | — | — | ||||||
(Loss) income from discontinued operations | (5,376 | ) | $ | 1,138 |
Nine months ended June 30, | ||||||||
2014 | 2013 | |||||||
Discontinued operations: | ||||||||
Revenues | $ | 176,607 | $ | 267,146 | ||||
Cost of sales | — | — | ||||||
Operating expenses | 189,500 | (266,046 | ) | |||||
Gain from write-off of debt | — | 58,984 | ||||||
(Loss) income from discontinued operations | (12,893 | ) | $ | 60,084 |
NOTE 8 – LINES OF CREDIT
In November 2013, the Company entered into a revolving line of credit with Mutual of Omaha in the amount of $65,000 at a 4.00% interest rate per annum which renews annually. As of June 30, 2014, the Company had borrowed $62,612 against the line of credit.
The Company has a revolving line of credit with Chase Bank with a balance as of June 30, 2014 in the amount of $0 and a borrowing limit of $50,000. The line of credit with Chase Bank has an interest rate of 4.25% per annum and renews annually.
Interest expense for these lines of credit was $1,657 and $15 for the three months ended June 30, 2014 and 2013, respectively, and $2,171 and $211 for the nine months ended June 30, 2014 and 2013, respectively.
NOTE 9 – DEBT MITIGATION PROGRAM
The Company determined that the statute of limitations for certain of the Company’s creditors to enforce collection of any amounts they might be owed has now elapsed. Based on the determinations and findings, during nine months
ended June 30, 2014 and 2013, the Company recognized a gain on the write-off of liabilities in the amount of $0 and $58,984 from third party liabilities, respectively, which was recorded in income from discontinued operations, and additional paid-in capital of $59,704 and $0 for related party liabilities, respectively. The Company will continue to conduct this analysis going forward and write-off obligations when such obligations are no longer enforceable based on applicable law.
The following liabilities, through the opinion of legal counsel, were determined by the Company as unenforceable.
June 30, | June 30, | |||||||
2014 | 2013 | |||||||
Debt Mitigation Program: | ||||||||
Accounts payable and accrued expenses | $ | 59,704 | $ | 58,984 | ||||
Total debt mitigation program | $ | 59,704 | $ | 58,984 | ||||
Gain on write-off of debt | — | (58,984 | ) | |||||
Additional paid-in capital (1) | $ | 59,704 | $ | — |
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Rent expense for the three and nine months ended June 30, 2014 and 2013 was $0 for both periods.
The Company entered into an agreement to purchase the assets of DNA in June 2012 and after due diligence by both parties the transaction closed on March 16, 2013. Subsequent to the transaction closing on March 16, 2013, the sellers refused to pay for medical billing process transaction fees in accordance with their contracts of approximately $200,000. In June 2013, the Company sued the sellers in federal court for breach of contract among other causes of action of unpaid medical billing transaction fees of approximately $200,000. The Company believes it will be successful in its litigation. However, if the Company is successful, the collectability of the judgment is highly questionable.
On July 5, 2013, the Company filed a complaint against Krooss Medical Management Systems, LLC, William F. Krooss and Marie W. Krooss in the United States District Court, District of Nevada Case No. 2013-CV-01187-ABG-VCF for the collection of $200,000 of unpaid medical billing fees that were seriously delinquent. After many attempts by the Company to begin collections, the Defendants refused to pay the outstanding balances, however expected the Company to continue to bill for them. The Complaint includes causes of action Breach of the PTAPA, Breach of Billing and Collections Contracts, Negligence, Breach of the Duty of Good Faith and Fair Dealing, Tortious Interference with Business Relations, Fraud, among other causes of action.
On August 13, 2013, Krooss Medical Management Systems et al filed a Complaint in Chancery Court of Rankin County, Mississippi Case No. 13-1372 as a strategy to keep the collection matter in Mississippi Chancery Court.
Case No. 13-1372 was remanded to the United States District Court, Southern District of Mississippi Jackson Division Case No. 3:13CV507-HTW-LRA.
