What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-13 · 161 added, 142 removed, 29 unchanged (91% of the section changed)

15 unchanged sentences

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,

our acquisition of SideChannel, Inc., a Massachusetts corporation, on July 1, 2022, we expanded our capabilities to include providing

cybersecurity programs to mid-market companies, which are designed to help those companies protect their assets.

With the additional

of SideChannel, we now employ what we believe to be among the market’s most skilled and experienced talent to help our clients

to improve their defenses against cybercrime.

With the SideChannel acquisition, we now have over 20 C-suite level information security

officers, who possess combined experience of over 400 years in the industry.

To date, SideChannel has created over 50 multi-layered cybersecurity

programs for its clients.

mission is to make cybersecurity easy and accessible for mid-market companies, a market that we believe is currently underserved.

believe that our cybersecurity offerings will identify and develop cybersecurity, privacy and risk management solutions for our customers.

We anticipate that our target customers will continue to need cost effective security solutions.

We intend to provide more tech-enabled

services to address the needs of our customers, including third-party risk management, due diligence, privacy, threat intelligence, and

managed end-point security solutions.

believe that our customers, and prospective customers, in the mid-market will favor our approach, as it provides them with an efficient

way to work with a single vendor to manage and oversee their cybersecurity programs.

We also believe that our approach will reduce our

customers’ overall security costs and streamline their ability to increase their sales, reduce regulatory risks and monitor their

risk posture.

believe that we provide a full range of cybersecurity solutions through our in-house delivery capabilities, and through our network of

subcontractors.

We work with our clients to help them select the right cybersecurity tools, products, and solutions.

We believe that

our use of subcontractors allows us to quickly move directly into implementation of projects, which we believe reduces the risk to our

Our subcontractors also provide us with sales leads and referrals, and may resell our services to their own client base.

believe that this allows us to maximize our sales efforts, reduce expense of sales, and gain new customers.

to our acquisition of SideChannel, we offered our customers a license 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 our legacy licensing program, we are building our own applications that we intend to sell directly to enterprises and managed

security service providers.

On February 14, 2022, we announced the launch of Enclave, our first internally developed product.

is a product designed to be an easy-to-use platform for organizations that are seeking to control communication between devices;

to fully encrypt traffic between those devices.

Enclave is designed to provide a simple and cost-effective solution for multiple devices,

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

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.

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

Enclave is designed

to make micro-segmentation available to everyone at a low cost, and with minimum technical administration.

Enclave platform is 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 plan will give individual users the ability to use the platform for hobby and educational purposes.

user plan will focus on business users, allowing them to have a more private experience that addresses security and optimization gaps

that we believe many companies face in today’s ever-changing technology environment.

anticipate that we will need between $2.0 million and $2.7 million of cash to cover our operating expenses for the next twelve months.

We expect to cover those expenses with the net proceeds we received from a private placement of our securities in the first quarter of

our fiscal year 2021.

We further anticipate that the SideChannel acquisition may mitigate or reduce our use of cash for operating expenses.

We intend to manage our business such that our current cash reserves will be sufficient to allow us to reach positive cash flow from

our operations, but we cannot assure you that will occur.

of Operations

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

Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

revenue was $198 for the three months ended June 30, 2022, compared to zero revenue for the three months ended June 30, 2021.

in fiscal 2022 was related to our licensing agreement with Castle Shield.

general and administrative expense was $1,107,310 for the three months ended June 30, 2022, compared to $197,534 for the three months

ended June 30, 2021, an increase of $909,776, or 461%.

The increase was driven by several factors including:

(i) $479,075 in costs related

to the SideChannel acquisition;

(ii) an increase in headcount related expenses of $335,232;

and (iii) a $45,000 increase in the amortization

of deferred costs related to private placement fees.

The increase in general and administrative expense was partially offset by (i) a

reduction of $441,597 as a result of a recognized gain related to the write-off of remaining right-of-use (ROU) assets and operating

lease liability after the early termination of our final operating lease;

and (ii) decreases in other items, including a reduction of

$192,732 in legal expense, as well as a decrease of $168,765 in rent expense.

selling and marketing expenses were $82,548 for the three months ended June 30, 2022, compared to zero for the three months ended June

Our sales and marketing expenses in fiscal 2022 include (i) consultant expenses of $37,500, (ii) $34,875 in brand and website

marketing costs, and (iii) stock compensation expense of $10,173.

research and development expenses were $191,258 for the three months ended June 30, 2022, compared to $169,098 for the three months ended

June 30, 2021, an increase of $22,160 or 13%.

The increase was primarily due to a $58,020 increase in development expenses, as well as

a $26,672 increase in personnel related costs.

These increases were partially offset by a $62,532 decrease in consultant expenses.

other income (expense) was zero for the three months ended June 30, 2022, compared to other income of $191,052 for the three months ended

June 30, 2021.

The other income in fiscal 2021 was related to the Paycheck Protection Program, or PPP, partial loan forgiveness we received,

partially offset by a minor amount of interest expense.

Months Ended June 30, 2022, Compared to Nine Months Ended June 30, 2021

revenue was $449 for the nine months ended June 30, 2022, compared to $15,417 for the nine months ended June 30, 2021, a decrease of

$14,968, or 97%.

The reduction in our revenue in fiscal 2022 was due to low sales activity from our licensees during the nine months

ended June 30, 2022.

general and administrative expense was $2,183,340 for the nine months ended June 30, 2022, compared to $1,748,398 for the nine months

ended June 30, 2021, an increase of $434,942, or 25%.

The increase in our general and administrative expense was driven by several factors

(i) $479,075 in SideChannel acquisition related costs in fiscal 2022;

(ii) an increase in headcount related expenses of $232,384;

and (iii) a $135,000 increase in the amortization of deferred costs related to private placements fees.

These increases in general and

administrative expense were partially offset by decreases in other items, including (i) a reduction of $441,597 in general and administrative

expense in fiscal 2021 as a result of a gain we recognized related to the write-off of our remaining right-of-use (ROU) assets and an

operating lease liability after the early termination of our final operating lease;

(ii) a reduction of $356,602 in legal expense;

a decrease of $302,811 in rent expense and (iv) a decrease in professional fees of $165,485.

selling and marketing expense was $188,316 for the nine months ended June 30, 2022, compared to $56,250 for the nine months ended June

30, 2021, an increase of $132,066, or 235%.

The increase in our sales and marketing expense was the result of several factors including:

(i) an increase of $112,500 in consultant expenses;

and (ii) an increase of $64,625 in brand and website marketing costs.

These increased

selling and marketing expenses were partially offset by a $45,059 decrease in headcount related costs during fiscal 2021 that were not

incurred in the current fiscal year.

research and development expense were $461,816 for the nine months ended June 30, 2022, compared to $465,974 for the nine months ended

June 30, 2021, a decrease of $4,158 or 1%.

The slight reduction in our research and development expense was primarily the result of a

$134,786 decrease in consulting related costs, resulting from the spending reductions we initiated during the prior fiscal year.

cost reduction was partially offset by an increase in payroll related expense of $72,608 and an increase of $58,020 in product development

other income (expense) was zero for the nine months ended June 30, 2022, compared to other income of $191,052 for the nine months ended

June 30, 2021.

The other income in fiscal 2021 was related to the partial forgiveness of our PPP loan, partially offset by a minor amount

of interest expense.

and Capital Resources

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.

had an accumulated deficit of $74,363,914 as of June 30, 2022.

We expect to continue to incur expenses, and generate continued operating

losses, until we can generate revenues that are sufficient to cover our expected ongoing expenses.

We anticipate that our operating expenses

for the next twelve months will require between $2.0 million and $2.7 million of cash.

We expect to cover those expenses with some of

the net proceeds we received from a private placement of our equity securities in the first quarter of our fiscal year 2021.

anticipate the SideChannel acquisition will mitigate or reduce our use of cash for operating expenses.

We intend to manage our business

so that our current cash reserves will be sufficient to allow us to reach positive cash flow from our operations, but we cannot assure

you that will occur.

We do not currently have access to any credit facilities and we cannot guarantee that we will be able to access

any credit facilities if needed.

June 30, 2022, we had cash and cash equivalents of $3,588,912, primarily representing proceeds from the private placement of shares of

our common stock in March and April of 2021.

of June 30, 2022, we had working capital of $3,010,376, 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

Nine Months Ended

Net cash provided by (used in):

1 unchanged sentence

$ (2,195,082 )

$ (2,566,292 )

Investing activities

Financing activities

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.

the nine months ended June 30, 2022, we recorded a net loss of $2,833,023.

Our net cash used in operating activities during this period

was $2,195,082.

During the nine months ended June 30, 2022, we had non-cash charges of $135,000 for amortization of deferred costs related

to private placement fees.

In addition, we recorded $84,305 of stock-based compensation expense during the period.

Our prepaid expenses

declined by $251,645, reflecting the amortization of those prepaid expenses during fiscal 2022.

We also settled $854,000 of our accounts

payable and accrued liabilities through the issuance of 4,744,448 shares of our common stock to our creditors.

We issued another 200,000

shares of our common stock to cover $14,000 in legal settlement expenses.

Our accrued compensation expense increased by $175,000 during

fiscal 2022 as a result of bonuses paid to our employees as of June 30, 2022.

We had no investing activities during the nine months ended June 30, 2022.

We had no financing activities during the nine months ended June 30, 2022.

Sheet Arrangements

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.

the nine months ended June 30, 2022, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current

or future effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources

that is material to our interests.

Accounting Policies and Estimates

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.

preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts

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

of revenues and expenses during the reporting period.

Our management periodically evaluates the estimates and judgments made.

Management bases its

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

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

Note 4 of the unaudited financial statements included in “Part I—Item 1.

Financial Statements,” above, for a discussion

of our significant accounting policies.

Our 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.

As of June 30, 2022, there have been

no significant changes to the accounting estimates and assumptions that we have deemed critical in the past.

Our critical accounting

estimates and assumptions are more fully described in our Annual Report on Form 10-K for our fiscal year 2021.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as

it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

to Item 305(e) of Regulation S-K (§ 229.305(e)), we are not required to provide the information required by this Item, as we are

a “smaller reporting company,” as defined by Rule 229.10(f)(1).

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis