What changed in this filing

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Item 1. Financial Statements

2021-05-17 compared with 2021-02-16 · 732 added, 291 removed, 189 unchanged (84% of the section changed)

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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.

Operating results for the three and six months ended

March 31, 2021 are not necessarily indicative of the results that can be expected for the year ending September 30, 2021.

March 31, 2021

September 30, 2020

4 unchanged sentences

LIABILITIES & STOCKHOLDERS’

EQUITY (DEFICIT)

Current liabilities

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Series A convertible preferred stock, $0.01 par value, 10,000,000 shares authorized;

nil and 1,000,000 shares issued and outstanding as of December 31, 2020 and September 30, 2020, respectively

nil and 1,000,000 shares issued and outstanding as of March 31, 2021 and September 30, 2020, respectively

Common stock, $0.01 par value, 681,000,000 shares authorized;

63,135,638 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

Treasury stock, at cost 13,414,814 and 13,287,314 shares as of December 31, 2020 and September 30, 2020, respectively

and 76,550,452 and 40,792,510 issued as of March 31, 2021 and September 30, 2020, respectively

Treasury stock, at cost 13,414,814 and 13,287,314 shares as of March 31, 2021 and September 30, 2020, respectively

Additional paid-in capital

3 unchanged sentences

Total stockholders’

equity (deficit)

Total liabilities and stockholders’

equity (deficit)

accompanying notes are an integral part of these unaudited financial statements.

1 unchanged sentence

Three Months Ended

Six Months Ended

Cost of revenues

1 unchanged sentence

General and administrative

Sales and marketing

Selling and marketing

Research and development

1 unchanged sentence

Operating loss

Other income (expenses)

Interest income (expense), net

$ (1,088,838 )

$ (3,068,247 )

$ (1,888,573 )

$ (5,176,336 )

Net loss per common share –

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OF CASH FLOWS

Three Months Ended

Six Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES:

$ (1,888,573 )

$ (5,176,336 )

Adjustments to reconcile net loss to net cash flows used in operating activities:

Stock-based compensation

Impairment loss

Changes in operating assets and liabilities:

Prepaid expenses and other assets

Prepaid expenses and other

Accounts payable and accrued liabilities

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CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of fixed assets

Purchases of fixed assets

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Purchase of preferred stock

Purchase of treasury stock

Net cash used in financing activities

DECREASE IN CASH

Purchase of preferred stock

Proceeds from the issuance of common stock, net of costs

Net cash provided by (used in) in financing activities

INCREASE (DECREASE) IN CASH

CASH, BEGINNING OF PERIOD

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NON-CASH INVESTING AND FINANCING ACTIVITIES:

ST operating lease liability

LT operating lease liability

Capitalization of ROU asset

ST operating lease liability recorded

LT operating lease liability recorded

accompanying notes are an integral part of these unaudited financial statements.

OF STOCKHOLDERS’

EQUITY (DEFICIT)

For the Six Months ended

Stockholders’

the Three Months ended December 31, 2020

at September 30, 2020

March 31, 2021

Balance at September 30, 2020

$ (68,426,608 )

Preferred and treasury

shares acquired

Stock option expense

issued to directors & employees

at December 31, 2020

Options issued to directors & employees

Preferred and treasury shares acquired

Issuance of common stock, net of issuance costs

$ (1,888,573 )

the Three Months Ended December 31, 2019

Balance at March 31, 2021

$ (70,315,181 )

For the Three Months ended

Stockholders’

March 31, 2021

Balance at December 31,2020

$ (69,226,343 )

Options issued to directors & employees

Issuance of common stock, net of issuance costs

$ (1,088,838 )

Balance at March 31, 2021

$ (70,315,181 )

For the Six Months ended

Stockholders’

March 31, 2020

Balance at September 30, 2019

$ (61,456,533 )

Stock option expense issued to directors & employees

Options issued to directors & employees

Purchase of treasury stock

$ (5,176,336 )

Balance at March 31, 2020

$ (66,632,869 )

For the Three Months ended

Stockholders’

March 31, 2020

Balance at December 31,2019

$ (63,564,622 )

Options issued to directors & employees

Purchase of treasury stock

$ (3,068,247 )

Balance at March 31, 2020

$ (66,632,869 )

accompanying notes are an integral part of these unaudited financial statements.

TO FINANCIAL STATEMENTS

THE THREE MONTHS ENDED DECEMBER 31, 2020 AND 2019

THE THREE AND MONTHS ENDED MARCH 31, 2021 AND 2020

1 - DESCRIPTION OF BUSINESS

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.”

Corporation (the “

Company ”

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 “

Our headquarters are located at 6836 Bee Cave Road, Building 1, S#279, Austin, TX 78746.

Our website is www.cipherloc.net .

2 - GOING CONCERN

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

If we are unsuccessful doing so, then the Company will cease operations.

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.

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.

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.

Our website is

www.cipherloc.net .

NEW EQUITY ISSUANCE

March 31, 2021 to April 16, 2021, we entered into a Securities Purchase Agreement (the “

Purchase Agreement ”),

with certain accredited investors (the “

Purchasers ”), pursuant to which the Company sold the Purchasers an

aggregate of 55,549,615 (a) shares of common stock (“

Offering Shares ”), and (b) warrants to purchase shares

of common stock of the Company (“

Offering Warrants ”).

The Offering Shares and Offering Warrants were sold at

a price of $0.18 per combined Offering Share and Offering Warrant (the “

Offering Price ”), which was equal to

80% of the closing sales price of the Company’s common stock on the OTCQB Market on March 30, 2021, which was the last trading

day prior to the initial entry into the Purchase Agreement.

sale of the Offering Shares and Offering Warrants occurred at four closings as follows:

Date of Closing

Warrants Sold

Gross Proceeds

March 31, 2021

April 7, 2021

April 9, 2021

April 16, 2021

gross proceeds from the offering of the Offering Shares and Offering Warrants (the “

Private Offering ”) were

approximately $10 million (as shown above) and the Private Offering is now closed.

Investment Company, LLC (the “

Placement Agent ”), served as placement agent for the Private Offering and the

Company entered into a Placement Agent Agreement with the Placement Agent in connection therewith (the “

Placement Agreement ”,

discussed below).

As partial consideration for the services provided by the Placement Agent, the Company granted the Placement

Agent and its assigns, warrants to purchase shares of common stock (“

Placement Warrants ”, discussed in greater

detail below).

agreed to use the proceeds from the Private Offering for working capital purposes and not to use such proceeds:

(a) for the satisfaction

of any portion of the Company’s debt (other than (i) payment of trade payables in the ordinary course of the Company’s

business and prior practices and (ii) the repayment of funds received by the Company under the “

paycheck protection program ”

of the CARES Act), (b) for the redemption of any common stock or common stock equivalents, (c) for the settlement of any outstanding

litigation, or (d) in violation of applicable regulations.

connection with the Private Offering, each of our officers and directors entered into Lock-Up Agreements whereby they agreed not

to sell, offer, or transfer, any of our securities which they hold for 180 days after the end of the Private Offering, subject

to customary exceptions.

Offering Warrants, which are evidenced by Common Stock Purchase Offering Warrants (the “

Warrant Agreements ”),

have an exercise price of $0.36 per share (200% of the Offering Price), and may be exercised at any time from the grant date of

the Offering Warrants (i.e., March 31, 2021, April 7, 2021, April 9, 2021 or April 16, 2021, as applicable), until five years

The Offering Warrants have cashless exercise rights if when exercised, a registration statement registering the shares

of common stock issuable upon exercise thereof, is not effective with the Securities and Exchange Commission.

The exercise of

each of the Offering Warrants is subject to a beneficial ownership limitation of 4.99%, preventing such exercise by the holder(s)

thereof, if such exercise would result in such holder(s) and their affiliates, exceeding ownership of 4.99% of our common stock.

The Offering Warrants contain anti-dilution rights such that if we issue, or are deemed to have issued, common stock or common

stock equivalents at a price less than the then exercise price of the Offering Warrants, the exercise price of the Offering Warrants

is automatically reduced to such lower value, and the number of shares of common stock issuable upon exercise thereafter is adjusted

proportionately so that the aggregate exercise price payable upon exercise of such Offering Warrants is the same prior to and

after such reduction in exercise price.

to the Registration Rights Agreement (“

RR Agreement ”) we agreed to file a registration statement to register

the sale of the Offering Shares and the shares of common stock issuable upon exercise of the Warrants, prior to the 10 th

day after the end of the Private Offering (provided that the Placement Agent has agreed that such 10 day period began on

April 19, 2021, regardless of the actual closing date of the Private Offering), and to obtain effectiveness of such registration

statement by the 60 th calendar day following the date of the RR Agreement (March 31, 2021)(provided that in the event

we are required to file any additional registration statements under the RR Agreement, such required effectiveness date is the

90 th day after such registration statement is required to be filed), which registration statement was timely filed

and has been declared effective to date.

January 11, 2021, we entered into a Placement Agent Agreement with the Placement Agent, pursuant to which we engaged the Placement

Agent as the Company’s exclusive placement agent in connection with the Private Offering.

Pursuant to the Placement Agent

Agreement, we agreed to pay the Placement Agent a cash commission of 13% of the gross proceeds received in the Private Offering

($1,334,861), and to grant the Placement Agent or its assigns, a warrant to purchase 15% of the Offering Shares sold in the Private

Offering (i.e., warrants to purchase 8,332,439 shares in aggregate), which were granted to the Placement Agent effective on April

The Placement Agent Agreement has a term expiring on August 31, 2021, and includes a three-year tail period, pursuant

to which the Placement Agent is due the same fees payable in connection with the Private Offering, in the event the Company sells

any securities to any investor or potential investor who received Private Offering documents as part of the Private Offering.

In addition to the compensation payable upon completion of the Private Offering, we paid the Placement Agent a $35,000 cash retainer.

Placement Warrants are evidenced by Purchase Warrants, have a term of 10 years (i.e., through April 16, 2031), an exercise price

of $0.18 per share (the Offering Price), and cashless exercise rights.

We are required to pay the Placement Agent liquidated damages

of $10 per day for each $1,000 of shares not timely delivered upon the exercise of the Placement Warrants.

The Placement Warrants

include a weighted average anti-dilution right in the event we issue any shares of common stock or equivalents with a value less

than the then exercise price.

3 - BASIS OF PRESENTATION OF INTERIM FINANCIAL STATEMENTS

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been included.

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.

results for the three and six months ended March 31, 2021 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 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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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”).

At March 31, 2021 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 ”).

FDIC insures these deposits up to $250,000.

At December 31, 2020, $149,876 of the Company’s cash balance was uninsured.

At March 31, 2021, $5,378,853 of the Company’s cash balance was uninsured.

and Diluted Net Loss per Common Share

6 unchanged sentences

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

As of March 31, 2021, there were no

preferred shares of stock outstanding and as of March 31, 2020, the Company had 1,000,000 shares of preferred stock outstanding,

which were convertible into 1,500,000 shares of common stock.

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.

During the three and six months ended March 31, 2021,

warrants to purchase 60,364,253 shares of common stock, and stock options to purchase 699,999 shares of common stock were excluded

from the calculation of diluted loss per share because their effect would be anti-dilutive.

During the three and six months ended

March 31, 2020, warrants to purchase 24,216,866 shares of common stock 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.

and Development and Software Development Costs

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Our research and development

costs incurred for the three months ended December 31, 2020 and 2019 were $121,793 and $566,015, respectively.

Company recognizes revenues in accordance with the provisions of Accounting Standards Update 2014-09, “Revenue from Contracts

costs incurred for the six months ended March 31, 2021 and 2020 were $296,876 and $1,338,592, respectively.

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”.

and a series of amendments which together we identify as “

ASC Topic 606 ”.

to the new revenue recognition guidance is a five-step revenue recognition model that requires reporting entities to:

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License Agreements

fiscal the fiscal year ended September 30, 2019, the Company entered into a one-year agreement with SoundFi LLC (“SoundFi”)

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.

2 unchanged sentences

Company executed an annual software licensing agreement with Castle Shield during the year ended September 30, 2020 which also

include auto-renewing terms.

includes auto-renewing terms.

Castle Shield made a $10,000 payment to the Company based on the terms of their agreement with Cipherloc.

the three-months ended December 31, 2020, the Company recognized $8,750 in licensing revenue from the SoundFi and Castle Shield

the six-months ended March 31, 2021, the Company recognized $15,417 in licensing revenue from the SoundFi and Castle Shield agreements.

Accounting Pronouncements

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.

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.

Financial Accounting Standards Board (“

FASB ”) issues Accounting Standards Updates (“

to amend the authoritative literature in the Accounting Standards Codification (“

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.

December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

5 unchanged sentences

adoption is permitted.

The Company are currently evaluating the impact of ASU 2019-12 on its financial statements, which is effective

The Company is 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.

11 unchanged sentences

financial position, results of operations and cash flows.

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.

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.

July 2017, the FASB issued ASU 2017-11—Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480),

and Derivatives and Hedging (Topic 815):

Accounting for Certain Financial Instruments with Down Round Features and II.

of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily

Redeemable Noncontrolling Interests with a Scope Exception.

ASU 2017-11 eliminates the requirement that a down round feature precludes

equity classification when assessing whether an instrument is indexed to an entity’s own stock.

A freestanding equity-linked

financial instrument no longer would be accounted for as a derivative liability at fair value as a result of the existence of

a down round feature.

The Company has adopted ASU 2017-11 and implemented the pronouncement retrospectively.

The adoption of this

guidance did not have an impact on its financial statements.

a result, a freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability at fair

value as a result of the existence of a down round feature.

For freestanding equity classified financial instruments, the amendments

require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round

feature when it is triggered.

That effect is treated as a dividend and as a reduction of income available to common shareholders

in basic EPS.

March and April 2021, the Company issued warrants to purchase 63,882,054 shares of common stock that have anti-dilution rights

that provide for adjustments in the exercise price and number of shares exercisable if there is an issuance of common stock or

common stock equivalents at a lower price (down round feature).

COMMITMENTS AND CONTINGENCIES

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effect on its financial condition or results of operations.

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.

December 2017, Robert LeBlanc, a disgruntled former consultant of the Company, filed a petition against the Company and Michael

De La Garza, our former Chief Executive Officer and President, in the in the 20th Judicial District for Hays County, Texas (Cause

The petition (which has been amended) alleges causes of action against us for alleged violation of the Texas Securities

Act (based on the allegation that the defendants sold securities by means of untrue statements of material facts), common law

fraud against Mr.

De La Garza (for alleged misrepresentations alleged made by Mr.

De La Garza);

breach of fiduciary duty against

breach of contract;

as well as declaratory relief.

Damages sought exceed $1,000,000, but are less than $10,000,000.

The Company believes it has made all required payments and delivered the stock to the plaintiff and that the plaintiff’s

claims are without merit.

The consultant also included a claim of partial ownership of certain of the Company’s patents,

1 unchanged sentence

The case is currently being defended by the Company.

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.

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.

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.

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.

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.

The Company believes it has

meritorious defenses to the allegations, and the Company intends to continue to vigorously defend against the litigation.

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, our former Chief Executive Officer and President, in the 20 th

Judicial District for Hays County, Texas (Cause No.

The lawsuit alleges causes of action for fraud against Mr.

De La Garza (for misrepresentations alleged made by Mr.

De La Garza);

Breach of Contract, for alleged breaches of Mr.

Marquez’s

employment agreement, which 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 declaratory relief and fraud.

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.

Marchal & Cooper, LLP (“

SMC ”), the Company’s former independent registered auditing firm, has brought

a demand for arbitration before the American Arbitration Association against the Company in October 2019, relating to amounts

which SMC has alleged are due to SMC for services rendered, which amount was alleged to exceed $75,000, but to be less than $150,000.

The parties entered into arbitration regarding the amounts owed and subsequently entered into a Settlement Agreement and Release

on April 26, 2021, to confidentially settle the matter and mutually release each other from any liabilities.

August 28, 2020, the Company settled all litigation matters which had previously been pending with Michael De La Garza, a former

chief executive officer of the Company.

As a result of this settlement, De La Garza returned 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.

has two remaining payments of $25,000 each payable to De La Garza by June 1, 2021 and September 1, 2021.

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.

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

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.

In connection

therewith, 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 caused the Company to issue the preferred stock to herself and Del La Garza 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.

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

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;

other compensatory damages in connection with certain lease payments under the lease discussed above;

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.

of December 31, 2020, the Company had one lease agreement for facilities.

This lawsuit was subsequently settled on April

29, 2021 and the Company paid Scandium $60,000 in exchange for a release from all past, present, and future liabilities associated

with the lease.

of March 31, 2021, the Company had one lease agreement for facilities.

February 2020, the Company leased approximately 3,666 square feet of office space on 2107 Wilson Boulevard, Arlington, Virginia.

4 unchanged sentences

The amount of future payments guaranteed is $741,680.

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

a result of restructuring actions intended to conserve cash during the COVID-19 crisis, the Company stopped occupying the space

in March 2020 and notified the landlord that the Company no longer needed the property and began seeking an amicable and reasonable

termination of the lease agreement.

This discussion is ongoing, and the outcome is uncertain.

Wilkinson, the Company’s Chairman of the Board of Directors, provides the Company the use of office space which he rents,

at 6836 Bee Caves Road, Building 1, Suite 279, Austin, TX 78746 for its corporate headquarters.

There is no formal lease or sublease

agreement with Mr.

Wilkinson and Mr.

Wilkinson does not charge the Company any rental fees in connection therewith.

Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenant.

6 unchanged sentences

Lease income is not material

to the results of operations for the three months ended December 31, 2020.

to the results of operations for the three and six months ended March 31, 2021.

initial right-of-use asset of $233,751 was recognized as a non-cash asset addition with the adoption of the new lease accounting

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.

weighted average remaining lease terms and discount rates for all of our operating lease were as follows as of December 31, 2020:

In February 2020, the Company’s 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 $80,402 for the six months ended March

31, 2021, and is included in operating cash flows.

weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of March 31, 2021:

Remaining lease term and discount rate:

December 31, 2020

March 31, 2021

Weighted average remaining lease terms (years)

2 unchanged sentences

Lease facilities

judgements include the discount rates applied, the expected lease terms, and lease renewal options.

annual minimum lease obligations at December 31, 2020 are as follows:

judgments include the discount rates applied, the expected lease terms, and lease renewal options.

annual minimum lease obligations on March 31, 2021 are as follows:

Year ending September 30

expense totaled $38,279 and $22,744 for the three months ended December 31, 2020 and 2019, respectively.

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.

expense totaled $136,188 and $63,353 for the six months ended March 31, 2021 and 2020, respectively.

April 6, 2020, to supplement its cash balance, the Company submitted their application for a Paycheck Protection Program (“

loan (the “

SBA loan ”) sponsored by the U.S.

Small Business Administration in the amount of $365,430.

12, 2020, Company’s SBA loan application was approved, and the Company received loan proceeds on April 22, 2020.

has an interest rate of 1% and matures on April 12, 2022.

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.

loan has an interest rate of 1% and matures on April 12, 2022.

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.

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.

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.

PPP loan balance on March 31, 2021 was $365,430.

The Company filed for $179,000 of loan forgiveness on January 29, 2021 but at

the time of this filing has not received an approval of its forgiveness application.

The staff reductions that occurred in 2020

prevented the Company from qualifying for full forgiveness of its principal balance.

principal balance plus $1,000 of interest was set aside in an escrow account at Texas Capital Bank on April 15, 2021.

of the forgiveness approval, the Paycheck Protection Program Loan will be repaid using funds in the escrow account and the remaining

balance will be returned to the Company’s operating account.

7 - STOCKHOLDERS’

1 unchanged sentence

Company is authorized to issue 681,000,000 common shares and 10,000,000 preferred shares, each at a par value of $0.01 per share.

the three months ended December 31, 2020, there were no issuances of common stock.

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.

the six months ended March 31, 2021, the Company issued 35,757,942 shares of common stock pursuant to the Private Offering.

the six months ended March 31, 2021, the Company came to a settlement with James LeGanke, as Trustee of Carmel Trust II and purchased

back 127,500 shares of common stock and recorded such shares as Treasury Stock.

the twelve months ended September 30, 2020, the Company came to a settlement with Michael De La Garza and purchased 13,137,757

shares of common stock held by Mr.

De La Garza in consideration for $400,000.

the six months ended March 31, 2020, the Company came to a settlement with First Fire and purchased back 149,557 shares of common

stock for $150,000 and recorded such shares as Treasury Stock.

A Preferred Stock

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.

the six months ended March 31, 2021, the Company came to a settlement with James LeGanke, as Trustee of Carmel Trust II and purchased

back 1,000,000 shares of Series A Preferred Stock.

SUBSEQUENT EVENTS

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.

February 5, 2021 the Company filed amendments to its Articles of Incorporation with the Texas Secretary of State.

April 16, 2021, the Company closed its Private Offering.

The total net proceeds to the Company from this offering were $8.7 million.

The Company received $3.1 million between April 1, 2021 and the closing date of April 16, 2021.

were 82,927,311 shares of common stock issued and outstanding as of April 26, 2021, held by approximately 1,210 shareholders of

The actual number of holders of our common stock is greater than this number of record holders, and includes shareholders

who are beneficial owners, but whose shares are held in street name by brokers or held by other nominees.

This number of holders

of record also does not include shareholders whose shares may be held in trust by other entities.

April 29, 2021, the Company filed a Form S-1 Registration Statement with the SEC, which was declared effective by the SEC on May

April 15, 2021, the Company funded an escrow account to repay its Paycheck Protection Program loan.

The principal balance is $365,430.

The Company has a pending application requesting $179,000 in loan forgiveness.

July 2020, the Board of Directors deferred their quarterly director fees.

On March 31, 2021, the Company had accrued $160,000

of unpaid director fees.

On April 8, 2021, the Board of Directors approved paying the accrued fees.

During that same meeting,

the Directors approved one-time performance bonuses totaling $275,000 for the Chairman, Chief Executive Officer, Chief Technology

Officer, and Chief Financial Officer.

The executive performance bonuses and the accrued director fees were paid the following

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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.

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.

innovative and patented polymorphic technology eliminates the flaws and inadequacies associated with today’s encryption

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.

of Operations for the three months ended December 31, 2020 and 2019

decreased to $8,750 for the three months ended December 31, 2020 from $18,750 for the three months ended December 31, 2019.

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.

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.

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.

information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this

Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “

Other Information –

Management’s Discussion and Analysis of Financial Condition and Results of Operations ”, contained in our Annual

Report on Form 10-K for the year ended September 30, 2020, filed with the Securities and Exchange Commission on December 29, 2020

Annual Report ”

or the “

Form 10-K ”).

capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our unaudited

consolidated financial statements included above under “

Part I –

Financial Information”

“Item 1.

Financial Statements”

logo and some of our trademarks and tradenames are used in this Report.

This Report also includes trademarks, tradenames and service

marks that are the property of others.

Solely for convenience, trademarks, tradenames and service marks referred to in this Report

may appear without the ®, ™

and SM symbols.

References to our trademarks, tradenames and service marks are not intended

to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable

licensors if any, nor that respective owners to other intellectual property rights will not assert, to the fullest extent under

applicable law, their rights thereto.

We do not intend the use or display of other companies’

trademarks and trade names

to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

market data and certain other statistical information used throughout this Report are based on independent industry publications,

reports by market research firms or other independent sources that we believe to be reliable sources.

Industry publications and

third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to

be reliable, although they do not guarantee the accuracy or completeness of such information.

We are responsible for all of the

disclosures contained in this Report, and we believe these industry publications and third-party research, surveys and studies

are reliable.

While we are not aware of any misstatements regarding any third-party information presented in this Report, their

estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties,

and are subject to change based on various factors, including those discussed under, and incorporated by reference in, the section

entitled “

Risk Factors ”

of this Report.

These and other factors could cause our future performance

to differ materially from our assumptions and estimates.

Some market and other data included herein, as well as the data of competitors

as they relate to Cipherloc Corp., is also based on our good faith estimates.

the context requires otherwise, references to the “

Company, ”

Cipherloc ”, and “

Cipherloc Corp.

refer specifically to Cipherloc

and its consolidated subsidiaries.

addition, unless the context otherwise requires and for the purposes of this report only:

refers to the Securities Exchange Act of 1934, as amended;

or the “

Commission ”

refers to the United States Securities and Exchange Commission;

refers to the Securities Act of 1933, as amended.

You Can Find Other Information

file annual, quarterly, and current reports, proxy statements and other information with the SEC.

Our SEC filings are available

to the public over the Internet at the SEC’s website at www.sec.gov and are available for download, free of charge, soon

after such reports are filed with or furnished to the SEC, on the “Investor Relations,”

page of our website at https://cipherloc.net.

Information on our website is not part of this Report, and we do not desire to incorporate by reference such information herein.

Copies of documents filed by us with the SEC are also available from us without charge, upon oral or written request to our

Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition

to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial condition,

and cash flows.

MD&A is organized as follows:

and Services.

of Operations

of Operations.

and Capital Resource.

Accounting Policies.

following discussion should be read in conjunction with Cipherloc Corporation’s financial statements and accompanying notes

included elsewhere in this Report.

references to years relate to the fiscal year ended September 30 of the particular year.

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.

described above, our products are designed to encrypt and decrypt information.

Encryption means encoding information which is

readable into another form which is not readable and which is therefore unable to be intercepted, read or used, by someone other

than the original person who encrypted the information—unless such encryption can be broken.

believe that 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.

2018 and 2019, we attempted to market several products, services and solutions.

The initial solution suite was marketed under

several product names.

CipherLoc EDGE, a solution to be installed on mobile/handset devices, was designed to enable data to be

securely sent between any two mobile devices.

CipherLoc ENTERPRISE, a solution to be installed on desktops, laptops and tablet

computers, was designed to enable data to be securely sent between any two platforms.

CipherLoc GATEWAY, a solution to be installed

on servers, was designed to enable end-to-end data protection to and from servers, computers, tablets, and/or mobile devices via

the GATEWAY-protected servers.

CipherLoc SHIELD was designed as a solution to be used as a data storage platform.

2018 and 2019, there were forward-looking public announcements by the Company’s then-management of product names or segments that

were not delivered to the market and are not presently available to customers.

Our current management restructured the Company to invest

material resources into only products and services that are deliverable, have viable economic potential, and may be publicly disclosed

without adversely affecting our competitive position.

The core of our product and service offerings will continue to be built around

our patents and our polymorphic encryption technology, which is a highly secure, quantum-ready data protection technology carrying FIPS

140-2 (Federal Information Processing Standard 140-2)(an information technology security accreditation program for validating that the

cryptographic modules produced by private sector companies meet well-defined security standards) validation certificate #3381, for the

CipherLoc Polymorphic Encryption Engine Core ”

solution by the National Institute of Standards and Technology (NIST).

