SideChannel, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS The accompanying interim financial statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders’ equity in conformity with accounting principles generally accepted in the United States of America. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2020. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included, and all such adjustments are of a normal recurring nature. Operating results for the three months ended December 31, 2020 are not necessarily indicative of the results that can be expected for the year ending September 30, 2021. 3 CIPHERLOC CORPORATION BALANCE SHEETS (UNAUDITED) December 30, 2020 September 30, 2020 ASSETS Current assets Cash $ 399,876 $ 1,079,839 Prepaid expenses 181,900 258,424 Total current assets 581,776 1,338,263 Other assets 140,132 200,000 Operating lease ROU asset 260,779 291,140 Total assets $ 982,687 $ 1,829,403 LIABILITIES & STOCKHOLDERS’ DEFICIT Current liabilities Accounts payable and accrued liabilities $ 852,928 $ 840,234 Accrued compensation — 10,000 Operating lease liability – current portion 135,058 132,608 Paycheck protection program loan – current portion 260,499 216,902 Deferred revenue 6,667 15,417 Total current liabilities 1,255,152 1,215,161 Paycheck protection program loan – long term 104,931 148,528 Operating lease liability – long-term portion 569,276 603,676 Total liabilities 1,929,359 1,967,365 Series A convertible preferred stock, $0.01 par value, 1,000,000 shares authorized; nil and 1,000,000 shares issued and outstanding as of December 31, 2020 and September 30, 2020, respectively — 10,000 Common stock, $0.01 par value, 681,000,000 shares authorized; 27,377,696 and 27,505,196 shares outstanding; and 40,792,510 and 40,792,510 issued as of December 31, 2020 and September 30, 2020, respectively 407,925 407,925 Treasury stock, at cost 13,414,814 and 13,287,314 shares as of December 31, 2020 and September 30, 2020, respectively (590,000 ) (550,000 ) Additional paid-in capital 68,461,746 68,420,721 Accumulated deficit (69,226,343 ) (68,426,608 ) Total stockholders’ deficit (946,672 ) (137,962 ) Total liabilities and stockholders’ deficit $ 982,687 $ 1,829,403 The accompanying notes are an integral part of these unaudited financial statements. 4 CIPHERLOC CORPORATION STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended December 31, 2020 2019 Revenues $ 8,750 $ 18,750 Cost of revenues — — Gross profit 8,750 18,750 Operating expenses General and administrative 661,692 1,304,780 Sales and marketing 25,000 256,044 Research and development 121,793 566,015 Total operating expenses 808,485 2,067,400 Operating loss (799,735 ) (2,108,089 ) Other income (expenses) Interest income (expense), net — — Net loss $ (799,735 ) $ (2,108,089 ) Net loss per common share – basic and diluted $ (0.03 ) $ (0.05 ) Weighted average common shares outstanding – basic and diluted 27,377,696 40,792,510 The accompanying notes are an integral part of these unaudited financial statements. 5 CIPHERLOC CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended December 31, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (799,735 ) $ (2,108,089 ) Adjustments to reconcile net loss to net cash flows used in operating activities: Depreciation — 5,404 Stock-based compensation 41,025 51,574 Changes in operating assets and liabilities: Prepaid expenses and other assets 136,392 56,641 Accounts payable and accrued liabilities 11,105 7,423 Accrued compensation (10,000 ) (142,295 ) Deferred revenue (8,750 ) (18,750 ) Net cash used in operating activities (629,963 ) (2,148,092 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets — (13,841 ) Net cash used in investing activities — (13,841 ) CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of preferred stock (10,000 ) — Purchase of treasury stock (40,000 ) — Net cash used in financing activities (50,000 ) — DECREASE IN CASH (679,963 ) (2,161,933 ) CASH, BEGINNING OF PERIOD 1,079,839 7,839,472 CASH, END OF PERIOD $ 399,876 $ 5,677,539 NON-CASH INVESTING AND FINANCING ACTIVITIES: ROU asset $ — $ 209,419 ST operating lease liability $ — $ 102,251 LT operating lease liability $ — $ 102,413 The accompanying notes are an integral part of these unaudited financial statements. 6 CIPHERLOC CORPORATION STATEMENTS OF STOCKHOLDERS’ DEFICIT (UNAUDITED) Preferred Stock Common Stock Treasury Additional Paid-in Accumulated Stockholders’ For the Three Months ended December 31, 2020 Shares Amount Shares Amount Stock Capital Deficit Equity Balance at September 30, 2020 1,000,000 $ 10,000 40,792,510 $ 407,925 $ (550,000 ) $ 68,420,721 $ (68,426,608 ) $ (137,962 ) Preferred and treasury shares acquired (1,000,000 ) (10,000 ) (40,000 ) (50,000 ) Stock option expense issued to directors & employees — — — — — 41,025 — 41,025 Net loss — — — — — (799,735 ) $ (799,735 ) Balance at December 31, 2020 — $ — 40,792,510 $ 407,925 $ (590,000 ) $ 68,461,746 $ (69,226,343 ) $ (946,672 ) For the Three Months Ended December 31, 2019 Shares Amount Shares Amount Capital Deficit Equity Balance at September 30, 2019 1,000,000 $ 10,000 40,792,510 $ 407,925 $ 68,225,825 $ (61,456,533 ) $ 7,187,217 Stock option expense issued to directors & employees — — — — 51,574 — 51,574 Net loss — — — — — (2,108,089 ) (2,108,089 ) Balance at December 30, 2019 1,000,000 $ 10,000 40,792,510 $ 407,925 $ 68,277,399 $ (63,564,622 ) $ 5,130,702 The accompanying notes are an integral part of these unaudited financial statements. 