SideChannel, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS CIPHERLOC CORPORATION TABLE OF CONTENTS Page REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 36 FINANCIAL STATEMENTS: Balance Sheets as of September 30, 2021 and 2020 37 Statements of Operations for the years ended September 30, 2021 and 2020 38 Statements of Stockholders’ Equity (Deficit) for the years ended September 30, 2021 and 2020 39 Statements of Cash Flows for the years ended September 30, 2021 and 2020 40 NOTES TO FINANCIAL STATEMENTS 41 35 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Cipherloc Corporation Opinion on the Financial Statements We have audited the accompanying balance sheets of Cipherloc Corporation (the “Company”) as of September 30, 2021, and 2020, and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended September 30, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021, and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Briggs & Veselka Co. We have served as the Company’s auditor since 2019. Houston, Texas December 28, 2021 36 CIPHERLOC CORPORATION BALANCE SHEETS September 30, 2021 September 30, 2020 ASSETS Current assets Cash $ 5,783,994 $ 1,079,839 Deferred costs 180,0000 — Prepaid expenses 279,832 258,424 Total current assets 6,243,826 1,338,263 Other assets — 200,000 Operating lease ROU asset — 291,140 Deferred costs 510,000 — Total assets $ 6,753,826 $ 1,829,403 LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT) Current liabilities Accounts payable and accrued liabilities $ 1,462,732 $ 840,234 Accrued compensation 25,000 10,000 Operating lease liability – current portion — 132,608 Paycheck protection program loan – current portion — 216,902 Deferred revenue — 15,417 Total current liabilities 1,487,732 1,215,161 Paycheck protection program loan – long term — 148,528 Operating lease liability – long-term portion — 603,676 Total liabilities 1,487,732 1,967,365 Commitments and contingencies 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 September 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 September 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 September 30, 2021 and September 30, 2020, respectively ( 590,000 ) ( 550,000 ) Additional paid-in capital 76,423,564 68,420,721 Accumulated deficit ( 71,530,891 ) ( 68,426,608 ) Total stockholders’ equity (deficit) 5,266,094 ( 137,962 Total liabilities and stockholders’ equity (deficit) $ 6,753,826 $ 1,829,403 The accompanying notes are an integral part of these financial statements. 37 CIPHERLOC CORPORATION STATEMENTS OF OPERATIONS 2021 2020 For the Year Ended September 30, 2021 2020 Revenues $ 15,417 $ 47,983 Cost of revenues — — Gross profit 15,417 47,983 Operating expenses: General and administrative 2,597,881 4,573,673 Sales and marketing 96,125 710,595 Research and development 616,746 1,689,455 Total operating expenses 3,310,752 6,973,723 Operating loss ( 3,295,335 ) ( 6,925,740 ) Other (expenses) income: Loss on disposal of asset — ( 44,332 ) Paycheck Protection Program Forgiveness Income 192,052 — Interest expense ( 1,000 ) — Total other income (expense), net 191,052 ( 44,332 ) Net loss $ ( 3,104,283 ) $ ( 6,970,072 ) Net loss per common share - Basic and diluted: $ ( 0.05 ) $ ( 0.18 ) Weighted average common shares outstanding - Basic and diluted 54,864,945 39,495,185 The accompanying notes are an integral part of these financial statements. 38 CIPHERLOC CORPORATION STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS ENDED SEPTEMBER 30, 2021, AND 2020 Shares Amount Shares Issued Amount Treasury Stock Paid-in Capital Accumulated Deficit Equity (Deficit) Preferred Stock Common Stock Additional Stockholders’ Shares Amount Shares Issued Amount Treasury Stock Paid-in Capital Accumulated Deficit Equity (Deficit) Balance at, September 30, 2019 1,000,000 $ 10,000 40,792,510 $ 407,925 $ — $ 68,225,825 $ ( 61,456,536 ) $ 7,187,217 Stock option issued to directors and officers — — — — 194,896 — 194,896 Treasury shares acquired — — — — ( 550,000 ) — — ( 550,000 Preferred and treasury shares acquired Preferred and treasury shares acquired, shares Issuance of common stock for cash, net of issuance costs Issuance of common stock for cash, net of issuance costs, shares Net loss — — — — — ( 6,970,072 ) ( 6,970,072 ) Balance at September 30, 2020 1,000,000 $ 10,000 40,792,510 $ 407,925 $ ( 550,000 ) $ 68,420,721 $ ( 68,426,608 ) $ ( 137,962 ) Preferred and treasury shares acquired ( 1,000,000 ) ( 10,000 ) — — ( 40,000 ) — — ( 50,000 ) Issuance of common stock for cash, net of issuance costs — — 55,549,615 555,496 — 8,002,843 — 8,558,339 Net loss — — — — — ( 3,104,283 ) ( 3,104,283 ) Balance at September 30, 2021 — $ — 96,342,125 $ 963,421 $ ( 590,000 ) $ 76,423,564 $ ( 71,530,891 ) $ 5,266,094 The accompanying notes are an integral part of these financial statements. 