2020, we have focused our development efforts to develop commercial application of our technology by advancing a Software Development

SDK ”) for the Polymorphic Encryption Core.

By doing so, we have allowed potential customers to integrate and

configure the PEC using the SDK.

Cipherloc’s technology has advanced from theory to commercial application in the form of these

Data-in-Motion:

Data-in-Motion products utilize the Polymorphic Encryption Core (PEC) to encrypt and transmit data between two separate locations.

We currently have developed products called Sentinel, Armor, and Shield which employ this technique.

The software package that would allow a customer to build a post-quantum encryption solution into their product environment.

This product is a software solution.

Employs the sentinel solution in a hardware appliance that can be deployed in front of any IT system and encrypts

the traffic between paired Armor devices with little setup.

Securely encrypts data, using the PEC, that is placed on a hard drive or in a database for long term storage.

products help to solve two challenges which cybersecurity professionals have:

Securing old and non-traditional network hardware.

Preparing all networks for the introduction of new ciphers including the next NIST standard which should be released by the end of 2024.

core technology in these products is protected by six patents that expire between 2034 and 2037.

The existing technology can be used

today to solve current customer problems and can be used in the future to provide agile adoption of quantum ready encryption.

of Operations

anticipate the operating expenses for the next twelve months may require up to $7.5 million capital, which funds will come from amounts

raised in the Private Offering;

however, we hope to manage our business such that the existing liquidity carries the Company to positive

cash flow from operations, of which there can be no assurance.

This measured approach to managing cash initially emphasizes demonstrating

product capabilities with current customers which is followed by a scaling exercise in all functional areas, including product development,

marketing, sales, customer support, and administration.

As such, the cash required for operating expenses through June 30, 2021, will

most likely range from $2.4 million to $4.4 million.

A summary of the operating plan by functional area is provided below.

Development will focus on further maturing the products that we have developed.

Our plan is to build out our core technologies on multiple

operating system platforms as well as work with current customers to ensure our product is in line with their needs.

Once these items

are completed, we plan to shift to further expand our product suite to enable user-defined encryption cipher modes, as well as a remote

PEC management system.

This will require us to expand the team footprint rapidly to ensure that we can meet market demand.

efforts will require more personnel as well as more infrastructure.

This personnel expansion will likely require $1 million of capital.

The infrastructure needed to perform these new functions is planned to be built on modern technology with scale and reliability built

from the ground-up.

Utilizing cloud services, we plan to provide our customers with an interface that modern software provides, but an

ease of use that encryption technologies desperately need.

We believe that if we are able to meet these goals, we will be at a competitive

advantage from most other players in this space.

Marketing efforts will emphasize qualified lead generation using very focused industry

messaging and engagement.

We will be participating in relevant cybersecurity and quantum computing industry events.

Our advisors will

help us identify the right focus areas for lead generation.

Customer support teams will need to be put in place and are expected to be

built around each of our product offerings.

We anticipate our Support Team will scale as our business needs change.

The projected costs

for the first 12 months are likely to reach $500,000.

These funds will be used for salaries and technology in order for the Support Team

to provide the necessary support described above.

Administration requirements are currently minimal but we expect that this will change

in the event the Company is able to generate revenues and add employees.

The administrative resources will be ramped according to the

Company’s demand to support employees, increase accounting capacity, and expand reporting and compliance capabilities.

leadership personnel in accounting and human resources are anticipated to precede staff additions.

We also plan to add software tools

to manage functional processes.

February 15, 2019, we entered into a Software License Agreement with SoundFi Systems, LLC (“

SoundFi ”), pursuant to

which we granted SoundFi a non-exclusive license to use our Shield/Edge product and Secured Watermark product.

The agreement had an initial

term of one year, automatically renewable thereafter for up to three additional one-year periods, if neither party terminates the agreement

prior to thirty days before such renewal date.

The agreement automatically renewed on February 15, 2020 and 2021, and is currently in

effect until February 15, 2022.

The agreement includes standard and customary indemnification obligations, warranty disclaimers and limitations

of liability.

Amounts are payable to us under the agreement based on the number of downloads per year of the licensed products (resetting

each year), ranging from a fee of $0.012 per download for downloads 3,000,001 to 5,000,000 (no fee is due for the first 3 million downloads),

to a fee of $0.00075 per download for downloads greater than 100,000,000.

There are also base license fees payable of $50,000 per year

for our Shield/Edge product and $25,000 per year for our Secured Watermark product.

We recognized $50,000 of revenue from SoundFi during

the first two quarters of fiscal 2020.

on January 16, 2020, and effective the same date, we entered into an Authorized Reseller Agreement with Castle Shield Holdings, LLC (“

Castle ”),

pursuant to which we agreed to grant Castle a non-exclusive license to use, store and reproduce, integrate, combine, incorporate and

sell, our Polymorphic Encryption Core (PEC) product in the United States.

We also appointed Castle our non-exclusive authorized reseller

of the proprietary polymorphic encryption engine in the United States.

The agreement provides Castle, subject to the terms of the agreement,

the right to resell our proprietary polymorphic encryption engine to its customers.

The agreement provides for Castle to be responsible

for all technical support.

The agreement contains customary confidentiality terms, indemnification terms, limitation of liability terms,

non-solicitation terms (prohibiting Castle from providing services to a company known to Castle to compete with us for a period of one

year following the termination of the agreement) and representations and warranties.

The agreement has an initial term of one year, automatically

renewable thereafter for additional one-year terms unless terminated by either party prior to such automatic renewal.

The agreement automatically

renewed on January 16, 2021, and is currently in effect until January 16, 2022.

Fees due under the agreement are based on the number

of authorized users licensed.

We have not generated any reseller revenues pursuant to this agreement to date.

March 6, 2020, and effective the same date, we entered into a Technology Partnership and Authorized Reseller Agreement with ECS Federal,

ECS ”), pursuant to which we agreed to grant ECS a non-exclusive license to use, store and reproduce, integrate,

combine, incorporate and sell, our Polymorphic Encryption Core (PEC) product in the United States.

We also appointed ECS our non-exclusive

authorized reseller of the proprietary polymorphic encryption engine in the United States.

The agreement provides ECS, subject to the

terms of the agreement, the right to resell our proprietary polymorphic encryption engine to its customers.

The agreement provides for

ECS to be responsible for all technical support.

The agreement contains customary confidentiality terms, indemnification terms, limitation

of liability terms and representations and warranties.

The agreement has an initial term of one year, automatically renewable thereafter

for additional one-year terms unless terminated by either party prior to such automatic renewal.

Fees due under the agreement are based

on the number of authorized users using our products, depending on the number of users and type of user (public sector versus private

sector), which amounts are payable to us monthly in arrears, 45 days after delivery of confirmation of each month’s fees due.

have not generated any reseller revenues pursuant to this agreement to date.

on August 13, 2020, and effective the same date, we entered into an Authorized Reseller /Developer Agreement with Arnouse Digital Devices

ADDC ”), pursuant to which we agreed to grant ADDC a non-exclusive license to use, store and reproduce, integrate,

combine, incorporate and sell, our Sentinel Application in the United States.

We also appointed ADDC as our non-exclusive authorized

reseller of the Sentinel Application in the United States.

The agreement contains customary confidentiality terms, indemnification terms,

limitation of liability terms, non-solicitation terms (prohibiting ADDC from providing services to a company known to ADDC to compete

with us for a period of one year following the termination of the agreement) and representations and warranties.

The agreement has an

initial term of one year, automatically renewable thereafter for additional one-year terms unless terminated by either party prior to

such automatic renewal.

Fees due under the agreement are based on the number of authorized users licensed.

We have not generated any

reseller revenues pursuant to this agreement to date.

of Operations for the three and six months ended March 31, 2021 and 2020

Coronavirus (COVID-19)

March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic.

The COVID-19 pandemic is affecting the United

States and global economies and may affect our operations and those of third parties on which we rely.

While the potential economic impact

brought by, and the duration of the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic on the global

financial markets may reduce our ability to access capital, which could negatively impact our short-term and long-term liquidity.

ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change.

We do not yet know the full extent of potential delays

or impacts on our business, financing or the global economy as a whole.

However, these effects could have a material impact on our liquidity,

capital resources, operations and business and those of the third parties on which we rely.

2020 and into 2021, the COVID-19 pandemic has interrupted our sales and marketing activities and restricted face-to-face interaction

between our team members and our partners.

This slowed the pace of our development and the expansion of our deal pipeline.

action for the current pandemic or the emergence of a new viral outbreak may negatively impact the adjustments we, our licensees, and

their and our, customers, and our partners have made to resume business under new protocols.

future impact of COVID-19 on our business and operations is currently unknown.

The pandemic is developing rapidly and the full extent

to which COVID-19 will ultimately impact us depends on future developments, including the duration and spread of the virus, as well as

potential seasonality of new outbreaks.

decreased to $6,667 for the three months ended March 31, 2021 from $11,733 for the three months ended March 31, 2020.

Revenue decreased

to $15,417 for the six months ended March 31, 2021 from $30,483 for the six months ended March 31, 2020.

Revenues decreased due to no

new invoicing activity taking place in the current reporting period.

and administrative expenses were $889,172 and $1,976,044 for the three months ended March 31, 2021 and 2020, respectively.

administrative expenses decreased primarily as a result of the impairment loss on the right-of-use (ROU) assets of $447,025 recorded

last year, a decrease in legal fees of $433,000, due to the settlement of legal matters, a decrease in headcount related costs including

payroll and travel costs of $208,000, due to staffing reductions initiated during the prior fiscal year, decreases in board and professional

fees of $137,000, and decreases in various other expenses of $10,000 offset by an increase in corporate insurance of $55,000, primarily

for directors and officers liability insurance premiums.

and administrative expenses were $1,550,864 and $3,280,824 for the six months ended March 31, 2021 and 2020, respectively.

in general and administrative expenses was primarily due to a decrease in legal expenses of $803,000, a decrease in headcount related

costs including payroll and travel costs of $451,000, due to staffing reductions initiated during the prior fiscal year, the impairment

loss on the ROU assets of $447,025 recorded last year, a decrease in board and professional fees of $87,000, and a decrease in various

other expenses of $54,000 offset by an increase in corporate insurance of $112,000, for directors and officers liability insurance premiums.

and marketing expenses were $31,250 and $331,359 for the three months ended March 31, 2021 and 2020, respectively.

Sales and marketing

expenses decreased primarily as a result of a decrease in payroll expenses of $177,000, a decrease in consulting related costs of $61,000,

a decrease in marketing related costs of $45,000 and a decrease in travel related costs of $18,000, all of these decreases were generated

by spending reductions initiated during the prior fiscal year.

and marketing expenses were $56,250 and $587,403 for the six months ended March 31, 2021 and 2020, respectively.

Sales and marketing

expenses decreased primarily as a result of a decrease in payroll related expenses of $243,000, a decrease in consulting related costs

of $195,000, a decrease in marketed related costs of $58,000 and a decrease in travel related costs of $35,000, all of which were generated

by spending reductions initiated during the prior fiscal year.

and development costs were $175,083 and $772,577 for the three months ended March 31, 2021 and 2020, respectively.

Research and development

costs decreased primarily as a result of a decrease in consulting related expenses of $490,000 and a decrease in payroll related expenses

of $107,000, both decreases were the result of the spending reductions initiated during the prior fiscal year.

and development costs were $296,876 and $1,338,592 for the six months ended March 31, 2021 and 2020, respectively.

Research and development

expenses decreased for the six-month period ended March 31, 2021 primarily as a result of a decrease in consulting related costs of $739,000

and a decrease in payroll related expense of $303,000, both decreases were the result of the spending reductions initiated during the

prior fiscal year.

had a net loss of $1,088,838 or $0.04 per share for the three months ended March 31, 2021, compared to a net loss of $3,068,247 or $0.08

per share for the three months ended March 31, 2020.

Net loss for the three months ended March 31, 2021, decreased mainly as a result

of us generating insufficient gross profit to cover our operating expenses.

For the six months ended March 31, 2021, we had a net loss

of $1,888,573 or $0.07 per share, compared to a net loss of $5,176,336 or $0.13 per share for the six months ended March 31, 2020.

loss for the six months ended March 31, 2021, decreased mainly as a result of us generating insufficient gross profit to cover our operating

and Capital Resources

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.

had an accumulated deficit on March 31, 2021 of $70,315,181.

We expect to incur substantial expenses and generate continued operating

losses until we generate revenues sufficient to meet our obligations.

On March 31, 2021, we had cash of $5,628,853.

On March 31, 2021,

we completed the initial closing of the Private Offering in which we sold 35,757,942 shares of our common stock at a price to the public

of $0.18 per share, for net proceeds of $5,497,964.

Subsequently, we sold the following securities after March 31, 2021 pursuant to the

Private Offering:

Date of Closing

Warrants Sold

Gross Proceeds

April 7, 2021

April 9, 2021

April 16, 2021

Private Offering is described in greater detail in Note 2 –

New Equity Issuance , to the unaudited financial statements included

had working capital of $3,817,835 as of March 31, 2021, compared to working capital of $123,102 as of September 30, 2020.

Working capital

increased as a result of funds raised in the Private Offering.

following table summarizes, for the periods indicated, selected items in our condensed Statements of Cash Flows:

Three Months Ended

Net cash (used in):

Operating activities

$ (2,148,092 )

Investing activities

Financing activities

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.

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.

used in financing activities was $50,000 and $0 for the three months ended December 31, 2020 and 2019, respectively.

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.

used in investing activities was $0 and $13,841 for the three months ended December 31, 2020 and 2019, respectively.

used in investing activities was the result of fixed asset purchases.

cash provided by (used in):

used in operating activities was $898,950 and $4,190,651 for the six months ended March 31, 2021 and 2020, respectively.

cash during the quarter ended March 31, 2021, were attributable to a net loss of $1,888,573, which was offset by a non-cash stock compensation

expense of $79,655 and a decrease in net operating assets and liabilities of $909,968.

The change in our net operating assets and liabilities

was primarily due to a decrease in prepaid and other assets of $342,544 and an increase in accounts payable and accrued liabilities of

$582,841, partially offset by a decrease in deferred revenue of $15,417.

used in investing activities was zero and $28,792 for the six months ended March 31, 2021 and 2020, respectively.

The cash used in investing

activities for the six months ended March 31, 2020, was the result of fixed asset purchases.

provided by financing activities was $5,447,964 for the six months ended March 31, 2021.

The Company sold certain securities pursuant

to the Private Offering, described in Note 2 –

New Equity Issuance , to the unaudited financial statements included above, and raised

$5,497,964, net of issuance costs, partially offset by the cash used in relation to a lawsuit filed by the Company against James LeGanke,

as Trustee of Carmel Trust II, which 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.

Cash used in financing activities for the six months ended March 31, 2020, was due

to the legal settlement with First Fire Global Opportunity Fund, LLC and the purchase of Treasury Stock for $150,000 in connection therewith

Unregistered Sales of Equity Securities and Use of Proceeds—Issuer Purchases of Securities ”, below).

information regarding the Private Offering and the Company’s debt can be found under Note 2 –

New Equity Issuance and Note 6 –

Debt , to the unaudited financial statements included above.

Sheet Arrangements

did not have during the periods presented, nor do we currently have, any off-balance sheet arrangements as defined under applicable

did not have during the periods presented, nor do we currently have, any off-balance sheet arrangements as defined under applicable SEC

Accounting Policies

financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).

The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets

and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amount of revenues

and expenses during the reporting period.

Our management periodically evaluates the estimates and judgments made.

Management bases its

estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances.

results may differ from these estimates as a result of different assumptions or conditions.

Note 4 of the unaudited financial statements included in “

Part I—Item 1.

Financial Statements ”, above, for a discussion

of our significant accounting policies.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

to Item 305(e) of Regulation S-K (§

229.305(e)), the Company is not required to provide the information required by this Item as

it is a “smaller reporting company,”

as defined by Rule 229.10(f)(1).

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements