What changed in this filing

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Item 1. Financial Statements

2024-02-07 compared with 2023-08-09 · 422 added, 407 removed, 77 unchanged (92% of the section changed)

FINANCIAL STATEMENTS

BALANCE SHEETS

thousands, except share and per share data)

receivable, net

expenses and other current assets

SIDECHANNEL, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

December 31, 2023

September 30, 2023

Current assets

& STOCKHOLDERS’ EQUITY

payable and accrued liabilities

taxes payable

Accounts receivable, net

Deferred costs

Prepaid expenses and other current assets

Total current assets

Deferred costs

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities

tax liability

and contingencies

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

0 and 100 shares issued and outstanding as of June

30, 2023 and September 30, 2022, respectively

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

212,765,780 and 148,724,056 shares issued and outstanding as of June 30,

2023 and September 30, 2022, respectively

paid-in capital

stockholders’ equity

liabilities and stockholders’ equity

Accounts payable and accrued liabilities

Deferred revenue

Promissory note payable

Income taxes payable

Total current liabilities

Other Liabilities

Total liabilities

Commitments and contingencies

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

221,645,310 and 213,854,781 shares issued and outstanding as of Dec 31, 2023 and Sep 30, 2023

Additional paid-in capital

Accumulated Deficit

Total stockholders’ equity

Total liabilities and stockholders’ equity

accompanying notes are an integral part of these unaudited consolidated financial statements.

STATEMENTS OF OPERATIONS

thousands, except share and per share data)

and administrative

and marketing

and development

Combination related costs

SIDECHANNEL, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except share and per share data)

Three Months Ended

Cost of revenues

Operating expenses

income (loss)

income (expense), net

income (loss) before income tax expense

income (loss) after income tax expense

income (loss) per common share – basic and diluted

income (loss) per common share – basic

average common shares outstanding – basic and diluted

average common shares outstanding – basic

General and administrative

Selling and marketing

Research and development

Total operating expenses

Operating loss

Other income (expense), net

Net 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 unaudited consolidated financial statements.

STATEMENTS OF STOCKHOLDERS’ EQUITY

thousands, except preferred shares)

the Nine Months Ended June 30, 2023

Stockholders’

at September 30, 2022

issued for services

compensation expense

at December 31, 2022

issued for services

compensation expense

at March 31, 2023

issued for services

compensation expense

of Preferred to Common

Combination – Contingent Consideration

at June 30, 2023

the Nine Months Ended June 30, 2022

Stockholders’

at September 30, 2021

distributions

at December 31, 2021

at March 31, 2022

income (loss)

at June 30, 2022

SIDECHANNEL, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except share and per share data)

Preferred Shares

Preferred Par Value

Common Shares

Common Par Value

Accumulated Deficit

Balance at September 30, 2023

Shares issued for 2021 Investor Warrants

Shares issued for services

Stock-based compensation expense

Stock issued for RSU vesting, net

Balance at December 31, 2023

Preferred Shares

Preferred Par Value

Common Shares

Common Par Value

Accumulated Deficit

Balance at September 30, 2022

Shares issued for services

Stock-based compensation expense

Balance at December 31, 2022

accompanying notes are an integral part of these unaudited consolidated financial statements.

STATEMENTS OF CASH FLOWS

FLOWS FROM OPERATING ACTIVITIES:

income (loss)

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

Combination related costs

in operating assets and liabilities:

expenses and other assets

payable and accrued liabilities

cash provided by (used in) operating activities

FLOWS FROM INVESTING ACTIVITIES:

of fixed assets

cash used in investing activities

FLOWS FROM FINANCING ACTIVITIES:

cash used in financing activities

INCREASE IN CASH

BEGINNING OF PERIOD

END OF PERIOD

INVESTING AND FINANCING ACTIVITIES:

redemption with notes payable

compensation included in accounts payable and accrued liabilities

SIDECHANNEL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Three Months Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

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

Depreciation and Amortization

Stock-based compensation, shares issued for services, and RSU vesting, net

Changes in operating assets and liabilities:

Accounts receivable

Prepaid expenses and other assets

Accounts payable and accrued liabilities

Deferred revenue

Net cash used in operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Net cash used in financing activities

(DECREASE) INCREASE IN CASH

CASH, BEGINNING OF PERIOD

CASH, END OF PERIOD

NON-CASH INVESTING AND FINANCING ACTIVITIES:

Stock-based compensation included in accounts payable and accrued liabilities

Shares Issued for Services

accompanying notes are an integral part of these unaudited consolidated financial statements.

TO CONSOLIDATED FINANCIAL STATEMENTS

THE THREE MONTHS ENDED DECEMBER 31, 2023 AND 2022

in thousands except shares and per share data)

1 – NATURE OF OPERATIONS

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

Our cybersecurity offerings identify and develop cybersecurity, privacy, and risk management solutions for our customers.

plan to address the needs of our customers is to provide more effective and cost-efficient products and tech-enabled services cybersecurity

and related services including virtual Chief Information Security Officer (“vCISO”), zero trust, third-party risk management,

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

Zero trust is a security framework requiring all

users to be continuously validated being granted or keeping access to digital assets, data, and applications.

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

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

It allows information technology professionals to easily segment the enterprise network, place the right assets in those segments,

and direct network traffic.

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

growth strategy focuses on these three initiatives:

new vCISO clients;

new Cybersecurity Software and Services (“Cybersecurity Software and Services”) offerings, such as Enclave;

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

clients typically enter into twelve (12) month engagements consisting of a monthly subscription with an annual renewal option, as well

as additional vCISO time and material projects, which additional time’s cost to customers ranges from $ 350 to $ 450 per hour.

vCISO is embedded as a member of the C-suite personnel from two (2) to five (5) of our vCISO clients reporting to the chief executive

officer, chief financial officer, or general counsel of most such vCISO clients.

July 1, 2022 (the “Closing Date”) we completed an 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 wholly

owned subsidiary of the registrant, changed its name to SCS, Inc.

Cipherloc Corporation, the Delaware parent company

of SCS, has changed its name to SideChannel, Inc.

(“SideChannel”).

As used herein, the words “the Company” refers

to, for periods from July 1, 2022 and forward, SideChannel, and for periods prior to July 1, 2022, SCS, and its direct and indirect subsidiaries,

as applicable.

part of the Business Combination, the former stockholders of SCS (the “Sellers”) transferred all of their equity securities

in SCS 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”).

In addition 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 SCS, 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 number of the Second Tranche Shares could have been reduced or increased, based upon whether SCS’ working capital as of the

Closing Date is less than or more than zero (“Closing Working Capital Adjustment”).

The number of the Second Tranche Shares

was also subject to adjustment based upon any successful indemnification claims made by the parties pursuant to the Purchase Agreement.

Business Combination was treated as a reverse acquisition (reverse merger), in accordance with accounting principles generally accepted

in the United States of America (“U.S.

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 immediately following the Business Combination

(1) a 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.

SCS was determined to be the accounting acquirer in the Business Combination, but not the legal acquirer, the transaction was deemed

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

(“ASC”) Topic 805, Business Combinations.

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

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 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.

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

Our website is www.sidechannel.com.

Our website is https://sidechannel.com .

1, 2022 we, then known as Cipherloc Corporation (“Cipherloc”), a Delaware corporation, completed an 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.

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

method of accounting, SCS was deemed to be the accounting acquirer for financial reporting purposes.

As part of the Business Combination, the former stockholders

of SCS (the “Sellers”) exchanged all of their equity securities in SCS 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 In addition 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 SCS, 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 number of the Second Tranche Shares could have been reduced or

increased, based upon whether SCS working capital as of the Closing Date is less than or more than zero (“Closing Working Capital

Adjustment”).

The number of the Second Tranche Shares was also subject to adjustment based upon any successful indemnification claims

made by the parties pursuant to the Purchase Agreement.

The Closing Working Capital Adjustment increased the Second Tranche Shares by

2,116,618 shares of common stock.

The 100 shares of Series A Preferred Stock were converted to common stock on May 4, 2023.

The 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 (12) months after the Closing

Date, and the remaining 80% of their shares of Common Stock beginning twenty-four (24) months after the Closing Date.

2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

of Presentation and Use of Estimates

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.

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

accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally

accepted in the United States of America (GAAP) for interim financial information with the instructions to Form 10-Q and Rule 10-01 of

Regulation S-X.

Accordingly, they do not include all the disclosures required for complete financial statements and they do

include our accounts and those of our wholly owned subsidiaries.

All significant intercompany accounts and transactions have been eliminated

upon consolidation.

References to Fiscal 2024 and Fiscal 2023 used throughout this report shall mean the current fiscal year ending

September 30, 2024 and the prior fiscal year ended September 30, 2023, respectively.

the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of

normal recurring adjustments) necessary to present fairly the financial position, results of operations, and changes in cash flows

for the interim periods presented.

Certain footnote information has been condensed or omitted from these consolidated financial

Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial

statements and accompanying footnotes included in our Form 10-K for the year ended September 30, 2023 (the “2022 Form

10-K”) filed on December 27, 2023, with the Securities and Exchange Commission (“SEC”).

The same accounting

policies have been followed in these unaudited interim condensed consolidated financial statements as those applied in the

preparation of our consolidated audited financial statements for the year ended September 30, 2023.

The preparation of financial statements in conformity

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.

the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of normal

recurring adjustments) necessary to present fairly the financial position, results of operations, and changes in cash flows for the interim

periods presented.

Certain footnote information has been condensed or omitted from these consolidated financial statements.

these consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes

included in our Form 10-K for the year ended September 30, 2022 (the “2022 Form 10-K”) filed on December 20, 2022, with the

Securities and Exchange Commission (“SEC”).

July 1, 2023 Brian Haugli, our chief executive officer, was granted 666,667 restricted stock units as stated in his annual employment

agreement and approved by our Board of Directors (“Board”).

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.

have assessed our operations and determined that there were no material subsequent events requiring adjustment to, or disclosure in,

our consolidated financial statements for the three months ended December 31, 2023 .

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

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

Business Combination 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.

Value of Financial Instruments

financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, our note payable, and

embedded conversion features in our stock warrants.

Our cash and cash equivalents, accounts receivable, accounts payable and accrued

expenses are carried at cost which approximates fair value, due to the short maturities of the accounts.

Our note payable’s carrying

amount approximates it fair value due to the short remaining term.

Topic 820 (Fair Value Measurement) establishes a fair value hierarchy for instruments measured at fair value that distinguishes between

assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs).

The fair values of the warrants issued

by us as part of the Business Combination were determined using Level 2 inputs in accordance with the guidance in ASC Topic 820.

Intangible, and Long-Lived Assets

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the total amount of goodwill allocated to that reporting unit.

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.

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.

cash flow estimates used to determine the impairment, if any, contain management’s best estimates using appropriate

assumptions and projections at that time.

There have been no significant events or changes in circumstances during the quarter ended December 31, 2023 that

would indicate that the carrying amount of the Company’s intangible asset, goodwill, may be impaired as of December 31, 2023.

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

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

In cases when customers are invoiced in advance or pay in advance of our product or service delivery, recognition of revenue is deferred

until 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 obligations.

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

do not have any material variable consideration arrangements, or any material payment terms with our customers other than standard payment

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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 period.

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

in the contracts and statements of work.

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 in the contracts and statements of work.

record accounts receivable at the time of invoicing.

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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 estimate of probable losses inherent in the accounts receivable balance.

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

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 3 for further information about our revenue from contracts with customers.

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

On December 10, 2021, we entered into a lease for approximately 500 square

feet of office space at 146 Main Street in Worcester, Massachusetts, with the option to renew annually for three (3) twelve (12) month

periods through December 2025 .

The annual renewal date is January 1 st .

Our current lease payment is $ 948 per month.

allows for a two percent (2%) increase effective at the beginning of each renewal period.

We anticipate the lease payment to be $ 967 per

month during calendar year 2024.

We 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.

not currently have any operating lease ROU assets and operating lease liabilities.

Finance leases are included in property and equipment

and financing lease liabilities.

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.

In addition, 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.

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.

Finance 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.

Operating lease payments are included in cash outflows

from operating activities on our consolidated statements of cash flows.

We 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

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

Following the guidance of ASC Topic 842, we are not required to record ROU

assets and operating lease liabilities.

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

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compensation plans in Note 7.

utilize 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 years 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

if it is more likely than not that such assets will not be realized.

and Diluted Net Loss per Common Share

(loss) per common share - basic is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding

during each period.

Earnings (loss) per common share - diluted is computed by dividing earnings (loss) by the weighted average number

of common shares and common share equivalents outstanding during each period.

Common share equivalents represent unvested shares of restricted

stock and stock options and are calculated using the treasury stock method.

Common share equivalents are excluded from the calculation

if their effect is anti-dilutive.

account for warrants in accordance with ASC Topics 480 and 815.

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.

in fair value is recorded in our Consolidated Statement of Operations as a component of other income or expense.

Upon exercise of a warrant,

it is marked to fair value at the exercise date and then that fair value is reclassified to equity.

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.

These accruals are adjusted as additional information

becomes available or circumstances change.

Legal fees are charged to expense as they are incurred.

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

during the reporting period.

The weighted average number of shares is calculated by taking the number of shares outstanding and weighting

them by the amount of time that they were outstanding.

Diluted earnings per share reflects the potential dilution that could occur if

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 our earnings.

Diluted loss per share is the same as basic loss per share during periods where net losses

are incurred since the inclusion of the potential common stock equivalents would be anti-dilutive as a result of the net loss.

loss from continuing operations for the three months ended December 31, 2023 and 2022, there are no common shares added to

calculate dilutive EPS because the effect would be anti-dilutive.

Potentially dilutive securities of approximately 50.3 million

shares were excluded from diluted EPS in the three months ended December 31, 2023, as we had a net loss .

account for warrants in accordance with FASB ASC Topics 480 and 815.

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.

change in fair value is recorded in our Consolidated Statement of Operations as a component of other income or expense.

Upon exercise

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

and Capital Resources

December 31, 2023 and September 30, 2023, we had $ 0.8 million and $ 1.1 million, respectively, of cash and cash equivalents.

incurred a net loss during the three month period ended December 31, 2023.

primary requirements for liquidity and capital are working capital, research and development and marketing activities, and other general

corporate needs.

Historically, these cash requirements have been met through cash provided by operating activities and cash and cash equivalents.

As of December 31, 2023, we are not party to any off-balance sheet arrangements that have had or are reasonably likely to have a

current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.

Significant cash requirements for the remainder of the fiscal year include our working capital requirement.

We believe that our existing cash, cash equivalents and our anticipated cash flows from operations will be sufficient

to meet our working capital, expenditure, and contractual obligation requirements for the next 12 months.

Although we believe we have

adequate sources of liquidity for the next 12 months and the foreseeable future, the success of our operations, the global economic outlook,

and the pace of sustainable growth in our markets could impact our business and liquidity.

of Recently Issued Amendments to Authoritative Accounting Guidance

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 our consolidated financial statements.

3 – ACQUISITIONS

Merger Between Cipherloc Corporation and SideChannel, Inc.

(now known as SCS, Inc.)

discussed further in Note 3 to our consolidated financial statements in our 2022 Form 10-K, on the Closing Date, the Sellers exchanged

all of their equity securities in SCS for a total of 59,900,000 shares of the Company’s common stock (“First Tranche Shares”),

and 100 shares of the Company’s Series A Preferred Stock, $ 0.001 par value.

The Sellers were entitled to receive up to an additional

59,900,000 shares of the Company’s common stock (“Second Tranche Shares”) at such time that the operations of SCS,

as a subsidiary of the Company, achieved at least $ 5.5 million in revenue (“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 million.

the twelve months ending March 31, 2023, the Milestone was achieved by the operations of SCS with trailing twelve-month revenue equaling

$ 5.7 million.

