The following discussion and analysis should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this Annual Report on Form 10-K.





Our Business

We are developing products and services around its patented polymorphic encryption technology designed to enable a more efficient and stronger layer of protection to be added to existing solutions which we believe could be the industry's first "Polymorphic Cipher Engine", which we call Cipherloc®. We anticipate offering the first secure commercially viable advanced "Polymorphic Key Progression Algorithmic Cipher Engine" ("PKPA"). We believe this morphing cipher can be used in any commercial data security industry and/or in sensitive applications.

Our innovative and patented polymorphic technology eliminates the flaws and inadequacies associated with today's encryption algorithms. Instead of dealing with large monolithic blocks of data, our approach decomposes the information to be protected into multiple segments. These individual segments each have a unique encryption key, utilize different encryption algorithms, are randomly grouped into different lengths, and can be further re-encrypted. Since segments are independent from each other and are individually protected, our technology is not susceptible to computational attacks. In fact, the strength of our technology improves as compute power increases.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.

The methods, estimates, and judgment we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The SEC has defined "critical accounting policies" as those accounting policies that are most important to the portrayal of our financial condition and results, and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based upon this definition, our most critical estimates are accounting for convertible debt and embedded derivatives, software revenue recognition, and stock issued to employees and non-employees. Our most critical accounting policies applicable to the periods presented are noted below. For additional information see Note 2, "Significant Accounting Policies" in the notes to our financial statements appearing elsewhere in this report. Although we believe that our estimates and assumptions are reasonable, they are based upon information presently available, and actual results may differ significantly from these estimates.

Our critical accounting policies and estimates are those related to revenue recognition, deferred income taxes, accounting for share-based payments, and litigation.

Revenue Recognition. We adopted the new accounting revenue standard for revenue recognition effective October 1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as of October 1, 2018. Results for reporting periods beginning after October 1, 2018 are presented under this new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under previous revenue guidance. See Note (1) Summary of Significant Accounting Policies.

We recognize revenue in accordance with the authoritative guidance issued by the FASB on revenue recognition when persuasive evidence of an arrangement exists, the fee is fixed or determinable, delivery has occurred, and collection of the resulting receivable is deemed probable. Products delivered to a customer on a trial basis are not recognized as revenue until the trial period has ended and acceptance has occurred by the customer. Reseller and distributor customers typically send us a purchase order when they have an end user identified.

The Company's contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.





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Judgment is required to determine the standalone selling price ("SSP") for each distinct performance obligation. For products and services aside from maintenance and support, the Company estimates SSP by adjusting the list price by historical discount percentages. SSP for software and hardware maintenance and support fees is based on the stated percentages of the fees charged for the respective products.

The Company's perpetual and term software licenses have significant standalone functionality and therefore revenue allocated to these performance obligations are recognized at a point in time upon electronic delivery of the download link and the license keys. For certain arrangements revenue is recognized based on usage or ratably over the term of the arrangement.

Product maintenance and support services are satisfied over time as they are stand-ready obligations throughout the support period. As a result, revenues associated with maintenance services are deferred and recognized as revenue ratably over the term of the contract.

Revenues associated with professional services are recognized at a point in time upon customer acceptance.

Accounting for Share-Based Payments. As discussed further in Note (10) Share-Based Payment Arrangements, to our consolidated financial statements, we account for share-based awards in accordance with the authoritative guidance issued by the FASB on stock compensation.

We have used and expect to continue to use the Black-Scholes option-pricing model to compute the estimated fair value of share-based compensation expense. The Black-Scholes option-pricing model includes assumptions regarding dividend yields, expected volatility, expected option term and risk-free interest rates. The assumptions used in computing the fair value of share-based compensation expense reflect our best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control. We estimate expected volatility based primarily on historical daily price changes of our stock and other factors. The expected option term is the number of years that we estimate that the stock options will be outstanding prior to exercise. The estimated expected term of the stock awards issued has been determined pursuant to SEC Staff Accounting Bulletin SAB No. 110. If other assumptions or estimates had been used, the share-based compensation expense that was recorded for the years ended September 30, 2019 and 2018 could have been materially different. Furthermore, if different assumptions or estimates are used in future periods, share-based compensation expense could be materially impacted in the future.

Accounting for Convertible Debt and Embedded Derivatives. Convertible debt is accounted for under the guidelines established by Accounting Standards Topic ("ASC") 470-20, Debt with Conversion and Other Options. ASC 470-20 governs the calculation of an embedded beneficial conversion feature, a derivative instrument, which is treated as an additional discount to the instruments where derivative accounting does not apply. This applies during the period for which embedded conversion features are either fixed, contingently convertible, or cash or net settlement is in control of the Company. When equity instruments, such as warrants, are issued with convertible debt, the net proceeds from the transaction are allocated to the convertible debt and equity instruments based on their relative fair values. The proceeds allocated to the equity instruments may reduce the carrying value of the convertible debt, and such discount is amortized to interest expense over the term of the debt. The amount of the warrants and beneficial conversion feature will reduce the carrying value of the debt instrument to zero, but no further. The discount relating to the initial recording of the original issue discounts, issue costs, warrants and beneficial conversion feature are accreted, together with the premium, over the estimated term of the debt.

The excess of fair value of the embedded conversion feature, together with the original issue discounts, warrants, and issue costs over the face value of the debt, is recorded as an immediate charge in the accompanying statements of operations and cash flows. Each reporting period, the Company will compute the estimated fair value of derivatives and record changes to operations.





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Results of Operations

Fiscal Year Ended September 30, 2019 Compared to Fiscal Year Ended September 30, 2018

Revenue decreased to $46,600 from $316,248 for the years ended September 30, 2019 compared with the same period in 2018. Conversely, the cost of revenue decreased to zero from $89,230 for the years ended September 30, 2019 compared with 2018. The decrease in the cost of revenues resulted from limited licensing income earned from the Company requiring no cost of revenues. The decrease in revenues resulted from expiration in the prior year of a four-year software license sold in 2014.

General and administrative expenses increased to $3,372,047 from $1,844,903 for the years ended September 30, 2019 compared with the same period in 2018. The increases in general and administrative expenses primarily resulted from higher professional fees, including for legal and accounting, higher consulting and contract services, higher salaries and higher rent expense. Payroll tax expense increased by $244,000 related to both employer and employee expense associated with historical stock grants issued to employees. Additionally, general and administrative expenses include payments totaling $416,000 to Quality Healthcare International, Inc. ("QHI") and Noun Energy which are currently under investigation.

Sales and marketing expenses increased to $1,772,197 from $545,250 for the years ended September 30, 2019 compared with the same period in 2018. Sales and marketing expenses increased primarily due to payments made to Ageos during 2019 as well as the hiring of individual sales consultants under contract with the Company.

Research and development expenses increased to $1,744,480 from $873,107 for the years ended September 30, 2019 compared with the same period in 2018. Research and development expenses increased primarily as a result higher salaries and consulting costs.

Settlement expense was $0 for the year ended September 30, 2019, as compared to $81,000 for the year ended September 30, 2018. Settlement expense for the year ended September 30, 2018 was due to the issuance of 50,000 shares of common stock to settle a legal claim.

Total other expenses, net, decreased to $8,101 from $(1,303,541) for the years ended September 30, 2019 and 2018, respectively. The decrease was due to the following expenses from 2018:





  1. Net loss on extinguishment of convertible notes totaling $317,268. The
     Company recognized a $358,038 loss on extinguishment related to the amendment
     of the convertible note with FirstFire Global Opportunities Fund, LLC
     ("FirstFire") in December 2017, as well as a $153,621 loss on extinguishment
     related to the redemption of the convertible note with Peak One Opportunity
     Fund LP ("Peak One") in April 2018. These losses were partially offset by a
     $194,391 gain on extinguishment related to the settlement of the amended
     FirstFire convertible note in March 2018.

  2. The Company recognized a loss of $486,745 in December 2017, resulting from
     the excess fair value of the embedded conversion feature in the Peak One
     convertible note and of the equity instruments issued with the Peak One
     convertible note.

  3. Changes in the fair value of the embedded conversion features in the
     FirstFire and Peak One convertible notes during the year ended September 30,
     2018, totaling $8,536.

  4. An increase in interest income (expense), net, to $8,101 from $(490,992) for
     the years ended September 30, 2019 and 2018, respectively, due to interest
     incurred on the Company's convertible notes with FirstFire and Peak One that
     were outstanding during the year ended September 30, 2018 and interest income
     earned on excess cash equivalents during the year ended September 30, 2019.

Liquidity and Capital Resources

We have an accumulated deficit at September 30, 2019 of $61,456,536. We expect to incur substantial expenses and generate continued operating losses until we generate revenues sufficient to meet our obligations. At September 30, 2019, the Company had cash of $7,839,472. We believe that our existing cash balances are sufficient to fund future operations for the next 12 months.





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Cash Flows



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



                                    Year Ended September 30,
                                      2019             2018
Net cash (used in) provided by:
Operating activities              $ (6,139,815 )   $ (2,299,459 )
Investing activities              $    (37,059 )   $    (14,429 )
Financing activities              $    (40,000 )   $ 16,142,838




Operating Activities

Cash used in operating activities was $6,139,815 and $2,299,459 for the years ended September 30, 2019 and 2018, respectively. The increase in cash used for operating activities was primarily an increase in net operating loss net of noncash items of $5,176,984, a favorable increase in prepaid expense of $116,719, offset by an unfavorable increase in liabilities of $1,453,348.





Investing Activities

Cash used in investing activities was $37,059 and $14,429 for the years ended September 30, 2019 and 2018, respectively. The increase in cash used for investing activities was due to an increase in fixed asset purchases.





Financing Activities

Cash used by financing activities was $40,000 versus cash provided of $16,142,838 for the years ended September 30, 2019 and 2018, respectively. The decrease in cash provided by financing activities was due to a payout related to an oversubscription on a capital raise as opposed to last year increase due to the issuances of common stock for cash.

Off-Balance Sheet Arrangements

We did not have during the periods presented, nor do we currently have, any off-balance sheet arrangements as defined under applicable SEC rules.

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