39 CIPHERLOC CORPORATION STATEMENTS OF CASH FLOWS 2021 2020 For the Year Ended September 30, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 3,104,283 ) $ ( 6,970,072 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation — 18,244 Stock-based compensation — 194,896 Impairment loss on ROU assets (gain on early termination of operating lease) ( 441,597 ) 382,961 Loss on disposal of asset — 44,332 PPP loan forgiveness income ( 192,052 ) — Changes in operating assets and liabilities: Prepaid expenses and other assets ( 511,408 ) ( 322,912 ) Accounts payable and accrued liabilities 618,951 151,736 Accrued compensation 15,000 ( 132,293 ) Deferred revenue ( 15,417 ) ( 12,983 ) Net cash used in operating activities ( 3,630,806 ) ( 6,646,091 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets — ( 28,972 ) Net cash used in investing activities — ( 28,972 ) CASH FLOWS FROM FINANCING ACTIVITIES Purchase of treasury stock ( 40,000 ) ( 450,000 ) Proceeds from PPP loan — 365,430 Repayment on PPP 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 (used in) financing activities 8,334,961 ( 84,570 ) INCREASE (DECREASE) IN CASH 4,704,155 ( 6,759,633 ) CASH, BEGINNING OF YEAR 1,079,839 7,839,472 CASH, END OF YEAR $ 5,783,994 $ 1,079,839 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 Unpaid treasury stock $ — 100,000 The accompanying notes are an integral part of these financial statements. 40 CIPHERLOC CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2021, AND 2020 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. ” Prior to September 30, 2021, the Company was a Texas corporation. The Company became a Delaware corporation effective September 30, 2021. Our headquarters are located at 6836 Bee Cave Road, Building 1, Suite279, Austin, Texas 78746. Our website is www.cipherloc.net . 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 (a) 55,549,615 shares of common stock (“ Offering Shares ”), and (b) warrants to purchase 55,549,615 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 unit of an Offering Share and an 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 closing under 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 Total 55,549,615 55,549,615 $ 9,998,931 Total gross proceeds from the offering of the Offering Shares and Offering Warrants (the “ Private Placement ”) were approximately $ 10 million (as shown above). 41 Paulson Investment Company, LLC (the “ Placement Agent ”), served as placement agent for the Private Offering. 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 8,332,439 shares of common stock (“ Placement Warrants ”, discussed in greater detail below). The Company agreed to use the proceeds from the Private Placement 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 Placement, each of our officers and directors entered into Lock-Up Agreements pursuant to which they agreed not to sell, offer, or transfer, any of our securities that they held for 180 days after the closing of the Private Placement, subject to customary exceptions. The Offering Warrants, which are evidenced by Common Stock Purchase 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 after 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 that are exercisable if, when exercised, a registration statement registering the shares of the Company’s common stock issuable upon exercise thereof, is not then 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 a 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 tenth day after the end of the Private Offering (provided that the Placement Agent agreed that such ten 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 warrants were priced at the issuance price of the Offering Shares in the Private Placement. The Placement Agent Agreement had 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, the Company paid the Placement Agent a $ 35,000 cash retainer. 42 The Placement Warrants are evidenced by warrants similar to the 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. Our management has evaluated the warrants for derivative status and concluded the warrants are freestanding equity instruments. NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Significant accounting policies are as follows: Use of Estimates and Assumptions The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net revenues and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates. Legal The Company is subject to legal proceedings, claims and liabilities which arise in the ordinary course of business. The Company accrues for losses associated with legal claims when such losses are probable and can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Legal fees are charged to expense as they are incurred. Cash and Cash Equivalents and Concentration of Credit Risk The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents as of September 30, 2021 and 2020. As of September 30, 2021 and 2020, our cash included cash on hand and cash in the bank. The Company maintains its cash in accounts held by large, globally recognized banks which, at times, may exceed federally insured limits as guaranteed by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures these deposits up to $ 250,000 . As of September 30, 2021, $ 5,533,994 of the Company’s cash balance was uninsured. The Company has not experienced any losses on cash. Liquidity and Capital Resources The Company had an accumulated deficit as of September 30, 2021 of $ 71,530,891 . The Company expects to continue to generate operating losses until it can generate revenues sufficient to exceed its operating expenses. As of September 30, 2021, the Company had $ 5,783,994 in cash. The Company believes that its existing cash balances are sufficient to fund its operations for the next 12 months. Fixed Assets Fixed assets are recorded at cost and depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. Equipment and furniture are depreciated over an estimated useful life of three ( 3 ) to five ( 5 ) years. Leasehold improvements are depreciated over the lesser of the related lease term or a useful life of ten ( 10 ) years. Software is depreciated over an estimated useful life of three ( 3 ) years. The Company does not have any fixed assets on its balance sheet as of September 30, 2021. The Company’s fixed assets were disposed of during 2020 as part of a downsizing and cash conservation effort. Long-Lived Assets Long-lived assets are evaluated for impairment whenever events or changes in our business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted future cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value. During the year ended September 30, 2020, the Company recorded an impairment loss of $ 382,961 related to its Virginia lease. In addition, the Company recorded a loss of $ 44,336 on the disposal of fixed assets. 43 Fair Value of Financial Instruments The Company’s financial instruments consisted primarily of cash, accounts payable and accrued expenses, and embedded conversion features in stock warrants. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments. Fair value is focused on an exit price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Within the measurement of fair value, the use of market-based information is prioritized over entity specific information and a three-level hierarchy for fair value measurements is used based on the nature of inputs used in the valuation of an asset or liability as of the measurement date. The three-level hierarchy for fair value measurements is defined as follows: ● Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; ● Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly, including inputs in markets that are not considered to be active; ● Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. The fair values of the embedded conversion features in the warrants issued by the Company were determined using level 2 measurements and are discussed in further detail in Note 8. Customer Concentration During the year ended September 30, 2021, two customers accounted for 100 % of the Company’s revenues. During the year ended September 30, 2020, two customers also accounted for 100 % of the Company’s revenues. Revenue Recognition The Company recognizes revenues in accordance with the provisions of Accounting Standards Update 2014-09, “Revenue from Contracts with Customers,” and a series of amendments which together we identify as “ASC Topic 606”. This new accounting standard, which we adopted on October 1, 2018, using the permitted modified retrospective method, outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers. The new standard supersedes most previous revenue recognition guidance, including industry-specific guidance. The effect of the adoption of ASC Topic 606 on retained earnings as of October 1, 2018, was not material. The differences between our reported operating results for the twelve months ended September 30, 2020, which reflect the application of the new standard on our contracts, and the results that would have been reported if the accounting was performed pursuant to the accounting standards previously in effect, also were not material. 44 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. Nature of Products and Services Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where the license is being modified at the direction of the customer the revenue is being recognized ratably over the term of the arrangement. Revenue allocated to software maintenance and support services is recognized ratably over the contractual support period. Professional services are primarily related to software implementation services and associated revenue is recognized upon customer acceptance. Contract Balances Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a contract asset or receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For perpetual licenses with multi-year product maintenance agreements, the Company generally invoices customers at the beginning of the coverage period. For multi-year subscription licenses, the Company generally invoices customers annually at the beginning of each annual coverage period. The Company records a contract asset related to revenue recognized for multi-year on-premises licenses as its right to payment is conditioned upon providing product support and services in future years. There were no accounts receivable balances on September 30, 2021, and 2020. There was no adjustment needed to the accounts receivable for the cumulative effect of applying ASC 606 under the modified retrospective method. There was no impact on the opening balance contract assets and liabilities, for the cumulative effect of applying ASC 606 under the modified retrospective method as of October 1, 2018. Deferred revenue is comprised mainly of unearned revenue related maintenance and technical support on term and perpetual licenses. Maintenance and technical support revenue are recognized ratably over the coverage period. Deferred revenue also includes contracts for professional services to be performed in the future which are recognized as revenue when the company delivers the related service pursuant to the terms of the customer arrangement. Changes in deferred revenue were as follows: SCHEDULE OF CHANGES IN DEFERRED REVENUE Year Ended September 30, 2021 Balance on September 30, 2020 $ 15,417 Deferral of revenue — Recognition of revenue ( 15,417 ) Balance at September 30, 2021 $ — Year Ended September 30, 2020 Balance on September 30, 2019 $ 28,400 Deferral of revenue 35,000 Recognition of revenue ( 47,983 ) Balance at September 30, 2020 $ 15,417 45 Deferred revenue includes invoiced revenue allocated to remaining performance obligations that has not yet been recognized and will be recognized as revenue in future periods. Deferred revenue was zero as of September 30, 2021. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 90 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined its contracts generally do not include a significant financing component. The primary purpose of the Company’s invoicing terms is to provide customers with simplified and predictable ways of purchasing its products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with maintenance and support revenue recognized ratably over the contract period, and multi-year on-premises licenses that are invoiced annually with product revenue recognized upon delivery. Significant Judgments The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. For products and services aside from maintenance and support, the Company estimates SSP by adjusting the list price by historical discount percentages. SSP for software and hardware maintenance and support fees is based on the stated percentages of the fees charged for the respective products. The Company’s perpetual and term software licenses may have significant standalone functionality and therefore revenue allocated to these performance obligations are recognized at a point in time upon electronic delivery of the download link and the license keys. In cases where the license is being modified at the direction of the customer the revenue is being recognized ratably over the term of the arrangement. Product maintenance and support services are satisfied over time as they are stand-ready obligations throughout the support period. As a result, revenues associated with maintenance services are deferred and recognized as revenue ratably over the term of the contract. Revenues associated with professional services are recognized at a point in time upon customer acceptance. Assets Recognized from Costs to Obtain a Contract with a Customer The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The Company has determined that its sales commission program meets the requirements for cost capitalization. Total capitalized costs to obtain a contract were immaterial during the periods presented. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. Software license revenue is generally recognized when a signed contract or other persuasive evidence of an arrangement exists, the software has been electronically delivered, the license fee is fixed or is measured on a paid user basis, and collection of the resulting receivable is probable. When contracts contain multiple elements wherein Vendor-Specific Objective Evidence (“VSOE”) exists for all undelivered elements, we account for the delivered elements in accordance with the “Residual Method.” VSOE of fair value for maintenance and support is established by a stated renewal rate, if substantive, included in the license arrangement or rates charged in stand-alone sales of maintenance and support. Revenue from subscription license agreements, which include software, rights to unspecified future products and maintenance, is recognized ratably over the term of the subscription period. When the fair value of VSOE of post contract customer support cannot be determined, the revenue is recognized ratably over the contract period. The only remaining undelivered element was post contract support services, and accordingly, the revenues were recognized on a pro rata basis prospectively over the terms of the related contracts. Deferred revenue results from fees billed to or collected from customers for which revenue has not yet been recognized. The Company had deferred revenue of zero and $ 15,417 as of September 30, 2021 and 2020, respectively. 46 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 years ended September 30, 2021 and 2020 were $ 616,746 and $ 1,689,455 , respectively. Stock-Based Compensation The Company measures the cost of services provided by employees and non-employees in exchange for an award of an equity instrument based on the grant-date fair value of the award. The Company granted stock options during the year ended September 30, 2020, but those awards were subsequently forfeited. The Company had both fully vested stock grants and stock options granted to employees and non-employees during the year ended September 30, 2019. As such, the Company recognized compensation cost for grants, as well as a ratable portion for the stock options vesting over a three-year time frame during the years ended September 30, 2019 and 2020; however, no vesting occurred during fiscal year 2021 for these awards due to separation of employment by these employees during fiscal year 2020. The Company made no award grants during the year ended September 30, 2021. The Company accounts for share-based payments in accordance with the authoritative guidance issued by the FASB on share-based compensation, which establishes the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Under the provisions of the authoritative guidance, share-based compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period), net of actual forfeitures. The Company estimates the fair value of share-based payments using the Black-Scholes option-pricing model. Additionally, share-based awards to non-employees are expensed over the period in which the related services are rendered at their fair value. All share-based awards are expected to be fulfilled with new shares of common stock. Under ASC 718-20-35-7, Repurchase or Cancellation of equity awards, the amount of cash or other assets transferred (or liabilities incurred) to repurchase an equity award shall be charged to equity, to the extent that the amount paid does not exceed the fair value of the equity instruments repurchased at the repurchase date. Any excess of the repurchase price over the fair value of the instruments repurchased shall be recognized as additional compensation cost. Income Taxes The Company utilizes the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carryforwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that the value of such assets will be realized. The Company uses the two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating the Company’s tax positions and tax benefits, which may require periodic adjustments. The Company did no t record any liabilities for uncertain tax positions during the years ended September 30, 2021, or 2020. 47 Basic and Diluted Net Loss per Common Share Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the reporting period. The weighted average number of shares is calculated by taking the number of shares outstanding and weighting 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. During the year ended September 30, 2021, 87,628,920 warrants were exclude from the calculation of diluted loss per share because their effect would be anti-dilutive. Diluted loss per share is the same as basic loss per share during periods where net losses are incurred since the inclusion of the potential common stock equivalents would be anti-dilutive as a result of the net loss. During the year ended September 30, 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. As of September 30, 2021, the Company had purchased the 1,000,000 shares of preferred stock outstanding which were outstanding as of September 30, 2020. Recent Accounting Announcements The Financial Accounting Standards Board (“FASB”) issues Accounting Standards Updates (“ASU”) to amend the authoritative literature in the ASC. There have been several ASUs to date that amend the original text of the ASCs. Other than those discussed below, the Company believes those ASUs issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance removes certain exceptions to the general principles in Topic 740 and enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company are currently evaluating the impact of ASU 2019-12 on its financial statements, which is effective for the Company in its fiscal year and interim periods beginning on October 1, 2021. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement , to modify the disclosure requirements for fair value measurements. The ASU removes certain disclosure requirements related to transfers between fair value hierarchy levels and valuation processes for Level 3 fair value measurements. It modifies certain disclosure requirements for investments in entities that calculate net asset value. It adds certain disclosure requirements regarding gains and losses for recurring Level 3 fair value measurements and unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted ASU 2018-13 on October 1, 2019, and the adoption of this update did not have a material impact on the Company’s notes to the financial statements. In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting , to expand the scope of Topic 718, Compensation – Stock Compensation , which currently only includes share-based payments to employees, to include share-based payments issued to nonemployees for goods or services. Thus, accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted ASU 2018-07 on October 1, 2019, and the adoption of this update did not have a material impact on the Company’s financial position, results of operations and cash flows. 48 In February 2016, the FASB issued ASU 2016-02, Leases, which aims to make leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset (ROU) and corresponding lease liability, including leases currently accounted for as operating leases. Leases of mineral reserves and related land leases have been exempted from the standard. We adopted ASU 2016-02, Leases, on October 1, 2019. We elected the “package of practical expedients” within the standard which permits us not to reassess prior conclusions about lease identification, lease classification and initial direct costs. We made an accounting policy election to not separate lease and non-lease components for all leases. The adoption of this standard resulted in the recognition of right-of-use assets and lease liabilities of $ 0.2 million, which were not previously recorded on our balance sheet. NOTE 4 – SOFTWARE LICENSES Software License Agreements During fiscal year 2019, the Company entered into a one-year agreement with SoundFi LLC (“SoundFi”) which will automatically renew for subsequent one-year periods unless otherwise terminated by either party. Cipherloc received $ 25,000 from SoundFi during the year ended September 30, 2020. The Company executed an annual software licensing agreement with Castle Shield during the year ended September 30, 2020, which also include auto-renewing terms. Castle Shield made a $ 10,000 payment to the Company based on the terms of their agreement with Cipherloc. During the years ended September 30, 2021, and 2020, the Company recognized $ 15,417 and $ 47,983 , respectively, in licensing revenue from the SoundFi and Castle Shield agreements. NOTE 5 – 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 on April 12, 2020, and the Company received loan proceeds on April 22, 2020. The SBA loan had an interest rate of 1 % and was scheduled to mature 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 Paycheck Protection Program loan balance at September 30, 2020, 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 September 30, 2021. NOTE 6 – RELATED PARTY TRANSACTIONS No related party transactions occurred during the years ending September 30, 2021 and September 30, 2020 other than those disclosed in Note 7. 