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 and nine months ended June 30, 2021 are not necessarily indicative of the results that can be expected for the year ending September 30, 2021. 3 Table of Contents CIPHERLOC CORPORATION BALANCE SHEETS (UNAUDITED) June 30, 2021 September 30, 2020 ASSETS Current assets Cash $ 6,848,508 $ 1,079,839 Prepaid expenses 8,167 258,424 Total current assets 6,856,675 1,338,263 Other assets — 200,000 Operating lease ROU asset — 291,140 Total assets $ 6,856,675 $ 1,829,403 LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT) Current liabilities Accounts payable and accrued liabilities $ 527,939 $ 840,234 Accrued compensation 26,912 10,000 Operating lease liability – current portion — 132,608 Paycheck protection program loan – current portion — 216,902 Deferred revenue — 15,417 Total current liabilities 554,850 1,215,161 Paycheck protection program loan – long term — 148,528 Operating lease liability – long-term portion — 603,676 Total liabilities 554,850 1,967,365 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 June 30, 2021, and September 30, 2020, respectively — 10,000 Common stock, $ 0.01 par value, 681,000,000 shares authorized; 82,927,311 and 27,505,196 shares outstanding; and 96,342,125 and 40,792,510 issued as of June 30, 2021, and September 30, 2020, respectively 963,421 407,925 Treasury stock, at cost 13,414,814 and 13,287,314 shares as of June 30, 2021, and September 30, 2020, respectively ( 590,000 ) ( 550,000 ) Additional paid-in capital 76,419,164 68,420,721 Accumulated deficit ( 70,490,761 ) ( 68,426,608 ) Total stockholders’ equity (deficit) 6,301,824 ( 137,962 ) Total liabilities and stockholders’ equity (deficit) $ 6,856,675 $ 1,829,403 The accompanying notes are an integral part of these unaudited financial statements. 4 Table of Contents CIPHERLOC CORPORATION STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended June 30, June 30, 2021 2020 2021 2020 Revenues $ — $ 8,750 $ 15,417 $ 39,233 Cost of revenues — — — — Gross profit — 8,750 15,417 39,233 Operating expenses General and administrative 197,534 833,260 1,748,398 4,114,084 Selling and marketing — 107,842 56,250 695,245 Research and development 169,098 205,613 465,974 1,544,205 Total operating expenses 366,632 1,146,715 2,270,622 6,353,534 Operating loss ( 366,632 ) ( 1,137,965 ) ( 2,255,205 ) ( 6,314,301 ) Other income (expense) Loss on disposal of asset — ( 19,778 ) — ( 19,778 ) Miscellaneous income 192,052 — 192,052 — Interest expense ( 1,000 ) — ( 1,000 ) — Net loss $ ( 175,580 ) $ ( 1,157,743 ) $ ( 2,064,153 ) $ ( 6,334,079 ) Net loss per common share – basic and diluted $ ( 0.00 ) $ ( 0.03 ) $ ( 0.05 ) $ ( 0.16 ) Weighted average common shares outstanding – basic and diluted 81,076,516 40,642,953 45,408,375 40,740,105 The accompanying notes are an integral part of these unaudited financial statements. 5 Table of Contents CIPHERLOC CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended June 30, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 2,064,153 ) $ ( 6,334,079 ) Adjustments to reconcile net loss to net cash flows used in operating activities: Depreciation — 18,243 PPP loan forgiveness ( 192,052 ) — Stock-based compensation ( 4,400 ) 142,872 Net loss on disposal of asset — 19,778 Impairment loss on ROU assets (gain on early termination of operating lease) ( 441,597 ) 382,961 Changes in operating assets and liabilities: Prepaid expenses and other 450,257 2,359 Accounts payable and accrued liabilities ( 315,842 ) 76,291 Accrued compensation 16,912 ( 102,293 ) Deferred revenue ( 15,417 ) ( 4,233 ) Net cash used in operating activities ( 2,566,292 ) ( 5,798,100 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed assets — ( 28,972 ) Net cash used in investing activities — ( 28,972 ) CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock ( 40,000 ) ( 150,000 ) Proceeds from PPA loan — 365,430 Repayment PPA loan ( 173,378 ) — Purchase of preferred stock ( 10,000 ) — Proceeds from the issuance of common stock, net of costs 8,558,339 — Net cash provided by financing activities 8,334,961 215,430 INCREASE (DECREASE) IN CASH 5,768,669 ( 5,611,642 ) CASH, BEGINNING OF PERIOD 1,079,839 7,839,472 CASH, END OF PERIOD $ 6,848,508 $ 2,227,830 NON-CASH INVESTING AND FINANCING ACTIVITIES: Capitalization of ROU asset $ — $ 746,125 ST operating lease liability recorded $ — $ 61,264 LT operating lease liability recorded $ — $ 684,861 The accompanying notes are an integral part of these unaudited financial statements. 