NOTES
TO FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED MARCH 31, 2022, AND 2021
(Unaudited)
NOTE
1 - DESCRIPTION OF BUSINESS
Cipherloc
Corporation (the “Company” or “Cipherloc”) was incorporated in the State of Texas on June 22, 1953, under the
name “American Mortgage Company.” Effective August 27, 2014, the Company changed its name to “Cipherloc Corporation.”
Prior to September 30, 2021, the Company was a Texas corporation. The Company became a Delaware corporation effective September 30, 2021.
The
Company’s headquarters is located at 6836 Bee Cave Road, Building 1, Suite279, Austin, Texas 78746. The Company’s website
is www.cipherloc.net.
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
(“U.S. GAAP”). The accompanying interim unaudited financial statements have been prepared in accordance with U.S. GAAP for
interim financial information in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. In the Company’s
opinion, it has included all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation.
The
Company’s operating results for the six months ended March 31, 2022 are not necessarily indicative of the results that may be expected
for the entire fiscal year ending September 30, 2022. The Company has omitted notes to the unaudited interim financial statements that
would substantially duplicate the disclosures contained in the audited financial statements for the fiscal year ended September 30, 2021.
This report should be read in conjunction with the audited financial statements and the footnotes thereto for the fiscal year ended September
30, 2021, included within the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Company prepares its financial statements in accordance with U.S. GAAP. Significant accounting policies are as follows:
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity at the time of purchase of three months or less to be cash equivalents.
At March 31, 2022, the Company’s cash included cash on hand and cash in the bank. The balance of such accounts, 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. As of March 31, 2022, $4,140,059 of the Company’s cash balance was uninsured. The Company has not experienced any
losses of uninsured cash.
Basic
and Diluted Net Loss per Common Share
The
Company’s computes its basic loss per share by dividing the net loss available to common stockholders 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 that number by the amount of time that the applicable shares were outstanding. Diluted earnings per
share reflects the potential dilution that could occur if vested stock options, warrants, and other commitments of the Company to issue
common stock were exercised, resulting in the issuance of common stock that would share in the earnings of the Company. As of March 31,
2022, the Company had no shares of preferred stock outstanding.
The
Company’s diluted loss per share was the same as basic loss per share for the periods in which the Company incurred net losses
since the inclusion of potential common stock equivalents would be anti-dilutive due to the net loss. For the three and six month periods
ended March 31, 2022, the Company excluded warrants to purchase 79,461,481 shares of its common stock, and 2,000,001 shares of its common
stock issued pursuant to restricted stock units from the calculation of diluted loss per share because the effect would be anti-dilutive.
During the three and six months ended March 31, 2021, the Company excluded warrants to purchase 60,364,253 shares of common stock and
stock options to purchase 699,999 shares of common stock from the calculation of diluted loss per share because their effect would be
anti-dilutive .
Research
and Development and Software Development Costs
The
Company expenses all research and development costs, including patent and software development costs. The research and development expenses
incurred by the Company for the three months ended March 31, 2022 and 2021 were $140,919 and $175,083, respectively which is a 19.5%
decrease. The research and development costs incurred by the Company for the six months ended March 31, 2022 and 2021 were $270,558 and
$296,876, respectively.
Revenue
Recognition
The
Company recognizes revenues in accordance with the provisions of ASC 606, “Revenue from Contracts with Customers,”
and a series of amendments, issued by the Financial Accounting Standards Board (“FASB”).
Central
to the Company’s revenue recognition guidance is a five-step revenue recognition model that requires reporting entities to:
1. |
Identify
the contract, |
2. |
Identify
the performance obligations of the contract, |
3. |
Determine
the transaction price of the contract, |
4. |
Allocate
the transaction price to the performance obligations, and |
5. |
Recognize
revenue. |
The
Company accounts for a promise to provide a customer with a right to access the Company’s intellectual property as a performance
obligation satisfied over time, because the customer will simultaneously receive and consume the benefit from access to the Company’s
intellectual property as the performance occurs.
Software
License Agreements
During
the fiscal year ended September 30, 2019, the Company entered into an agreement with SoundFi LLC (“SoundFi”). The SoundFi
agreement provides for a one-year term that automatically renews for subsequent one-year periods unless otherwise terminated by either
party. The Company received a payment of $25,000 from SoundFi during the fiscal year ended September 30, 2020. However, the Company has
not yet received any payments from SoundFi in the current fiscal year and is uncertain if there will be any such payments.
The
Company executed a software licensing agreement with Castle Shield Holdings, LLC (“Castle Shield”) during the fiscal year
ended September 30, 2020. That agreement includes an auto-renewing annual term. The Company received a $10,000 payment from Castle Shield
during the fiscal year ended September 30, 2020, but did not receive any payments from Castle Shield during the fiscal year ended September
30, 2021. However, the Company did receive payments totaling $15,417 from Castle Shield during the six months ended March 31, 2021. The
Company recognized $251 in licensing revenues from Castle Shield during the six months ended March 31, 2022.
Recent
Accounting Pronouncements
The
Financial Accounting Standards Board (“FASB”) issues Accounting Standards Updates (“ASU”) to amend the authoritative
literature in the ASC. There have been several ASUs to date that amend the original text of the ASCs. Other than those discussed below,
the Company believes those ASUs issued to date either (i) 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
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance
removes certain exceptions to the general principles in Topic 740 and enhances and simplifies various aspects of the income tax accounting
guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination,
ownership changes in investments, and interim-period accounting for enacted changes in tax law. This standard is effective for fiscal
years and interim periods within those fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company adopted
ASU 2019-12 on October 1, 2021, and the adoption of this update did not have a material impact on the Company’s financial position,
results of operations and cash flows.
In
January 2020, the FASB issued guidance to clarify certain interactions between the guidance to account for equity securities, the guidance
to account for investments under the equity method of accounting, and the guidance to account for derivatives and hedging. The new guidance
clarifies the application of measurement alternatives and the accounting for certain forward contracts and purchased options to acquire
investments. The Company adopted this guidance on October
1, 2021, and the adoption of this update did not have a material impact on the Company’s financial position, results of operations
and cash flows.
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock
Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU addresses
an issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment
is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.
Early adoption is permitted.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, which requires a financial asset
(or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance
for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net
carrying value at the amount expected to be collected on the financial asset. The guidance is effective for fiscal years beginning after
December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses
(Topic 326), which pushes back the effective date for public business entities that are smaller reporting companies, as defined
by the SEC, to fiscal years beginning after December 15, 2022. Early adoption is permitted.
In
November 2021, the FASB issued guidance to increase the transparency of government assistance received by an entity by requiring disclosures
relating to accounting policy, nature of the assistance, and the effect of the assistance on the financial statements. The Company is
required to adopt the guidance in the first quarter of its fiscal 2023. Early adoption is permitted. The Company is currently evaluating
the impact of this guidance on its financial statements.
[In
August 2020, the FASB issued ASU 2020-06—Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and edging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an
Entity’s Own Equity (“ASU 2020-06”) to simplify the accounting for convertible instruments by removing certain
separation models in Subtopic 470- 20, Debt with Conversion and Other Options, for convertible instruments. Under the amendments
in ASU 2020-06, the embedded conversion features no longer are separated from the host contract for convertible instruments with conversion
features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in
substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single
liability measured at its amortized cost and a convertible preferred stock will be accounted for as a single equity instrument measured
at its historical cost, as long as no other features require bifurcation and recognition as derivatives. By removing those separation
models, the interest rate of convertible debt instruments typically will be closer to the coupon interest rate when applying the guidance
in Topic 835, Interest. The amendments in ASU 2020-06 provide financial statement users with a simpler and more consistent starting point
to perform analyses across entities. The amendments also improve the operability of the guidance and reduce, to a large extent, the complexities
in the accounting for convertible instruments and the difficulties with the interpretation and application of the relevant guidance.
Additionally,
for convertible debt instruments with substantial premiums accounted for as paid-in capital, amendments in ASU 2020-06 added disclosures
about (1) the fair value amount and the level of fair value hierarchy of the entire instrument for public business entities and (2) the
premium amount recorded as paid-in capital.
The
amendments in ASU 2020-06 are effective for public business entities, excluding entities eligible to be smaller reporting companies,
as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all
other entities, the amendments are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted, but no
earlier than fiscal years beginning after December 15, 2020. The Company adopted ASU 2020-06 on October 1, 2021, and the adoption of
this update did not have a material impact on the Company’s financial position, results of operations and cash flows.
NOTE
4– COMMITMENTS AND CONTINGENCIES
Litigation
The
Company is currently not involved in any litigation that it believes could have a material adverse effect on its financial condition
or results of operations.
In
December 2017, Robert LeBlanc filed a petition against the Company and Michael De La Garza, the Company’s former Chief Executive
Officer and President, in the 20th Judicial District for Hays County, Texas (Cause No. 18-0005). Mr. LeBlanc claims that he is a former
consultant, employee, and/or officer of the Company, Mr. LeBlanc’s petition (which has been amended) alleges causes of action against
the Company for alleged violation of the Texas Securities Act, common law fraud against Mr. De La Garza; breach of fiduciary duty against
Mr. De La Garza; breach of contract; as well as declaratory relief. Mr. LeBlanc seeks damages exceeding $1,000,000, but less than $10,000,000.
The Company believes that Mr. LeBlanc was fully compensated for his services, and that his claims are without merit. Mr. LeBlanc is also
asserting a claim of partial ownership of certain of the Company’s patents, which the Company believes is without merit. The Company
believes it has meritorious defenses to Mr. LeBlanc’s allegations, and the Company intends to continue to vigorously defend against
the litigation.
In
April 2020, Eric Marquez, the former Secretary/Treasurer and Chief Financial Officer of the Company, and certain other plaintiffs filed
a lawsuit against the Company and Michael De La Garza, the Company’s former Chief Executive Officer and President, in the 20th
Judicial District for Hays County, Texas (Cause No. 20-0818). The lawsuit alleges causes of action for fraud against Mr. De La
Garza (for misrepresentations allegedly made by Mr. De La Garza); breach of contract, for alleged breaches of Mr. Marquez’s alleged
oral employment agreement, which Mr. Marquez claims required the Company pay him cash and shares of stock; unjust enrichment; quantum
meruit; and rescission of certain stock purchases made by certain of the plaintiffs, as well as requests for declaratory relief. Damages
sought exceed $1,000,000. The Company believes it has made all required payments and delivered the stock to the plaintiffs. The case
is currently being defended by the Company. The Company believes it has meritorious defenses to the allegations, and the Company intends
to continue to vigorously defend against the litigation.
Leases
As
of March 31, 2022, the Company had no financial obligations for facility lease agreements, except as set forth below.
Prior
to December 1, 2021, Tom Wilkinson, the Company’s Chairman of the Board of Directors, provided the Company with the use of office
space that he rents, located at 6836 Bee Caves Road, Building 1, Suite 279, Austin, TX 78746, for its corporate headquarters. As of December
1, 2021, the Company entered into a month-to-month lease agreement for this office space with Nolen & Associates, under which the
Company pays Nolen & Associates $500 per month in rent.
The
Company’s rent expense totaled $1,641 and $2,141 for the three and six months ended March 31, 2022, and $97,910 and $136,188 for
the three and six months ended March 31, 2021, respectively.
NOTE
5 – DEBT
On
April 6, 2020, to supplement its cash balances, the Company submitted an application for a $365,430 loan under the Paycheck Protection
Program (“PPP”) sponsored by the U.S. Small Business Administration (the “SBA Loan”). On April 12, 2020, the
SBA Loan application was approved, and the Company received the loan proceeds on April 22, 2020. The SBA Loan had an interest rate of
1% and was scheduled to mature on April 12, 2022.
