NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2016
(Unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS
Cipherloc Corporation (the “Company”)
was incorporated in Texas on June 22, 1953 as American Mortgage Company. On March 15, 2015, the Company changed its name to Cipherloc
Corporation. The name change became effective by the Amended Certificate as of March 23, 2015 .
CipherLoc is a data security solutions
company. Our highly innovative products - based on our patented polymorphic encryption technology - are designed to enable an
iron-clad layer of protection to be added to existing solutions. CipherLoc has developed technology that:
• Dramatically enhances
data security
• Can be easily added to
existing products
• Is scalable and future-proof
Our solutions are not a replacement
of existing encryption technologies but rather an enhancement to them. Our mobile, desktop, and server software solutions are
specifically designed to be added to any third-party application, service, or product. With a highly flexible and modular technology
that can be easily added other software solutions, CipherLoc can support a wide range of use cases including any-to-any security
(mobile-to-mobile, mobile-to-desktop, desktop-to-cloud, etc.), dynamically-created VPNs (where no provisioning is necessary),
and many others.
NOTE 2 – BASIS OF PRESENTATION
OF INTERIM FINANCIAL STATEMENTS
The Company prepares its financial
statements in accordance with accounting principles generally accepted in the United States of America. The accompanying interim
unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial
information in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. In our opinion, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
Operating results for the six months
ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending September 30, 2016.
Notes to the unaudited interim financial statements that would substantially duplicate the disclosures contained in the audited
financial statements for the year ended September 30, 2015 have been omitted; this report should be read in conjunction
with the audited financial statements and the footnotes thereto for the fiscal year ended September 30, 2015 included within
the Company’s Form 10-K as filed with the Securities and Exchange Commission.
NOTE 3 - GOING CONCERN
The
accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as a going concern. However, the Company has incurred
losses from operations, has an accumulated deficit at March 31, 2016 of $43,824,467 and needs additional cash to maintain its
operations . We intend to continue raising money through a private placement memorandum and also by the release of
products during the 2016 calendar year to fund our operations.
These factors raise doubt about
the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty. The Company’s continued existence is dependent upon management’s
ability to develop profitable operations, continued contributions from the Company’s executive officers to finance its operations
and the ability to obtain additional funding sources to explore potential strategic relationships and to provide capital and other
resources for the further development and marketing of the Company’s products and business.
NOTE 4 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The Company prepares its financial
statements in accordance with accounting principles generally accepted in the United States of America. Significant accounting
policies are as follows:
Cash and Cash Equivalents
The Company considers all highly
liquid investments with an original maturity of three months or less to be cash equivalents. At March 31, 2016 and
2015, cash and cash equivalents include cash on hand and cash in the bank. The Company maintains its cash in accounts held by
large, globally recognized banks which, at times, may exceed federally insured limits as guaranteed by the Federal Deposit Insurance
Corporation (FDIC). The FDIC insures these deposits up to $250,000. At March 31, 2016, $490,672 of the Company’s cash balance
was uninsured. The Company has not experienced any losses in such accounts.
Basic and Diluted Net Loss per
Common Share
Basic income (loss) per share is
computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding
during the reporting period. The weighted average number of shares is calculated by taking the number of shares outstanding and
weighting them by the amount of time that they were outstanding. Diluted earnings per share reflects the potential dilution that
could occur if stock options, warrants, and other commitments to issue common stock were exercised or equity awards vest resulting
in the issuance of common stock that could share in the earnings of the Company. As of March 31, 2016 and September 30, 2015,
the Company had 10,000,000 shares of preferred stock outstanding which are convertible into 15,000,000 shares of common stock.
Diluted loss per share is the same
as basic loss per share during periods where net losses are incurred since the inclusion of the potential common stock equivalents
would be anti-dilutive as a result of the net loss.
Concentration of Credit Risk
and Customer Concentrations
All of the Company’s cash
and cash equivalents are maintained in regional and national financial institutions. The Company has exposure to credit risk to
the extent that its cash and cash equivalents exceed amounts covered by the U.S. federal deposit insurance; however, the Company
has not experienced any losses in such accounts. In management’s opinion, the capitalization and operating history of the
financial institutions are such that the likelihood of material loss is remote.
During the three and six months
ended March 31, 2016, one customer made up 100% of revenues. Management believes the loss of this customer would have a material
impact on the Company’s financial position, results of operations, and cash flows.
Revenue Recognition
Software license revenue is generally
recognized when a signed contract or other persuasive evidence of an arrangement exists, the software has been electronically
delivered, the license fee is fixed or is measured on a paid user basis; and collection of the resulting receivable is probable.
When contracts contain multiple elements wherein Vendor-Specific Objective Evidence (“VSOE”) exists for all undelivered
elements, we account for the delivered elements in accordance with the “Residual Method.” VSOE of fair value for maintenance
and support is established by a stated renewal rate, if substantive, included in the license arrangement or rates charged in stand-alone
sales of maintenance and support. Revenue from subscription license agreements, which include software, rights to unspecified
future products and maintenance, is recognized ratably over the term of the subscription period. When the
fair value of VSOE of post contract customer support cannot be determined, the revenue is recognized ratably over the contract
period. In June 2014, the Company entered into an agreement to provide software and support to a third party for which no VSOE
for any elements is known. Delivery of the use of the license was not achieved until December 2015; the only remaining undelivered
element was post contract support services, and accordingly, the revenues will be recognized on a pro rata basis prospectively
over the remaining 30 months of the related contracts. Deferred revenue results from fees billed to or collected from customers
for which revenue has not yet been recognized.
The Company has deferred revenue
from one customer of $1,008,686 as of March 31, 2016 and $1,125,000 as of September 30, 2015.
Research and Development and
Software Development Costs
Capitalization of certain software
development costs are recorded after the determination of technological feasibility. Based on our product development process,
technological feasibility is determined upon the completion of a working model. To date, costs incurred by us from the completion
of the working model to the point at which the product is ready for general release have been insignificant. Accordingly, we have
charged all such costs to research and development expense in the period incurred. Our research and development costs incurred
in our continuing operations for the three and six months ended March 31, 2016 and 2015 were $110,493, $19,469, $237,643 and $41,650,
respectively.
Recent Accounting Announcements
The FASB issues ASUs to amend the
authoritative literature in ASC. There have been a number of ASUs to date that amend the original text of ASC. The Company believes
those issued to date either (1) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the
Company or (iv) are not expected to have a significant impact on the Company.
In February
2016, the FASB issued ASU 2016-02, Leases (Topic 840), to increase transparency and comparability among organizations by recognizing
lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments
in this standard are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years, for a public entity. Early adoption of the amendments in this standard is permitted for all entities and the Company must
recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company
is currently in the process of evaluating the effect this guidance will have on its financial statements and related disclosures.
NOTE 5 – RELATED PARTY
TRANSACTIONS
The advances
from the CEO are due on demand and do not accrue interest. These advances are included in accounts payable and accrued liabilities
on the balance sheet. The Company had advances from the CEO of $0 and $1,205 as of March 31, 2016 and September 30, 2015, respectively.
NOTE
6– DISCONTINUED OPERATIONS
Cloud MD Sale The Company’s
Board of Directors believed that it was in the best interest of the Company to discontinue the former business operation Cloud
MD. During September 2015, the Cloud MD business segment was discontinued and a plan of sale of the segment was approved. The
Cloud MD sale occurred in October 2015 as a $250,000 note payable from a former employee of Cloud MD. The note receivable has
five annual payments of $50,000 and carries interest of 3% a year. We reviewed the need for an allowance for loan loss and estimation
of impairment of the note receivable based on professional relationship and experience with the buyer and the specifics of the
agreements. As it was determined that collectability of the cash was not reasonably assured, the Company has fully reserved the
receivable, and the Company will record the gain from the sale of assets of discontinued operations in the future when and if
cash is received.
NOTE 7 - EQUITY
As of March 31, 2016, the Company
was authorized to issue 650,000,000 common shares and 10,000,000 preferred shares at a par value of $0.01.
Common Stock
On April 11, 2011, the Company amended
its articles of incorporation to increase the authorized shares to 650,000,000 shares, at $0.01 par value. There were 4,469,241
shares issued and outstanding as of March 31, 2016. The holders of our common stock are entitled to receive such dividends, if
any, as may be declared by our board of directors from time to time out of legally available funds. The dividend rights of our
common stock are junior to any preferential dividend rights of any outstanding shares of preferred stock. The holders of our common
stock also are entitled to receive distributions upon our liquidation, dissolution or winding up of our assets that are legally
available for distribution, after payment of all debt and other liabilities and distribution in full of preferential amounts,
if any, to be distributed to holders of our preferred stock.
The holders of our common stock
are not entitled to preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders
of our common stock are subject to, and may be adversely affected by, the rights of any series of preferred stock that we may
designate and issue in the future.
During the three months ended March
31, 2016, there were no shares of common stock sold for cash. During the six months ended March 31, 2016, 132,500
shares of common stock were sold for cash proceeds of $265,001. On October 22, 2015, the Company issued 5,000 shares of common
stock to an individual per an asset purchase agreement. The shares had a value of $27,500 on the date of issue, which was treated
as a research and development expense rather than an asset, as the purchased technology has not reached technological feasibility.
Preferred
Stock
As
of March 31, 2016, the Series A Preferred Stock is convertible into the Company’s common stock at a rate of 1 to 1.5 common
shares. As of March 31, 2016, there are a total of 10,000,000 shares of the Series A Preferred Stock authorized and outstanding
which are convertible into a total of 15,000,000 shares of common stock. Each share of the Preferred Stock has 150 votes on all
matters presented to be voted by the holders of common stock. The holders of the Preferred A shares can only convert the shares
if agreed upon by 50.1% vote of all preferred shareholders.
NOTE
8 - COMMITMENTS AND CONTINGENCIES
Litigation
The
Company is involved in various collections matters; the defendants have asserted certain counterclaims. While the outcome and
impact of currently pending legal proceedings cannot be predicted with certainty, based on the current status of the matters,
we believe that the resolution of these proceedings through settlement or judgment will not have a material adverse effect on
our operating results, financial position or cash flow.
NOTE 9 -
SUBSEQUENT EVENTS
The
Company hired Mike Salas as Vice President of Sales and Marketing on April 25,
2016.
The
employment contract grants an annual salary of $175,000 and restricted common stock with an annual value of $125,000.
One quarter of the stock shall be granted at the end of the first quarter anniversary of employment and a like amount each quarter
as long as the contract is in effect. The Company also executed a three-year lease agreement effective April 1, 2016 for
a free standing building with annual rent of $86,596 for the first year increasing annual to $90,502 for the third year. The
lease is automatically renewable for two one year periods at the Company’s option. The building is located in
Buda, Texas. Since March 31, 2016, the Company has issued 315,500 restricted common shares through a Private Placement Memorandum
for cash proceeds totaling $631,000
. The Company also issued 28,800 shares
for services in lieu of cash.