6 Table of Contents CIPHERLOC CORPORATION STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED) 1 2 3 4 5 6 For the Nine Months ended Preferred Stock Common Stock Treasury Additional Paid-in Accumulated Stockholders’ June 30, 2021 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 ) Options issued to directors & employees — — — — — ( 4,400 ) — ( 4,400 ) Purchase of treasury stock Preferred and treasury shares acquired ( 1,000,000 ) ( 10,000 ) — — ( 40,000 ) — ( 50,000 ) Issuance of common stock, net of issuance costs — — 55,549,615 555,496 — 8,002,843 — 8,558,339 Net loss — — — — — ( 2,064,153 ) $ ( 2,064,153 ) Balance at June 30, 2021 — $ — 96,342,125 $ 963,421 $ ( 590,000 ) $ 76,419,164 $ ( 70,490,761 ) $ 6,301,824 For the Three Months ended Preferred Stock Common Stock Treasury Additional Paid-in Accumulated Stockholders’ June 30, 2021, Shares Amount Shares Amount Stock Capital Deficit Equity Balance at March 31, 2021 — $ — 76,550,452 $ 765,504 $ ( 590,000 ) $ 73,640,761 $ ( 70,315,181 ) $ 3,501,084 Options issued to directors & employees — — — — ( 84,055 ) — ( 84,055 ) Issuance of common stock, net of issuance costs — — 19,791,773 197,917 — 2,862,458 — 3,060,375 Net loss — — — — — ( 175,580 ) $ ( 175,580 ) Balance at June 30, 2021 — $ — 96,342,125 $ 963,421 $ ( 590,000 ) $ 76,419,164 $ ( 70,490,761 ) $ 6,301,824 For the Nine Months ended Preferred Stock Common Stock Treasury Additional Paid-in Accumulated Stockholders’ June 30, 2020 Shares Amount Shares Amount Stock 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 Options issued to directors & employees — — — — 142,781 — 142,782 Purchase of treasury stock — — — — ( 150,000 ) — ( 150,000 ) Net loss — — — — — ( 6,334,079 ) $ ( 6,334,079 ) Balance at June 30, 2020 1,000,000 $ 10,000 40,792,510 $ 407,925 $ ( 150,000 ) $ 68,368,697 $ ( 67,790,612 ) $ 846,010 For the Three Months ended Preferred Stock Common Stock Treasury Additional Paid-in Accumulated Stockholders’ June 30, 2020, Shares Amount Shares Amount Stock Capital Deficit Equity Balance at March 31, 2020 1,000,000 $ 10,000 40,792,510 $ 407,925 $ ( 150,000 ) $ 68,316,673 $ ( 66,632,869 ) $ 1,951,729 Options issued to directors & employees — — — — — 52,024 — 52,024 Purchase of treasury stock — — — — — — — — Net loss — — — — — (1,157,743 ) $ (1,157,743 ) Balance at June 30, 2020 1,000,000 $ 10,000 40,792,510 $ 407,925 $ ( 150,000 ) $ 68,368,697 $ ( 67,790,612 ) $ 846,010 The accompanying notes are an integral part of these unaudited financial statements. 7 Table of Contents CIPHERLOC CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2021 AND 2020 (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, Texas 78746. Our website is www.cipherloc.net . Management is seeking shareholder approval at its upcoming shareholders meeting to be held on September 13, 2021, to among other things, change the Company’s state of incorporation from Texas to Delaware. The full slate of proposals is summarized under Note 8 - Subsequent Events section of this filing and are detailed in the Definitive Proxy Statement on Schedule 14A and related Amendments on file with the SEC. The Notice of Meeting and Proxy Statement may be viewed on http://annualgeneralmeetings.com/cipherloc/. NOTE 2 – NEW EQUITY ISSUANCE From 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. The sale of the Offering Shares and Offering Warrants occurred at four closings as follows: SCHEDULE OF OFFERING SHARES AND OFFERING WARRANTS Date of Closing Shares Sold Warrants Sold Gross Proceeds March 31, 2021 35,757,942 35,757,942 $ 6,436,430 April 7, 2021 7,513,893 7,513,893 $ 1,352,501 April 9, 2021 8,683,336 8,683,336 $ 1,563,000 April 16, 2021 3,594,444 3,594,444 $ 647,000 55,549,615 55,549,615 $ 9,998,931 Total 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. Paulson 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). We 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. In 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. 8 Table of Contents The 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 thereafter. 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. Pursuant 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 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 was timely declared effective. On 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 16, 2021. 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. The 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. Management has evaluated the warrants for derivative status and concluded the warrants are freestanding equity instruments. 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 and nine months ended June 30, 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. 9 Table of Contents 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 June 30, 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 ”). The FDIC insures these deposits up to $ 250,000 . At June 30, 2021, $ 6,598,508 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 June 30, 2021, there were no preferred shares of stock outstanding and as of June 30, 2020, the Company had 1,000,000 shares of preferred stock outstanding, which were 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 because of the net loss. During the three and nine months ended June 30, 2021, warrants to purchase 79,461,481 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 nine months ended June 30, 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. 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 nine months ended June 30, 2021, and 2020 were $ 465,974 and $ 1,544,205 , respectively. Revenue Recognition The Company recognizes revenues in accordance with the provisions of Accounting Standards Update (“ ASU ”) 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. 10 Table of Contents Software License Agreements During 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 includes auto-renewing terms. Castle Shield made a $ 10,000 payment to the Company based on the terms of their agreement with Cipherloc. During the nine-months ended June 30, 2021, the Company recognized $ 15,417 in licensing revenue from the SoundFi and Castle Shield agreements. Recent Accounting Pronouncements The Financial Accounting Standards Board (“ FASB ”) issues ASUs 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. 