As
filed with the Securities and Exchange Commission on November 9,
2021
Registration
No. 333-255629
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
POST-EFFECTIVE AMENDMENT NO.1
TO
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CIPHERLOC CORPORATION
(Exact
name of registrant as specified in its charter)
Texas |
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7374 |
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86-0837077 |
(State
or other jurisdiction of
incorporation
or organization)
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|
(Primary
Standard Industrial
Classification
Code Number)
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|
(I.R.S.
Employer
Identification
Number)
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6836
Bee Cave Road, Bldg. 1, S#279
Austin,
TX 78746
(512)
337-3728
(Address,
including zip code, and telephone number;
including
area code, of registrant’s principal offices)
David
Chasteen
Chief
Executive Officer
Cipherloc
Corporation
6836
Bee Cave Road, Bldg. 1, S#279
Austin,
TX 78746
(512)
337-3728
(Name,
address, including zip code, and telephone number;
including
area code, of agent for service of process)
Copies To:
John
Hempill, Esq.
Jeffrey
Fessler, Esq.
Sheppard Mullin Richter & Hampton LLP
30 Rockefeller Plaza
New York, NY 10112
Telephone:
(212) 653-8700
Facsimile:
(212) 653-8701
Approximate
date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes
effective.
If
any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933 check the following box: [X]
If
this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act and
registration number of the earlier effective registration statement
for the same offering. [ ]
If
this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list
the Securities Act registration number of the earlier effective
registration statement for the same offering.
[ ]
If
this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list
the Securities Act registration number of the earlier effective
registration statement for the same offering.
[ ]
If this Form is a registration statement pursuant to General
Instruction I.D. or a post-effective amendment thereto that shall
become effective upon filing with the Commission pursuant to Rule
462(e) under the Securities Act, check the following box.
[ ]
If this Form is a post-effective amendment to a registration
statement filed pursuant to General Instruction I.D. filed to
register additional securities or additional classes of securities
pursuant to Rule 413(b) under the Securities Act, check the
following box. [ ]
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
file [ ] |
Non-accelerated
filed [X] |
Smaller
reporting company [X] |
|
Emerging
growth company [ ] |
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided to
Section 7(a)(2)(B) of the Securities Act. [ ]
The
registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states
that this Registration Statement shall thereafter become effective
in accordance with Section 8(a) of the Securities Act or until the
Registration Statement shall become effective on such date as the
Securities and Exchange Commission acting pursuant to said Section
8(a), may determine.
EXPLANATORY NOTE
Cipherloc Corporation (the “Company” or the “Registrant”), a
Delaware corporation, files this Post-Effective Amendment to the
Registration Statement on Form S-3 (this “Amendment”) as the
successor registrant to Cipherloc Corporation (“Predecessor
Registrant”), a corporation organized under the laws of Texas, in
accordance with Rule 414 under the Securities Act of 1933, as
amended (the “Securities Act”). The Predecessor Registrant, and its
wholly owned subsidiary, the Company, entered into an Agreement and
Plan of Merger, dated as of September 13, 2021 (the
“Reincorporation Merger Agreement”), with the Company continuing as
the surviving corporation (the “Reincorporation Merger”). Pursuant
to the Reincorporation Merger Agreement, at the Effective Time (as
hereinafter defined) the Company succeeded to the assets, continued
the business and assumed the rights and obligations of the
Registrant existing immediately prior to the Effective Time. The
Reincorporation Merger became effective on September 30, 2021 (the
“Effective Time”).
At the Effective Time, pursuant to the Reincorporation Merger
Agreement, each outstanding share of common stock of the
Predecessor Registrant (“Predecessor Common Stock”), automatically
converted into one share of common stock of the Company (“Company
Common Stock”).
Pursuant to the Reincorporation Merger Agreement, at the Effective
Time, the directors and officers of the Predecessor Registrant
immediately prior to the Reincorporation Merger become the
directors and officers of the Company and continue their respective
directorship or services with the Company on the same terms as
their respective directorship or service with the Predecessor
Registrant immediately prior to the Effective Time. In addition,
the standing committees of the board of directors of the
Predecessor Registrant (the Compensation Committee, Audit
Committee, Nominating Committee and Strategic Planning Committee)
and the members thereof remain unchanged following the Effective
Time.
As a result of the Reincorporation Merger, the internal affairs of
the Company ceased to be subject to the Texas Business
Organizations Code (“TBOC”) or governed by the Predecessor
Registrant’s Amended and Restated Articles of Incorporation (the
“Texas Certificate”) and its bylaws (the “Texas Bylaws”). As of the
Effective Time, the Company is subject to the Delaware General
Corporation Law (“DGCL”) and is governed by the Company’s
Certificate of Incorporation (the “Delaware Certificate”) and
Bylaws (the “Delaware Bylaws”).
While the Company sought to maintain the material rights of
stockholders by adopting the Delaware Certificate and the Delaware
Bylaws with provisions similar to the provisions of the Texas
Certificate and Texas Bylaws, there are also key differences that
may impact the rights of stockholders. A description of these
differences, as well as certain differences between the TBOC and
the DGCL, are included in the definitive proxy statement filed by
the Predecessor Registrant with the Securities and Exchange
Commission on July 15, 2021 (as supplemented, from time to time,
the “2021 Proxy”), under “Proposal 4”, which is incorporated herein
by reference.
The information in this prospectus is not complete and may be
changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not
permitted.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED NOVEMBER 5,
2021

CIPHERLOC
CORPORATION
119,431,669
Shares of Common Stock
This
prospectus relates to the resale by the selling shareholders named
herein of up to 119,431,669 shares of common stock, par value $0.01
per share, which we refer to as common stock, of Cipherloc
Corporation, which we refer to as us, we, the Company, the
Registrant or Cipherloc, representing (a) 55,549,615 outstanding
shares of common stock, held by certain of the selling shareholders
named herein (the “Offering Shares”); (b) up to 55,549,615
shares of common stock issuable upon exercise of Common Stock
Purchase Warrants to purchase 55,549,615 shares of common stock
(the “Offering Warrants”), with an exercise price of $0.36
per share, which are held by certain selling shareholders named
herein (the “Offering Warrant Shares”); and (c) up to
8,332,439 shares of common stock that are issuable upon exercise of
Purchase Warrants, with an exercise price of $0.18 per share (the
“Placement Warrants” and together with the Offering
Warrants, the “Warrants”), granted to Paulson Investment
Company, LLC (the “Placement Agent”) and its assigns, and
held by certain of the selling shareholders named herein (the
“Placement Warrant Shares” and together with the Offering
Warrant Shares, the “Warrant Shares”). The selling
shareholders are described in greater detail, below, under “Selling
Shareholders”.
The
shares of common stock being offered by the selling shareholders
(which term includes their respective donees, pledgees,
transferees, or other successors-in-interest) have been issued
pursuant to a private offering transaction which had multiple
closings occurring on March 31, 2021, April 7, 2021, April 9, 2021
and April 16, 2021 (the “Private Offering”), which are
described in greater detail under the heading “Private Placement Offering”, beginning on
page 36. The selling shareholders are described in greater detail
under the heading “Selling Shareholders”, beginning on page
45.
The
shares of common stock described in this prospectus may be offered
for sale from time to time by the selling shareholders named
herein. The selling shareholders may offer and sell the shares in a
variety of transactions as described under the heading “Plan of Distribution” beginning on page
38, including transactions on any stock exchange, market or
facility on which our common stock may be traded, in privately
negotiated transactions or otherwise at market prices prevailing at
the time of sale, at prices related to such market prices or at
negotiated prices. We have no basis for estimating either the
number of shares of our common stock that will ultimately be sold
by the selling shareholders or the prices at which such shares will
be sold.
We
are not selling any securities covered by this prospectus and will
not receive any of the proceeds from the sale of such shares by the
selling shareholders. However, to the extent that the Warrants are
exercised for cash, we will receive the payment of the exercise
price in connection with such exercise (see also “Use of Proceeds” on page 38 below). We are
bearing all of the expenses in connection with the registration of
the shares of common stock, but all selling and other expenses
incurred by the selling shareholders, including commissions and
discounts, if any, attributable to the sale or disposition of the
shares will be borne by them.
The
selling shareholders and intermediaries through whom such
securities are sold may be deemed “underwriters” within the
meaning of the Securities Act of 1933, as amended (the
“Securities Act”), with respect to the securities offered
hereby, and any profits realized or commissions received may be
deemed underwriting compensation.
A
current prospectus must be in effect at the time of the sale of the
shares of common stock discussed above and each selling shareholder
or dealer selling the common stock is required to deliver a current
prospectus upon the sale.
In
addition, any securities covered by this prospectus which qualify
for sale pursuant to Rule 144 of the Securities Act may be sold
under Rule 144 rather than pursuant to this prospectus.
Our
common stock is considered a “penny stock”, and subject to
the requirements of Rule 15g-9, promulgated under the Exchange Act
of 1934, as amended. “Penny stock” is generally defined as
any equity security not traded on an exchange or quoted on NASDAQ
that has a market price of less than $5.00 per share. Under such
rule, broker-dealers who recommend low-priced securities to persons
other than established customers and accredited investors must
satisfy special sales practice requirements, including a
requirement that they make an individualized written suitability
determination for the purchaser and receive the purchaser’s consent
prior to the transaction. The Securities Enforcement Remedies and
Penny Stock Reform Act of 1990, also requires additional disclosure
in connection with any trades involving a stock defined as a penny
stock.
The
required penny stock disclosures include the required delivery,
prior to any transaction, of a disclosure schedule explaining the
penny stock market and the risks associated with it. Such
requirements could severely limit the market liquidity of the
securities and the ability of purchasers to sell their securities
in the secondary market. In addition, various state securities laws
impose restrictions on transferring “penny stocks” and as a
result, investors in the common stock may have their ability to
sell their shares of the common stock impaired.
Our
common stock is quoted on the OTCQB Market under the symbol
“CLOK”. The closing price for our common stock on the OTCQB
Market on November 4, 2021, was $0.12 per share.
Investing
in our securities involves risks. You should carefully consider the
“risk factors” beginning on page 8
of this prospectus and set forth in the documents incorporated by
reference herein before making any decision to invest in our
securities.
Neither
the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal
offense.
The
date of this prospectus is November 5, 2021.
TABLE OF CONTENTS
About This Prospectus
This
prospectus is part of a registration statement that we filed with
the Securities and Exchange Commission (the “SEC” or the
“Commission”). This prospectus relates to the resale by the
selling shareholders listed in this prospectus of up to 119,431,669
shares of our common stock. We will not receive any proceeds from
the resale of any of the shares by the selling shareholders.
However, to the extent that the Warrants are exercised for cash, we
will receive the payment of the exercise price in connection with
such exercise (see also “Use of
Proceeds” on page 38 below). We have agreed to pay for the
expenses related to the registration of the shares being offered by
the selling shareholders.
You
should read this prospectus, together with additional information
described under “Where You Can Find
More Information”, beginning on page 40, before making an
investment decision.
This
prospectus does not contain all the information provided in the
registration statement we filed with the SEC. For further
information about us or our securities offered hereby, you should
refer to that registration statement, which you can obtain from the
SEC as described below under “Where You
Can Find More Information”, beginning on page 40.
You
should rely only on the information contained in this prospectus.
We have not authorized any other person to provide you with
different information. If anyone provides you with different or
inconsistent information, you should not rely on it. This
prospectus is not an offer to sell or the solicitation of an offer
to buy any securities other than the securities to which it relates
and is not an offer to sell or the solicitation of an offer to buy
securities in any jurisdiction to any person to whom it is unlawful
to make an offer or solicitation in that jurisdiction. You should
assume that the information appearing in this prospectus, as well
as information we have previously filed with the SEC, is accurate
as of the date of those documents only. Our business, financial
condition, results of operations and prospects may have changed
since those dates.
We
will disclose any material changes in our affairs in a
post-effective amendment to the registration statement of which
this prospectus is a part, or a prospectus supplement. We do not
imply or represent by delivering this prospectus that the Company,
or its business, financial condition or results of operations, are
unchanged after the date on the front of this prospectus is correct
at any time after such date, provided that we will amend or
supplement this prospectus to disclose any material events which
occur after the date of such prospectus to the extent required by
applicable law.
Persons
outside the United States who come into possession of this
prospectus must inform themselves about, and observe any
restrictions relating to, the offering of the securities and the
distribution of this prospectus outside of the United
States.
Our
logo and some of our trademarks and tradenames are used in this
prospectus. This prospectus also includes trademarks, tradenames
and service marks that are the property of others. Solely for
convenience, trademarks, tradenames and service marks referred to
in this prospectus may appear without the ®, ™ and SM symbols.
References to our trademarks, tradenames and service marks are not
intended to indicate in any way that we will not assert to the
fullest extent under applicable law our rights or the rights of the
applicable licensors if any, nor that respective owners to other
intellectual property rights will not assert, to the fullest extent
under applicable law, their rights thereto. We do not intend the
use or display of other companies’ trademarks and trade names to
imply a relationship with, or endorsement or sponsorship of us by,
any other companies.
The
market data and certain other statistical information used
throughout this prospectus are based on independent industry
publications, reports by market research firms or other independent
sources that we believe to be reliable sources. Industry
publications and third-party research, surveys and studies
generally indicate that their information has been obtained from
sources believed to be reliable, although they do not guarantee the
accuracy or completeness of such information. We are responsible
for all of the disclosure contained in this prospectus, and we
believe these industry publications and third-party research,
surveys and studies are reliable. While we are not aware of any
misstatements regarding any third-party information presented in
this prospectus, their estimates, in particular, as they relate to
projections, involve numerous assumptions, are subject to risks and
uncertainties, and are subject to change based on various factors,
including those discussed under the section entitled “Risk Factors” beginning on page 8 of this
prospectus. These and other factors could cause our future
performance to differ materially from our assumptions and
estimates. Some market and other data included herein, as well as
the data of competitors as they relate to the Company, is also
based on our good faith estimates.
Unless
the context otherwise requires, references in this prospectus to
“we,” “us,” “our,” the “Registrant”,
the “Company,” and “Cipherloc”, refer to Cipherloc
Corporation. In addition, unless the context otherwise
requires:
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“Exchange
Act” refers to the Securities Exchange Act of 1934, as
amended; |
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“FYE”
refers to fiscal year end; |
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“SEC”
or the “Commission” refers to the United States Securities
and Exchange Commission; and |
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“Securities
Act” refers to the Securities Act of 1933, as amended. All
dollar amounts in this prospectus are in U.S. dollars unless
otherwise stated. |
You
should read the entire prospectus before making an investment
decision to purchase our securities.
Cautionary Statement Regarding
Forward-Looking Statements
This
prospectus, any prospectus supplement and the information
incorporated by reference in this prospectus and any prospectus
supplement contains certain statements that constitute
“forward-looking statements” within the meaning of Section
27A of the Securities Act and Section 21E of the Securities
Exchange Act. The words “believe,” “may,”
“will,” “potentially,” “estimate,”
“continue,” “anticipate,” “intend,”
“could,” “would,” “project,” “plan,”
“expect” and the negative and plural forms of these words
and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such
statements. Those statements appear in this prospectus, any
prospectus supplement and the documents incorporated herein and
therein by reference, particularly in the sections titled “Prospectus Summary” and “Risk Factors,” and include statements
regarding the intent, belief or current expectations of the Company
and management that are subject to known and unknown risks,
uncertainties and assumptions.
This
prospectus, any prospectus supplement and the information
incorporated by reference in this prospectus and any prospectus
supplement also contain statements that are based on the current
expectations of our Company and management. You are cautioned that
any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual
results may differ materially from those projected in the
forward-looking statements as a result of various
factors.
Because
forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified, you
should not rely upon forward-looking statements as predictions of
future events. The events and circumstances reflected in the
forward-looking statements may not be achieved or occur and actual
results could differ materially from those projected in the
forward-looking statements. Except as required by applicable law,
including the securities laws of the United States and the rules
and regulations of the SEC, we do not plan to publicly update or
revise any forward-looking statements contained hereinafter we
distribute this prospectus, whether as a result of any new
information, future events or otherwise.
You
should also consider carefully the statements under “Risk Factors” and other sections of this
prospectus, which address additional facts that could cause our
actual results to differ from those set forth in the
forward-looking statements. We caution investors not to place
significant reliance on the forward-looking statements contained in
this prospectus.
Prospectus Summary
The
following summary highlights material information found in more
detail elsewhere in the prospectus. It does not contain all of the
information you should consider in making your investment decision.
As such, before you decide to buy our common stock, in addition to
the following summary, we urge you to carefully read the entire
prospectus, especially the risks of investing in our common stock
as discussed under “Risk
Factors.”
Our
Business
We
are developing products and services around our patented
polymorphic encryption technology designed to enable a more
efficient and stronger layer of protection to be added to existing
solutions. Through a licensing program, we anticipate offering the
first secure commercially viable advanced “Polymorphic
Encryption Core” (“PEC”) Data-in-motion product to be
used in any commercial data security industry and/or in sensitive
applications. PEC Data-in-motion allows our customers to securely
send data with little setup time.
As
described above, our products are designed to encrypt and decrypt
information. Encryption means encoding information which is
readable into another form which is not readable and which is
therefore unable to be intercepted, read or used, by someone other
than the original person who encrypted the information—unless such
encryption can be broken.
Products
and Services
During
2018 and 2019, we attempted to market several products, services
and solutions. The initial solution suite was marketed under
several product names. CipherLoc EDGE, a solution to be installed
on mobile/handset devices, was designed to enable data to be
securely sent between any two mobile devices. CipherLoc ENTERPRISE,
a solution to be installed on desktops, laptops and tablet
computers, was designed to enable data to be securely sent between
any two platforms. CipherLoc GATEWAY, a solution to be installed on
servers, was designed to enable end-to-end data protection to and
from servers, computers, tablets, and/or mobile devices via the
GATEWAY-protected servers. CipherLoc SHIELD was designed as a
solution to be used as a data storage platform.
During
2018 and 2019, there were forward-looking public announcements by
the Company’s then-management of product names or segments that
were not delivered to the market and are not presently available to
customers. Our current management restructured the Company to
invest material resources into only products and services that are
deliverable, have viable economic potential, and may be publicly
disclosed without adversely affecting our competitive position. The
core of our product and service offerings will continue to be built
around our patents and our polymorphic encryption technology, which
is a highly secure, quantum-ready data protection technology
carrying FIPS 140-2 (Federal Information Processing Standard
140-2)(an information technology security accreditation program for
validating that the cryptographic modules produced by private
sector companies meet well-defined security standards) validation
certificate #3381, for the “CipherLoc Polymorphic Encryption
EngineCore ” solution by the National Institute of Standards
and Technology (NIST).