On
January 29, 2021, the Company filed for partial forgiveness of $192,052 of the SBA Loan, which was approved on June 11, 2021. The Company’s
reductions in staff that occurred in 2020 prevented the Company from qualifying for full forgiveness of the principal balance of the
SBA Loan.
On
April 15, 2021, the Company placed the full $365,430 principal balance of the SBA Loan, plus an additional $1,000, in an escrow account.
Upon approval of the partial SBA Loan forgiveness, the Company paid the remaining balance of the SBA Loan, using funds in the escrow
account. The Company transferred the remaining balance of the escrow account to the Company’s operating account. As a result, the
balance of the SBA Loan was $0 as of September 30, 2021.
NOTE
6 - STOCKHOLDERS’ EQUITY
The
Company’s certificate of incorporation authorizes the issuance of up to 681,000,000 shares of common stock and 10,000,000 shares
of Series A convertible preferred stock, each with a par value of $0.001 per share. As of March 31, 2022, the Company had 87,560,647
shares of common stock, and no shares of preferred stock, outstanding.
Common
Stock
During
the six months ended March 31, 2022, the Company issued 4,633,336 shares of its common stock as set forth below. No preferred stock has
been issued during this six-month period.
Beginning
with the last quarter of the Company’s fiscal year ended September 30, 2021, the Company’s Board of Directors elected to
receive one-half of the members’ quarterly compensation in shares of the Company’s common stock, instead of cash. At its
April 2021 meeting, the Board of Directors also approved a one-time award of 100,000 shares of common stock to each director, subject
to approval of the Company’s new Equity Incentive Compensation Plan by its stockholders. That approval was received at the Company’s
annual meeting of stockholders in September 2021. As a result, the Company’s directors have received a total of 633,336 shares
of the Company’s common stock through the one-time grant and three quarterly compensation payments discussed above. The Company
issued the shares for the one-time awards and the fiscal year 2021 fourth quarter awards, totaling 411,112 shares, on January 13, 2022.
The Company issued the shares for the fiscal year 2022 first quarter awards totaling 111,112 on January 31, 2022, and shares for the
second quarter awards totaling 111,112 on March 28, 2022.
On
July 23, 2021, the Company entered into a financial advisory and consulting agreement with Paulson Investment Company, LLC (“Paulson”).
Pursuant to that agreement, Paulson will provide the following services at the Company’s request: (a) familiarize itself with the
Company’s business, assets and financial condition; (b) assist the Company in developing strategic and financial objectives; (c)
assist the Company in increasing its exposure in the software industry; (d) assist the Company in increasing its profile in the investment
and financial community through introductions to analysts and potential investors, participation in investment conferences and exploitation
of reasonably available media opportunities; (e) identify potentially attractive merger and acquisition opportunities; (f) review possible
innovative financing opportunities and (g) render other financial advisory services as may be reasonably requested by the Company. The
term of the agreement is four years from the date of the agreement, unless terminated earlier by either party as provided therein. As
compensation for the services provided by Paulson under the agreement, on March 20, 2022, the Company issued a total of 4,000,000 shares
of the Company’s common stock to Paulson and three of its employees. This was valued at $720,000 at the date of the consulting
agreement. The contract amount was capitalized as deferred contract costs and is being amortized to expense straight-line over the 4-
year service period.
Restricted
Common Stock Units
On
October 22, 2021, the Company entered into restricted stock unit award agreements with four employees and one contractor. The Company
granted a total of 2,000,001 shares of restricted stock to these individuals. The restricted stock awards vest in three equal tranches
on the next three anniversaries of the date of the applicable awards. The value of the shares of restricted stock was $260,000, based
upon the then current market price of the Company’s common stock of $0.13 per share on the grant date. For the six months ended
March 31, 2022, the Company recorded $51,568 in stock compensation expense related to these agreements.
NOTE
7 – SUBSEQUENT EVENTS
The Company does not have any subsequent events to report as of
the date of this filing.