7 CIPHERLOC CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2020 AND 2019 (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, we changed our name to “Cipherloc Corporation.” Our headquarters are located at 6836 Bee Cave Road, Building 1, S#279, Austin, TX 78746. Our website is www.cipherloc.net . NOTE 2 - GOING CONCERN We do not believe that our existing cash balances are sufficient to fund future operations for the next 12 months. We are considering options to issue additional equity as a means to increase liquidity sufficient to fund operations into the start of calendar year 2022. If we are unsuccessful doing so, then the Company will cease operations. At December 31, 2020, the Company had not yet achieved profitable operations. We had a net loss of approximately $7.0 million for the year ended September 30, 2020 and had an accumulated deficit in aggregate of approximately $69.2 million from our inception through December 31, 2020. We expect to incur further losses in the development of our business. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management’s plan to address the Company’s ability to continue as a going concern includes: (1) obtaining debt or equity funding from private placement or institutional sources; (2) generating cash flow from operations. Although management believes that it will be able to obtain the necessary funding to allow the Company to remain a going concern through the methods discussed above, there can be no assurances that such methods will prove successful. These financial statements have been prepared assuming that the Company will continue as a going concern and therefore, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classifications of liabilities that may result from the outcome of this uncertainty. 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, 2020 are not necessarily indicative of the results that may be expected for the year ending September 30, 2021. 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, 2020 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, 2020 included within the Company’s Form 10-K as filed with the Securities and Exchange Commission. 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 a maturity at the time of purchase of three months or less to be cash equivalents. At December 31, 2020 and September 30, 2020, cash includes 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. At December 31, 2020, $149,876 of the Company’s cash balance was uninsured. Basic and Diluted Net Loss per Common Share Basic loss per share is computed by dividing net 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 December 31, 2020, and December 31, 2019, the Company had 1,000,000 shares of preferred stock outstanding, which are convertible into 1,500,000 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. During the three months ended December 31, 2020, 23,746,866 warrants, 800,000 stock options and 1,000,000 shares of convertible preferred stock were excluded from the calculation of diluted loss per share because their effect would be anti-dilutive. During the three months ended December 31, 2019, 24,216,866 warrants and 1,000,000 shares of convertible preferred stock were excluded from the calculation of diluted loss per share because their effect would be anti-dilutive. 8 Research and Development and Software Development Costs The Company expenses all research and development costs, including patent and software development costs. Our research and development costs incurred for the three months ended December 31, 2020 and 2019 were $121,793 and $566,015, respectively. Revenue Recognition The Company recognizes revenues in accordance with the provisions of Accounting Standards Update 2014-09, “Revenue from Contracts with Customers,” and a series of amendments which together we identify as “ASC Topic 606”. Central to the new 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 the entity’s performance of providing access to its intellectual property as the performance occurs. Software License Agreements During fiscal the fiscal year ended September 30, 2019, the Company entered into a one-year agreement with SoundFi LLC (“SoundFi”) which automatically renews for subsequent one-year periods unless otherwise terminated by either party. Cipherloc received $25,000 from SoundFi during the year ended September 30, 2020. The Company executed an annual software licensing agreement with Castle Shield during the year ended September 30, 2020 which also include auto-renewing terms. Castle Shield made a $10,000 payment to the Company based on the terms of their agreement with Cipherloc. During the three-months ended December 31, 2020, the Company recognized $8,750 in licensing revenue from the SoundFi and Castle Shield agreements. 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 are currently evaluating the impact of ASU 2019-12 on its financial statements, which is effective for the Company in its fiscal year and interim periods beginning on October 1, 2021. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement , to modify the disclosure requirements for fair value measurements. The ASU removes certain disclosure requirements related to transfers between fair value hierarchy levels and valuation processes for Level 3 fair value measurements. It modifies certain disclosure requirements for investments in entities that calculate net asset value. It adds certain disclosure requirements regarding gains and losses for recurring Level 3 fair value measurements and unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted ASU 2018-13 on October 1, 2020 and the adoption of this update did not have a material impact on the Company’s financial position, results of operations and cash flows. 9 In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting , to expand the scope of Topic 718, Compensation – Stock Compensation , which currently only includes share-based payments to employees, to include share-based payments issued to nonemployees for goods or services. Thus, accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted ASU 2018-07 on October 1, 2019 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 February 2016, the FASB issued ASU 2016-02, Leases, which aims to make leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset (ROU) and corresponding lease liability, including leases currently accounted for as operating leases. Leases of mineral reserves and related land leases have been exempted from the standard. We adopted ASU 2016-02, Leases, on October 1, 2019. We elected the “package of practical expedients” within the standard which permits us not to reassess prior conclusions about lease identification, lease classification and initial direct costs. We made an accounting policy election to not separate lease and non-lease components for all leases. The adoption of this standard resulted in the recognition of right-of-use assets and lease liabilities of $0.2 million, which were not previously recorded on our balance sheet. NOTE 5 – COMMITMENTS AND CONTINGENCIES Litigation Other than as set forth below, the Company is not currently involved in any litigation that it believes could have a material adverse effect on its financial condition or results of operations. In December 2017, a disgruntled former consultant brought an action in Texas state court against the Company and its former chief executive officer, alleging fraud and misrepresentation pertaining to stock and payments alleged to be owed to the consultant. The Company believes it has made all required payments and delivered the stock to the consultant. The consultant also included a claim of partial ownership of certain of the Company’s patents, which the Company believes is without merit. The case is currently being defended by the Company. In August 2019, the Board of Directors formed a special committee of independent directors (the “Special Committee”) to investigate certain activities of Michael De La Garza (“De La Garza”), our former chief executive officer. Also, in that same month, the Company initiated litigation against De La Garza in the District Court of Travis Country, Texas (the “Court”). On September 25, 2019, the Court entered a temporary injunction against De La Garza enjoining him from numerous acts. The Special Committee investigated certain activities of De La Garza, including the Ageos, LLC Operating Agreement, the QHCI/Noun note receivable, an advance/bonus, personal expenditures, and other items. All amounts expended have been expensed as of September 30, 2019. The Company also sued De La Garza, among others, in federal district court seeking to invalidate the issuance of Series A preferred stock to him in 2015. The preferred shares were converted to 13.5 million shares of common stock by De La Garza during 2018. All litigation with De La Garza was settled on August 28, 2020 with De La Garza and the Company entering into a Settlement Agreement, whereby De La Garza agreed to return 13.1 million shares of common stock to the Company and the Company agreed to pay De La Garza $400,000 between September 30, 2020 and September 30, 2021. At December 31, 2020, Cipherloc owed $75,000 in settlement payments which will be made in $25,000 equal payments on March 1, 2021, June 1, 2021, and September 1, 2021, respectively. 10 The Company also sought to invalidate the issuance of 1 million shares of the Company’s Series A preferred stock in or around 2011 to former director and chief financial officer, Pamela Thompson, which stock was being held by the Carmel Trust II. As such, the Company initiated an action against James LeGanke, as Trustee of Carmel Trust II, in federal district court as part of its efforts to invalidate those shares. The Company alleged that Thompson failed to comply with both state law and the Company bylaws when she De La Garza caused the Company to issue the preferred stock to themselves as purported compensation. The action was settled on January 11, 2021, for $50,000 in exchange for the return of the 1,000,000 shares of Series A preferred stock and 127,500 shares of the Company’s common stock. The settlement payment was included in the December 31, 2020 balance sheet as an accrued liability. In October, 2020, Ageos, LLC, a Virginia limited liability company (“Ageos”), filed a Third Party Complaint against the Company (Third Party Case No. GV20015643-00) in connection with the pending action titled Scandium, LLC v. Ageos, LLC (Case No. GV20014313-00) in the General District Court for Fairfax County in the Commonwealth of Virginia. The action relates to an operating agreement, by and between the Company and Ageos, whereby the Company agreed to guarantee Ageos’s lease in order to enable the leasing of space in Fairfax County, VA. The Company’s subsequently terminated the agreement with Ageos and offered to take over the space as an accommodation. Ageos declined. Ageos’s third party complaint demands from the Company, among other things, all damages obtained by Scandium, LLC against Ageos; (ii) other compensatory damages in connection with certain lease payments under the lease discussed above; and (iii) pre-judgment interest. This lawsuit is ongoing, and its resolution