The accompanying notes are an integral
part of these unaudited financial statements.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER
31, 2015 AND 2014
(Unaudited)
NOTE 1- DESCRIPTION OF
BUSINESS
Cipherloc Corporation (the “Company”)
was incorporated in Texas on June 22, 1953 as American Mortgage Company. On May 16, 1996, the Company changed its name to National
Scientific Corporation. On March 15, 2015, the Company changed its name to Cipherloc Corporation.
The
name change became effective through the Amended Certificate as of March 23, 2015.
CipherLoc is a data security solutions
company. Our highly innovative products - based on our patented polymorphic encryption technology - are designed to enable an
iron-clad layer of protection to be added to existing solutions. 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
– RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The restatement
reflects adjustments to correct errors identified by management related to the Company’s revenue recognition of a transaction
that occurred during the quarter ended December 31, 2015. The effect of the restatement was material on the Company’s Balance
Sheets, Income Statement and Statement of Cash Flows. The nature and impact of these adjustments are described below.
Gain recognition on the sale of certain assets of discontinued operations needed to
be deferred and will be discussed in detail in Note 6.
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.
During the quarter ended December 31, 2015, the Company had
retrospectively restated software revenue related to the sale of a license for its Cipherloc software to a third-party. Management
subsequently determined that there was an error in calculating the correct amount of revenue based upon ratable accounting to
recognize during the quarter ended December 31, 2015. The Company has corrected the classification of this amount ($3,814) as
a reduction to software revenue and an increase to deferred revenue
.
For
the quarter ended December 31, 2015
The results
of the restatements are summarized as follows:
Balance Sheet as of December 31,
2015:
|
|
As
reported
|
|
Restatement
Adjustment
|
|
As
restated
|
Deferred
revenue
|
|
$
|
691,406
|
|
|
$
|
429,779
|
|
|
$
|
1,121,185
|
|
Current
liabilities
|
|
|
1,098,408
|
|
|
|
429,779
|
|
|
|
1,528,187
|
|
Accumulated
deficit
|
|
|
(42,908,755
|
)
|
|
|
(429,779
|
)
|
|
|
(43,338,534
|
)
|
Statement
of Operations for the three months ended December 31, 2015:
|
|
As reported
|
|
Restatement Adjustment
|
|
As restated
|
Revenue
|
|
$
|
433,594
|
|
|
$
|
(429,780
|
)
|
|
$
|
3,814
|
|
Loss from continuing operations
|
|
|
(19,929
|
)
|
|
|
(429,780
|
)
|
|
|
(449,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Cash Flows for the three months ended December 31, 2015:
|
|
As
reported
|
|
Restatement
Adjustment
|
|
As
restated
|
Net
loss
|
|
$
|
230,071
|
|
|
$
|
(679,780
|
)
|
|
$
|
(449,709
|
)
|
Revenue
|
|
|
(433,594)
|
|
|
|
429,780
|
|
|
|
(3,814
|
)
|
NOTE 3 – 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 three months ended December
31, 2015 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 amended, as filed with the Securities and Exchange
Commission.
NOTE 4 - 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 December 31, 2015 of $43,588,534 and needs additional cash to maintain its operations.
These factors raise substantial 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 5 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
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
December 31, 2015 and 2014, 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 December 31, 2015, $871,111 of
the Company’s cash balance was uninsured. The Company has not experienced any losses in such accounts.
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 $1,121,185 as of December 31, 2015 and $1,125,000 as of September 30, 2015.
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 the buyer. 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 revenue in the future when and if cash is received.
NOTE 7
– EQUITY
Since
September 30, 2015
, the Company has issued
132,500
restricted common shares through a Private Placement Memorandum for cash proceeds totaling $
265,001
.
NOTE 8 - 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 $175,000.00 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.
ITEM 2 - MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this Quarterly Report “Company,”
“our company,” “us,” and “our” refer to Cipherloc Corporation and its subsidiaries, unless
the context requires otherwise
Forward-Looking Statements
The following information contains certain
forward-looking statements. Forward-looking statements are statements that estimate the happening of future events and are not
based on historical fact. Forward-looking statements may be identified by the use of forward-looking terminology, such as "may,"
"could," "expect," "estimate," "anticipate," "plan," "predict," "probable,"
"possible," "should," "continue," or similar terms, variations of those terms or the negative of
those terms. The forward-looking statements specified in the following information have been compiled by our management on the
basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however,
are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.
Our Business
Cipherloc Corporation is a Technology
and Services based Solutions Company for the rapidly expanding Cloud based Cyber Security industry. Cipherloc is based in Henderson,
Nevada.
The company has introduced an innovative
and revolutionary new type of encryption technology with five international patents and two US patents pending and is the industry’s
first “Polymorphic Cipher Engine”, called CipherLoc
®
. It
is the first secure commercially viable
advanced “Polymorphic Key Progression Algorithmic Cipher Engine” (PKPA). This morphing cipher can be used in any commercial
data security industry and/or in sensitive applications.
Financial results and
trends
Results of Operations for the Three Months Ended December 31, 2015 and 2014
Revenue increased to $3,814 from $0
for the three months ended December 31, 2015 and 2014, respectively. Our revenues increased as a result of a software sale that
was recognized using ratable accounting during the three months ended December 31, 2015.
Cost of revenue was $0 for the three
months ended December 31, 2015 and 2014, respectively.
Selling, general and administrative expenses
increased to $298,767 from $176,325 for the three months ended December 31, 2015 and 2014, respectively.
The
increase in our selling, general and administrative expenses is related to compensation.
Research
and development costs increased to $154,650 from $17,431 for the three months ended December 31, 2015 and 2014, respectively.
Our research and development costs increase is related to new product development of our Cipherloc technology.
Interest expense decreased to $106 from $1,024
for the three months ended December 31, 2015 and 2014, respectively. Our interest expense decreased as a result of paying off
and closing our line of credit.
Liquidity and Capital Resources
We expect to incur substantial expenses
and generate significant operating losses as we continue to grow our operations, as well as incur expenses related to operating
as a public company and compliance with regulatory requirements. At December 31, 2015, the Company had cash of $1,131,206.
We have an accumulated deficit at December
31, 2015 of $
43,588,534
and need additional cash flows to maintain our operations. We depend
on the continued contributions of our executive officers to finance our operations and need to obtain additional funding sources
to explore potential strategic relationships and to provide capital and other resources for the further development and marketing
of our products and business. We expect our cash needs for the next 12 months to be $850,000 to fund our operations. The
ability of the Company to continue its operations is dependent on the successful execution of management’s plans, which
include expectations of raising debt or equity based capital until such time that funds from operations are sufficient to fund
working capital requirements. The Company may need to incur additional liabilities with related parties to sustain the Company’s
existence. There is no assurance that such funding, if required will be available to us or, if available, will be available upon
terms favorable to us.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements
including arrangements that would affect the liquidity, capital resources, market risk support and credit risk support or other
benefits.
WHERE YOU CAN FIND MORE INFORMATION
You are advised to read this Quarterly
Report on Form 10-Q in conjunction with other reports and documents that we file from time to time with the SEC. In particular,
please read our Quarterly Reports on Form 10-Q, Annual Report on Form 10-K, and Current Reports on Form 8-K that we file from
time to time. You may obtain copies of these reports directly from us or from the SEC at the SEC’s Public Reference Room
at 100 F. Street, N.E. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reference Room by
calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers at its website http://www.sec.gov.