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EX-31.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 AND PURSUANT TO RULE 13A-14(A) AND RULE 15D-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934 - CIPHERLOC Corpcloud10q051515ex31_1.htm
EXCEL - IDEA: XBRL DOCUMENT - CIPHERLOC CorpFinancial_Report.xls
EX-32.1 - CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - CIPHERLOC Corpcloud10q051515ex32_1.htm
EX-31.2 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 AND PURSUANT TO RULE 13A-14(A) AND RULE 15D-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934 - CIPHERLOC Corpcloud10q051515ex31_2.htm
EX-32.2 - CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - CIPHERLOC Corpcloud10q051515ex32_2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934  

 

For the quarterly period ended March 31, 2015

 

[ ]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’s telephone 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  [ ]
Non–Accelerated filer  [ ]  Smaller reporting company  [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–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  May 14, 2015
Common stock, $0.01 par value    2,832,788

 

 CIPHERLOC CORPORATION

INDEX TO FORM 10-Q FILING

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2015 AND 2014

 

TABLE OF CONTENTS

 

        PAGE
PART I - FINANCIAL INFORMATION    
     
Item 1.   Consolidated Financial Statements (Unaudited)   4
     Consolidated Balance Sheets   5
     Consolidated Statements of Operations   6
     Consolidated Statements of Cash Flows   7
     Notes to Consolidated Financial Statements   7
Item 2.   Management Discussion & Analysis of Financial Condition and Results of Operations   16
Item 3   Quantitative and Qualitative Disclosures About Market Risk   19
Item 4.   Controls and Procedures   19

 

 

 
PART II - OTHER INFORMATION    
     
Item 1.   Legal Proceedings   19
Item 1A.   Risk Factors   19
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   20
Item 3.   Defaults Upon Senior Securities   20
Item 4.   Mining Safety Disclosures   20
Item 5   Other information   20
Item 6.   Exhibits   21
         
         
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, 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 six months ended March 31, 2015 are not necessarily indicative of the results that can be expected for the year ending September 30, 2015.

 

CIPHERLOC CORPORATION

(Formerly Cloud Medical Doctor Software Corporation)

(Formerly National Scientific Corporation)

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   March 31,  September 30,
   2015  2014
ASSETS          
CURRENT ASSETS:          
  Cash  $86,872   $545,650 
  Accounts receivable   —      1,006 
   Assets attributable to discontinued operations   —      6,887 
      Total current assets   86,872    553,543 
           
  Proprietary technology, net   238,530    604,301 
    TOTAL ASSETS  $325,402   $1,157,844 
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
           
CURRENT LIABILITIES:          
   Accounts payable and accrued liabilities  $630,720   $649,452 
   Liabilities attributable to discontinued operations   —      18 
   Line of credit   46,098    53,612 
   Stock payable   —      7,000 
      Total current liabilities   676,818    710,082 
      TOTAL LIABILITIES   676,818    710,082 
           
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 March 31, 2015 and September 30, 2014   100,000    40,000 
    Common stock, $0.01 par value, 650,000,000 shares authorized;          
     2,832,587 and 2,834,737 issued and outstanding as of          
     March 31, 2015 and September 30, 2014, respectively   28,325    28,347 
    Additional paid-in capital   38,470,411    28,635,141 
    Accumulated deficit   (38,950,152)   (28,255,726)
      Total stockholders' equity (deficit)   (351,416)   447,762 
           
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)  $325,402   $1,157,844 

 

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 OPERATIONS

(UNAUDITED)

 

   Three Months Ended  Six Months Ended
   March 31,  March 31,
   2015  2014  2015  2014
             
             
REVENUE  $—     $105,118   $431   $222,675 
COST OF REVENUES   64,650    61,155    127,970    122,310 
                     
    GROSS PROFIT   (64,650)   43,963    (127,539)   100,365 
                     
OPERATING EXPENSES:                    
    General and administrative   10,107,671    1,106,142    10,283,996    1,328,218 
     Impairment   238,531    —      238,531    —   
    Research and development   19,469    30,000    41,650    60,000 
    Total operating expenses   10,365,671    1,136,142    10,564,177    1,388,218 
OPERATING LOSS   (10,430,321)   (1,092,179)   (10,691,716)   (1,287,853)
                     
OTHER (INCOME) AND EXPENSES                    
   Interest expense   (817)   (279)   (1,841)   (515)
Total other (income) expenses   (817)   (279)   (1,841)   (515)
                     
LOSS FROM CONTINUING OPERATIONS   (10,431,138)   (1,092,458)   (10,693,557)   (1,288,368)
                     
(LOSS) INCOME FROM DISCONTINUED OPERATIONS   (155)   3,198    (869)   (7,517)
                     
NET INCOME (LOSS)  $(10,431,293)  $(1,089,260)  $(10,694,426)  $(1,295,885)
                     
NET INCOME (LOSS) PER COMMON SHARE - Basic and diluted:                    
                     
   Continuing operations  $(3.68)  $(0.49)  $(3.77)  $(0.59)
                     
    Discontinued operations  $(0.00)  $0.00   $(0.00)  $(0.00)
                     
    Total  $(3.68)  $(0.49)  $(3.77)  $(0.59)
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                    
   Basic and diluted   2,832,587    2,245,463    2,833,320    2,196,569 

 

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 CASH FLOWS

(UNAUDITED)

 

   Six Months Ended
   March 31,
   2015  2014
       
  Net income (loss)  $(10,694,426)  $(1,288,368)
  Loss (Income) from discontinued operations   869    (7,517)
  Net loss from continuing operations   (10,693,557)   (1,295,885)
  Adjustments to reconcile net loss from continuing operations to net cash          
     (used in) provided by operating activities:          
  Impairment of software   238,531    —   
  Depreciation and amortization   127,240    122,310 
   Gain on cancellation of stock issued for services   (4,752)   —   
   Common stock issued for compensation        666,750 
  Stock issued with software sales   —      5,700 
  Stock compensation   9,900,000    —   
  Changes in operating assets and liabilities:          
    Accounts receivable   7,006    3,162 
    Accounts payable and accrued liabilities   (18,732)   397,270 
          Net cash (used in) operating activities   (444,264)   (100,693)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
  Proceeds from line of credit   —      58,574 
   Subscribed stock   (7,000)   —   
  Repayment of line of credit   (7,514)   —   
  Common stock issued for cash   —      5,000 
          Net cash (used in) provided by financing activities   (14,514)   63,574 
           
(DECREASE) INCREASE IN CASH   (458,778)   (37,119)
CASH, BEGINNING OF YEAR   545,650    8,587 
CASH, END OF YEAR  $86,872   $(28,532)
           
CASH PAID FOR:          
   Interest paid  $1,222   $—   
   Income taxes paid  $—     $—   
           
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING AND FINANCING ACTIVITIES:          
           
   Write-off of debt - related parties  $—     $59,704 
   Common stock issued for purchase of software  $—     $6,000 
   Cancellation of stock resinded 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

(Formerly Cloud Medical Doctor Software Corporation)

(formerly National Scientific Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(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. The name change became effective as of March 23, 2015. The name change effected by the Amended Certificate was effective 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. All share references have been retroactively adjusted.

 

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 – 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 six months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending September 30, 2015. Notes to the unaudited interim consolidated financial statements that would substantially duplicate the disclosures contained in the audited consolidated financial statements for the year ended September 30, 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, 2014 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 consolidated financial statements of the Company. See Note 12 for additional information on our segment reporting change.

 

NOTE 3 - 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 March 31, 2015 of $38,950,152 and needs additional cash to maintain its operations.

 

These factors raise 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 – 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:

 

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. During the six months ended March 31, 2015, the Company impaired $238,531 of its software assets.

 

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:

 

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; liabilities in active markets;
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly, including inputs in markets that are not considered to be active; or directly or indirectly including inputs in markets that are not considered to be active;
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The following table summarizes fair value measurements by level at March 31, 2015 and September 30, 2014 for assets measured at fair value on a recurring basis:

   Level 1  Level 2  Level 3  Total
At March 31, 2015            
Software  $—     $—     $238,530   $238,530 
Total Software  $—     $—     $238,530   $238,530 
                     
At September 30, 2014                    
Software  $—     $—     $604,301   $604,301 
Total Software  $—     $—     $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. 

 

NOTE 5 – SOFTWARE

 

The following is a detail of software at March 31, 2015 and 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 
Acquisition of Doctor’s Network of America   10,000    10,000 
Total intangible assets   1,276,406    1,282,406 
Accumulated amortization of intangible assets (charged to cost of sales)   (795,345)   (668,105)
Accumulated impairment of assets   (248,531)   (10,000)
Total proprietary technology, net  $238,530   $604,301 

 

The amortization expense was $127,240 for the six months ended March 31, 2015. During the six months ended March 31, 2015, the Company impaired $238,531 of its software assets, as a result of the decline in revenues.

 

Source Code License

 

In October 2013, the Company through a 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 issued 2,000 shares of its common stock as consideration for the purchase. The fair value of the consideration and the assets acquired is based on the fair value of the common stock issued in exchange for the software. The total fair value, based on the market price on the date of grant, was $6,000. The Company evaluated this acquisition and determined that it did not meet the definition of a significant business acquisition.

 

During the six months ended March 31, 2014, the Company and Antree agreed to unwind the acquisition of the software by 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 appropriate 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 shares issued for the purchase. The Company cancelled the 2,000 shares issued to Antree and recorded a 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.

 

NOTE 6- DISCONTINUED OPERATIONS

 

The Company’s former Board of Directors believed that it was in the best interest of the Company to discontinue the former business operation of the GPS operational device business. In 2011, this business was 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 former officer never paid the specific consideration for this transaction.

 

Accordingly, the Company reclassified the assets, liabilities and operations related to its GPS operational device business as discontinued operations.  Consequently, the accompanying consolidated financial statements reflect the assets, liabilities and operations of the GPS operational device business as net assets of discontinued operations, net liabilities of discontinued operations and results from 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 net liabilities and operations are shown below.

  March 31, 2015  September 30, 2014
Net liabilities of discontinued operations:      
Accounts payable  $—     $18 
Net liabilities of discontinued operations  $—     $18 

 

  Three Months Ended March 31,
   2015  2014
Discontinued operations:          
Revenues  $12,779   $53,766 
Operating expenses   (12,934)   (50,568)
(Loss) income from discontinued operations   (155)  $3,198 

 

  Six Months Ended March 31,
   2015  2014
Discontinued operations:          
Revenues  $12,779   $12,779 
Operating expenses   (13,648)   (13,494)
(Loss) income from discontinued operations   (869)   (7,517)

 

NOTE 7 – LINES 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 March 31, 2015, the Company had borrowed $46,097 against the line of credit. During the six months ended March 31, 2015, the Company repaid $7,514 of the outstanding balance and incurred and paid $1,222 in interest expense related to the Mutual of Omaha line of credit.

 

NOTE 8 – COMMITMENTS AND CONTINGENCIES

 

The Company entered into an agreement to purchase the assets of DNA in June 2012 and, after due diligence by both parties, the transaction closed on March 16, 2013. Subsequent to the transaction closing on March 16, 2013, the sellers refused to pay for medical billing process transaction fees in accordance with their contracts of approximately $200,000. In June 2013, the Company sued the sellers in federal court for breach of contract among other causes of action of unpaid medical billing transaction fees of approximately $200,000. The Company believes it will be successful in its litigation. However, if the Company is successful, the collectability of the judgment is highly questionable.

 

NOTE 9 - EQUITY

 

As of March 31, 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.  

 

Six months ended March 31, 2015

 

Stock Cancelled

 

During the six months ended March 31, 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.

 

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 six months ended March 31, 2015, the Company paid back the proceeds and did not issue the stock.

 

  

Preferred Stock

 

On February 5, 2015, the Company issued 6,000,000 shares of its Series A Preferred Stock to its CEO. As 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. The holders of the Preferred A shares can only convert the shares upon proper notice and approval of the Board of Directors. Presently, the holders of the Preferred A shares have not sent notice to the Board of Directors and the Board of Directors does not currently intend to approve such conversion.

 

NOTE 10 – SEGMENT INFORMATION

 

Cloud Medical Doctors Software Corporation has two reporting segments and corporate overhead:

 

Cloud-MD – the Company sells medical billing software to doctors. Prior to 2014, all of the Company’s business activities were derived from this segment.
Cipherloc – the Company has a second software program which is an encryption technology that can be used by larger corporation to protect their data through our polymorphic technology.
Corporate Overhead – the Company’s investment holding including financing current operations and expansion of its current holdings as well as evaluating the feasibility of entering into additional business.

 

The 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.

 

 

Consolidated revenues from external customers, operating loss, and identifiable assets were as follows:

 

  Three months ended March 31,
   2015  2014
Revenues:          
Cloud-MD  $—     $105,118 
CipherLoc   —      —   
Total revenues  $—     $105,118 
Operating expenses:          
Cloud-MD  $(10,254,265)  $(91,155)
Cipherloc   (18,520)   —   
Corporate   (157,806)   (1,106,142)
Net Loss from Continuing Operations  $(10,430,321)  $(1,092,179)

 

   Six months ended March 31,
   2015  2014
Revenues:          
Cloud-MD  $431   $222,675 
Cipherloc   —      —   
Total revenues  $431   $222,675 
Operating expenses:          
Cloud-MD  $(10,516,073)  $(182,310)
Cipherloc   (18,520)   (18,520)
Corporate   (604,075)   (1,309,698)
Net Loss from Continuing Operations  $(10,691,716)  $(1,287,853)

 

  March 31, 2015  September 30,
2014
Identifiable assets:          
Cloud-MD  $216,730   $583,507 
CipherLoc   21,800    21,800 
Corporate   86,872    552,537 
Total identifiable assets  $325,402   $1,157844 

 

NOTE 11 – SUBSEQUENT EVENTS

 

On April 21, 2015, the Company entered into  a Licensing Agreement with two entities, Code Robert, LLC and Sunset Angel Productions, LLC that jointly own software for cross-platform, digital use. Cipherloc has the right to perpetually use the software in its CipherLoc PKPA engine. With this licensed software, the Company expects to be able to reduce the initial development time of the delivery mechanism for its PKPA engine to as little as 6-8 months and with fewer engineers.

 

The licensing fee for the use of the software is Fifty Thousand 50,000 restricted common shares of the Company’s stock divided equally between the Licensors.

 

ITEM 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®. It is 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 Three Months Ended March 31, 2015 and 2014

 

Revenue decreased to $0 from $105,118 for the three months ended March 31, 2015 and 2014, respectively. Our revenues decreased as a result of our focus on the marketing of our CipherLoc Encryption Technology.

 

Cost of revenue was $64,650 and $61,115 for the three months ended March 31, 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 $10,107,671 from $1,106,142 for the three months ended March 31, 2015 and 2014, respectively. The increase in our selling, general and administrative expenses are related to the increase of preferred stock issued for services Research and development costs decreased to $19,469 from $30,000 for the three months ended March 31, 2015 and 2014, respectively. Our research and development costs decrease is related to our focus on our CipherLoc Encryption Technology.

 

Interest expense increased to $817 from $279 for the three months ended March 31, 2015 and 2014, respectively. Our interest expense increased as a result of the increase in outstanding borrowings on our lines of credits.

 

We recorded loss from discontinued operations of ($155) compared to $3,198 for the three months ended March 31, 2015 and 2014, respectively. The Company is currently engaged in the medical billing operations. Until October 1, 2009, the Company’s sole sources of 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).

 

Results of Operations for the Six Months Ended March 31, 2015 and 2014

 

Revenue decreased to $431 from $222,675 for the six months ended March 31, 2015 and 2014, respectively. Our revenues decreased as a result of our focus on the marketing of our CipherLoc Encryption Technology.

 

Cost of revenue was $127,970 and $122,310for the six months ended March 31, 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 $10,283,996 from $1,328,218 for the six months ended March 31, 2015 and 2014, respectively. The increase in our selling, general and administrative expenses are related to the increase of stock issued for services Research and development costs decreased to $41,650 from $60,000 for the six months ended March 31, 2015 and 2014, respectively. Our research and development costs decrease is related to our focus on our CipherLoc Encryption Technology.

 

Interest expense increased to $1,841 from $515 for the six months ended March 31, 2015 and 2014, respectively. Our interest expense increased as a result of the increase in outstanding borrowings on our lines of credits.

 

We recorded loss from discontinued operations of $869 compared to and to loss of $7,517 for the six months ended March 31, 2015 and 2014, respectively. The Company is currently engaged in the medical billing operations. Until October 1, 2009, the Company’s sole sources of 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 March 31, 2015, the Company had cash of $86,872.

 

We have an accumulated deficit at March 31, 2015 of $38,950,152 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 March 31, 2015 in the amount of $0 and a borrowing limit of $50,000. We have previously received advances from our Chief Executive Officer which we have used to help fund our operations.

 

In November 2013, the Company entered into a revolving line of credit with Mutual of Omaha for a line of credit at 4.00% interest rate which renews annually. The outstanding balance as of March 31, 2015 is $46,098.

 

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.

 

Uses of Cash

 

Our revolving lines of credit renew annually and we make significant principle payments to those lines to assure that they remain a line of credit.

 

Cash Flow

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

 

  Six Months Ended
  March 31, 2015  March 31, 2014
Net cash provided by (used in):          
Operating activities  $(444,264)  $(100,693)
Investing activities   (-)   (-)
Financing activities   14,514    63,574 

 

Operating Activities

 

Cash flows from operating activities. Our cash (used in) operating activities were $($444,264) and ($100,693) for the Six Months ended March 31, 2015 and 2014, respectively. The increase in cash provided by operations was primarily attributable to the decrease of revenue.

 

Financing Activities

 

Cash flows from financing activities. Cash (used in) provided by financing activities was ($14,514) and $63,574 for the six months ended March 31, 2015 and 2014, respectively. In the six months ended March 31, 2014, we repaid our line of credits and received proceeds of $7,514 and $58,574 from our line of credits and receive cash for the sale of common stock of $Nil and $5,000 six months ended March 31, 2015 and 2014, respectively.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements including arrangements that would affect 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 that 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 or 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.

 

 

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 effective as of March 31, 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 March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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

 

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. We have filed separate lawsuits to collect receivables from two physicians in the State of Mississippi totaling $230,000 plus interest and costs.

 

In the case against Orhan Ilercil, MD, Mississippi Brain and Spine PLLC wherein we claim Dr. Ilercil owes the Company over $30,000 in unpaid billing fees, Dr. Ilercil has filed a counterclaim for $70,000 alleging that our software did not perform. The Company considers this claim to be frivolous in that it was not our software that he was using and the Company will vigorously defend said claim.

 

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, 2013 during our six months ended March 31, 2015.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS SECURITIES

 

None 

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

  

There were no defaults upon senior securities during the three months ended March 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

3.1  Articles of Incorporation(1)
3.2  Bylaws(2)
10.1  Employment Agreement between National Scientific Corporation and Michael A. Grollman dated January 2001(4)
10.2  Employment Agreement between National Scientific Corporation and Graham L. Clark dated January 2003(6)
10.3  NSC Consulting Agreement dated August 2001, and Amendments dated August 2002 and July 2003, with Dr. El-Badawy El-Sharawy(6)
10.4  Amended and Restated 2000 Stock Option Plan(3)
10.5  Form of 2004 Stock Retainage Plan Agreement(6)
10.6  Agreement Regarding Management Consulting Services with Stanton Walker of New York dated May 2003(6)
10.7  Agreement Regarding Distribution and Marketing of Gotcha!® Child Safety Product and other products dated December 2002 with FutureCom Global, Inc. (6)
10.8  Purchase Order from Verify Systems, Inc, dated March 2003 for IBUS™ School Child Tracking Systems(5)
10.9  Letter of Understanding and Agreement dated April 2004 Regarding Sales and Distribution of Verify School safety products, and an Unlimited Software License with Anthony Grosso and CIS Services, LLC(6)
10.10  Letter of Intent from Positus, Inc. dba Bike & Cycle Trak, dated February 2003 for Design of Power Sports Tracking System(6)
10.11  Purchase Order from Positus, Inc. dba Bike & Cycle Trak, for Design of Power Sports Tracking System dated March 2003(6)
10.12  Employment agreement of Michael De La Garza(8)
10.13  Employment agreement of Pamela Thompson(8)
10.14  Licensing Agreement Code Robert, LLC and Sunset Angel Productions, LLC(11)
14  Code of Ethics(7)
16.1  Letter of GBH CPAs, PC, regarding change in independent registered public accounting firm(12)
17  Departure of Director and Officer (9)
19  Report to Security Holders re reverse stock split, name change and new trading symbol (10)
31  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
32  Certification Pursuant to Section 906 of the Sarbanes-Oxley Act

 

(1)Incorporated by reference to the Registrant’s Form 10-SB filed on or about January 3, 2000.
(2)Incorporated by reference to the Registrant’s Form 10-QSB for the quarter ended March 31, 2001 and filed on or about May 15, 2001.
(3)Incorporated by reference to the Registrant’s Form 10-QSB for the quarter ended December 31, 2000 and filed on or about February 14, 2001.
(4)Incorporated by reference to the Registrant’s Form 10-KSB for the year ended September 30, 2000 and filed on or about December 19, 2000.
(5)Incorporated by reference to the Registrant’s Form S-8 filed on or around June 3, 2003.
(6)Incorporated by reference to the Registrant’s Form SB2 filed on or around June 24, 2004.
(7)Incorporated by reference to the Registrant’s Form 10-QSB for the quarter ended June 30, 2004 and filed on or about August 16, 2004.
(8)Incorporated by reference to the Registrant’s Form 10-K for the year ended September 30, 2011 and filed on or about October 10, 2013.
(9)Incorporated by reference to the Registrant’s Form 8-K filed on January 8, 2015
(10)Incorporated by reference to the Registrant’s Form 14-CDEF filed on September 12, 2014
(11)Incorporated by reference to the Registrant’s Form 8-K filed on April 25, 2015
(12)Incorporated by reference to the Registrant’s Form 8-K filed on April 13, 2015

 

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.

 

May 20, 2015 

Cipherloc Corporation

 

By: /s/ Michael De La Garza

  Michael De La Garza
  Chief Executive Officer (Principal Executive Officer)

 

Registrant
 
Date: May 20, 2015
 

Cipherloc Corporation

 

By: /s/ Eric Marquez

  Eric Marquez
  Principal Financial Officer