Item 9A. Controls and Procedures
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file
or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commission’s (the “SEC”) rules and forms and that such information is accumulated and communicated to
our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is
required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls
and procedures have not been formally designed and evaluated to provide reasonable assurance that the controls and procedures would meet
their objectives.
55
As
required by SEC Rule 13a-15(b), our Chief Executive Officer and Principal Financial Officer need to carry out an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the
foregoing, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not
effective as of September 30, 2020, due to 1) no formal evaluation has been performed by us and 2) the existence of the material weaknesses
in internal control over financial reporting described below (which we view as an integral part of our disclosure controls and procedures).
Based on the performance of additional procedures designed to ensure the reliability of our financial reporting, we believe that the
financial statements included in this Annual Report fairly present, in all material respects, our financial position, results of operations
and cash flows as of the dates, and for the periods, presented, in conformity with U.S. GAAP.
Management’s
Report on Internal Control over Financial Reporting
Our
Chief Executive Officer and the Principal Financial Officer are responsible for establishing and maintaining adequate internal control
over financial reporting and for the assessment of the effectiveness of our internal control over financial reporting. Internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d(f) under the Exchange Act) is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes
in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that (a) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (b) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP,
(c) provide reasonable assurance that receipts and expenditures are being made only in accordance with appropriate authorization of management
and the Board of Directors, and (d) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of assets that could have a material effect on the financial statements.
In
connection with the preparation of the Annual Report on Form 10-K for the year ended September 30, 2021, our Chief Executive Officer
and Principal Financial Officer evaluated the effectiveness of our internal control over financial reporting as of September 30, 2021
and concluded that we had not implemented effective internal control over financial reporting during the reporting year.
Remediation
Plan
Management
executed a remediation plan to address the material weaknesses discussed above. These remediation efforts focused on:
●
Enhancing
monitoring and review controls over financial reporting and disclosures;
●
Enhancing
review and approval controls around transaction processing;
●
Enhancing
controls around proving the delivery of software; and
●
Enhancing
and maintaining written policies and procedures for accounting and financial reporting.
Subsequent
to September 30, 2019, management designed and implemented review and approval controls around transaction processing, including written
policies and procedures. In addition, management has continued to train key accounting staff to improve controls that will eliminate
the material weaknesses discussed above, as well as improve the accounting and financial reporting process.
Management
has also evaluated the effectiveness of its internal control over financial reporting in accordance with generally accepted accounting
principles within the guidelines of the Committee of Sponsoring Organizations of the Treadway Commission framework (2013). Based on the
results of this evaluation, management has determined that the Company’s internal control over financial reporting was effective
as of September 30, 2021.
56
Changes
in Internal Control over Financial Reporting
During
the year ended September 30, 2021, there were no changes in our internal control over financial reporting that have materially affected
or are reasonably likely to materially affect our internal control over financial reporting, other than the remediation actions discussed
above.
Inherent
Limitations on Internal Controls
It
should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance
that the objectives of the control system are met. In addition, the design of any control system is based in part upon certain assumptions
about the likelihood of certain events. Limitations inherent in any control system include the following:
●
Judgments
in decision-making can be faulty, and control and process breakdowns can occur because of simple errors or mistakes;
●
Controls
can be circumvented by individuals, acting alone or in collusion with others, or by management override;
●
The
design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under all potential future conditions;
●
Over
time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated
policies or procedures; and
●
The
design of a control system must reflect the fact that resources are constrained, and the benefits of controls must be considered
relative to their costs.
Because
of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected.
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE [incorporate by reference to July 2021 proxy statement?]
Directors
and Executive Officers
Set
forth below is information regarding the Company’s current directors and executive officers. There are no family relationships
between any of our directors or executive officers. The directors are elected annually by our stockholders. The executive officers serve
at the pleasure of the Board of Directors.
Name
Age
Title
Tom
Wilkinson
52
Chairman
of the Board of Directors
Anthony
Ambrose
60
Lead
Independent Director
David
Chasteen
44
Chief
Executive Officer and Director
Sammy
Davis DrPH
74
Director
Ryan
Polk
53
Chief
Financial Officer
Nicholas
Hnatiw
40
Chief
Technology Officer
57
The
background and principal occupations of the directors and executive officers of the Company are as follows:
Board
of Directors
Tom
Wilkinson – Chairman of the Board of Directors
Mr.
Wilkinson serves as the Company’s Chairman of the Board of Directors. He is a licensed CPA in Texas and Colorado. From 2014 to
October 2015 he was the Chief Financial Officer of Amherst Holdings, LLC. Mr. Wilkinson joined Xplore Technologies Corp., a NASDAQ traded
company, in 2015 where he served as the Chief Financial Officer until 2017 when he took on the position of Chief Executive Officer until
the sale of the company to Zebra Technologies in August 2018. He presently owns and operates Wilkinson & Company, a financial and
business consulting firm focused on emerging growth pre-IPO and public companies. Mr. Wilkinson has also been a member of the board of
directors of Astrotech Corporation (NASDAQ: ASTC) since October 2018. He received his Bachelor of Business Administration and Master
of Professional Accounting from the University of Texas in 1992. We believe Mr. Wilkinson is qualified to serve on our board of directors
based on his financial experience.
Anthony
Ambrose – Lead Independent Director
Mr.
Ambrose serves a director of the Company. Mr. Ambrose has served as a director, President and Chief Executive Officer of Data I/O, the
leading global provider of advanced data and security programming solutions, and a NASDAQ listed company (NASDAQ: DAIO). Prior to Data
I/O, Mr. Ambrose was Owner and Principal of Cedar Mill Partners, LLC, a strategy consulting firm since 2011. From 2007 to 2011, he was
Vice President and General Manager at RadiSys Corporation, a leading provider of embedded wireless infrastructure solutions, where he
established the telecom platform business and grew it to over $125M in annual revenues. He was previously general manager and held several
other progressively responsible positions at Intel Corporation, where he led development and marketing of standards-based communications
platforms and grew the industry standard server business to over $1B in revenues. Mr. Ambrose has a Bachelor of Science degree in Engineering
from Princeton University and has completed the Stanford University Director Symposium. We
believe Mr. Ambrose is qualified to serve on our board of directors based on his data security and industry experience.
David
Chasteen – Chief Executive Officer and Director
Mr.
Chasteen serves as a director of the Company. Since 2018, Mr. Chasteen has been the Chief Information Security Officer for the City and
County of San Francisco Police Department. From 2015 to 2018, Mr. Chasteen was a Threat Intelligence Strategist for the City and County
of San Francisco where he was responsible for managing city, state and federal intelligence relationships and managing cybersecurity
operations for the City and County of San Francisco. From 2015 to 2016 Mr. Chasteen was the Western Regional Director for Iraq and Afghanistan
Veterans of America. From 2006 to 2014 Mr. Chasteen worked for the Central Intelligence Agency as a Collection Management Officer, Specialized
Skills Officer, and finally an Executive Officer, Covert Action Staff. Mr. Chasteen received a B.S. in Political Science from Ball State
University in 2000. We believe Mr. Chasteen is qualified to serve on our board of directors based on his cybersecurity and industry experience.
Sammy
Davis DrPH – Director
Dr.
Davis serves as a director of the Company. Dr. Davis has over 20 years’ experience in operations, finance, budgeting, financial
reporting, revenue cycle management, inventory, payroll, accounts receivable and payable, and information systems in the healthcare industry.
Since 2009 Dr. Davis has been a Senior Marketing Liaison with Physician Reliance Corporation. From 2005 to 2009, Dr. Davis was the Chief
Executive officer of Renaissance Hospital in the Dallas/Fort Worth Area. From 2004 to 2005, Dr. Davis was the interim Chief Executive
Officer of Transition Health Care LTAC in Corpus Christi, TX. Dr. Davis holds a Doctor of Public Health degree from the University of
Texas. We believe Dr. Davis is qualified to serve on our board of directors based on his leadership experience.
58
Executive
Officers
Ryan
Polk – Chief Financial Officer
Ryan
Polk serves as the Company’s Chief Financial Officer. Mr. Polk has served in leadership roles in both public and private companies
after a brief time at accounting firm Ernst & Young. He is a part-time employee of Cipherloc and is engaged in providing CEO and
CFO related services to other companies as an independent contractor. He is a graduate of Purdue University with two Bachelor of Science
degrees from the Krannert School of Management. His career has focused on both the consumer products and technology industries.
Nicholas
Hnatiw – Chief Technology Officer
Nicholas
Hnatiw serves as the Company’s Chief Technology Officer. Mr. Hnatiw has more than 15 years of experience creating software technologies
from network security to artificial intelligence. Mr. Hnatiw has led the design and development of a security risk assessment SaaS platform,
run a security monitoring service with a custom-built next generation automation and SIEM system. Prior to the Company, Mr. Hnatiw served
as the technical director for network operations supporting U.S. Cyber Command, U.S. Intelligence Agencies, and other Department of Defense
research organizations from October 2010 to October 2014. From June 2015 to September 2019, Mr. Hnatiw was the Chief Executive Officer
of Loki Labs, a cyber security firm. Mr. Hnatiw is also currently a consultant with Cuesta Partners (since January 2020); a partner and
Chief Technology Officer of Sidechannel Security (since February 2020), and the Chief Technology Officer of RealCISO.io (since October
2020). Mr. Hnatiw earned a Bachelor of Science degree in computer engineering and computer science at the University of Massachusetts,
Amherst.
Family
Relationships and Other Arrangements
There
are no family relationships among our directors and executive officers. Other than Mr. Chasteen’s appointment as a chief executive
officer in connection with his employment agreement, there are no arrangements or understandings between or among our executive officers
and directors pursuant to which any director or executive officer was or is to be selected as a director or executive officer.
Board
Leadership Structure and Role in Risk Oversight
Our
Board has established an audit committee, a compensation committee, and a nominating and corporate governance committee, each of which
operate pursuant to a charter adopted by our Board. Each committee has the composition and responsibilities described below. Our Board
may establish other committees from time to time.
The
following table identifies the current members of each of our committees:
Name
Executive
Committee
Audit
Compensation
Corporate
Governance/
Nominating
Tom Wilkinson
X*
X
X
X
Anthony Ambrose
X
X*
X*
X*
David Chasteen
X
Sammy Davis DrPH
X
X
X
X
*
Chairman of the committee
Director
Independence
Our
Board has determined that a majority of the Board consists of members who are currently “independent” as that term is defined
under the rules of the Nasdaq Stock Market LLC. As our common stock is traded over the counter on the OTCQB, we are not required to comply
with such requirements. Nevertheless, the Board considers Ms. Young, Dr. Davis, and Mr. Ambrose to be “independent” under
such rules.
59
Audit
Committee
Messrs.
Ambrose, Wilkinson, and Davis serve on the Audit Committee, which is chaired by Mr. Ambrose.
The
audit committee’s responsibilities include:
●
appointing,
approving the compensation of, and assessing the independence of our independent registered public accounting firm;
●
pre-approving
auditing and permissible non-audit services, and the terms of such services, to be provided by our independent registered public
accounting firm;
●
reviewing
the overall audit plan with our independent registered public accounting firm and members of management responsible for preparing
our financial statements;
●
reviewing
and discussing with management and our independent registered public accounting firm our annual and quarterly financial statements
and related disclosures as well as critical accounting policies and practices used by us;
●
coordinating
the oversight and reviewing the adequacy of our internal control over financial reporting;
●
establishing
policies and procedures for the receipt and retention of accounting-related complaints and concerns;
●
recommending
based upon the audit committee’s review and discussions with management and our independent registered public accounting firm
whether our audited financial statements will be included in our Annual Reports on Form 10-K;
●
monitoring
the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to our financial
statements and accounting matters;
●
preparing
the audit committee report required by SEC rules to be included in our annual proxy statement;
●
reviewing
all related person transactions for potential conflict of interest situations and approving all such transactions; and
●
reviewing
quarterly earnings releases.
Compensation
Committee
Messrs.
Ambrose, Wilkinson, and Davis and serve on the Compensation Committee which is chaired by Mr. Ambrose.
The
compensation committee’s responsibilities include:
●
annually
reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer;
●
evaluating
the performance of our chief executive officer considering such corporate goals and objectives and determining the compensation of
our chief executive officer;
●
reviewing
and approving the compensation of our other executive officers;
●
reviewing
and establishing our overall management compensation, philosophy and policy;
●
overseeing
and administering our compensation and similar plans;
●
evaluating
and assessing potential and current compensation advisors in accordance with the independence standards identified in the applicable
Nasdaq rules;
●
retaining
and approving the compensation of any compensation advisors;
●
reviewing
and making recommendations to our Board about our policies and procedures for the grant of equity-based awards;
●
evaluating
and making recommendations to the Board about director compensation;
●
preparing
the compensation committee report required by SEC rules, if and when required, to be included in our annual proxy statement; and
●
reviewing
and approving the retention or termination of any consulting firm or outside advisor to assist in the evaluation of compensation
matters.
60
Corporate
Governance/Nominating Committee
Messrs.
Ambrose, Wilkinson, and Davis serve on the Corporate Governance/Nominating Committee, which is chaired by Mr. Ambrose.
The
nominating and corporate governance committee’s responsibilities include:
●
developing
and recommending to the Board criteria for board and committee membership;
●
establishing
procedures for identifying and evaluating board of director candidates, including nominees recommended by stockholders;
●
reviewing
the size and composition of the Board to ensure that it is composed of members containing the appropriate skills and expertise to
advise us;
●
identifying
individuals qualified to become members of the Board;
●
recommending
to the Board the persons to be nominated for election as directors and to each of the board’s committees;
●
developing
and recommending to the Board a code of business conduct and ethics and a set of corporate governance guidelines; and
●
overseeing
the evaluation of our Board and management.
Conflicts
of Interest
Members
of our management are associated with other firms involved in a range of business activities. Consequently, there are potential inherent
conflicts of interest in their acting as officers and directors of our company. Although the directors are engaged in other business
activities, we anticipate they will devote an important amount of time to our affairs.
Our
officers and directors are now and may in the future become stockholders, officers or directors of other companies, which may be formed
for the purpose of engaging in business activities similar to ours. Accordingly, additional direct conflicts of interest may arise in
the future with respect to such individuals acting on behalf of us or other entities. Moreover, additional conflicts of interest may
arise with respect to opportunities which come to the attention of such individuals in the performance of their duties or otherwise.
Currently, we do not have a right of first refusal pertaining to opportunities that come to their attention and may relate to our business
operations.
Our
officers and directors are, so long as they are our officers or directors, subject to the restriction that all opportunities contemplated
by our plan of operation which come to their attention, either in the performance of their duties or in any other manner, will be considered
opportunities of, and be made available to us and the companies that they are affiliated with on an equal basis. A breach of this requirement
will be a breach of the fiduciary duties of the officer or director. If we or the companies with which the officers and directors are
affiliated both desires to take advantage of an opportunity, then said officers and directors would abstain from negotiating and voting
upon the opportunity. However, all directors may still individually take advantage of opportunities if we should decline to do so. Except
as set forth above, we have not adopted any other conflict of interest policy with respect to such transactions.
61
Code
of Ethics
We
have adopted a formal Code of Ethics applicable to all Board members, officers and employees. A copy of our Code of Ethics may be obtained
without charge upon written request to Secretary, Cipherloc Corporation, 6836 Bee Cave Road, Bldg. 1, Suite 279, Austin, TX 78746.
ITEM
11. EXECUTIVE COMPENSATION
Summary
Compensation Table
The
following tables set forth certain information concerning all compensation paid, earned or accrued for service by (i) our Principal Executive
Officer and Principal Financial Officer and (ii) all other executive officers who earned in excess of $100,000 in the fiscal years ended
September 30, 2021 and 2020, and each of the other two most highly compensated executive officers of the Company who served in such capacity
at the end of the fiscal year whose total salary and bonus exceeded $100,000 (collectively, the “Named Executive Officers”):
SUMMARY
COMPENSATION TABLE
Name
and Position
Year
Salary
($)
Bonus
($)
Stock
Awards ($)
All
Other Compensation ($) (1)
Change
in Pension Value and Nonqualified Deferred Compensation Earnings ($)
Total
($)
David Chasteen(7)
Chief
Executive Officer & Director
2021
$ 125,000
100,000
$ —
$ 15,100
—
$ 240,100
Executive
Officer
2020
$ —
—
$ —
$ 15,100
—
$ 15,100
Andrew
Borene
Chairman &
2021
$ —
—
$ —
$ —
—
$ —
Chief
Executive Officer (2)
2020
$ 94,500
$ 100,000
—
$ 175,000
—
$ 369,500
Ryan
Polk,
Chief Financial Officer (3)
2021
$ 75,000
100,000
—
$ —
—
$ 175,000
2020
$ 49,760
—
—
$ —
—
$ 49,760
Nick
Hnatiw,
Chief
Technology Officer (8)
2021
$ 66,667
25,000
—
$ 149,450
—
$ 241,117
Gino
Mauriello
2021
$
Chief
Financial Officer (4)
2020
$ 72,917
—
—
$ 50,000
—
$ 122,917
Albert
Carlson, PhD
Director
&
2021
$ —
—
$ —
$ —
—
$ —
Chief
Scientific Officer (6)
2020
$ 121,890
—
—
—
—
$ 121,890
Milton
Mattox
2021
$ 41,667
—
$ —
$ —
—
$ 41,667
Chief
Operating Officer (5)
2020
$ 222,865
$ 15,000
$ —
—
—
$ 237,865
(1)
All other compensation consists primarily of remunerations for legal settlements, severance, auto and health insurance costs.
(2)
Mr. Andrew Borene was terminated as Chief Executive Officer on April 3, 2020.
(3)
Mr. Polk was appointed as Chief Financial Officer on February 1, 2020.
(4)
Mr. Mauriello was terminated as Chief Financial Officer on December 13, 2019.
(5)
Mr. Mattox resigned from the Company on November 12, 2020.
(6)
Mr. Carlson resigned from the Company on December 17, 2019
(7)
Mr. Chasteen was appointed as Chief Executive Officer on November 1, 2020
(8)
Mr. Hnatiw was appointed as Chief Technology Officer on June 1, 2021
62
Compensation
of Directors
The
Company’s compensation policy for directors includes quarterly
fees as well as stock options. Annual director compensation will be $60,000 for the Chairman of the Board and Lead Independent Director,
$40,000 for directors with an additional $4,000 for additional committees. In July 2020, the board of directors temporarily deferred
cash payments to its members. We restored cash payments to directors in April 2021.
Beginning
with the quarter ended September 30, 2021, the Company’s directors received one-half of their compensation in cash and the
remaining half in common stock. During the years ended September 30, 2021, and 2020, the Company paid $220,000 and $170,000 in
board fees, respectively.
Employment
Contracts
Borene
Employment Agreement
The
Company entered into an Employment Agreement with Andrew Borene (the
“Borene Employment Agreement”), our Chief Executive Officer, on November 25, 2019, pursuant to which he received a base annual
salary of $350,000, payable in accordance with the Company’s standard payroll schedule, and other customary benefits. Mr. Borene
also received options to purchase up to 500,000 shares of the Company’s common stock (the “Borene Options”). The Borene
Options had an exercise price of $0.75 per share and were to vest as follows: 166,666 shares vest on November 26, 2020, 166,667 shares
vest on November 26, 2021, and 166,667 shares vest on November 26, 2022. Additionally. Mr. Borene received a signing bonus in the amount
of $150,000 which is payable in equal installments at the end of each of the first three months of his employment.
Mr.
Andrew Borene’s employment with the Company was terminated on April 3, 2020. The Company expects no future payments
under Mr. Boren’s employment contract.
63
Carlson
Employment Agreement
The
Company previously entered into an employment agreement with Albert
Carlson as its Chief Scientific Officer. Dr. Carlson resigned from his positions as Chief Scientific Officer and director on December
17, 2019. The employment agreement was for a term of one year, commencing on September 1, 2015, and initially expired on August
31, 2016, with three one-year extensions. The agreement provided that, in addition to receiving paid vacation in accordance with
the Company’s policies as well as other customary benefits and provisions, Dr. Carlson received an annual base salary of $150,000.
If, at any time during the term of the agreement, Dr. Carlson was terminated “without cause,” he was entitled to receive
a cash payment equal to the aggregate compensation payable to him during the remaining term of the Agreement. During the year ended September
30, 2019, prior to his resignation, Dr. Carlson’s annual base salary was increased to $300,000.
2021
Omnibus Equity Incentive Plan
The
Company’s Board of Directors approved the 2021 Omnibus Equity
Incentive Plan (“2021 Plan”) on May 12, 2021, and it became effective upon approval by the Company’s
shareholders at the annual meeting on September 13, 2021. The 2021 Plan is intended to align the interests of our stockholders
and the recipients of awards under the 2021 Plan, and to advance the Company’s interests by attracting and retaining directors,
officers, employees and other service providers and motivating them to act in our long-term best interests. The material terms of the
2021 Plan are as follows:
Plan
term . The 2021 Plan terminates on September 12, 2031 (the day before the tenth anniversary of the adoption of the plan), unless terminated
earlier by our Board.
Eligible
participants . All officers, directors, employees, consultants, agents and independent contractors, and persons expected to become
officers, directors, employees, consultants, agents and independent contractors of our Company or any of our subsidiaries are eligible
to receive awards under the 2021 Plan. The compensation committee of our Board will determine the participants under the 2021 Plan.
Shares
authorized . 8,000,000 shares of common stock are available for awards granted under the 2021 Plan, subject to adjustment for stock
splits and other similar changes in capitalization. The number of available shares will be reduced by the aggregate number of shares
that become subject to outstanding awards granted under the 2021 Plan. To the extent that shares subject to an outstanding award granted
under the 2021 Plan are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or
by reason of the settlement of an award in cash, then those shares will again be available under the 2021 Plan. In addition, any shares
covered by an award that have been surrendered in connection with the payment of the award exercise or purchase price or in satisfaction
of tax withholding obligations incident to the grant, exercise, vesting or settlement of an award will be deemed not to have been issued
for purposes of determining the maximum number of shares which may be issued pursuant to all awards under the 2021 Plan.
Award
types . Awards include options (non-qualified and incentive stock options) and restricted stock.
Administration .
The compensation committee will interpret and administer the 2021 Plan. The compensation committee’s interpretation, construction
and administration of the 2021 Plan and all its determinations thereunder will be conclusive and binding on all persons.
The
compensation committee shall have the authority to determine the participants in the 2021 Plan, the form, amount and timing of any awards,
the performance goals, if any, and all other terms and conditions pertaining to any award. The compensation committee may take any action
such that (i) any outstanding options become exercisable in part or in full, (ii) all or any portion of a restriction period on any restricted
stock will lapse, (iii) all or a portion of any performance period applicable to any performance-based award will lapse and (iv) any
performance measures applicable to any outstanding award will be deemed satisfied at the target level or any other level. Subject to
the terms of the 2021 Plan relating to grants to our executive officers and directors, the compensation committee may delegate some or
all of its powers and authority to the Chief Executive Officer or other executive officer as the compensation committee deems appropriate.
Stock
options . The 2021 Plan provides for the grant of stock options. Stock options may be either tax-qualified incentive stock options
or non-qualified stock options. The compensation committee will determine the terms and conditions to the exercisability of each option.
64
The
period for the exercise of a non-qualified stock option will be determined by the compensation committee provided that no option may
be exercised later than ten years after its date of grant. The exercise price of a non-qualified stock option will not be less than 100%
of the fair market value of a share of our common stock on the date of grant.
Each
incentive stock option will be exercisable for not more than 10 years after its date of grant, unless the optionee owns greater than
10% of the voting power of all shares of our capital stock, or a “ten percent holder,” in which case the option will be exercisable
for not more than five years after its date of grant. The exercise price of an incentive stock option will not be less than the fair
market value of a share of our common stock on its date of grant, unless the optionee is a ten percent holder, in which case the option
exercise price will be the price required by the Internal Revenue Code of 1986, as amended, or the “Code,” currently 110%
of fair market value.
Upon
exercise, the option exercise price may be paid in cash, by the delivery of previously owned shares of our common stock, share withholding
or through a cashless exercise arrangement, as permitted by the applicable award agreement. All of the terms relating to the exercise,
cancellation or other disposition of an option upon a termination of employment, whether by reason of disability, retirement, death or
any other reason, will be determined by the compensation committee.
The
compensation committee, without stockholder approval, may (i) reduce the exercise price of any previously granted option, or (ii) cancel
any previously granted option at a time when its exercise price exceeds the fair market value of the underlying shares, in exchange for
another option, or other award or for cash.
Stock
awards . The 2021 Plan provides for the grant of stock awards. The compensation committee may grant a stock award as a restricted
stock award and the compensation committee may determine that such award will be subject to the attainment of performance measures over
an established performance period. All of the terms relating to the satisfaction of performance measures and the termination of a restriction
period, or the forfeiture and cancellation of a stock award upon a termination of employment, whether by reason of disability, retirement,
death or any other reason, will be determined by the compensation committee.
Unless
otherwise set forth in a restricted stock award agreement, the holder of shares of restricted stock will have rights as our stockholder,
including the right to vote and receive dividends with respect to the shares of restricted stock, except that distributions other than
regular cash dividends and regular cash dividends with respect to shares of restricted stock subject to performance-based vesting conditions
will be held by us and will be subject to the same restrictions as the restricted stock.
Performance
goals . Under the 2021 Plan, the vesting or payment of performance-based awards will be subject to the satisfaction of certain performance
goals. The performance goals applicable to a particular award will be determined by the compensation committee at the time of grant.
The performance goals may be one or more of the following corporate-wide or subsidiary, division, operating unit or individual measures,
stated in either absolute terms or relative terms.
Individual
Limits . With respect to non-employee directors, the maximum grant date fair value of shares that may be granted to an individual
non-employee director during any fiscal year of the Company is $150,000 in their first year of service and $120,000 thereafter.
Amendment
or termination of the 2021 Plan . Our Board may amend or terminate the 2021 Plan as it deems advisable, subject to any requirement
of stockholder approval required by law, rule or regulation.
Change
in control . In the event there is a change in control and/or the Company is a party to a merger or acquisition or reorganization
or Change in Control event or similar transaction, outstanding awards shall be subject to the merger agreement or other applicable transaction
agreement. Such agreement may provide, without limitation, that subject to the consummation of the applicable transaction, for the assumption
(or substitution) of outstanding awards by the surviving corporation or its parent, for their continuation by the Company (if the Company
is a surviving corporation), for accelerated vesting or for their cancellation with or without consideration, or for the mandatory exercise
or conversion of awards into shares and/or cash whether by net exercise or otherwise, in all cases without the consent of a participant
of the 2021 Plan.
65
Additionally,
in the event a change in control occurs and there is no assumption, substitution or continuation of awards, the compensation committee
in its discretion may provide that all awards shall vest and become exercisable as of immediately before such change in control. The
compensation committee may also in its discretion include in an award agreement a requirement that unless approval under Section 280G
of the Code has been obtained, no acceleration of vesting shall occur with respect to an award to the extent that such acceleration would,
after taking into account any other payments in the nature of compensation to which the participant would have a right to receive from
the Company and any other person contingent upon the occurrence of such change in control, result in a “parachute payment”
as defined under Code Section 280G.
Under
the 2021 Plan, a change of control will occur upon: (i) the consummation of an acquisition, a merger or consolidation of the Company
with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or
surviving entity’s securities outstanding immediately after such acquisition, merger, consolidation or other reorganization is
owned by persons who in the aggregate owned less than 20% of the Company’s combined voting power represented by the Company’s
outstanding securities immediately prior to such acquisition, merger, consolidation or other reorganization; (ii) A sale of more than
fifty percent (50%) of the outstanding shares of each class of capital stock of the Company to a person, entity or group other than a
person, entity or group affiliated with the Company, or (iii) he sale, transfer or other disposition of all or substantially all of the
Company’s assets to a person, entity or group other than a person, entity or group affiliated with the Company.
New
plan benefits . The benefits that might be received by officers, employees and non-employee directors cannot be determined at this
time. All officers, employees and non-employee directors are eligible for consideration to participate in the 2021 Plan.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth certain information regarding beneficial ownership of our common stock as of December 17, 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 17,
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
0.18
%
Anthony
Ambrose
141,667
0.17
%
David
Chasteen
—
—
%
Sammy
Davis, DrPH
137,778
0.17
%
Ryan
Polk
—
—
%
Nicholas
Hnatiw
—
—
%
All
Officers and Directors as a Group (6 persons)
436,312
0.52
%
5%
or greater
%
None
—
—
%
66
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The
following includes a summary of transactions during our fiscal years ended September 30, 2021 and September 30, 2020 to which we have
been a party, including transactions in which the amount involved in the transaction exceeds the lesser of $120,000 or 1% of the average
of our total assets at year-end for the last two completed fiscal years, and in which any of our directors, executive officers or, to
our knowledge, beneficial owners of more than 5% of our capital stock or any member of the immediate family of any of the foregoing persons
had or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control and
other arrangements, which are described elsewhere in this Annual Report on Form 10-K.
De
La Garza Settlement
On
August 28, 2020, we entered into a Settlement Agreement and Mutual General Release (the “Settlement”) with Michael De La
Garza, a former director of the Company. The Settlement related to certain actions, including (i) Cipherloc Corporation vs. Michael De
La Garza, MSR, LLC, and James LaGanke, as Trustee of the Caramel Trust II, Civil Action No. 1:19-CV-01147-LY in the United States District
Court for the Western District of Texas, Austin Division, (ii) Cipherloc Corporation vs. Michael De La Garza, Cause No. D-1-GN-19-005253
in the 53 rd Judicial District Court of Travis County, Texas, and (iii) Michael De La Garza and Cipherloc, Inc. v. Tom Wilkinson,
Anthony Ambrose, Manchester PR, LLC and Manchester Explorer, LP; Cause No. D-1-GN-19-004708 in the 53 rd Judicial District
Court of Travis County, Texas. Under the Settlement, all of the foregoing actions were dismissed with prejudice. Pursuant to the Settlement,
Mr. De La Garza, agreed to, among other things, (i) resign as a director of the Company and confirmed that he had no disagreements with
the Board of Directors, and (ii) return 13,137,757 shares of the Company’s common stock, $0.01 par value per share (the “Forfeited
Stock”), held by him to the Company’s treasury. We agreed to pay Mr. De La Garza an aggregate sum of $400,000 (the “Settlement
Amount”), payable as follows: (A) $300,000 on or before ten (10) business days after the last to occur (the “Settlement Date”)
of (i) the execution of the Settlement by Mr. De La Garza, (ii) actual receipt by the Company of the Forfeited Stock and consummation
of the deliveries contemplated by the Settlement, and (iii) the receipt by the Company of a completed Internal Revenue Service Form W-9
from Mr. De La Garza; and (B) $25,000 on each of the four (4) succeeding quarterly anniversaries of the Settlement Date. Notwithstanding
the foregoing, in the event that Mr. De La Garza is not in compliance with the Settlement on any such payment date, then no payment shall
be due, and we will have the right to pursue any and all remedies against De La Garza including, without limitation, seeking the return
of all amounts paid. In exchange for the consideration described above, and subject to the terms and conditions set forth in the Settlement,
the Company and Mr. De La Garza mutually agreed to grant each other a general release.
Review,
Approval or Ratification of Transactions with Related Parties
Our
Board of Directors reviews and approves transactions with directors, officers and holders of five percent or more of our voting securities
and their affiliates, each a related party. The material facts as to a related party’s relationship or interest in the transaction
are disclosed to our Board of Directors prior to their consideration of such transaction. Further, when stockholders are entitled to
vote on a transaction with a related party, the material facts of the related party’s relationship or interest in the transaction
are disclosed to the stockholders, who must approve the transaction in good faith. The Company does not have a related party transactions
policy in place.
67
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
aggregate fees billed to the Company by its principal accountants for each of the last two
fiscal years were as follows:
2021
2020
Audit
fees
$ 83,200
$ 83,200
Other
fees
7,000
—
Tax
fees
$ 13,500
$ 12,250
Total
fees
$ 103,700
$ 95,450
Audit
Fees. The aggregate fee billed by Briggs & Veselka Co for the audit of the Company’s annual financial statements were $83,200
for the year ended September 30, 2021. The aggregate fees billed by Briggs & Veselka Co. for the audit of the Company’s annual
financial statements were $83,200 for the year ended September 30, 2020.
Audit-Related
Fees. The aggregate fees billed by Briggs & Veselka Co., for assurance and related services that are reasonably related to the
performance of the audit or review of the Company’s financial statements for the fiscal years ended September 30, 2021 and 2020
that are not disclosed in the paragraph captioned “Audit Fees” above, were $0.00.
Tax
Fees. The aggregate fee billed by The Wenmohs Group for professional services rendered for tax compliance, tax advice and tax planning
for the fiscal year ended 2020 were $13,500. The aggregate fee billed by The Wenmohs Group for professional services rendered for tax
compliance, tax advice and tax planning for the fiscal year ended 2020 were $12,250.
All
Other Fees. The aggregate fees billed by Briggs & Veselka Co. for products and services, other than the services described in
the paragraphs “Audit Fees,” “Audit-Related Fees,” and “Tax Fees” above for the fiscal years ended
September 30, 2021 and 2020 were $7,000 and $0.
The
Board of Directors has received and reviewed the written disclosures and the letter from the Company’s independent registered public
accounting firm required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and has discussed
with its auditors its independence from the Company. The Board of Directors has considered whether the provision of services other than
audit services is compatible with maintaining auditor independence.
Based
on the review and discussions referred to above, the Board of Directors approved the inclusion of the audited financial statements be
included in the Company’s Annual Report on Form 10-K for its 2020 fiscal year for filing with the SEC.
The
Board of Directors pre-approved all fees described above.
68
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
2.1
Agreement and Plan of Merger (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed September 13, 2021)
3.1
Certificate of Incorporation (incorporated by reference to the Company’s Current Report on Form 8-K filed on September 30, 2021).
3.2
Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed on September 30, 2021).
4.1
Description
of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated by reference
to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on September 30, 2021).
10.1
Registration Rights Agreement dated March 31, 2021 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 8-K filed on April 8, 2021.
10.2
Employment Agreement of Dr. Albert Carlson (incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K filed on September 4, 2015).?
10.3
Indemnification Agreement by and between the Company and Paulson Investment Company, LLC (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on April 8, 2021).
10.4
Technology Partnership and Authorized Reseller Licensing Agreement between the Company and ECS Federal, LLC (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 filed on April 30, 2021)
10.5
Developer Agreement between the Company and Arnouse Digital Devices (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 filed on April 30, 2021)
10.6
Authorized Reseller/Developer Agreement with Arouse Digital Devices (incorporated by reference to Exhibit 10.21 to the Company’s Current Report on Form S-1 filed on April 30, 2021)
10.7
Letter Agreement with Paulson Investment Company, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 28, 2021)
10.8
Employment Agreement with Nick Hnatiw
10.9
Executive Employment Agreement with Ryan Polk (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 30, 2021)
10.10
2019 Stock Incentive Plan, Effective as of August 8, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 12, 2019.
10.11
Executive Offer Letter accepted by David Chasteen
14.1
Code of Ethics for Directors, Officers and Employees of Cipherloc and its Affiliates, dated August 8, 2019 (filed as Exhibit 14.1 to a Current Report on Form 8-K, filed on August 12, 2019)
31.1
Certification
of Principal Executive Officer Pursuant to the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification
of Principal Financial Officer Pursuant to the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
69
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, there unto duly authorized.
Cipherloc
Corporation
Date:
December 20, 2021
By:
/s/
David Chasteen
David
Chasteen
Chief
Executive Officer, Director
Date:
December 20, 2021
By:
/s/
Ryan Polk
Ryan
Polk
Principal
Financial Officer
In
accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Date:
December 20, 2021
By:
/s/
David Chasteen
David
Chasteen
Chief
Executive Officer, Director
Date:
December 20, 2021
By:
/s/
Tom Wilkinson
Tom
Wilkinson
Chairman
of the Board of Directors
Date:
December 20, 2021
By:
/s/
Anthony Ambrose
Anthony
Ambrose
Director
Date:
December 20, 2021
By:
/s/
Sammy Davis
Sammy
Davis
Director
70
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.