This litigation is a collection matter of unpaid fees by the Defendants and the Company vehemently denies the allegations (Breach of the Permanent Transfer Asset Purchase Agreement (“PTAPA”), Rescission of the PTAPA, Breach of Billing and Collections Contracts, Negligence, Quantum Meruit, Restitution, and Estoppel, Breach of the Duty of Good Faith and Fair Dealing, Tortious Interference with Business Relations, among other causes of action) filed in Mississippi Chancery Court related to this collection matter. The Company does not expect the cost to litigate this matter to adversely affect the Company’s operations. However, the Company has reduced operations in DNA-Cloud in Mississippi as the sellers have interfered with the billing contracts purchased which is one of the causes of action in Complaint, among others. Many of the contracts have been terminated due to the interference by the sellers, and DNA-Cloud has not been able to expand the business because of the reputation of the sellers in Jackson, Mississippi and the surrounding area.
The Company has issued shares to new investors since January 2, 2011, that have an anti-reverse common stock split clause if the Company reverse splits the common stock. The reverse split of common stock is determined by management but must be approved by Financial Industry Regulation Authority (“FINRA”). The current investors holding anti-reverse split stock will have the right to hold the same number of shares of common stock as status quo after the reverse split. The anti-reverse split common stock protection is only for stock subject to reverse split and once the Company declares a reverse split and it is completed, the anti-reverse split protection will be terminate and shareholders that received anti-reverse split stock will be held with regular stockholders as the Company proceeds forward. In accordance with the anti-reverse split provision, no further shares will be issued to the anti-reverse split shareholders once the reverse split is approved and completed. The Company has issued 90,029,843 anti-reverse split shares and these holders will hold the same number of shares after the reverse split has been completed.
As discussed in Note 9, the Company has written off $59,704 and $58,984 in accounts payable, accrued liabilities and notes payable based on the opinion of legal counsel for the nine months ended June 30, 2014 and 2013. However, the related creditors could make a claim in the future in regards to these liabilities.
In June 2014, the Company entered into an investor relations agreement and market awareness consulting agreement with BCMG Entertainment, Inc. (“BCMG”) for $450,000. The Company has paid BCMG $75,000 as of June 30, 2014. The Company will continue to pays $25,000 per month based on performance until the contract is satisfied.
NOTE 11– RELATED PARTY TRANSACTIONS
The Company repaid $8,299 and $25,591 of the advances from the Company’s CEO in the nine months ended June 30, 2014 and 2013, respectively. The advances from the CEO are due on demand and do not accrue interest. As of June 30, 2014 and September 30, 2013, there were no amounts owed to the CEO for advances, respectively.
NOTE 12 - EQUITY
As of June 30, 2014, the Company was authorized to issue 650,000,000 common shares and 4,000,000 preferred shares at a par value of $0.01.
Nine months ended June 30, 2014
Stock Issued for Cash
During the nine months ended June 30, 2014, the Company issued 35,000 shares of common stock for $15,000 in net cash proceeds as follows:
Date | Number of Shares | Proceeds | ||||||||
October 21, 2013 | 25,000 | $ | 5,000 | |||||||
January 12, 2014 | 10,000 | 10,000 | ||||||||
Total | 35,000 | $ | 15,000 |
Stock Issued in Connection with Software Licensing and Subscription Agreements
During the nine months ended June 30, 2014, the Company issued 220,000 shares of common stock valued at $5,700 based on the market price on the date of grant, to customers, in regards to the purchase of software from the Company in accordance with the Software Licensing and Subscription Agreements. The fair values of the shares issued were recorded as a reduction of software revenue recognized during the three months ended June 30, 2014.
