UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q10-Q/A
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
For the transition period from N/A to N/A |
Commission File No. 000-28745
Cipherloc Corporation
(Name of small business issuer as specified in its charter)
(Formerly National Scientific Corporation)
Texas | 86-0837077 |
( State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
1291 Galleria Drive, Suite 200
Henderson, NV 89014
(Address of principal executive offices)
(702) 818-9011
Registrant’stelephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | [ ] | Accelerated filer | [ ] |
[ ] | Smaller reporting company | [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–212b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at | |
Common stock, $0.01 par value | 4,494,241 |
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A amends the Quarterly Report on Form 10-Q of Cipherloc Corporation (the “Company”) for the quarter ended June 30, 2015 as originally filed with the Securities and Exchange Commission on August 18, 2015 (the “Original Filing”).
This Form 10-Q/A amends the Original Filing to reflect a retrospective restatement of financial information. The Company realized that the criteria for revenue recognition had not been met for revenue previously recognized. The Company is amending the Consolidated Balance Sheet, Statements of Operations and Statements of Cash Flows. We also made adjustments to the Notes to Consolidated Financial Statements, specifically, Notes 2 and 4 to support the changes to the Consolidated Balance Sheet.
This amendment also contains changes to Part II – Other information. These changes are as follows:
Item 2. Management’s Discussion and analysis of financial condition and results of operations has been amended by updating changes in Results of operations and Liquidity and Capital Resources.
CIPHERLOC CORPORATION
INDEX TO FORM 10-Q10-Q/A FILING
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31,JUNE 30, 2015 AND 2014
PAGE | ||||
PART I - FINANCIAL INFORMATION | ||||
Item 1. | Consolidated Financial Statements (Unaudited) | |||
Consolidated Balance Sheets (Restated) | ||||
Consolidated Statements of Operations (Restated) | ||||
Consolidated Statements of Cash Flows (Restated) | ||||
Notes to Consolidated Financial Statements (Restated) | ||||
Item 2. | Management Discussion & Analysis of Financial Condition and Results of Operations | |||
Item 4. | Controls and Procedures | |||
| ||||
PART II - OTHER INFORMATION | ||||
Item 6. | Exhibits | |||
CERTIFICATIONS |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. |
32.2 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act. |
32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act. |
PART I
FINANCIAL INFORMATION
Item 1.Financial Statements
The accompanying interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders' equity in conformity with generally accepted accounting principles. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2015.2014. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the threenine months ended December 31,June 30, 2015 are not necessarily indicative of the results that can be expected for the year ending September 30, 2016.
CIPHERLOC CORPORATION | ||||||||
BALANCE SHEETS | ||||||||
(UNAUDITED) | ||||||||
Dec 31, 15 | Sep 30, 15 | |||||||
ASSETS | ||||||||
Cash | $ | 1,131,206 | $ | 1,993,406 | ||||
Assets attributable to discontinued operations | — | 3,232 | ||||||
Short-term notes receivable | 50,000 | — | ||||||
Total Current Assets | 1,181,206 | 1,996,638 | ||||||
Long-term notes receivable | 200,000 | — | ||||||
Deposits with others | 10,449 | — | ||||||
TOTAL ASSETS | $ | 1,391,655 | $ | 1,996,638 | ||||
LIABILITIES & EQUITY | ||||||||
Liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 405,779 | $ | 1,100,945 | ||||
Due to related party | 1,205 | — | ||||||
Liabilities attributable to discontinued operations | 18 | 18 | ||||||
Deferred Revenue | 691,406 | 1,125,000 | ||||||
Total Liabilities | 1,098,408 | 2,225,963 | ||||||
Equity | ||||||||
Series A Convertible Preferred Stock, $0.01 par value, 10,000,000 shares authorized; 10,000,000 outstanding As of December 31, 2015 and September 30, 2015 | 100,000 | 100,000 | ||||||
Common Stock, $0.01 par value, 650,000,000 shares authorized; 4,494,421 issued and outstanding as of December 31, 2015 and 4,356,741 issued and outstanding as of September 30, 2015 | 44,942 | 43,567 | ||||||
Other Equity | (50,000 | ) | (50,000 | ) | ||||
Additional Paid-In Capital | 43,107,060 | 42,815,934 | ||||||
Accumulated deficit | (42,908,755 | ) | (43,138,826 | ) | ||||
Total Equity | 293,247 | (229,325 | ) | |||||
TOTAL LIABILITIES & EQUITY | $ | 1,391,655 | $ | 1,996,638 |
The accompanying notes are an integral part of these unaudited financial statements. 2015.
CIPHERLOC CORPORATION | ||||||||
STATEMENTS OF OPERATIONS | ||||||||
(UNAUDITED) | ||||||||
Three Months Ended December 31, | ||||||||
2015 | 2014 | |||||||
Revenue | $ | 433,594 | $ | — | ||||
Cost of Revenues | — | — | ||||||
Gross Profit | 433,594 | — | ||||||
Operating Expenses: | ||||||||
General and administrative | 326,267 | 176,325 | ||||||
Research and development | 127,150 | 17,431 | ||||||
Total Operating Expenses | 453,417 | 193,756 | ||||||
Operating Loss | (19,823 | ) | (193,756 | ) | ||||
Other Expenses | ||||||||
Interest expense | (106 | ) | (1,024 | ) | ||||
(Loss) from Continuing Operations | (19,929 | ) | (194,780 | ) | ||||
Gain (Loss) from Discontinued Operations | 250,000 | (68,353 | ) | |||||
Net Income (Loss) | $ | 230,071 | $ | (263,133 | ) | |||
Net Income (Loss) per Common Share - Basic and diluted: | ||||||||
Continuing operations | $ | (0.00 | ) | $ | (0.09 | ) | ||
Discontinued operations | $ | 0.06 | $ | (0.00 | ) | |||
Total | $ | 0.05 | $ | (0.09 | ) | |||
Weighted Average Number of Common Shares Outstanding Basic and diluted | 4,476,659 | 2,833,265 |
CIPHERLOC CORPORATION
(Formerly Cloud Medical Doctor Software Corporation)
(Formerly National Scientific Corporation)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) as Amended
June 30, 2015 | September 30, | |||||||
2015 | 2014 | |||||||
(Restated) | (Restated) | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash | $ | 90,567 | $ | 545,650 | ||||
Accounts receivable | — | 1,006 | ||||||
Assets attributable to discontinued operations | — | 6,887 | ||||||
Total current assets | 90,567 | 553,543 | ||||||
Proprietary technology, net | 53,300 | 604,301 | ||||||
Intangible assets, net of accumulated amortization | 194,500 | — | ||||||
TOTAL ASSETS | $ | 338,367 | $ | 1,157,844 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable and accrued liabilities | $ | 698,024 | $ | 649,452 | ||||
Liabilities attributable to discontinued operations | — | 18 | ||||||
Line of credit | 42,097 | 53,612 | ||||||
Due to related party | 74,211 | — | ||||||
Stock payable | — | 7,000 | ||||||
Deferred Revenue | 1,125,000 | 1,125,000 | ||||||
Total current liabilities | 1,939,332 | 1,835,082 | ||||||
TOTAL LIABILITIES | 1,939,332 | 1,835,082 | ||||||
COMMITMENTS AND CONTINGENCIES | — | — | ||||||
STOCKHOLDERS' EQUITY (DEFICIT): | ||||||||
Preferred stock, $0.01 par value, 10,000,000 shares authorized; 10,000,000 issued and outstanding as of June 30, 2015 and September 30, 2014 | 100,000 | 40,000 | ||||||
Common stock, $0.01 par value, 650,000,000 shares authorized; 2,951,587 and 2,834,737 issued and outstanding as of June 30, 2015 and September 30, 2014, respectively | 29,515 | 28,347 | ||||||
Additional paid-in capital | 38,806,521 | 28,635,141 | ||||||
Accumulated deficit | (40,537,001 | ) | (29,380,726 | ) | ||||
Total stockholders' deficit | (1,600,965 | ) | (677,238 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $ | 338,367 | $ | 1,157,844 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CIPHERLOC CORPORATION | ||||||||
STATEMENT OF CASH FLOWS | ||||||||
(UNAUDITED) | ||||||||
Three Months Ended December 31, | ||||||||
2015 | 2014 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | 230,071 | $ | (263,133 | ) | |||
(Gain) Loss from discontinued operations | (250,000 | ) | 68,353 | |||||
Net loss from continuing operations | (19,929 | ) | (194,780 | ) | ||||
Adjustments to reconcile net loss from continuing operations: | ||||||||
to net cash (used in) provided by operating activities: | ||||||||
Stock based compensation | 27,500 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Deferred revenue | (433,594 | ) | — | |||||
Accounts payable and accrued liabilities | (695,166 | ) | (138,879 | ) | ||||
Net cash (used in) operating activities | (1,121,189 | ) | (333,659 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Deposit with others | (10,449 | ) | — | |||||
Net cash from investing activities | (10,449 | ) | — | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Advances from officer | 1,205 | — | ||||||
Subscribed stock | — | (4,739 | ) | |||||
Common stock issued for cash | 265,001 | — | ||||||
Net cash provided by financing activities | 266,206 | (4,739 | ) | |||||
CASH FLOWS FROM DISCONTINUED OPERATIONS: | ||||||||
Operating | 3,232 | 1,249 | ||||||
Net decrease in cash from discontinued operations | 3,232 | 1,249 | ||||||
(DECREASE) INCREASE IN CASH | (862,200 | ) | (337,149 | ) | ||||
CASH, BEGINNING OF YEAR | 1,993,406 | 545,650 | ||||||
CASH, END OF YEAR | $ | 1,131,206 | $ | 208,501 | ||||
CASH PAID FOR: | ||||||||
Interest | $ | 107 | $ | 1,111 | ||||
Taxes | $ | — | $ | — | ||||
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING AND FINANCING ACTIVITIES: | ||||||||
Common stock rescinded for purchase of software | $ | — | $ | (6,000 | ) | |||
Cancellation of common stock | $ | — | $ | 150 |
CIPHERLOC CORPORATION
(Formerly Cloud Medical Doctor Software Corporation)
(Formerly National Scientific Corporation)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED) As Amended
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
(Restated) | (Restated) | |||||||||||||||
REVENUE | $ | — | $ | 1,725 | $ | 431 | $ | 224,400 | ||||||||
COST OF REVENUES | 63,620 | 61,155 | 191,590 | 183,465 | ||||||||||||
GROSS PROFIT | (63,620 | ) | (59,430 | ) | (191,159 | ) | 40,935 | |||||||||
OPERATING EXPENSES: | ||||||||||||||||
General and administrative | 251,770 | 1,079,306 | 10,535,766 | 2,447,524 | ||||||||||||
Impairment | 119,266 | — | 357,797 | — | ||||||||||||
Research and development | 27,195 | — | 68,845 | 20,000 | ||||||||||||
Total operating expenses | 398,231 | 1,079,306 | 10,962,408 | 2,467,524 | ||||||||||||
OPERATING LOSS | (461,851 | ) | (1,138,736 | ) | (11,153,567 | ) | (2,426,589 | ) | ||||||||
OTHER (INCOME) AND EXPENSES | ||||||||||||||||
Interest expense | 2 | (1,656 | ) | (1,839 | ) | (2,171 | ) | |||||||||
Total other (income) expenses | 2 | (1,656 | ) | (1,839 | ) | (2,171 | ) | |||||||||
LOSS FROM CONTINUING OPERATIONS | (461,849 | ) | (1,140,392 | ) | (11,155,406 | ) | (2,428,760 | ) | ||||||||
(LOSS) INCOME FROM DISCONTINUED OPERATIONS | — | (5,376 | ) | (869 | ) | (12,893 | ) | |||||||||
NET LOSS | $ | (461,849 | ) | $ | (1,145,768 | ) | $ | (11,156,275 | ) | $ | (2,441,653 | ) | ||||
NET LOSS PER COMMON SHARE - Basic and diluted: | ||||||||||||||||
Continuing operations | $ | (0.16 | ) | $ | (0.43 | ) | $ | (3.91 | ) | $ | (1.03 | ) | ||||
Discontinued operations | $ | 0.00 | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | |||||
Total | $ | (0.16 | ) | $ | (0.43 | ) | $ | (3.91 | ) | $ | (1.03 | ) | ||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic and diluted | 2,885,104 | 2,689,457 | 2,852,486 | 2,360,865 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CIPHERLOC CORPORATION
(Formerly Cloud Medical Doctor Software Corporation)
(Formerly National Scientific Corporation)
CONSOLIDATED STATEMENT OF CASHFLOWS
(UNAUDITED) As Amended
Nine Months Ended | ||||||||
June 30, | ||||||||
2015 | 2014 | |||||||
(Restated) | ||||||||
Net loss | $ | (11,156,275 | ) | $ | (2,441,653 | ) | ||
Loss from discontinued operations | (869 | ) | (12,893 | ) | ||||
Net loss from continuing operations | (11,155,406 | ) | (2,428,760 | ) | ||||
Adjustments to reconcile net loss from continuing operations to net cash (used in) provided by operating activities: | ||||||||
Impairment of software | 357,797 | — | ||||||
Depreciation and amortization | 193,204 | 183,465 | ||||||
Stock-based compensation | 9,930,800 | 1,623,369 | ||||||
Gain on cancellation of stock issued for services | (4,752 | ) | — | |||||
Common stock issued for software sales | — | 5,700 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 7,006 | 1,437 | ||||||
Accounts payable and accrued liabilities | 48,572 | 241,887 | ||||||
Deferred revenue | — | 1,125,000 | ||||||
Net cash (used in) operating activities | (622,779 | ) | 752,098 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Advances from officer | 74,211 | 8,299 | ||||||
Repayment of advances from officer | — | (8,299 | ) | |||||
Proceeds from line of credit | — | 103,529 | ||||||
Subscribed stock | (7,000 | ) | — | |||||
Repayment of line of credit | (11,515 | ) | (50,713 | ) | ||||
Common stock issued for cash | 112,000 | 15,000 | ||||||
Net cash provided by financing activities | 167,696 | 67,816 | ||||||
(DECREASE) INCREASE IN CASH | (455,083 | ) | 819,914 | |||||
CASH, BEGINNING OF YEAR | 545,650 | 8,587 | ||||||
CASH, END OF YEAR | $ | 90,567 | $ | 828,501 | ||||
CASH PAID FOR: | ||||||||
Interest paid | $ | 1,839 | $ | — | ||||
Income taxes paid | $ | — | $ | — | ||||
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING AND FINANCING ACTIVITIES: | ||||||||
Write-off of related party debt to additional paid-in capital | $ | — | $ | 59,704 | ||||
Common stock issued for purchase of software | $ | 194,500 | $ | 6,000 | ||||
Cancellation of stock rescinded for purchase of software | $ | 6,000 | $ | — | ||||
Cancellation of common stock | $ | 150 | $ | — |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CIPHERLOC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31,JUNE 30, 2015 AND 2014
(Unaudited)
NOTE 1- DESCRIPTION OF BUSINESS
Cipherloc Corporation (the “Company”) was incorporated in Texas on June 22, 1953 as American Mortgage Company. On May 16, 1996, the Company changed its name to National Scientific Corporation. On March 15, 2015, the Company changed its name to Cipherloc Corporation. On March 15, 2015, the Company changed its name to Cipherloc Corporation. The name change became effective through the Amended Certificate as of March 23, 2015.
The Company has notified the Financial Industry Regulatory Authority (FINRA) of its name change and has received FINRA’s approval for a new trading symbol CLOK reflecting its new name. The name change and the 1-100 reverse split were announced March 20, 2015 in the Daily List and became effective on March 23, 2015. The financial statements as to shares and earnings per share are restated as if the reverse split occurred on the first day of the first period being reported.
In the year ended September 30, 2011, the Company introduced the Cloud-MD Office, a “Cloud Based”, 5010 ready and ICD-10 compliant, fully integrated and interoperable suite of medical software and services, designed by experienced healthcare analysts and programmers for healthcare providers, that produces “Actionable Information” to help Independent Physician Practices, New Care Delivery Models (ACO), Healthcare Systems and Billing Services optimize a wide range of business processes resulting in Increased Profits, Higher Quality, Greater Efficiency, Noticeable Cost Reductions and Better Patient Care. Current software product offerings include Practice Management, Electronic Medical Records, Revenue Management, Patient Financial Solutions, Medical and Pharmaceutical Supply Management, Claims Management and PHI Exchange.
During the year ended September 30, 2012, we launched Cloud-MD Billing Services which provides management of medical claims from posting physician charges and payments into our medical billing software. The software uses a continuous insurance claim follow-up system to track and research all rejected or denied medical claims; a Comprehensive Reporting module that includes monthly financial statements sent to our clients so they can see how their practice is performing and a variety of detailed reports giving our clients the necessary information and tools used to assist in the increased production which leads to more profit; and patient account inquiries and support to assist patients with their billing and insurance questions.
On November 21, 2012, the Company purchased from CipherSmith, LLC a complete source code, intellectual property rights, all computer software or algorithm licensed or sold under CipherSmith, and appropriate copy rights, patents, mask works, trademarks, service marks, internet domain names or world wide web URS. Since 2012, the Company has tested the software application and created a commercial product for distribution of its encryption technology. The Company is presently developing more applications for consumer usage in the future.
On September 1, 2014, the company purchased Evolve Software for $25,000, which is a front office interface that complements our back office medical billing software. The Company has bridged the software to provide a more user friendly medical billing package for our customers.
NOTE 2 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The restatement reflects adjustments to correct errors identified by management related to the Company’s revenue recognition of a transaction that occurred during the year ended September 30, 2014. The effect of the restatement was material on the Company’s Balance Sheets, Income Statement and Statement of Cash Flows. The nature and impact of these adjustments are described below.
Revenue Recognition
During the quarter ended June 30, 2015, the Company has retrospectively restated software revenue related to the sale of a license for its Cipherloc software to a third-party. Management subsequently determined that a lack of delivery of the software to the customer did not allow for revenue recognition during the year ended September 30, 2014. The Company has corrected the classification of this amount ($1,125,000) as a reduction to software revenue and an increase to deferred revenue.
For the quarter ended June 30, 2015
The results of the restatements are summarized as follows:
Consolidated Balance Sheets as of June 30, 2015:
As reported | Restatement Adjustment | As restated | ||||||||||
Deferred revenue | $ | — | $ | 1,125,000 | $ | 1,125,000 | ||||||
Current liabilities | 814,332 | 1,125,000 | 1,939,332 | |||||||||
Accumulated deficit | (39,412,001 | ) | (1,125,000 | ) | (40,537,001 | ) | ||||||
Stockholders’ deficit | $ | (475,965 | ) | $ | (1,125,000 | ) | $ | (1,600,965 | ) |
Consolidated Balance Sheets as of September 30, 2014:
As reported | Restatement Adjustment | As restated | ||||||||||
Deferred revenue | $ | — | $ | 1,125,000 | $ | 1,125,000 | ||||||
Current liabilities | 710,082 | 1,125,000 | $ | 1,835,082 | ||||||||
Accumulated deficit | (28,255,726 | ) | (1,125,000 | ) | (29,380,726 | ) | ||||||
Stockholders’ equity (deficit) | $ | 447,762 | $ | (1,125,000 | ) | $ | (677,238 | ) |
Consolidated Income Statement for the three months ended June 30, 2014:
As reported | Restatement Adjustment | As restated | ||||||||||
Revenue | $ | 1,126,725 | $ | (1,125,000 | ) | $ | 1,725 | |||||
Loss from continuing operations | (15,392 | ) | (1,125,000 | ) | $ | (1,140,392 | ) | |||||
Net loss | (20,768 | ) | (1,125,000 | ) | (1,145,768 | ) |
Consolidated Income Statement for the nine months ended June 30, 2014:
As reported | Restatement Adjustment | As restated | ||||||||||
Revenue | $ | 1,349,400 | $ | (1,125,000 | ) | $ | 224,400 | |||||
Loss from continuing operations | (1,303,760 | ) | (1,125,000 | ) | $ | (2,428,760 | ) | |||||
Net loss | (1,316,653 | ) | (1,125,000 | ) | (2,411,653 | ) |
Consolidated Statement of Cash Flow for the nine months ended June 30, 2014:
As reported | Restatement Adjustment | As restated | ||||||||||
Net loss | $ | (1,316,653 | ) | $ | (1,125,000 | ) | $ | (2,411,653 | ) | |||
Deferred Revenue | — | 1,125,000 | 1,125,000 |
NOTE 3 - BASIS OF PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The accompanying interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
Operating results for the threenine months ended December 31,June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending September 30, 2016.2015. Notes to the unaudited interim consolidated financial statements that would substantially duplicate the disclosures contained in the audited consolidated financial statements forthe year ended September 30,2015 2014 have been omitted; this report should be read in conjunction with the audited consolidated financial statements and the footnotes thereto for the fiscal year ended September 30, 20152014 included within the Company’s Form 10-K as filed with the Securities and Exchange Commission.
Segment reporting change
With the placement into service of the Company’s encryption technology, the Company began a segment reporting structure to match the new operating structure and how the Company’s management views the business and allocates resources.
Reclassifications of prior period financial information have been made to conform to the current period presentation. This change does not impact previously reported condensed consolidated financial statements of the Company. See Note 10 for additional information on our segment reporting change.
NOTE 34 - GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has incurred losses from operations, has an accumulated deficit at December 31,June 30, 2015 of $42,908,755$40,537,001 and needs additional cash to maintain its operations.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s continued existence is dependent upon management’s ability to develop profitable operations, continued contributions from the Company’s executive officers to finance its operations and the ability to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resources for the further development and marketing of the Company’s products and business.
NOTE 4 –5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are as follows:
Reclassifications
Certain reclassifications have been made to conform with the current period presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At December 31, 2015 and 2014, cash and cash equivalents include 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. At December 31, 2015, $871,111 of the Company’s cash balance was uninsured. The Company has not experienced any losses in such accounts.
Long-Lived Assets
Long-lived assets are evaluated for impairment whenever events or changes in 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. The Company impaired $119,266 and $357,797 for the three and nine month periods ending June 30, 2015
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts payable and accrued expenses, and debt. 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:
The following table summarizes fair value measurements by level at June 30, 2015 and September 30, 2014 for assets measured at fair value on a recurring basis:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
At June 30, 2015 | ||||||||||||||||
Proprietary technology, net | $ | — | $ | — | $ | 53,300 | $ | 53,300 | ||||||||
Intangible assets, net of accumulated amortization | $ | — | $ | $ | 194, 500 | $ | 194,500 | |||||||||
Total | $ | — | $ | — | $ | 247,800 | $ | 247,800 | ||||||||
At September 30, 2014 | ||||||||||||||||
Proprietary technology | $ | — | $ | — | $ | 604,301 | $ | 604,301 | ||||||||
Total | $ | — | $ | — | $ | 604,301 | $ | 604,301 |
Concentration of Credit Risk
All of the Company’s cash and cash equivalents are maintained in regional and national financial institutions. The Company has exposure to credit risk to the extent that its cash and cash equivalents exceed amounts covered by the U.S. federal deposit insurance; however, the Company has not experienced any losses in such accounts. In management’s opinion, the capitalization and operating history of the financial institutions are such that the likelihood of material loss is remote.
Recent Accounting AnnouncementsNOTE 6 - Proprietary Technology
In May 2014, the FASB issued new accounting guidance regarding revenue recognition under GAAP. This new guidance will supersede nearly all existing revenue recognition guidance, andThe following is effective for public entities for annual and interim periods beginning after December 31, 2016. Early adoption is not permitted. The Company is currently evaluating the impacta detail of this new guidance on the Company's financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, "Presentation of Financial Statements--Going Concern", which requires management to evaluate,software at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Early application is permitted. Management is still in the process of assessing the impact of ASU 2014-15 on the Company's financial statements.
In April 2015, the FASB issued Accounting Standard Update ("ASU") 2015-03 Simplifying the Presentation of Debt Issuance Costs. This update requires capitalized debt issuance costs to be classified as a reduction to the carrying value of debt rather than a deferred charge, as is currently required. This update will be effective for the Company for all annual and interim periods beginning after December 15,June 30, 2015 and is required to be adopted retroactively for all periods presented, and early adoption is permitted. The Company is currently evaluating the expected impact of this new accounting standard on its financial statements.September 30, 2014:
2015 | 2014 | |||||||
Source Code License | $ | 2,500 | $ | 2,500 | ||||
Software License | 1,200,106 | 1,200,106 | ||||||
EMR Certification | 23,000 | 23,000 | ||||||
Encryption Software Code | 15,800 | 15,800 | ||||||
Evolve Software Code | 25,000 | 25,000 | ||||||
Compose Rose Code | 6,000 | 6,000 | ||||||
Acquisition of Doctor’s Network of America | 10,000 | 10,000 | ||||||
Total intangible assets | 1,282,406 | 1,282,406 | ||||||
Accumulated amortization of intangible assets (charged to cost of sales) | (861,310 | ) | (668,105 | ) | ||||
Accumulated impairment of assets | (367,766 | ) | (10,000 | ) | ||||
Total proprietary technology, net | $ | 53,300 | $ | 604,301 |
The FASB issues ASUsCompany’s software was placed into service starting in the second quarter of fiscal year ended September 30, 2012. The amortization expense was $63,320 and $61,155 for the three months ended June 30, 2015 and June 30, 2014 as compared to amend$193,204 and $183,465 for the authoritative literature in ASC. There have beennine months ended June 30, 2015 and 2014, respectively.
Source Code License
In October 2013, the Company through a number of ASUs to date that amend the original text of ASC.purchase agreement with Antree Systems Limited has purchased a complete source code, intellectual property rights, all computer software, patents, or formulas, algorithm licensed or sold under a project known as Compass Rose and appropriate copyrights, patents, mask works, trademarks, service marks, internet domain names and world wide web uniform resource locators (“URLs”) from Antree Systems Limited. The Company believes those issued to date either (1) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to200,000 shares of its common stock as consideration for the Company or (iv) are not expected to have a significant impact on the Company.
Revenue Recognition
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 collectionpurchase. The fair value of the resulting receivableconsideration and the assets acquired 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. Whenbased on the fair value of VSOEthe common stock issued in exchange for the software. The total fair value, based on the market price on the date of post contract customer support cannot begrant, was $6,000. The Company evaluated this acquisition and determined that it did not meet the revenue is recognized ratably overdefinition of a significant business acquisition.
During the contract period. In Junethree months ended March 31, 2014, the company entered into an agreementCompany and Antree agreed to provideunwind the acquisition of the software to a third party. Delivery was not achieved until December 2015by the Company. Accordingly, the Company gave up all its rights for the use of the Compass Rose Code and all associated intellectual property rights, all computer software, patents, or formulas, algorithms licensed or sold under the project known as Compass Rose and the pro rata portionappropriate copyrights, patents, mask works, trademarks, service marks, internet domain names and world wide web uniform resource locators. In exchange for the Company giving up its rights to the Compass Rose Code, Antree agreed to the rescission and cancellation of the deferred revenue was recognized. This resulted inshares issued for the purchase. The Company cancelled the 2,000 shares issued to Antree and recorded a significant change in deferred revenue.reduction to its capitalized intangible assets of $6,000 and a corresponding reduction of equity. The Company recorded a gain on the cancellation for the shares of $4,752.
Provided all other revenue criteria are met, the upfront, minimum, non-refundable license fees from customers are generally recognized upon delivery and on-going royalty fees are generally recognized upon reports of new licenses issued. If there is significant uncertainty about the project completion or receipt of payment for professional services, revenue is deferred until the uncertainty is sufficiently resolved. VSOE of fair value of services is based upon stand-alone sales of those services.NOTE 7- DISCONTINUED OPERATIONS
The amortization of acquired technology for products acquired through business combinations are considered as the cost of revenues. The acquired software technologies are amortized over their useful lives of five years.
Deferred Revenue
Deferred revenue result from fees billed to customers for which revenue has not yet been recognized. The Company also recognizes annual subscription fees for virtual servers and subscription and small usage fees and those revenues are based on a 48-month lease, the Company would amortize the revenue over the life of the agreement of 48 months.
The Company has deferred revenue of $691,406 as of December 31, 2015 and $1,125,000 as of September 30, 2015.
NOTE 5– RELATED PARTY TRANSACTIONS
The advances from the CEO are due on demand and do not accrue interest. As of December 31, 2015 and 2014, the amount owed to the CEO for advances was $1,205 and $0, respectively.
NOTE 6– DISCONTINUED OPERATIONS
Cloud MD Sale
The Company’s former Board of Directors believed that it was in the best interest of the Company to discontinue the former business operation Cloud MD. During September 2015, the Cloud MD business segment was discontinued and a plan of sale of the segmentGPS operational device business. In 2011, this business was approved.transferred to National Scientific Corporation; a company owned by the Company’s prior CEO, by prior management in which the Company’s former CEO was to pay $100,000 plus 2% of revenues for that technology. The Cloud MD sale occurred in October 2015 as a $250,000 note payable fromformer officer never paid the buyer. The note receivable has five annual payments of $50,000 and carries interest of 3% a year. We reviewed the needspecific consideration for an allowance for loan loss and estimation of impairment of the note receivable based on professional relationship and experience with the buyer and the specifics of the agreements. Currently, no allowance is deemed necessary and no impairment is expected as collection seems reasonably assured. this transaction.
Accordingly, the Company reclassified the assets, which had a net book value of zero as of September 30, 2015, qualified as held for saleliabilities and the Company has presented Cloud MDoperations related to its GPS operational device business as discontinued operations. Discontinued revenue for 2014 consisted Consequently, the accompanying consolidated financial statements reflect the assets, liabilities and operations of $12,779 revenuethe GPS operational device business as net assets of discontinued operations, net liabilities of discontinued operations and results from D&A and $431 of revenues associated with Cloud MD. Discontinued operating expenses for 2014 consisted of $13,493 operating expenses from D&A and $68,070 from Cloud MD.discontinued operations.
DNA
On March 16, 2013, the Company closed the acquisition with the final payment for DNA. Subsequent to the transaction closing, the sellers refused to pay the transaction fees for medical billing contracts that were processed. The Company filed a lawsuit against the sellers for Breach of Contract among other things in June of 2013. During that time, the Company believes the sellers began contacting all billing contract holders and interfered with the acquisition of all the assets from the transaction. Consequently, the accompanying consolidated financial statements reflect the assets, liabilities and operations of DNA as net assets of discontinued operations, net liabilities of discontinued operations and results from discontinued operations.
Details of the classifications for revenues, operating expensesnet assets, liabilities and operations are shown below.
Period ended December 31, | ||||||||
2015 | 2014 | |||||||
Discontinued operations: | ||||||||
Revenues | $ | — | $ | 13,210 | ||||
Operating expenses | — | 81,563 | ||||||
Gain from discontinued operations | 250,000 | |||||||
Income(loss) from discontinued operations | $ | 250,000 | $ | (68,353 | ) |
June 30, 2015 | September 30, 2014 | |||||||
Net liabilities of discontinued operations: | ||||||||
Accounts payable | $ | — | $ | 18 | ||||
Net liabilities of discontinued operations | $ | — | $ | 18 |
Dec 31, 2015 | Sep 30, 2015 | |||||||
Net assets attributable to discontinued operations: | — | — | ||||||
Intangible Software | — | 3,232 | ||||||
Net liabilities of discontinued operations | 18 | 18 |
Three Months Ended June 30, | ||||||||
2015 | 2014 | |||||||
Discontinued operations: | ||||||||
Revenues | $ | — | $ | 45,555 | ||||
Operating expenses | — | 50,931 | ||||||
(Loss) income from discontinued operations | $ | — | (5,376 | ) |
Nine Months Ended June 30, | ||||||||
2015 | 2014 | |||||||
Discontinued operations: | ||||||||
Revenues | $ | 12,779 | $ | 176,607 | ||||
Operating expenses | 13,648 | 189,500 | ||||||
(Loss) income from discontinued operations | (869 | ) | (12,893 | ) |
NOTE 7-8 - LINE OF CREDIT
In November 2013, the Company entered into a revolving line of credit with Mutual of Omaha in the amount of $65,000 at a 5.00% interest rate per annum which renews annually. As of June 30, 2015, the Company had borrowed $42,097 against the line of credit. During the nine months ended June 30, 2015, the Company repaid $11,515 of the outstanding balance and paid $1,839 in interest expense related to the Mutual of Omaha line of credit. The line of credit was unsecured and is paid in full.
NOTE 9- RELATED PARTY TRANSACTIONS
The Company repaid $16,000 and $8,299 of the advances from the Company’s CEO in the nine months ended June 30, 2015 and 2014, respectively. The advances from the CEO are due on demand and do not accrue interest. As of June 30, 2015 and September 30, 2014, the amount owed to the CEO for advances was $74,211 and $0, respectively.
NOTE 10- EQUITY
As of December 31,June 30, 2015, the Company was authorized to issue 650,000,000 common shares and 10,000,000 preferred shares at a par value of $0.01.
Nine months ended June 30, 2015
Stock Cancelled
The Company received $7,000 for the issuance of 50,000 shares of common stock recorded as stock payable and as of September 30, 2014 the common stock has not been issued by the Company. In the nine months ended March 31, 2015, the Company paid back the proceeds and did not issue the stock.
During the nine months ended June 30, 2015, the Company cancelled 2,150 shares of common stock. 2,000 of these shares were cancelled in relation to the Company giving back its rights to the Compass Rose Code. See Note 5. As part of the Antree rescission and cancellation, 150 shares were additionally cancelled that were issued in the year ended September 30, 2014, to one of the owners of Antree who provided additional programming services for improvements to the Compass Rose Code. The cancellation of the 150 shares was recorded as an adjustment to the Company’s par value, as no consideration was paid for the cancellation.
Preferred Stock
On February 5, 2015, the Company issued 6,000,000 shares of its Series A Preferred Stock to its CEO. As of September 30, 2015, the Series A Preferred Stock is convertible into the Company’s common stock at a rate of 1 to 1.5 common shares. The Company recorded $9,900,000 as stock compensation based on the market value of the Company’s common stock on the date of grant. As of February 17, 2015, there are a total of 10,000,000 shares of the Series A Preferred Stock authorized and outstanding which are convertible into a total of 15,000,000 shares of common stock. Each share of the Preferred Stock has 150 votes on all matters presented to be voted by the holders of common stock. The holders of the Preferred A shares can only convert the shares if agreed upon by 50.1% voteproper notice and approval of all preferred shareholders. During November 2015, the conversion rate forBoard of Directors. Presently, the Seriesholders of the Preferred A preferred stock was modified to a 1 to 30 common shares. The certificate of amendmentshares have not sent notice to the ArticlesBoard of Incorporation was not filedDirectors and on February 12, 2016 the Board reversed its position and reinstated the 1of Directors does not currently intend to 1.5 conversion rate. Accordingly, we determined that no modification accounting was required. (See note 9)approve such conversion.
Common Stock Issued for Cash
TheOn March 18, 2015, the Company issued 132,500 shares of5,000 restricted common shares through a Private Placement Memorandumto Entrust Group/Michael Hopkins for proceeds of $265,001 during$5,000. On May 20, 2015 the three months ended December 31, 2015.Company issued 7,000 restricted common shares to Garry Zagami for $7,000. On June 18, 2015, the Company issued 50,000 restricted common shares to Common Wealth Management for $100,000.
Common Stock Issued for Services
On October 1,May 5, 2015 the Company issued 2,0842,000 restricted common shares to Dr. Albert Carlson perRobert Wurzburg for his employment agreementassistance in the production of an animated video for the Company. The shares had a value of $10,733$8,800 on the date of issue. On October 22, 2015 the Company issuedCommon Wealth Management received 5,000 restricted common shares to Isaiah Eichen per an asset purchase agreement.from the Company on May 5, 2015 for commissions. The shares had a value of $27,500$22,000 on the date of issue.issuance.
Common Stock Issued for Software Licensing
On April 21, 2015 the Company issued 50,000 shares of restricted common stock for the purchase of a software license as follows; 25,000 shares to Code Robert, LLC and 25,000 shares to Sunset Angel Productions, LLC.
NOTE 11 - SEGMENT INFORMATION
Cloud Medical Doctors Software Corporation has two reporting segments and corporate overhead:
NOTE 8 -COMMITMENTS AND CONTINGENCIESThe accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performances based on profit or loss from operations before income taxes, not including nonrecurring gains and losses and foreign exchange gains and losses. The reportable segments are strategic business units that offer different technology and marketing strategies. Most of the businesses were developed internally and management remains the same. To date, the Company’s operations are principally in the United States.
LitigationConsolidated revenues from external customers, operating loss, and identifiable assets were as follows:
Three months ended June 30, | ||||||||
2015 | 2014 | |||||||
Revenues: | ||||||||
Cloud-MD | $ | — | $ | 1,725 | ||||
Total revenues | $ | — | $ | 1,725 | ||||
Operating expenses: | ||||||||
Cloud-MD | $ | (19,693 | ) | $ | (61,155 | ) | ||
Cipherloc | (27,195 | ) | (30,684 | ) | ||||
Corporate | (414,963 | ) | (1,021,150 | ) | ||||
Net Loss from Continuing Operations | $ | (461,851 | ) | $ | (1,111,264 | ) |
The Company is involved in various collections matters; the defendants have asserted certain counterclaims. While the outcome and impact of currently pending legal proceedings cannot be predicted with certainty, based on the current status of the matters, we believe that the resolution of these proceedings through settlement or judgment will not have a material adverse effect on our consolidated operating results, financial position or cash flow.
Nine months ended June 30, | ||||||||
2015 | 2014 | |||||||
Revenues: | ||||||||
Cloud-MD | $ | 431 | $ | 224,400 | ||||
Total revenues | $ | 431 | $ | 224,400 | ||||
Operating expenses: | ||||||||
Cloud-MD | $ | (10,535,766 | ) | $ | (203,465 | ) | ||
Cipherloc | (45,715 | ) | (30,684 | ) | ||||
Corporate | (572,517 | ) | (2,431,904 | ) | ||||
Net Loss from Continuing Operations | $ | (11,153,567 | ) | $ | (2,441,653 | ) |
June 30, 2015 | September 30, 2014 | |||||||
Identifiable assets: | ||||||||
Cloud-MD | $ | 31,500 | $ | 583,507 | ||||
CipherLoc | 216,300 | 21,800 | ||||||
Corporate | 90,567 | 552,537 | ||||||
Total identifiable assets | $ | 338,367 | $ | 1,157,844 |
Contingencies
The company entered into a licensing and subscription agreement on June 11, 2014. The counterparty has requested an extension of its terms and claimed that the product may not be viable. The company disagrees with both claims. The range of loss, if any, associated with these claims cannot currently be estimated.
NOTE 9 - SUBSEQUENT EVENTS
During November 2015, the conversion rate for the Series A preferred stock was modified to a 1 to 30 common shares. The certificate of amendment to the Articles of Incorporation was not filed and on February 12, 2016 the Board reversed its position and reinstated the 1 to 1.5 conversion rate.
* * * * * * * * * * * *
ITEM 2 -2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this Quarterly Report “Company,” “our company,” “us,” and “our” refer to Cipherloc Corporation and its subsidiaries, unless the context requires otherwise
Forward-Looking Statements
The following information contains certain forward-looking statements. Forward-looking statements are statements that estimate the happening of future events and are not based on historical fact. Forward-looking statements may be identified by the use of forward-looking terminology, such as "may," "could," "expect," "estimate," "anticipate," "plan," "predict," "probable," "possible," "should," "continue," or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.
Our Business
Cipherloc Corporation is a Technology and Services based Solutions Company for the rapidly expanding Cloud based Cyber Security industry. Cipherloc is based in Henderson, Nevada.
The company has introduced an innovative and revolutionary new type of encryption technology with five international patents and two US patents pending and is the industry’s first “Polymorphic Cipher Engine”, called CipherLoc®. Itis the first secure commercially viable advanced “Polymorphic Key Progression Algorithmic Cipher Engine” (PKPA). This morphing cipher can be used in any commercial data security industry and/or in sensitive applications: Banks, Financial transactions, Credit Cards, Securities, Stock and Bonds transactions, Emails, Phones, tablets, Servers and or computers, etc...
Financial results and trends
Results of Operations for the ThreeNine Months Ended December 31,June 30, 2015 and 2014 (Restated)
Revenue increaseddecreased to $433,594$431 from $0$224,400 for the threenine months ended December 31,June 30, 2015 and 2014, respectively. Our revenues increaseddecreased as a result of a software sale that was recognized duringour focus on the three months ended December 31, 2015.marketing of our CipherLoc Encryption Technology.
Cost of revenue was $0$191,590 and $183,465 for the threenine months ended December 31,June 30, 2015 and 2014, respectively. Our cost of revenue was related to the amortization of the software costs placed into service.
Selling, general and administrative expenses increased to $326,267$10,535,766 from $176,325$2,447,524 for the threenine months ended December 31,June 30, 2015 and 2014, respectively.The increase in our selling, general and administrative expenses is related to stock-based compensation.Research and development costs increased to $127,150$68,845 from $17,431$20,000 for the threenine months ended December 31,June 30, 2015 and 2014, respectively. Our research and development costs increase is related to new product development of our Cipherloc technology.focus on our CipherLoc Encryption Technology.
Interest expense decreased to $106$1,839 from $1,024$2,171 for the threenine months ended December 31,June 30, 2015 and 2014, respectively. Our interest expense decreased as a result of paying offthe decrease in outstanding borrowings on our lines of credits.
We recorded a loss to income for discontinued operations of $869 and closing our line$12,893 for the nine months ended June 30, 2015 and 2014, respectively. The Company is currently engaged in the medical billing operations. Until October 1, 2009, the Company’s sole sources of credit.revenues were from GPS operational device business. The Company discontinued its GPS operational device business in February 2010 (See “Note 6 - Discontinued Operations” to the accompanying Consolidated Financial Statements).
Liquidity and Capital Resources
We expect to incur substantial expenses and generate significant operating losses as we continue to grow our operations, as well as incur expenses related to operating as a public company and compliance with regulatory requirements. At December 31,June 30, 2015, the Company had cash of $1,131,206.$90,567.
We have an accumulated deficit at December 31,June 30, 2015 of $42,908,755$40,537,001 and need additional cash flows to maintain our operations. We depend on the continued contributions of our executive officers to finance our operations and need to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resources for the further development and marketing of our products and business. We expect our cash needs for the next 12 months to be $850,000 to fund our operations. The ability of the Company to continue its operations is dependent on the successful execution of management’s plans, which include expectations of raising debt or equity based capital until such time that funds from operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with related parties to sustain the Company’s existence. There is no assurance that such funding, if required will be available to us or, if available, will be available upon terms favorable to us.
Sources of Cash
The Company has a revolving line of credit with Chase Bank with a balance as of December 31, 2015 in the amount of $139 and a borrowing limit of $29,000. We have previously received advances from our Chief Executive Officer which we have used to help fund our operations.
We believe that our existing cash and investment balances, our available revolving credit facility, our ability to issue new debt instruments, and cash generated from operations will be sufficient to meet our working capital and capital expenditure requirements. Our strategy emphasizes organic growth through internal innovation and will be complemented by acquisitions that fit strategically and meet specific internal profitability hurdles.
Cash Flow
The following table summarizes, for the periods indicated, selected items in our Condensed Statements of Cash Flows:
Three Months Ended | ||||||||
December 31, 2015 | December 31, 2014 | |||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | (1,121,189 | ) | $ | (333,659 | ) | ||
Investing activities | (10,449 | ) | — | |||||
Financing activities | 266,206 | (4,739 | ) | |||||
Operating Activities
Cash flows from operating activities.Our cash (used in) operating activities were ($1,121,189)622,779) and ($333,659)$752,098 for the three monthsNine Months ended December 31,June 30, 2015 and 2014, respectively.The increase of cash used in operations was primarily attributable to the payment of salaries.stock compensation.
Financing Activities
Cash flows from financing activities.Cash provided by (used in) financing activities was $266,206$167,696 and $ (4,739)$67,816 for the threenine months ended December 31,June 30, 2015 and 2014, respectively. In the threenine months ended December 31,June 30, 2015, we repaid our line of credits of $11,515, received $265,001 from a PPM duringcash for the three months ended December 31, 2015sale of common stock of $112,000 and $0 duringsubscribed stock of $7,000. For the three months ended December 31, 2014.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements including arrangements that would affectsame period in the liquidity, capital resources, market risk support and credit risk support or other benefits.
WHERE YOU CAN FIND MORE INFORMATION
You are advised to read this Quarterly Report on Form 10-Q in conjunction with other reports and documents thatprior year, we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q, Annual Report on Form 10-K, and Current Reports on Form 8-K that we file from time to time. You may obtain copies of these reports directly from us orreceived cash from the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers at its website http://www.sec.gov.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold any derivative instruments and do not engage in any hedging activities.sale of our common stock of $15,000.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures were designed to provide reasonable assurance that the controls and procedures would meet their objectives. As required by SEC Rule 13a-15(b), our Chief Executive Officer and Principal Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective.
Our Chief Executive Officer and Principal Financial Officer are responsible for establishing and maintaining adequate internal control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control —- Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has used the framework set forth in the report entitled Internal Control-Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based on this assessment, our Chief Executive Officer and Principal Financial Officer have concluded that our internal control over financial reporting were not effective as of December 31, 2015.June 30, 2015 There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
a. | There were no changes in our internal control over financial reporting that occurred during the three months ended |
b. | It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. |
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various collections matters; the defendants have asserted certain counterclaims. While the outcome and impact of currently pending legal proceedings cannot be predicted with certainty, based on the current status of the matters, we believe that the resolution of these proceedings through settlement or judgment will not have a material adverse effect on our consolidated operating results, financial position or cash flow
ITEM 1A - RISK FACTORS
There were no material changes from the risk factors previously disclosed in Part II, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2015 during our three months ended December 31, 2015.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS SECURITIES
During the three months ended December 31, 2015, through the utilization of a Private Placement Memorandum and upon receipt of executed Subscription Agreements, the Company issued 132,500 shares of common stock for $265,000 in net cash proceedspursuant to the exemption from the registration provisions of the Securities Act of 1933, as amended (the "Act"), afforded by Rule 506 of Regulation D.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the three months ended December 31, 2015.
ITEM 4.MINING SAFETY DISCLOSURES
N/A
ITEM 5. OTHER INFORMATION
There is no information with respect to which information is not otherwise called for by this form.
ITEM 6. EXHIBITS
Exhibits
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The following exhibits are filed herein
No. | Title |
32 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the |
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the |
Table of Contents |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Registrant
Date: March 24, 2016 | Cipherloc Corporation
By:/s/ Michael De La Garza | |
Michael De La Garza | ||
Chief Executive Officer (Principal Executive Officer) |
Registrant
Date: | Cipherloc Corporation By: /s/Eric Marquez | |
Eric Marquez | ||
Table of Contents |