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Item 8. Financial Statements and Supplementary Data

2022-12-20 compared with 2021-12-21 · 861 added, 703 removed, 204 unchanged (88% of the section changed)

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

FINANCIAL STATEMENTS:

Balance Sheets as of September 30, 2022 and 2021

Statements of Operations for the years ended September 30, 2022 and 2021

Statements of Stockholders’ Equity (Deficit) for the years ended September 30, 2021 and 2020

Statements of Stockholders’ Equity for the years ended September 30, 2022 and 2021

Statements of Cash Flows for the years ended September 30, 2022 and 2021

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the Board of Directors and

of Cipherloc Corporation

of SideChannel, Inc.

on the Financial Statements

have audited the accompanying balance sheets of Cipherloc Corporation (the “Company”) as of September 30, 2021, and 2020,

and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year

period ended September 30, 2021, and the related notes (collectively referred to as the “financial statements”).

In our opinion,

the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021, and

2020, and the results of its operations and its cash flows for each of the years in the two-year period ended, in conformity with accounting

principles generally accepted in the United States of America.

financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s

financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board

(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

have audited the accompanying consolidated balance sheets of SideChannel, Inc.

and Subsidiaries (the Company) as of September 30, 2022

and 2021, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for

each of the years in the two-year period ended September 30, 2022, and the related notes (collectively referred to as the consolidated

financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial

position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the years

in the two-year period ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of

consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion

on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public

Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance

with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

conducted our audits in accordance with the standards of the PCAOB.

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is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit,

As part of our audits,

we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion

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the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant

Our audits also included evaluating the accounting principles used and significant

estimates made by management, as well as evaluating the overall presentation of the financial statements.

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provide a reasonable basis for our opinion.

Briggs & Veselka Co.

Audit Matters

critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated

or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial

statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters

does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit

matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

for the Business Combination of Cipherloc, Inc.

—Refer to Note 3 to the financial statements

of the Matter:

described in Note 3 to the consolidated financial statements, the Company completed an acquisition of Cipherloc, Inc.

and affiliates

for net consideration of $15.2 million in the year ended September 30, 2022.

The Company accounted for this acquisition as a business

This included the issuance of 88.4 million shares of common stock valued at $9.0 million and warrants to purchase 87.6 million

shares of common stock valued at $6.2 million.

fair values of identified intangible assets consisted of technology of $4.9 million.

Goodwill, which represents the excess of the consideration

paid over the fair value of the net tangible assets and intangible assets acquired, of $7.1 million was also recorded.

The significant

estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about future performance

of the acquired business.

The significant assumptions used to form the basis of the forecasted results included revenue growth rates,

discount rates, tax amortization benefit factor, and other intangible specific assumptions.

These significant assumptions were forward-looking

and could be affected by future economic and market conditions.

The goodwill was evaluated at the acquisition date and the fair value

of the goodwill was determined to be less than the carrying amount of the goodwill by $5.7 million.

As a result, an impairment charge

was recorded on the acquisition date of $5.7 million was recorded and the net carrying amount of goodwill was $1.4 million.

principal considerations for our determination that performing procedures relating to the valuation of intangible assets as a critical

audit matter are (1) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value of

intangible assets acquired due to the significant judgment by management when developing the estimates and (2) significant audit effort

was required in evaluating the significant assumptions relating to the estimates, including the income projections and discount rates.

In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures

and evaluating the audit evidence obtained.

we addressed the Matter in our Audit:

the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated

financial statements.

These procedures included the following:

the underlying agreements and testing management’s application of the relevant accounting guidance

of management regarding the development of the assumptions used in the valuation of the intangible assets.

management’s process included evaluating the appropriateness of the valuation models, testing the completeness, accuracy, and

relevance of underlying data used in the models, and testing the reasonableness of significant assumptions, including the income

and expense projections.

the credentials and evaluated the experience, qualifications and objectivity of the Company’s specialist, a third-party valuation

an understanding of the nature of the work the Company’s specialist performed, including the objectives and scope of the specialist’s

the methods or assumptions used;

and a comparison of the methods or assumptions used with industry standards and historical

and evaluated assumptions developed by the specialist considering assumptions generally used in the specialist’s field;

evidence provided by the specialist;

existing market data;

historical or recent experience and changes in conditions and events affecting

the Company’s estimates of future revenue projections reviewing support for revenue growth rates.

We tested the significant

assumptions discussed above, as well as the completeness and accuracy of the underlying data used in the projected cash flows and

professionals with specialized skill and knowledge to assist in evaluating the reasonableness of significant assumptions.

have served as the Company’s auditor since 2021.

Vegas, Nevada

ID Number 587

BALANCE SHEETS

thousands except share and per share data)

September 30, 2022

September 30, 2021

Current assets

Accounts receivable, net

Deferred costs

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Total current assets

Operating lease ROU asset

Deferred costs

LIABILITIES & STOCKHOLDERS’

EQUITY (DEFICIT)

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable and accrued

Accrued compensation

Operating lease liability

– current portion

Paycheck protection program

loan – current portion

Accounts payable and accrued liabilities

Deferred revenue

Promissory note payable

Income taxes payable

Total current liabilities

Paycheck protection program loan – long

Operating lease liability – long-term

Deferred tax liability

Total liabilities

Commitments and contingencies

Series A convertible preferred stock, $ 0.01

par value, 10,000,000 shares

nil and 1,000,000 shares issued and outstanding as of September 30, 2021 and September

30, 2020, respectively

Common stock, $ 0.01 par value, 681,000,000

shares authorized;

and 27,505,196 shares outstanding;

and 96,342,125 and 40,792,510 issued as of

September 30,

2021 and September 30, 2020, respectively

Treasury stock, at cost, 13,414,814 and

13,287,314 shares as of September 30, 2021 and September 30, 2020, respectively

Series A convertible preferred stock, $ 0.001 par value, 10,000,000 shares authorized;

100 and 100 shares issued and outstanding as of September 30, 2022 and 2021, respectively

Common stock, $ 0.001 par value, 681,000,000 shares authorized;

148,724,056 and 59,900,000 shares issued and outstanding;

September 30, 2022 and 2021, respectively

Additional paid-in capital

Accumulated deficit

( 71,530,891 )

( 68,426,608 )

Total stockholders’

equity (deficit)

Total liabilities and stockholders’

equity (deficit)

Total stockholders’ equity

Total liabilities and stockholders’ equity

accompanying notes are an integral part of these financial statements.

OF OPERATIONS

STATEMENTS OF OPERATIONS

thousands except share and per share data)

For the Year Ended

September 30,

Cost of revenues

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Sales and marketing

and development

operating expenses

Operating loss

( 3,295,335 )

( 6,925,740 )

Other (expenses) income:

Loss on disposal of asset

Paycheck Protection Program

Forgiveness Income

other income (expense), net

$ ( 3,104,283 )

$ ( 6,970,072 )

Net loss per common

share - Basic and diluted:

Weighted average common

shares outstanding - Basic and diluted

Research and development

Acquisition costs

Goodwill impairment

Total operating expenses

Operating income (loss)

Other income:

Total other income (expense), net

Net income (loss) before income tax expense

Income tax expense

Net income (loss) after income tax expense

Net income (loss) per common share – Basic and diluted:

Weighted average common shares outstanding – Basic and diluted

accompanying notes are an integral part of these financial statements.

OF STOCKHOLDERS’ EQUITY (DEFICIT)

STATEMENTS OF STOCKHOLDERS’ EQUITY

THE YEARS ENDED SEPTEMBER 30, 2022, AND 2021

thousands except preferred shares)

Shares Issued

Treasury Stock

Paid-in Capital

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Shares Issued

Treasury Stock

Paid-in Capital

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Balance at, September 30, 2020

$ ( 61,456,536 )

Stock option issued to directors and officers

Treasury shares acquired

Preferred and treasury shares acquired

Preferred and treasury shares acquired, shares

Issuance of common stock for cash, net of issuance costs

Issuance of common stock for cash, net of issuance costs, shares

( 6,970,072 )

Equity distributions

Equity redemptions

Balance at September 30, 2021

$ ( 550,000 )

$ ( 68,426,608 )

$ ( 137,962 )

Preferred and treasury shares acquired

( 1,000,000 )

Issuance of common stock for cash, net of issuance costs

( 3,104,283 )

Equity distributions

Equity redemptions

Shares issued for services

Shares issued for vesting of RSUs

Acquisition costs – contingent consideration

Cipherloc Business Combination

income (loss)

Balance at September 30, 2022

$ ( 590,000 )

$ ( 71,530,891 )

accompanying notes are an integral part of these financial statements.

OF CASH FLOWS

the Year Ended

STATEMENTS OF CASH FLOWS

For the Year Ended September 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

$ ( 3,104,283 )

$ ( 6,970,072 )

Adjustments to reconcile

net loss to net cash used in operating activities:

Net (loss) income

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

Depreciation and amortization

Stock-based compensation

Impairment loss on ROU

assets (gain on early termination of operating lease)

Loss on disposal of asset

PPP loan forgiveness income

Changes in operating assets

and liabilities:

Prepaid expenses and other

Accounts payable and accrued

Accrued compensation

cash used in operating activities

( 3,630,806 )

( 6,646,091 )

Provision for doubtful accounts

Acquisition costs

Goodwill impairment

Changes in operating assets and liabilities:

Accounts receivable

Prepaid expenses and other assets

Accounts payable and accrued liabilities

Deferred revenue

Net cash (used in) provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

of fixed assets

cash used in investing activities

Cash and cash equivalents acquired in connection with the Business Combination

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES

Purchase of treasury stock

Proceeds from PPP loan

Repayment on PPP loan

Purchase of preferred stock

from the issuance of common stock, net of costs

cash provided by (used in) financing activities

Equity redemptions

Equity distributions

Net cash (used in) financing activities

INCREASE (DECREASE) IN CASH

( 6,759,633 )

CASH, BEGINNING OF YEAR

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NON-CASH INVESTING AND FINANCING ACTIVITIES:

Capitalization

operating lease liability recorded

treasury stock

Shares issued for services

Equity redemption with note payable

Assets acquired and liabilities assumed

accompanying notes are an integral part of these financial statements.

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1 – DESCRIPTION OF BUSINESS

Cipherloc Corporation (the “ Company ”

or “ Cipherloc ”) was incorporated in the State of Texas on June 22, 1953, under the name “ American Mortgage

” Effective August 27, 2014, we changed our name to “ Cipherloc Corporation.

” Prior to September

30, 2021, the Company was a Texas corporation.

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

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

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

We intend to provide more tech-enabled

services to address the needs of our customers, including virtual Chief Information Security Officer (vCISO), zero trust, third-party

risk management, due diligence, privacy, threat intelligence, and managed end-point security solutions.

We now have over 20 C-suite level

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

To date, SideChannel has created over

50 multi-layered cybersecurity programs for its clients.

growth strategy focuses on these three initiatives:

Securing new vCISO clients

Adding new Cybersecurity Software and Services offerings

Increasing adoption of Cybersecurity Software, including Enclave and Services offerings at vCISO clients

support of securing new vCISO clients, we expanded the sales and marketing team from one dedicated person to five during the fiscal quarter

ended during September 30, 2022.

On October 27, 2022, we announced that during the same fiscal quarter we acquired six (6) new clients

with potential annual revenue of $ 1.3 million.

vCISO engagements are typically twelve (12) month engagements containing a monthly subscription

and an annual renewal option and hourly rates for vCISO time and material projects range from $ 350 to $ 400 .

Each of our vCISO’s

is generally embedded into the C-suite executive teams of two (2) to four (4) of our clients.

September 2022 we announced a proprietary product called Enclave which simplifies an important cybersecurity task called “microsegmentation”.

Enclave seamlessly combines access control, microsegmentation, encryption and other secure networking concepts to create a comprehensive

It allows Information Technology to easily segment the enterprise network, place the right staff in those segments and direct

We expect to begin recognizing revenue from Enclave during fiscal year 2023.

(the “ Company ” or “ SideChannel ”) was incorporated in the State of Texas on June 22, 1953,

under the name “ American Mortgage Company.

” Effective August 27, 2014, we changed our name to “ Cipherloc

Corporation ” and on July 5, 2022 we changed our name to “SideChannel, Inc.” Prior to September 30, 2021, the Company

was a Texas corporation.

The Company became a Delaware corporation effective September 30, 2021.

Our headquarters are

located at 6836 Bee Cave Road, Building 1, Suite279, Austin, Texas 78746.

Our website is www.cipherloc.net .

2 – NEW EQUITY ISSUANCE

March 31, 2021, to April 16, 2021, we entered into a Securities Purchase Agreement (the “ Purchase Agreement ”), with

certain accredited investors (the “ Purchasers ”), pursuant to which the Company sold the Purchasers an aggregate of

(a) 55,549,615 shares of common stock (“ Offering Shares ”), and (b) warrants to purchase 55,549,615 shares of common

stock of the Company (“ Offering Warrants ”).

The Offering Shares and Offering Warrants were sold at a price of $ 0.18

per combined unit of an Offering Share and an Offering Warrant (the “ Offering Price ”), which was equal to 80 % of the

closing sales price of the Company’s common stock on the OTCQB Market on March 30, 2021, which was the last trading day prior to

the initial closing under the Purchase Agreement.

sale of the Offering Shares and Offering Warrants occurred at four closings as follows:

SCHEDULE OF OFFERING SHARES AND OFFERING WARRANTS

March 31, 2021

April 7, 2021

April 9, 2021

April 16, 2021

gross proceeds from the offering of the Offering Shares and Offering Warrants (the “ Private Placement ”) were approximately

$ 10 million (as shown above).

Investment Company, LLC (the “ Placement Agent ”), served as placement agent for the Private Offering.

The Company entered

into a Placement Agent Agreement with the Placement Agent in connection therewith (the “ Placement Agreement ”, discussed

As partial consideration for the services provided by the Placement Agent, the Company granted the Placement Agent and its assigns,

warrants to purchase 8,332,439 shares of common stock (“ Placement Warrants ”, discussed in greater detail below).

Company agreed to use the proceeds from the Private Placement for working capital purposes and not to use such proceeds:

satisfaction of any portion of the Company’s debt (other than (i) payment of trade payables in the ordinary course of the Company’s

business and prior practices and (ii) the repayment of funds received by the Company under the “ paycheck protection program ”

of the CARES Act), (b) for the redemption of any common stock or common stock equivalents, (c) for the settlement of any outstanding

litigation, or (d) in violation of applicable regulations.

connection with the Private Placement, each of our officers and directors entered into Lock-Up Agreements pursuant to which they agreed

not to sell, offer, or transfer, any of our securities that they held for 180 days after the closing of the Private Placement, subject

to customary exceptions.

Offering Warrants, which are evidenced by Common Stock Purchase Warrants (the “ Warrant Agreements ”), have an exercise

price of $ 0.36 per share ( 200 % of the Offering Price), and may be exercised at any time after the grant date of the Offering Warrants

(i.e., March 31, 2021, April 7, 2021, April 9, 2021, or April 16, 2021, as applicable), until five years thereafter.

The Offering Warrants

have cashless exercise rights that are exercisable if, when exercised, a registration statement registering the shares of the Company’s

common stock issuable upon exercise thereof, is not then effective with the Securities and Exchange Commission.

The exercise of each

of the Offering Warrants is subject to a beneficial ownership limitation of 4.99%, preventing such exercise by the holder(s) thereof,

if such exercise would result in such holder(s) and their affiliates, exceeding ownership of 4.99 % of our common stock.

Warrants contain anti-dilution rights such that, if we issue, or are deemed to have issued, common stock or common stock equivalents

at a price less than the then exercise price of the Offering Warrants, the exercise price of the Offering Warrants is automatically reduced

to such lower value, and the number of shares of common stock issuable upon exercise thereafter is adjusted proportionately so that the

aggregate exercise price payable upon exercise of such Offering Warrants is the same prior to and after such reduction in exercise price.

to a Registration Rights Agreement (“ RR Agreement ”), we agreed to file a registration statement to register the sale

of the Offering Shares and the shares of common stock issuable upon exercise of the Warrants, prior to the tenth day after the end of

the Private Offering (provided that the Placement Agent agreed that such ten day period began on April 19, 2021, regardless of the actual

closing date of the Private Offering), and to obtain effectiveness of such registration statement by the 60 th calendar day

following the date of the RR Agreement (March 31, 2021)(provided that in the event we are required to file any additional registration

statements under the RR Agreement, such required effectiveness date is the 90 th day after such registration statement is required

to be filed), which registration statement was timely filed and was timely declared effective.

January 11, 2021, we entered into a Placement Agent Agreement with the Placement Agent, pursuant to which we engaged the Placement Agent

as the Company’s exclusive placement agent in connection with the Private Offering.

Pursuant to the Placement Agent Agreement,

we agreed to pay the Placement Agent a cash commission of 13 %

of the gross proceeds received in the Private Offering ($ 1,334,861 ),

and to grant the Placement Agent or its assigns, a warrant to purchase 15 %

of the Offering Shares sold in the Private Offering (i.e., warrants to purchase 8,332,439

shares in aggregate), which were granted to the

Placement Agent effective on April 16, 2021.

The warrants were priced at the issuance price of the Offering Shares in the

Private Placement.

The Placement Agent Agreement had a term expiring on August

31, 2021 , and includes a three-year tail period,

pursuant to which the Placement Agent is due the same fees payable in connection with the Private Offering, in the event the Company

sells any securities to any investor or potential investor who received Private Offering documents as part of the Private Offering.

addition to the compensation payable upon completion of the Private Offering, the Company paid the Placement Agent a $ 35,000

cash retainer.

Placement Warrants are evidenced by warrants similar to the Purchase Warrants, have a term of 10 years (i.e., through April 16, 2031),

an exercise price of $ 0.18 per share (the Offering Price), and cashless exercise rights.

We are required to pay the Placement Agent liquidated

damages of $10 per day for each $1,000 of shares not timely delivered upon the exercise of the Placement Warrants.

The Placement Warrants

include a weighted average anti-dilution right in the event we issue any shares of common stock or equivalents with a value less than

the then exercise price.

management has evaluated the warrants for derivative status and concluded the warrants are freestanding equity instruments.

3 – SIGNIFICANT ACCOUNTING POLICIES

headquarters are located at 146 Main Street, Suite 405, Worcester, MA, 01608.

Our website is www.sidechannel.com .

are following the guidance of the Centers for Disease Control and Prevention and the local regulatory authorities in regions outside

While the negative impact of COVID-19 on our business was reduced significantly throughout 2021, the spread of the virus or

variants of the virus could worsen and one or more of our significant customers or suppliers could be impacted, or significant additional

governmental regulations and restrictions could be imposed, thus negatively impacting our business in the future.

We continue to monitor

the situation closely in the regions in which we operate in the U.S.

and abroad and will adjust our operations as necessary to protect

the health and well-being of our employees.

To the extent that further governmental mandates or restrictions are implemented in the future,

we currently expect to be able to continue to operate our business in a manner similar to how we have operated over the past year.

2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

of Presentation

accompanying consolidated financial statements include the accounts of SideChannel, Inc., and its wholly-owned subsidiary, SCS, Inc.

(Massachusetts).

Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America

All intercompany balances and transactions have been eliminated.

Significant accounting policies are as follows:

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differ from these estimates.

Company is subject to legal proceedings, claims and liabilities which arise in the ordinary course of business.

The Company accrues for

losses associated with legal claims when such losses are probable and can be reasonably estimated.

These accruals are adjusted as additional

information becomes available or circumstances change.

Legal fees are charged to expense as they are incurred.

and Cash Equivalents and Concentration of Credit Risk

businesses are accounted for using the purchase method of accounting, which requires that the purchase price be allocated to the net

assets acquired at their respective fair values.

Any excess of the purchase price over the estimated fair values of the net assets acquired

is recorded as goodwill.

Fair values of intangible assets are estimated by valuation models prepared by our management and third-party

The assets purchased and liabilities assumed have been reflected in our consolidated balance sheets, and the operating results

are included in the consolidated statements of operations and consolidated statements of cash flows from the date of acquisition.

change in the fair value of acquisition-related contingent consideration subsequent to the acquisition date, including changes from events

after the acquisition date, will be recognized in the consolidated statement of operations in the period of the estimated fair value

Acquisition-related transaction costs, including legal and accounting fees and other external costs directly related to the acquisition,

are recognized separately from the acquisition and expensed as incurred in general and administrative expense in the consolidated statements

of operations.

and Cash Equivalents

Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

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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 .

As of September 30, 2021, $ 5,533,994 of the Company’s cash balance was uninsured.

The Company has not experienced any losses on

and Capital Resources

Company had an accumulated deficit as of September 30, 2021 of $ 71,530,891 .

The Company expects to continue to generate operating losses until it can generate revenues sufficient to exceed its

operating expenses.

As of September 30, 2021, the Company had $ 5,783,994

The Company believes that its

existing cash balances are sufficient to fund its operations for the next 12 months.

assets are recorded at cost and depreciation is provided over the estimated useful lives of the related assets using the straight-line

method for financial statement purposes.

Equipment and furniture are depreciated over an estimated useful life of three ( 3 ) to five ( 5 )

Leasehold improvements are depreciated over the lesser of the related lease term or a useful life of ten ( 10 ) years.

is depreciated over an estimated useful life of three ( 3 ) years.

Company does not have any fixed assets on its balance sheet as of September

The Company’s fixed assets were disposed of during 2020 as part of a downsizing and cash conservation effort.

assets are evaluated for impairment whenever events or changes in our 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 year ended September 30, 2020, the Company recorded an impairment loss of $ 382,961 related

to its Virginia lease.

In addition, the Company recorded a loss of $ 44,336 on the disposal of fixed assets.

The Company maintains its cash in accounts held by highly reputable financial institutions 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 .

As of September 30, 2022, approximately $ 2.8 million of the Company’s cash balance was uninsured.

Company has not experienced any losses on cash.

accounts receivable are recorded at the invoiced amount and do not bear interest.

We grant credit to customers and generally require

no collateral.

We do not have any significant off-balance sheet credit exposure related to our customers.

There were no customers with

accounts receivable balances that exceeded 10% of accounts receivable at September 30, 2022.

Cash flows from accounts receivable are

recorded in operating cash flows.

Value of Financial Instruments

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3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

fair values of the embedded conversion features in the warrants issued by the Company were determined using level 2 measurements and

are discussed in further detail in Note 8.

Concentration

the year ended September 30, 2021, two customers accounted for 100 % of the Company’s revenues.

During the year ended September

30, 2020, two customers also accounted for 100 % of the Company’s revenues.

Company recognizes revenues in accordance with the provisions of Accounting Standards Update 2014-09, “Revenue from Contracts with

Customers,” and a series of amendments which together we identify as “ASC Topic 606”.

This new accounting standard,

which we adopted on October 1, 2018, using the permitted modified retrospective method, outlines a single comprehensive model for entities

to use in accounting for revenues arising from contracts with customers.

The new standard supersedes most previous revenue recognition

guidance, including industry-specific guidance.

The effect of the adoption of ASC Topic 606 on retained earnings as of October 1, 2018,

was not material.

The differences between our reported operating results for the twelve months ended September 30, 2020, which reflect

the application of the new standard on our contracts, and the results that would have been reported if the accounting was performed pursuant

to the accounting standards previously in effect, also were not material.

to the new revenue recognition guidance is a five-step revenue recognition model that requires reporting entities to:

fair values of the warrants issued by the Company as part of the acquisition price were determined using level 2 measurements and are

discussed in further detail in Note 3.

Intangible, and Long-Lived Assets

account for goodwill and intangible assets in accordance with Accounting Standards Codification (“ASC”) Topic 350 (Intangibles

– Goodwill and Other).

Finite-lived intangible assets are amortized over their estimated useful economic life and are carried at cost

less accumulated amortization.

Goodwill is assessed for impairment annually at the beginning of the fourth quarter on a reporting unit

basis, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired.

Goodwill is considered

to be impaired if the fair value of a reporting unit is less than its carrying amount.

As a part of the goodwill impairment assessment,

we have the option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting

unit is less than its carrying amount.

If, as a result of our qualitative assessment, we determine that it is more-likely-than-not that

the fair value of the reporting unit is greater than its carrying amount, a quantitative goodwill impairment test is not required.

if, as a result of our qualitative assessment, we determine it is more-likely-than-not that the fair value of a reporting unit is less

than its carrying amount, or, if we choose not to perform a qualitative assessment, we are required to perform a quantitative goodwill

impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized.

quantitative goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill.

fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired.

If the carrying

amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to

the total amount of goodwill allocated to that reporting unit.

The goodwill impairment assessment is based upon the income approach,

which estimates the fair value of our reporting units based upon a discounted cash flow approach.

This fair value is then reconciled

to our market capitalization at year end with an appropriate control premium.

The determination of the fair value of our reporting units

requires management to make significant estimates and assumptions including the selection of control premiums, discount rates, terminal

growth rates, forecasts of revenue and expense growth rates, income tax rates, changes in working capital, depreciation, amortization

and capital expenditures.

Changes in assumptions concerning future financial results or other underlying assumptions could have a significant

impact on either the fair value of the reporting unit or the amount of the goodwill impairment charge.

The goodwill was evaluated at

the acquisition date and the fair value of the goodwill was determined to be less than the carrying amount of the goodwill by $ 5.7 million.

As a result, an impairment charge was recorded on the acquisition date of $ 5.7 million was recorded and the net carrying amount of goodwill

was $ 1.4 million.

of the goodwill associated with the Business Combination is deductible for income tax purposes.

did not record indefinite-lived intangible assets in the fiscal years ended September 30, 2022 and 2021.

assets, which consist of finite-lived intangible assets and property and equipment, are assessed 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 estimated undiscounted cash flows to the recorded

value of the asset.

If impairment is indicated, the asset is written down to its estimated fair value.

The cash flow estimates used to

determine the impairment, if any, contain management’s best estimates using appropriate assumptions and projections at that time.

recognize revenue in accordance with the guidance in ASC Topic 606 (Revenue from Contracts with Customers).

We recognize revenue for

the sale of products or services when our performance obligations under the terms of a contract with a customer are satisfied and control

of the product or service has been transferred to the customer.

Generally, this occurs when we deliver a product or perform a service.

In certain cases, recognition of revenue is deferred until the product or service is received by the customer or at some other point

in the future when we have determined that we have satisfied our performance obligations under the contract.

Our contracts with customers

may include a combination of products and services, which are generally capable of being distinct and accounted for as separate performance

recognition guidance is a five-step revenue recognition model that requires reporting entities to:

Identify the contract,

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Recognize revenue.

Company accounts for a promise to provide a customer with a right to access the Company’s intellectual property as a performance

obligation satisfied over time because the customer will simultaneously receive and consume the benefit from the entity’s performance

of providing access to its intellectual property as the performance occurs.

is recorded in an amount that reflects the consideration we expect to receive in exchange for those products or services.

We do not have

any material variable consideration arrangements, or any material payment terms with our customers other than standard payment terms

which generally range from net 30 to net 90 days.

of Products and Services

for on-premises software provide the customer with a right to use the software as it exists when made available to the customer.

may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the

duration over which the customer benefits from the software.

Revenue from distinct on-premises licenses is recognized upfront at the

point in time when the software is made available to the customer.

In cases where the license is being modified at the direction of the

customer the revenue is being recognized ratably over the term of the arrangement.

Revenue allocated to software maintenance and support

services is recognized ratably over the contractual support period.

services are primarily related to software implementation services and associated revenue is recognized upon customer acceptance.

of revenue recognition may differ from the timing of invoicing to customers.

The Company records a contract asset or receivable when

revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing.

For perpetual licenses

with multi-year product maintenance agreements, the Company generally invoices customers at the beginning of the coverage period.

multi-year subscription licenses, the Company generally invoices customers annually at the beginning of each annual coverage period.

The Company records a contract asset related to revenue recognized for multi-year on-premises licenses as its right to payment is conditioned

upon providing product support and services in future years.

were no accounts receivable balances on September 30, 2021, and 2020.

There was no adjustment needed to the accounts receivable for the

cumulative effect of applying ASC 606 under the modified retrospective method.

There was no impact on the opening balance contract assets

and liabilities, for the cumulative effect of applying ASC 606 under the modified retrospective method as of October 1, 2018.

revenue is comprised mainly of unearned revenue related maintenance and technical support on term and perpetual licenses.

and technical support revenue are recognized ratably over the coverage period.

Deferred revenue also includes contracts for professional

services to be performed in the future which are recognized as revenue when the company delivers the related service pursuant to the

terms of the customer arrangement.

in deferred revenue were as follows:

OF CHANGES IN DEFERRED REVENUE

Year Ended September

Balance on September 30, 2020

Deferral of revenue

Recognition of revenue

Balance at September 30, 2021

Year Ended September

Balance on September 30, 2019

Deferral of revenue

Recognition of revenue

Balance at September 30, 2020

revenue includes invoiced revenue allocated to remaining performance obligations that has not yet been recognized and will be recognized

as revenue in future periods.

Deferred revenue was zero as of September 30, 2021.

terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 90 days.

where the timing of revenue recognition differs from the timing of invoicing, the Company has determined its contracts generally do not

include a significant financing component.

The primary purpose of the Company’s invoicing terms is to provide customers with simplified

and predictable ways of purchasing its products and services, not to receive financing from our customers or to provide customers with

Examples include invoicing at the beginning of a subscription term with maintenance and support revenue recognized ratably

over the contract period, and multi-year on-premises licenses that are invoiced annually with product revenue recognized upon delivery.

Company’s contracts with customers often include promises to transfer multiple products and services to a customer.

whether products and services are considered distinct performance obligations that should be accounted for separately versus together

may require significant 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

The Company’s perpetual and term software licenses may 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

In cases where the license is being modified at the direction of the customer the revenue is being recognized 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.

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

Recognized from Costs to Obtain a Contract with a Customer

Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs

to be longer than one year.

The Company has determined that its sales commission program meets the requirements for cost capitalization.

Total capitalized costs to obtain a contract were immaterial during the periods presented.

The Company applies a practical expedient

to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or

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 collection of the resulting receivable

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.

When the fair value of VSOE of post

contract customer support cannot be determined, the revenue is recognized ratably over the contract period.

The only remaining undelivered

element was post contract support services, and accordingly, the revenues were recognized on a pro rata basis prospectively over the

terms of the related contracts.

Deferred revenue results from fees billed to or collected from customers for which revenue has not yet

been recognized.

Company had deferred revenue of zero and $ 15,417 as of September 30, 2021 and 2020, respectively.

identify, develop, and deploy cybersecurity, privacy, and risk management solutions for our clients and customers in North America.

categorize our products and services as either vCISO Services or Cybersecurity Software and Services.

As a result of the Business Combination,

we announced a proprietary cybersecurity software product called Enclave.

We also sell third party software and services through a network

of strategic partnerships.

of Contracts with Customers

contracts with customers are generally structured as annual subscription agreements or project specific statements of work.

subscription agreements include a minimum number of service hours per year or month and a specified rate for the minimum amount of services

to be delivered during the subscription time period.

Payment terms and any other customer-specific acceptance criteria are also specified

in the contracts and statements of work.

record accounts receivable at the time of invoicing.

Accounts receivable, net of the allowance for doubtful accounts, is included in

current assets on our balance sheet.

To the extent that we do not recognize revenue at the same time as we invoice, we record a liability

for deferred revenue.

In certain instances, we also receive customer deposits in advance of invoicing and recording of accounts receivable.

Deferred revenue and customer deposits are included in current liabilities on our consolidated balance sheets.

used, the allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance.

We determine the allowance based on known troubled accounts, if any, historical experience, and other currently available evidence.

to Obtain a Contract with a Customer

only costs we incur associated with obtaining contracts with customers are sales commissions that we pay to our internal sales personnel

or third-party sales representatives.

These costs are calculated based on set percentages of the revenue value of each product or service

Commissions are considered earned by our internal sales personnel at the time we recognize revenue for a particular transaction.

Commissions are considered earned by third-party sales representatives at the time that revenue is recognized for a particular transaction.

We record commission expense in our consolidated statements of operations at the time the commission is earned.

Commissions earned but

not yet paid are included in current liabilities on our balance sheets.

Note 4 for further information about our revenue from contracts with customers.

account for leases in accordance with ASC Topic 842 (Leases).

We determine if an arrangement is a lease at inception.

A lease contract

is within scope if the contract has an identified asset (property, plant or equipment) and grants the lessee the right to control the

use of the asset during the lease term.

The identified asset may be either explicitly or implicitly specified in the contract.

the supplier must not have any practical ability to substitute a different asset and would not economically benefit from doing so for

the lease contract to be in scope.

The lessee’s right to control the use of the asset during the term of the lease must include

the ability to obtain substantially all of the economic benefits from the use of the asset as well as decision-making authority over

how the asset will be used.

Leases are classified as either operating leases or finance leases based on the guidance in ASC Topic 842.

Operating leases are included in operating lease ROU assets and operating lease liabilities in our consolidated balance sheets.

leases are included in property and equipment and financing lease liabilities.

We do not currently have any financing leases.

lease payments are included in cash outflows from operating activities on our consolidated statements of cash flows.

have made an accounting policy election not to apply the recognition requirements of ASC Topic 842 to short-term leases (leases with

a term of one year or less at the commencement date of the lease).

Lease expense for short-term lease payments is recognized on a straight-line

basis over the lease term.

the guidance of ASC Topic 842, we are not required to record ROU assets and operating lease liabilities.

Note 7 for further disclosures regarding our leases.

and Development and Software Development Costs

1 unchanged sentence

Our research and development costs

incurred for the years ended September 30, 2021 and 2020 were $ 616,746 and $ 1,689,455 , respectively.

Company measures the cost of services provided by employees and non-employees in exchange for an award of an equity instrument based

on the grant-date fair value of the award.

The Company granted stock options during the year ended September 30, 2020, but

those awards were subsequently forfeited.

The Company had both fully vested stock grants and stock options granted to employees

and non-employees during the year ended September 30, 2019.

As such, the Company recognized compensation cost for grants,

as well as a ratable portion for the stock options vesting over a three-year time frame during the years ended September 30, 2019 and

however, no vesting occurred during fiscal year 2021 for these awards due to separation of employment by these employees during

fiscal year 2020.

The Company made no award grants during the year ended

September 30, 2021.

Company accounts for share-based payments in accordance with the authoritative guidance issued by the FASB on share-based compensation,

which establishes the accounting for transactions in which an entity exchanges its equity instruments for goods or services.

provisions of the authoritative guidance, share-based compensation expense is measured at the grant date, based on the fair value of

the award, and is recognized as an expense over the requisite employee service period (generally the vesting period), net of actual forfeitures.

The Company estimates the fair value of share-based payments using the Black-Scholes option-pricing model.

Additionally, share-based

awards to non-employees are expensed over the period in which the related services are rendered at their fair value.

All share-based

awards are expected to be fulfilled with new shares of common stock.

ASC 718-20-35-7, Repurchase or Cancellation of equity awards, the amount of cash or other assets transferred (or liabilities incurred)

to repurchase an equity award shall be charged to equity, to the extent that the amount paid does not exceed the fair value of the equity

instruments repurchased at the repurchase date.

Any excess of the repurchase price over the fair value of the instruments repurchased

shall be recognized as additional compensation cost.

incurred for the year ended September 30, 2022, were $ 178,000 .

account for stock-based compensation in accordance with ASC Topic 718 (Compensation – Stock Compensation) which requires that employee

share-based equity awards be accounted for under the fair value method and requires the use of an option pricing model for estimating

fair value of awards, which is then amortized to expense over the service periods.

See further disclosures related to our stock-based

compensation plans in Note 8.

Company is subject to legal proceedings, claims and liabilities which arise in the ordinary course of business.

The Company accrues for

losses associated with legal claims when such losses are probable and can be reasonably estimated.

These accruals are adjusted as additional

information becomes available or circumstances change.

Legal fees are charged to expense as they are incurred.

Company utilizes the asset and liability method in accounting for income taxes.

19 unchanged sentences

any liabilities for uncertain tax positions during the years ended September 30, 2022, or 2021.

and Diluted Net Loss per Common Share

Earnings (Loss) Per Common Share

loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding

5 unchanged sentences

common stock that could share in the earnings of the Company.

During the year ended September 30, 2021, 87,628,920 warrants were exclude

from the calculation of diluted loss per share because their effect would be anti-dilutive.

loss per share is the same as basic loss per share during periods where net losses are incurred since the inclusion of the potential

1 unchanged sentence

During the year ended September 30, 2022, 87,628,920 warrants,

800,000 stock options and 1,000,000 shares of convertible preferred stock were excluded from the calculation of diluted loss per share

because their effect would be anti-dilutive.

As of September 30, 2021, the Company had purchased the 1,000,000 shares of preferred stock

outstanding which were outstanding as of September 30, 2020.

and 4,309,262 restricted stock units were excluded from the calculation of diluted loss per share because their effect would be anti-dilutive.

There were no anti-dilutive common stock equivalents outstanding during the year ended September 30, 2021.

Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions.

The Company’s focus is on the research, development and commercialization of its technology.

Company evaluates warrants in accordance with Topic 480 of the FASB ASC and Topic 815 of the FASB ASC.

The result of this accounting

treatment is that the fair value of the embedded derivative, if required to be bifurcated, is marked-to-market at each balance sheet

date and recorded as a liability.

The change in fair value is recorded in the Statement of Operations as a component of other income

Upon exercise of a warrant, it is marked to fair value at the exercise date and then that fair value is reclassified to equity.

Accounting Announcements

Financial Accounting Standards Board (“FASB”) issues Accounting Standards Updates (“ASU”) to amend the authoritative

literature in the ASC.

There have been several ASUs to date that amend the original text of the ASCs.

Other than those discussed below,

the Company believes those ASUs issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not

applicable to the Company or (iv) are not expected to have a significant impact on the Company.

issues Accounting Standards Updates (“ASU”) to amend the authoritative literature in the ASC.

There have been several ASUs

to date that amend the original text of the ASCs.

Other than those discussed below, the Company believes those ASUs issued to date either

(i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to

have a significant impact on the Company.

Pronouncements Adopted

August 2020, FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other and Derivatives and Hedging—Contracts in

Entity’s Own Equity:

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” which simplifies

the accounting for convertible instruments by removing the separation models for convertible debt with a cash conversion feature and

convertible instruments with a beneficial conversion feature.

As a result, a convertible debt instrument will be accounted for as a single

liability measured at its amortized cost.

These changes will reduce reported interest expense and increase reported net income for entities

that have issued a convertible instrument that was bifurcated according to previously existing rules.

Also, ASU 2020-06 requires the

application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available.

The new guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal

years beginning after December 15, 2020.

The Company has adopted the guidance effective July 1, 2021.

Pronouncements Not Yet Adopted

June 2016, the FASB issued amendments to the guidance for accounting for credit losses.

In November 2019, the FASB deferred the effective

date of these amendments for certain companies, including smaller reporting companies.

As a result of the deferral, the amendments are

effective for us for reporting periods beginning after September 30, 2023.

The amendments replace the incurred loss impairment methodology

under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit

loss model for accounts receivables, loans, and other financial instruments.

The amendments require a modified retrospective approach

through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is

We plan to adopt the amendments when they become effective for us on October 1, 2023.

The adoption of this standard is not

expected to have a material impact on the Company’s consolidated financial statements.

December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

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beginning on October 1, 2022.

August 2018, the FASB issued ASU 2018-13, Fair Value Measurements (Topic 820) – Disclosure Framework – Changes to the

Disclosure Requirements for Fair Value Measurement , to modify the disclosure requirements for fair value measurements.

The ASU removes

certain disclosure requirements related to transfers between fair value hierarchy levels and valuation processes for Level 3 fair value

measurements.

It modifies certain disclosure requirements for investments in entities that calculate net asset value.

It adds certain

disclosure requirements regarding gains and losses for recurring Level 3 fair value measurements and unobservable inputs used to develop

Level 3 fair value measurements.

ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning

after December 15, 2019.

The Company adopted ASU 2018-13 on October 1, 2019, and the adoption of this update did not have a material

impact on the Company’s notes to the financial statements.

June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based

Payment Accounting , to expand the scope of Topic 718, Compensation – Stock Compensation , which currently only includes

share-based payments to employees, to include share-based payments issued to nonemployees for goods or services.

Thus, accounting for

share-based payments to nonemployees and employees will be substantially aligned.

ASU 2018-07 is effective for fiscal years, and interim

periods within those fiscal years, beginning after December 15, 2018.

The Company adopted ASU 2018-07 on October 1, 2019, and the adoption

of this update did not have a material impact on the Company’s financial position, results of operations and cash flows.

February 2016, the FASB issued ASU 2016-02, Leases, which aims to make leasing activities more transparent and comparable and requires

substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset (ROU) and corresponding lease liability,

including leases currently accounted for as operating leases.

Leases of mineral reserves and related land leases have been exempted from

the standard.

We adopted ASU 2016-02, Leases, on October 1, 2019.

We elected the “package of practical expedients” within

the standard which permits us not to reassess prior conclusions about lease identification, lease classification and initial direct costs.

We made an accounting policy election to not separate lease and non-lease components for all leases.

The adoption of this standard resulted

in the recognition of right-of-use assets and lease liabilities of $ 0.2 million, which were not previously recorded on our balance sheet.

4 – SOFTWARE LICENSES

3 – REVERSE MERGER BETWEEN CIPHERLOC CORPORATION AND SIDECHANNEL, INC.

(now known as SCS, Inc.)

of the Business Combination

July 1, 2022 (the “Closing Date”) the Company, then known as Cipherloc Corporation, a Delaware corporation, completed its

acquisition (“Business Combination”) of all the outstanding equity securities of SideChannel, Inc., a Massachusetts corporation

pursuant to an Equity Securities Purchase Agreement dated May 16, 2022 (the “Purchase Agreement”).

On September 9, 2022,

SideChannel, Inc.

the acquired Massachusetts corporation and a subsidiary of the registrant, changed its name to SCS, Inc.

(the “Subsidiary”

or “SCS”) and Cipherloc Corporation, the Delaware parent company of the subsidiary has changed its name to SideChannel, Inc.

transaction was accounted for as a reverse acquisition (“reverse merger”) in accordance with accounting principles generally

accepted in the United States of America (“GAAP”).

Under this method of accounting, SCS was deemed to be the accounting acquirer

for financial reporting purposes.

This determination was primarily based on the facts that, immediately following the Business Combination:

majority of the Board of Directors of the combined company will be composed of directors designated by the Sellers under the terms of

the Purchase Agreement;

and (2) existing members of SCS management constituted the management of the combined company.

Because SDS has

been determined to be the accounting acquirer in the Business Combination, but not the legal acquirer, the transaction is deemed a reverse

acquisition under the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)

Topic 805, Business Combinations.

As a result, the historical financial statements of SideChannel are the historical financial statements

of the combined company.

the closing of the Business Combination, SCS, Inc.

became a wholly owned subsidiary of the Company.

As used herein, the words “the

Company” refers to, for periods following the Business Combination, SideChannel, together with its subsidiaries, and for periods

prior to the Business Combination, SideChannel Inc., and its direct and indirect subsidiaries, as applicable.

of the Business Combination Terms

to the Purchase Agreement, on the Closing Date, the former shareholders of the Subsidiary (the “Sellers”) exchanged all

of their equity securities in the Subsidiary for a total of

59,900,000 shares of the Company’s common stock (the “First Tranche Shares”), and 100 shares

of the Company’s newly designated Series A Preferred Stock, $ 0.001

par value (the “Series A Preferred Stock”).

The Sellers are entitled to receive up to an additional 59,900,000

shares of the Company’s common stock (the “Second Tranche Shares” and together with the First Tranche Shares and

the Series A Preferred Stock, the “Shares”) at such time that the operations of the Subsidiary, as a subsidiary of the

Company, achieves at least $ 5.5

million in revenue (the “Milestone”) for any twelve-month period occurring after the Closing Date and before the

48-month anniversary of the execution of the Purchase Agreement.

The Second Tranche shares were valued using the closing price on July 1, 2022 of $ 0.10 per share which resulted in a fair value of $ 6.1

the Closing Date, the Sellers acquired approximately 40.4% of the Company’s outstanding common stock.

If the Subsidiary achieves

the Milestone, and the Sellers are issued the Second Tranche Shares, and assuming that there is no other change in the number of shares

outstanding prior to the issuance of the Second Tranche Shares, the Sellers will hold a total of approximately 57.5% of the Company’s

outstanding common stock.

The number of the Second Tranche Shares may be reduced or increased, based upon whether the Subsidiary’s

working capital as of the Closing Date was less than or more than zero.

The number of the Second Tranche Shares may also be subject to

adjustment based upon any successful indemnification claims made by the Company pursuant to the Purchase Agreement.

Shares are subject to a Lock-Up/Leak-Out Agreement, pursuant to which, subject to certain exceptions, the Sellers may not directly or

indirectly offer to sell, or otherwise transfer, any of the Shares for twenty-four months after the Closing Date without the prior written

consent of the Company.

Notwithstanding the foregoing, pursuant to the Lock-Up/Leak-Out Agreement, each of the Sellers may sell up to

20% of their Shares beginning twelve months after the Closing Date, and the remaining 80% of their shares of Common Stock beginning twenty-four

months after the Closing Date.

The Company is currently performing a formal valuation of the acquisition, including an analysis of any

purchase price adjustments, and a review of the assets and liabilities acquired to determine appropriate fair values.

July 1, 2022, Sammy Davis and David Chasteen resigned from the Company’s Board of Directors (the “Board”).

same date, the Board appointed Deborah MacConnel and Kevin Powers to fill the vacancies resulting from those resignations.

date, the Board expanded the number of members of the Board by two members and approved the appointments of Brian Haugli and Hugh Regan

to fill the vacancies caused by the expansion, to be effective on July 19, 2022.

MacConnel, Mr.

Powers, and Mr.

Regan are considered

independent directors.

As of July 19, 2022, the total number of members of the Board was six (6), including four (4) independent directors.

July 1, 2022, the Board appointed Brian Haugli to the position of Chief Executive Officer of the Company, following the resignation of

David Chasteen from that position.

Chasteen assumed the role of Executive Vice President of the Company on that same date.

Merger Accounting

Business Combination was accounted for as a reverse merger involving only the exchange of equity.

SCS is the accounting acquirer and

Cipherloc is the legal acquirer.

In order to account for the acquisition, management closed the books of Cipherloc on the Closing Date,

closed all equity accounts to additional paid in capital and merged the balance sheets as of the Closing Date.

SCS maintained its historical

financial statements, only consolidating Cipherloc’s assets, liabilities, and equity as of the Closing Date.

the transaction was between two operating companies, the consideration for Cipherloc assumed by SCS to effectuate the Business Combination

was fair valued at approximately $ 15.2 million composed of $ 9.0 million in market capitalization of Cipherloc on July 1, 2022 ( 88.4 million

shares outstanding and a per share price of $ 0.101 plus $ 6.2 million for the fair value of warrants outstanding on July 2, 2022).

consolidated SCS as of the closing date of the agreement, and the results of operations of Cipherloc include those of SCS.

The historical

financial statements of Cipherloc before the Business Combination will be replaced with the historical financial statements of SCS before

the Business Combination in all future filings with the SEC.

July 5, 2022, Cipherloc amended and restated its articles of incorporation with the office of the Secretary of State of Delaware to change

the Company’s name to SideChannel, Inc.

Company valued Cipherloc’s equity to determine the consideration paid and the purchase price allocation.

Consideration

consideration paid was determined as follows:

OF CONSIDERATION PAID

Shares outstanding

Closing stock price on July 1, 2022

Market capitalization on July 1, 2022

Fair value of warrants vested at July 1, 2022

Total fair value of Cipherloc at July 1, 2022

Company has utilized the following assumptions in its Black-Scholes warrant valuation model to calculate the estimated fair value of

the financing warrants as of July 1, 2022:

$ 0.18 to $ 1.20 ($ 0.56 weighted average)

life in years:

1 to 8.5 years ( 3.7 weighted average)

2.9 % to 3.0 %

Rate of dividends:

Company’s objective in estimating expected volatility is to ascertain the assumption about expected volatility that marketplace

participants would likely use in determining an exchange price for an option.

The Company estimates expected volatility by considering

its historical volatility and also considers, based on available information, how the expected volatility of its share price may differ

from historical volatility.

The Company believes the implied volatility can be useful in estimating expected volatility because it is

generally reflective of both historical volatility and expectations of how future volatility will differ from historical volatility.

The Company has made a good faith effort to estimate volatility utilized which will result in the best estimate of expected volatility.

As of July 1, 2022 the volatility rate used was 168.3 %.

Price Allocation

acquisition purchase price is allocated based on the fair values of the assets acquired and liabilities assumed, which are based on management

estimates and third-party appraisals.

The Company engaged a valuation expert to provide guidance to management which was considered and

in part relied upon in completing its purchase price allocation.

The excess of the purchase price over the aggregate estimated fair value

of net assets acquired was allocated to goodwill.

following table summarizes the allocation of the purchase price of the assets and liabilities acquired related to the acquisition as

of the closing date (in thousands):

OF ALLOCATION OF THE PURCHASE PRICE OF THE ASSETS AND LIABILITIES ACQUIRED RELATED TO THE ACQUISITION

Prepaid expenses and deferred costs

Intangible assets (IPR&D)

Accounts payable and accrued liabilities

Deferred Tax Liability

Accrued compensation

Consideration

July 23, 2021, Cipherloc entered into a financial advisory and consulting agreement with Paulson Investment Company, LLC

The agreement with Paulson remains in place after the Business Combination.

Pursuant to the agreement,

Paulson will provide the following services at the Company’s request:

(a) familiarize itself with the Company’s

business, assets and financial condition;

(b) assist the Company in developing strategic and financial objectives;

Company in increasing its exposure in the software industry;

(d) assist the Company in increasing its profile in the investment and

financial community through introductions to analysts and potential investors, participation in investment conferences and

exploitation of reasonably available media opportunities;

€ identify potentially attractive merger and acquisition

opportunities;

(f) review possible innovative financing opportunities and (g) render other financial advisory services as may be

reasonably requested.

The term of the agreement is four years from the date of the agreement, unless terminated earlier by either

party as provided therein.

As compensation for these services, the Company is issuing to Paulson 4,000,000

shares of the Company’s common stock and agreed to reimburse Paulson for all reasonable and documented expenses incurred by

Paulson in connection with providing such services.

The fair value of the shares issued was $ 720,000

which Cipherloc recognized as deferred costs which are amortized at a rate of $ 45,000

The unamortized balance of the deferred cost was $ 555,000

at June 30, 2022.

During the year ended September 30, 2022, the Company expensed $ 45,000 in amortization expenses.

The unamortized balance of the deferred

costs was $ 510,000 at September 30, 2022.

estimated fair values of the identifiable intangible assets acquired were calculated using an income valuation approach which requires

a forecast of expected future cash flows either through the use of relief-from-royalty method or multi-period excess earnings methods

The estimated useful lives are based on the Company’s experience and expectations as to the duration of

the time the Company expects to realize benefits of the assets.

estimated fair values of the identifiable intangible assets acquired, estimated useful lives and related valuation methodology are as

OF ESTIMATED FAIR VALUES OF THE IDENTIFIABLE INTANGIBLE ASSETS ACQUIRED, ESTIMATED USEFUL LIVES

Intangible Assets:

Preliminary Fair Value (000’s)

Estimated Life in Years

Discount Rate

Valuation Method

Income (MPEEM)

Company will amortize the intangible assets above on a straight-line basis over their estimated useful life once the product is complete

and ready for sale.

As a finite-lived intangible asset, IPR&D will be evaluated as described in our Summary of Significant Accounting

Policies in Note 2.

No amortization was recorded during the fiscal year ended September 30, 2022.

The Company expects to complete the

product and begin sale of the product in fiscal year 2023.

Tax Liability

part of the Business Combination, the Company acquired federal tax net operating loss carryforwards of approximately $ 35 million.

addition the intangible asset acquired, IPR&D, has no basis for tax and resulted in a temporary difference of $ 4.9 million.

two items were offset and resulted in a deferred tax asset of approximately $ 7 million which was fully reserved.

state tax purposes, there were only limited state net operating loss carryforwards, consequently, the temporary difference from the intangible

asset acquired resulted in a state deferred tax liability of $ 211,000 .

Pro Forma Operating Results

following presents the unaudited proforma combined results of operations of Cipherloc with SCS as if the entities were combined on October

1, 2020 and show activity for the years ended September 30, 2022 and September 30, 2021.

PRO FORMA OPERATING RESULTS

For the Year Ended September 30, 2022

the Year Ended September 30, 2021

Cost of revenues

Operating expenses (a)

Acquisition costs and goodwill impairment (b)

Operating income (loss)

Other income and (expenses)

Net income (loss) before income taxes

Net income (loss)

Basic loss per share (c)

costs incurred in connection with the acquisition have been removed from operating expenses in the proforma statement of operations.

Cipherloc incurred $ 479,055 of transaction expenses and SCS incurred $ 108,655 of transaction expenses.

The Company deems it highly probable that SCS will achieve the Milestone which triggers contingent consideration of common stock being issued to the Sellers ( 59.9 million Second Tranche shares).

This issuance is being recorded as a $ 6.1 million increase in additional

paid in capital and $ 6.1 million of acquisition costs.

forma weighted average shares outstanding are 145.1 million and 114.8 million for the years ended September 30, 2022 and 2021 respectively.

Concentration

the year ended September 30, 2022, eight customers accounted for approximately 42 % of the Company’s revenues.

During the year ended

September 30, 2021, eight customers also accounted for approximately 45 % of the Company’s revenues.

revenue is comprised mainly of unearned revenue related to CISO, Risk management and other professional services.

Deferred revenue also

includes contracts for professional services to be performed in the future which are recognized as revenue when SCS delivers the related

service pursuant to the terms of the customer arrangement.

revenue includes invoiced revenue allocated to remaining performance obligations that has not yet been recognized and will be recognized

as revenue in future periods.

Deferred revenue was $ 130,000 at September 30, 2022, and $ 194,000 at September 30, 2021.

The deferred revenue

is expected to be earned within 12 months of the balance sheet date,

in deferred revenue were as follows:

OF CHANGES IN DEFERRED REVENUE

Year Ended September 30, 2022

Balance on September 30, 2021

Deferral of revenue

Recognition of revenue

Balance at September 30, 2022

Year Ended September 30, 2021

Balance on September 30, 2020

Deferral of revenue

Recognition of revenue

Balance at September 30, 2021

License Agreements

fiscal year 2019, the Company entered into a one-year agreement with SoundFi LLC (“SoundFi”) which will automatically renew

for subsequent one-year periods unless otherwise terminated by either party.

Cipherloc received $ 25,000 from SoundFi during the year

ended September 30, 2020.

Company executed an annual software licensing agreement with Castle Shield during the year ended September 30, 2020, which also include

auto-renewing terms.

Castle Shield made a $ 10,000 payment to the Company based on the terms of their agreement with Cipherloc.

the years ended September 30, 2021, and 2020, the Company recognized $ 15,417 and $ 47,983 , respectively, in licensing revenue from the

SoundFi and Castle Shield agreements.

April 6, 2020, to supplement its cash balance, the Company submitted their application for a Paycheck Protection Program (“PPP”)

loan (the “SBA loan”) sponsored by the U.S.

Small Business Administration in the amount of $ 365,430 .

On April 12, 2020, Company’s

SBA loan application was approved on April 12, 2020, and the Company received loan proceeds on April 22, 2020.

The SBA loan had an interest

rate of 1 % and was scheduled to mature on April 12, 2022 .

1106 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides for forgiveness of up to the full principal

amount of qualifying loans guaranteed under the PPP.

The PPP and loan forgiveness are intended to provide economic relief to small businesses,

such as the Company, that are adversely impacted under the COVID-19 Emergency Declaration issued by President Donald J.

Trump on March

Paycheck Protection Program loan balance at September 30, 2020, was $ 365,430 .

The Company filed for partial loan forgiveness on January

29, 2021, which was approved in the amount of $ 192,052 on June 11, 2021.

The staff reductions that occurred in 2020 prevented the Company

from qualifying for full forgiveness of its principal balance.

full principal balance of the loan, plus $ 1,000 of interest was set aside in an escrow account at Texas Capital Bank on April 15, 2021.

Upon receipt of the partial forgiveness approval, the remaining amount of the Paycheck Protection Program Loan was repaid using funds

in the escrow account and the remaining balance was returned to the Company’s operating account.

The balance of the loan was $ 0

as of September 30, 2021.

the year ended September 30, 2022, the Company recognized a minimal amount in licensing revenue from a licensing agreement between Castle

Shield Holdings LLC (“Castle Shield”) and Cipherloc.

The Company and Castle Shield mutually agreed to terminate this agreement

on October 14, 2022.

Company announced Enclave in September 2022 which is a proprietary software product developed to provide network microsegmentation capabilities,

also referred to as zero trust network access (“ZTNA”).

We expect to launch the product and begin receiving revenue during

fiscal year 2023.

to a Membership Interest Redemption Agreement, dated November 3, 2021, by and between the Company and Akash Desai (“Desai Redemption

Agreement”), the Company promised to pay Mr.

Desai $ 100,000 , without interest, in exchange for Mr.

Desai’s right, title,

and interest in the Company.

Desai was paid $ 50,000 at on the execution of the Desai Redemption Agreement and the remaining $ 50,000

is due on or before December 31, 2023 .

The implied interest on the note payable component

of the Desai Redemption Agreement was deemed insignificant.

6 – RELATED PARTY TRANSACTIONS

related party transactions occurred during the years ending September 30, 2021 and September 30, 2020 other than those disclosed in Note

Haugli, the Company’s Chief Executive Officer and a stockholder in the Company is also a principal shareholder of RealCISO Inc.

(“RealCISO”).

On September 22, 2020 SideChannel assigned to RealCISO Inc.

certain contracts and intellectual property.

Company is a reseller of the RealCISO software.

The Company receives revenue from its customers for the use of RealCISO software and

pays licensing fees to RealCISO for such use.

SideChannel paid $ 98,000 to RealCISO for licenses that SideChannel resold to its clients

during the year ended September 30, 2022.

other related party transactions occurred during the years ending September 30, 2022, and September 30, 2021.

7 – COMMITMENTS AND CONTINGENCIES

2 unchanged sentences

Pending Litigation

December 2017, Robert LeBlanc, filed a petition against the Company and Michael De La Garza, the Company’s former Chief Executive

Officer and President, in the 20th Judicial District for Hays County, Texas (Cause No.

LeBlanc claims that he is a former

consultant, employee, and/or officer of the Company, Mr.

LeBlanc’s petition (which has been amended) alleges causes of action

against the Company for alleged violation of the Texas Securities Act, common law fraud against Mr.

breach of fiduciary

duty against Mr.

breach of contract;

as well as declaratory relief.

Damages sought exceed $ 1,000,000

but are less than $ 10,000,000 .

The Company believes that the plaintiff was fully compensated for his services and that the plaintiff’s claims are without

LeBlanc is also asserting a claim of partial ownership of certain of the Company’s patents, which the

Company believes is without merit.

The Company believes it has meritorious defenses to the allegations, and the Company intends to continue

to vigorously defend against the litigation.

April 2021, Eric Marquez, the former Secretary/Treasurer and Chief Financial Officer of the Company, and certain other plaintiffs, filed

a lawsuit against the Company and Michael De La Garza, the Company’s former Chief Executive Officer and President, in the 20 th

Judicial District for Hays County, Texas (Cause No.

The lawsuit alleges causes of action for fraud against Mr.

Garza (for misrepresentations allegedly made by Mr.

a lawsuit against Cipherloc Corporation and Michael De La Garza, Cipherloc’s former Chief Executive Officer and President, in the

20 th Judicial District for Hays County, Texas (Cause No.

The lawsuit alleges causes of action for fraud against

De La Garza (for misrepresentations allegedly made by Mr.

De La Garza);

breach of contract, for alleged breaches of Mr.

Marquez’s alleged

oral employment agreement, which Mr.

Marquez claims required the Company pay him cash and shares of stock;

alleged oral employment agreement, which Mr.

Marquez claims required Cipherloc pay him cash and shares of stock;

unjust enrichment;

6 unchanged sentences

Settled During the Year Ended September 30, 2022

Marchal & Cooper, LLP (“ SMC ”), the Company’s former independent registered auditing firm, brought a demand

for arbitration before the American Arbitration Association against the Company in October 2019, relating to amounts which SMC has alleged

are due to SMC for services rendered, which amount was alleged to exceed $ 75,000 , but to be less than $ 150,000 .

The parties entered arbitration

regarding the amounts owed and subsequently entered into a Settlement Agreement and Release on April 26, 2021, to confidentially settle

the matter and mutually release each other from any liabilities.

August 28, 2020, the Company settled all litigation matters which had previously been pending with Michael De La Garza, a former chief

executive officer of the Company.

As a result of this settlement, De La Garza returned 13.1 million shares of common stock to the Company

and the Company agreed to pay De La Garza $ 400,000 between September 30, 2020, and September 30, 2021.

The final payment of the settlement

balance was made on September 1, 2021.

Company sought to invalidate the issuance of one million shares of the Company’s Series A preferred stock on or around 2011 to

former director and chief financial officer, Pamela Thompson, which stock was being held by the Carmel Trust II.

In connection therewith,

the Company initiated an action against James LeGanke, as Trustee of Carmel Trust II, in federal district court as part of its efforts

to invalidate those shares.

The action was settled on January 11, 2021, for $ 50,000 , in exchange for the return of the 1,000,000 shares

of Series A preferred stock and 127,500 shares of the Company’s common stock.

October 2020, Ageos, LLC, a Virginia limited liability company (“ Ageos ”), filed a Third-Party Complaint against the

Company in connection with the pending action titled Scandium, LLC v.

Ageos, LLC in the General District Court for Fairfax County in

the Commonwealth of Virginia.

The action related to an operating agreement, by and between the Company and Ageos, whereby the Company

agreed to guarantee Ageos’s lease to enable the leasing of space in Fairfax County, VA.

The Company subsequently terminated the

agreement with Ageos and offered to take over the space as an accommodation.

Ageos declined.

This lawsuit was subsequently settled on

April 29, 2021, and the Company paid Scandium $ 60,000 in exchange for a release from all past, present, and future liabilities associated

with the lease.

February 2019, the Company and the landlord for its leased office space in Buda, Texas entered into a new lease agreement, and the Company

reduced its rented space from approximately 3,900 to 1,302 square feet.

The new lease became effective on February 1, 2019 and has a

three -year term.

The initial monthly rent is $ 2,566 , and the lease agreement provided for annual rent increases of approximately 2.7 %.

The lease automatically renews for a three-year term, unless either party to the lease agreement notifies the other of the intent to

terminate the lease in writing at least 180 days prior to the expiration of the current term.

In July 2020, the Company executed a lease

termination agreement with the landlord for an early termination fee of $ 10,546 and forfeited the existing security deposit of $ 2,566 .

There are no future payments related to this lease.

October 2018, the Company leased approximately 3,900 square feet of office space on North Scottsdale Road in Scottsdale, Arizona.

lease for this facility began on October 4, 2018, and originally continued until October 31, 2021.

Annual rent of $ 77,180 was prepaid

for the first year from November 1, 2018, to October 31, 2019, and the lease agreement provides for annual rent increases of approximately

In June 2020, the Company executed a lease termination agreement with the landlord for an early termination fee of $ 27,013 and

forfeited the existing security deposit of $ 9,796 .

There are no future payments related to this lease.

February 2020, the Company leased approximately 3,666 square feet of office space on 2107 Wilson Boulevard, Arlington, Virginia.

lease for this facility began on February 1, 2020, and continued until July 31, 2025.

The base annual rent was $ 159,471 , a $ 100,000 security

deposit was paid, and abatement of monthly rent payments was provided until August 1, 2020, and the lease provided for annual rent increases

of approximately 2.5 %.

As the result of restructuring actions intended to conserve cash during the COVID-19 crisis, the landlord of the

Wilson Boulevard space was notified that the Company no longer needed the space and reached a termination agreement with the landlord.

As part of this agreement, the company paid $ 150,000 on June 9, 2021.

of September 30, 2021, the Company had no lease agreements for facilities.

leases were included in operating lease ROU] lease assets, and operating lease liabilities and operating long-term lease liabilities

on the Balance Sheets.

Lease expense for operating leases is recognized on a straight-line basis over the lease term.

Variable lease

expense is recognized in the period in which the obligation for those payments is incurred.

Lease expense is included in general and

administrative expense in the statements of operations and is reported net of lease income.

a result of restructuring actions intended to conserve cash during the COVID-19 crisis, the Company stopped occupying the space in March

2020 and notified the landlord that the Company no longer needed the property and began seeking an amicable and reasonable termination

of the lease agreement.

On June 9, 2021, a settlement of $ 150,000 was reached with 2111 Wilson Boulevard, Inc.

to terminate the lease

effective June 2021.

Following the settlement agreement with 2111 Wilson Boulevard, Inc., as discussed above, the Company does not have

any operating leases as of September 30, 2021.

early termination of the 2111 Wilson Boulevard operating lease resulted in recognizing a $ 441,597 gain in this reporting period due to

the removal of the ROU assets and operating lease liabilities.

The balance for ROU assets and liabilities at September 30, 2021, is $ 0

initial right-of-use asset of $ 233,751 was recognized as a non-cash asset addition with the adoption of the new lease accounting standard.

Cash paid for amounts included in the present value of operating lease liabilities was $ 80,402 during the fiscal year ended September

30, 2021 and is included in operating cash flows.

The landlord agreed to an early termination and release from all past, present and

future liabilities associated with the lease in exchange for a $ 150,000 one-time payment which the Company made during the quarter ended

June 30, 2021.

8 - STOCKHOLDERS’ EQUITY (DEFICIT)

of September 30, 2021 and 2020, the Company had 82,927,311

and 27,505,196

shares of common stock outstanding, respectively,

and were authorized to issue 681,000,000 shares

of common stock at a par value of $ 0.01 .

determines the fair value of stock issuances using the closing stock price on the grant date.

the year ended September 30, 2021, the Company came to a settlement with Mr.

James LaGanke, as Trustee of Carmel Trust II and purchased

back 127,500 shares and recorded such shares as Treasury Stock.

James LaGanke received $ 50,000 in exchange for the 127,500 shares.

The Company attributed $ 40,000 of this settlement to the repurchase of common stock and the remaining $ 10,000 to the repurchase of Series

A Preferred Stock.

the year ended September 30, 2020, the Company came to a settlement with First Fire and purchased back 149,557 shares

and recorded such shares as Treasury Stock.

First Fire received $ 150,000 in exchange for the 149,557 shares.

the year ended September 30, 2020, the Company entered into to a settlement with Michael De La Garza and purchased 13,137,757

shares of common stock held by Mr.

De La Garza in exchange for $ 400,000 in cash, of which $ 300,000 was paid at the time

of settlement and the remaining $ 100,000 was paid through four quarterly payments of $ 25,000 .

The Company made the final

payment was made on September 1, 2021.

accumulated number of common stock recorded in Treasury Stock at September 30, 2021 is 13,414,814 shares versus 13,287,314 shares as

of September 30, 2020.

December 2017, Robert LeBlanc filed a petition against Cipherloc and Michael De La Garza, Cipherloc’s former Chief Executive Officer

and President, in the 20th Judicial District for Hays County, Texas (Cause No.

LeBlanc sought damages against Cipherloc

exceeding $ 1 million, but less than $ 10 million.

On May 19, 2022, Mr.

LeBlanc entered into a joint settlement agreement with Cipherloc,

Cipherloc’s directors and officer’s liability carrier, and Mr.

As part of this settlement agreement, Cipherloc

LeBlanc $ 109,432 in cash and issued him 200,000 shares of Cipherloc’s common stock in exchange for his release of Cipherloc

from all past and future liabilities associated with this matter.

December 2021, the Company and the landlord for its leased office space in Worcester, MA entered into a lease agreement.

The lease became

effective on January 1, 2022 and has a one-year term.

The initial monthly rent is $ 930 , and the lease agreement provided for annual

rent increases of approximately 2.7 %.

The lease automatically renews for a one year term, unless either party to the lease agreement

notifies the other of the intent to terminate the lease in writing at least 60 days prior to the expiration of the current term.

landlord of the property leased at 146 Main Street in Worcester, Massachusetts is not an affiliate of the Company.

to September 30, 2022, the Company had a month-to-month lease with Nolen & Associates to use office space along with the Company’s

chairman, Tom Wilkinson, for its company headquarters in Austin, Texas.

This lease was terminated on September 30, 2022.

leases have been accounted for as a month-to-month lease and no right of use asset or lease liability has been recorded at September

Flow Impact of Leases

Company is not carrying any assets or liabilities associated with leases for the fiscal years 2022 or 2021.

Therefore, the Company does

not have any cash flow impacts to report for leasing activities .

8 - STOCKHOLDERS’ EQUITY

December 29, 2021, SCS was authorized to issue 1,000 shares of common stock with a $ 0.01 per share par value.

The 1,000 shares of common

stock were exchanged for 59,900,000 shares of Cipherloc common stock and 100 shares of Series A Preferred stock.

As a result, the financial

statements have been adjusted retroactively to reflect these shares as being outstanding as of September 30, 2020.

individuals owned 100 % of SCS’s 1,000 shares of issued common stock with one individual owning 71 % and a second individual owning

11 % of the common stock.

The remaining three shareholders each owned 6 % of the common stock.

SCS did not have any convertible debt or

issued preferred stock.

LLC redeemed units from Taylor Lehmann in exchange for $ 90,000 as stated in a Membership Interest Redemption Agreement executed on November

Lehmann received a total of $ 90,000 in redemption payments between November 23, 2020 and December 21, 2020.

As explained in Note 5, in December 2021, while it was SideChannelSec LLC, the Company promised to pay Mr.

$ 100,000 , without interest, in exchange for Mr.

Desai’s right, title, and interest in the Company.

LLC made profit sharing distributions of $ 461,000

during the fiscal year ended September 30, 2022 and $ 210,000

during the year ended September 30, 2021 in accordance with its partnership agreements.

of September 30, 2022, and 2021, the Company had 148,724,056 and 59,900,000 shares of common stock outstanding, respectively, and was

authorized to issue 681,000,000 shares of common stock at a par value of $ 0.001 .

Stock Issued for Cash

the year ended September 30, 2021, the Company issued 55,549,615 shares of common stock pursuant to the Private Offering.

was priced at $ 0.18 and the gross proceeds from the equity issuance were $ 9,998,931 .

The proceeds net of issuance costs were $ 8,558,339 .

As of September 30, 2021, the Company had

issued 96,342,125 shares of common stock, of which 13,414,814 are now in treasury stock.

The amount of shares of common

stock outstanding as of September 30, 2021, was 82,927,311 .

Company did not issue shares of common stock for cash during the year ended September 30, 2022.

March 31, 2021, to April 16, 2021, Cipherloc entered into a Securities Purchase Agreement (the “Purchase Agreement”), with

certain accredited investors (the “Purchasers”), pursuant to which the Company sold the Purchasers an aggregate of (a) 55,549,615

shares of common stock (“Offering Shares”), and (b) warrants to purchase 55,549,615 shares of common stock of the Company

(“Offering Warrants”).

The Offering Shares and Offering Warrants were sold at a price of $ 0.18 per combined unit of an Offering

Share and an Offering Warrant (the “Offering Price”).

Stock Issued for Business Combinations

July 1, 2022 the Company issued a total of 59,900,000 shares of common stock related to the Business Combination detailed in Note 3 of

this Form 10-K.

Company did not issue shares for mergers and acquisitions related activity during fiscal year 2021.

Stock Issued for Services

July 23, 2021, the Company entered into a financial advisory and consulting agreement with Paulson Investment Company, LLC (“ Paulson ”).

Pursuant to the agreement, Paulson will provide the following services at the Company’s request:

(a) familiarize itself

with the Company’s business, assets and financial condition;

(b) assist the Company in developing strategic and financial

July 23, 2021, Cipherloc entered into a financial advisory and consulting agreement with Paulson Investment Company, LLC

(“ Paulson ”).

The agreement with Paulson remains in place after the Business Combination.

Pursuant to the

agreement, Paulson will provide the following services at the Company’s request:

(a) familiarize itself with the

Company’s business, assets and financial condition;

(b) assist the Company in developing strategic and financial objectives;

(d) assist the Company in

increasing its profile in the investment and financial community through introductions to analysts and potential investors, participation

in investment conferences and exploitation of reasonably available media opportunities;

(e) identify potentially attractive merger and

acquisition opportunities;

(f) review possible innovative financing opportunities and (g) render other financial advisory services as

may be reasonably requested.

The term of the agreement is four years from the date of the agreement, unless terminated

earlier by either party as provided therein.

As compensation for these services, the Company is issuing to Paulson 4,000,000 shares

of the Company’s common stock and agreed to reimburse Paulson for all reasonable and documented expenses incurred

by Paulson in connection with providing such services.

When the 4,000,000 shares are issued to Paulson, the Company’s

total outstanding shares of common stock will increase to 86,297,311 .

Stock and Stock Options Issued to Directors and Officers

2020, 620,000 stock options were granted to employees.

Also, during 2020, 920,000 stock options were cancelled due to the termination

of employment of the holders.

As of September 30, 2020, 800,000 stock options were outstanding.

None of the stock options are in the

money and the unamortized amount of stock compensation as of September 30, 2020, was $ 383,453 .

During 2021 the remaining options were

canceled because the 2019 plan under which they were awarded was not approved by the Company’s shareholders, and none of

the options holders were still employees, which is a requirement for vesting.

Consequently, the Company recognized no stock

compensation expense for the year ended September 30, 2021.

stock or stock options were granted to employees, officers, and directors during the year ended September 30, 2021.

OF STOCK OPTIONS

Year Ended September

Balance on September 30, 2019

Options Cancelled

Balance at September

Company’s board of directors authorized, and the shareholders approved, the Company’s 2021 Omnibus Equity

Incentive Plan which provides for the award of up to 8,000,000 shares of common stock.

See Note 10 – Subsequent Events for awards

recently made as part of this plan.

of September 30, 2021 and 2020, the Company had zero and 1,000,000 shares of restricted preferred stock outstanding, respectively.

Company came to a settlement with James LeGanke, as Trustee of Carmel Trust II and purchased back 127,500 shares of common stock and

recorded such shares as Treasury Stock.

LeGanke received a total payment of $ 50,000 as a result of the settlement.

The Company attributed

$ 40,000 of this settlement to the repurchase of common stock and the remaining $ 10,000 to the repurchase of 1,000,000 shares of Series

A Preferred stock.

the year ended September 30, 2021, the Company granted 63,882,054 warrants, see Note 2 above.

activities for the years ended September 30, 2021 and 2020 are as follows:

OF WARRANT ACTIVITY

Average Exercise

Average Remaining Life

Outstanding at September 30,

(d) assist the Company in increasing its profile in the

investment and financial community through introductions to analysts and potential investors, participation in investment

conferences and exploitation of reasonably available media opportunities;

(e) identify potentially attractive merger and acquisition

opportunities;

(f) review possible innovative financing opportunities and (g) render other financial advisory services as may be

reasonably requested.

The term of the agreement is four years from the date of the agreement, unless terminated earlier by either

party as provided therein.

As compensation for these services, the Company issued to Paulson 4,000,000

shares of the Company’s common stock and agreed to reimburse Paulson for all reasonable and documented expenses incurred by

Paulson in connection with providing such services.

The 4,000,000 shares were issued to Paulson on February 24, 2022.

The unamortized costs of the consulting agreement have been accounted

for as part of the transaction and are being amortized over the remaining life of the agreement,

Company’s Board of Directors have elected to have each of its members receive one-half of such member’s quarterly compensation

in the form of shares of the Company’s common stock, instead of cash.

On September 15, 2022, the Company issued shares of 180,557

for a value of $ 33,000 to the Board of Directors for the fourth quarter of 2022.

On July 1, 2022, 100,000 shares for a value of $ 10,000

were issued to an outgoing board of director.

An additional $ 30,000 of stock based compensation has been recorded and reported in Shared Issued for Services on

the Consolidated Statement of Shareholders Equity.

Company did not issue shares of common stock for services during the year ended September 30, 2021.

Stock Issued for Legal Settlement

June 6, 2022, Cipherloc had entered into the mediated settlement agreement with Robert LeBlanc described above.

Pursuant to that agreement,

Cipherloc had issued a total of 200,000 shares of the Company’s common stock to Mr.

Stock and Restricted Stock Units Issued to Directors and Officers

of this filing, the Company is making equity compensation awards to employees, directors, and contractors using the 2021 Omnibus Equity

Compensation Plan (“Equity Incentive Plan”) approved by stockholders on September 13, 2021.

The approval on September 13,

2021 included a reserve of 8.0 million shares for awards.

The Equity Incentive Plan also allows for an annual increase in the reserve

up to an amount approximately equal to five percent ( 5 %) of the fully diluted outstanding shares at the end of the prior calendar year.

On June 29, 2022, the Board of Directors authorized an 8,186,106 increase in the shares reserved for the Equity Incentive Program.

granted under the Equity Incentive Plan in lieu of compensation are exempt from counting against the reserve.

SCHEDULE OF STOCK OPTIONS

2021 Omnibus Equity Incentive Plan Reserve (000’s)

Initial Reserve at September 13, 2021

Non-exempt Awards

2022 Annual Reserve Increase

Reserve at September 30, 2022

Reserve percent of outstanding shares at September 30, 2022

2022 and assumed with the Business Combination, the Company granted restricted stock units (“RSU’s”) to directors and

employees with service-based vesting conditions.

The restricted stock units vest over a 3 year service period.

The following table summarizes

the activity of our restricted stock units granted under our 2021 Equity Incentive Plan.

weighted average grant-date fair value of awards granted during the year ended September 30, 2022 was $ 0.11

The remaining weighted average term to vesting is 2.4 years and the unamortized stock compensation expense is $ 427,000 .

were made to named executives and directors of the Company under the Equity Incentive Plan.

The table below summarizes the unearned incentive

compensation awards at September 30, 2022 for named officers and directors.

All unearned awards made during the fiscal year were RSU’s

subject to vesting over three years.

SCHEDULE OF RESTRICTED STOCK UNITS VESTING

Number of RSU’s

RSU Grants Acquired at July 1, 2022

Canceled/Forfeited

Outstanding at September 30, 2020

Outstanding Grants at September 30, 2022

of September 30, 2022 and 2021, the Company had 100 and 100 shares of preferred stock outstanding, respectively.

The shares of Series

A Preferred Stock were issued as part of the Business Combination .

The 100 shares of preferred stock have that were exchanged

for SCS, Inc.

common stock have been retroactively reflected as issued and outstanding on September 30, 2020.

A The Series A Preferred

Stock contains a Board Designation Right which provides that the holders of the majority of the Series A Preferred Stock have the right

to elect a majority of the Company’s Board of Directors.

July 1, 2022 following the Business Combination, we assumed the outstanding warrants of Cipherloc.

activities for the period from July 1, 2022 to September 30, 2022 are as follows:

SCHEDULE OF WARRANT ACTIVITY

Number of Warrants

Weighted Average Exercise Price

Weighted Average Remaining Life

Warrants Acquired at July 1, 2022

Canceled/Forfeited

Outstanding at September 30, 2022

fair value of the warrants was considered as part of the acquisition costs of Cipherloc as described in Note 3.

9 - INCOME TAXES

SCS’s inception to December 29, 2021, SCS was not subject to federal and state income taxes since it was operating as a Limited

Liability Company (LLC).

Effective with the conversion to a corporation, the stockholders of SCS elected to be taxed as a Subchapter

C corporation under the provisions of Subchapter C of the Internal Revenue Code.

Federal income taxes were the responsibility of SCS’s

stockholders during the audited periods, as were certain state income taxes.

Therefore, no provision or liability for income taxes is

reflected in the financial statements.

has adopted the provisions related to accounting for uncertainty in income taxes, which defines a recognition threshold and measurement

attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

has considered its tax positions and believes that all of the positions taken by SCS in its federal and state tax returns are more likely

than not to be sustained upon examination.

is subject to tax examinations by federal and state tax authorities for years after 2018.

SideChannelSec,

LLC converted to a Massachusetts corporation on December 29, 2021.

Upon this conversion SCS will be taxed as a corporation.

utilizes the asset and liability method in accounting for income taxes.

Under this method, deferred tax assets and liabilities are recognized

for operating loss and tax credit carryforwards and for the future tax consequences attributable to differences between the financial

statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are

measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to

be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations

in the period that includes the enactment date.

A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets

unless it is more likely than not that the value of such assets will be realized.

provision (benefit) for income taxes from continued operations for the years ended September 30, 2022, and 2021 consist of the following:

SCHEDULE OF PROVISION (BENEFIT) FOR INCOME TAXES FROM CONTINUED

Current Federal and State Income Tax Expense (Benefit)

$ ( 692,230 )

$ ( 239,000 )

Deferred Federal and State Income Tax Expense (Benefit)

( 1,284,065 )

in valuation allowance

SCHEDULE OF PROVISION (BENEFIT) FOR INCOME TAXES FROM CONTINUED OPERATIONS

September 30,

Provision (benefit) for income taxes, net

difference between income tax expense computed by applying the federal statutory corporate tax rate and actual income tax expense is

SCHEDULE OF FEDERAL STATUTORY CORPORATE TAX RATE AND ACTUAL INCOME

Statutory federal income tax

SCHEDULE OF FEDERAL STATUTORY CORPORATE TAX RATE AND ACTUAL INCOME TAX EXPENSE

September 30,

Statutory federal income tax rate

Tax impact passed-through to SideChannelSec LLC members

Non-deductible contingent consideration

Non-deductible impairment of goodwill

Non-deductible stock-based compensation

and other permanent differences

in state statutory tax rate

in valuation allowance

Change in state statutory tax rate

Change in valuation allowance

Effective tax rate

the years ended September 30, 2021 and 2020, the difference between the amounts of income tax expense or benefit that would result from

applying the statutory rates to pretax income to the reported income tax expense of $ 0 is the result of the net operating loss carry

forward and the related valuation allowance, as well as non-deductible stock-based compensation.

the years ended September 30, 2022 and 2021, the difference between the amounts of income tax expense or benefit that would result

from applying the statutory rates to pretax income to the reported income tax expense of $ 195,000

for the year ended September 2022 and $ 0

for the year ended September 2021 is the result of the non-deductible contingent consideration plus impairment of goodwill and

additional net operating loss carry forward offset by the valuation allowance.

The fiscal year 2021 income tax expense is $ 0 because the Company was an LLC during that fiscal year with the LLC

members responsible for the income taxes generated from the Company’s income.

For the same reason, the Company did not have deferred

income tax assets or liabilities at September 30, 2021.

income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for

2 unchanged sentences

SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES

September 30,

Net operating loss carry forward

Intangible asset – not deductible for tax

Deferred compensation

Valuation allowance

( 10,087,705 )

( 8,823,000 )

Deferred income tax

Deferred income tax asset

operating loss carry forward

asset – not deductible for tax

income tax asset

Company has a net operating loss carry forward of $ 35.6 million available to offset future taxable income.

6 unchanged sentences

for a valuation reserve against the net operating loss benefit, because in the opinion of management based upon the earning history of

it is more likely than not that the benefits will not be realized.

the Company, it is more likely than not that the benefits will not be realized.

For income tax reporting purposes, Management has determined

that net operating losses prior to February 5, 2015, are subject to an annual limitation of approximately $ 525,000 .

of the pre-Business Combination net operating loss carryforwards (“pre-Combination NOL’s”) attributable to

Cipherloc may become subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to

ownership changes occurred during the tax year associated with the Business Combination.

general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders

or public groups in the stock of a corporation by more than 50% over a three-year period.

Future ownership changes may trigger

Section 382 and therefore, substantially limit the amount of pre-Combination NOL’s that can be utilized annually to offset

future taxable income.

Company is current on all its federal income tax filings.

An extension will be filed for the September 30, 2021, tax return.

December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law in the U.S.

The Tax Act has resulted in significant

changes to the U.S.

corporate income tax system.

These changes include a federal statutory rate reduction from 35% to 21%, the elimination

or reduction of certain domestic deductions and credits, and limitations on the deductibility of interest expense and executive compensation.

These changes were effective beginning in 2018 .

The Company is subject to IRS examinations for periods beginning after September 30, 2018.

10 - SUBSEQUENT EVENTS

October 12, 2021, through the filing of a Current Report on Form 8-K, the Company announced a new employment agreement with Ryan

Polk, who serves as its Chief Financial Officer.

The agreement provides for an annual salary of $ 150,000 , annual equity

incentive awards equal to $ 50,000 , and a discretionary annual performance bonus target of $ 100,000 .

October 22, 2021, the Company filed a Form S-8 Registration Statement registering the issuance of the 8,000,000 shares of common stock

under the Company’s 2021 Omnibus Equity Incentive Plan, which was approved by the shareholders at the annual

meeting held on September 13, 2021.

SEC acceptance of the Form S-8 for the Omnibus Equity Incentive Plan, the Company made the following awards, and the

award recipients filed Form 4s with the SEC:

Wilkinson, Chairman:

141,667 shares vesting immediately

Ambrose, Lead Independent Director:

141,667 shares vesting immediately

Davis, Director:

127,778 shares vesting immediately

Chasteen, Chief Executive Officer:

1,111,111 shares vesting over 3 years with the first vesting

anniversary on June 1, 2022

Hnatiw, Chief Technology Officer:

277,778 shares vesting over 3 years with the first vesting

anniversary on June 1, 2022

Polk, Chief Financial Officer:

277,778 shares vesting over 3 years with the first vesting

anniversary on June 1, 2022

November 12, 2021, the Company announced the formation of a Board of Advisors to its support product development, market entry

and commercial applications of its disruptive polymorphic encryption technology.

The founding members of the advisory board are Griffin

Boyce, Privacy Lead at Google Fuchsia;

Margaret Jones, Head of Content and Women’s ERG Lead at Airtable;

and Travis Williams, Director

of Product Management for Mind Tech at Hyperice.

On November 9, 2022 our Board of Directors authorized equity incentive grants totaling 2,882,539 RSU’s to four (4) employees.

of these grants will vest over three ( 3 ) years.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data