Date | Number of Shares | Fair Value | ||||||||
December 4, 2013 | 120,000 | $ | 3,600 | |||||||
March 4, 2014 | 100,000 | 2,100 | ||||||||
Total | 220,000 | $ | 5,700 |
Stock Issued for Assets Acquisition
In October 2013, the Company through a purchase agreement with Antree Systems Limited has purchased a complete source code, intellectual property rights, all computer software, patents, or formulas, algorithm licensed or sold under a project known as Compass Rose and appropriate copyrights, patents, mask works, trademarks, service marks, internet domain names and world wide web uniform resource locators (“URLs”) from Antree Systems Limited. The Company issued 200,000 shares of its common stock as consideration for the purchase. The fair value of the consideration and the assets acquired is based on the fair value of the common stock issued in exchange for the software. The total fair value, based on the market price on the date of grant, was $6,000. The Company evaluated this acquisition and determined that it did not meet the definition of a significant business acquisition.
In November 2013, the Company issued 180,000 shares of common stock as replacement shares for the 160,000 shares of common stock issued to Antree Systems Limited and 20,000 shares of common stock to Kimberly Ilicerl. The Company intends to cancel the original shares issued because the shares were lost during delivery to the shareholders.
Stock Issued for Services
During the nine months ended June 30, 2014, the Company issued 65,207,506 shares of common stock as compensation. The fair values of the shares were a total of $1,446,069 and were recorded at the market price on the date of grant. The issuances of stock were as follows:
Date | Number of Shares | Fair Value | Description of Services | |||||||||
March 5, 2014 | 31,750,000 | $ | 666,750 | Compensation to officers | ||||||||
April 3, 2014 | 5,000 | 116 | Compensation for legal services | |||||||||
April 21, 2014 | 1,392,506 | 34,228 | Compensation for CipherLoc consultants | |||||||||
April 22, 2014 | 7,000,000 | 138,600 | Marketing agreement with Hemp, Inc. | |||||||||
May 3, 2014 | 5,000 | 115 | Compensation for legal services | |||||||||
May 5, 2014 | 50,000 | 1,150 | Compensation for marketing services | |||||||||
May 6, 2014 | 25,000,000 | 605,000 | Compensation to a sales consultant | |||||||||
June 3, 2014 | 5,000 | 110 | Compensation for legal services | |||||||||
Total | 65,207,506 | $ | 1,446,069 |
In June 2014, the Company entered into a consulting agreement with Gawk, Inc. This agreement requires the issuance of 3,000,000 common shares and Gawk has agreed to assist the Company in seeking addition purchasers of CipherLoc Encryption Technology within the entertainment industry. The Company has valued the shares on the date of grant and recorded a stock payable in the amount of $177,300.
Nine months ended June 30, 2013
Stock Issued for Cash
During the nine months ended June 30, 2013, the Company issued 197,500 shares of common stock for $141,000 in net cash proceeds as follows:
Date | Number of Shares | Proceeds | ||||||||
October 14, 2012 | 20,000 | $ | 20,000 | |||||||
October 14, 2012 | 15,000 | 3,000 | ||||||||
October 14, 2012 | 18,750 | 2,500 | ||||||||
October 14, 2012 | 18,750 | 2,500 | ||||||||
December 6, 2012 | 15,000 | 3,000 | ||||||||
March 12, 2013 | 20,000 | 20,000 | ||||||||
March 12, 2013 | 20,000 | 20,000 | ||||||||
March 31, 2013 | 50,000 | 50,000 | ||||||||
March 27, 2013 | 20,000 | 20,000 | ||||||||
Total | 197,500 | $ | 141,000 |
Stock Issued in Connection with Software Licensing and Subscription Agreements
During the nine months ended June 30, 2013, the Company issued 400,000 shares of common stock valued at $12,313 based on the market price on the date of grant, to customers, in regards to the purchase of software from the Company in accordance with the Software Licensing and Subscription Agreements. The fair values of the shares issued were recorded as a reduction of software revenue recognized during the nine months ended June 30, 2013.
Date | Number of Shares | Fair Value | ||||||||
October 14, 2012 | 50,000 | $ | 1,300 | |||||||
December 6, 2012 | 100,000 | 2,800 | ||||||||
March 12, 2013 | 50,000 | 1,750 | ||||||||
March 21, 2013 | 50,000 | 1,750 | ||||||||
March 21, 2013 | 50,000 | 1,750 | ||||||||
April 17, 2013 | 25,000 | 838 | ||||||||
April 17, 2013 | 50,000 | 1,675 | ||||||||
June 26, 2013 | 25,000 | 450 | ||||||||
Total | 400,000 | $ | 12,313 |
Stock Issued for Services
During the nine months ended June 30, 2013, the Company issued 945,500 shares of common stock as compensation. The fair values of the shares were a total of $31,829 and were recorded at the market price on the date of grant. The issuances of stock were as follows:
Date | Number of Shares | Fair Value | Description of Services | |||||||||||
October 14, 2012 | 10,000 | $ | 260 | Commission | ||||||||||
December 6, 2012 | 100,000 | 2,800 | Compensation | |||||||||||
March 12, 2013 | 50,000 | 1,750 | Consulting | |||||||||||
March 21, 2013 | 167,000 | 5,845 | Compensation | |||||||||||
March 21, 2013 | 500,000 | 17,500 | Compensation | |||||||||||
April 17, 2013 | 78,500 | 2,630 | Compensation | |||||||||||
May 1, 2013 | 20,000 | 522 | Programming | |||||||||||
May 10, 2013 | 20,000 | 522 | Programming | |||||||||||
Total | 945,500 | $ | 31,829 |
Stock Issued for Assets Acquisition
During the nine months ended June 30, 2013, the Company issued 400,000 shares of common stock for the acquisition of CipherSmith software. Those shares were valued at $13,000 based on the market price on the dates of grant.
Preferred Stock
The Company has authorized 4,000,000 shares of preferred stock, at $0.01 par value and 4,000,000 are issued and outstanding as of September 30, 2013. Each share of the Preferred Stock has 150 votes on all matters presented to be voted by the holders of our common stock. All 4,000,000 shares of preferred stock have been granted to our CEO & CFO on November 30, 2010 and issued on April 11, 2012 which was valued at the trading price of the common stock of $0.0095 and recorded as an expense of $38,000.
On December 17, 2013, the Company amended its Articles of Incorporation that gave the right to the holders of Preferred A shares to convert 1 share of Convertible Preferred A shares to 150 Common Shares of the Company. The holders of the Preferred A shares can convert the shares upon proper notice and approval of the Board of Directors. Presently, the holders of the Preferred A shares have not sent notice to the Board of Directors.
NOTE 13 – SEGMENT INFORMATION
Cloud Medical Doctors Software Corporation has two reporting segments and corporate overhead:
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performances based on profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses. The reportable segments are strategic business units that offer different technology and marketing strategies. Most of the businesses were developed internally and management remains the same. To date, the Company’s operations are principally in the United States.
Consolidated revenues from external customers, operating loss, and identifiable assets were as follows:
Three months ended June 30, | ||||||||
2014 | 2013 | |||||||
(Restated) | ||||||||
Revenues: | ||||||||
Cloud-MD | $ | 1,725 | $ | 137,941 | ||||
CipherLoc | — | — | ||||||
Total revenues | $ | 1,725 | $ | 137,941 | ||||
Operating expenses: | ||||||||
Cloud-MD | $ | (61,155 | ) | $ | (125,199 | ) | ||
CipherLoc | (30,684 | ) | — | |||||
Corporate | (1,021,150 | ) | (202,005 | ) | ||||
Operating loss | $ | (1,138,736 | ) | $ | (189,263 | ) |
Nine months ended June 30, | ||||||||
2014 | 2013 | |||||||
(Restated) | ||||||||
Revenues: | ||||||||
Cloud-MD | $ | 224,400 | $ | 461,512 | ||||
CipherLoc | — | — | ||||||
Total revenues | $ | 224 ,400 | $ | 461,512 | ||||
Operating loss: | ||||||||
Cloud-MD | $ | (203,465 | ) | $ | (341,359 | ) | ||
CipherLoc | (30,684 | ) | — | |||||
Corporate | (2,431,904 | ) | (537,830 | ) | ||||
Operating loss | $ | (2,441,653 | ) | $ | (417,677 | ) |
Nine months ended June 30, 2014 |
September 30, 2013 | |||||||
Identifiable assets: | ||||||||
Cloud-MD | $ | 631,557 | $ | 826,259 | ||||
CipherLoc | 15,800 | — | ||||||
Corporate | 828,501 | 8,587 | ||||||
Total identifiable assets | $ | 1,475,858 | $ | 834,846 |
NOTE 14 – SUBSEQUENT EVENTS
On July 11, 2014 the Company issued 35,000 common shares for compensation. The stock was issued as compensation for work performed on our CipherLoc Encryption Technology. The shares were valued at $2,450 based on the market price on the date of grant.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this Quarterly Report on Form 10-Q/A, “Company,” “our company,” “us,” and “our” refer to Cipherloc Corporation and its subsidiaries, unless the context requires otherwise.otherwise
Forward-Looking Statements
Management’s Discussion and AnalysisThe following information contains various “forward looking statements” withincertain forward-looking statements. Forward-looking statements are statements that estimate the meaninghappening of Section 21E of the Securities Exchange Act of 1934, as amended, regarding future events and are not based 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 future financial performancenegative of the Company that involve risks and uncertainties. Certain statements included in this Form 10-Q/A, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to “anticipates”, “believes”, “plans”, “expects”, “future” and similar statements or expressions, identify forward looking statements. Anythose terms. The forward-looking statements herein are subject to certain risks and uncertaintiesspecified in the Company’s business, including but not limitedfollowing information have been compiled by our management on the basis of assumptions made by management and considered by management to reliance on key customersbe reasonable. Our future operating results, however, are impossible to predict and competition in its markets, market demand, delayed payments of accounts receivables, technological developments, maintenance of relationships with key suppliers, difficulties of hiringno representation, guaranty, or retaining key personnel and any changes in current accounting rules, all of which maywarranty is to be beyond the control of the Company. Management will elect additional changes to revenue recognition to comply with the most conservative SEC recognition on a forward going accrual basis as the model is replicated with other similar markets (i.e. SBDC). The Company’s actual results could differ materiallyinferred from those anticipatedforward-looking statements.
Our Business
Cipherloc Corporation is a Technology and Services based Solutions Company for the rapidly expanding Cloud based Cyber Security industry. Cipherloc is based in these forward-looking statements as a resultHenderson, Nevada.
The company has introduced an innovative and revolutionary new type of certain factors, including those set forth therein.encryption technology with five international patents and two US patents pending and is the industry’s first “Polymorphic Cipher Engine”, called CipherLoc®. Itis the first secure commercially viable advanced “Polymorphic Key Progression Algorithmic Cipher Engine” (PKPA). This morphing cipher can be used in any commercial data security industry and/or in sensitive applications.
Financial results and trends
Results of Operations for the Three Months Ended June 30,December 31, 2015 and 2014 and 2013
Revenue decreasedincreased to $1,725$3,814 from $137,941$0 for the three months ended June 30,December 31, 2015 and 2014, and 2013, respectively. Our revenues decreasedincreased as a result of lower sales activitya software sale that was recognized using ratable accounting during the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The lower sales activity is due to the Company’s focus on CipherLoc Encryption Technology.December 31, 2015.
Cost of revenue was $61,155$0 for the three months ended June 30,December 31, 2015 and 2014, and 2013, respectively. Our cost of revenue was related to the amortization of the software costs placed into service.
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Selling, general and administrative expenses increased to $1,079,306$298,767 from $202,005$176,325 for the three months ended June 30,December 31, 2015 and 2014, and 2013, respectively.The increase in our selling, general and administrative expenses areis related to the contract services of $920,900, and investor relations of $75,000 in the three months ended June 30, 2014 compared to contract services of $0, and investor relations of $0 in the three months ended June 30, 2013.
compensation.Research and development costs decreasedincreased to $0$154,650 from $58,044$17,431 for the three months ended June 30,December 31, 2015 and 2014, and 2013, respectively. Our research and development costs decreaseincrease is related to decreased salary costs for programmers to update software required to be in compliance with the updates and modifications to the Affordable Care Act.new product development of our Cipherloc technology.
Interest expense increaseddecreased to $1,656$106 from $15$1,024 for the three months ended June 30,December 31, 2015 and 2014, and 2013, respectively. Our interest expense increased as a result of the increase in outstanding borrowings on our lines of credits.
We recorded loss from discontinued operations of $5,376 as related to income of $1,138 for the three months ended June 30, 2014 and 2013, respectively. The Company is currently engaged in the medical billing operations. Until October 1, 2009, the Company’s sole sources of revenues were from GPS operational device business. The Company discontinued its GPS operational device business in February 2010 (See “Note 7 -Discontinued Operations” to the accompanying Consolidated Financial Statements).
Results of Operations for the Nine Months Ended June 30, 2014 and 2013
Revenue decreased to $224,400 from $461,512 for the nine months ended June 30, 2014 and 2013, respectively. Our revenues decreased as a result of lower sales activity during the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013. The lower sales activity is due to the Company’s focus on CipherLoc Encryption Technology.
Costpaying off and closing our line of revenue increased to $183,465 from $182,315 for the nine months ended June 30, 2014 and 2013, respectively. Our cost of revenue increased during the nine months ended due to the additional amortization of the software costs placed into service.
Selling, general and administrative expenses increased to $2,447,524 from $537,830 for the nine months ended June 30, 2014 and 2013, respectively. The increase in our selling, general and administrative expenses are related to the salaries and bonuses of management of $1,133,583, contract services of $920,900, accounting fees of $126,852, investor relations of $75,000, and legal costs of $44,635 in the nine months ended June 30, 2014 compared to $290,150 of salaries and bonuses of management, contract services of $0, accounting fees of $59,000, investor relations of $0 and legal costs of $2,800 in the nine months ended June 30, 2013.credit.
Liquidity and Capital Resources
We expect to incur substantial expenses and generate significant operating losses as we continue to grow our operations, as well as incur expenses related to operating as a public company and compliance with regulatory requirements. At December 31, 2015, the Company had cash of $1,131,206.
We have an accumulated deficit at June 30, 2014December 31, 2015 of $28,983,918 $43,588,534and need additional cash flows to maintain our operations. We depend on the continued contributions of our executive officers 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. We expect our cash needs for the next 12 months to be $850,000 to fund our operations. The ability of the Company to continue its operations is dependent on the successful execution of management’s plans, which include expectations of raising debt or equity based capital until such time that funds from operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with related parties to sustain the Company’s existence. 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.
Cash Flow
Off-Balance Sheet Arrangements
The following table summarizes, forWe have no off-balance sheet arrangements including arrangements that would affect the periods indicated, selected items in our Consolidated Statements of Cash Flows:
Nine Months Ended | ||||||||
June 30, 2014 | June 30, 2013 | |||||||
(Restated) | ||||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | 752,098 | $ | (40,043 | ) | |||
Investing activities | — | (10,147 | ) | |||||
Financing activities | 67,816 | 98,646 |
Operating Activitiesliquidity, capital resources, market risk support and credit risk support or other benefits.
Cash flowsWHERE YOU CAN FIND MORE INFORMATION
You are advised to read this Quarterly Report on Form 10-Q in conjunction with other reports and documents that we file from operating activities. Our cash provided by (used in) operating activities were $752,099time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q, Annual Report on Form 10-K, and ($40,043) forCurrent 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 nine months ended June 30, 2014SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549, and 2013, respectively. The increase in cash provided by operations was primarily attributableyou may obtain information about obtaining access to the increase of deferred revenue generatedReference Room by our CipherLoc segment.