49 NOTE 7 – COMMITMENTS AND CONTINGENCIES Litigation The Company is currently not involved in any litigation that it believes could have a material adverse effect on its financial condition or results of operations. Currently Pending Litigation In December 2017, Robert LeBlanc, filed a petition against the Company and Michael De La Garza, the Company’s former Chief Executive Officer and President, in the 20th Judicial District for Hays County, Texas (Cause No. 18-0005). Mr. LeBlanc claims that he is a former consultant, employee, and/or officer of the Company, Mr. LeBlanc’s petition (which has been amended) alleges causes of action against the Company for alleged violation of the Texas Securities Act, common law fraud against Mr. De La Garza; breach of fiduciary duty against Mr. De La Garza; breach of contract; as well as declaratory relief. Damages sought exceed $ 1,000,000 but are less than $ 10,000,000 . The Company believes that the plaintiff was fully compensated for his services and that the plaintiff’s claims are without merit. Mr. LeBlanc is also asserting a claim of partial ownership of certain of the Company’s patents, which the Company believes is without merit. The Company believes it has meritorious defenses to 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, the Company’s 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 allegedly made by Mr. De La Garza); breach of contract, for alleged breaches of Mr. Marquez’s alleged oral employment agreement, which Mr. Marquez claims required the Company pay him cash and shares of stock; unjust enrichment; quantum meruit; and rescission of certain stock purchases made by certain of the plaintiffs, as well as 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. Litigation Settled During the Year Ended September 30, 2021 Semple, Marchal & Cooper, LLP (“ SMC ”), the Company’s former independent registered auditing firm, 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 final payment of the settlement balance was made on September 1, 2021. The Company sought to invalidate the issuance of one million shares of the Company’s Series A preferred stock on or around 2011 to former director and chief financial officer, Pamela Thompson, which stock was being held by the Carmel Trust II. 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 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. In October 2020, Ageos, LLC, a Virginia limited liability company (“ Ageos ”), filed a Third-Party Complaint against the Company in connection with the pending action titled Scandium, LLC v. Ageos, LLC in the General District Court for Fairfax County in the Commonwealth of Virginia. The action related 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. 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. 50 Leases In February 2019, the Company and the landlord for its leased office space in Buda, Texas entered into a new lease agreement, and the Company reduced its rented space from approximately 3,900 to 1,302 square feet. The new lease became effective on February 1, 2019 and has a three -year term. The initial monthly rent is $ 2,566 , and the lease agreement provided for annual rent increases of approximately 2.7 %. The lease automatically renews for a three-year term, unless either party to the lease agreement notifies the other of the intent to terminate the lease in writing at least 180 days prior to the expiration of the current term. In July 2020, the Company executed a lease termination agreement with the landlord for an early termination fee of $ 10,546 and forfeited the existing security deposit of $ 2,566 . There are no future payments related to this lease. In October 2018, the Company leased approximately 3,900 square feet of office space on North Scottsdale Road in Scottsdale, Arizona. The lease for this facility began on October 4, 2018, and originally continued until October 31, 2021. Annual rent of $ 77,180 was prepaid for the first year from November 1, 2018, to October 31, 2019, and the lease agreement provides for annual rent increases of approximately 5.0 %. In June 2020, the Company executed a lease termination agreement with the landlord for an early termination fee of $ 27,013 and forfeited the existing security deposit of $ 9,796 . There are no future payments related to this lease. 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 continued 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, and the lease provided for annual rent increases of approximately 2.5 %. As the result of restructuring actions intended to conserve cash during the COVID-19 crisis, the landlord of the Wilson Boulevard space was notified that the Company no longer needed the space and reached a termination agreement with the landlord. As part of this agreement, the company paid $ 150,000 on June 9, 2021. As of September 30, 2021, the Company had no lease agreements for facilities. 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 September 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 September 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. Cash paid for amounts included in the present value of operating lease liabilities was $ 80,402 during the fiscal year ended September 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 the quarter ended June 30, 2021. 51 NOTE 8 - STOCKHOLDERS’ EQUITY (DEFICIT) Common Stock As of September 30, 2021 and 2020, the Company had 82,927,311 and 27,505,196 shares of common stock outstanding, respectively, and were authorized to issue 681,000,000 shares of common stock at a par value of $ 0.01 . Treasury Stock Management determines the fair value of stock issuances using the closing stock price on the grant date. During the year ended September 30, 2021, the Company came to a settlement with Mr. James LaGanke, as Trustee of Carmel Trust II and purchased back 127,500 shares and recorded such shares as Treasury Stock. Mr. James LaGanke received $ 50,000 in exchange for the 127,500 shares. 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 year ended September 30, 2020, the Company came to a settlement with First Fire and purchased back 149,557 shares and recorded such shares as Treasury Stock. First Fire received $ 150,000 in exchange for the 149,557 shares. During the year ended September 30, 2020, the Company entered into to a settlement with Michael De La Garza and purchased 13,137,757 shares of common stock held by Mr. De La Garza in exchange for $ 400,000 in cash, of which $ 300,000 was paid at the time of settlement and the remaining $ 100,000 was paid through four quarterly payments of $ 25,000 . The Company made the final payment was made on September 1, 2021. The accumulated number of common stock recorded in Treasury Stock at September 30, 2021 is 13,414,814 shares versus 13,287,314 shares as of September 30, 2020. Common Stock Issued for Cash During the year ended September 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 . As of September 30, 2021, the Company had issued 96,342,125 shares of common stock, of which 13,414,814 are now in treasury stock. The amount of shares of common stock outstanding as of September 30, 2021, was 82,927,311 . Common Stock Issued for Services 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 the Company’s request: (a) familiarize itself with the Company’s business, assets and financial condition; (b) assist the Company in developing strategic and financial objectives; (c) assist the Company in increasing its exposure in the software industry; (d) assist the Company in increasing its profile in the investment and financial community through introductions to analysts and potential investors, participation in investment conferences and exploitation of reasonably available media opportunities; (e) identify potentially attractive merger and acquisition opportunities; (f) review possible innovative financing opportunities and (g) render other financial advisory services as may be reasonably requested. 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, the Company is issuing to Paulson 4,000,000 shares of the Company’s common stock and agreed to reimburse Paulson for all reasonable and documented expenses incurred by Paulson in connection with providing such services. When the 4,000,000 shares are issued to Paulson, the Company’s total outstanding shares of common stock will increase to 86,297,311 . 52 Common Stock and Stock Options Issued to Directors and Officers During 2020, 620,000 stock options were granted to employees. Also, during 2020, 920,000 stock options were cancelled due to the termination of employment of the holders. As of September 30, 2020, 800,000 stock options were outstanding. None of the stock options are in the money and the unamortized amount of stock compensation as of September 30, 2020, was $ 383,453 . During 2021 the remaining options were canceled because the 2019 plan under which they were awarded was not approved by the Company’s shareholders, and none of the options holders were still employees, which is a requirement for vesting. Consequently, the Company recognized no stock compensation expense for the year ended September 30, 2021. No stock or stock options were granted to employees, officers, and directors during the year ended September 30, 2021. SCHEDULE OF STOCK OPTIONS Year Ended September 30, 2020 Balance on September 30, 2019 1,100,000 New Awards 620,000 Options Cancelled ( 920,000 ) Balance at September 30, 2020 800,000 The Company’s board of directors authorized, and the shareholders approved, the Company’s 2021 Omnibus Equity Incentive Plan which provides for the award of up to 8,000,000 shares of common stock. See Note 10 – Subsequent Events for awards recently made as part of this plan. Preferred Stock As of September 30, 2021 and 2020, the Company had zero and 1,000,000 shares of restricted preferred stock outstanding, respectively. 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 1,000,000 shares of Series A Preferred stock. Warrants During the year ended September 30, 2021, the Company granted 63,882,054 warrants, see Note 2 above. Warrant activities for the years ended September 30, 2021 and 2020 are as follows: SCHEDULE OF WARRANT ACTIVITY Number of Warrants Weighted Average Exercise Price Weighted Average Remaining Life Outstanding at September 30, 2019 24,290,866 $ 1.14 4.84 Granted — — — Exercised — — — Canceled/Forfeited ( 544,000 ) 2.11 — Outstanding at September 30, 2020 23,746,866 1.12 3.74 Granted 63,882,054 0.34 5.15 Exercised — — — Canceled/Forfeited — — — Outstanding at September 30, 2021 87,628,920 $ 0.55 4.77 53 NOTE 9 - INCOME TAXES The provision (benefit) for income taxes from continued operations for the years ended September 30, 2021, and 2020 consist of the following: SCHEDULE OF PROVISION (BENEFIT) FOR INCOME TAXES FROM CONTINUED OPERATIONS 2021 2020 September 30, 2021 2020 Current: Federal $ — $ — State — — Current Federal and State Income Tax Expense (Benefit) $ — $ — Deferred: Federal $ ( 692,230 ) $ ( 239,000 ) State ( 591,835 ) — Deferred Federal and State Income Tax Expense (Benefit) ( 1,284,065 ) ( 239,000 ) Change in valuation allowance 1,284,065 239,000 Provision (benefit) for income taxes, net $ — $ — The difference between income tax expense computed by applying the federal statutory corporate tax rate and actual income tax expense is as follows: SCHEDULE OF FEDERAL STATUTORY CORPORATE TAX RATE AND ACTUAL INCOME TAX EXPENSE September 30, 2021 2020 Statutory federal income tax rate 21.0 % 21.0 % Non-deductible stock-based compensation and other permanent differences 1.3 ( 0.1 ) Change in state statutory tax rate 19.06 ( 0.0 ) Change in valuation allowance ( 41.36 ) ( 20.90 ) Effective tax rate 0.0 % 0.0 % For the years ended September 30, 2021 and 2020, the difference between the amounts of income tax expense or benefit that would result from applying the statutory rates to pretax income to the reported income tax expense of $ 0 is the result of the net operating loss carry forward and the related valuation allowance, as well as non-deductible stock-based compensation. Deferred income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes. The tax effect of these temporary differences representing deferred tax asset and liabilities result principally from the following: SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES 2021 2020 September 30, 2021 2020 Net operating loss carry forward $ 6,961,203 $ 6,127,000 Deferred compensation 3,126,502 2,696,000 Valuation allowance ( 10,087,705 ) ( 8,823,000 ) Deferred income tax asset $ — $ — The Company has a net operating loss carry forward of $ 32.9 million available to offset future taxable income. Of which, $ 3.7 million will expire within the next five years, and the remaining $ 29.2 million will expire thereafter. For income tax reporting purposes, the Company’s aggregate unused net operating losses were subject to the limitations of Section 382 of the Internal Revenue Code, as amended. The Company has adjusted the net operating losses incurred prior to 2015 to reflect only the losses not subject to limitation. The Company has provided for a valuation reserve against the net operating loss benefit, because in the opinion of management based upon the earning history of the Company; it is more likely than not that the benefits will not be realized. For income tax reporting purposes, Management has determined that net operating losses prior to February 5, 2015, are subject to an annual limitation of approximately $ 525,000 . 54 The Company is current on all its federal income tax filings. An extension will be filed for the September 30, 2021, tax return. On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law in the U.S. The Tax Act has resulted in significant changes to the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and credits, and limitations on the deductibility of interest expense and executive compensation. These changes were effective beginning in 2018 . NOTE 10 - SUBSEQUENT EVENTS On October 12, 2021, through the filing of a Current Report on Form 8-K, the Company announced a new employment agreement with Ryan Polk, who serves as its Chief Financial Officer. The agreement provides for an annual salary of $ 150,000 , annual equity incentive awards equal to $ 50,000 , and a discretionary annual performance bonus target of $ 100,000 . On October 22, 2021, the Company filed a Form S-8 Registration Statement registering the issuance of the 8,000,000 shares of common stock under the Company’s 2021 Omnibus Equity Incentive Plan, which was approved by the shareholders at the annual meeting held on September 13, 2021. Following SEC acceptance of the Form S-8 for the Omnibus Equity Incentive Plan, the Company made the following awards, and the award recipients filed Form 4s with the SEC: ● Tom Wilkinson, Chairman: 141,667 shares vesting immediately ● Anthony Ambrose, Lead Independent Director: 141,667 shares vesting immediately ● Sammy Davis, Director: 127,778 shares vesting immediately ● David Chasteen, Chief Executive Officer: 1,111,111 shares vesting over 3 years with the first vesting anniversary on June 1, 2022 ● Nick Hnatiw, Chief Technology Officer: 277,778 shares vesting over 3 years with the first vesting anniversary on June 1, 2022 ● Ryan Polk, Chief Financial Officer: 277,778 shares vesting over 3 years with the first vesting anniversary on June 1, 2022 On November 12, 2021, the Company announced the formation of a Board of Advisors to its support product development, market entry and commercial applications of its disruptive polymorphic encryption technology. The founding members of the advisory board are Griffin Boyce, Privacy Lead at Google Fuchsia; Margaret Jones, Head of Content and Women’s ERG Lead at Airtable; and Travis Williams, Director of Product Management for Mind Tech at Hyperice. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.