Since
2020, we have focused our development efforts to develop commercial
application of our technology by advancing a Software Development
Kit (“SDK”) for the Polymorphic Encryption Core. By doing
so, we have allowed potential customers to integrate and configure
the PEC using the SDK. Cipherloc’s technology has advanced from
theory to commercial application in the form of these
products:
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Data-in-Motion:
Data-in-Motion products utilize the Polymorphic Encryption Core
(PEC) to encrypt and transmit data between two separate locations.
We currently have developed products called Sentinel, Armor, and
Shield which employ this technique. |
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Sentinel – The software package that would allow a customer
to build a post-quantum encryption solution into their product
environment. This product is a software solution. |
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Armor – Employs the sentinel solution in a hardware
appliance that can be deployed in front of any IT system and
encrypts the traffic between paired Armor devices with little
setup. |
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Data-at-rest |
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Shield
– Securely encrypts data, using the PEC, that is placed on a hard
drive or in a database for long term storage. |
Our
products help to solve two challenges which cybersecurity
professionals have:
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(1) |
Securing
old and non-traditional network hardware. |
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Preparing
all networks for the introduction of new ciphers including the next
NIST standard which should be released by the end of
2024. |
The
core technology in these products is protected by six patents that
expire between 2034 and 2037. The existing tech can be used today
to solve current customer problems and can be used in the future to
provide agile adoption of quantum ready encryption.
Market
According
to an August 2019 research report by BCC Research, the global
quantum cryptography market is projected to reach $1.3 billion by
2024, from $0.3 billion in 2019, with a compound annual growth rate
(CAGR) of 30.7% during that period.
The
public key encryption algorithms used to secure the most critical
aspects of the internet: banking, health care, critical
infrastructure, and communications, are vulnerable to trivial
defeat with the application of practical quantum computers (i.e.,
computers which use quantum computations to solve computational
problems substantially faster than classical computers) and quantum
supremacy. We estimate that this event will occur in the next
decade, though the accelerating rate of research suggests that this
may happen earlier rather than later. Thankfully, research has
already begun on replacement algorithms that are expected to be
resistant to quantum computers. NIST will select the official
post-quantum encryption in 2024, but businesses that transmit
information that must remain secret past the 2020s are encouraged
to begin migration immediately.
We
believe that we are the only company offering an FIPS (Federal
Information Processing Standards) -certified, commercially viable
quantum-resistant software suite as of the date of this prospectus.
FIPS are standards and guidelines for federal computer systems that
are developed by NIST in accordance with the Federal Information
Security Management Act (FISMA) and approved by the Secretary of
Commerce.
According
to a March 2021 report by Fortune Business Insights, the global
cyber security market size was $153 billion in 2020, and is
expected to grow to $336 billion in 2028. We believe we will
benefit from the growth of both cybersecurity and quantum
cryptography trends because our products meet existing needs to
improve the security of currently deployed data management assets,
while simultaneously providing customers with an agile approach for
implementing new quantum ready ciphers.
Novel
Coronavirus (COVID-19)
On
March 11, 2020, the World Health Organization declared the COVID-19
outbreak a pandemic. The COVID-19 pandemic is affecting the United
States and global economies and may affect our operations and those
of third parties on which we rely. While the potential economic
impact brought by, and the duration of the COVID-19 pandemic is
difficult to assess or predict, the impact of the COVID-19 pandemic
on the global financial markets may reduce our ability to access
capital, which could negatively impact our short-term and long-term
liquidity. The ultimate impact of the COVID-19 pandemic is highly
uncertain and subject to change. We do not yet know the full extent
of potential delays or impacts on our business, financing or the
global economy as a whole. However, these effects could have a
material impact on our liquidity, capital resources, operations and
business and those of the third parties on which we
rely.
During
2020 and into 2021, the COVID-19 pandemic has interrupted our sales
and marketing activities and restricted face-to-face interaction
between our team members and our partners. This slowed the pace of
our development and the expansion of our deal pipeline. Government
action for the current pandemic or the emergence of a new viral
outbreak may negatively impact the adjustments we, our customers
(if any), the customers of our licensees, and our partners have
made to resume business under new protocols.
Office
and Website
Our
principal executive offices are located at 6836 Bee Cave Road,
Bldg. 1, S#279, Austin, TX 78746. Our telephone number is (512)
337-3728. Our website is www.cipherloc.net. Information on
or accessed through our website is not incorporated into this
prospectus and is not a part of this prospectus.
Summary
Risk Factors
Our
business is subject to numerous risks and uncertainties, including
those in the section entitled “Risk
Factors” and elsewhere in this prospectus. These risks include,
but are not limited to, the following:
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Statutory
preemptive rights which our shareholders are provided under Texas
law, our failure to comply with such rights in the past, dilution
caused by the exercise of such rights, and potential penalties or
liability in connection therewith, as well as our plans to
terminate such rights in the future; |
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Penalties
and other amounts which may be payable for our failure to comply
with the covenants in, and time periods set forth in, the
March/April 2021 Private Offering documents, including our failure
to timely obtain effectiveness of the registration statement of
which this prospectus forms a part, our ability to maintain the
effectiveness of such registration statement, and our ability to
timely terminate the statutory preemptive rights which currently
apply under Texas law; |
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That
we have incurred net losses since inception, our need for
additional funding, the substantial doubt about our ability to
continue as a going concern, and the terms of any future funding we
raise; |
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That
COVID-19 has materially adversely affected our operations and may
continue to have a material adverse impact on our operating results
in the future; |
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Our
dependence on current management and our ability to attract and
retain qualified employees; |
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Competition
for our products; |
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Our
ability to develop new products, improve current products and
innovate; |
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Unpredictability
in our operating results; |
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Our
ability to retain existing licensees and add new
licensees; |
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Risks
associated with data breaches, security flaws, unauthorized access
to our and our customers’ (if any) and the customers of our
licensees’ systems and products, hacking risks, risks of
intentional disruption of our products or services, product
failures and the effect of such failures and other events on our
brand and operating results; |
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Outages
in third party infrastructure on which we rely; |
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Customer
defaults and delays in payment; |
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Delays
in product development, our failure to predict changes in
technology, and actual or perceived defects or vulnerabilities in
our products; |
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Our
ability to manage our growth; |
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Our
ability to protect our intellectual property (IP), enforce our IP
rights and defend against claims that we infringed on the IP of
others; |
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Risks
related to the volatile and sporadic trading of our common stock,
dilution caused by future offerings, anti-dilutive rights which
exist relating to our securities, over-hang, the effect of
substantial sales of our common stock, the anti-dilutive rights of
the Warrants and set forth in the Purchase Agreement, additional
restrictions put on the sale of our common stock as a result of it
being a ‘penny stock’; |
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Our
compliance with various rules and regulations, penalties we may
face for non-compliance, and the risk of new, more costly or more
restrictive rules and regulations; |
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Our
ability to maintain effective controls and procedures; |
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Restrictions
on our ability to issue new securities and amounts required to be
paid to our CEO upon certain sales of the Company; |
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The
Board of Directors’ ability to designate blank check preferred
stock without further shareholder approval; |
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Risks
associated with future acquisitions and/or with our failure to grow
by acquisition; and |
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Risks
associated with pending and/or future litigation, lawsuits, and/or
regulatory claims. |
Penny
Stock Rules
Our
common stock is considered a “penny stock”, and subject to
the requirements of Rule 15g-9, promulgated under the Exchange Act.
“Penny stock” is generally defined as any equity security
not traded on an exchange or quoted on NASDAQ that has a market
price of less than $5.00 per share. Under such rule, broker-dealers
who recommend low-priced securities to persons other than
established customers and accredited investors must satisfy special
sales practice requirements, including a requirement that they make
an individualized written suitability determination for the
purchaser and receive the purchaser’s consent prior to the
transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990, also requires additional disclosure in
connection with any trades involving a stock defined as a penny
stock.
The
required penny stock disclosures include the required delivery,
prior to any transaction, of a disclosure schedule explaining the
penny stock market and the risks associated with it. Such
requirements could severely limit the market liquidity of the
securities and the ability of purchasers to sell their securities
in the secondary market. In addition, various state securities laws
impose restrictions on transferring “penny stocks” and as a
result, investors in the common stock may have their ability to
sell their shares of the common stock impaired.
Additional
Information
Additional
information about us can be obtained from the documents described
under “Where You Can Find More
Information.”
This Offering
The
selling shareholders named in this prospectus may offer and sell up
to 199,431,669 shares of our common stock, par value $0.01 per
share. Our common stock is currently quoted on the OTC Markets
Group Inc.’s OTCQB Market (the “OTCQB”) under the trading
symbol, “CLOK.”
Shares
of Common Stock Offered by the Selling
Shareholders: |
|
119,431,669
shares of common stock, representing (a) 55,549,615 outstanding
shares of common stock, held by certain of the selling shareholders
named herein; (b) up to 55,549,615 shares of common stock issuable
upon exercise of the Offering Warrants, with an exercise price of
$0.36 per share, which are held by certain selling shareholders
named herein; and (c) up to 8,332,439 shares of common stock that
are issuable upon exercise of the Placement Warrants, with an
exercise price of $0.18 per share, which Warrants are described in
greater detail under “Private
Placement Offering”, beginning on page 36. |
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Shares
of Common Stock Offered by the Selling
Shareholders: |
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82,927,311
shares of common stock. |
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Shares
of Common Stock Outstanding Prior to this Offering: |
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146,809,365
shares of common stock. |
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Use
of Proceeds: |
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We
will not receive any of the proceeds from the sale or other
disposition by the selling shareholders or their transferees of the
shares of common stock covered hereby. However, to the extent that
the Warrants are exercised for cash, we will receive the payment of
the exercise price in connection with such exercise (see also
“Use of Proceeds” on page 38
below). |
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Risk
Factors: |
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The
purchase of our common stock involves a high degree of risk. The
common stock offered in this prospectus is for investment purposes
only and currently only a limited market exists for our common
stock. Please refer to the section entitled “Risk Factors” before making an investment
in our common stock. |
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Trading
symbol: |
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Our
common stock is quoted on the OTCQB under the trading symbol
“CLOK”. |
In
this prospectus, unless otherwise indicated, the number of shares
of our common stock and other capital stock, and the other
information based thereon, is as of April 26, 2021 and
excludes:
|
● |
shares
issuable upon the exercise of the Warrants; and |
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shares
issuable upon the exercise of outstanding warrants to purchase
23,746,866 shares of common stock of the Company with a weighted
average exercise price of $1.12 per share, separate from the
Warrants. |
Additionally,
unless otherwise stated, all information in this
prospectus:
|
● |
reflects
all currency in United States dollars. |
1 Assumes the exercise of all Warrants for
cash.
Risk Factors
You should be aware that there are substantial risks for an
investment in our common stock. You should carefully consider these
risk factors, along with the other information included in this
prospectus, before you decide to invest in our common
stock.
If any of the following risks were to occur, such as our business,
financial condition, results of operations or other prospects, any
of these could materially affect our likelihood of success. If that
happens, the market price of our common stock and warrants, if any,
could decline, and prospective investors would lose all or part of
their investment in our common stock.
Risks
Related to Preemptive Rights
Our shareholders have statutory preemptive rights and our failure
to provide shareholders notice of their right to exercise such
rights or the exercise by such shareholders of such rights, could
create dilution to existing shareholders, uncertainty regarding our
capitalization structure, and result in the value of our common
stock declining in value or being less than similarly situated
companies whose governing documents do not provide for preemptive
rights.
Pursuant
to Section 21.208 of the Texas Business Organizations Code
(TBOC), shareholders of Texas corporations formed prior to
September 1, 2003, like the Company, have a preemptive right to
acquire unissued or treasury shares, to the extent a Texas
corporation’s Articles of Incorporation do not limit or deny such
right. The Company’s Articles of Incorporation do not limit or deny
the statutory right of preemption and as such our shareholders have
preemptive rights. Specifically, the shareholders of the Company
have a preemptive right to acquire proportional amounts of the
Company’s unissued or treasury shares on the decision of the
Company’s Board of Directors to issue the shares, provided that no
preemptive right exists with respect to: (1) shares issued or
granted as compensation to a director, officer, agent, or employee
of the Company or a subsidiary or affiliate of the Company; (2)
shares issued or granted to satisfy conversion or option rights
created to provide compensation to a director, officer, agent, or
employee of the corporation or a subsidiary or affiliate of the
Company; or (3) shares sold, issued, or granted by the Company for
consideration other than money. As the sale of the Offering Shares
and Offering Warrants in the offering did not meet one of the
exceptions above, such securities are subject to statutory
preemptive rights. An action brought against the Company, the Board
of Directors or an officer, shareholder, or agent of the Company,
or an owner of a beneficial interest in shares of the Company, for
the violation of a preemptive right of a shareholder under the TBOC
must be brought not later than the earlier of: (1) the first
anniversary of the date written notice is given to each shareholder
whose preemptive right was violated; or (2) the fourth anniversary
of the latest of: (A) the date the Company issued the shares,
securities, or rights; (B) the date the Company sold the shares,
securities, or rights; or (C) the date the Company otherwise
distributed the shares, securities, or rights. The exercise of
shareholders preemptive rights could cause dilution to existing
shareholders. Actions brought by shareholders to enforce their
preemptive rights may be costly or time consuming, and may take
management’s focus away from the Company’s operations. The Company
has to date, not provided any shareholders any notice of any
preemptive rights and as such, any and all issuances of the
Company’s securities (other than those exempt from the preemptive
rights described above) during the past four years are subject to
preemptive rights of shareholders, in the event any shareholders
bring an action against the Company to enforce such rights.
Shareholders may therefore be subject to dilution in the event any
shareholders file an action to enforce their preemptive rights in
connection with prior issuances, are successful in such action, and
acquire additional securities of the Company. Finally, the Company,
its officers and directors, and in some cases its shareholders, may
face liability, penalties and costs in connection with the
continued failure of the Company to provide notice of shareholders’
rights to preemptive rights.
The
Company is required, pursuant to the terms of the Securities
Purchase Agreement (“Purchase Agreement”) entered into with
the Purchasers, to take prompt action to seek shareholder approval
to amend its Articles of Incorporation to terminate shareholders
preemptive rights and investors in the offering waived their
statutory preemptive rights, in consideration for anti-dilutive
rights which require the Company to issue them additional shares of
common stock to maintain their percentage ownership in the Company
prior to any preemptive right issuance, for no consideration, if
any statutory preemptive rights are exercised by any shareholder of
the Company, which will expire at such time, if ever, as the
Company has adopted an amendment to its Articles of Incorporation
to terminate such statutory preemptive rights. As such,
shareholders should not assume that such preemptive rights will
continue to exist in the future, or that such shareholders will be
able to acquire any securities in the future, pursuant to such
preemptive rights which are currently provided for under the
TBOC.
In
addition to the Private Offering, the Company completed the sale of
18.9 million common shares during its fiscal year ended September
30, 2018 at $1.00 per unit. To date, no preemptive rights claims
have been made by shareholders as a result of these sales. Prior to
that sale, the Company had 7.2 million common shares outstanding
and eligible for preemptive rights per the criteria outlined
above.
In
addition to possible dilution caused by shareholders of the Company
taking action to enforce their preemptive rights or anti-dilution
rights of the investors in the Private Offering (the
“Purchasers”) in connection with the exercise of preemptive
rights by any other shareholder, such rights could create
uncertainty regarding our capitalization structure, and result in
the value of our common stock declining in value or being less than
similarly situated companies whose governing documents do not
provide for preemptive rights.
The
exercise of statutory preemptive rights by shareholders may require
us to sell shares or other securities below the then current
trading price of our common stock, or for nominal consideration,
and may cause significant dilution to current and future
shareholders.
Risks
Related to Our Financial Position and Need for
Capital
We have incurred net losses since our inception and may never be
profitable.
Our
likelihood of success must be considered in light of the problems,
expenses, difficulties, complications and delays frequently
encountered in connection with development of a business enterprise
in the technology sector. Our net losses for the year ended
September 30, 2020 and for the period from September 30, 2017
through September 30, 2020 were $6,970,072 and $22,642,039,
respectively, and our aggregate accumulated deficit as of September
30, 2020 and 2019 was $68,426,608 and $61,456,536, respectively.
For the quarters ending December 31, 2020 and September 30, 2020,
our net losses were $799,735 and $635,993, respectively.
There
can be no assurance that any products under development by us will
be successfully commercialized, and the extent of our future losses
and the timing of our profitability, if ever achieved, are highly
uncertain. If we are unable to achieve profitability, we may be
unable to continue our operations.
There is substantial doubt about our ability to continue as a going
concern.
The
financial statements for the year ended September 30, 2020,
included herein, are presented under the assumption that we will
continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business over a reasonable length of time. We are not generating
sufficient operating cash flows to support continuing operations
and expect to incur further losses in the development of our
business.
In
our financial statements for the year ended September 30, 2020,
included herein, our auditor indicated that certain factors raised
substantial doubt about our ability to continue as a going concern.
These factors included our accumulated deficit, as well as the fact
that we were not generating sufficient cash flows to meet our
regular working capital requirements. Our ability to continue as a
going concern is dependent upon our ability to generate future
profitable operations and/or to obtain the necessary financing to
meet our obligations and repay our liabilities arising from normal
business operations when they come due. Management’s plan to
address our ability to continue as a going concern includes: (1)
obtaining debt or equity funding from private placement or
institutional sources (similar to the Private Offering, provided
that we currently believe that funds from the Private Offering will
allow us to support our operations until approximately June 2023);
and (2) generating cash flow from operations. Although management
believes that it will be able to obtain the necessary funding to
allow us to remain a going concern through the methods discussed
above, there can be no assurances that such methods will prove
successful. The accompanying financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
Our ability to continue as a going concern depends upon our ability
to raise additional capital and such capital may not be available
on acceptable terms, or at all.
We
may need to raise additional funds in order to support expansion,
develop new or enhanced services and products, hire employees,
respond to competitive pressures, acquire technologies or respond
to unanticipated requirements, provided that we currently believe
that funds from the Private Offering will allow us to support our
operations until approximately June 2023. Management’s plans
include attempting to improve our profitability and our ability to
generate sufficient cash flow from operations to meet our operating
needs on a timely basis, obtaining additional working capital funds
through equity and debt financing arrangements, and restructuring
on-going operations to eliminate inefficiencies to increase our
cash balances. However, there can be no assurance that these plans
and arrangements will be sufficient to fund our ongoing capital
expenditures, working capital, and other requirements. Management
intends to make every effort to identify and develop sources of
funds. The outcome of these matters cannot be predicted at this
time. There can be no assurance that any additional financings will
be available to the Company on satisfactory terms and conditions,
if at all. If adequate funds are not available on acceptable terms,
we may be unable to develop or enhance our services and products,
take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could have a
material adverse effect on our business, financial condition and
operating results. Further, we may seek to raise additional funds
through the issuance of equity securities, in which case, the
percentage ownership of our shareholders will be reduced and
holders may experience additional dilution in net book value per
share.
The
amount of capital we may need depends on many factors, including
the progress, timing and scope of our product development programs;
the time and cost necessary to obtain any necessary regulatory
approvals; our ability to enter into and maintain collaborative,
licensing and other commercial relationships; and our partners’
commitment of time and resources to the development and
commercialization of our products.
The
capital markets have been unpredictable in the recent past for
unprofitable companies such as ours. The amount of capital that a
company such as ours is able to raise often depends on variables
that are beyond our control. As a result, we may not be able to
secure financing on terms attractive to us, or at all. If we are
able to consummate a financing arrangement, the amount raised may
not be sufficient to meet our future needs. If adequate funds are
not available on acceptable terms, or at all, our business,
including our results of operations, financial condition and our
continued viability will be materially adversely
affected.
Even if we can raise additional funding, we may be required to do
so on terms that are dilutive to you.
Issuing
new equity may dilute the ownership percentage of existing
shareholders. The extent of the dilution will depend on the number
of shares issued. The shares issued will be equal to the total
dollars contributed to the Company as common stock investment
divided by the offering price. Neither the amount of funds that
will be received in this equity issuance nor the price of each
common stock share are known at this time.
We
may need to raise additional funds in order to support expansion,
develop new or enhanced services and products, hire employees,
respond to competitive pressures, acquire technologies or respond
to unanticipated requirements. If the need arises and issuing new
equity is the vehicle used to secure additional funds, then these
issuances may further dilute the ownership percentages of existing
shareholders.
Risks
Related to Our Business and Results of Operations
A pandemic, epidemic or outbreak of an infectious disease, such as
COVID-19, has materially affected, and may in the future materially
and adversely affect, our business and
operations.
On
March 11, 2020, the World Health Organization declared the COVID-19
outbreak a pandemic. The COVID-19 pandemic is affecting the United
States and global economies and may affect our operations and those
of third parties on which we rely. While the potential economic
impact brought by, and the duration of the COVID-19 pandemic is
difficult to assess or predict, the impact of the COVID-19 pandemic
on the global financial markets may reduce our ability to access
capital, which could negatively impact our short-term and long-term
liquidity. The ultimate impact of the COVID-19 pandemic is highly
uncertain and subject to change. We do not yet know the full extent
of potential delays or impacts on our business, financing or the
global economy as a whole. However, these effects could have a
material impact on our liquidity, capital resources, operations and
business and those of the third parties on which we
rely.
During
2020 and into 2021, the COVID-19 pandemic has interrupted our sales
and marketing activities and restricted face-to-face interaction
between our team members and our partners. This slowed the pace of
our development and the expansion of our deal pipeline. Government
action for the current pandemic or the emergence of a new viral
outbreak may negatively impact the adjustments we, our customers
(if any), and the customers of our licensees, and our partners have
made to resume business under new protocols.
We depend significantly upon the continued involvement of our
present management and on our ability to attract and retain
talented employees.
The
Company’s success depends significantly upon the involvement of our
present management, who are in charge of our strategic planning and
operations. We may need to attract and retain additional talented
individuals in order to carry out our business objectives. The
competition for individuals with expertise in this industry is
intense and there are no assurances that these individuals will be
available to us.
Our
business is based on successfully attracting and retaining talented
employees. The market for highly skilled workers and leaders in our
industry is extremely competitive. If we are less successful in our
recruiting efforts, or if we are unable to retain key employees,
our ability to develop and deliver successful products and services
may be adversely affected. Effective succession planning is also
important to our long-term success. Failure to ensure effective
transfer of knowledge and smooth transitions involving key
employees could hinder our strategic planning and
execution.
Our products face significant competition in the markets for such
products, and if they are unable to compete successfully, our
business will suffer.
Our
product candidates face, and will continue to face, intense
competition from larger companies, as well as academic and research
institutions. We compete in an industry that is characterized by:
(i) rapid technological change, (ii) evolving industry standards,
(iii) emerging competition and (iv) new product introductions. Our
competitors have existing products and technologies that will
compete with our products and technologies and may develop and
commercialize additional products and technologies that will
compete with our products and technologies. Because several
competing companies and institutions have greater financial
resources than us, they may be able to: (i) provide broader
services and product lines, (ii) make greater investments in
research and development and (iii) carry on larger research and
development initiatives. Our competitors also generally have
greater development capabilities than we do and substantially
greater experience in undertaking testing of products, obtaining
regulatory approvals, and manufacturing and marketing their
products. They also have greater name recognition and better access
to customers/licensees than us. Our chief competitors include
companies such as HashiCorp, Inc. (“HashiCorp”), Palo Alto
Networks, Inc., Barracuda Networks, Inc., Cisco Systems, Inc., and
Cloudhesive LLC.
If we are unable to develop new and enhanced products, or if we are
unable to continually improve the performance, features, and
reliability of our existing products, our competitive position may
weaken, and our business and operating results could be adversely
affected.
Our
future success depends on our ability to effectively respond to
evolving threats to consumers, as well as competitive technological
developments and industry changes, by developing or introducing new
and enhanced products on a timely basis. We have in the past
incurred significant research and development expenses, and will
continue to incur, research and development expenses, but at a
lower rate, as we strive to remain competitive, and as we focus on
organic growth through internal innovation. If we are unable to
anticipate or react to competitive challenges or if existing or new
competitors gain market share in any of our markets, our
competitive position could weaken, and we could experience a
decline in our revenues, if any, that could adversely affect our
business and operating results. If we do not achieve the benefits
anticipated from these investments, or if the achievement of these
benefits is delayed, our operating results may be adversely
affected. Additionally, we must continually address the challenges
of dynamic and accelerating market trends and competitive
developments. Customers may require features and capabilities that
our current products do not have. Our failure to develop new
products and improve our existing products to satisfy customer
preferences and effectively compete with other market offerings in
a timely and cost-effective manner may harm our ability to retain
our customers (if any), and ability of our licensees to retain
their customers, and to create or increase demand for our products,
which may adversely impact our operating results. The development
and introduction of new products involve a significant commitment
of time and resources and are subject to a number of risks and
challenges including but not limited to:
●
Lengthy development
cycles;
●
Evolving industry and regulatory
standards and technological developments by our competitors and
customers (if any), and the customers of our
licensees;
●
Rapidly changing customer
preferences;
●
Evolving platforms, operating
systems, and hardware products, such as mobile devices, and related
product and service interoperability challenges;
●
Entering into new or unproven
markets; and
●
Executing new product and service
strategies.
If we
are not successful in managing these risks and challenges, or if
our new or improved products are not technologically competitive or
do not achieve market acceptance, our business and operating
results could be adversely affected.
Our operating results may vary significantly from period to period
and can be unpredictable, which could cause the market price of our
common stock to decline.
Our
operating results, in particular, our revenues, gross margins,
operating margins, and operating expenses, have historically varied
from period to period, and we expect variation to continue as a
result of a number of factors, many of which are outside of our
control and may be difficult to predict, including:
● our
ability to attract and retain customers (if any), and/or the
ability of our licensees to retain customers or sell
products;
●
the budgeting cycles, seasonal buying
patterns, and purchasing practices of customers;
●
price competition;
●
the timing and success of new product
and service introductions by us or our competitors or any other
change in the competitive landscape of our industry, including
consolidation among our competitors, licensees or customers and
strategic partnerships entered into by and between our
competitors;
●
changes in the mix of our products
and support;
●
changes in the growth rate of the
encryption technology market;
●
the timing and costs related to the
development or acquisition of technologies or businesses or
strategic partnerships;
●
lack of synergy or the inability to
realize expected synergies, resulting from acquisitions or
strategic partnerships;
●
our inability to execute, complete or
integrate efficiently any acquisitions that we may
undertake;
●
increased expenses, unforeseen
liabilities, or write-downs and any impact on our operating results
from any acquisitions we may consummate;
●
our ability to create a sizeable and
productive distribution channel;
●
decisions by potential customers (if
any), or the customers of our licensees, to purchase encryption
solutions from larger, more established security vendors or from
their primary network vendors;
●
timing of any revenue recognition and
any revenue deferrals;
●
insolvency or credit difficulties
confronting customers (if any), our licensees, or the customers of
our licensees, which could adversely affect their ability to
purchase or pay for our products and offerings;
●
the cost and potential outcomes of
litigation, which could have a material adverse effect on our
business;
●
seasonality or cyclical fluctuations
in our markets;
●
future accounting pronouncements or
changes in our accounting policies, including the potential impact
of the adoption and implementation of the Financial Accounting
Standards Board’s new standard regarding revenue recognition;
and
●
general macroeconomic conditions, in
some or all regions where we operate.
Any
one of the factors above, or the cumulative effect of some of the
factors referred to above, may result in significant fluctuations
in our financial and other operating results. This variability and
unpredictability could result in our failure to meet our revenue,
margin, or other operating result expectations or those of
securities analysts or investors for a particular period. If we
fail to meet or exceed such expectations for these or any other
reasons, the market price of our common stock could fall
substantially, and we could face costly lawsuits, including
securities class action suits.
We face intense competition in our market, especially from larger,
well-established companies, and we may lack sufficient financial or
other resources to maintain or improve our competitive
position.
The
market for encryption technologies is intensely competitive, and we
expect competition to increase in the future from established
competitors and new market entrants. Our main competitors fall into
three categories:
●
large companies that incorporate
security or encryption features in their products, such as Google’s
Cloud Platform, Amazon’s AWS services, and Microsoft’s Azure, or
those that have acquired, or may acquire, encryption products or
technologies and have the technical and financial resources to
bring competitive solutions to the market;
●
independent security vendors, such as Hashi Corp, that offer
encryption products; and
●
small and large companies that offer
encryption technologies that compete with some of the features
proposed for our product
Many
of our existing competitors have, and some of our potential
competitors could have, substantial competitive advantages such
as:
●
greater name recognition and longer
operating histories;
●
larger sales and marketing budgets
and resources;
●
broader distribution and established
relationships with distribution partners and customers (if any), or
the customers of our licensees;
●
greater customer support resources;
●
greater resources to make strategic
acquisitions or enter into strategic
partnerships;
●
substantially greater financial,
technical, and other resources.
In
addition, some of our larger competitors have substantially broader
and more diverse product and services offerings, which may make
them less susceptible to downturns in a particular market and allow
them to leverage their relationships based on other products or
incorporate functionality into existing products to gain business
in a manner that discourages users from purchasing our products and
subscriptions, including through selling at zero or negative
margins, offering concessions, product bundling, or closed
technology platforms. Many of our smaller competitors that
specialize in providing protection from a single type of security
threat are often able to deliver these specialized encryption or
security products to the market more quickly than we
can.
Organizations
that use legacy products and services may believe that these
products and services are sufficient to meet their security needs
or that our platform only serves the needs of a portion of the
encryption technology market. Accordingly, many organizations have
invested substantial personnel and financial resources to design
and operate their networks and have established deep relationships
with other providers of encryption products. As a result, these
organizations may prefer to purchase from their existing suppliers
rather than add or switch to a new supplier such as us regardless
of product performance, features, or greater services offerings or
may be more willing to incrementally add solutions to their
encryption infrastructure from existing suppliers than to replace
it wholesale with our solutions.
Conditions
in our market could change rapidly and significantly as a result of
technological advancements, partnering or acquisitions by our
competitors, or continuing market consolidation. New start-up
companies that innovate and large competitors that are making
significant investments in research and development may invent
similar or superior products and technologies that compete with our
products. Some of our competitors have made or could make
acquisitions of businesses that may allow them to offer more
directly competitive and comprehensive solutions than they had
previously offered and adapt more quickly to new technologies and
changing needs. Our current and potential competitors may also
establish cooperative relationships among themselves or with third
parties that may further enhance their resources. These competitive
pressures in our market or our failure to compete effectively may
result in price reductions, fewer orders, reduced revenue and gross
margins, and loss of market share. Any failure to meet and address
these factors could seriously harm our business and operating
results.
We currently have only two licensees and have no customers and will
need to obtain additional licensees and/or customers in the future
to generate revenues.
As of
the filing of this prospectus, we don’t have any significant
revenue generating licensees or customers. In order to generate
funds to support our operations we will need to obtain additional
licensees and/or customers for our products in the future. If we
are unable to obtain such licensees and/or customers, we will not
be able to generate revenues and the value of our securities may
decline in value or become worthless.
Our future revenue and operating results will depend significantly
on our ability to retain licensees and the ability of those
licensees to retain customers, and add new customers, and any
decline in our retention rates or failure to add new customers will
harm our future revenue and operating results.
We
anticipate that our future revenue and operating results will
depend significantly on our ability to retain licensees and the
ability of those licensees to retain customers and add new
customers. In addition, we may not be able to predict or anticipate
accurately future trends in customer/licensee retention or
effectively respond to such trends. Our retention rates may decline
or fluctuate due to a variety of factors, including the
following:
●
our licensees or their customers’
levels of satisfaction or dissatisfaction with our
products;
●
the quality, breadth, and prices of
our products;
●
our general reputation and events
impacting that reputation;
●
the services and related pricing
offered by our competitors;
●
disruption by new services or changes
in law are regulations that impact the need for efficacy of our
products and services;
● our
customer service and responsiveness to any customer
complaints;
●
customer dissatisfaction if they do
not receive the full benefit of our services due to their failure
to provide all relevant data;
●
customer dissatisfaction with the
methods or extent of our remediation services;
and
●
changes in target customers’ spending levels as a result of general
economic conditions or other factors.
If we
do not retain our existing licensees or they do not retain their
customers and add new customers, we may not generate revenue and/or
our revenue may grow more slowly than expected or decline, and our
operating results and gross margins will be harmed. In addition,
our business and operating results may be harmed if we are unable
to increase our retention rates.
We
also must continually add new licensees and/or customers both to
replace licensees who cancel or elect not to renew their agreements
with us and to grow our business beyond our current base. If we are
unable to attract new licensees in numbers greater than the
percentage who cancel or elect not to renew their agreements with
us, our licensee base will decrease, and our business, operating
results, and financial condition could be adversely
affected.
A network or data security incident may allow unauthorized access
to our or our end users’ network or data, harm our reputation,
create additional liability and adversely impact our financial
results.
Increasingly,
companies are subject to a wide variety of attacks on their
networks on an ongoing basis. In addition to traditional computer
“hackers,” malicious code (such as viruses and worms),
phishing attempts, employee theft or misuse, and denial of service
attacks, sophisticated nation-state and nation-state supported
actors engage in intrusions and attacks (including advanced
persistent threat intrusions) and add to the risks to our internal
networks, cloud deployed enterprise and customer-facing
environments and the information they store and process. Despite
significant efforts to create security barriers to such threats, it
is virtually impossible for us to entirely mitigate these risks. We
and our third-party service providers may face security threats and
attacks from a variety of sources. Our data, corporate systems,
third-party systems and security measures and/or those of our end
users may be breached due to the actions of outside parties,
employee error, malfeasance, a combination of these, or otherwise,
and, as a result, an unauthorized party may obtain access to our
data. Furthermore, as a provider of encryption technologies, we may
be a more attractive target for such attacks. A breach in our data
security or an attack against our service availability, or that of
our third-party service providers, could impact our networks or
networks secured by our products and subscriptions, creating system
disruptions or slowdowns and exploiting security vulnerabilities of
our products, and the information stored on our networks or those
of our third-party service providers could be accessed, publicly
disclosed, altered, lost, or stolen, which could subject us to
liability and cause us financial harm. Any actual or perceived
breach of network security in our systems or networks, or any other
actual or perceived data security incident we or our third-party
service providers suffer, could result in damage to our reputation,
negative publicity, loss of channel partners, licensees, customers
and sales, loss of competitive advantages over our competitors,
increased costs to remedy any problems and otherwise respond to any
incident, regulatory investigations and enforcement actions, costly
litigation, and other liability. In addition, we may incur
significant costs and operational consequences of investigating,
remediating, eliminating and putting in place additional tools and
devices designed to prevent actual or perceived security incidents,
as well as the costs to comply with any notification obligations
resulting from any security incidents. Any of these negative
outcomes could adversely impact the market perception of our
products and customer and investor confidence in our company and,
moreover, could seriously harm our business or operating
results.
It is
essential to our business strategy that our technology and network
infrastructure remain secure and are perceived by our potential
licensees, their customers, any customers we have, and partners to
be secure. Despite security measures, however, any network
infrastructure may be vulnerable to cyber-attacks by hackers and
other security threats. We may face cyber-attacks that attempt to
penetrate our network security, sabotage or otherwise disable our
research, products and services, misappropriate our or our
licensees, or their or our customers’ and partners’, proprietary
information, which may include personally identifiable information,
or cause interruptions of our internal systems and services. Any
cyber-attacks could negatively affect our reputation, damage our
network infrastructure and our ability to deploy our products and
services, harm our business relationships, and expose us to
financial liability.
Our products, systems, and website and the data on these sources
may be subject to intentional disruption that could materially harm
our reputation and future sales.
Despite
our precautions and significant ongoing investments to protect
against security risks, data protection breaches, cyber-attacks,
and other intentional disruptions of our products, we expect to be
an ongoing target of attacks specifically designed to impede the
performance and availability of our offerings and harm our
reputation as a company. Similarly, experienced computer
programmers or other sophisticated individuals or entities,
including malicious hackers, state-sponsored organizations, and
insider threats including actions by employees and third-party
service providers, may attempt to penetrate our network security or
the security of our systems and websites and misappropriate
proprietary information or cause interruptions of our services,
including the operation of the global civilian cyber intelligence
threat network. This risk may be increased during the current
COVID-19 pandemic as more individuals are working from home and
utilize home networks for the transmission of sensitive
information. Such attempts are increasing in number and in
technical sophistication, and if successful could expose us and the
affected parties, to risk of loss or misuse of proprietary or
confidential information or disruptions of our business operations.
While we engage in a number of measures aimed to protect against
security breaches and to minimize problems if a data breach were to
occur, our information technology systems and infrastructure may be
vulnerable to damage, compromise, disruption, and shutdown due to
attacks or breaches by hackers or due to other circumstances, such
as error or malfeasance by employees or third-party service
providers or technology malfunction. The occurrence of any of these
events, as well as a failure to promptly remedy these events should
they occur, could compromise our systems, and the information
stored in our systems could be accessed, publicly disclosed, lost,
stolen, or damaged. Any such circumstance could adversely affect
our ability to attract and maintain licensees, and/or for us or our
licensees to retain customers, as well as strategic partners, cause
us to suffer negative publicity, and subject us to legal claims and
liabilities or regulatory penalties. In addition, unauthorized
parties might alter information in our databases, which would
adversely affect both the reliability of that information and our
ability to market and perform our services. Techniques used to
obtain unauthorized access or to sabotage systems change
frequently, are constantly evolving and generally are difficult to
recognize and react to effectively. We may be unable to anticipate
these techniques or to implement adequate preventive or reactive
measures. Several recent, highly publicized data security breaches
at other companies have heightened consumer awareness of this issue
and may embolden individuals or groups to target our systems or
those of our licensees or strategic partners, or our or their
customers.
Our products are complex and operate in a wide variety of
environments, systems and configurations, which could result in
failures of our products to function as designed and negatively
impact our brand recognition and reputation.
Because
we offer very complex products, errors, defects, disruptions, or
other performance problems with our products may and have occurred.
For example, we may experience disruptions, outages, and other
performance problems due to a variety of factors, including
infrastructure changes, human or software errors, capacity
constraints due to an overwhelming number of users accessing our
websites simultaneously, fraud, or security attacks. In some
instances, we may not be able to identify the cause or causes of
these performance problems within an acceptable period of time.
Interruptions in our products could impact our revenues or cause
licensees/customers to cease doing business with us. Our operations
are dependent upon our ability to protect our technology
infrastructure against damage from business continuity events that
could have a significant disruptive effect on our operations. We
could potentially lose end user/customer data or experience
material adverse interruptions to our operations or delivery of
products to our clients in a disaster recovery scenario. Further,
our business would be harmed if any of the events of this nature
caused our licensees or customers, or our licensees’ customers, or
potential customers to believe our products are unreliable. Our
brand recognition and reputation are critical aspects of our
business to retaining existing licensees, customers and attracting
new licensees and customers. Furthermore, negative publicity,
whether or not justified, relating to events or activities
attributed to us, our employees, our strategic partners, our
affiliates, or others associated with any of these parties, may
tarnish our reputation and reduce the value of our brands. Damage
to our reputation and loss of brand equity may reduce demand for
our products and have an adverse effect on our business, operating
results, and financial condition. Moreover, any attempts to rebuild
our reputation and restore the value of our brands may be costly
and time consuming, and such efforts may not ultimately be
successful.
If our products do not work properly, our business, financial
condition and financial results could be negatively affected and we
could experience negative publicity, declining sales and legal
liability.
We
produce complex products that incorporate leading-edge technology
that must operate in a wide variety of technology environments.
Software may contain defects or “bugs” that can interfere
with expected operations. There can be no assurance that our
testing programs will be adequate to detect all defects prior to
the product being introduced, which might decrease customer
satisfaction with our products and services. The product
reengineering cost to remedy a product defect could be material to
our operating results. Our inability to cure a product defect could
result in the temporary or permanent withdrawal of a product or
service, negative publicity, damage to our reputation, failure to
achieve market acceptance, lost revenue and increased expense, any
of which could have a material adverse effect on our business,
financial condition and financial results.
Outages or problems with systems and infrastructure supplied by
third parties could negatively affect our business, financial
condition and financial results.
Our
business relies on third-party suppliers of the telecommunications
infrastructure. We and our licensees and their customers use
various communications service suppliers and the global internet to
provide network access between our data centers and end-users of
our services. If those suppliers do not enable us to provide our
licensees and their customers with reliable, real-time access to
our systems (to the extent required), we may be unable to gain or
retain licensees. These suppliers periodically experience outages
or other operational problems as a result of internal system
failures or external third-party actions. Supplier outages or other
problems could materially adversely affect our business, financial
condition and financial results.
Current global financial conditions have been characterized by
increased volatility which could negatively impact our business,
prospects, liquidity and financial condition.
Current
global financial conditions and recent market events have been
characterized by increased volatility and the resulting tightening
of the credit and capital markets has reduced the amount of
available liquidity and overall economic activity. We cannot
guaranty that debt or equity financing, the ability to borrow funds
or cash generated by operations will be available or sufficient to
meet or satisfy our initiatives, objectives or requirements. Our
inability to access sufficient amounts of capital on terms
acceptable to us for our operations will negatively impact our
business, prospects, liquidity and financial condition.
If we experience delays and/or defaults in payments, we could be
unable to recover all expenditures.
Because
of the nature of our contracts, at times we commit resources to
projects prior to receiving payments from the counterparty in
amounts sufficient to cover expenditures on projects as they are
incurred. Delays in payments may require us to make a working
capital investment. Defaults by any of our licensees or their
customers could have a significant adverse effect on our revenues,
profitability and cash flow. Our licensees or their customers may
in the future default on their obligations to us or them, due to
bankruptcy, lack of liquidity, operational failure or other reasons
deriving from the current general economic environment. If a
customer defaults on its obligations to us or our licensee, or a
licensee defaults in its payments to us, it could have a material
adverse effect on our business, financial condition, results of
operations or cash flows.
Risks
Related to Our Industry
We face intense competition.
We
expect to experience intense competition across all markets for our
products and services, our competitors that are focused on narrower
product lines may be more effective in devoting technical,
marketing, and financial resources to compete with us. In addition,
barriers to entry in our businesses generally are low, and
products, once developed, can be distributed broadly and quickly at
a relatively low cost. Open-source software vendors are devoting
considerable efforts to developing software that mimics the
features and functionality of our anticipated products. These
competitive pressures may result in decreased sales volumes, price
reductions, and/or increased operating costs, such as for marketing
and sales incentives, resulting in lower revenue, gross margins,
and operating income.
Delays in product development schedules may adversely affect our
revenues.
The
development of encryption products is a complex and time-consuming
process. New products can require long development and testing
periods. Future revenues may include the sale of new products not
yet developed by the Company. Significant delays in product
development including quality assurance testing or significant
problems in creating new products could adversely affect our
revenue recognition from new products. Revenue in a reporting
periods could be lower than anticipated because product development
problems could cause the loss of a competitive deal, a delay in
invoicing a licensee/customer, or the renegotiation of terms to
retain a deal.
If we do not accurately predict, prepare for, and respond promptly
to rapidly evolving technological and market developments and
successfully manage product introductions and transitions to meet
changing needs in the encryption technology market, our competitive
position and prospects will be harmed.
The
encryption technologies market has grown quickly and is expected to
continue to evolve rapidly. Moreover, many of our potential
licensees and their customers operate in markets characterized by
rapidly changing technologies and business plans, which require
them to add numerous network access points and adapt increasingly
complex enterprise networks, incorporating a variety of hardware,
software applications, operating systems, and networking protocols.
If we fail to accurately predict potential changing needs and
emerging technological trends in the encryption technology
industry, including in the areas of mobility, virtualization, and
cloud computing our business could be harmed. The technology in our
platform is especially complex because it needs to effectively
identify and respond to new and increasingly sophisticated methods
of attack, while minimizing the impact on network performance. If
we experience unanticipated delays in the availability of new
products, platform features, and subscriptions, and fail to meet
expectations for such availability, our competitive position and
business prospects will be harmed.
Additionally,
we must commit significant resources to developing new platform
features before knowing whether our investments will result in
products, subscriptions, and platform features the market will
accept. The success of new platform features depends on several
factors, including appropriate new product definition,
differentiation of new products, subscriptions, and platform
features from those of our competitors, and market acceptance of
these products, services and platform features. Moreover,
successful new product introduction and transition depends on a
number of factors including, our ability to manage the risks
associated with new product production ramp-up issues, the
availability of application software for new products, the
effective management of purchase commitments and inventory, the
availability of products in appropriate quantities and costs to
meet anticipated demand, and the risk that new products may have
quality or other defects or deficiencies, especially in the early
stages of introduction. There can be no assurance that we will
successfully identify opportunities for new products and
subscriptions, develop and bring new products and subscriptions to
market in a timely manner, or achieve market acceptance of our
products and subscriptions, or that products, subscriptions, and
technologies developed by others will not render our products,
subscriptions, or technologies obsolete or
noncompetitive.
Actual, possible or perceived defects or vulnerabilities in our
products or services, the failure of our products or services to
detect or prevent a security breach or the misuse of our products
could harm our reputation and divert resources.
Because
our products and services are complex, they have contained and may
contain defects or errors that are not detected until after their
commercial release and deployment. Defects or vulnerabilities may
impede or block network traffic, cause our products or services to
be vulnerable to electronic break-ins or cause them to fail to help
secure networks. We are also susceptible to errors, defects,
vulnerabilities or attacks that may arise at, or be inserted into
our products in, different stages in our supply chain, or
manufacturing processes, and which are out of our control. Attacks
may target specific unidentified or unresolved vulnerabilities that
exist or arrive only in the supply chain, making these attacks
virtually impossible to anticipate and difficult to defend against.
Different users deploy and use encryption products in different
ways, and certain deployments and usages may subject our products
to adverse conditions that may negatively impact the effectiveness
and useful lifetime of our products. Our networks and products,
including any cloud-based technology we utilize, could be targeted
by attacks specifically designed to disrupt our business and harm
our reputation. Our products may not prevent all security threats.
Because the techniques used by computer hackers to access or
sabotage networks change frequently and generally are not
recognized until launched against a target, we may be unable to
anticipate these techniques. An actual, possible or perceived
security breach or infection of the network of one of the users of
our products, regardless of whether the breach is attributable to
the failure of our products or services to prevent the security
breach, could adversely affect the market’s perception of our
security products and services and, in some instances, subject us
to potential liability that is not contractually limited. We may
not be able to correct any security flaws or vulnerabilities
promptly, or at all. Our products may also be misused by potential
end users or third parties who obtain access to our products. For
example, our products could be used to censor private access to
certain information on the internet. Such use of our products for
censorship could result in negative press coverage and negatively
affect our reputation, even if we take reasonable measures to
prevent any improper shipment of our products or if our products
are provided by an unauthorized third party.
Any
actual, possible or perceived defects, errors or vulnerabilities in
our products, or misuse of our products, could result
in:
●
the expenditure of significant
financial and product development resources in efforts to analyze,
correct, eliminate or work around errors or defects or to address
and eliminate vulnerabilities;
●
the loss of potential licensees,
customers or distribution partners;
●
delayed or lost
revenue;
●
delay or failure to attain market
acceptance;
●
negative publicity and harm to our
reputation; and
●
litigation, regulatory inquiries or
investigations that may be costly and harm our reputation and, in
some instances, subject us to potential liability that is not
contractually limited.
Risks
Related to Intellectual Property
Our proprietary rights may be difficult to enforce, which could
enable others to copy or use aspects of our products without
compensating us.
We
rely primarily on patent, trademark, copyright and trade secrets
laws and confidentiality procedures and contractual provisions to
protect our technology. Valid patents may not issue from our
pending applications, and the claims eventually allowed on any
patents may not be sufficiently broad to protect our technology or
products. Any issued patents may be challenged, invalidated or
circumvented, and any rights granted under these patents may not
actually provide adequate defensive protection or competitive
advantages to us. Patent applications in the United States are
typically not published until at least 18 months after filing, or,
in some cases, not at all, and publications of discoveries in
industry-related literature lag behind actual discoveries. We
cannot be certain that we were the first to make the inventions
claimed in our pending patent applications or that we were the
first to file for patent protection. Additionally, the process of
obtaining patent protection is expensive and time-consuming, and we
may not be able to prosecute all necessary or desirable patent
applications at a reasonable cost or in a timely manner. In
addition, recent changes to the patent laws in the United States,
including but not limited to “first to file” and
“post-grant review” provisions, may bring into question the
validity of certain software patents and may make it more difficult
and costly to prosecute patent applications. As a result, we may
not be able to obtain adequate patent protection or effectively
enforce our issued patents.
Despite
our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or obtain and use
information that we regard as proprietary. We generally enter into
confidentiality or license agreements with our employees,
consultants, vendors and licensees, as the case may be, and
generally limit access to and distribution of our proprietary
information. However, we cannot guarantee that the steps taken by
us will prevent misappropriation of our technology. Policing
unauthorized use of our technology or products is difficult. In
addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as the laws of the United
States, and many foreign countries do not enforce these laws as
diligently as government agencies and private parties in the United
States. From time to time, legal action by us may be necessary to
enforce our patents and other intellectual property rights, to
protect our trade secrets, to determine the validity and scope of
the proprietary rights of others or to defend against claims of
infringement or invalidity. Such litigation could result in
substantial costs and diversion of resources and could negatively
affect our business, operating results and financial condition. If
we are unable to protect our proprietary rights (including aspects
of our software and products protected other than by patent
rights), we may find ourselves at a competitive disadvantage to
others who need not incur the additional expense, time and effort
required to create the innovative products that have enabled us to
be successful to date.
If our end users experience data losses, our brand, reputation and
business could be harmed.
A
breach of our end users’ network security and systems or other
events that cause the loss or public disclosure of, or access by
third parties to, our end users’ files or data could have serious
negative consequences for our business, including reduced demand
for our services, an unwillingness of our licensees or their
customers to use our services, harm to our brand and reputation.
The techniques used to obtain unauthorized access, disable or
degrade service, or sabotage systems change frequently, often are
not recognized until launched against a target, and may originate
from less regulated or remote areas around the world. As a result,
our end users may be unable to proactively prevent these
techniques, implement adequate preventative or reactionary
measures, or enforce the laws and regulations that govern such
activities. If our end users experience any data loss, data
disruption, or any data corruption or inaccuracies, whether caused
by security breaches or otherwise, our brand, reputation and
business could be harmed.
Our
insurance (if any) may be inadequate or may not be available in the
future on acceptable terms, or at all. In addition, our policy may
not cover claims against us for loss of data or other indirect or
consequential damages. Defending a suit based on any data loss or
system disruption, regardless of its merit, could be costly and
divert management’s attention.
Claims by others that we infringe their proprietary technology or
other litigation matters could harm our
business.
Patent
and other intellectual property disputes are common in the
encryption and technology industries. Third parties may in the
future assert claims of infringement of intellectual property
rights against us. They may also assert such claims against our
licensees, end users or partners whom we may indemnify against
claims that our products infringe the intellectual property rights
of third parties. As the number of products and competitors in our
market increases and overlaps occur, infringement claims may
increase. Any claim of infringement by a third party, even those
without merit, could cause us to incur substantial costs defending
against the claim and could distract our management from our
business. In addition, litigation may involve patent holding
companies, non-practicing entities or other adverse patent owners
who have no relevant product revenue and against whom our own
patents may therefore provide little or no deterrence or
protection.
Although
third parties may offer a license to their technology, the terms of
any offered license may not be acceptable, and the failure to
obtain a license or the costs associated with any license could
cause our business, financial condition and results of operations
to be materially and adversely affected. In addition, some licenses
may be non-exclusive and, therefore, our competitors may have
access to the same technology licensed to us. Alternatively, we may
be required to develop non-infringing technology, which could
require significant time, effort and expense, and may ultimately
not be successful. Furthermore, a successful claimant could secure
a judgment or we may agree to a settlement that prevents us from
distributing certain products or performing certain services or
that requires us to pay substantial damages (including treble
damages if we are found to have willfully infringed such claimant’s
patents or copyrights), royalties or other fees. Any of these
events could seriously harm our business, financial condition and
results of operations.
We
may be subject to lawsuits claiming patent infringement. We may
also be subject to other litigation in addition to patent
infringement claims, such as employment-related litigation and
disputes, as well as general commercial litigation, and could
become subject to other forms of litigation and disputes, including
shareholder litigation. If we are unsuccessful in defending any
such claims, our operating results and financial condition and
results may be materially and adversely affected. For example, we
may be required to pay substantial damages and could be prevented
from selling certain of our products. Litigation, with or without
merit, could negatively impact our business, reputation and sales
in a material fashion.
We rely on the availability of third-party licenses and our
inability to maintain those licenses could harm our
business.
Many
of our products or products under development include software or
other intellectual property licensed from third parties. It may be
necessary in the future to renew licenses relating to various
aspects of these products or to seek new licenses for existing or
new products. Licensors may claim we owe them additional license
fees for past and future use of their software and other
intellectual property or that we cannot utilize such software or
intellectual property in our products going forward. There can be
no assurance that the necessary licenses would be available on
acceptable terms, if at all.
The
inability to obtain certain licenses or other rights or to obtain
such licenses or rights on favorable terms or for reasonable
pricing, or the need to engage in litigation regarding these
matters, could result in delays in product releases until
equivalent technology can be identified, licensed or developed, if
at all, and integrated into our products and may result in
significant license fees and have a material adverse effect on our
business, operating results, and financial condition. Moreover, the
inclusion in our products of software or other intellectual
property licensed from third parties on a non-exclusive basis could
limit our ability to differentiate our products from those of our
competitors.
We
also rely on technologies licensed from third parties in order to
operate functions of our business. If any of these third parties
allege that we have not properly paid for such licenses or that we
have improperly used the technologies under such licenses, we may
need to pay additional fees or obtain new licenses, and such
licenses may not be available on terms acceptable to us or at all
or may be costly. In any such case, or if we were required to
redesign our internal operations to function with new technologies,
our business, results of operations and financial condition could
be harmed.
Our use of open-source software in our products could negatively
affect our ability to sell our products and subject us to possible
litigation.
Our
products and/or those under development contain software modules
licensed to or used by us from third-party authors under “open
source” licenses. Some open-source licenses contain
requirements that we make available applicable source code for
modifications or derivative works we create based upon the type of
open-source software we use. If we combine our proprietary software
with open-source software in a certain manner, we could, under
certain open-source licenses, be required to release the source
code of our proprietary software to the public. This would allow
our competitors to create similar products with lower development
effort and time, and ultimately could result in a loss of product
sales for us.
Although
we monitor our use of open-source software to avoid subjecting our
products and subscriptions to conditions we do not intend, the
terms of many open-source licenses have not been interpreted by
United States courts, and there is a risk that these licenses could
be construed in a way that could impose unanticipated conditions or
restrictions on our ability to commercialize our products. From
time to time, there have been claims against companies that
distribute or use open-source software in their products, asserting
that open-source software infringes the claimants’ intellectual
property rights. We could be subject to suits by parties claiming
infringement of intellectual property rights in what we believe to
be licensed open-source software. If we are held to have breached
the terms of an open source software license, we could be required
to seek licenses from third parties to continue offering our
products on terms that are not economically feasible, to reengineer
our products, to discontinue the sale of our products if
reengineering could not be accomplished on a timely basis, or to
make generally available, in source code form, our proprietary
code, any of which could adversely affect our business, operating
results, and financial condition.
In
addition to risks related to license requirements, usage of
open-source software can lead to greater risks than use of
third-party commercial software, as open-source licensors generally
do not provide warranties or assurance of title or controls on
origin of the software. In addition, many of the risks associated
with usage of open-source software, such as the lack of warranties
or assurances of title, cannot be eliminated, and could, if not
properly addressed, negatively affect our business. We have
established processes to help alleviate these risks, including a
review process for screening requests from our development
organizations for the use of open-source software, but we cannot be
sure that our processes for controlling our use of open-source
software in our products will be effective.
Risks
Related to Our Common Stock
The market price for our common stock has been volatile
historically, and you may not be able to sell our stock at a
favorable price or at all.
You
should consider an investment in our common stock to be risky, and
you should invest in our common stock and securities convertible
into our common stock only if you can withstand a complete loss and
wide fluctuations in the market value of your investment. Some
factors that may cause the market price of our common stock to
fluctuate, in addition to the other risks mentioned in this
“Risk Factors” section and elsewhere are:
●
sale of our common stock by our
shareholders, executives, and directors;
●
volatility and limitations in trading
volumes of our shares of common stock;
●
our ability to obtain financings to
conduct and complete research and development activities and other
business activities;
●
the timing and success of
introductions of new products by us or our competitors or any other
change in the competitive dynamics of our industry, including
consolidation among competitors;
●
our ability to attract new
licensees;
●
changes in the development status of
our products;
●
changes in our capital structure or
dividend policy, future issuances of securities, sales of large
blocks of common stock by our shareholders;
●
our cash position;
●
announcements and events surrounding
financing efforts, including debt and equity
securities;
●
our inability to enter into new
markets or develop new products;
●
reputational
issues;
●
announcements of acquisitions,
partnerships, collaborations, joint ventures, new products, capital
commitments, or other events by us or our
competitors;
●
changes in industry conditions or
perceptions;
●
analyst research reports, recommendation and changes in
recommendations, price targets, and withdrawals of
coverage;
●
departures and additions of key
personnel;
●
disputes and litigations related to
intellectual properties, proprietary rights, and contractual
obligations;
●
changes in applicable laws, rules,
regulations, or accounting practices and other dynamics;
and
●
other events or factors, many of
which may be out of our control.
In
addition, if the market for stocks in our industry or industries
related to our industry, or the stock market in general,
experiences a loss of investor confidence, the trading price of our
common stock could decline for reasons unrelated to our business,
financial condition and results of operations. If any of the
foregoing occurs, it could cause our stock price to fall and may
expose us to lawsuits that, even if unsuccessful, could be costly
to defend and a distraction to management.
Substantial sales of our common stock, or the perception that such
sales might occur, could depress the market price of our common
stock.
We
cannot predict whether future issuances of our common stock or
resale in the open market will not decrease the market price of our
common stock. The consequence of any such issuances or resale of
our common stock on our market price may be increased as a result
of the fact that our common stock is thinly, or infrequently,
traded. The exercise of any options, or the vesting of any
restricted stock that we may grant to directors, executive officers
and other employees in the future, the issuance of common stock in
connection with acquisitions and other issuances of our common
stock, may decrease the market price of our common
stock.
Holders of our common stock have a risk of potential dilution if we
issue additional shares of common stock in the
future.
The
exercise of options and warrants will dilute the shareholder’s
ownership percentage. We currently have outstanding warrants to
purchase 23,746,866 shares of our common stock with a weighted
average exercise price of $1.12, not including the 55,549,615
shares of common stock issuable upon exercise of the Warrants
included in the registration statement of which this prospectus
forms a part (which have exercise prices of between $0.18 and $0.36
per share). The Board of Directors contemplates authorizing an
employee stock option plan comprised of total shares equal to 8% to
10% of the outstanding shares at the time of the plan effective
date and submitting that plan to our shareholders for approval. If
approved, such a plan would allow for the issuance of new shares
which may be in the form of options or grants. In the future, we
may grant additional stock options, warrants, preferred stock or
convertible securities. The exercise or conversion of stock
options, warrants, preferred stock, or convertible securities will
dilute the ownership percentage of our other shareholders. The
dilutive effect of the exercise or conversion of these securities
may adversely affect our ability to obtain additional capital. The
holders of these securities may be expected to exercise or convert
their securities when we are able to obtain additional equity
capital on terms more favorable than these securities.
The issuance and sale of common stock upon exercise of the Warrants
may cause substantial dilution to existing shareholders and may
also depress the market price of our common
stock.
A
total of 55,549,615 shares of common stock issuable upon exercise
of Offering Warrants and 8,332,439 shares of common stock issuable
upon exercise of the Placement Warrants, are being registered in
the registration statement, of which this prospectus forms a part.
The Offering Warrants, if not exercised by such date, terminate
between March 31, 2026 and April 16, 2026 (depending on the date
sold) and the Placement Warrants, if not exercised by such date,
terminate on April 16, 2031. The Offering Warrants contain
provisions limiting each Purchaser’s ability to exercise the
Warrants if such exercise would cause the Purchaser’s (or any
affiliate of any such Purchaser) holdings in the Company to exceed
4.99% of the Company’s issued and outstanding shares of common
stock (the Placement Warrants do not contain such a restriction).
The ownership limitation does not prevent such holder from
exercising some of the Offering Warrants, selling those shares, and
then exercising the rest of the Offering Warrants, while still
staying below the 4.99% limit. In this way, the holders of the
Offering Warrants could sell more than this limit while never
actually holding more shares than this limit allows. If the holders
of the Offering Warrants choose to do this, it will cause
substantial dilution to the then holders of our common
stock.
If
exercises of the Warrants and sales of such shares issuable upon
exercise thereof take place, the price of our common stock may
decline. In addition, the common stock issuable upon exercise of
the Warrants may represent overhang that may also adversely affect
the market price of our common stock. Overhang occurs when there is
a greater supply of a company’s stock in the market than there is
demand for that stock. When this happens the price of the company’s
stock will decrease, and any additional shares which shareholders
attempt to sell in the market will only further decrease the share
price. If the share volume of our common stock cannot absorb shares
sold by the warrant holders, then the value of our common stock
will likely decrease.
The anti-dilutive rights of the Warrants and/or Securities Purchase
Agreement could result in significant dilution to existing
shareholders and/or require us to issue a substantially greater
number of shares, which may adversely affect the market price of
our common stock.
The
Offering Warrants contain anti-dilution rights such that if we
issue, or are deemed to have issued, common stock or common stock
equivalents at a price less than the then exercise price of the
Offering Warrants, the exercise price of the Offering Warrants is
automatically reduced to such lower value, and the number of shares
of common stock issuable upon exercise thereafter is adjusted
proportionately so that the aggregate exercise price payable upon
exercise of such Offering Warrants is the same prior to and after
such reduction in exercise price. As a result, the effect of the
anti-dilution right may cause significant dilution to existing
shareholders. The Placement Warrants include a weighted average
anti-dilution right in the event we issue any shares of common
stock or equivalents with a value less than the then exercise
price. As a result, the effect of the anti-dilution right may cause
significant dilution to existing shareholders. The triggering of
the anti-dilution rights in the Warrants may result in such
securities being exercisable for a significant number of additional
shares of common stock and/or exercisable for a reduced exercise
price. As a result, the number of shares issuable could prove to be
significantly greater than they are currently and could result in
substantial dilution to our existing shareholders.
Additionally,
pursuant to the Purchase Agreement the Purchasers in the offering
waived their statutory preemptive rights, in consideration for
anti-dilutive rights which require the Company to issue them
additional shares of common stock to maintain their percentage
ownership in the company prior to any preemptive right issuance,
for no consideration, if any statutory preemptive rights are
exercised by any shareholder of the Company, which will expire at
such time, if ever, as the Company has adopted an amendment to its
Articles of Incorporation to terminate such statutory preemptive
rights. The issuance of additional shares of common stock in
connection with such anti-dilution rights could result in
substantial dilution to our existing shareholders.
Our common shares are thinly-traded, and in the future, may
continue to be thinly-traded, and you may be unable to sell at or
near ask prices or at all, if you need to sell your shares to raise
money or otherwise desire to liquidate such
shares.
We
cannot predict the extent to which an active public market for our
common stock will develop or be sustained due to a number of
factors, including the fact that we are a small company that is
relatively unknown to stock analysts, stock brokers, institutional
investors, and others in the investment community that generate or
influence sales volume, and that even if we came to the attention
of such persons, they tend to be risk-averse and would be reluctant
to follow an unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we become more
seasoned and viable. As a consequence, there may be periods of
several days or more when trading activity in our shares is minimal
or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support
continuous sales without an adverse effect on share price. We
cannot give you any assurance that a broader or more active public
trading market for our common stock will develop or be sustained,
or that current trading levels will be sustained. You may be unable
to sell your common stock at or above your purchase price if at
all, which may result in substantial losses to you. As a
consequence of this lack of liquidity, the trading of relatively
small quantities of shares by our shareholders may
disproportionately influence the price of those shares in either
direction. The price for our shares could, for example, decline
precipitously in the event that a large number of our common shares
are sold on the market without commensurate demand, as compared to
a seasoned issuer that could better absorb those sales without
adverse impact on its share price. As a consequence of this
enhanced risk, more risk-adverse investors may, under the fear of
losing all or most of their investment in the event of negative
news or lack of progress, be more inclined to sell their shares on
the market more quickly and at greater discounts than would be the
case with the stock of a seasoned issuer.
A significant number of our shares are being registered for resale
and their sale or potential sale may depress the market price of
our common stock.
The
registration statement, of which this prospectus forms a part,
registers the resale of 55,549,615 shares of common stock and
warrants to purchase an additional 63,882,054 shares of common
stock. The 55,549,615 outstanding shares constitute 67% of our
currently outstanding shares of common stock (37.8% assuming the
exercise in full of the Warrants), and the Warrants would
constitute 43.5% of our outstanding common stock in the event they
are exercised in full for cash. Sales of a significant number of
shares of our common stock in the public market, or the potential
or expectation of such sales, could harm the market price of our
common stock. As large numbers of sales of our common stock are
sold, it would increase the supply of our common stock, thereby
causing a decrease in its price.
In
addition, the common stock which is being registered herein for
resale and/or which issuable upon exercise of the Warrants may
represent overhang that may also adversely affect the market price
of our common stock. Overhang occurs when there is a greater supply
of a company’s stock in the market than there is demand for that
stock. When this happens the price of the company’s stock will
decrease, and any additional shares which shareholders attempt to
sell in the market will only further decrease the share price. The
exercise price of the Warrants may be less than the trading price
of our common stock, or may create an artificial ceiling on the
price of our common stock. In the event of such overhang, the
Warrant holders will have an incentive to sell their common stock
as quickly as possible. If the share volume of our common stock
cannot absorb the new shares issuable upon exercise of the
Warrants, or made available for sale pursuant to the registration
statement, of which this prospectus forms a part, then the value of
our common stock will likely decrease.
Future sales and issuances of our securities could result in
additional dilution of the percentage ownership of our shareholders
and could cause our share price to fall.
We
expect that significant additional capital will be needed in the
future to continue our planned operations, including research and
development, increased marketing, hiring new personnel,
commercializing our products, and continuing activities as an
operating public company. To the extent we raise additional capital
by issuing equity securities, our shareholders may experience
substantial dilution. We may sell common stock, convertible
securities or other equity securities in one or more transactions
at prices and in a manner, we determine from time to time. If we
sell common stock, convertible securities or other equity
securities in more than one transaction, investors may be
materially diluted by subsequent sales. Such sales may also result
in material dilution to our existing shareholders, and new
investors could gain rights superior to our existing
shareholders.
Our common stock is subject to restrictions on sales by
broker-dealers and penny stock rules, which may be detrimental to
investors.
Our
common stock is subject to Rules 15g-1 through 15g-9 under the
Exchange Act, which impose certain sales practice requirements on
broker-dealers who sell our common stock to persons other than
established customers and “accredited investors” (as defined
in Rule 501(a) of the Securities Act. For transactions covered by
this rule, a broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser’s
written consent to the transaction prior to the sale. This rule
adversely affects the ability of broker-dealers to sell our common
stock and purchasers of our common stock to sell their shares of
our common stock.
Additionally,
our common stock is subject to SEC regulations applicable to
“penny stocks.” Penny stocks include any non-Nasdaq equity
security that has a market price of less than $5.00 per share,
subject to certain exceptions. The regulations require that prior
to any non-exempt buy/sell transaction in a penny stock; a
disclosure schedule proscribed by the SEC relating to the penny
stock market must be delivered by a broker-dealer to the purchaser
of such penny stock. This disclosure must include the amount of
commissions payable to both the broker-dealer and the registered
representative and current price quotations for our common stock.
The regulations also require that monthly statements be sent to
holders of a penny stock that disclose recent price information for
the penny stock and information of the limited market for penny
stocks. These requirements adversely affect the market liquidity of
our common stock.
Because our common stock is quoted on the OTCQB instead of a
national exchange, our investors may have difficulty selling their
stock or may experience negative volatility on the market price of
our common stock.
Our
common stock is quoted on the OTCQB Market (“OTCQB”)
operated by the OTC Markets Group. The OTCQB is often highly
illiquid, in part because it does not have a national quotation
system by which potential investors can follow the market price of
shares except through information received and generated by a
limited number of broker-dealers that make markets in particular
stocks. There is a greater chance of volatility for securities that
trade on the OTCQB as compared to a national exchange or quotation
system. This volatility may be caused by a variety of factors,
including the lack of readily available price quotations, the
absence of consistent administrative supervision of bid and ask
quotations, lower trading volume, and market conditions. Investors
in our common stock may experience high fluctuations in the market
price and volume of the trading market for our securities. These
fluctuations, when they occur, have a negative effect on the market
price for our securities. Accordingly, our shareholders may not be
able to realize a fair price from their shares when they determine
to sell them or may have to hold them for a substantial period of
time until the market for our common stock improves.
Risks
Related to Regulations and Our Compliance with Such
Regulations
We previously identified material weaknesses in our disclosure
controls and procedures and internal control over financial
reporting. If not remediated, our failure to establish and maintain
effective disclosure controls and procedures and internal control
over financial reporting could result in material misstatements in
our financial statements and a failure to meet our reporting and
financial obligations, each of which could have a material adverse
effect on our financial condition and the trading price of our
common stock.
Maintaining
effective internal control over financial reporting and effective
disclosure controls and procedures are necessary for us to produce
reliable financial statements. While our disclosure controls and
procedures and internal controls over financial reporting are
currently effective, they have in the past been ineffective and
subject to material weaknesses. A material weakness is a
deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s annual or
interim financial statements will not be prevented or detected on a
timely basis. A control deficiency exists when the design or
operation of a control does not allow management or employees, in
the normal course of performing their assigned functions, to
prevent or detect misstatements on a timely basis.
Maintaining
effective disclosure controls and procedures and effective internal
control over financial reporting are necessary for us to produce
reliable financial statements and the Company is committed to
remediating its material weaknesses in such controls as promptly as
possible. However, there can be no assurance as to when these
material weaknesses will be remediated or that additional material
weaknesses will not arise in the future. Any failure to remediate
material weaknesses, or the development of new material weaknesses
in our internal control over financial reporting, could result in
material misstatements in our financial statements and cause us to
fail to meet our reporting and financial obligations, which in turn
could have a material adverse effect on our financial condition and
the trading price of our common stock, and/or result in litigation
against us or our management.
We are subject to changing laws and regulations.
U.S.
government agencies continue to implement extensive requirements on
our industry. These have both positive and negative impacts with
much remaining uncertainty as to how various provisions will
ultimately affect our licensees, end users and our business. As to
prospective legislation and regulation concerning collection,
transmission, storage and use of personal data, we cannot determine
what effect additional state or federal governmental legislation,
regulations, or administrative orders would have on our business in
the future. New legislation or regulation may require the
reformulation of our business to meet new standards, require us to
cease operations, impose stricter qualification and/or registration
standards, impose additional record keeping, or require expanded
consumer protection measures (such as heightened notification
procedures and data subject access rights).
Failure to comply with laws and regulations applicable to our
business could subject us to fines and penalties and could also
cause us to lose potential licensees and/or for them to lose
potential customers in the public sector or negatively impact our
ability to contract with the public sector.
Our
business is subject to regulation by various federal, state,
regional, local and foreign governmental agencies, including
agencies responsible for monitoring and enforcing employment and
labor laws, workplace safety, product safety, product labeling,
environmental laws, consumer protection laws, anti-bribery laws,
data privacy laws, import and export controls, federal securities
laws and tax laws and regulations. In certain jurisdictions, these
regulatory requirements may be more stringent than in the United
States. Noncompliance with applicable regulations or requirements
could subject us to investigations, sanctions, enforcement actions,
disgorgement of profits, fines, damages and civil and criminal
penalties or injunctions. If any governmental sanctions are
imposed, or if we do not prevail in any possible civil or criminal
litigation, our business, operating results and financial condition
could be adversely affected. In addition, responding to any action
will likely result in a significant diversion of management’s
attention and resources and an increase in professional fees.
Enforcement actions and sanctions could harm our business,
operating results and financial condition.
Additionally,
we may be subject to other legal regimes throughout the world
governing data handling, protection and privacy. For example, in
June 2018, California passed the California Consumer Privacy Act
(the “CCPA”), which provides new data privacy rights for
consumers and new operational requirements for companies became
effective in 2020 and in March 2021, Virginia passed a consumer
data protection law which includes similar rights as set forth in
the CCPA (the “VCDPA”). Fines for noncompliance may be up to
$7,500 per violation. The costs of compliance with, and other
burdens imposed by, the CCPA, the VCDPA and other state or foreign
laws, may limit the use and adoption of our products and services
and could have an adverse impact on our business. These laws and
regulations impose added costs on our business, and failure to
comply with these or other applicable regulations and requirements,
including non-compliance in the past, could lead to claims for
damages from our channel partners, penalties, termination of
contracts, loss of exclusive rights in our intellectual property
and temporary suspension or permanent debarment from government
contracting. Any such damages, penalties, disruptions or
limitations in our ability to do business with the public sector
could have an adverse effect on our business and operating
results.
Governmental restrictions on the sale of our products and services
in non-U.S. markets could negatively affect our business, financial
condition and financial results.
Exports
of software products and services using encryption technology such
as ours are generally restricted by the U.S. government. In
addition, some countries impose restrictions on the use of
encryption products and services such as ours. The cost of
compliance with U.S. and other export laws, or our failure to
obtain governmental approvals to offer our products and services in
non-U.S. markets, could affect our ability to sell our products and
services and could impair our international expansion. We face a
variety of other legal and compliance risks. If we or our
distributors fail to comply with applicable law and regulations, we
may become subject to penalties, fines or restrictions that could
materially adversely affect our business, financial condition and
financial results.
Risks
Related to Our Contractual Agreements
We owe amounts to our Chief Executive Officer upon the occurrence
of certain change of control transactions.
Pursuant
to the employment agreement of Mr. David Chasteen, if the Company
sells all or substantially all of its assets or consummates a
merger, reorganization or similar transaction in which a majority
of the equity in the surviving company is not owned by the
stockholders of the Company immediately prior to such a
transaction, then Mr. Chasteen will receive a bonus equal to 5% of
the Net Proceeds of such a transaction. Net Proceeds are defined as
the purchase price, less costs incurred to complete the sale, to
include but not limited to accounting, legal, due diligence,
commissions, investment banking fees or similar costs that are
necessitated by the applicable transaction. The requirement to pay
5% of the Net Proceeds to Mr. Chasteen may prevent a change of
control which could be accretive to shareholders, or decrease the
amount of funds available to be paid to shareholders upon a change
of control.
We are currently subject to a restriction on our ability to issue
securities.
The
Company agreed in the Purchase Agreement that until 120 days after
the closing of the Private Offering (i.e., until August 14, 2021),
that we would not issue or agree to issue any shares of common
stock, except pursuant to certain customary exceptions. Such
restriction may limit our ability to raise funding, force us to
seek debt financing, and/or may have a material adverse effect on
our cash flows and the value of our securities.
We face significant penalties and damages in the event the
registration statement we agreed to file to register the Offering
Shares and Warrant Shares is not timely declared effective or is
subsequently suspended or terminated.
Pursuant
to the Registration Rights Agreement (“RR Agreement”), we
agreed to file a registration statement to register the sale of the
Shares and the shares of common stock issuable upon exercise of the
Warrants, prior to the 10th day after the end of the Private
Offering (provided that the Placement Agent has agreed that such 10
day period began on April 19, 2021, regardless of the actual
closing date of the Private Offering), and to obtain effectiveness
of such registration statement by the 60th calendar day following
the date of the RR Agreement (March 31, 2021)(provided that in the
event we are required to file any additional registration
statements under the RR Agreement, such required effectiveness date
is the 90th day after such registration statement is required to be
filed). In the event we fail to use commercially reasonable best
efforts to cause the registration statement to be filed by, or such
registration statement does not become effective by, such required
dates as set forth above, or such registration statement is not
continuously effective after the effective date thereof, then, in
addition to any other rights the Purchasers may have, on each date
that we are deemed not timely or a date pursuant to which the
registration statement cannot be relied upon occurs, and on each
monthly anniversary, or portion thereof, thereafter, until such
applicable event is cured, we are required to pay the Purchasers an
amount in cash, as partial liquidated damages and not as a penalty,
of 2% of the aggregate consideration paid by each applicable
Purchaser pursuant to the Purchase Agreement. We agreed to pay all
expenses associated with the registration statement and to provide
the Purchasers indemnification rights in connection therewith. Such
penalties and/or others which we are subject, could adversely
affect our cash flow and cause the value of our securities to
decline in value.
The accounting treatment of the Warrants could have a material
adverse impact on our financial statements.
Various
provisions of the Warrants, including, but not limited to, various
price reset and anti-dilution provisions will cause these
instruments to be treated as derivative liabilities. As a result,
we will be forced to value the Warrants at the end of each fiscal
quarter based upon complex accounting methods for the treatment of
derivative liabilities such as Monte Carlo or other similar
valuation models, which will calculate the value of the Warrants
based upon a variety of factors, including price volatility in the
market price of our common stock. We cannot predict the financial
impact of the issuance of the Warrants on our financial statements,
specifically our balance sheet, and the deviation in the impact
from quarter to quarter.
Our shareholders are subject to significant dilution upon the
occurrence of certain events which could result in a decrease in
our stock price.
As of
the date of this prospectus, we had approximately 87,628,920 shares
of our common stock reserved or designated for future issuance upon
the exercise of outstanding options and warrants (including the
Warrant Shares), and conversion of convertible instruments.
Further, we may from time to time make an offer to our warrant
holders to exchange their outstanding warrants for shares of our
common stock, a fewer number of warrants with more favorable terms,
or a combination thereof, subject to applicable rules and
requirements.
The
Warrants contain provisions that, subject to certain exceptions,
reset the exercise price of such Warrants if at any time while such
Warrants are outstanding we sell or issue (or are deemed to sell or
issue) shares of our common stock or rights, warrants, options or
other securities or debt convertible, exercisable or exchangeable
for shares of our common stock at a price below the then current
exercise price per share for such Warrants ($0.36 per share for the
Offering Warrants and $0.18 per share for the Placement Warrants).
Any future resets to the exercise price of those Warrants will have
a further dilutive effect on our existing shareholders and could
result in a decrease in our stock price.
The Securities Purchase Agreement includes various covenants and if
we don’t comply with such covenants, we may suffer potential
monetary and other penalties.
The
Securities Purchase Agreement entered into in connection with the
Private Offering contains certain covenants. If we do not comply
with these covenants, we will be in breach of our obligations under
the Securities Purchase Agreement, which may lead to exercise by
the investors of the remedies available to them under the
Securities Purchase Agreement and may cause a material impact upon
our financial condition.
General
Risk Factors
Our Articles of Incorporation allow us to issue “blank
check” preferred stock without shareholder
approval.
Pursuant
to our Articles of Incorporation, our Board of Directors has the
authority to issue up to 10 million shares of “blank check”
preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those
shares without any additional vote or action by our shareholders.
Because the Board of Directors is able to designate the powers and
preferences of the preferred stock without the vote of a majority
of the Company’s shareholders, shareholders of the Company will
have no control over what designations and preferences the
Company’s preferred stock will have. The issuance of shares of
preferred stock or the rights associated therewith, could cause
substantial dilution to our existing shareholders. Additionally,
the dilutive effect of any preferred stock which we may issue may
be exacerbated given the fact that such preferred stock may have
voting rights and/or other rights or preferences which could
provide the preferred shareholders with substantial voting control
over us and/or give those holders the power to prevent or cause a
change in control, even if that change in control might benefit our
shareholders. As a result, the issuance of shares of preferred
stock may cause the value of our securities to decrease.
We will continue to incur increased costs as a result of being a
reporting company, and given our limited capital resources, such
additional costs may have an adverse impact on our
profitability.
We
are an SEC reporting company. The rules and regulations under the
Exchange Act require reporting companies to provide periodic
reports with interactive data files, which require that we engage
legal, accounting and auditing professionals, and eXtensible
Business Reporting Language (XBRL) and EDGAR (Electronic Data
Gathering, Analysis, and Retrieval) service providers. The
engagement of such services can be costly, and we may continue to
incur additional losses, which may adversely affect our ability to
continue as a going concern. In addition, the Sarbanes Oxley Act of
2002, as well as a variety of related rules implemented by the SEC,
have required changes in corporate governance practices and
generally increased the disclosure requirements of public
companies. For example, as a result of being a reporting company,
we are required to file periodic and current reports and other
information with the SEC and we have adopted policies regarding
disclosure controls and procedures and regularly evaluate those
controls and procedures.
The
additional costs we continue to incur in connection with becoming a
reporting company (expected to be approximately a hundred thousand
dollars per year) will continue to further stretch our limited
capital resources. Due to our limited resources, we have to
allocate resources away from other productive uses in order to
continue to comply with our obligations as an SEC reporting
company. Further, there is no guarantee that we will have
sufficient resources to continue to meet our reporting and filing
obligations with the SEC as they come due.
If securities or industry analysts do not publish research or
reports, or publish unfavorable research or reports about our
business, our stock price and trading volume may
decline.
The
trading market for our common stock will rely in part on the
research and reports that industry or financial analysts publish
about us, our business, our markets and our competitors. We do not
control these analysts. If securities analysts do not cover our
common stock, the lack of research coverage may adversely affect
the market price of our common stock. Furthermore, if one or more
of the analysts who do cover us downgrade our stock or if those
analysts issue other unfavorable commentary about us or our
business, our stock price would likely decline. If one or more of
these analysts cease coverage of us or fails to regularly publish
reports on us, we could lose visibility in the market and interest
in our stock could decrease, which in turn could cause our stock
price or trading volume to decline and may also impair our ability
to expand our business and attract new licensees.
Market and economic conditions may negatively impact our business,
financial condition and share price.
Concerns
over inflation, energy costs, geopolitical issues, unstable global
credit markets and financial conditions, and volatile oil prices
have in the past led to periods of significant economic
instability, diminished liquidity and credit availability, declines
in consumer confidence and discretionary spending, diminished
expectations for the global economy and expectations of slower
global economic growth going forward, increased unemployment rates,
and increased credit defaults. Our general business strategy may be
adversely affected by any such economic downturns, volatile
business environments and continued unstable or unpredictable
economic and market conditions. If these conditions continue to
deteriorate or do not improve once they occur, it may make any
necessary debt or equity financing more difficult to complete, more
costly, and more dilutive. Failure to secure any necessary
financing in a timely manner and on favorable terms could have a
material adverse effect on our growth strategy, financial
performance, and share price and could require us to delay or
abandon development or commercialization plans.
Failure to adequately manage our planned aggressive growth strategy
may harm our business or increase our risk of
failure.
For
the foreseeable future, we intend to pursue an aggressive growth
strategy for the expansion of our operations through increased
product development and marketing. Our ability to rapidly expand
our operations will depend upon many factors, including our ability
to work in a regulated environment, market value-added products
effectively to independent pharmacies, establish and maintain
strategic relationships with suppliers, and obtain adequate capital
resources on acceptable terms. Any restrictions on our ability to
expand may have a materially adverse effect on our business,
results of operations, and financial condition. Accordingly, we may
be unable to achieve our targets for sales growth, and our
operations may not be successful or achieve anticipated operating
results.
Additionally,
our growth may place a significant strain on our managerial,
administrative, operational, and financial resources and our
infrastructure. Our future success will depend, in part, upon the
ability of our senior management to manage growth effectively. This
will require us to, among other things:
|
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implement
additional management information systems; |
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|
|
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● |
further
develop our operating, administrative, legal, financial, and
accounting systems and controls; |
|
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● |
hire
additional personnel; |
|
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|
● |
develop
additional levels of management within our company; |
|
|
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locate
additional office space; |
|
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● |
maintain
close coordination among our engineering, operations, legal,
finance, sales and marketing, and client service and support
organizations; and |
|
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manage
our expanding international operations. |
As a
result, we may lack the resources to deploy our services on a
timely and cost-effective basis. Failure to accomplish any of these
requirements could impair our ability to deliver services in a
timely fashion or attract and retain new licensees.
If we do not successfully implement any acquisition strategies, our
operating results and prospects could be harmed.
We
face competition within our industry for acquisitions of
businesses, technologies and assets, and, in the future, such
competition may become more intense. As such, even if we are able
to identify an acquisition that we would like to consummate, we may
not be able to complete the acquisition on commercially reasonable
terms or at all because of such competition. Furthermore, if we
enter into negotiations that are not ultimately consummated, those
negotiations could result in diversion of management time and
significant out-of-pocket costs. Even if we are able to complete
such acquisitions, we may additionally expend significant amounts
of cash or incur substantial debt to finance them, which
indebtedness could result in restrictions on our business and use
of available cash. In addition, we may finance or otherwise
complete acquisitions by issuing equity or convertible debt
securities, which could result in dilution of our existing
shareholders. If we fail to evaluate and execute acquisitions
successfully, we may not be able to realize their benefits. If we
are unable to successfully address any of these risks, our
business, financial condition or operating results could be
harmed.
If we make any acquisitions, they may disrupt or have a negative
impact on our business.
If we
make acquisitions in the future, funding permitting, which may not
be available on favorable terms, if at all, we could have
difficulty integrating the acquired company’s assets, personnel and
operations with our own. We do not anticipate that any acquisitions
or mergers we may enter into in the future would result in a change
of control of the Company. In addition, the key personnel of the
acquired business may not be willing to work for us. We cannot
predict the effect expansion may have on our core business.
Regardless of whether we are successful in making an acquisition,
the negotiations could disrupt our ongoing business, distract our
management and employees and increase our expenses. In addition to
the risks described above, acquisitions are accompanied by a number
of inherent risks, including, without limitation, the
following:
|
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the
difficulty of integrating acquired products, services or
operations; |
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the
potential disruption of the ongoing businesses and distraction of
our management and the management of acquired
companies; |
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difficulties
in maintaining uniform standards, controls, procedures and
policies; |
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the
potential impairment of relationships with employees, licensees,
and customers as a result of any integration of new management
personnel; |
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the
potential inability or failure to achieve additional sales and
enhance our licensee and customer base through cross-marketing of
the products to new and existing licensees and
customers; |
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the
effect of any government regulations which relate to the business
acquired; |
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potential
unknown liabilities associated with acquired businesses or product
lines, or the need to spend significant amounts to retool,
reposition or modify the marketing and sales of acquired products
or operations, or the defense of any litigation, whether or not
successful, resulting from actions of the acquired company prior to
our acquisition; and |
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potential
expenses under the labor, environmental and other laws of various
jurisdictions. |
Our
business could be severely impaired if and to the extent that we
are unable to succeed in addressing any of these risks or other
problems encountered in connection with an acquisition, many of
which cannot be presently identified. These risks and problems
could disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our results
of operations.
We may apply working capital and future funding to uses that
ultimately do not improve our operating results or increase the
value of our securities.
In
general, we have complete discretion over the use of our working
capital and any new investment capital we may obtain in the future.
Because of the number and variety of factors that could determine
our use of funds, our ultimate expenditure of funds (and their
uses) may vary substantially from our current intended operating
plan for such funds.
We
intend to use existing working capital and future funding to
support the development of our products and services, product
purchases in our wholesale distribution division, the expansion of
our marketing, or the support of operations to educate our end
users. We will also use capital for market and network expansion,
acquisitions, and general working capital purposes. However, we do
not have more specific plans for the use and expenditure of our
capital. Our management has broad discretion to use any or all of
our available capital reserves. Our capital could be applied in
ways that do not improve our operating results or otherwise
increase the value of a shareholder’s investment.
Our websites may encounter technical problems and service
interruptions.
Our
websites may in the future experience slower response times or
interruptions as a result of increased traffic or other reasons.
These delays and interruptions resulting from failure to maintain
Internet service connections to our site could frustrate visitors
and reduce our future web site traffic, which could have a material
adverse effect on our business.
The sale of shares by our directors and officers may adversely
affect the market price for our shares.
Sales
of significant amounts of shares held by our officers and
directors, or the prospect of these sales, could adversely affect
the market price of our common stock. Management’s stock ownership
may discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, which in turn could
reduce our stock price or prevent our shareholders from realizing a
premium over our stock price.
Shareholders may be diluted significantly through our efforts to
obtain financing and satisfy obligations through the issuance of
additional shares of our common stock.
Wherever
possible, our Board of Directors will attempt to use non-cash
consideration to satisfy obligations. In many instances, we believe
that the non-cash consideration will consist of restricted shares
of our common stock or where shares are to be issued to our
officers, directors and applicable consultants. Our Board of
Directors has authority, without action or vote of the shareholders
to issue all or part of the authorized but unissued shares of
common stock. In addition, we may attempt to raise capital by
selling shares of our common stock, possibly at a discount to
market. These actions will result in dilution of the ownership
interests of existing shareholders, which may further dilute common
stock book value, and that dilution may be material. Such issuances
may also serve to enhance existing management’s ability to maintain
control of the Company because the shares may be issued to parties
or entities committed to supporting existing management.
If we do not effectively manage our growth, our existing
infrastructure may become strained, and we may be unable to
increase revenue growth.
Our
past growth that we have experienced, and in the future may
experience, may provide challenges to our organization, requiring
us to expand our personnel and our operations. Future growth may
strain our infrastructure, operations and other managerial and
operating resources. If our business resources become strained, our
earnings may be adversely affected, and we may be unable to
increase revenue growth. Further, we may undertake contractual
commitments that exceed our labor resources, which could also
adversely affect our earnings and our ability to increase revenue
growth.
Our growth depends in part on the success of our strategic
relationships with third parties.
In
order to grow our business, we anticipate that we will need to
continue to depend on our relationships with third parties,
including our technology providers. Identifying partners, and
negotiating and documenting relationships with them, requires
significant time and resources. Our competitors may be effective in
providing incentives to third parties to favor their products or
services, or utilization of, our products and services. In
addition, acquisitions of our partners by our competitors could
result in a decrease in the number of our current and potential
licensees and end users. If we are unsuccessful in establishing or
maintaining our relationships with third parties, our ability to
compete in the marketplace or to grow our revenue could be impaired
and our results of operations may suffer. Even if we are
successful, we cannot assure you that these relationships will
result in increased use of our products or increased
revenue.
Claims, litigation, government investigations, and other
proceedings may adversely affect our business and results of
operations.
As a
company offering a wide range of products and services, we are
regularly subject to actual and threatened claims, litigation,
reviews, investigations, and other proceedings, including
proceedings relating to goods and services offered by us and by
third parties, and other matters. Any of these types of
proceedings, including currently pending proceedings as discussed
herein, may have an adverse effect on us because of legal costs,
disruption of our operations, diversion of management resources,
negative publicity, and other factors. The outcomes of these
matters are inherently unpredictable and subject to significant
uncertainties. Determining legal reserves and possible losses from
such matters involves judgment and may not reflect the full range
of uncertainties and unpredictable outcomes. Until the final
resolution of such matters, we may be exposed to losses in excess
of the amount recorded, and such amounts could be material. Should
any of our estimates and assumptions change or prove to have been
incorrect, it could have a material effect on our business,
consolidated financial position, results of operations, or cash
flows. In addition, it is possible that a resolution of one or more
such proceedings, including as a result of a settlement, could
require us to make substantial future payments, prevent us from
offering certain products or services, require us to change our
business practices in a manner materially adverse to our business,
requiring development of non-infringing or otherwise altered
products or technologies, damaging our reputation, or otherwise
having a material effect on our operations.
We have never paid or declared any dividends on our common
stock.
We
have never paid or declared any dividends on our common stock or
preferred stock. Likewise, we do not anticipate paying, in the near
future, dividends or distributions on our common stock. Any future
dividends on common stock will be declared at the discretion of our
Board of Directors and will depend, among other things, on our
earnings, our financial requirements for future operations and
growth, and other facts as we may then deem appropriate. Since we
do not anticipate paying cash dividends on our common stock, return
on your investment, if any, will depend solely on an increase, if
any, in the market value of our common stock.
For all of the foregoing reasons and others set forth herein, an
investment in our securities involves a high degree of
risk.
Private Placement Offering
From
March 31, 2021 to April 16, 2021, we entered into a Securities
Purchase Agreement (the “Purchase Agreement”), with certain
accredited investors (the “Purchasers”), pursuant to which
the Company sold the Purchasers an aggregate of 55,549,615 (a)
shares of common stock (Offering Shares), and (b) warrants to
purchase shares of common stock of the Company (Offering Warrants).
The Offering Shares and Offering Warrants were sold at a price of
$0.18 per combined Offering Share and Offering Warrant (the
“Offering Price”), which was equal to 80% of the closing
sales price of the Company’s common stock on the OTCQB Market on
March 30, 2021, which was the last trading day prior to the initial
entry into the Purchase Agreement.
The
sale of the Offering Shares and Offering Warrants occurred at four
closings as follows:
Date of
Closing |
|
Shares
Sold |
|
|
Warrants
Sold |
|
|
Gross
Proceeds |
|
March 31,
2021 |
|
|
35,757,942 |
|
|
|
35,757,942 |
|
|
$ |
6,436,430 |
|
April 7,
2021 |
|
|
7,513,893 |
|
|
|
7,513,893 |
|
|
$ |
1,352,501 |
|
April 9,
2021 |
|
|
8,683,336 |
|
|
|
8,683,336 |
|
|
$ |
1,563,000 |
|
April 16,
2021 |
|
|
3,594,444 |
|
|
|
3,594,444 |
|
|
$ |
647,000 |
|
|
|
|
55,549,615 |
|
|
|
55,549,615 |
|
|
$ |
9,998,931 |
|
Total
gross proceeds from the offering of the Offering Shares and
Offering Warrants were approximately $10 million (as shown above)
and the Private Offering is now closed.
Paulson
Investment Company, LLC (Placement Agent), served as placement
agent for the Private Offering and the Company entered into a
Placement Agent Agreement with the Placement Agent in connection
therewith (the “Placement Agreement”, discussed below). As
partial consideration for the services provided by the Placement
Agent, the Company granted the Placement Agent and/or its assigns,
warrants to purchase shares of common stock (Placement Warrants,
discussed in greater detail below).
The
Company also granted the Purchasers registration rights pursuant to
the RR Agreement, which is discussed in greater detail
below.
Securities
Purchase Agreement
The
Purchase Agreement required that the members of the Board of
Directors and senior management of the Company enter into a lock-up
agreement (the “Lock-Up Agreements”, discussed in greater
detail below).
The
Purchase Agreement included standard and customary representations
of the parties; covenants of the Company (including obligations to
indemnify the Purchasers in certain cases); penalties for the
Company’s failure to be deemed current in its filing obligations
under Rule 144 of the Securities Act; a right of first refusal to
provide the Purchasers the right to purchase any new securities we
offer, for a period of one year following termination date of the
Private Offering; a restriction on our ability to issue new
securities, or file new registration statements (except as
contemplated by the RR Agreement), for a period of 120 days after
the termination of the Private Offering, subject to certain
customary exceptions; and a restriction on our ability to enter
into a variable rate transaction until such time as all Offering
Warrants granted in the Private Offering have been exercised or
expired.
The
Purchase Agreement also included a waiver by the Purchasers of
their statutory preemptive rights under Texas law, and provided the
Purchasers a make-whole right, requiring us to issue the Purchasers
additional shares of common stock following the Private Offering,
in the event that any shareholder of the Company exercises their
statutory preemptive rights provided for under Texas law, and are
issued additional securities, resulting in the dilution of such
Purchasers’ interests, to keep such Purchasers’ at the same
percentage ownership of our common stock as they held prior to such
preemptive right issuance (without taking into account any
unexercised Offering Warrants).
We
agreed to use the proceeds from the Private Offering for working
capital purposes and not to use such proceeds: (a) for the
satisfaction of any portion of the Company’s debt (other than (i)
payment of trade payables in the ordinary course of the Company’s
business and prior practices and (ii) the repayment of funds
received by the Company under the “paycheck protection
program” of the CARES Act), (b) for the redemption of any
common stock or common stock equivalents, (c) for the settlement of
any outstanding litigation or (d) in violation of applicable
regulations.
We
also agreed to hold a shareholders meeting within 180 days after
the closing of the Private Offering (i.e., by October 13, 2021), to
seek shareholder approval to amend the Company’s Articles of
Incorporation to terminate the statutory preemptive right provided
for under Texas law (the “Amendment”), and to solicit
proxies to approve such Amendment consistent with applicable law,
and the Purchasers agreed to vote all of the Shares in favor of
approving such Amendment.
The
Purchase Agreement may be amended with the approval of the Company
and Purchasers holding at least 50.1% of the Shares initially sold
pursuant to the Purchase Agreement.
Lock-Up
Agreement
In
connection with the Private Offering, each of our officers and
directors entered into Lock-Up Agreements whereby they agreed not
to sell, offer, or transfer, any of our securities which they hold
for 180 days after the end of the Private Offering, subject to
customary exceptions.
Offering
Warrants
The
Offering Warrants, which are evidenced by Common Stock Purchase
Offering Warrants (the “Warrant Agreements”), have an
exercise price of $0.36 per share (200% of the Offering Price), and
may be exercised at any time from the grant date of the Offering
Warrants (i.e., March 31, 2021, April 7, 2021, April 9, 2021 or
April 16, 2021, as applicable), until five years thereafter. The
Offering Warrants have cashless exercise rights if when exercised,
a registration statement registering the shares of common stock
issuable upon exercise thereof, is not effective with the
Securities and Exchange Commission. The exercise of each of the
Offering Warrants is subject to a beneficial ownership limitation
of 4.99%, preventing such exercise by the holder(s) thereof, if
such exercise would result in such holder(s) and their affiliates,
exceeding ownership of 4.99% of our common stock. The Offering
Warrants contain anti-dilution rights such that if we issue, or are
deemed to have issued, common stock or common stock equivalents at
a price less than the then exercise price of the Offering Warrants,
the exercise price of the Offering Warrants is automatically
reduced to such lower value, and the number of shares of common
stock issuable upon exercise thereafter is adjusted proportionately
so that the aggregate exercise price payable upon exercise of such
Offering Warrants is the same prior to and after such reduction in
exercise price. As a result, the effect of the anti-dilution right
may cause significant dilution to existing shareholders.
Registration
Rights Agreement
Pursuant
to the RR Agreement, we agreed to file a registration statement to
register the sale of the Shares and the shares of common stock
issuable upon exercise of the Warrants, prior to the
10th day after the end of the Private Offering (provided
that the Placement Agent has agreed that such 10 day period began
on April 19, 2021, regardless of the actual closing date of the
Private Offering), and to obtain effectiveness of such registration
statement by the 60th calendar day following the date of
the RR Agreement (March 31, 2021)(provided that in the event we are
required to file any additional registration statements under the
RR Agreement, such required effectiveness date is the
90th day after such registration statement is required
to be filed). In the event we fail to use commercially reasonable
best efforts to cause the registration statement to be filed by, or
such registration statement does not become effective by, such
required dates as set forth above, or such registration statement
is not continuously effective after the effective date thereof,
then, in addition to any other rights the Purchasers may have, on
each date that we are deemed not timely or a date pursuant to which
the registration statement cannot be relied upon occurs, and on
each monthly anniversary, or portion thereof, thereafter, until
such applicable event is cured, we are required to pay the
Purchasers an amount in cash, as partial liquidated damages and not
as a penalty, of 2% of the aggregate consideration paid by each
applicable Purchaser pursuant to the Purchase Agreement. We agreed
to pay all expenses associated with the registration statement and
to provide the Purchasers indemnification rights in connection
therewith.
This
prospectus forms a part of the registration statement we are
required to file pursuant to the RR Agreement.
Placement
Agent Agreement and Indemnification Agreement
On
January 11, 2021, we entered into a Placement Agent Agreement with
the Placement Agent, pursuant to which we engaged the Placement
Agent as the Company’s exclusive placement agent in connection with
the Private Offering. Pursuant to the Placement Agent Agreement, we
agreed to pay the Placement Agent a cash commission of 13% of the
gross proceeds received in the Private Offering ($1,334,861), and
to grant the Placement Agent or its assigns, a warrant to purchase
15% of the Shares sold in the Private Offering (i.e., warrants to
purchase 8,332,439 shares in aggregate), which were granted to the
Placement Agent effective on April 16, 2021. The Placement Agent
Agreement has a term expiring on August 31, 2021, and includes a
three-year tail period, pursuant to which the Placement Agent is
due the same fees payable in connection with the Private Offering,
in the event the Company sells any securities to any investor or
potential investor who received Private Offering documents as part
of the Private Offering. The Placement Agent Agreement includes
customary representations and warranties, and requires us to
indemnify the Placement Agent and its representatives, and the
Placement Agent to indemnify us and our management and directors,
against certain claims and losses. In addition to the compensation
payable upon completion of the Private Offering, we paid the
Placement Agent a $35,000 cash retainer.
We
also entered into an Indemnification Agreement in favor of the
Placement Agent dated February 22, 2021, whereby we agreed to
indemnify the Placement Agreement and its representatives against
certain claims and losses associated with the Private
Offering.
Placement
Agent Warrants
The
Placement Warrants are evidenced by Purchase Warrants, have a term
of 10 years (i.e., through April 16, 2031), an exercise price of
$0.18 per share (the Offering Price), and cashless exercise rights.
We are required to pay the Placement Agent liquidated damages of
$10 per day for each $1,000 of shares not timely delivered upon the
exercise of the Placement Warrants. The Placement Warrants include
a weighted average anti-dilution right in the event we issue any
shares of common stock or equivalents with a value less than the
then exercise price. As a result, the effect of the anti-dilution
right may cause significant dilution to existing
shareholders.
Use of Proceeds
Any proceeds we receive from the exercise of stock options issued
under the Plan will be used for general corporate purposes,
including repayment or refinancing of debt, acquisitions, working
capital, capital expenditures and repurchases and redemptions of
securities. Pending any specific application, we may initially
invest funds in short-term marketable securities or apply them to
the reduction of other short-term indebtedness. We cannot estimate
the amount of any such proceeds at this time.
Plan of Distribution
We
are registering for resale by the selling shareholders a total of
119,431,669 shares of common stock, representing (a) 55,549,615
outstanding shares of common stock, held by certain of the selling
shareholders named herein; (b) up to 55,549,615 shares of common
stock issuable upon exercise of the Offering Warrants, with an
exercise price of $0.36 per share, which are held by certain
selling shareholders named herein; and (c) up to 8,332,439 shares
of common stock that are issuable upon exercise of the Placement
Warrants, with an exercise price of $0.18 per share. We are not
selling any securities under this prospectus and we will not
receive any of the proceeds from the sale or other disposition by
the selling shareholders or their transferees of the shares of
common stock covered hereby. However, to the extent that the
Warrants are exercised for cash, we will receive up to $19,997,861
upon exercise of the Offering Warrants (Offering Warrants to
purchase 55,549,615 shares of common stock with an exercise price
of $0.36 per share) and $1,499,839 upon exercise of the Placement
Warrants (Placement Warrants to purchase 8,332,439 shares of common
stock with an exercise price of $0.18 per share), or $21,497,700 in
aggregate. We will bear all fees and expenses incident to our
obligation to register the shares of common stock. If the shares of
common stock are sold through broker-dealers or agents, the selling
shareholder will be responsible for any compensation to such
broker-dealers or agents.
Each
Selling Shareholder (the “Selling Shareholders”) of the
securities and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of
their securities covered hereby on the principal Trading Market or
any other stock exchange, market or trading facility on which the
securities are traded or in private transactions. These sales may
be at fixed or negotiated prices. A Selling Shareholder may use any
one or more of the following methods when selling
securities:
|
● |
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers; |
|
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|
● |
block
trades in which the broker-dealer will attempt to sell the
securities as agent but may position and resell a portion of the
block as principal to facilitate the transaction; |
|
|
|
|
● |
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its account; |
|
● |
an
exchange distribution in accordance with the rules of the
applicable exchange; |
|
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|
● |
privately
negotiated transactions; |
|
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|
|
● |
settlement
of short sales; |
|
|
|
|
● |
in
transactions through broker-dealers that agree with the Selling
Shareholders to sell a specified number of such securities at a
stipulated price per security; |
|
|
|
|
● |
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise; |
|
|
|
|
● |
a
combination of any such methods of sale; or |
|
|
|
|
● |
any
other method permitted pursuant to applicable law. |
The
Selling Shareholders may also sell securities under Rule 144 or any
other exemption from registration under the Securities Act, if
available, rather than under this prospectus.
Broker-dealers
engaged by the Selling Shareholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the Selling Shareholders (or, if any
broker-dealer acts as agent for the purchaser of securities, from
the purchaser) in amounts to be negotiated, but, except as set
forth in a supplement to this Prospectus, in the case of an agency
transaction not in excess of a customary brokerage commission in
compliance with FINRA Rule 2440; and in the case of a principal
transaction a markup or markdown in compliance with FINRA
IM-2440.
In
connection with the sale of the securities or interests therein,
the Selling Shareholders may enter into hedging transactions with
broker-dealers or other financial institutions, which may in turn
engage in short sales of the securities in the course of hedging
the positions they assume. The Selling Shareholders may also sell
securities short and deliver these securities to close out their
short positions, or loan or pledge the securities to broker-dealers
that in turn may sell these securities. The Selling Shareholders
may also enter into option or other transactions with
broker-dealers or other financial institutions or create one or
more derivative securities which require the delivery to such
broker-dealer or other financial institution of securities offered
by this prospectus, which securities such broker-dealer or other
financial institution may resell pursuant to this prospectus (as
supplemented or amended to reflect such transaction).
The
Selling Shareholders and any broker-dealers or agents that are
involved in selling the securities may be deemed to be
“underwriters” within the meaning of the Securities Act in
connection with such sales. In such event, any commissions received
by such broker-dealers or agents and any profit on the resale of
the securities purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Each Selling
Shareholder has informed the Company that it does not have any
written or oral agreement or understanding, directly or indirectly,
with any person to distribute the securities.
The
Company is required to pay certain fees and expenses incurred by
the Company incident to the registration of the securities. The
Company has agreed to indemnify the Selling Shareholders against
certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
We
agreed to keep this prospectus effective until the earlier of (i)
the date on which the securities may be resold by the Selling
Shareholders without registration and without regard to any volume
or manner-of-sale limitations by reason of Rule 144, without the
requirement for the Company to be in compliance with the current
public information under Rule 144 under the Securities Act or any
other rule of similar effect or (ii) all of the securities have
been sold pursuant to this prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. The resale
securities will be sold only through registered or licensed brokers
or dealers if required under applicable state securities laws. In
addition, in certain states, the resale securities covered hereby
may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration
or qualification requirement is available and is complied
with.
Under
applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale securities may not
simultaneously engage in market making activities with respect to
the common stock for the applicable restricted period, as defined
in Regulation M, prior to the commencement of the distribution. In
addition, the Selling Shareholders will be subject to applicable
provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of
purchases and sales of the common stock by the Selling Shareholders
or any other person. We will make copies of this prospectus
available to the Selling Shareholders and have informed them of the
need to deliver a copy of this prospectus to each purchaser at or
prior to the time of the sale (including by compliance with Rule
172 under the Securities Act).
Where You Can Find
MORE Information
We
file annual, quarterly and current reports, proxy statements and
other information with the SEC. We also filed a registration
statement on Form S-3, including exhibits, under the Securities Act
of 1933 with respect to the securities offered by this prospectus.
This prospectus is a part of the registration statement, but does
not contain all of the information included in the registration
statement or the exhibits to the registration statement. You may
read and copy the registration statement and any other materials
that we file with the SEC at the SEC’s Public Reference Room at 100
F Street, N.E., Washington, D.C. 20549. You may call the SEC at
1-800-SEC-0330 for information on the operation of the Public
Reference Room. Our reports, proxy and information statements, and
other SEC filings are also available at the SEC’s web site at
http://www.sec.gov.
We
are “incorporating by reference” specified documents that we file
with the SEC, which means:
|
● |
incorporated
documents are considered part of this prospectus; |
|
|
|
|
● |
we
are disclosing important information to you by referring you to
those documents; and |
|
|
|
|
● |
information
we file with the SEC will automatically update and supersede
information contained in this prospectus. |
We
incorporate by reference the documents listed below and any future
filings we make with the SEC under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 after the date of this
prospectus and before the end of the offering of the securities
pursuant to this prospectus:
|
● |
Cipherloc’s
Annual Report on Form 10-K for the for the fiscal year ended
September 30, 2020; |
|
|
|
|
● |
Cipherloc’s
Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, 2021 and June 30, 2021; and |
|
|
|
|
● |
Cipherloc’s
Current Reports on Form 8-K dated July 28, 2021,September 14, 2021;
September 17, 2021; September 30, 2021; and October 12,
2021. |
You
may obtain copies of documents incorporated by reference in this
prospectus, at no cost, by request directed to us at the following
address or telephone number:
David
Chasteen
Chief
Executive Officer
Cipherloc
Corporation
6836
Bee Cave Road, Bldg. 1, S#279
Austin,
TX 78746
(512) 337-3728
You should not assume that the information in this prospectus, any
prospectus supplement and/or other offering material, as well as
the information we file or previously filed with the SEC that we
incorporate by reference in this prospectus, any prospectus
supplement and/or other offering material, is accurate as of any
date other than its respective date. Our business, financial
condition, results of operations and prospects may have changed
since that date.
Legal Matters
The
validity of the securities offered by this prospectus will be
passed upon for us by Sheppard Mullin Richter & Hampton LLP,
New York, New York.
Experts
The balance sheets of Cipherloc Corporation as of September 30,
2020 and 2019, and the related statements of operations,
shareholders’ equity (deficit), and cash flows for each of the
years in the two-year period ended September 30, 2020, and the
related notes, included in this prospectus have been audited by
Briggs & Veselka Co., Houston, Texas, independent registered
public accounting firm, as stated in their report date dated
December 28, 2020, which is included herein, and has been so
included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
No expert or counsel named in this prospectus as having prepared or
certified any part of this prospectus or having given an opinion
upon the validity of the securities being registered or upon other
legal matters in connection with the registration or offering of
the common stock was employed on a contingency basis, or had, or is
to receive, any interest, directly or indirectly, in our Company or
any of our parents or subsidiaries, nor was any such person
connected with us or any of our parents or subsidiaries, if any, as
a promoter, managing or principal underwriter, voting trustee,
director, officer, or employee.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of
Issuance and Distribution.
The
following table sets forth an estimate of the registrant’s
expenses, other than any sales commissions or discounts, in
connection with the issuance and distribution of the securities
being registered hereby. All amounts are estimates except the SEC
registration fee.
Securities and
Exchange Commission Registration fee |
|
$ |
4,432.32 |
|
Accounting fees and
expenses |
|
|
5,000.00 |
* |
Legal fees and
expenses |
|
|
50,000.00 |
* |
Miscellaneous |
|
|
10,000.00 |
* |
Total |
|
$ |
69,342.32 |
* |
Item 14.
Indemnification of Directors and Officers.
The
Company’s Certificate of Incorporation and Bylaws (collectively,
the “Charter Documents”) provide that, to the fullest extent
permitted under the Delaware General Corporation Law
(“DGCL”), no director of the Company shall be personally
liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director. In addition, the Company’s
Charter Documents provide that the Company shall indemnify and hold
harmless, to the fullest extent permitted by applicable law, any
person (a “Covered Person”) who was or is made or is
threatened to be made a party or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative
or investigative (a “Proceeding”) by reason of the fact that
he or she, or a person for whom he or she is the legal
representative, is or was a director or officer of the Company or,
while a director or officer of the Company, is or was serving at
the request of the Company as a director, officer, employee or
agent of another corporation or of a partnership, joint venture,
trust, enterprise or nonprofit entity against all liability and
loss suffered and expenses (including attorneys’ fees) reasonably
incurred by such Covered Person. Pursuant to the Company’s Charter
Documents, the Company shall pay the expenses (including attorneys’
fees) incurred by a Covered Person in defending any Proceeding in
advance of its final disposition; provided, however, that, to the
extent required by applicable law, such payment of expenses in
advance of the final disposition of the Proceeding shall be made
only upon receipt of an undertaking by the Covered Person to repay
all amounts advanced if it should be ultimately determined that the
Covered Person is not entitled to be indemnified pursuant to the
Company’s Certificate of Incorporation.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling us pursuant to the foregoing provisions, we have been
informed that, in the opinion of the SEC, this indemnification is
against public policy as expressed in the Securities Act and is
therefore unenforceable
Item
15. Recent Sales of Unregistered Securities
Stock
Issued for Cash
During
the year ended September 30, 2018, through the utilization of
Private Placement Memorandums (PPMs) and upon receipt of executed
Subscription Agreements, the Company sold 18,909,900 shares of
restricted common stock for $16,625,238 in net cash proceeds. Of
the 18,909,900 shares of common stock issued, 72,000 shares were
each issued with a warrant to purchase two additional shares of
common stock and 18,837,900 shares were each issued with a warrant
to purchase one additional share of common stock with an exercise
price of $1.20 per share and a term of five years. The Company
issued warrants to purchase an additional 5,398,970 shares of
common stock to its underwriters. These warrants were issued with
an exercise price of $1.00 and a term of ten years. Additionally,
in connection with shares sold through the PPMs, the Company issued
warrants to purchase 144,000 shares of common stock. These warrants
were issued with an exercise price of $4.50 and a term of two
years.
During
the year ended September 30, 2019, there was no stock issued for
cash.
During
the year ended September 30, 2020, there was no stock issued for
cash.
On
March 31, 2021, April 7, 2021, April 9, 2021 and April 16, 2021,
the Company entered into a Securities Purchase Agreement, with
certain accredited investors, pursuant to which the Company sold
the Purchasers an aggregate of 55,549,615 (a) shares of common
stock (Offering Shares), and (b) warrants to purchase shares of
common stock of the Company (Offering Warrants). The Offering
Shares and Offering Warrants were sold at a price of $0.18 per
combined Offering Share and Offering Warrant, which was equal to
80% of the closing sales price of the Company’s common stock on the
OTCQB Market on March 30, 2021, which was the last trading day
prior to the initial entry into the Purchase Agreement.
The
sale of the Offering Shares and Offering Warrants occurred at four
closings as follows:
Date of
Closing |
|
Shares
Sold |
|
|
Warrants
Sold |
|
|
Gross
Proceeds |
|
March 31,
2021 |
|
|
35,757,942 |
|
|
|
35,757,942 |
|
|
$ |
6,436,430 |
|
April 7,
2021 |
|
|
7,513,893 |
|
|
|
7,513,893 |
|
|
$ |
1,352,501 |
|
April 9,
2021 |
|
|
8,683,336 |
|
|
|
8,683,336 |
|
|
$ |
1,563,000 |
|
April 16,
2021 |
|
|
3,594,444 |
|
|
|
3,594,444 |
|
|
$ |
647,000 |
|
|
|
|
55,549,615 |
|
|
|
55,549,615 |
|
|
$ |
9,998,931 |
|
The
Offering Warrants, which are evidenced by Common Stock Purchase
Offering Warrants, have an exercise price of $0.36 per share (200%
of the Offering Price), and may be exercised at any time from the
grant date of the Offering Warrants (i.e., March 31, 2021, April 7,
2021, April 9, 2021 or April 16, 2021, as applicable), until five
years thereafter. The Offering Warrants contain anti-dilution
rights such that if we issue, or are deemed to have issued, common
stock or common stock equivalents at a price less than the then
exercise price of the Offering Warrants, the exercise price of the
Offering Warrants is automatically reduced to such lower value, and
the number of shares of common stock issuable upon exercise
thereafter is adjusted proportionately so that the aggregate
exercise price payable upon exercise of such Offering Warrants is
the same prior to and after such reduction in exercise
price.
Paulson
Investment Company, LLC served as placement agent for the offering
and the Company entered into a Placement Agent Agreement with the
Placement Agent in connection therewith. As partial consideration
for the services provided by the Placement Agent, the Company
granted the Placement Agent warrants to purchase shares of common
stock.
On
April 16, 2021, we issued Placement Warrants to the Placement Agent
and its assigns to purchase 15% of the Offering Shares sold in the
Private Offering (8,332,439 shares in aggregate) evidencing the
Placement Warrants. The Placement Warrants have a term of 10 years,
an exercise price of $0.18 per share, and cashless exercise rights.
The Placement Warrants include a weighted average anti-dilution
right in the event we issue any shares of common stock or
equivalents with a value less than the then exercise price. As a
result, the effect of the anti-dilution right may cause significant
dilution to existing shareholders.
Stock
and Stock Options Issued to Board of Directors and Officers and
Employees
During
the year ended September 30, 2018, the Company issued 766,033
shares of common stock with a fair value of $1,472,601 to its
officers and other employees as part of their
compensation.
During
the year ended September 30, 2019, the Company issued 9,346 shares
of common stock with a fair value of $11,216 to its employees as
part of their compensation. The Company also issued stock options
to purchase 1,100,000 shares of common stock to members of the
Board of Directors and officers with a Black Scholes value of
$862,000, which vest ratably over a three-year period. Stock
compensation expense for $45,942 was recognized in the
period.
During
the year ended September 30, 2020, stock options to purchase
300,000 shares of common stock were cancelled due to the
termination of employment. As of September 30, 2020, 800,000 stock
options are outstanding. None of the shares are in the money and
the unamortized amount of stock compensation as of September 30,
2020 is $383,453.
Stock
Issued for Services
During
the year ended September 30, 2018, the Company issued 10,000 shares
of common stock with a fair value of $15,000 to Magnolia Investor
Relations for investor relations services rendered.
During
the year ended September 30, 2019, the Company issued 20,000 shares
of common stock with a fair value of $40,000 to a consultant for
consulting services rendered.
During
the year ended September 30, 2020, the Company did not issue any
stock for services.
Stock
Issued for Settlement
During
the year ended September 30, 2018, the Company issued 50,000 shares
of common stock with a fair value of $81,000 to settle a legal
matter by two shareholders who claimed they were entitled to
125,000 shares of common stock because of funds allegedly paid to
the Company and promises allegedly made by the Company. The Company
denied these allegations and settled the matter for 50,000 shares
of common stock.
Other
On
September 26, 2017, the Company issued a convertible note payable
to FirstFire Global Opportunities Fund, LLC (“FirstFire”) in
the principal amount of $330,000, which included an original issue
discount of $30,000. The Company incurred $8,500 in debt issuance
costs. The note accrued interest at 5% per annum and was to mature
on March 26, 2018. The note was convertible at $2.00 per share,
subject to adjustment due to ratchet or down round protection,
among other adjustments. The Company also issued 50,000 shares of
its common stock, as well as warrants to purchase an additional
165,000 shares of common stock at $4.50 per share with a term of
two years. The note was amended on December 20, 2017, which reduced
the conversion price of the note from $2.00 to $1.00 per share and
the exercise price of the warrants from $4.50 to $2.00. The
amendment also required the Company to issue an additional 87,500
shares of common stock to FirstFire. The Company also received the
right to prepay the convertible note at any time from the 151st
through the 180th day following September 26, 2017, then the
Company could repay FirstFire at 130% multiplied by the outstanding
principal amount plus accrued and unpaid interest.
On
March 21, 2018, the Company entered into a settlement agreement
with FirstFire, under which FirstFire converted $77,500 of the note
payable into 50,000 shares of common stock, and the Company paid
$350,000 to satisfy the convertible note payable in
full.
On
December 14, 2017, the Company issued a convertible note payable to
Peak One Opportunity Fund LP (“Peak One”) with a principal
amount of $300,000. The Company incurred $27,400 in debt issuance
costs. The note was to mature on December 14, 2020. The note was
convertible at $1.00 per share. The Company also issued 275,000
shares of its common stock, as well as warrants to purchase an
additional 75,000 shares of common stock at $2.00 per share with a
term of five years at the time of note issuance.
On
April 30, 2018, the Company settled the Peak One note for $375,000
and issued 71,429 shares of common stock.
* * *
* * * *
To
the extent such issuances and grants described above are deemed
“sold or offered” (and not issued under a no-sale theory),
we claim an exemption from registration pursuant to Section
4(a)(2), Rule 506 of Regulation D and/or Regulation S of the
Securities Act, since the foregoing issuances and grants did not
involve a public offering, the recipients took the securities for
investment and not resale, we took take appropriate measures to
restrict transfer, and the recipients were (a) “accredited
investors”; (b) had access to similar documentation and
information as would be required in a Registration Statement under
the Securities Act; (c) were non U.S. persons; and/or (d) were
officers or directors of the Company. The securities are subject to
transfer restrictions, and the certificates evidencing the
securities contain an appropriate legend stating that such
securities have not been registered under the Securities Act and
may not be offered or sold absent registration or pursuant to an
exemption therefrom. The securities were not registered under the
Securities Act and such securities may not be offered or sold in
the United States absent registration or an exemption from
registration under the Securities Act and any applicable state
securities laws.
We
claim an exemption from registration afforded by Section 3(a)(9) of
the Securities Act, for the above exchanges/settlements, as the
securities were exchanged by the Company with its existing security
holders exclusively in transactions where no commission or other
remuneration was paid or given directly or indirectly for
soliciting such exchange.
Item
16. Exhibits.
(a)
Exhibits Pursuant to Item 601 of Reg S-K
|
|
|
|
Incorporated by Reference |
Exhibit
No.
|
|
Description |
|
Form |
|
File No. |
|
Exhibit |
|
Filing
Date
|
3.6 |
|
Delaware Certificate of Merger, filed
on September 16, 2021 |
|
8-K |
|
000-28745 |
|
3.2 |
|
9/17/2021 |
4.1 |
|
Form of Common Stock Purchase Warrant of
Cipherloc Corporation issued in March 2021 Private
Offering |
|
8-K |
|
000-28745 |
|
4.1 |
|
4/8/2021 |
4.2 |
|
Form of Purchase Warrant Issued to Placement
Agent and its Assigns dated April 16, 2021 |
|
8-K |
|
000-28745 |
|
4.2 |
|
4/21/2021 |
4.3 |
|
Description of the Registrant’s Securities
Registered Pursuant to Section 12 of the Securities Exchange Act of
1934 |
|
10-K |
|
000-28745 |
|
4.1 |
|
12/29/2020 |
5.1* |
|
Opinion
of Sheppard Mullin Richter & Hampton LLP |
|
|
|
|
|
|
|
|
10.1** |
|
2019 Stock Incentive Plan Effective as of August
8, 2019 |
|
8-K |
|
000-28745 |
|
10.1 |
|
8/12/2019 |
10.2 |
|
Settlement Agreement, effective January 15, 2021,
between CipherLoc Corporation, the Carmel Trust, the Carmel Trust
II, James LaGanke, individually and as the Trustee of both the
Trust and Trust II |
|
8-K |
|
000-28745 |
|
10.1 |
|
1/20/2021 |
|
|
|
|
Incorporated by Reference |
Exhibit
No.
|
|
Description |
|
Form |
|
File No. |
|
Exhibit |
|
Filing
Date
|
10.3** |
|
Executive Agreement dated October 19, 2020
between Cipherloc Corporation and David
Chasteen |
|
8-K |
|
000-28745 |
|
10.1 |
|
10/23/2020 |
10.4** |
|
Offer
Letter, dated October 29, 2020, between Cipherloc Corporation and
David Chasteen |
|
8-K |
|
000-28745 |
|
10.2 |
|
1/20/2020 |
10.5 |
|
Amendment Agreement, dated September 30, 2020, by
and between the Company and Manchester Explorer,
LP |
|
8-K |
|
000-28745 |
|
10.1 |
|
10/2/2020 |
10.6 |
|
Amendment Agreement, dated September 30, 2020, by
and between the Company and JEB Partners, LP |
|
8-K |
|
000-28745 |
|
10.2 |
|
10/2/2020 |
10.7 |
|
Amendment Agreement, dated September 30, 2020, by
and between the Company and James Besser |
|
8-K |
|
000-28745 |
|
10.3 |
|
10/2/2020 |
10.8 |
|
$365,430 Promissory Note, dated April 12, 2020
between Cipherloc Corporation and Texas Capital Bank,
N.A. |
|
8-K |
|
000-28745 |
|
99.1 |
|
4/27/2020 |
10.9** |
|
Executive Transition and Release Agreement by and
between the Company and Andrew Borene, dated March 28,
2020 |
|
8-K |
|
000-28745 |
|
10.1 |
|
3/31/2020 |
10.10 |
|
Lease termination Agreement for property located
on Butherus Drive in Scottsdale, AZ with an effective date of March
1, 2019 |
|
8-K |
|
000-28745 |
|
10.34 |
|
3/1/2019 |
10.11 |
|
Lease Reduction Agreement for property located in
Buda, TX with an effective date of February 1,
2019 |
|
8-K |
|
000-28745 |
|
10.35 |
|
3/1/2019 |
10.12 |
|
Marketing Consulting Services Agreement was
executed by the Registrant on March 29, 2019 |
|
8-K |
|
000-28745 |
|
10.34 |
|
4/2/2019 |
10.13 |
|
Operating Agreement with Ageos, LLC effective
April 24, 2019 and incorporated by reference to the Registrant’s
Form 8-k filed on April 30, 2019 |
|
8-K |
|
000-28745 |
|
10.38 |
|
4/30/2019 |
10.14 |
|
Reseller Agreement with Quality Health Care
International, LLC and Promissory Note dated May 30, 2019 and
attached hereto |
|
10-Q |
|
000-28745 |
|
10.40 |
|
6/5/2019 |
10.15 |
|
Form of Securities Purchase Agreement dated March
31, 2021, by and between Cipherloc Corporation, and each of the
purchasers party thereto |
|
8-K |
|
000-28745 |
|
10.1 |
|
4/8/2021 |
10.16 |
|
Form of Registration Rights Agreement dated March
31, 2021, by and between Cipherloc Corporation, and each of the
purchasers party thereto |
|
8-K |
|
000-28745 |
|
10.2 |
|
4/8/2021 |
|
|
|
|
Incorporated by
Reference |
Exhibit
No.
|
|
Description |
|
Form |
|
File
No. |
|
Exhibit |
|
Filing
Date
|
10.17** |
|
Form of Lock-Up
Agreement (March 2021 Offering) |
|
8-K |
|
000-28745 |
|
10.3 |
|
4/8/2021 |
10.18 |
|
Placement Agent
Agreement dated January 11, 2021, by and between Cipherloc
Corporation and Paulson Investment Company, LLC |
|
8-K |
|
000-28745 |
|
10.4 |
|
4/8/2021 |
10.19 |
|
Indemnification
Agreement dated February 22, 2021, by and between Cipherloc
Corporation and Paulson Investment Company, LLC |
|
8-K |
|
000-28745 |
|
10.5 |
|
4/8/2021 |
10.20£* |
|
March 6, 2020,
Technology Partnership and Authorized Reseller Licensing Agreement
between Cipherloc Corporation and ECS Federal, LLC |
|
|
|
|
|
|
|
|
10.21£* |
|
August
13, 2020, Authorized Reseller / Developer Agreement between
Cipherloc Corporation and Arnhouse Digital Devices
|
|
|
|
|
|
|
|
|
14.1** |
|
Code of Ethics for
Directors Officers and Employees of Cipherloc and its Affiliates,
dated August 8, 2019 |
|
8-K |
|
000-28745 |
|
14.1 |
|
8/12/2019 |
23.1* |
|
Consent of Briggs
& Veselka Co. Independent Registered Public Accounting
Firm |
|
|
|
|
|
|
|
|
23.2* |
|
Consent of Sheppard
Mullin Richter & Hampton LLP (included in Exhibit
5.1) |
|
|
|
|
|
|
|
|
24.1* |
|
Power of Attorney
(included on signature page) |
|
|
|
|
|
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101.INS |
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XBRL Instance
Document |
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101.SCH |
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XBRL Taxonomy
Extension Schema Document |
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101.CAL |
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XBRL Taxonomy
Extension Calculation Linkbase Document |
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101.DEF |
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XBRL Taxonomy
Extension Definition Linkbase Document |
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101.LAB |
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XBRL Taxonomy
Extension Label Linkbase Document |
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* |
Filed
herewith. |
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** |
Indicates
management contract or compensatory plan or
arrangement. |
£
Certain confidential portions of this Exhibit were omitted by means
of marking such portions with brackets (“[****]”) because the
identified confidential portions (i) are not material and (ii)
would be competitively harmful if publicly disclosed.
Item
17. Undertakings.
The
undersigned registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement
to:
(i)
Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii)
Reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the “Calculation of Registration Fee” table in the
effective registration statement; and
(iii)
Include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2)
That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3)
To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4)
That, for the purpose of determining liability under the Securities
Act of 1933 to any purchaser each prospectus filed by the
registrant pursuant to Rule 424(b)(3) shall be deemed to be part of
the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5),
or (b)(7) as part of a registration statement in reliance on Rule
430B relating to an offering made pursuant to Rule 415(a)(1)(i),
(vii), or (x) for the purpose of providing the information required
by section 10(a) of the Securities Act of 1933 shall be deemed to
be part of and included in the registration statement as of the
earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided
in Rule 430B, for liability purposes of the issuer and any person
that is at that date an underwriter, such date shall be deemed to
be a new effective date of the registration statement relating to
the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is
part of the registration statement will, as to a purchaser with a
time of contract of sale prior to such effective date, supersede or
modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in
any such document immediately prior to such effective
date.
(5)
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant
has duly caused this Post-Effective amendment to its registration
statement on form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Austin,
State of Texas on the 9th day of November 2021.
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CIPHERLOC
CORPORATION |
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/s/
David Chasteen |
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By: |
David
Chasteen, Chief Executive Officer
(Principal
Executive Officer)
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Pursuant to the requirements of the
Securities Act of 1933, this Registration Statement has been signed
by the following persons in the capacities and on the dates
indicated.
Signature |
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Title |
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Date |
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/s/
David Chasteen |
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Chief
Executive Officer and Director |
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November
9, 2021 |
David
Chasteen |
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(Principal
Executive Officer) |
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/s/
Ryan Polk |
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Chief
Financial Officer |
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November
9, 2021 |
Ryan
Polk |
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(Principal
Financial and Accounting Officer) |
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/s/
Tom Wilkinson |
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Chairman
of the Board of Directors |
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November
9, 2021 |
Tom
Wilkinson |
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/s/
Anthony Ambrose |
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Director |
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November
9, 2021 |
Anthony
Ambrose |
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/s/
Sammy Davis |
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Director |
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November
9, 2021 |
Sammy
Davis DrPH |
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