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Item 2. Management’s Discussion and Analysis

2022-05-13 compared with 2022-02-14 · 127 added, 123 removed, 44 unchanged (85% of the section changed)

9 unchanged sentences

Forward-looking statements

are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ

are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ

materially from the forward-looking statements.

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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.

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.

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.

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

This Report also includes trademarks, tradenames and service

marks that are the property of others.

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

appear without the ®, ™ and SM symbols.

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

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

any, nor that respective owners to other intellectual property rights will not assert, to the fullest extent under applicable law, their

rights thereto.

We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with,

or endorsement or sponsorship of us by, any other companies.

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

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

Industry publications and third-party research,

surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do

not guarantee the accuracy or completeness of such information.

We are responsible for all of the disclosures contained in this Report,

and we believe these industry publications and third-party research, surveys and studies are reliable.

While we are not aware of any

misstatements regarding any third-party information presented in this Report, their estimates, in particular, as they relate to projections,

involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those

discussed under, and incorporated by reference in, the section entitled “ 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.

the context requires otherwise, references to the “Company , ” “we , ” “us , ” “our,”

“Cipherloc”, and “Cipherloc Corporation” refer specifically to Cipherloc Corporation and its consolidated subsidiaries.

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

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

or the “ Commission ” refers to the United States Securities and Exchange Commission;

Act ” refers to the Securities Act of 1933, as amended.

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

This MD&A is organized as follows:

Strategy and Plan of Operations .

Discussion of our strategy moving forward.

of Operations .

An analysis of our financial results comparing the three months ended December 31, 2021 with the three months

ended December 31, 2020.

and Capital Resources .

A discussion of changes in our consolidated balance sheets, cash flows and a discussion of our financial

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.

following discussion should be read in conjunction with our financial statements and accompanying notes included elsewhere in this report.

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

are developing products and services around our 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

We believe that our products will allow our customers to securely send sensitive data to others, with little setup time required.

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).

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.

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.

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.

Annual Report on Form 10-K for the fiscal year ended September 30, 2021, and elsewhere in this Current Report on Form 10-Q.

no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or

a licensing program, we have offered our customers the right to use our Polymorphic Encryption Core, (“PEC”), which is a

secure, advanced polymorphic data-in-motion product.

Recently, one licensee, Castle Shield, began to report early-stage product sales

from its software tools that contain our PEC.

supplement the legacy licensing program, we are building our own applications that we intend to sell directly to enterprises and managed

security service providers (“MSSP”).

On February 14, 2022, we announced the launch of Cipherloc Enclave, our first internally

developed product, through a press release and the filing of a Current Report on Form 8-K.

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.

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

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companies face in today’s ever-changing technology environment.

have six patents related to our core technology, which expire between 2034 and 2037.

anticipate that our operating expenses for the next twelve months will require between $2.0 and $2.7 million of cash, which will come

from the net proceeds we received from a private placement of our securities held between March 31, 2021, and April 16, 2021.

to manage our business such that our current cash reserves will allow us to reach positive cash flow from our operations, but we cannot

assure you that will occur.

Our proposed approach to managing our cash will initially emphasize demonstrating our products’ capabilities

with early adopters of Cipherloc Enclave.

We will follow those efforts with using our remaining cash to scale all of our functional areas,

including product development, marketing, sales, customer support, and administration.

intend to focus our product development efforts on building new software and services to work with our existing core technology, while

continuing to support our existing licensees.

These efforts will require more personnel, as well as more infrastructure.

We expect the

increase in product development activities will require approximately $600,000 of our cash over the next 12 months.

We plan to build

the infrastructure we need to perform these new functions on modern technology, with scale and reliability.

We plan to utilize cloud

services to provide our customers with an interface that modern software provides, but also an ease of use that we believe encryption

technologies desperately need.

We believe that, if we are able to build our infrastructure, as described above, we will have a competitive

advantage over most other participants in our market.

intend to have our sales and marketing efforts emphasize qualified lead generation, using very focused industry messaging and engagement.

We plan to participate in relevant cybersecurity and quantum computing industry events.

We have also formed a board of advisors designed

to help us identify the correct product focus areas and market segmentation.

This board of advisors includes professionals from cybersecurity,

technology business development and software marketing.

We estimate that the expenses we will incur for sales and marketing during the

next fiscal year will range between $600,000 and $800,000.

expect that we will have to increase administrative costs if we are successful in generating revenue and need to hire additional employees.

Our administrative resources will have to be increased according to our demand to support our employees, increase accounting capacities,

and expand our reporting and compliance capabilities.

We expect that we will need additional personnel in our accounting and human resources

functions to support these expected staff additions.

We also plan to add software tools to help us manage our internal processes.

expect that we will need to add customer support teams if and when potential customers adopt each of our product offerings.

the costs of customer support for our fiscal year 2022 will likely range from $100,000 to $300,000.

We believe that these funds will

be used primarily for salaries and technology to support these efforts.

These expenses will be reported as part of our cost of goods

of Operations

Months Ended December 31, 2021 Versus Three Months Ended December 31, 2020

revenue decreased to zero for the three months ended December 31, 2021, from $8,750 for the three months ended December 31, 2020.

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.

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.

sales and marketing expenses were $53,393 and $25,000, respectively, for the three months ended December 31, 2021, and 2020.

marketing expenses increased in fiscal 2021 due to new costs incurred for brand and website marketing and business development consulting.

research and development expenses were $129,639 and $121,793 for the three months ended December 31, 2021, and 2020, respectively.

research and development expense increased in fiscal 2021 primarily due to personnel related costs.

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.

and Six Months Ended March 31, 2022, Versus Three and Six Months Ended March 31, 2021

revenue decreased to $251 for the three months ended March 31, 2022, from $6,667 for the three months ended March 31, 2021.

This decrease

was due to lower licensee revenue for the period compared to the prior fiscal year.

Our revenue decreased from $15,417 for the six months

ended March 31, 2021 to $251 for the six months ended March 31, 2022, primarily due to low licensing activity taking place during the

six months ended March 31, 2022.

general and administrative expenses were $607,014 and $889,172, respectively, for the three months ended March 31, 2022, and 2021.

and administrative expenses decreased in fiscal 2022, primarily as a result of (i) $108,711 in headcount related costs, including payroll

and travel costs (ii) a decrease in professional fees of $106,941, (iii) a decrease in rent expenses of $96,268, and, (iv) a decrease

in legal of $81,384 as a result of the settlement of various litigations matters during 2021.

The decrease in general and administrative

expenses was partially offset by an increase of $45,000 in amortization of deferred costs related to the private placement fees we paid

to the placement agent of the private placement of shares of our common stock in March and April of 2021 and increase in other expenses

of $46,146 and an increase in board fees of $20,000.

general and administrative expenses were $1,076,030 and $1,550,864 for the six months ended March 31, 2022, and 2021, respectively.

decrease in general and administrative expenses in 2022 was primarily due to (i) a decrease in legal expenses of $163,870, (ii) a decrease

in rent of $134,047, (iii) a decrease in professional fees of $127,067, (iv) a decrease in board fees of $120,000, and, (v) a decrease

in headcount related costs, including payroll and travel costs, of $94,814, due to bonus payouts in the prior fiscal year.

in general and administrative expenses were partially offset by an increase of $90,000 in amortization of deferred costs related to

the private placement fees we paid to the placement agent of the private placement of shares of our common stock in March and April of

2021 and increases in other expenses of $75,144.

sales and marketing expenses were $52,375 and $31,250 for the three months ended March 31, 2022, and 2021, respectively.

Our sales and

marketing expenses increased in fiscal 2022 by $37,500 related to the sales consultant expense and $14,875 brand and website marketing

costs, partially offset by a $31,250 decrease in headcount expense related to sales employees in 2021.

selling and marketing expenses were $105,768 and $56,250 for the six months ended March 31, 2022, and 2021, respectively.

Our sales and

marketing expenses increased in fiscal 2022 primarily as a result of (i) an increase in consultant expense of $75,000, and (ii) an increase

in marketing related costs of $29,750, partially offset by a $55,232 decrease in headcount related costs incurred during 2021.

research and development expenses were $140,919 and $175,083 for the three months ended March 31, 2022, and 2021, respectively.

and development expense increased in fiscal 2021 primarily due to personnel related costs.

research and development expenses were $270,558 and $296,876 for the six months ended March 31, 2022 and 2021, respectively.

and development expenses decreased for the six-month period ended March 31, 2022 primarily as a result of a decrease in consulting related

costs of $72,254, partially offset by an increase in payroll related expense of $45,937, both of which were the result of the spending

reductions we initiated during the prior fiscal year.

had a net loss of $800,057, or $0.01 per share, for the three months ended March 31, 2022, compared to a net loss of $1,088,838, or $0.04

per share, for the three months ended March 31, 2021.

The year-over-year decrease in the net loss for the three months ended March 31,

2022, was primarily due to a decrease in operating expenses from the prior fiscal year.

For the six months ended March 31, 2022, we had

a net loss of $1,452,105, or $0.02 per share, compared to a net loss of $1,888,573 or $0.07 per share, for the six months ended March

and Capital Resources

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.

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.

had an accumulated deficit of $72,982,996 as of March 31, 2022.

We expect to incur expenses and generate continued operating losses until

we can generate revenues sufficient to cover our expected ongoing expenses.

On March 31, 2022, we had cash of $4,390,059, primarily representing

proceeds of the private placement of shares of our common stock in March and April 2021.

of March 31, 2022, we had working capital of $4,279,557, compared to working capital of $4,756,094 as of September 30, 2021.

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

Six Months Ended

Net cash provided by (used in):

Operating activities

$ (1,393,935 )

Investing activities

Financing activities

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.

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.

used in investing activities was zero and zero for the three months ended December 31, 2021, and 2020, respectively.

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.

used cash in operating activities in the amounts of $1,393,935 and $898,950 for the six months ended March 31, 2022, and March 31, 2021,

respectively.

Our uses of cash during the six months ended March 31, 2022, were mainly attributable to a net loss of $1,452,105, which

was partially offset by $90,000 in amortization of deferred costs, $51,568 in stock compensation expense, and an increase in our net

operating assets and liabilities of $83,398.

The change in our net operating assets and liabilities was primarily due to an increase

in accounts payable and accrued liabilities of $220,022, which was partially offset by a decrease in prepaid and other assets of $136,624.

used in operating activities was $898,950 for the six months ended March 31, 2021.

The uses of cash during the quarter ended March 31,

2021, were attributable to a net loss of $1,888,573, which was offset by a non-cash stock compensation expense of $79,655 and a decrease

in net operating assets and liabilities of $909,968.

The change in our net operating assets and liabilities was primarily due to a decrease

in prepaid and other assets of $342,544 and an increase in accounts payable and accrued liabilities of $582,841, partially offset by

a decrease in deferred revenue of $15,417.

had no cash used in investing activities for either of the six months ended March 31, 2022, or March 31, 2021.

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

The Company sold certain securities pursuant

to the Private Offering, described in Note 2 – New Equity Issuance, to the unaudited financial statements included above, and raised

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

as Trustee of Carmel Trust II, which was settled for $50,000 in exchange for the return of 1,000,000 shares of Series A Preferred Stock

and 127,500 shares of common stock to the Company.

Sheet Arrangements

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis