What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-12-27 compared with 2022-12-20 · 504 added, 571 removed, 494 unchanged (69% of the section changed)

FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID Number 587 )

Balance Sheets as of September 30, 2023 and 2022

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on the Financial Statements

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

have audited the accompanying consolidated balance sheets of SideChannel, Inc., (the Company) as of September 30, 2023 and 2022, 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, 2023, and the related notes (collectively referred to as the consolidated financial

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

the Company as of September 30, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year

period ended September 30, 2023, in conformity with accounting principles generally accepted in the United States of America.

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

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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.

determined that there are no critical audit matters.

served as the Company’s auditor since 2021.

Vegas, Nevada

ID Number 587

LLP (PCAOB ID Number 587)

SIDECHANNEL, INC.

BALANCE SHEETS

thousands, except share and per share data)

September 30, 2022

September 30, 2021

Current assets

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Deferred costs

Prepaid expenses

expenses and other current assets

Total current assets

Deferred costs

LIABILITIES & STOCKHOLDERS’ EQUITY

Fixed assets, net

Intangible assets

LIABILITIES & STOCKHOLDERS’

Current liabilities

Accounts payable and accrued liabilities

Accounts payable and accrued

Deferred revenue

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Income taxes payable

Total current liabilities

Deferred tax liability

Total liabilities

current liabilities

tax liability

Commitments and contingencies

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

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

0 and 100 shares issued and outstanding as of September 30, 2023 and 2022, 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

and 148,724,056 shares issued and outstanding as of September 30, 2023 and 2022, respectively

Additional paid-in capital

Accumulated deficit

Total stockholders’ equity

Total liabilities and stockholders’ equity

accompanying notes are an integral part of these financial statements.

stockholders’ equity

liabilities and stockholders’ equity

SIDECHANNEL, INC.

STATEMENTS OF OPERATIONS

thousands, except share and per share data)

For the Year Ended

September 30,

Twelve Months

Cost of revenues

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General and administrative

Sales and marketing

Selling and marketing

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.

Intangible asset impairment

operating expenses

Operating loss

Other income, net

Net loss before income tax expense

Income tax expense (benefit)

Net loss after income

tax expense (benefit)

common share – basic and diluted

Weighted average common

shares outstanding – basic and diluted

STATEMENTS OF STOCKHOLDERS’ EQUITY

THE YEARS ENDED SEPTEMBER 30, 2022, AND 2021

thousands, except preferred shares)

Shares Issued

Paid-in-Capital

Accumulated Deficit

Equity (Deficit)

Preferred Stock

Earnings / (Deficit)

Stockholders’

Shares Issued

the Twelve Months Ended September 30, 2023 and 2022

Paid-in-Capital

Accumulated Deficit

Equity (Deficit)

Balance at, September 30, 2020

Equity distributions

Equity redemptions

Balance at September 30, 2021

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

accompanying notes are an integral part of these financial statements.

Earnings / (Deficit)

Stockholders’

at September 30, 2021

distributions

issued for services

issued for vesting of RSUs

costs – contingent consideration

Business Combination

at September 30, 2022

issued for services

compensation expense

of Preferred to Common

Combination – Contingent Consideration

at September 30, 2023

SIDECHANNEL, INC.

STATEMENTS OF CASH FLOWS

For the Year Ended September 30,

thousands, unaudited)

Ended September 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) income

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

Adjustments to reconcile net loss to

net cash flows used in operating activities:

Depreciation and Amortization

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Provision for doubtful accounts

Acquisition costs

Business combination related costs

Goodwill impairment

Intangible asset impairment

Changes in operating assets and liabilities:

Accounts receivable

Unbilled revenue

Prepaid expenses and other assets

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Deferred revenue

Net cash (used in) provided by operating activities

Net cash used in operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Cash and cash equivalents acquired in connection with the Business Combination

Net cash used in investing activities

Cash and cash equivalents acquired in connection

with the Business Combination

Purchase of fixed assets

Net cash provided by (used in) investing

CASH FLOWS FROM FINANCING ACTIVITIES:

Equity redemptions

Equity distributions

Net cash (used in) financing activities

INCREASE (DECREASE) IN CASH

CASH, BEGINNING OF YEAR

CASH, END OF YEAR

Equity redemption

Equity distribution

Net cash used in financing

(DECREASE) INCREASE IN CASH

CASH, BEGINNING OF PERIOD

CASH, END OF PERIOD

NON-CASH INVESTING AND FINANCING ACTIVITIES:

Shares issued for services

Equity redemption with note payable

Equity redemption with notes payable

Stock-based compensation included in accounts

payable and accrued liabilities

Assets acquired and liabilities assumed

accompanying notes are an integral part of these financial statements.

TO FINANCIAL STATEMENTS

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1 – DESCRIPTION OF BUSINESS

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.

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

We believe that our cybersecurity product and service offerings provide cybersecurity and privacy risk management solutions for our customers.

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

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.

growth strategy focuses on these three initiatives:

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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.

engagements typically contain a monthly subscription and rates for vCISO time and material projects ranging from $ 350

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

augment our vCISO offering with a full range of other cybersecurity products and services through a team of security engineer employees

combined with a network of third-party service providers and value-added resellers.

On 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.

The transaction was accounted for as

a reverse acquisition (“reverse merger”) in accordance with 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:

the 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 SCS 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.

Following 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, Inc., together with its subsidiaries.

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:

of Estimates and Assumptions

preparation of financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect (i)

the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date

the financial statements are published, and (iii) the reported amount of net revenues and expenses recognized during the periods presented.

Adjustments made with respect to the use of estimates often relate to improved information not previously available.

Uncertainties with

respect to such estimates and assumptions are inherent in the preparation of financial statements;

accordingly, actual results could

differ from these estimates.

of Presentation and Use of Estimates

The accompanying consolidated financial

statements include our accounts and those of our wholly owned subsidiaries.

All significant intercompany accounts and transactions have

been eliminated upon consolidation.

The preparation of financial statements in conformity with U.S.

GAAP requires us to make estimates

and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the

date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

Actual results could differ

from those estimates.

Certain of our accounts, including goodwill, identifiable intangibles, and deferred tax assets and liabilities,

including related valuation allowances, are based upon estimates.

Reclassifications

prior year amounts have been reclassified to be comparable with the current year’s presentation.

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

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and Cash Equivalents

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

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

did not have any cash equivalents as of September 30, 2023, and 2022.

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and cash in the bank.

The Company maintains its cash in accounts held by highly reputable financial institutions which, at times, may

We maintain our 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”).

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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.

As of September 30, 2023, approximately $ 0.8 million of our cash balance was uninsured.

We have not experienced any losses on cash.

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

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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.

We had one (1) customer with

an accounts receivable balance that exceeded 10% of accounts receivable at September 30, 2023.

Cash flows from accounts receivable are

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Value of Financial Instruments

Company’s financial instruments consisted primarily of cash, accounts payable and accrued expenses, and embedded conversion features

in stock warrants.

The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term

maturities and approximate market interest rates of these instruments.

financial instruments consisted primarily of cash, accounts receivable, accounts payable and accrued expenses, and embedded

conversion features in stock warrants.

The carrying amounts of such financial instruments approximate their respective estimated

fair value due to the short-term maturities and approximate market interest rates of these instruments.

value is focused on an exit price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction

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– 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.

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 during the fourth quarter on a reporting

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

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.

However, 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.

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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.

the acquisition date of July 1, 2022, and the fair value of the goodwill was determined to be less than the carrying amount of the goodwill

by $ 5.702 thousands.

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 as of September 30, 2022.

goodwill was evaluated at the balance sheet date of September 30, 2023.

For fiscal year 2023, we recorded no impairment of goodwill.

For fiscal year 2022, we incurred $ 5.7

million of goodwill impairment.

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

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

recorded $ 4.9 million

of finite-lived intangible assets in the form of Acquired In Process Research & Development (“AIPR&D”) as a

result of acquiring Enclave in the Business Combination as of September 30, 2022.

Under ASC 805, AIPR&D are initially recognized

at fair value and classified as finite-lived assets until the successful completion or abandonment of the associated research

and development efforts.

During the development period, these assets will not be amortized as charges to earnings;

instead, these

assets will be tested for impairment on an annual basis or more frequently if impairment indicators are identified.

An impairment

loss is measured based on the excess of the carrying amount over the asset’s fair value.

Our impairment testing as of

September 30, 2023, indicated the full value of this finite-lived intangible asset should be impaired.

The difficulty of projecting

the amount and timing of future revenues caused us to conclude a full impairment of the asset was appropriate.

impairment neither indicates a decrease in our emphasis on Enclave as a key initiative nor does it suggest a lack of market interest

in the product.

The Company did not record any finite-lived intangible asset impairment for the year ended September 30, 2022.

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

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

Identify the contract,

Identify the performance obligations of the contract,

Determine the transaction price of the contract,

Allocate the transaction price to the performance obligations, and

Recognize revenue.

the contract,

the performance obligations of the contract,

the transaction price of the contract,

the transaction price to the performance obligations, and

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

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of Products and Services

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

identify, develop, and deploy cybersecurity and privacy 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.

In addition to Enclave, our

proprietary software product, 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.

subscription agreements include a minimum number of service hours purchased during the subscription time period.

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

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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.

We maintain an allowance for doubtful accounts (“allowance”) equal to 3 % of the ending quarterly accounts

receivable balance.

The allowance is rounded up to the nearest $10,000.

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.

only costs we incur associated with obtaining contracts with customers are marketing costs incurred with third-party service providers

and sales commissions that we pay to our employees, contractors, or third-party sales representatives.

Commissions are calculated based

on set percentages of the revenue value of each product or service sold.

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.

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and Development and Software Development Costs

Company expenses all research and development costs, including patent and software development costs.

We expense all research and development costs, including patent and software development costs.

Our research and development costs

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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

We are subject to legal proceedings, claims, and liabilities which arise in the ordinary course of business, and we accrue for

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

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Legal fees are charged to expense as they are incurred.

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

We utilize the asset and liability method in accounting for income taxes.

Under this method, deferred tax assets and liabilities

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

Company uses the two-step approach to recognize and measure uncertain tax positions.

We use the two-step approach to recognize and measure uncertain tax positions.

The first step is to evaluate the tax position for

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largest amount, which is more than 50% likely of being realized upon ultimate settlement.

The Company considers many factors when evaluating

and estimating the Company’s tax positions and tax benefits, which may require periodic adjustments.

The Company did no t record

We consider many factors when evaluating

and estimating our tax positions and tax benefits, which may require periodic adjustments.

We did no t record

any liabilities for uncertain tax positions during the years ended September 30, 2023, or 2022.

Earnings (Loss) Per Common Share

Net 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

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stock options, warrants, and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of

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

common stock that could share in our earnings.

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

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and 8,636,973 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.

At September 30, 2022, anti-dilutive warrants and restricted stock units outstanding were 87,628,920 and 4,309,262 , respectively.

We manage our operations as a single operating segment for the purposes of assessing performance and making operating decisions.

Our focus is on the research, development, and commercialization of our technology.

We evaluate warrants in accordance with Topic 480 of the FASB ASC and Topic 815 of the FASB ASC.

The result of this accounting

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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.

Other than those discussed below, we believe those ASUs issued to date either

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

have a significant impact on us.

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.

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

Simplifying the Accounting for Income Taxes.

guidance removes certain exceptions to the general principles in Topic 740 and enhances and simplifies various aspects of the income

tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a

business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law.

This standard

is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2021.

We adopted it on

October 1, 2022, without material impact on our financial statements.

Pronouncements Not Yet Adopted

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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):

Simplifying the Accounting for Income Taxes.

This guidance

removes certain exceptions to the general principles in Topic 740 and enhances and simplifies various aspects of the income tax accounting

guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination,

ownership changes in investments, and interim-period accounting for enacted changes in tax law.

This standard is effective for fiscal

years and interim periods within those fiscal years beginning after December 15, 2021.

Early adoption is permitted.

The Company are currently

evaluating the impact of ASU 2019-12 on its financial statements, which is effective for the Company in its fiscal year and interim periods

beginning on October 1, 2022.

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

(now known as SCS, Inc.)

of the Business Combination

Overview of the Business Combination

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

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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”).

transaction was accounted for as a reverse acquisition (“reverse merger”) in accordance with GAAP.

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

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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;

(1) the 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.

SCS 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.

As used herein, the words

“the Company” refers to, for periods following the Business Combination, SideChannel, Inc., together with its

subsidiaries.

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.

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 were 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, achieved 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.

number of the Second Tranche Shares could have been 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 was also subject to adjustment based upon

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

previously disclosed in Form 8-K dated May 9, 2023, a total of 62,016,618 shares of common stock were issued for the Second Tranche and

Closing Working Capital Adjustment.

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

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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

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The historical

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

financial statements of Cipherloc before the Business Combination have been replaced with the historical financial statements of SCS before

the Business Combination in all future filings with the SEC.

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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

stock price on July 1, 2022

Market capitalization on

value of warrants vested at July 1, 2022

fair value of Cipherloc at July 1, 2022

Company 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:

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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

expenses and deferred costs

assets (AIPR&D)

payable and accrued liabilities

Tax Liability

Consideration

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

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;

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.

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;

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;

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 fair value of the shares issued was $ 720,000 , which Cipherloc recognized

as deferred costs which are amortized at a rate of $ 45,000 per quarter.

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

June 30, 2022.

During the years ended September 30, 2023, and September 30, 2022, the Company expensed $ 180,000 and $ 45,000 in amortization

expenses respectively.

The unamortized balance of the deferred costs was $ 330,000 at September 30, 2023.

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

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

follows as of September 30, 2022:

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

Fair Value (in thousands)

Life in Years

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.

conducted a fair value analysis of the intangible assets acquired as of September 30, 2023 and concluded that the full carrying

value of this asset should be impaired.

Our balance sheet as of September 30, 2023 reflects this conclusion.

Incurring impairment neither indicates a decrease in our emphasis on Enclave as a key initiative nor does it suggest a lack of market interest in the product.

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.

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

addition, the intangible asset acquired, AIPR&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 $ 7.0 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.

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

at September 30, 2022.

At September 30, 2023, there were additional state net operating loss carryforwards to offset

the temporary difference from the intangible asset acquired, resulting in a state deferred tax liability of zero ($ 0 ).

Pro Forma Operating Results

For the Year Ended September 30, 2022

the Year Ended September 30, 2021

following presents the unaudited proforma combined results of operations of Cipherloc with SCS for the year ended September 30, 2022 as if the entities were combined on October 1, 2020.

OF UNAUDITED PROFORMA OPERATIONS RESULTS

(In thousands,

except per share data)

the Year Ended

September 30, 2022

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) before

Net income (loss)

Basic loss per share (c)

Basic loss per share (b)

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.

In fiscal year 2022, Cipherloc incurred $ 479,000

of transaction expenses and

SCS incurred $ 109,000

of transaction expenses.

forma weighted average shares outstanding are 82.0

for the year ended September 30, 2022.

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.

one customer accounted for more than ten percent ( 10 %) of our revenues during the years ended September 30, 2023, and 2022.

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

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

service pursuant to the terms of the customer arrangement.

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OF CHANGES IN DEFERRED REVENUE

Year Ended September 30, 2022

Ended September 30, 2023

Balance on September

Deferral of revenue

Recognition of revenue

Balance at September 30, 2022

Year Ended September 30, 2021

Revenue deferred

Revenue recognized

at September 30, 2023

Ended September 30, 2022

Balance on September 30,

Deferral of revenue

Recognition of revenue

Balance at September 30, 2021

Revenue deferred

Revenue recognized

at September 30, 2022

License Agreements

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

the year ended September 30, 2022, we 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

We 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,

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.

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

Agreement”), we 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

and interest in us.

Desai was paid $ 50,000 at 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.

implied interest on the note payable component of the Desai Redemption Agreement was deemed insignificant.

6 – RELATED PARTY TRANSACTIONS

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

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

(“RealCISO”).

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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.

We are a reseller of the RealCISO software.

We receive revenue from our customers for the

use of RealCISO software and pays licensing fees to RealCISO for such use.

For the years ended September 30, 2023, and 2022,

SideChannel paid $ 26,000

to RealCISO for licenses, respectively.

also received $ 63,000 from RealCISO for software development services that we began providing Real CISO during fiscal year 2023.

other related party transactions occurred during the years ending September 30, 2023, and September 30, 2022.

7 – COMMITMENTS AND CONTINGENCIES

Company is currently not involved in any litigation that it believes could have a material adverse effect on its financial condition

We are currently not involved in any litigation that we believe could have a material adverse effect on its financial condition

or results of operations.

Pending Litigation

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

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

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

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sought exceed $ 1,000,000 .

The Company believes it has made all required payments and delivered the stock to the plaintiffs.

is currently being defended by the Company.

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

We believe we have made all required payments and delivered the stock to the plaintiffs.

is currently being defended by us.

We believe we have meritorious defenses to the allegations, and we intend

to continue to vigorously defend against the litigation.

Settled During the Year Ended September 30, 2022

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.

December 2021, we and our landlord for our leased office space in Worcester, Massachusetts, 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

The initial monthly rent was $ 930 and increased to $ 948 on January 1, 2023 a 2 %

increase, per the lease agreement.

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.

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

lease has been accounted for as a month-to-month lease, and no right of use asset or lease liability has been recorded at September 30,

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 .

We are not carrying any assets or liabilities associated with leases for the fiscal years 2023 or 2022.

We lease an office at 146 Main Street in Worcester, Massachusetts, for which we expect to pay approximately $ 12,000

over the next twelve (12) months .

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.

December 29, 2021, SCS was authorized to issue 1,000

shares of common stock with a $ 0.01

per share par value.

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 of the Business Combination.

The financial statements have been adjusted

retroactively to reflect the Cipherloc shares received as being outstanding the outstanding

shares of SCS as of September 30, 2020.

did not have any convertible debt or issued preferred stock.

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

Desai $ 50,000 , 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

LLC made profit sharing distributions of $ 461,000 during the fiscal year ended September 30, 2022, in accordance with its partnership

We ceased operations as an LLC on December 29, 2021, and since then have had zero ($ 0 ) equity distributions.

of September 30, 2023, and 2022, we had 213,854,781 and 148,724,056 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

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”).

We did not issue shares of common stock for cash during the years ended September 30, 2023, and September 30, 2022.

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

July 1, 2022, we 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.

On May 4, 2023, we

issued a total of 62,016,618 shares of common stock for the Second Tranche ( 59,900,000 shares) and Closing Working Capital

Adjustment ( 2,116,618 shares).

Stock Issued for Services

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 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.

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.

We also use stock as a form of compensation for independent contractors

who provide professional services to us in sales, marketing, or administration.

During fiscal year 2023, the fair market value of stock

issued for services totaled $ 66,000 for 770,978 shares of common stock compared to $ 43,000 for 280,557 shares of common stock in fiscal

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.

June 6, 2022, Cipherloc entered into a mediated settlement agreement with Robert LeBlanc.

Pursuant to that agreement, Cipherloc had issued

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

shares were issued for legal settlement during fiscal year 2023.

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

of this filing, we are granting 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.

