SideChannel, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in our Management’s Discussion and Analysis of Financial Condition and Results of Operations, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 and elsewhere in this Form 10-Q. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “Part II. Other Information – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contained in our Annual Report on Form 10-K for the year ended September 30, 2021, filed with the Securities and Exchange Commission on December 21, 2021. Our logo and some of our trademarks and tradenames are used in this Report. This Report also includes trademarks, tradenames and service marks that are the property of others. Solely for convenience, trademarks, tradenames, and service marks referred to in this Report may appear without the ®, ™ and SM symbols. References to our trademarks, tradenames and service marks are not intended to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable licensors if any, nor that respective owners to other intellectual property rights will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies. The market data and certain other statistical information used throughout this Report are based on independent industry publications, reports by market research firms or other independent sources that we believe to be reliable sources. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. We are responsible for all of the disclosures contained in this Report, and we believe these industry publications and third-party research, surveys and studies are reliable. While we are not aware of any misstatements regarding any third-party information presented in this Report, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed under, and incorporated by reference in, the section entitled “ Item 1A. Risk Factors ” of this Report. These and other factors could cause our future performance to differ materially from our assumptions and estimates. Some market and other data included herein, as well as the data of competitors as they relate to Cipherloc Corp., is also based on our good faith estimates. Unless the context requires otherwise, references to the “Company , ” “we , ” “us , ” “our,” “Cipherloc”, and “Cipherloc Corporation” refer specifically to Cipherloc Corporation and its consolidated subsidiaries. In addition, unless the context otherwise requires and for the purposes of this report only: ● “ Exchange Act ” refers to the Securities Exchange Act of 1934, as amended; ● “ SEC ” or the “ Commission ” refers to the United States Securities and Exchange Commission; and ● “ Securities Act ” refers to the Securities Act of 1933, as amended. 13 Table of Contents Introduction This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. This MD&A is organized as follows: ● Business Strategy and Plan of Operations . Discussion of our strategy moving forward. ● Results of Operations . An analysis of our financial results comparing the three months ended December 31, 2021 with the three months ended December 31, 2020. ● Liquidity and Capital Resources . A discussion of changes in our consolidated balance sheets, cash flows and a discussion of our financial condition. ● Critical Accounting Policies and Estimates . Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts. The following discussion should be read in conjunction with our financial statements and accompanying notes included elsewhere in this report. All references to years relate to the fiscal year ended September 30 of the particular year. Overview We are developing products and services around our core encryption technology, which is designed to enable secure and private data transmission in a post-quantum computing world. We plan to offer a new suite of products that can be used in virtually any commercial data security industry. We believe that our products will allow our customers to securely send sensitive data to others, with little setup time required. Beginning in calendar 2019, we retained an entirely new management team. That management team restructured our business to focus our resources on only products and services that we believe will be deliverable, will have viable economic potential, and may be publicly disseminated without adversely affecting our competitive position. The core of our product and service offerings will be built around our patents and proprietary encryption technology. We believe that we have developed a highly secure data protection technology, which has received a validation certificate from the National Institute of Standards and Technology (NIST). We have focused our product development efforts on the commercial application of our technology by advancing what we call a Software Development Kit, or “SDK.” We believe that our product development efforts have advanced our technology to be ready for commercial application, in the form of products we have named Sentinel, Armor, and Shield. We intend to make these products available to our future licensees through our SDK. In the past, we have primarily marketed our products through indirect sales efforts. We are currently developing new products and services designed for direct sales to customers, rather than sales through third parties. On February 14, 2022, we announced the launch of Cipherloc Enclave, our first internally developed product. Cipherloc Enclave is a micro-segmentation product designed as an easy-to-use platform designed for organizations that are seeking to control communication between devices and fully encrypt traffic between those devices. Enclave is designed to provide a simple and cost-effective solution, as compared to current complex cost-prohibitive solutions, which we believe require technical personnel to operate. Cipherloc Enclave is designed to make micro-segmentation available to everyone at a low cost, and with minimum technical administration. Cipherloc’s Enclave platform will be available through a free plan or a fee per user plan, designed to fit the needs of the two types of end users of the platform. The free tier will give individuals the ability to use the platform for hobby and educational purposes. The paid tier will focus on business users, allowing them to have a more private experience that addresses security and optimization gaps that many companies face in today’s ever-changing technology environment. We have six patents related to our core technology, which expire between 2034 and 2037. 14 Table of Contents Results of Operations Three Months Ended December 31, 2021 Versus Three Months Ended December 31, 2020 Comparison of Results Our revenue decreased to zero for the three months ended December 31, 2021, from $8,750 for the three months ended December 31, 2020. This decrease was due to our having no new invoicing activity taking place in the reporting period. Neither of our current licensees generated any licensing revenue during the period. Our general and administrative expenses were $469,016 and $661,692, respectively, for the three months ended December 31, 2021, and 2020. General and administrative expenses decreased in fiscal 2021, primarily as a result of $140,000 in accrued board fees in fiscal 2020 that did not occur in fiscal 2021, a decrease in legal expenses of $82,486 as a result of the settlement of various litigations matters in 2020, and a decrease in rent of $37,779, which was partially offset by an increase of $45,000 in amortization of deferred costs related to the private placement fees paid to the placement agent for a private placement of shares of our common stock in March and April 2021. Our sales and marketing expenses were $53,393 and $25,000, respectively, for the three months ended December 31, 2021, and 2020. Sales and marketing expenses increased in fiscal 2021 due to new costs incurred for brand and website marketing and business development consulting. Our research and development expenses were $129,639 and $121,793 for the three months ended December 31, 2021, and 2020, respectively. Our research and development expense increased in fiscal 2021 primarily due to personnel related costs. We had a net loss of $652,048, or $0.01 per share, for the three months ended December 31, 2021, compared to a net loss of $799,735, or $0.03 per share, for the three months ended December 31, 2020. The year-over-year decrease in net loss for the three months ended December 31, 2021 was primarily due to a decrease in operating expenses. Liquidity and Capital Resources We had an accumulated deficit of $72,182,939 as of December 31, 2021. We expect to incur substantial expenses and generate continued operating losses until we generate revenues sufficient to cover our expected ongoing obligations. On December 31, 2021, we had cash of $5,071,588, primarily from the proceeds of the private placement of shares of our common stock in March and April 2021 for $0.18 per share. We had working capital of $4,171,607 as of December 31, 2021, compared to working capital of $4,756,094 as of September 30, 2021. Cash Flows The following table summarizes, for the periods indicated, selected items in our condensed Statements of Cash Flows: Three Months Ended December, 2021 2020 Net cash provided by (used in): Operating activities $ (712,406 ) $ (629,963 ) Investing activities $ — $ — Financing activities $ — $ (50,000 ) 15 Table of Contents Operating Activities We used cash in operating activities in the amounts of $712,406 and $629,963 for the three months ended December 31, 2021, and 2020, respectively. Our uses of cash during the three months ended December 31, 2021, were mainly attributable to a net loss of $652,048, which was partially offset by $45,000 in amortization of deferred costs, $22,561 in stock compensation expense, and an increase in our net operating assets and liabilities of $127,919. The change in our net operating assets and liabilities was primarily due to an increase in accounts payable and accrued liabilities of $198,921, which was partially offset by a decrease in prepaid and other assets of $71,002. Our uses of cash during the quarter ended December 31, 2020, were attributable to a net loss of $799,735, which was partially offset by a non-cash stock compensation expense of $41,025 and a decrease in net operating assets and liabilities of $128,747. The decrease in our net operating assets and liabilities was primarily due to a decrease in prepaid and other assets of $136,392, which was partially offset by an increase in accounts payable and accrued liabilities of $7,645. Investing Activities Cash used in investing activities was zero and zero for the three months ended December 31, 2021, and 2020, respectively. The cash used in financing activities was in relation to the settlement of a lawsuit in which we paid $50,000 in exchange for the return of 1,000,000 shares of our Series A Preferred Stock and 127,500 shares of our common stock. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements, as defined under applicable SEC rules, during the periods presented, nor do we currently have any such arrangements. Critical Accounting Policies and Estimates Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions. See Note 4 of the unaudited financial statements included in “Part I—Item 1. Financial Statements”, above, for a discussion of our significant accounting policies. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).