NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2017 AND 2016
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, 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.
NOTE
2 – RISKS AND UNCERTAINTIES
Going
Concern
The
accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America (“GAAP”), 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, 2017 of $50,201,730 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.
Convertible
Notes
In
September 2017, the Company issued a convertible note with a principal amount of $330,000 which includes an original issue discount
of $30,000. The note accrues interest at 5% per annum and matures six months following the issuance date. The note provides the
holder with the right, at any time on or after the note’s maturity date, to convert all or a portion of the outstanding
principal balance and accrued interest to shares of the Company’s common stock at a fixed conversion price. The note includes
adjustments to the conversion price based on the market price of the Company’s common stock after 180 days if the note
is not repaid on the maturity date. Refer to Note 5 for further details. After the maturity date, the note does not
contain a minimum conversion price or floor price per share, nor does it contain an explicit limit on the number of shares that
may be issued upon conversion. If the Company is not able to repay the convertible note in cash at maturity, the conversion
of the note by the holders could have a material adverse effect on the Company’s common stock.
In
December 2017, the Company issued an additional convertible note in the amount of $300,000 payable in three years. Refer to Note
10 for further details.
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES
The
Company prepares its 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 financial statements in conformity with 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 relate to the valuation
of its convertible note and the valuation of its common stock.
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.
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. At September
30, 2017 and 2016, cash and cash equivalents include 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. The Company has not experienced any losses in such
accounts.
Website
and Software Costs
The
Company’s accounting for software development costs complies with Accounting Standards Codification (“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. The estimated life of equipment is three (3) years. The estimated life of our leasehold
improvements is the lesser of the term of the related lease and useful life.
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.
Fair
Value of Financial Instruments
The
Company's financial instruments consisted primarily of cash, accounts payable and accrued expenses, 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. The embedded
conversion feature in the convertible note payable will have to be re-evaluated when the convertible note payable first becomes
convertible, which is after six months. At which time, it is probable that the embedded convertible feature will become a derivative
which requires bifurcation and is separately recorded as a derivative liability at its estimated fair value.
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:
|
●
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Level
1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active
markets; liabilities in active markets;
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●
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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; or directly or indirectly including inputs in markets that are not
considered to be active;
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●
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Level
3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
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 years ended September 30, 2017 and 2016, one customer accounted for 100% of revenues. The loss of this customer will have
a significant impact on operations.
Revenue
Recognition
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; 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.
The
Company has deferred revenue of $316,248 and $783,522 as of September 30, 2017 and 2016, 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 charged all such costs to research and development expense in the period incurred. Our research
and development costs incurred for the years ended September 30, 2017 and 2016 were $1,087,372 and $755,159, respectively.
Share-Based
Compensation
The
Company measures the cost of services provided by employees 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. The Black-Scholes option-pricing
model is used to estimate the fair value of options or warrants granted. Performance-based grants should be recognized prior to
completion if the assessment is that it is probable that the performance condition will be met.
For
non-employees, the Company uses the fair value at each reporting date over the service period, which is usually the vesting period.
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-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.
The Company did not record any liabilities for uncertain tax positions for the years ended September 30, 2017 or 2016.
Basic
and Diluted Net 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. As of September
30, 2017 and 2016, the Company had 10,000,000 shares of preferred stock outstanding which are convertible into 15,000,000 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.
Recent
Accounting Announcements
The
Financial Accounting Standards Board (“FASB”) issues Accounting Standards Updates (“ASU”) to amend the
authoritative literature in the ASC. There have been a number of ASUs to date that amend the original text of ASC. The Company
believes those updates 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
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260) – Accounting for Certain Financial Instruments
with Down Round Features
, to change the classification analysis of certain equity-linked financial instruments with down round
features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a
down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s
own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding
equity-linked financial instrument no longer would be accounted for as a derivative liability at fair value as a result of the
existence of a down round feature. For freestanding equity-classified instruments, the amendments require the effect of the down
round feature to be recognized in earnings per share when it is triggered. That effect is treated as a dividend and as a reduction
of income available to common shareholders in basic EPS. ASU 2017-11 is effective in annual periods beginning after December 15,
2019 and in interim periods within annual periods beginning after December 15, 2020. The Company early adopted ASU 2017-11 during
the year ended September 30, 2017.
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 must recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.
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, the FASB issued 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 effective for the Company beginning January 1, 2018. The Company is currently
evaluating the effect that the updated standard will have on its financial statements 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
annual 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.
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
Gawk
On
June 14, 2014, the Company entered into a license agreement with Gawk to use the Cipherloc engine for $1,125,000 for a period
of four (4) years. This customer licensed the CipherShop-Cipherloc encryption software technology and support services. The Company
was not required to make significant modifications at the time the contract was executed. The Company has never sold or licensed
the CipherShop-Cipherloc encryption software, nor any support services for such. Under the license agreement, the Company is to
provide access to its software on an operational basis and provide training. The Company will also provide unspecified upgrades,
if and when available, and 24/7 support over the license term. No Vendor-Specific Objective Evidence was known for any of the
elements. After the agreement was executed, the licensee requested modifications to the software because they could not use the
software with the requested modifications. The Company made the newly requested modifications to the software. Management delivered
the finished product in late December 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 being recorded from the date of delivery over the remaining
term of the agreement or approximately 30 months. For these reasons, revenue is recognized ratably from December 2015 until June
2018. During the years ended September 30, 2017 and 2016, the Company recognized revenues of $467,274 and $341,478, and had deferred
revenue balances of $316,248 and $783,522, respectively.
NOTE
5 – CONVERTIBLE NOTE PAYABLE
On
September 26, 2017, the Company issued a convertible note to FirstFire Global Opportunities Fund, LLC with a principal amount
of $330,000 which includes an original issue discount of $30,000. The Company incurred $8,500 in direct costs. The note
accrues interest at 5% per annum and matures on March 26, 2018, six months following the issuance date. The note provides the
holder with the right, at any time on or after the note’s maturity date, to convert all or a portion of the outstanding
principal balance and accrued interest to shares of the Company’s common stock at a conversion price of $2.00 per share,
subject to certain adjustments to the conversion price under certain circumstances. In the event of default, the conversion price
shall equal the lower of $2.00 per share or 70% multiplied by the lowest bid price of the Company’s common stock during
the 25 trading days preceding the conversion date. An event of default, among other events, is the non-payment of the note at
maturity.
If
shares of the Company’s common stock trade below $2.00 per share on the day following the conversion date, the conversion
price shall be retroactively adjusted to equal 75% multiplied by the lowest traded price on the day following the conversion date.
If the Company consummates a registered or unregistered primary offering of its securities for capital raising purposes, the holder
of the note shall have the right to demand repayment in full or convert the outstanding principal balance and accrued interest
into shares of the Company’s common stock at the lower of $2.00 per share or a 20% discount to the offering price to investors
in the primary offering.
Together
with the convertible note, 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, to FirstFire Global Opportunities Fund, LLC. The relative fair value of the
common stock and warrants were $44,609 and $84,227, respectively. Refer to Note 8 below for further discussion of the common
stock and warrants that were issued with the convertible note. Based on this allocation, the Company concluded that the convertible
note contained a beneficial conversion feature, which was valued at $135,986 and recorded as an additional discount and within
additional paid-in capital on the balance sheet, resulting in an aggregate discount of $303,322. The Company is amortizing the
discount over the term of the note to interest expense using the effective interest method, commencing October 1, 2017.
See
Note 10 for a subsequent amendment to the convertible note, which reduced the conversion price of the convertible note, reduced
the exercise price of the warrants, and also specified additional shares to be issued.
NOTE
6 – RELATED PARTY TRANSACTIONS
Notes
Payable to Chief Executive Officer
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
repaid all four notes in full at the end of September. As of September 30, 2017, there were no outstanding notes payable to the
Company’s CEO.
See
Note 8 for additional related party transactions.
NOTE
7
– COMMITMENTS AND CONTINGENCIES
Litigation
As
of September 30, 2017, the Company is not involved in any material litigation.
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.
Employment
Contracts
The
Company entered into an employment agreement with its 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:
|
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, 2017,
the base salary was $360,000.
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ii.
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A
cash bonus of 25% of his annual base salary each year if the Company reaches the following milestones:
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a.
|
The
Company posts annual gross revenues on a consolidated basis of at least $5,000,000;
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b.
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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;
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iii.
|
An
automobile allowance of $1,500 per month.
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iv.
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A
medical insurance allowance of $1,500 per month.
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v.
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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 original employment agreement.
During
the years ended September 30, 2017 and 2016, cash compensation amounted to $390,278 and $397,854 including benefits, respectively.
Of the total compensation at September 30, 2017, $96,885 was unpaid. The Chief Executive Officer was prepaid $52,244 in compensation
in 2016 which was offset by a $60,000 bonus in 2017. The Chief Executive Officer is still due the remainder of this bonus, which
is included in accrued compensation, as of September 30, 2017. During the years ended September 30, 2017 and 2016, stock-based
compensation amounted to $1,633,000 and $0, respectively.
As
of September 30, 2017, we also have employment agreements with Michael Salas and Michael Hufnagel (the “Agreements”).
The Agreements are 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 and were extended. 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, 2017, 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 $46,250 to accrue the common shares earned.
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 with Former Chief Financial Officer
The
Company previously had an employment agreement with its Chief Financial Officer, which terminated in 2015. There were amounts
that were accrued and unpaid as of September 30, 2017 and 2016, totaling $338,437 and $291,715, respectively. According to the
original agreement, the unpaid salaries were to accrue interest at each reporting date. Interest expense was $46,722 and $47,119
for the years ended September 30, 2017 and 2016, respectively. Management believes that such amounts were previously satisfied
through the issuance of common stock and does not intend to pay such amounts.
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 8% in cash. During the year ended September 30, 2017, the Company
paid cash commissions of $73,680. 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.
Leases
The
Company leases 3,906 square feet of office space Buda, Texas. The lease for the Buda facility began on April 1, 2016 and continues
until March 31, 2019. The current monthly rent payment of $7,379 continues until March 31, 2018. On April 1, 2018, the monthly
rent payment increases to $7,542 and continues until March 31, 2019. The lease shall be automatically renewed for two one-year
periods - $7,705 per month through March 31, 2020 and $7,867 per month until March 31, 2021 unless either party to the lease agreement
notifies the other in writing at least 180 days prior to the expiration of the current term.
Future
annual minimum lease obligations at September 30, 2017 are as follows:
Year
Ending September 30,
|
|
Amount
|
|
2018
|
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$
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89,520
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2019
|
|
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45,252
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|
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$
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134,772
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NOTE
8
- STOCKHOLDERS’
DEFICIT
Common
Stock
As
of September 30, 2017 and 2016, the Company had 6,635,127 and 5,268,859 shares of common stock outstanding, respectively, and
was authorized to issue 650,000,000 shares of common stock at a par value of $0.01.
Common
Stock Issued for Cash
During
the year ended September 30, 2017, through the utilization of a Private Placement Memorandum and upon receipt of executed Subscription
Agreements, the Company issued 724,000 shares of common stock for $1,383,320 in net cash proceeds pursuant to the exemption from
the registration provisions of the Securities Act of 1933, as amended, afforded by Rule 506 of Regulation D.
During
the year ended September 30, 2017, the
Company also issued
50,000 shares of common stock with a relative fair value of $44,609 to FirstFire Global Opportunities Fund, LLC based on the relative
fair value of the convertible debt and warrants issued. See Note 5 for additional information.
During
the year ended September 30, 2016, through the utilization of a Private Placement Memorandum and upon receipt of executed Subscription
Agreements, the Company issued 513,500 shares of common stock for $946,320 in net cash proceeds.
Common
Stock Issued to Officers and Employees
During
the year ended September 30, 2017, the Company issued 300,000 shares of common stock with a fair value of $1,633,000 to the CEO
and 242,268 shares of common stock with a fair value of $1,150,922 to its other officers and employees as part of their compensation.
The shares were valued on the date of issuance based upon the closing market price of the Company’s common stock as the
performance was complete.
During
the year ended September 30, 2016, the Company issued 10,677 shares of common stock with a fair value of $32,138 and accrued earned
shares of common stock amounting to $41,456 as compensation to certain officers pursuant to their employment agreements. The shares
were valued on the date of issuance based upon the closing market price of the Company’s common stock as the performance
was complete.
Common
Stock Issued for Services
During
the year ended September 30, 2017, the Company issued 25,000 shares of common stock with a fair value of $74,500 to StockVest
for investor relations services. The shares were valued on the date of issuance based upon the closing market price of the Company’s
common stock as the performance was complete.
During
the year ended September 30, 2016, the Company issued 800 shares for marketing services valued at $1,600 and 5,000 shares 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 market price of the Company's common stock on the commitment date.
Common
Stock Issued for License Termination
During
the year ended September 30, 2017, the Company issued 25,000 shares of common stock with a fair value of $106,250 for a software
termination settlement. The shares were valued on the date of agreement based upon the closing market price of the Company’s
common stock.
During
the year ended September 30, 2016, the Company issued 307,141 shares of common stock with a fair value of $763,469 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 shares were valued on the date of agreement based upon the closing market price of the Company’s
common stock.
Preferred
Stock
As
of both September 30, 2017 and 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 Stock has 150 votes on all
matters presented to be voted by the holders of common stock. The holders of the Preferred A shares can only convert the shares
if agreed upon by 50.1% vote of all preferred shareholders.
Warrants
During
the year ended September 30, 2017, the Company issued warrants to FirstFire Opportunities Fund LLC to purchase 165,000 shares
of common stock valued at $84,227 based on the relative fair value of the convertible debt and common stock. See Note 5 for additional
information. The warrants have an exercise price of $4.50 and a term of two years, subject to adjustment in the event of a
lower price per share offered, similar to a ratchet provision.
Additionally,
during the year ended September 30, 2017, the Company issued 560,000 warrants to the Private Placement Investors. The Private
Placement Investors were granted units, which consisted of one share of common stock and a warrant to purchase two additional
shares of common stock, for $2 each. The warrants were issued with an exercise price of $4.50 and a term of two years. The fair
value of these warrants was $313,192; however, no entry was required to be recorded in equity related to these warrants.
Warrant
activity for the years ended September 30, 2017 and 2016 is as follows:
|
|
Number
of Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average Remaining Life
|
|
Outstanding
at September 30, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at September 30, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
725,000
|
|
|
|
4.50
|
|
|
|
1.78
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at September 30, 2017
|
|
|
725,000
|
|
|
$
|
4.50
|
|
|
|
1.78
|
|
Vested
at September 30, 2017
|
|
|
725,000
|
|
|
$
|
4.50
|
|
|
|
1.78
|
|
Exerciseable
at September 30, 2017
|
|
|
725,000
|
|
|
$
|
4.50
|
|
|
|
1.78
|
|
The
Company valued the warrants using the Black-Scholes pricing model on the date of grant using the following inputs:
Expected
life (years)
|
|
|
2.00
|
|
Risk-free
interest rate
|
|
|
1.45
|
%
|
Expected
volatility
|
|
|
150
|
%
|
Annual
dividend yield
|
|
|
0
|
%
|
NOTE
9
- INCOME TAXES
The
provision (benefit) for income taxes from continued operations for the years ended September 30, 2017 and 2016 consist of the
following:
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(781,817
|
)
|
|
$
|
(603,753
|
)
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(781,817
|
)
|
|
|
(603,753
|
)
|
Valuation
allowance
|
|
|
781,817
|
|
|
|
603,753
|
|
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,
|
|
|
|
2017
|
|
|
2016
|
|
Statutory
federal income tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State
income taxes and other
|
|
|
0.0
|
|
|
|
0.0
|
|
Non-deductible
stock-based compensation
|
|
|
-16.0
|
|
|
|
-11.0
|
|
Valuation
allowance
|
|
|
(18.0
|
)
|
|
|
(23.0
|
)
|
Effective
tax rate
|
|
|
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,
|
|
|
|
2017
|
|
|
2016
|
|
Net
operating loss carry forward
|
|
$
|
4,725,000
|
|
|
$
|
3,943,000
|
|
Valuation
allowance
|
|
|
(4,725,000
|
)
|
|
|
(3,943,000
|
)
|
Deferred
income tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company has a net operating loss carry forward of $13.9 million available to offset future taxable income. 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. The Company has provided 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.
For
the years ended September 30, 2017 and 2016, 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, 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 filed its federal income tax returns since 2012, which is through the fiscal year ending September 30, 2013. The
Company is preparing the 2013 through 2015 filings, which report activity for the fiscal years ending September 30, 2014 through
2016. The September 30, 2017 tax return is not due at this time. The Company intends to remediate the lack of filing timely tax
returns immediately. There are currently no ongoing tax examinations.
In
December 2017, the Tax Cuts and Jobs Act, which provides tax relief for certain corporations, effective January 1, 2018, was passed.
Management is currently evaluating the impact of the effects of the regulations.
NOTE
10
- SUBSEQUENT
EVENTS
The
Company has continued to raise equity financing through a Private Placement. After September 30, 2017, the Company has sold 42,000
shares of common stock for approximately $77,000, net of offering costs.
On
October 18, 2017, the Company received a letter of resignation from Michael Salas, Vice President of Marketing and Sales, with
an effective date of October 27, 2017.
On
October 27, 2017, Mike Hufnagel was appointed Chief Operating Officer by the Board of Directors with an effective date of November
1, 2017.
On
December 14, 2017, the Company entered into the following agreements with Peak One Opportunity Fund L.P. (“Peak One”).
The agreements became effective on December 22, 2017.
|
1.
|
A
convertible note in the amount of $300,000 payable in three years in common stock and
convertible into common shares at $1.00 per share at Peak One’s option.
If
an Event of Default has occurred or the date of conversion is on or after the date that
is one hundred eighty (180) days after the Issuance Date, the lesser of (a) $1.00 or
(b) Seventy percent (70%) of the lowest traded price (as reported by Bloomberg LP) of
the Common Stock for the twenty (20) Trading Days immediately preceding the date of the
date of conversion of the Debentures (provided, further, that if either the Company is
not DWAC Operational at the time of conversion or the Common Stock is traded on the OTC
Pink (“OTCP”) at the time of conversion, then Seventy percent (70%) shall
automatically adjust to Sixty Five percent (65%) of the lowest traded price (as reported
by Bloomberg LP) of the Common Stock for the twenty (20) Trading Days immediately preceding
the date of conversion of the Debentures), subject in each case to equitable adjustments
resulting from any stock splits, stock dividends, recapitalizations or similar events.
The net cash received from the note was $242,600, and will be accounted for as an original
issue discount, together with the relative fair value of the warrant and debt.
|
|
2.
|
A
warrant agreement wherein Peak One may purchase up to 75,000 shares of common stock of the Company for $2.00 per share with
an expiration date of five years from the date of the warrant agreement.
|
|
3.
|
A
stock purchase agreement setting forth the details of the above stated agreements, including an additional convertible debenture
in the amount of $300,000.
|
|
4.
|
An
e
quity purchase agreement
for up to $7,000,000
of the Company’s common
stock and related registration rights agreement, which will require a registration
statement to be filed, both
d
a
t
e
d
December 14, 2017,
b
y
a
nd
a
mo
n
g
the
C
omp
a
n
y
a
nd
Peak
One, as well an agreement to issue 275,000 shares of the Company’s common stock
as commitment shares to Peak One or it’s designee in connection therewith
.
|
On
December 20, 2017, the Company entered into a Memorandum of Understanding with FirstFire Global Opportunities Fund, LLC (“FirstFire”),
acknowledging that the following adjustments have been triggered due to the Company’s intent to consummate a corporate finance
transaction with Peak One Opportunity Fund L.P.
|
1.
|
FirstFire
waives its rights under Section 3.20 of the Senior Convertible Promissory Note (with respect to the enforcement of an event
of default) and Sections 4(d) and Section 4(q) of the Securities Purchase Agreement, with respect to the intended transaction
with Peak One only.
|
|
2.
|
The
fixed conversion price of the convertible note shall be reduced from $2.00 to $1.00 pursuant to Section 4.14 of the Senior
Convertible Promissory Note.
|
|
3.
|
The
terms of the warrant shall automatically be adjusted as a result of the intended transaction with Peak One, pursuant to the
terms of the warrant.
|
|
4.
|
The
total commitment shares shall be increased to 137,500 shares of the Company’s common stock pursuant to Section 4.14
of the Senior Convertible Promissory Note, such that the Company shall issue an additional 87,500 shares of the Company’s
common stock to FirstFire within three days after December 20, 2017.
|
|
5.
|
Section
1.9 of the Senior Convertible Promissory Note shall be adjusted, such that if the Company exercises its right to prepay the
convertible note at any time from the 151st through the 180th day following September 26, 2017, then the Company shall pay
to FirstFire 130% multiplied by the outstanding principal amount plus accrued and unpaid interest.
|
|
6.
|
The
warrant exercise price is adjusted to $2.00 per the terms of the original agreement.
|