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SCHEDULE OF STOCK OPTIONS

2021 Omnibus Equity Incentive Plan Reserve (000’s)

2021 Omnibus Equity Incentive

Initial Reserve at September 13, 2021

Non-exempt Awards

2022 Annual Reserve Increase

Annual Reserve Increases

Reserve at September 30, 2023

Reserve percent of outstanding shares at September 30, 2023

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

employees with service-based vesting conditions.

We have granted and intend to continue granting restricted stock units (“RSU’s”) to directors, employees, and

contractors 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.

The following table

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

SCHEDULE OF RESTRICTED STOCK UNITS VESTING

Number of RSU’s

RSU Grants Acquired at July 1, 2022

Outstanding Equity Compensation Grants

(In thousands)

Acquired at July 1, 2022

Canceled/Forfeited

Outstanding Grants at September 30, 2022

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

Canceled/Forfeited

Outstanding Grants at September 30, 2023

weighted average grant-date fair value of all awards granted during the year ended September 30, 2023, was $ 0.10 per share.

unamortized stock compensation expense at September 30, 2023, is $ 694,000 and the remaining weighted average term to vesting is 2.3 years.

of September 30, 2023, and 2022, we had zero ( 0 ) 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.

The 100 shares of preferred stock that were exchanged for SCS,

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.

A The Series A Preferred Stock contained

a Board Designation Right which provides that the holders of the majority of the Series A Preferred Stock had the right to elect a majority

of our Board of Directors.

All 100 shares of Series A Preferred Stock were converted to common stock on June 12, 2023.

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, 2023, are as follows:

SCHEDULE OF WARRANT ACTIVITY

Number of Warrants

Weighted Average Exercise Price

Weighted Average Remaining Life

Warrants Acquired at July 1, 2022

OF WARRANT ACTIVITY

of Warrants (000’s)

Average Exercise Price

Average Remaining Life

Warrants Acquired

at July 1, 2022

Canceled/Forfeited

Outstanding at September

Canceled/Forfeited

at September 30, 2023

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

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September 30,

(In thousands)

Provision (benefit) for income taxes, net

1 unchanged sentence

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

Statutory federal income tax

Non-deductible contingent consideration

1 unchanged sentence

Non-deductible stock-based compensation

Change in state statutory tax rate

Prior Year Adjustment

Non-deductible meals & entertainment

Change in valuation allowance

1 unchanged sentence

the years ended September 30, 2023, and 2022, 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.

from applying the statutory rates to pretax income to the reported income tax benefit $ 379,000

for the year ended September 30, 2023, and income tax expense of $ 195,000

for the year ended September 30, 2022.

The September 30, 2022, expense of $ 195,000 was accrued as an estimate of income taxes

due by SCS, Inc.

for activity prior to the Business Combination.

The actual taxes due by SCS, Inc.

for such activity was zero ($ 0 )

resulting in a reversal of the $ 195,000 accrual during fiscal year 2023.

The reversal was partially offset by $ 27,000 of state

income taxes incurred by the Company during fiscal year 2023.

In addition, a deferred tax liability was recognized for a book versus tax basis difference for state income taxes

upon the business combination with Cipherloc in 2022.

During the year ended September 30, 2023 this deferred tax liability was reduced

to zero resulting in a deferred income tax benefit of $ 211,000 .

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

Intangible asset – not deductible for

AIPR&D capitalization

Deferred compensation

1 unchanged sentence

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.

Of which, $ 2.6 million will

expire within the next five years, and the remaining $ 33.0 million will expire thereafter.

For income tax reporting purposes, the Company’s

aggregate unused net operating losses were subject to the limitations of Section 382 of the Internal Revenue Code, as amended.

has adjusted the net operating losses incurred prior to 2015 to reflect only the losses not subject to limitation.

The Company has provided

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

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.

Net operating loss carry forward

Intangible asset – not deductible for

Valuation allowance

Deferred income tax asset

Company has a net operating loss carry forward of $ 36.2

million available to offset future taxable income, of which, $ 2.6

million will expire within the next five years, $ 12.5

million will expire thereafter, and the remaining $ 21.1

million will not expire.

For income tax reporting purposes, the Company’s aggregate unused net operating losses were subject

to the limitations of Section 382 of the Internal Revenue Code, as amended.

The Company has adjusted the net operating losses

incurred prior to 2015 to reflect only the losses not subject to limitation.

The Company has provided for a valuation reserve

against the net operating loss benefit, because in the opinion of management based upon the earning history of 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.

In 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

NOLs that can be utilized annually to offset future taxable income.

Company is current on all its federal income tax filings.

The Company is subject to IRS examinations for periods beginning after September

30, 2019, and all net operating losses we may use in future federal tax filings are subject to IRS examination.

10 - SUBSEQUENT EVENTS

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.

November 6, 2023, Anthony Ambrose, a current Member of our Board of Directors (“Board”),

and the Chairman of the Nomination and Corporate Governance Committee, informed us of his upcoming retirement from the Board.

Ambrose will remain a member of the Board until our next Annual Meeting of Stockholders (“Annual Meeting”),

at which time Mr.

Ambrose will not stand for re-election as a Member of the Board.

Ambrose’s departure is not the result of any disagreement with our management, our Board, or us on any matter related to its operations, policies, or practices.

recognition of Mr.

Ambrose’s tenure and contributions to us during his nearly five years of service as a member of the

Board, we will accelerate the vesting of Mr.

Ambrose’s 333,334 restricted stock units, which were awarded to Mr.

on July 2, 2022 and previously scheduled to vest pro-ratably on June 1, 2024 and on June 1, 2025.

The full amount of unvested restricted

stock units will now vest on January 2, 2024.

The full terms of Mr.

Ambrose’s separation will be formalized in a forthcoming Separation

Agreement between us and Mr.

on November 7, 2023, we announced an offer (“Offer to Exchange”) made to certain holders of 55,549,615

of our warrants issued during 2021 with an exercise

price of $ 0.36

and expiration

dates between March 31, 2026 and April 16, 2026 (“2021 Investor Warrants”).

The Offer to Exchange provided 2021 Investor

Warrant holders one (1) share of common stock for every six 2021 Investor Warrants and one (1) New Warrant for every two and one-half

(2.5) 2021 Investor Warrants.

The Offer to Exchange expired at 5:00 PM EST on December 26, 2023 (“Expiration Date”).

The New Warrants being offered have a five ( 5 )

year term, an exercise price of $ 0.18 ,

and an automatic conversion if the bid price of the stock is equal to or greater than $ 0.36

for 30 consecutive days.

November 14, 2023, the Offer to Exchange was amended to include an Amended New Warrant Agreement which removed a restriction on the cashless

exercise of the New Warrant.

November 21, 2023, we received a Comment Letter from the SEC about the Offer to Exchange.

On December 1, 2023 we filed a response with

the SEC to the Comment Letter and on December 4, 2023, we filed an Amended Offer to Exchange which reflected the clarifications and corrections

requested by the SEC.

Offer to Exchange was made as an offer for all or none of the 2021 Investor Warrants.

At its meeting on December 11, 2023, our Board

approved waiving the all or nothing clause and authorized us to close the offer on the Expiration Date if the percentage of 2021 Investor

Warrants validly tendered and not validly withdrawn exceed 65% of the total 2021 Investor Warrants outstanding.

The Expiration Date

was also changed to December 26, 2023.

On December 11, 2023, we received a Comment

Letter from the SEC requesting clarifications on three responses we submitted regarding the November 21, 2023 Comment Letter.

21, 2023, we filed an Amended Offer to Exchange which reflected the clarifications requested by the SEC.

On December 26, 2023, we closed the Offer to Exchange and issued 7,270,958 shares of common stock and 17,415,437 New Warrants in exchange for 43,538,501 2021 Investor Warrants

( 78.4 % of the total outstanding 2021 Investor Warrants).

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