Investing Activities
Cash flows from investing activities.Our cash used in investing operating activities were $0 and $10,147calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for the nine months ended June 30, 2014 and 2013, respectively. The decrease in cash used in investing activities was primarily attributable to the purchase of intangible assets for $11,000 and the sale of assets of $1,353 in June 30, 2013 with no such activities in the nine months ended June 30, 2014.electronic filers at its website http://www.sec.gov.
Financing ActivitiesITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cash flows from financingWe do not hold any derivative instruments and do not engage in any hedging activities.Cash provided by financing activities was $67,816 and $98,646 for the nine months ended June 30, 2014 and 2013, respectively. We received cash from the sale of our common stock of $15,000 and $141,000 for the nine months ended June 30, 2014 and 2013, respectively. During the nine months ended June 30, 2014, we received $103,529 from our lines of credit, repaid our lines of credit of $50,713. We also received $8,299 in advances from our officer, and repaid $8,299 to our officer. During the nine months ended June 30, 2013, we received $5,664 from our Chase line of credit, repaid the Chase line of credit of $22,427, and repaid our advances from our officer of $25,591.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
(a) | Evaluation of Disclosure Controls and Procedures |
The SEC defines the term “disclosureWe maintain disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under theour Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’sSecurities and Exchange Commission’s rules and forms. “Disclosure controlsforms and procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management.Chief Executive Officer and Principal 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 management (withdisclosure controls and procedures were designed to provide reasonable assurance that the participation ofcontrols and procedures would meet their objectives. As required by SEC Rule 13a-15(b), our Chief Executive Officer and ChiefPrincipal Financial Officer) has conductedOfficer need to carry out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)as of the Securities Exchange Act).end of the period covered by this report. Based on such evaluation,the foregoing, our Chief Executive Officer and our ChiefPrincipal Financial Officer have concluded that our disclosure controls and procedures were not effective ateffective.
Our Chief Executive Officer and Principal Financial Officer are responsible for establishing and maintaining adequate internal control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our system of internal control over financial reporting is designed to provide reasonable assurance levelregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has used the framework set forth in the report entitled Internal Control-Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based on this assessment, our Chief Executive Officer and Principal Financial Officer have concluded that our internal control over financial reporting were not effective as of the date of this filing.December 31, 2015. There have been changes in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. Specifically, management has continued to apply precise revenue recognition standards to properly record revenue.
a. |
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various collections matters; the defendants have asserted certain counterclaims. While the outcome and impact of currently pending legal proceedings cannot be predicted with certainty, based on the current status of the matters, we believe that the resolution of these proceedings through settlement or judgment will not have a material adverse effect on our consolidated operating results, financial position or cash flow
ITEM 1A - RISK FACTORS
There were no material changes from the risk factors previously disclosed in Part II, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2015 during our three months ended December 31, 2015.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS SECURITIES
During the three months ended December 31, 2015, through the utilization of a Private Placement Memorandum and upon receipt of executed Subscription Agreements, the Company issued 132,500 shares of common stock for $265,000 in net cash proceedspursuant to the exemption from the registration provisions of the Securities Act of 1933, as amended (the "Act"), afforded by Rule 506 of Regulation D.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the three months ended December 31, 2015.
ITEM 4.MINING SAFETY DISCLOSURES
N/A
ITEM 5. OTHER INFORMATION
There is no information with respect to which information is not otherwise called for by this form.
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ITEM 6. EXHIBITS
Exhibits
31.1 | Certification of Chief Executive 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 |
31.2 | Certification of Chief 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 |
____________
SIGNATURES
Pursuant to the requirements of 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, thereunto duly authorized.
Registrant Date: June 7, 2016 | Cipherloc Corporation
By:/s/ Michael De La Garza |
Michael De La Garza | ||
Chief Executive Officer (Principal Executive Officer) |
Registrant
Date: | Cipherloc Corporation
By: /s/Eric Marquez | |
Eric Marquez | ||
Chief Financial Officer (Principal Financial Officer) |
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