is unknown. Leases As of December 31, 2020, the Company had one lease agreement for facilities. In February 2020, the Company leased approximately 3,666 square feet of office space on 2107 Wilson Boulevard, Arlington, Virginia. The lease for this facility began on February 1, 2020 and continues until July 31, 2025. The base annual rent is $159,471, a $100,000 security deposit was paid, and abatement of monthly rent payments was provided until August 1, 2020, and the lease provides for annual rent increases of approximately 2.5%. The amount of future payments guaranteed is $782,214. As the result of restructuring actions intended to conserve cash during the COVID-19 crisis, the landlord of the Wilson Boulevard space was notified that the Company no longer needed the space and is seeking an amicable and reasonable termination of the lease agreement. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenant. Operating Leases Operating leases are included in operating lease ROU lease assets, and operating lease liabilities and operating long-term lease liabilities on the Balance Sheets. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Lease expense is included in general and administrative expense in the statements of operations and is reported net of lease income. Lease income is not material to the results of operations for the three months ended December 31, 2020. 11 Cash Flows An initial right-of-use asset of $233,751 was recognized as a non-cash asset addition with the adoption of the new lease accounting standard. In February 2020, the Company’s new lease in Arlington, Virginia added approximately $746,000 in new lease obligations. Cash paid for amounts included in the present value of operating lease liabilities was $39,868 during first quarter 2021 and is included in operating cash flows. The weighted average remaining lease terms and discount rates for all of our operating lease were as follows as of December 31, 2020: Remaining lease term and discount rate: December 31, 2020 Weighted average remaining lease terms (years) Lease facilities 4.58 Weighted average discount rate Lease facilities 4.35 % Significant Judgements Significant judgements include the discount rates applied, the expected lease terms, and lease renewal options. Future annual minimum lease obligations at December 31, 2020 are as follows: Year ending September 30 Amount 2021 $ 122,267 2022 166,180 2023 170,322 2024 174,575 2025 148,870 $ 782,214 Rent expense totaled $38,279 and $22,744 for the three months ended December 31, 2020 and 2019, respectively. NOTE 6 – DEBT On April 6, 2020, to supplement its cash balance, the Company submitted their application for a Paycheck Protection Program (“PPP”) loan (the “SBA loan”) sponsored by the U.S. Small Business Administration in the amount of $365,430. On April 12, 2020, Company’s SBA loan application was approved, and the Company received loan proceeds on April 22, 2020. The SBA loan has an interest rate of 1% and matures on April 12, 2022. Section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP. The PPP and loan forgiveness are intended to provide economic relief to small businesses, such as the Company, that are adversely impacted under the COVID-19 Emergency Declaration issued by President Donald J. Trump on March 13, 2020. As a result of staff reductions during 2020, the Company expects the ultimate amount of loan forgiveness to be less the original principal of the PPP SBA loan. The PPP loan balance at December 31, 2020 was $365,430. The Company filed for partial loan forgiveness on January 29, 2021 but has not received approval of its forgiveness application as of the time of this filing. NOTE 7 - STOCKHOLDERS’ EQUITY (DEFICIT) The Company is authorized to issue 681,000,000 common shares and 1,000,000 preferred shares, each at a par value of $0.01 per share. Common Stock During the three months ended December 31, 2020, there were no issuances of common stock. During the three months ended December 31, 2019, the Company issued 620,000 shares of stock options to the employees with a fair value of $459,019, of which $12,751 was recorded as stock-based compensation expenses in research and development, marketing and general administration expense. Options will vest over a three-year period ratably. Of the 620,000 options, 500,000 options have a strike price of $0.78 and the remaining 120,000 have a strike price of $0.81. Total stock compensation expense was $51,574 for the quarter ended December 31, 2019. Series A Preferred Stock Each outstanding share of Series A preferred stock is convertible into the Company’s common stock at a rate of one preferred share to 1.5 common shares. Each share of preferred stock has 1.5 votes on all matters presented to be voted by the holders of common stock. The holders of preferred stock can only convert the shares upon approval of the Company’s board of directors. If declared by the board of directors, holders of preferred stock are entitled to receive dividends prior and in preference to any declaration or payment of any dividend on the common stock of the Company. In the event of liquidation or dissolution of the Company, holders of preferred stock shall be paid out of the assets of the Company prior and in preference to any payment or distribution to holders of common stock of the Company. NOTE 8 – SUBSEQUENT EVENTS On January 11, 2021, settlement was reached in relation to suit filed by the Company against James LeGanke, as Trustee of Carmel Trust II, and was settled for $50,000 in exchange for the return of 1,000,000 shares of Series A Preferred Stock and 127,500 shares of common stock to the Company. On February 5, 2021 the Company filed amendments to its Articles of Incorporation with the Texas Secretary of State. 12 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this Quarterly Report on Form 10-Q, “Company,” “Cipherloc,” “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 is a data security solutions company. We are developing products and services around our patented polymorphic encryption technology designed to enable a more efficient and stronger layer of protection to be added to existing solutions. Through a licensing program, we anticipate offering the first secure commercially viable advanced “Polymorphic Encryption Core” (“PEC”) software developers kit to be used in any commercial data security industry and/or in sensitive applications. Our innovative and patented polymorphic technology eliminates the flaws and inadequacies associated with today’s encryption algorithms. Instead of dealing with large monolithic blocks of data, our approach decomposes the information to be protected into multiple segments. These individual segments each have a unique encryption key, utilize different encryption algorithms, are randomly grouped into different lengths, and can be further re-encrypted. Since segments are independent from each other and are individually protected, our technology is not susceptible to computational attacks. In fact, the strength of our technology improves as compute power increases. Results of Operations for the three months ended December 31, 2020 and 2019 Revenue decreased to $8,750 for the three months ended December 31, 2020 from $18,750 for the three months ended December 31, 2019. General and administrative expenses decreased to $661,692 for the three months ended December 31, 2020 from $1,304,780 for the three months ended December 31, 2019. General and administrative expenses decreased primarily as a result of a decrease in legal fees of $370,000, a decrease headcount related costs including combined payroll, consulting, and travel costs of $243,000, decreases in various other expenses of $47,000, decreases in professional fees, consulting fees and contract services of $40,000 offset by an increase in corporate insurance of $57,000. Sales and marketing expenses decreased to $25,000 for the three months ended December 31, 2020 from $256,044 for the three months ended December 31, 2019. Sales and marketing expenses decreased primarily as a result of a decrease in consultant expenses of $134,000, a decrease in headcount related costs of $67,000, a decrease in travel related costs of $17,000 and a decrease in marketing spend related costs of $13,000. Research and development costs decreased to $121,793 for the three months ended December 31, 2020 from $566,015 for the three months ended December 31, 2019. Research and development expenses decreased primarily as a result of a decrease in consulting costs of $248,000 and a decrease in headcount related costs of $196,000. Liquidity and Capital Resources We had an accumulated deficit at December 31, 2020 of $69,226,343. We expect to incur substantial expenses and generate continued operating losses until we generate revenues sufficient to meet our obligations. At December 31, 2020, we had cash of $399,876. We do not believe that our existing cash balances are sufficient to fund future operations for the next 12 months. We are considering options to issue additional equity as a means to increase liquidity sufficient to fund operations and resources needed to add new customers and products. 13 Cash Flow The following table summarizes, for the periods indicated, selected items in our condensed Statements of Cash Flows: Three Months Ended December 31, 2020 2019 Net cash (used in): Operating activities $ (629,963 ) $ (2,148,092 ) Investing activities $ (50,000 ) $ (13,841 ) Financing activities $ — $ — Operating Activities Cash used in operating activities was $679,963 and $2,148,092 for the three months ended December 31, 2020 and 2019, respectively. The uses of cash during the quarter ended December 31, 2020 were attributable to a net loss of $899,735 which was offset by a non-cash stock compensation expense of $41,025 and a decrease in net operating assets and liabilities of $128,748. The change in our net operating assets and liabilities was primarily due to a decrease in prepaid and other assets of $136,393 and an increase in accounts payable and accrued liabilities of $51,105. The Company used cash during the year to pay for the cost of general and administrative, sales and marketing, and research and development activities which combined to be $858,485. Financing Activities Cash used in financing activities was $50,000 and $0 for the three months ended December 31, 2020 and 2019, respectively. The cash used in financing activities was in relation to suit filed by the Company against James LeGanke, as Trustee of Carmel Trust II, and was settled for $50,000 in exchange for the return of 1,000,000 shares of Series A Preferred Stock and 127,500 shares of common stock to the Company. Investing Activities Cash used in investing activities was $0 and $13,841 for the three months ended December 31, 2020 and 2019, respectively. The cash used in investing activities was the result of fixed asset purchases. Off-Balance Sheet Arrangements We did not have during the periods presented, nor do we currently have, any off-balance sheet arrangements as defined under applicable SEC rules. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable