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As
filed with the Securities and Exchange Commission on December
30, 2021
Registration
No. 333-255629
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Amendment
No. 1 to
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)
Delaware |
|
7374 |
|
86-0837077 |
(State
or other jurisdiction of
incorporation
or organization)
|
|
(Primary
Standard Industrial
Classification
Code Number)
|
|
(I.R.S.
Employer
Identification
Number)
|
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: ☒
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 ☒ |
Smaller
reporting company
☒ |
|
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 Amendment No. 1 to the
Post-Effective Amendment No. 1 to the Registration Statement on
Form S-1 (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 DECEMBER 30,
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 December 28,
2021, was $0.14 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 __________, 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 42, 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 42.
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 7 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:
|
● |
“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, which is designed to enable
secure and private data transmission. Through our licensing
program, we are offering what we believe to be the first secure,
commercially viable, advanced Polymorphic Encryption Core, or PEC,
data-in-motion product that can be used in virtually any commercial
data security industry or in sensitive application. We believe that
our PEC data-in-motion product allows our customers to securely
send data, with little setup time required.
Beginning
in 2019, we retained an entirely new management team. Our current
management restructured our business to focus our resources on only
products and services that we believe 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 encryption technology. We believe that our
Cipherloc Polymorphic Encryption Engine Core technology is a highly
secure data protection technology, which has received a validation
certificate from the National Institute of Standards and Technology
(NIST).
Prior
to September 30, 2021, we were a Texas corporation. We are now a
Delaware corporation. Our headquarters is located at 6836 Bee Cave
Road, Building 1, Suite 279, Austin, TX 78746.
The
transition to becoming a Delaware corporation was approved by our
shareholders at our 2021 annual meeting that was held on September
13, 2021. In addition to the reincorporation in Delaware, our
shareholders approved other governance actions designed to reduce
risk and accelerate our growth were approved by the shareholders.
Other actions by our shareholders at the annual meeting
included:
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Election
of Anthony Ambrose, Sammy Davis, David Chasteen and Tom Wilkinson
to our board of directors; |
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Ratification
of the appointment of Briggs & Veselka Co. as our independent
auditor; |
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Approval
and adoption of our 2021 Omnibus Equity Incentive Plan; |
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Granting
discretionary authority to our board of directors to combine the
outstanding shares of our common stock into a lesser number of
outstanding shares in a reverse stock split, with the exact ratio
to be determined by our board of directors, within a range of
1-for-2 to a maximum of 1-for-20; |
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Approval
of an amendment to our Amended and Restated Articles of
Incorporation to eliminate the statutory preemptive rights pursuant
to Section 21.208 of the Texas Business Organizations Code in the
event that the reincorporation from the State of Texas to the State
of Delaware is not consummated; |
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Approval,
by non-binding advisory vote, of a resolution approving named
executive officer compensation; and |
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Approval,
by non-binding advisory vote, of future non-binding advisory votes
regarding future named executive officer compensation to occur
every three years. |
Recent
Transaction
Between
March 31, 2021 and April 16, 2021, we entered into a securities
purchase agreement with certain accredited investors, pursuant to
which we sold an aggregate of 55,549,615 shares of our common
stock, and warrants to purchase an equal number shares of our
common stock, for $0.18 per share of common stock sold, in a
private placement. The price of $0.18 per share was equal to 80% of
the closing sales price of our common stock on the OTCQB Market on
March 30, 2021. The warrants issued with the shares of common stock
have an exercise price of $0.36 per share, and may be exercised at
any time prior to March 31, 2026. The warrants have anti-dilution
protection that applies if we issue shares of our common stock at
less than the $0.36 per share exercise price of the
warrants.
We
received approximately $10 million in gross proceeds from the sale
of the shares and warrants. In connection with the private
placement, we agreed to use the proceeds for working capital, and
not for (i) debt repayment, other than the payment of trade
payables in the ordinary course of our business or the repayment of
funds we received under the paycheck protection program of the
Cares Act, (ii) redemption of our stock, (iii) settlement of any
litigation, or (iv) in violation of the law.
Paulson
Investment Company, LLC acted as the placement agent for the
offering. Pursuant to our agreement then, we paid the placement
agent a cash commission of $1,334,861, 13% of the gross proceeds we
received from the placement, and we granted to the placement agent
a ten-year warrant to purchase 8,332,439 shares of our common stock
at the price of $0.18 per share.
On
April 29, 2021, we filed a registration statement on Form S-1 with
the SEC, registering the resale of up to 119,431,669 shares of our
common stock, representing (i) the shares sold in the private
placement referred to above, (i) the shares issuable upon exercise
of warrants issued in that private placement, and (iii) the shares
issuable upon exercise of warrants issued to the placement agent in
the private placement. As a result of the filing of that
registration statement, the holders of the registered shares may
sell those shares into the market.
Products
and Services
We
have focused our development efforts on the commercial application
of our technology by advancing a Software Development Kit or SDK,
for our solution. We believe that this effort has advanced our
technology from theory to commercial application in the form of
several products, named Sentinel, Armor, and Shield, which we make
available to licensees through our SDK. In the past, we have relied
on indirect sales efforts. We are currently developing new products
and services designed for direct sales to customers, rather than
sales through third parties.
Our
core technology is protected by six patents that expire between
2034 and 2037.
Research
and Development
Our
research and development expenditures for the fiscal years ended
September 30, 2021 and September 30, 2020 were $616,746 and
$1,689,455, respectively. During December of 2019, our management
determined that the pending maturity of our patented technology
justified a cessation of our academic research activities,
including the elimination of our chief scientist’s role in leading
various academic efforts. We allocated the cost savings from
ceasing those activities entirely to product development, product
engineering, and revenue-generating sales activities. Our
management continued to emphasis these three areas during fiscal
year 2021 and intends to continue that emphasis in our fiscal year
2022 and beyond.
Competition
The
encryption software market sector is highly competitive, subject to
rapid change, and significantly affected by new product
introductions and other activities of market
participants.
Some
of our competitors have greater financial, technical, sales,
marketing and other resources than we do. Because of these and
other factors, competitive conditions in the markets we compete in
are likely to continue to intensify in the future. Increased
competition could result in price reductions for our products and
services, reductions in our net revenue and profit margins and the
loss of our market share, any of which would likely harm our
business.
We
believe that our future results depend largely upon our ability to
serve our customers better than our competitors, and by offering
new product enhancements, whether by internal development or
acquisition. We also believe that we must provide product offerings
that compete favorably against those of our competitors with
respect to ease of use, reliability, performance, range of useful
features, reputation and price.
We
anticipate that we will face increasing pricing pressures from our
competitors in the future. Since there are low barriers to entry
into the encryption software market, which is subject to rapid
technological change, we believe that competition in our market
will persist and intensify in the future.
Intellectual
Property
Protective
Measures
We
believe that our intellectual property is an important and vital
asset, which enables us to develop, market, and sell our products
and services, and enhance our competitive position. Our
intellectual property includes our proprietary business and
technical know-how, inventions, works of authorship, and
confidential information. To protect our intellectual property, we
rely primarily upon legal rights in trade secrets, patents,
copyrights, and trademarks, in addition to our policies and
procedures, security practices, contracts, and relevant operational
measures.
We
protect the confidentiality of our proprietary information by
entering into non-disclosure agreements with our employees,
contractors, and other entities with which we do business. In
addition, our license agreements related to our software and
proprietary information includes confidentiality terms. These
agreements are generally non-transferable. We also employ access
controls and associated security measures to protect our
facilities, equipment, and networks.
Patents,
Copyrights, Trademarks, and Licenses
Our
products, particularly our software and related documentation, are
protected under domestic and international copyright laws and other
laws related to the protection of intellectual property and
proprietary rights. Currently, we have six patents filed with the
U.S. Patent and Trademark Office. We employ procedures to label
copyrightable works with the appropriate proprietary rights
notices, and we actively enforce our rights in the United States
and abroad. However, these measures may not provide us with
adequate protection from infringement, and our intellectual
property rights may be challenged.
Our
Cipherloc logo is a registered trademark with the U.S. Patent and
Trademark Office. In the United States, we are generally able to
maintain our trademark rights and renew trademark registrations for
as long as the trademarks are in use.
Government
Regulation
Export Control Regulations. We expect that all of our
products will be subject to U.S. export control laws and applicable
foreign government import, export and/or use requirements. The
level of such control generally depends on the nature of the
products in question. Often, the level of export control is
impacted by the nature of the software and encryption incorporated
into our products. In those countries where such controls apply,
the export of our products may require an export license or
authorization. However, even if a transaction qualifies for a
license exception or the equivalent, it may still be subject to
corresponding reporting requirements. For the export of some of our
products, we may be subject to various post-shipment reporting
requirements. Minimal U.S. export restrictions apply to all our
products, whether or not they perform encryption functions. If we
become a Department of Defense contractor in the future, certain
registration requirements may be triggered by our sales. In
addition, certain of our products and related services may be
subject to the International Traffic in Arms Regulations (ITAR) if
our software or services are specifically designed or modified for
defense purposes. If we become engaged in manufacturing or
exporting ITAR-controlled goods and services (even if we do not
export such items), we will be required to register with the U.S.
State Department.
Enhancements
to our existing products may be subject to review under the Export
Administration Act to determine what export classification they
will receive. In addition, any new products that we release in the
future will also be subject to such review before we can export
them. The U.S. Congress continues to discuss t the correct level of
export control in possible anti-terrorism legislation. Such export
regulations may be modified at any time. Modifications to these
export regulations could reduce or eliminate our ability to export
some or all of our products from the United States in the future,
which could put us at a disadvantage in competing with companies
located outside of the U.S. Modifications to U.S. export
regulations could restrict us from exporting our existing and
future products. Any such modifications to export regulations may
put us at a competitive disadvantage with respect to selling our
products internationally.
Privacy
Laws. We may be subject to various international, federal and
state regulations regarding the treatment and protection of
personally identifying and other regulated information. Applicable
laws may include U.S. federal laws and implementing regulations,
such as the [GLBA and HIPAA], as well as state and international
laws and regulations, including the European Union General Data
Protection Regulation (GDPR). Some of these laws have requirements
on the transmittal of data from one jurisdiction to another. In the
event our systems are compromised, many of these privacy laws
require that we provide notices to our customers whose personally
identifiable data may have been compromised. Additionally, if we
transfer data in violation of these laws, we could be subjected to
substantial fines. To mitigate the risk of having such data
compromised, we use encryption and other security to protect our
databases.
Personnel
As of
the date of this prospectus, we have three full-time employees and
one part-time employee. We also have four independent contractors
that provide services to us. We anticipate that we will need to
increase our staffing in the foreseeable future.
Properties
We
lease office space at 2107 Wilson Blvd. Suite 530, Arlington,
Virginia. In February 2020, we entered into a lease agreement with
our landlord for approximately 3,666 square feet. The lease was
effective February 1, 2020, and has a term of five years and six
months. The initial monthly rent is $13,289, and the lease
agreement provides for annual rent increases of approximately 2.7%.
The amount of future guaranteed payments is $822,082. We terminated
the employment of all of our employees working in the Arlington
office space during our restructure completed in April 2021. On
June 9, 2021, we reached a settlement with 2111 Wilson Boulevard,
Inc. to terminate the lease effective June 2021 in exchange for a
payment by us of $150,000. Following the settlement with 2111
Wilson Boulevard, Inc., as discussed above, we did not have any
office leases as of September 30, 2021. Tom Wilkinson, the
Company’s Chairman of the Board of Directors, provides us with the
use of office space that he rents, located at 6836 Bee Caves Road,
Building 1, Suite 279, Austin, TX 78746, which we use as our
corporate headquarters. As of December 1, 2021, we entered into a
month-to-month lease agreement with Mr. Wilkinson, under which we
pay Mr. Wilkinson $500 per month in rent.
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 November 30, 2021 and
excludes:
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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:
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reflects
all currency in United States dollars. |
Risk
Factors
Outlined below are some of the risks that we believe could affect
our business and financial statements, some of which are beyond our
control. An investment in our common stock involves a high degree
of risk. You should carefully consider the following information
about these risks, together with the other information contained in
this prospectus, before investing in our common stock. If any of
the events anticipated by the risks described below occur, our
results of operations and financial condition could be adversely
affected, which could result in a decline in the market price of
our common stock, causing you to lose all or part of your
investment. Additional risks that we do not yet know of, or that we
currently think are immaterial, may also affect our business and
results of operations.
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, 2021 were $3,104,283, and for the year ended
September 30, 2020 were $6,970,072, respectively, and our aggregate
accumulated deficit as of September 30, 2021 was
$71,530,891.
We
cannot assure you that any
of our products currently under development 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.
Our ability to continue as a going concern may
dependupon
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 our recent private placement will allow us to
support our operations until approximately September of 2023. Our
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, we cannot
assure you that these plans and arrangements will be sufficient to
fund our ongoing capital expenditures, working capital, and other
requirements. Our 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 us 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
stockholders 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 ability to
secure commitment of time and resources from third parties 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 we
may be 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. Even 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 our
stockholders.
Future
issuances of new
equity by us may dilute the ownership percentage of our existing
stockholders. The extent of such dilution will depend on the number
of shares issued. The shares issued in such a transaction will be
equal to the total dollars paid to us as an investment divided by
the offering price. Neither the amount of funds that may be
received in such an equity financing, nor the price per share of
our equity securities issued 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 such a need should arise, and
issuing new equity is the vehicle we use to secure additional
funds, then such issuances will likely further dilute the ownership
percentages of our existing stockholders.
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 of the pandemic 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 third parties on which we
rely.
During
2020 and 2021, the COVID-19 pandemic has interrupted our sales and
marketing activities and restricted face-to-face interaction
between our representatives and our potential partners. This slowed
the pace of our development and the expansion of our deal pipeline.
Government action related to 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
other business partners have made to resume business under the new
protocols.
We depend significantly upon the continued involvement of our
present management and on our ability to attract and retain
talented employees.
Our
success
depends significantly upon the involvement of our present
management, who are involved in 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 our industry is
intense, and there are no assurances that such individuals will be
available to us.
Our
business is based on successfully attracting and retaining talented
employees and contractors. The market for highly skilled people in
our industry is extremely competitive. If we are less successful in
our recruiting efforts, or if we are unable to retain key existing
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. Our 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 applicable
markets, and if they are unable to compete successfully our
business will suffer.
Our
proposed products face, and will continue to face, intense
competition from larger companies, as well as from 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 many 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 have 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 we do. Our chief competitors include
companies such as HashiCorp, Inc., 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 and potential customers, as well as
competitive technological developments and industry changes, by
developing or introducing new and enhanced products on a timely
basis. In the past, we have incurred significant research and
development expenses. We expect to 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, which 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 the 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 our new products will
involve a significant commitment of time and resources and will be
subject to a number of risks and challenges, including but not
limited to:
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Lengthy
development cycles; |
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Evolving
industry and regulatory standards and technological developments by
our competitors and customers (if any), and the customers of our
licensees; |
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Rapidly
changing customer preferences; |
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Evolving
platforms, operating systems, and hardware products, such as mobile
devices, and related product and service interoperability
challenges; |
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Entering
into new or unproven markets; and |
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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 in
the market, 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 such 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:
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our
ability to attract and retain customers (if any), and/or the
ability of our licensees to retain customers or sell
products; |
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the
budgeting cycles, seasonal buying patterns, and purchasing
practices of potential customers; |
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price
competition; |
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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 relationships entered into by
and between our competitors; |
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changes
in the mix of our products and support; |
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changes
in the growth rate of the encryption technology market; |
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the
timing and costs related to the development or acquisition of
technologies or businesses or strategic partnerships; |
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lack
of synergy, or the inability to realize expected synergies,
resulting from any acquisitions or strategic
partnerships; |
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our
inability to execute, complete or integrate efficiently any
acquisitions that we may undertake; |
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increased
expenses, unforeseen liabilities, or write-downs and any impact on
our operating results from any acquisitions we may
consummate; |
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our
ability to create a sizeable and productive distribution
channel; |
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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; |
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timing
of any revenue recognition and any revenue deferrals; |
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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; |
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the
cost and potential outcomes of any litigation, which could have a
material adverse effect on our business; |
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seasonality
or cyclical fluctuations in our markets; |
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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 |
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general
macroeconomic conditions, in some or all regions in which 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:
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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; |
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independent
security vendors, such as HashiCorp, that offer encryption
products; and |
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small
and large companies that offer encryption technologies that compete
with some of the features proposed for our products. |
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Many
of our existing competitors have, and some of our potential
competitors may have, substantial competitive advantages such
as: |
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greater
name recognition and longer operating histories; |
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larger
sales and marketing budgets and resources; |
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broader
distribution and established relationships with distributors and
customers (if any), or the customers of our licensees; |
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greater
customer support resources; |
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greater
resources to make strategic acquisitions or enter into strategic
partnerships; and |
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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 direct end users
and will need to obtain additional licensees and/or end users in
the future to generate revenues.