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 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. 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. In 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): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement 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 because 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. As a result, a freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability at fair value because 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. 11 Table of Contents During 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). 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, 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 20th Judicial District for Hays County, Texas (Cause No. 18-0005). 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 Mr. De La Garza; 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, which the Company believes is without merit. 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. In April 2020, Eric Marquez, the former Secretary/Treasurer and Chief Financial Officer of the Company, and certain other plaintiffs, filed a lawsuit against the Company and Michael De La Garza, our former Chief Executive Officer and President, in the 20 th Judicial District for Hays County, Texas (Cause No. 20-0818). The lawsuit alleges causes of action for fraud against Mr. De La Garza (for misrepresentations 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. Semple, 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 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. On 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. The Company has one remaining payment of $ 25,000 due, payable to De La Garza by September 1, 2021. 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 to enable the leasing of space in Fairfax County, VA. The Company 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 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. 12 Table of Contents Leases As of June 30, 2021, the Company has no financial obligations for facility lease agreements. 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 was scheduled to continue until July 31, 2025. The base annual rent was $ 159,471 , a $ 100,000 security deposit was paid, and abatement of monthly rent payments was provided until August 1, 2020. The lease provided for annual rent increases of approximately 2.5 %. The amount of future payments guaranteed was $ 741,680 . Tom 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. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenant. Operating Leases Operating leases were 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. As 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. On June 9, 2021, a settlement of $ 150,000 was reached with 2111 Wilson Boulevard, Inc. to terminate the lease effective June 2021. Following the settlement agreement with 2111 Wilson Boulevard, Inc., as discussed above, the Company does not have any operating leases as of June 30, 2021. The early termination of the 2111 Wilson Boulevard operating lease resulted in recognizing a $ 441,597 gain in this reporting period due to the removal of the ROU assets and operating lease liabilities. The balance for ROU assets and liabilities at June 30, 2021 is $ 0 each. 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 lease in Arlington, Virginia added approximately $ 746,000 in new lease obligations. Cash paid for this lease was $ 80,402 for the nine months ended June 30, 2021 and is included in operating cash flows. The landlord agreed to an early termination and release from all past, present and future liabilities associated with the lease in exchange for a $ 150,000 one-time payment which the company made during June 2021. 13 Table of Contents Significant Judgments There are no significant judgments. Rent expense totaled $ 306,452 and $ 177,785 for the nine months ended June 30, 2021, and 2020, 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. The PPP loan balance on March 31, 2021, was $ 365,430 . The Company filed for partial loan forgiveness on January 29, 2021, which was approved in the amount of $ 192,052 on June 11, 2021. The staff reductions that occurred in 2020 prevented the Company from qualifying for full forgiveness of its principal balance. The full principal balance of the loan, plus $ 1,000 of interest was set aside in an escrow account at Texas Capital Bank on April 15, 2021. Upon receipt of the partial forgiveness approval, the remaining amount of the Paycheck Protection Program Loan was repaid using funds in the escrow account and the remaining balance was returned to the Company’s operating account. The balance of the loan was $ 0 as of June 30, 2021. NOTE 7 - STOCKHOLDERS’ EQUITY (DEFICIT) The 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. Common Stock During the nine months ended June 30, 2021, the Company issued 55,549,615 shares of common stock pursuant to the Private Offering. Each share was priced at $ 0.18 and the gross proceeds from the equity issuance were $ 9,998,931 . The proceeds net of issuance costs were $ 8,558,339 . During the nine months ended June 30, 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. Mr. LeGanke received a total payment of $ 50,000 as a result of the settlement. The Company attributed $ 40,000 of this settlement to the repurchase of common stock and the remaining $ 10,000 to the repurchase of Series A Preferred stock. During 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 of which $ 300,000 was paid at the time of settlement and the remaining $ 100,000 paid through four quarterly payments of $ 25,000 . The final payment will be made on September 1, 2021. During the nine months ended June 30, 2020, the Company came to a settlement with First Fire Global Opportunity Fund, LLC and purchased back 149,55 7 shares of common stock for $ 150,000 and recorded such shares as Treasury Stock. As of June 30, 2021, we had issued 40,792,501 common shares of which 13,414,814 are now in treasury stock. The net amount of common shares outstanding as of June 30, 2021 was 82,927,311 . Series A Preferred Stock During the nine months ended June 30, 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. Mr. LeGanke received a total payment of $ 50,000 as a result of the settlement. The Company attributed $ 10,000 of this settlement to the repurchase of the Series A Preferred Stock and the remaining $ 40,000 to the repurchase of common stock. 14 Table of Contents NOTE 8 – SUBSEQUENT EVENTS On July 14, 2021, we entered into an employment agreement with Nick Hnatiw to fulfill the role of Chief Technology Officer (“CTO”). The effective date of the employment agreement was June 1, 2021. Mr. Hnatiw began providing CTO services to Cipherloc as an independent contractor during November 2020. On July 19, 2021, the Company filed a Definitive Proxy Statement on Schedule 14A announcing a shareholders meeting to be held on September 13, 2021 for shareholders of record as of July 15, 2021, to elect a Board of Directors and to seek approval of five other proposals. On July 28, 2021, the Definitive Proxy Statement was amended to add two additional proposals relating to executive compensation. The meeting will be held at the Company’s headquarters at 6836 Bee Cave Road in Austin, Texas at 9:00 AM Central Time on September 13, 2021. Shareholders will be voting on the following proposals: 1. To elect four (4) members to our Board of Directors; 2. To ratify the appointment of Briggs & Veselka Co. as our independent registered public accounting firm for our fiscal year ending September 30, 2021; 3. To approve the Company’s 2021 Omnibus Equity Incentive Plan and the reservation of 8,000,000 shares for issuance thereunder; 4. To approve the reincorporation of the Company from the State of Texas to the State of Delaware; 5. To grant discretionary authority to our board of directors to (i) amend our proposed Delaware certificate of incorporation, after the Company effectuates its reincorporation to the State of Delaware, to combine outstanding shares of our common stock into a lesser number of outstanding shares, or a “reverse stock split,” at a specific ratio within a range of 1-for-2 to a maximum of a 1-for-20 split, with the exact ratio to be determined by our board of directors in its sole discretion; and (ii) effect the reverse stock split, if at all, within one year of the date the proposal is approved by stockholders ; 6. To approve an amendment of the Company’s Amended and Restated Articles of Incorporation, as amended, to eliminate the shareholders’ statutory preemptive rights pursuant to Section 21.208 of the Texas Business Organizations Code in the event that the reincorporation of the Company from the State of Texas to the State of Delaware is not consummated; 7. To approve, by non-binding advisory vote, of the resolution approving named executive officer compensation; and 8. To approve, by non-binding advisory vote, of the frequency of future non-binding advisory votes on resolutions approving future named executive officer compensation. On July 23, 2021, the “ Company entered into a financial advisory and consulting agreement with Paulson Investment Company, LLC (“ Paulson ”). Pursuant to the agreement, Paulson will provide the following services at our request: (a) familiarize itself with our business, assets and financial condition; (b) assist us in developing strategic and financial objectives; (c) assist us in increasing our exposure in the software industry; (d) assist us in increasing our profile in the investment and financial community through introductions to analysts and potential investors, participation in investment conferences and exploitation of reasonably available media opportunities; (e) identify potentially attractive merger and acquisition opportunities; (f) review possible innovative financing opportunities and (g) render other financial advisory services as may be reasonably requested. The term of the Agreement is four years from the date of the Agreement, unless terminated earlier by either party as provided therein. As compensation for these services, we are issuing to Paulson 4,000,000 shares of our common stock and agreeing to reimburse them for all reasonable and documented expenses incurred by Paulson in connection with providing such services. 15 Table of Contents