As of
the filing of this report, we don’t have any significant revenue
generating licensees or customers. In order to generate revenue 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 stock 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:
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our
licensees or their customers’ levels of satisfaction or
dissatisfaction with our products; |
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the
quality, breadth, and prices of our products; |
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our
general reputation and events impacting that
reputation; |
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the
services and related pricing offered by our
competitors; |
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disruption
by new services or changes in law are regulations that impact the
need for efficacy of our products and services; |
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our
customer service activities and responsiveness to any customer
complaints; |
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customer
dissatisfaction if they do not receive the full benefit of our
services due to their failure to provide all relevant
data; |
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customer
dissatisfaction with the methods or extent of our remediation
services; and |
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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
existing 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
negatively impacted. 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 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 others 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 proprietary
information, or that of our licensees, or their or our customers’
and partners’, 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 these types of events caused
our licensees or customers, or our licensees’ customers or
potential customers, to believe that our products are unreliable.
We believe that our brand recognition and reputation are critical
aspects of our business, to retaining existing licensees and
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 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 after such an event 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, will 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, or the ability to generate
cash from 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 will commit resources
to projects prior to receiving payments from the counterparty in
amounts sufficient to cover our 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 that
may not yet be developed. 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 certain 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 that 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. We cannot assure you 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 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:
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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; |
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the
loss of potential licensees, customers or distribution
partners; |
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delayed
or lost revenue; |
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delay
or failure to attain market acceptance; |
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negative
publicity and harm to our reputation; and |
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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 Our 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 would compete with
our products.
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 our 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 have to 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
stockholder 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
current 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 be required
to release the source code of our proprietary software to the
public under certain open-source licenses. 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
Historically, the
market price for our common stock has been volatile, 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:
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volatility
and limitations in trading volumes of our shares of common
stock; |
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our
ability to obtain financings to conduct and complete research and
development activities and other business activities; |
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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; |
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our
ability to attract new licensees; |
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changes
in the development status of our products; |
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changes
in our capital structure or dividend policy, future issuances of
securities, sales of large blocks of common stock by our
stockholders; |
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our
cash position; |
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announcements
and events surrounding financing efforts, including debt and equity
securities; |
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our
inability to enter into new markets or develop new
products; |
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reputational
issues; |
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announcements
of acquisitions, partnerships, collaborations, joint ventures, new
products, capital commitments, or other events by us or our
competitors; |
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changes
in industry conditions or perceptions; |
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analyst
research reports, recommendation and changes in recommendations,
price targets, and withdrawals of coverage; |
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departures
and additions of key personnel; |
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disputes
and litigations related to intellectual properties, proprietary
rights, and contractual obligations; |
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changes
in applicable laws, rules, regulations, or accounting practices and
other dynamics; and |
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events or factors, many of which may be out of our
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In
addition, if the market for stock of companies 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 of shares in the open market, will decrease the market price
of our common stock. The consequence of any such issuances or
resale of our common stock on our market price may be increased as
a result of the fact that our common stock is thinly, or
infrequently, traded. The exercise of any outstanding options, or
the vesting of any restricted stock, that we may grant to
directors, executive officers and other employees in the future, or
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 outstanding options and warrants to purchase our common
stock will dilute existing stockholders’ ownership percentage. We
currently have outstanding warrants to purchase 87,628,920 shares
of our common stock, with a weighted average exercise price of
$0.55. Our board of directors has authorized, and our stockholders
have approved, an employee stock option plan, under which we may
issue options to purchase or grant up to an aggregate of 8,000,000
shares of common stock. 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 then existing stockholders. The dilutive effect
of the exercise or conversion of these securities may adversely
affect our ability to obtain additional capital. The holders of
these securities may be expected to exercise or convert their
securities when we are able to obtain additional equity capital on
terms more favorable than these securities.
The anti-dilutive rights of certain warrants could result in
significant dilution to our existing stockholders and/or require us
to issue a substantially greater number of shares, which may
adversely affect the market price of our common
stock.
The
warrants to purchase 55,549,615 shares of our common stock issued
to investors in our recent private placementcontain
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 those warrants, the exercise price
of those warrants will automatically be reduced to such lower
value, and the number of shares of common stock issuable upon
exercise thereafter will be adjusted proportionately, so that the
aggregate exercise price payable upon exercise of such 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 our other stockholders. The warrants to purchase
8,332,439 shares of our common stock issuable upon exercise of
warrants issued to the placement agent in the private placement
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 our other
stockholders. The triggering of the anti-dilution rights in the
warrants issued in the private placement 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 other stockholders.
Our common shares are thinly traded, and in the future may continue
to be thinly traded, and you may be unable to sell your shares 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 that has a large
and steady volume of trading activity that will generally support
continuous sales without an adverse effect on its 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 even 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 stockholders 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 have been registered for resale,
and their sale or potential sale may depress the market price of
our common stock.
As of
September 30, 2021, we had 82,927,311 shares of common stock
outstanding. In April 2021, we filed aregistration
statement that registers the resale of 55,549,615 shares of our
common stock and warrants to purchase an additional 63,882,054
shares of our common stock. As of September 30, 2021, the
55,549,615 registered shares constitute approximately 67.0% of our
outstanding shares of common stock, and the 63,882,054 warrants
shares would constitute 37.5% of our outstanding common stock,
assuming the exercise of all of the total outstanding warrants for
the purchase of 87,628,920 shares 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 our
common stock are sold, it would increase the supply of our common
stock, which would thereby cause a decrease in its
price.
In
addition, the shares of our common stock that has been registered
for resale and/or is issuable upon exercise of the warrants issued
in the private placement 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 that stockholders attempt to sell in the market will only
further decrease the share price. The exercise price of our
outstanding 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 holders of
those warrants 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 those warrants or
made available for sale pursuant to the registration statement,
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 stockholders
and could cause our share price to fall.
We
expect that we will need significant additional capital 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 that we raise additional
capital by issuing equity securities, our existing stockholders 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 in which 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 stockholders, and new
investors could gain rights superior to our existing
stockholders.
Our common stock is subject to restrictions on sales by
broker-dealers and penny stock rules, which may be detrimental to
investors.
Our
common stock is subject to Rules 15g-1 through 15g-9 under the
Exchange Act, which imposes certain sales practice requirements on
broker-dealers who sell our common stock to persons other than
established customers and “accredited investors” (as defined in
Rule 501(a) of the Securities Act). For transactions covered by
this rule, a broker-dealer must make a special suitability
determination for the purchaser and receive 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
holders 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 and
the 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 regarding 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, operated by the OTC
Markets Group. The OTCQB is often highly illiquid, in part because
it does not have a national quotation system by which potential
investors can follow the market price of shares, except through
information received and generated by a limited number of
broker-dealers that make markets in particular stocks. There is a
greater chance of volatility for securities that trade on the
OTCQB, as compared to a national exchange or quotation system. This
volatility may be caused by a variety of factors, including the
lack of readily available price quotations, the absence of
consistent administrative supervision of bid and ask quotations,
lower trading volume, and market conditions. Investors in our
common stock may experience high fluctuations in the market price
and volume of the trading market for our securities. These
fluctuations, when they occur, have a negative effect on the market
price for our securities. Accordingly, our stockholders may not be
able to realize a fair price for 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 a 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 we are committed to remediating
our material weaknesses in such controls as promptly as possible.
However, we cannot assure you as to when these material weaknesses
will be remediated or that additional material weaknesses will not
arise in the future. Any failure by us 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 regulations 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).
Our 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 legal
action will likely result in a significant diversion of our
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 of 2018, California passed the California Consumer Privacy
Act, or 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, the “VCDPA,” which includes similar rights as
set forth in the CCPA. 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 our chief executive officer, David
Chasteen, if we sell all or substantially all of our assets or
consummate a merger, reorganization or similar transaction in which
a majority of the equity in the surviving company is not owned by
our stockholders immediately prior to such a transaction, then Mr.
Chasteen will receive a bonus equal to 5% of the “Net Proceeds” we
receive from such a transaction. Net Proceeds are defined as the
purchase price, less costs incurred to complete the sale, including
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 that could
be accretive to stockholders or decrease the amount of funds
available to be paid to stockholders upon a change of
control.
The accounting treatment of the recently issued warrants could have
a material adverse impact on our financial
statements.
Various
provisions of the warrants we issued in the recent private
placement, 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 those 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 those 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 stockholders 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 report, 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, 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 issued in the recent private placement 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 warrants issued to
investors and $0.18 per share for the warrants issued to the
placement agent). Any future resets to the exercise price of those
warrants will have a further dilutive effect on our existing
stockholders and could result in a decrease in our stock
price.
The purchase agreement related to our recent private placement
includes various covenants, such that if we don’t comply with such
covenants, we may suffer potential monetary and other
penalties.
The
securities purchase agreement we entered into in connection with
the recent private placement 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, which may cause a material
impact upon our financial condition.
General
Risk Factors
Our charter allows us to issue “blank check” preferred stock
without stockholder approval.
Pursuant
to our certificate 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 stockholders. Because our board of
directors is able to designate the powers and preferences of the
preferred stock without the vote of a majority of our stockholders,
our stockholders will have no control over what designations and
preferences our preferred stock will have. The issuance of shares
of preferred stock or the rights associated therewith, could cause
substantial dilution to our existing stockholders. Additionally,
the dilutive effect of any preferred stock that we may issue may be
exacerbated given the fact that such preferred stock may have
voting rights and/or other rights or preferences that could provide
the preferred stockholders with substantial voting control over us
and/or give those holders the power to prevent or cause a change in
control. As a result, the issuance of shares of preferred stock may
cause the value of our common stock 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 a reporting company to the Securities and Exchange Commission,
or SEC. 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 financial
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 being 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 by us 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 our target markets, 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 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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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 intense competition within our industry for acquisitions of
businesses, technologies and assets. In the future, such
competition may become more intense. As such, even if we are able
to identify an acquisition target that we would like to acquire, 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
stockholders. 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 us. In addition, the key personnel of the acquired
business may not be willing to work for us. We cannot predict the
effect any 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 any 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 that 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 stockholder’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 such sales, could adversely affect
the market price of our common stock. Our 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 stockholders from
realizing a premium over our stock price.
Stockholders
may be diluted significantly through our efforts to obtain
financing and satisfy obligations through the issuance of
additional shares of our common stock.
Whenever
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 when shares are issued to our officers, directors
and applicable consultants as compensation. Our board of directors
has authority, without action or vote of the stockholders to issue
all or part of the authorized but unissued shares of our 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 stockholders, which may further dilute our 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 us 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 such third parties,
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, over utilization of our products and services. In
addition, acquisitions of our business 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 our common stock will be declared at the discretion of
our board of directors and will depend on, among other things, 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).
We
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
We
are registering the shares of common stock for the benefit of the
selling shareholders. 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, which amount we plan to
use to funding growth initiatives for working capital needs.
However, the timing and manner of use of the net proceeds may vary,
depending on the amount of actual proceeds received from the
exercise of the Warrants, if any, the timing of the receipt of such
proceeds, our rate of growth and other factors. To the extent that
any shares of common stock issuable upon exercise of the Warrants
are not registered under an effective registration statement under
the Securities Act, such unregistered Warrants or portion thereof
are exercisable on a cashless basis pursuant to the terms of the
Warrant agreements. Additionally, the Placement Warrants may be
exercised on a cashless basis, regardless of whether a registration
statement covering the shares of common stock issuable upon
exercise thereof is effective.
We
have agreed to pay all costs, expenses and fees relating to
registering the shares of our common stock referenced in this
prospectus. The selling shareholders will pay any underwriting
discounts and commissions and expenses incurred by the selling
shareholders for brokerage, accounting, tax or legal services or
any other expenses incurred by the selling shareholders in
disposing of the shares.
See
“Selling Shareholders” and
“Plan of Distribution”
described below.
Determination of
Offering Price
The
selling shareholders will offer the shares at the prevailing market
prices or privately negotiated price. The offering price of our
common stock does not necessarily bear any relationship to our book
value, assets, past operating results, financial condition or any
other established criteria of value. Our common stock may not trade
at market prices in excess of the offering price as prices for
common stock in any public market will be determined in the
marketplace and may be influenced by many factors, including the
depth and liquidity.
Description of Capital
Stock
The
following information describes our common stock and preferred
stock, as well as certain provisions of our Certificate of
Incorporation and Bylaws, as amended and restated (the
“Bylaws”). This
description is only a summary. You should also refer to our
Certificate of Incorporation and Bylaws, which have been filed with
the SEC as exhibits to our registration statement, of which this
prospectus forms a part.
Our
authorized capital stock consists 681,000,000 shares of common
stock at a par value of $0.01 and 10,000,00 shares of preferred
stock at a par value of $0.01.
Common Stock
There
were 82,927,311 shares of common stock outstanding as of December
16, 2021, held by approximately 1,210 shareholders of record. The
actual number of holders of our common stock is greater than this
number of record holders, and includes shareholders who are
beneficial owners, but whose shares are held in street name by
brokers or held by other nominees. This number of holders of record
also does not include shareholders whose shares may be held in
trust by other entities.
Voting
Rights. Each share of our common stock is entitled to one vote
on all stockholder matters. Shares of our common stock do not
possess any cumulative voting rights.
Except
for the election of directors, if a quorum is present, an action on
a matter is approved if it receives the affirmative vote of the
holders of a majority of the voting power of the shares of capital
stock present in person or represented by proxy at the meeting and
entitled to vote on the matter, unless otherwise required by
applicable law, Delaware law, our Certificate of Incorporation or
Bylaws. The election of directors will be determined by a plurality
of the votes cast in respect of the shares present in person or
represented by proxy at the meeting and entitled to vote, meaning
that the nominees with the greatest number of votes cast, even if
less than a majority, will be elected. The rights, preferences and
privileges of holders of common stock are subject to, and may be
impacted by, the rights of the holders of shares of any series of
preferred stock that we have designated, or may designate and issue
in the future.
Dividend
Rights. Each share of our common stock is entitled to equal
dividends and distributions per share with respect to the common
stock when, as and if declared by our Board of Directors (the
“Board”), subject
to any preferential or other rights of any outstanding preferred
stock.
Liquidation
and Dissolution Rights. Upon liquidation, dissolution or
winding up, our common stock will be entitled to receive pro rata
on a share-for-share basis, the assets available for distribution
to the stockholders after payment of liabilities and payment of
preferential and other amounts, if any, payable on any outstanding
preferred stock.
Other
Matters. No shares of our common stock subject to redemption or
convertible into other securities.
Preferred Stock
The
Company has authorized 10,000,000 shares of Preferred Stock, at
$0.01 par value of which 1,000,000 shares are designated as Series
A Preferred Stock, of which none are issued and outstanding as of
December 16, 2021. Each share of Series A Preferred Stock has 1.5
votes on all matters presented to be voted by the holders of our
common stock. The holders of the Preferred A shares can only
convert the shares if agreed upon by the Board of
Directors.
Shares
of Preferred Stock of the Company may be issued from time to time
in one or more series, each of which shall have such distinctive
designation or title as shall be determined by the Board of
Directors of the Company prior to the issuance of any shares
thereof. Preferred Stock shall have such voting powers, full or
limited, or no voting powers, and such preferences and relative,
participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be
stated in such resolution or resolutions providing for the issue of
such class or series of Preferred Stock as may be adopted from time
to time by the Board of Directors prior to the issuance of any
shares thereof.
Warrants
During
the year ended September 30, 2018, the Company issued warrants to
purchase 75,000 shares of common stock. These warrants were issued
with an exercise price of $2.00 and a term of five years. No
warrants were issued during fiscal year 2020 and 2019.
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.
The
Offering Warrants to purchase 55,549,615 shares of common stock
issued in March and April 2021, 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
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.
The
Placement Warrants to purchase 8,332,439 shares of common stock 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.
As of
December 16, 2021, and including the Offering Warrants and
Placement Warrants, we had outstanding warrants to purchase
87,628,920 shares of common stock with a weighted average exercise
price of approximately $0.57 per share.
Anti-Takeover
Effects of Certain Provisions of our Certificate of Incorporation,
Bylaws and the DGCL
We
are governed by the provisions of Section 203 of the DGCL. In
general, Section 203 prohibits a publicly traded Delaware
corporation from engaging in a business combination with an
interested stockholder for a period of three years after the date
of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a
prescribed manner. A business combination includes mergers, asset
sales or other transactions resulting in a financial benefit to the
stockholder. An interested stockholder is a person who, together
with affiliates and associates, owns (or within three years, did
own) 15% or more of the corporation’s voting stock, subject to
certain exceptions. The statute could have the effect of delaying,
deferring or preventing a change in control of our
Company.
Our
Certificate of Incorporation and bylaws contain provisions that
could have the effect of discouraging potential acquisition
proposals or making a tender offer or delaying or preventing a
change in control, including changes a stockholder might consider
favorable. In particular, our Certificate of Incorporation and
bylaws, as applicable, among other things:
|
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provide
our Board of Directors with the ability to alter our bylaws without
stockholder approval; and |
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provide
that vacancies on our Board of Directors may be filled by a
majority of directors in office, although less than a
quorum. |
Such
provisions may have the effect of discouraging a third-party from
acquiring us, even if doing so would be beneficial to our
stockholders. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of our
Board of Directors and in the policies formulated by them, and to
discourage some types of transactions that may involve an actual or
threatened change in control of our Company. These provisions are
designed to reduce our vulnerability to an unsolicited acquisition
proposal and to discourage some tactics that may be used in proxy
fights. We believe that the benefits of increased protection of our
potential ability to negotiate with the proponent of an unfriendly
or unsolicited proposal to acquire or restructure our Company
outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals could result in
an improvement of their terms.
However,
these provisions could have the effect of discouraging others from
making tender offers for our shares that could result from actual
or rumored takeover attempts. These provisions also may have the
effect of preventing changes in our management.
Common
Stock Quotation
Our
common stock is traded on the over-the-counter market and is quoted
on the OTCQB Venture Market run by OTC Markets Group under the
symbol “CLOK.”
As of
December 16, 2021, there were 82,927,311 shares of our common stock
issued and outstanding, and there were 1,127 holders of our common
stock.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is Pacific Stock
Transfer Company, 6725 Via Austin Pkwy #300, Las Vegas, Nevada
89119. Its telephone number is (800) 785-7782.
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:
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● |
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; |
|
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● |
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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|
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settlement
of short sales; |
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● |
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; |
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● |
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise; |
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a
combination of any such methods of sale; or |
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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).
Selling
Shareholders
None
of the selling shareholders has ever been an executive officer or
director of the Company or has had a material relationship with us
at any time within the past three years unless disclosed in the
footnotes below.
The
common stock being offered by the selling shareholders are those
previously issued to the selling shareholders, and those issuable
to the selling shareholders, upon exercise of the Warrants. For
additional information regarding the issuances of those shares of
common stock and warrants, see “Private Placement Offering”
above. We are registering the shares of common stock in order to
permit the selling shareholders to offer the shares for resale from
time to time. Except for the ownership of the shares of common
stock and the Warrants, the selling shareholders have not had any
material relationship with us within the past three
years.
The
table below lists the selling shareholders and other information
regarding the beneficial ownership of the shares of common stock by
each of the selling shareholders. The second column lists the
number of shares of common stock beneficially owned by each selling
shareholder, based on their ownership of shares of common stock and
warrants, as of December 16, 2021, assuming exercise of the
warrants held by the selling shareholders on that date, without
regard to any limitations on exercises, and is based on information
provided by such selling shareholders to the Company.
The
third column lists the shares of common stock being offered by this
prospectus by the selling shareholders.
In
accordance with the terms of the RR Agreement with the selling
shareholders, this prospectus generally covers the resale of the
sum of (i) the number of shares of common stock issued to the
selling shareholders in the “Private Placement Offering”
described above and (ii) the maximum number of shares of common
stock issuable upon exercise of the related Warrants, determined as
if the outstanding Warrants were exercised in full as of the
trading day immediately preceding the date the registration
statement of which this prospectus forms a part, was initially
filed with the SEC, each as of the trading day immediately
preceding the applicable date of determination and all subject to
adjustment as provided in the RR Agreement, without regard to any
limitations on the exercise of the Warrants. The fourth column
assumes the sale of all of the shares offered by the selling
shareholders pursuant to this prospectus.
Under
the terms of the Warrants, a selling shareholder may not exercise
the Warrants to the extent such exercise would cause such selling
shareholder, together with its affiliates and attribution parties,
to beneficially own a number of shares of common stock which would
exceed 4.99% of our then outstanding common stock following such
exercise, excluding for purposes of such determination shares of
common stock issuable upon exercise of the warrants which have not
been exercised. The number of shares in the second column does not
reflect this limitation. The selling shareholders may sell all,
some or none of their shares in this offering. See “Plan of
Distribution.”
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Number
of Shares of Common Stock Beneficially Owned Prior to this
Offering |
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Number
of
Shares of Common Stock Being |
|
|
Beneficial
Ownership of Common Stock
After Registration
Assuming All Shares
Are Sold (1) |
|
Name
of Selling Shareholder |
|
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|
Number |
|
|
Percentage |
|
|
Offered |
|
|
Number |
|
|
Percentage |
|
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|
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|
|
|
|
|
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|
A
Wayne Newkumet |
|
|
|
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1,261,112 |
|
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1.5 |
% |
|
|
1,111,112 |
(4) |
|
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150,000 |
|
|
|
* |
|
Aaron
Lehmann |
|
|
|
|
327,778 |
|
|
|
* |
|
|
|
277,778 |
(2) |
|
|
50,000 |
|
|
|
* |
|
Adam
Schofield |
|
|
|
|
555,556 |
|
|
|
* |
|
|
|
555,556 |
(2) |
|
|
— |
|
|
|
— |
|
Albert
Landstrom |
|
|
|
|
99,500 |
|
|
|
* |
|
|
|
99,500 |
(3) |
|
|
— |
|
|
|
— |
|
Allen
Gabriel |
|
|
|
|
605,000 |
|
|
|
* |
|
|
|
600,000 |
(5) |
|
|
5,000 |
|
|
|
* |
|
Anthony
& Angela Reed Family Trust |
|
(a) |
|
|
377,778 |
|
|
|
* |
|
|
|
277,778 |
(5) |
|
|
100,000 |
|
|
|
* |
|
Anthony
Eleftheriades |
|
|
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(2) |
|
|
— |
|
|
|
— |
|
Arturo
Filippe |
|
|
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(2) |
|
|
— |
|
|
|
— |
|
Ashit
K & Minaxi Vijapura |
|
|
|
|
377,778 |
|
|
|
* |
|
|
|
277,778 |
(4) |
|
|
100,000 |
|
|
|
* |
|
Beacon
Investments LLC |
|
(b) |
|
|
1,211,112 |
|
|
|
1.5 |
% |
|
|
1,111,112 |
(4) |
|
|
100,000 |
|
|
|
* |
|
Bradley
& Lori Abeson Rev Family Trust |
|
(c) |
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(2) |
|
|
— |
|
|
|
— |
|
Brett
Moreland |
|
|
|
|
333,334 |
|
|
|
* |
|
|
|
333,334 |
(2) |
|
|
— |
|
|
|
— |
|
Brian
Wheeler |
|
|
|
|
322,012 |
|
|
|
* |
|
|
|
322,012 |
(2) |
|
|
— |
|
|
|
— |
|
Butler
Family Holdings LLLP |
|
(d) |
|
|
3,333,334 |
|
|
|
3.9 |
% |
|
|
3,333,334 |
(2) |
|
|
— |
|
|
|
— |
|
Butler
Real Estate Investments LLC |
|
(e) |
|
|
3,333,334 |
|
|
|
3.9 |
% |
|
|
3,333,334 |
(2) |
|
|
— |
|
|
|
— |
|
Charles
G & Tammi R Gates |
|
|
|
|
677,778 |
|
|
|
* |
|
|
|
677,778 |
(4) |
|
|
— |
|
|
|
— |
|
Charles
Metcalf Crump Jr. |
|
|
|
|
355,556 |
|
|
|
* |
|
|
|
355,556 |
(2) |
|
|
— |
|
|
|
— |
|
Charles
Robinson Revocable Dec of Trust |
|
(f) |
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(2) |
|
|
— |
|
|
|
— |
|
Christopher
Clark |
|
|
|
|
1,258,021 |
|
|
|
1.5 |
% |
|
|
1,258,021 |
(3) |
|
|
— |
|
|
|
— |
|
Clayton
A Struve |
|
|
|
|
3,400,000 |
|
|
|
4.0 |
% |
|
|
3,000,000 |
(7) |
|
|
400,000 |
|
|
|
* |
|
Cleto
Escobedo III |
|
|
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(2) |
|
|
— |
|
|
|
— |
|
Collegiate
Tutoring Inc |
|
(g) |
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(4) |
|
|
— |
|
|
|
— |
|
Craig
Brown |
|
|
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(4) |
|
|
— |
|
|
|
— |
|
Currie
Family Trust |
|
(h) |
|
|
605,556 |
|
|
|
* |
|
|
|
555,556 |
(6) |
|
|
50,000 |
|
|
|
* |
|
Curtis
D Walker Living Trust |
|
(i) |
|
|
2,422,222 |
|
|
|
2.9 |
% |
|
|
2,222,222 |
(6) |
|
|
200,000 |
|
|
|
* |
|
Damon
Thomas |
|
|
|
|
27,500 |
|
|
|
* |
|
|
|
27,500 |
(3) |
|
|
— |
|
|
|
— |
|
Dan
Mancuso |
|
|
|
|
15,334 |
|
|
|
* |
|
|
|
15,334 |
(3) |
|
|
— |
|
|
|
— |
|
David
Rozenholc |
|
|
|
|
2,777,778 |
|
|
|
3.3 |
% |
|
|
2,777,778 |
(5) |
|
|
— |
|
|
|
— |
|
Dean
Bekken |
|
|
|
|
555,556 |
|
|
|
* |
|
|
|
555,556 |
(2) |
|
|
— |
|
|
|
— |
|
Dmitry
Aksenov |
|
|
|
|
36,667 |
|
|
|
* |
|
|
|
36,667 |
(3) |
|
|
— |
|
|
|
— |
|
Douglas
Harnar LLC |
|
(j) |
|
|
2,252,222 |
|
|
|
2.7 |
% |
|
|
2,222,222 |
(2) |
|
|
30,000 |
|
|
|
* |
|
Ellen
Gardner |
|
|
|
|
850,000 |
|
|
|
1.0 |
% |
|
|
850,000 |
(4) |
|
|
— |
|
|
|
— |
|
Eric
Petersen |
|
|
|
|
1,111,112 |
|
|
|
1.3 |
% |
|
|
1,111,112 |
(2) |
|
|
— |
|
|
|
— |
|
Ernest
John Curcio |
|
|
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(2) |
|
|
— |
|
|
|
— |
|
Eugene
Webb |
|
|
|
|
914,207 |
|
|
|
1.1 |
% |
|
|
394,200 |
(3) |
|
|
520,007 |
|
|
|
* |
|
Ever
Onofre-Gonzalez |
|
|
|
|
16,667 |
|
|
|
* |
|
|
|
16,667 |
(3) |
|
|
— |
|
|
|
— |
|
Francis
Lymburner |
|
|
|
|
2,222,224 |
|
|
|
2.6 |
% |
|
|
2,222,224 |
(8) |
|
|
— |
|
|
|
— |
|
Gary
Prosterman |
|
|
|
|
1,111,112 |
|
|
|
1.3 |
% |
|
|
1,111,112 |
(2) |
|
|
— |
|
|
|
— |
|
Gary
Saccaro |
|
|
|
|
232,500 |
|
|
|
* |
|
|
|
232,500 |
(3) |
|
|
— |
|
|
|
— |
|
GBS
Living Trust Dated 11/20/2003 |
|
(k) |
|
|
425,000 |
|
|
|
* |
|
|
|
400,000 |
(4) |
|
|
25,000 |
|
|
|
* |
|
Geoffrey
Keller |
|
|
|
|
555,556 |
|
|
|
* |
|
|
|
555,556 |
(5) |
|
|
— |
|
|
|
— |
|
George
Martin |
|
|
|
|
555,556 |
|
|
|
* |
|
|
|
555,556 |
(2) |
|
|
— |
|
|
|
— |
|
Gerald
Lionudakis |
|
|
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(4) |
|
|
— |
|
|
|
— |
|
Gerald
Tomsic 1995 Trust |
|
(l) |
|
|
1,111,112 |
|
|
|
1.3 |
% |
|
|
1,111,112 |
(5) |
|
|
— |
|
|
|
— |
|
Ghassan
Gheith |
|
|
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(4) |
|
|
— |
|
|
|
— |
|
Greg
Buffington |
|
|
|
|
705,556 |
|
|
|
* |
|
|
|
555,556 |
(5) |
|
|
150,000 |
|
|
|
* |
|
Gregory
R Gomes Trust |
|
(m) |
|
|
555,556 |
|
|
|
* |
|
|
|
555,556 |
(2) |
|
|
— |
|
|
|
— |
|
Harry
Striplin |
|
|
|
|
42,222 |
|
|
|
* |
|
|
|
42,222 |
(3) |
|
|
— |
|
|
|
— |
|
Hazem
Algendi |
|
|
|
|
17,500 |
|
|
|
* |
|
|
|
17,500 |
(3) |
|
|
— |
|
|
|
— |
|
J&C
Resources LLC |
|
(n) |
|
|
555,556 |
|
|
|
* |
|
|
|
555,556 |
(2) |
|
|
— |
|
|
|
— |
|
Jack
Cavin Holland 1979 Trust |
|
(o) |
|
|
786,666 |
|
|
|
* |
|
|
|
666,666 |
(2) |
|
|
120,000 |
|
|
|
* |
|
James
Alderman |
|
|
|
|
484,444 |
|
|
|
* |
|
|
|
444,444 |
(5) |
|
|
40,000 |
|
|
|
* |
|
James
T Betts |
|
|
|
|
1,000,000 |
|
|
|
1.2 |
% |
|
|
1,000,000 |
(5) |
|
|
— |
|
|
|
— |
|
James
Walker |
|
|
|
|
1,111,112 |
|
|
|
1.3 |
% |
|
|
1,111,112 |
(2) |
|
|
— |
|
|
|
— |
|
Jim
Dixon Jr. |
|
|
|
|
605,556 |
|
|
|
* |
|
|
|
555,556 |
(6) |
|
|
50,000 |
|
|
|
* |
|
John
Avon |
|
|
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(2) |
|
|
— |
|
|
|
— |
|
John
Leonhardt |
|
|
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(2) |
|
|
— |
|
|
|
— |
|
Jon
Saloukas |
|
|
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(5) |
|
|
— |
|
|
|
— |
|
Joseph
W Hostetler |
|
|
|
|
244,444 |
|
|
|
* |
|
|
|
244,444 |
(2) |
|
|
— |
|
|
|
— |
|
Joshua
Kaikov |
|
|
|
|
12,200 |
|
|
|
* |
|
|
|
12,200 |
(3) |
|
|
— |
|
|
|
— |
|
Juha
& Stacy Tuominen |
|
|
|
|
333,334 |
|
|
|
* |
|
|
|
333,334 |
(2) |
|
|
— |
|
|
|
— |
|
Keith
Wright |
|
|
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(4) |
|
|
— |
|
|
|
— |
|
Ken
May |
|
|
|
|
5,555,556 |
|
|
|
4.99 |
%(7) |
|
|
5,555,556 |
(2) |
|
|
— |
|
|
|
— |
|
Kent
H & Susan R Elliott |
|
|
|
|
333,334 |
|
|
|
* |
|
|
|
333,334 |
(2) |
|
|
— |
|
|
|
— |
|
Kim
Marie Timothy |
|
|
|
|
2,522,222 |
|
|
|
3.0 |
% |
|
|
2,222,222 |
(6) |
|
|
300,000 |
|
|
|
* |
|
Kyle
Soucy |
|
|
|
|
5,667 |
|
|
|
* |
|
|
|
5,667 |
(3) |
|
|
— |
|
|
|
— |
|
Larry
Lindstrom |
|
|
|
|
1,116,699 |
|
|
|
1.3 |
% |
|
|
1,111,112 |
(4) |
|
|
5,587 |
|
|
|
* |
|
Lloyd
Grissinger |
|
|
|
|
1,111,112 |
|
|
|
1.3 |
% |
|
|
1,111,112 |
(2) |
|
|
— |
|
|
|
— |
|
Lucius
E Burch III Trust |
|
(p) |
|
|
2,222,222 |
|
|
|
2.6 |
% |
|
|
2,222,222 |
(2) |
|
|
— |
|
|
|
— |
|
MAL
2020 Family Trust |
|
(q) |
|
|
5,555,556 |
|
|
|
4.99 |
%(7) |
|
|
5,555,556 |
(2) |
|
|
— |
|
|
|
— |
|
Malcolm
Alexander Winks |
|
|
|
|
262,462 |
|
|
|
* |
|
|
|
262,462 |
(3) |
|
|
121,722 |
|
|
|
* |
|
Mark
& Rita Azzopardi |
|
|
|
|
341,112 |
|
|
|
* |
|
|
|
341,112 |
(2) |
|
|
— |
|
|
|
— |
|
Marta
Wypych |
|
|
|
|
166,649 |
|
|
|
* |
|
|
|
166,649 |
(3) |
|
|
— |
|
|
|
— |
|
Mason
Sexton |
|
|
|
|
147,067 |
|
|
|
* |
|
|
|
147,067 |
(3) |
|
|
— |
|
|
|
— |
|
Merri
Moken |
|
|
|
|
833,334 |
|
|
|
* |
|
|
|
833,334 |
(2) |
|
|
— |
|
|
|
— |
|
Michael
Chieco |
|
|
|
|
555,556 |
|
|
|
* |
|
|
|
555,556 |
(2) |
|
|
— |
|
|
|
— |
|
Michael
Pellerito |
|
|
|
|
163,854 |
|
|
|
* |
|
|
|
163,854 |
(2) |
|
|
— |
|
|
|
— |
|
Michael
Piccolo |
|
|
|
|
13,334 |
|
|
|
* |
|
|
|
13,334 |
(3) |
|
|
— |
|
|
|
— |
|
Mike
D Walker |
|
|
|
|
1,161,112 |
|
|
|
1.4 |
% |
|
|
1,111,112 |
(4) |
|
|
50,000 |
|
|
|
* |
|
MIS
Equity Strategies LP |
|
(r) |
|
|
984,156 |
|
|
|
1.2 |
% |
|
|
555,556 |
(5) |
|
|
428,600 |
|
|
|
* |
|
Nick
Panayotou |
|
|
|
|
2,100,000 |
|
|
|
2.5 |
% |
|
|
2,000,000 |
(4) |
|
|
100,000 |
|
|
|
* |
|
Paulson
Investment Company, LLC |
|
(s) |
|
|
2,570,620 |
|
|
|
3.0 |
% |
|
|
1,365,175 |
(3) |
|
|
1,205,445 |
|
|
|
1.5 |
% |
Peter
Fogarty |
|
|
|
|
129,617 |
|
|
|
* |
|
|
|
129,617 |
(3) |
|
|
22.950 |
|
|
|
* |
|
Phillip
H McNeill |
|
|
|
|
555,556 |
|
|
|
* |
|
|
|
555,556 |
(2) |
|
|
— |
|
|
|
— |
|
Porter
Partners LP |
|
(t) |
|
|
1,388,888 |
|
|
|
1.7 |
% |
|
|
1,388,888 |
(5) |
|
|
— |
|
|
|
— |
|
Randy
Rabin |
|
|
|
|
555,556 |
|
|
|
* |
|
|
|
555,556 |
(2) |
|
|
— |
|
|
|
— |
|
Raphael
Tshibangu |
|
|
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(4) |
|
|
— |
|
|
|
— |
|
Raymond
Guarini |
|
|
|
|
85,911 |
|
|
|
* |
|
|
|
85,911 |
(3) |
|
|
— |
|
|
|
— |
|
Richard
Casamento |
|
|
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(4) |
|
|
— |
|
|
|
— |
|
Richard
M Reiter |
|
|
|
|
325,278 |
|
|
|
* |
|
|
|
277,778 |
(2) |
|
|
47,500 |
|
|
|
* |
|
Robert
D & Debra Beck |
|
|
|
|
333,334 |
|
|
|
* |
|
|
|
333,334 |
(2) |
|
|
— |
|
|
|
— |
|
Robert
Lanphere Jr. |
|
|
|
|
2,595,400 |
|
|
|
3.1 |
% |
|
|
2,222,222 |
(5) |
|
|
373,178 |
|
|
|
* |
|
Robert
Myer |
|
|
|
|
5,555,556 |
|
|
|
4.99 |
%(7) |
|
|
5,555,556 |
(2) |
|
|
— |
|
|
|
— |
|
Robert
Setteducati |
|
|
|
|
1,258,021 |
|
|
|
1.5 |
% |
|
|
1,258,021 |
(3) |
|
|
— |
|
|
|
— |
|
Robert
Surella |
|
|
|
|
5,984 |
|
|
|
* |
|
|
|
5,984 |
(3) |
|
|
— |
|
|
|
— |
|
Robert
Susie |
|
|
|
|
555,556 |
|
|
|
* |
|
|
|
555,556 |
(2) |
|
|
— |
|
|
|
— |
|
Rodney
Baber |
|
|
|
|
1,402,334 |
|
|
|
1.7 |
% |
|
|
1,402,334 |
(3) |
|
|
— |
|
|
|
— |
|
Romero
Holdings LLC |
|
(u) |
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(2) |
|
|
— |
|
|
|
— |
|
Satterfield
Vintage Investments LP |
|
(v) |
|
|
3,222,222 |
|
|
|
3.8 |
% |
|
|
2,222,222 |
(2) |
|
|
1,000,000 |
|
|
|
1.2 |
% |
Scott
Carmony |
|
|
|
|
244,444 |
|
|
|
* |
|
|
|
244,444 |
(6) |
|
|
— |
|
|
|
— |
|
Sean
P Sego |
|
|
|
|
555,556 |
|
|
|
* |
|
|
|
555,556 |
(4) |
|
|
— |
|
|
|
— |
|
Southern
Cross Trust |
|
(w) |
|
|
5,555,556 |
|
|
|
4.99 |
%(7) |
|
|
5,555,556 |
(2) |
|
|
— |
|
|
|
— |
|
Stephen
A Wilson Revocable Trust |
|
(x) |
|
|
6,666,666 |
|
|
|
4.99 |
%(7) |
|
|
6,666,666 |
(2) |
|
|
— |
|
|
|
— |
|
Stephen
P Hafner |
|
|
|
|
544,444 |
|
|
|
* |
|
|
|
544,444 |
(4) |
|
|
— |
|
|
|
— |
|
Stephen
P Lightman |
|
|
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(4) |
|
|
— |
|
|
|
— |
|
Stephen
R Hennessy |
|
|
|
|
1,111,112 |
|
|
|
1.3 |
% |
|
|
1,111,112 |
(4) |
|
|
— |
|
|
|
— |
|
Steven
Hornbaker |
|
|
|
|
833,334 |
|
|
|
* |
|
|
|
833,334 |
(9) |
|
|
— |
|
|
|
— |
|
Strata
Trust Company FBO Alexander Tosi IRA |
|
(y) |
|
|
2,146,668 |
|
|
|
2.6 |
% |
|
|
1,666,668 |
(5) |
|
|
480,000 |
|
|
|
* |
|
Strata
Trust Company FBO David S Perry Sep IRA |
|
(z) |
|
|
1,588,888 |
|
|
|
2.0 |
% |
|
|
1,388,888 |
(6) |
|
|
200,000 |
|
|
|
* |
|
Strata
Trust Company FBO Lisa Zupan IRA |
|
(aa) |
|
|
377,778 |
|
|
|
* |
|
|
|
377,778 |
(5) |
|
|
— |
|
|
|
— |
|
Strata
Trust Company FBO Michael Zupan Roth IRA |
|
(bb) |
|
|
352,778 |
|
|
|
* |
|
|
|
277,778 |
(5) |
|
|
75,000 |
|
|
|
* |
|
Strata
Trust Company FBO Roger Langeliers Roth IRA |
|
(cc) |
|
|
1,156,112 |
|
|
|
1.4 |
% |
|
|
1,111,112 |
(4) |
|
|
45,000 |
|
|
|
* |
|
Terry
Lynch |
|
|
|
|
28,934 |
|
|
|
* |
|
|
|
28,934 |
(3) |
|
|
— |
|
|
|
— |
|
The
Blaine 2000 Revocable Trust |
|
(dd) |
|
|
444,444 |
|
|
|
* |
|
|
|
444,444 |
(2) |
|
|
— |
|
|
|
— |
|
The Jane Kantor 2011 Trust |
|
(ee) |
|
|
297,778 |
|
|
|
* |
|
|
|
277,778 |
(2) |
|
|
20,000 |
|
|
|
* |
|
Thomas Endres |
|
|
|
|
16,050 |
|
|
|
* |
|
|
|
14,050 |
(3) |
|
|
2,000 |
|
|
|
* |
|
Thomas McChesney |
|
|
|
|
311,112 |
|
|
|
* |
|
|
|
311,112 |
(2) |
|
|
— |
|
|
|
— |
|
Thomas Parigian |
|
|
|
|
1,258,021 |
|
|
|
1.5 |
% |
|
|
1,258,021 |
(3) |
|
|
— |
|
|
|
— |
|
Tim & Rachel Delaporte |
|
|
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(5) |
|
|
— |
|
|
|
— |
|
Timothy Connell |
|
|
|
|
2,222,222 |
|
|
|
2.6 |
% |
|
|
2,222,222 |
(2) |
|
|
— |
|
|
|
— |
|
Timothy Dabulis |
|
|
|
|
40,834 |
|
|
|
* |
|
|
|
40,834 |
(3) |
|
|
— |
|
|
|
— |
|
Transcendent Development Group
Inc |
|
(ff) |
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(2) |
|
|
— |
|
|
|
— |
|
Trent Davis |
|
|
|
|
140,740 |
|
|
|
* |
|
|
|
140,740 |
(3) |
|
|
— |
|
|
|
— |
|
Veronica & Thomas Volckening
Marano |
|
|
|
|
2,780,000 |
|
|
|
3.3 |
% |
|
|
2,222,222 |
(2) |
|
|
180,000 |
|
|
|
* |
|
Vijay & Tejal Patel |
|
|
|
|
377,778 |
|
|
|
* |
|
|
|
277,778 |
(5) |
|
|
100,000 |
|
|
|
* |
|
William C & Barbara M
Berry |
|
|
|
|
277,778 |
|
|
|
* |
|
|
|
277,778 |
(4) |
|
|
— |
|
|
|
— |
|
William Gerald Gibson |
|
|
|
|
555,556 |
|
|
|
* |
|
|
|
555,556 |
(2) |
|
|
— |
|
|
|
— |
|
William H Costigan |
|
|
|
|
181,112 |
|
|
|
* |
|
|
|
111,112 |
(2) |
|
|
70,000 |
|
|
|
* |
|
William Murphy |
|
|
|
|
2,422,222 |
|
|
|
2.9 |
% |
|
|
2,222,222 |
(2) |
|
|
200,000 |
|
|
|
* |
|
William
Stocker |
|
|
|
|
1,211,112 |
|
|
|
1.5 |
% |
|
|
1,111,112 |
(10) |
|
|
100,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,431,669 |
|
|
|
|
|
|
|
|
|
* Less than
one percent (1%).
(1) Assumes
the sale of all shares offered herein.
(2) Such
number is made up 50% of Offering Shares and 50% of Offering
Warrants, sold on March 31, 2021.
(3)
Represents Placement Warrants, granted to the Placement Agent and
its representatives and affiliates, who are affiliates of the
Placement Agent, a broker-dealer.
(4)
Such number is made up 50% of Offering Shares and 50% of Offering
Warrants, sold on April 7, 2021.
(5)
Such number is made up 50% of Offering Shares and 50% of Offering
Warrants, sold on April 9, 2021.
(6)
Such number is made up 50% of Offering Shares and 50% of Offering
Warrants, sold on April 16, 2021.
(7)
Includes 1,111,111 Offering Shares and 1,111,111 Offering Warrants
sold on March 31, 2021, and 388,889 Offering Shares and 388,889
Offering Warrants sold on April 9, 2021.
(8)
Includes 555,556 Offering Shares and 555,556 Offering Warrants sold
on March 31, 2021, and 555,556 Offering Shares and 555,556 Offering
Warrants sold on April 9, 2021.
(9)
Includes 277,778 Offering Shares and 277,778 Offering Warrants sold
on March 31, 2021, and 138,889 Offering Shares and 138,889 Offering
Warrants sold on April 9, 2021.
(10)
Includes 277,778 Offering Shares and 277,778 Offering Warrants sold
on March 31, 2021, and 277,778 Offering Shares and 277,778 Offering
Warrants sold on April 9, 2021.
(a)
The securities are beneficially owned by Tony Reed, the Trustee of
the selling shareholder.
(b)
The securities are beneficially owned by Russell Lieblick, the
Managing Member of the selling shareholder.
(c)
The securities are beneficially owned by Bradley Abeson, the
Trustee of the selling shareholder.
(d)
The securities are beneficially owned by G. Marshall Butler Jr.,
the General Partner of the selling shareholder.
(e)
The securities are beneficially owned by G. Marshall and Jane
Butler.
(f)
The securities are beneficially owned by Charles Robinson, the
Trustee of the selling shareholder.
(g)
The securities are beneficially owned by Robert Ertner, President
of the selling shareholder.
(h)
The securities are beneficially owned by David S. Perry.
(i)
The securities are beneficially owned by Curtis D. Walker, the
Trustee of the selling shareholder.
(j)
The securities are beneficially owned by Douglas Harnar, Manager of
the selling shareholder.
(k)
The securities are beneficially owned by Gregory B.
Stewart.
(l)
The securities are beneficially owned by Gerald Tomsic.
(m)
The securities are beneficially owned by Barbara Kamiya, Co-Trustee
of the selling shareholder.
(n)
The securities are beneficially owned by Charles Johnston, Chief
Executive Officer of the selling shareholder.
(o)
The securities are beneficially owned by Jack C. Holland, the
Trustee of the selling shareholder.
(p)
The securities are beneficially owned by Lucius E. Burch IV, the
Trustee of the selling shareholder.
(q)
The securities are beneficially owned by Mark Puckett, Trustee and
Michael Lightman, Grantor of the selling shareholder.
(r)
The securities are beneficially owned by Tony Reed, Manager of the
General Partner of the selling shareholder.
(s)
Trent Donald Davis has voting control and investment discretion
over the securities reported herein that are held by Paulson
Investment Company, LLC.
(t)
The securities are beneficially owned by Jeffrey Porter, General
Partner of the selling shareholder.
(u)
The securities are beneficially owned by Steven Romero
Delgado.
(v)
The securities are beneficially owned by Thomas A. Satterfield Jr.,
President of General Partner
(w)
The securities are beneficially owned by Graham R. Smith, the
Trustee of the selling shareholder.
(x)
The securities are beneficially owned by Stephen A. Wilson, the
Trustee of the selling shareholder.
(y)
The securities are beneficially owned by Alexander Tosi.
(z)
The securities are beneficially owned by Curtis D. Walker, the
Trustee of the selling shareholder.
(aa)
The securities are beneficially owned by Lisa Zupan.
(bb)
The securities are beneficially owned by Michael Zupan.
(cc)
The securities are beneficially owned by Roger
Langeliers.
(dd)
The securities are beneficially owned by Gregory H. Blaine, the
Trustee of the selling shareholder.
(ee)
The securities are beneficially owned by Robert Kantor, the Trustee
of the selling shareholder.
(ff)
The securities are beneficially owned by Danny Rodriguez, Chief
Executive Officer of the selling shareholder.
Certain Beneficial
Owners and Management
The
following table sets forth certain information regarding beneficial
ownership of our common stock as of December 16, 2021, by (i) each
person (or group of affiliated persons) who is known by us to own
more than five percent (5%) of the outstanding shares of our common
stock, (ii) each director and executive officer, and (iii) all of
our directors and executive officers as a group. As of December 16,
2021, there were 82,927,311 shares of our common stock issued and
outstanding.
Except
as otherwise indicated, the persons listed below have sole voting
and investment power with respect to all shares of our common stock
owned by them, except to the extent that power may be shared with a
spouse.
Beneficial
ownership is determined in accordance with SEC rules and generally
includes voting or investment power with respect to securities. For
purposes of this table, a person or group of persons is deemed to
have “beneficial ownership” of any shares of common stock that such
person currently owns or has the right to acquire within 60 days of
the date of this prospectus. With respect to options and warrants,
this would include options and warrants that are currently
exercisable within 60 days. With respect to convertible securities,
this would include securities that are currently convertible within
60 days.
Except
as indicated in footnotes to this table, we believe that the
stockholders named in this table have sole voting and investment
power with respect to all shares of common stock shown to be
beneficially owned by them, based on information provided to us by
such stockholders. Unless otherwise indicated, the address for each
director and executive officer listed is c/o Cipherloc Corporation,
6836 Bee Cave Road, Bldg. 1, Suite 279, Austin, TX
78746.
Name of
Beneficial Owners |
|
Amount |
|
|
Percent
Ownership |
|
Tom
Wilkinson |
|
|
156,867 |
|
|
|
* |
% |
Anthony
Ambrose |
|
|
141,667 |
|
|
|
* |
% |
David
Chasteen |
|
|
— |
|
|
|
— |
|
|