The combined 62,016,618 Second Tranche shares and the Closing Working Capital Adjustment shares were issued on May 5, 2023.

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

1, 2021, and show activity for the three months and nine months ended June 30, 2022.

OF UNAUDITED PROFORMA OPERATIONS RESULTS

For the Three Months

Ended June 30, 2022

the Nine Months

Ended June 30, 2022

thousands, except share and per share data)

loss before income taxes

loss per share (a)

forma weighted average shares outstanding were 148.1 million for the three months and nine months ended June 30, 2022.

2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures” which provides

guidance to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.

In addition, the guidance enhances interim disclosure requirements, clarifies circumstances in which an entity can disclose multiple segment

measures of profit or loss, provides new segment disclosure requirements for entities with a single reportable segment and contains other

disclosure requirements.

The purpose of the guidance is to enable investors to better understand an entity’s overall performance

and assess potential future cash flows.

The guidance is effective for fiscal years beginning December 15, 2023, and interim periods within

fiscal years beginning December 15, 2024.

For us, annual reporting requirements will be effective for our fiscal year 2025 beginning on

October 1, 2024 and interim reporting requirements will be effective beginning with our fourth quarter of fiscal year 2025.

Early adoption

is permitted.

We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.

2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures” which updates income

tax disclosure requirements primarily by requiring specific categories and greater disaggregation within the rate reconciliation table

and disaggregation of income taxes paid, net of refunds, by jurisdiction.

All entities are required to apply the guidance prospectively,

with the option to apply it retrospectively.

The guidance is effective for fiscal years beginning after December 15, 2024, which for us

is our fiscal year 2026 beginning on October 1, 2025.

Early adoption is permitted.

We are currently evaluating the impact that the new

guidance will have on our consolidated financial statements.

The Company does not believe that any recently issued, but not yet effective accounting standards, when adopted,

will have a material effect on the accompanying consolidated financial statements.

3 – REVENUE FROM CONTRACTS FROM CUSTOMERS

Concentration

customer individually accounted 10 % or more of our revenue during the nine months ended June 30, 2023 and 2022.

revenue was $ 358,000 at June 30, 2023.

client individually accounted for 13 % of our revenue during the three months ended December 31, 2023;

no client individually accounted

for over 10 % of our revenue during the three months ended December 31, 2022.

revenue was $ 238,000 at December 31, 2023.

The deferred revenue is expected to be earned within 12 months of the balance sheet date.

in deferred revenue for the nine months ended June 30, 2023 were as follows:

OF CHANGES IN DEFERRED REVENUE

on September 30, 2022

at June 30, 2023

internally report our revenue using two categories.

The first, “vCISO Services”, captures the revenue for the Chief Information

Security Officer services that we provide to our clients on a fractional, virtual or outsourced basis;

thus, we use the acronym “vCISO”.

Services delivered by SideChannel through our team of vCISOs include assessing the cybersecurity risk profile, implementing policies

and programs to mitigate risks, and managing the day-to-day tasks to ensure compliance with the adopted cybersecurity framework.

of our clients use our vCISO services.

second revenue category encompasses an array of “Cybersecurity Software and Services” that our clients deem necessary to

protect their digital assets.

These include cybersecurity software owned by SideChannel and software sourced from third parties.

earns commissions on third-party software sales which it recognizes as revenue.

Cybersecurity services are also delivered directly by

SideChannel employees and indirectly by third party service providers.

table below reflects the revenue by category for the nine months ended June, 2023 and 2022:

OF REVENUE BY CATEGORY

Months Ended June 30

Cybersecurity

Software & Services

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

Agreement”), we promised to pay Mr.

in deferred revenue for the three months ended December 31, 2023 were as follows:

SCHEDULE OF CHANGES IN DEFERRED REVENUE

Deferred Revenue

(In thousands)

Balance at September 30, 2023

Deferral of revenue

Recognition of revenue

Balance at December 31, 2023

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

Desai was paid $ 50,000 at the execution of the Desai Redemption Agreement and the remaining $ 50,000 is due on or before December

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

Desai’s right, title, and interest in us while we

operated as an LLC.

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

paid in December 2023.

5 – RELATED PARTY TRANSACTIONS

Haugli, our Chief Executive Officer and one of our stockholders, 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”).

On September 22, 2020, SideChannel assigned to RealCISO certain contracts and intellectual property.

We are a reseller of RealCISO software.

We receive revenue from our customers for the use of RealCISO software and we pay licensing fees to RealCISO for such use.

nine months ended June 30, 2023, we paid $ 36,000 to RealCISO for licenses that we can resell to our clients.

For the nine months ended

June 30, 2023, we have invoiced our clients $ 180,100 for the annual use of RealCISO licenses.

Chasteen, our Executive Vice President of Sales, has an amount payable to the Company in relation to the payroll taxes paid by the Company

on his behalf for restricted stock units that vested during calendar year 2022.

The balance due is $ 6,864 and is recorded in prepaid

and other current assets as of June 30, 2023.

other related party transactions occurred during the three and nine months ended June 30, 2023.

On September 22, 2020, SideChannel assigned to RealCISO Inc.

certain contracts and intellectual property.

We are a reseller of the RealCISO

We receive revenue from our customers for the use of RealCISO software and pays licensing fees to RealCISO for such use.

amounts were paid to RealCISO in the three months ending December 31,2023.

We paid $ 36,000 to RealCISO during the three months ended December 31, 2022.

received $ 43,200 from RealCISO for software development services that we provided RealCISO during the three months ending December 31,

other related party transactions occurred during the three months ending December 31, 2023.

6 – COMMITMENTS AND CONTINGENCIES

April 2021, Eric Marquez, our former Secretary/Treasurer and Chief Financial Officer, and certain other plaintiffs, filed a lawsuit against

Michael De La Garza, our former Chief Executive Officer and President, and us in the 20 th Judicial District for Hays County,

Texas (Cause No.

The lawsuit alleges causes of action for fraud against Mr.

De La Garza (for misrepresentations allegedly made

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 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.

claims required that we 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;

quantum meruit;

and rescission of certain stock purchases

made by certain of the plaintiffs, as well as declaratory relief and fraud.

Damages sought exceed $ 1,000,000 .

We believe we have made

all required payments and delivered the stock to the plaintiffs.

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

to continue to vigorously defend against the litigation.

and rescission of certain stock purchases made by certain of the plaintiffs, as well as declaratory relief and fraud.

sought exceed $ 1,000,000 .

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

The case 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.

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

1 unchanged sentence

7 – STOCK BASED COMPENSATION

grant equity compensation awards to employees, directors, and contractors under the 2021 Omnibus Equity Compensation Plan (“Equity

Incentive Plan”) approved by stockholders on September 13, 2021.

2022 the Company granted restricted stock units to directors and employees with service-based vesting conditions.

The restricted stock

units vest over a 3 -year service period.

following table summarizes the activity for unvested restricted stock units granted to directors and employees during the nine months

ended June 30, 2023:

OF UNVESTED RESTRICTED STOCK UNITS ACTIVITY

Average Grant

Date Fair Value

grant equity compensation awards to directors, employees, and contractors under the 2021 Omnibus Equity Compensation Plan.

and 2024 we granted restricted stock units (RSUs) with service-based vesting conditions with vesting typically occurring over a

3-year period.

The following table summarizes the activity of our restricted stock units granted under our Equity Incentive

Plan during the three months ended December 31, 2023 and 2022.

SCHEDULE OF RESTRICTED STOCK UNITS VESTING

Equity Compensation Grants

Grants at September 30, 2023

( 1,768,517 )

Canceled/Forfeited

Grants at June 30, 2023

incurred stock-based compensation expense of $ 127,000 and $ 372,000 respectively for the three months and nine months ended June 30, 2023.

Unamortized stock compensation expense is $ 764,000 as of June 30, 2023.

Outstanding Grants at December

Outstanding Grants at September

Canceled/Forfeited

Grants at December 31, 2022

weighted average grant-date fair value of all awards granted during the quarter ended December 31, 2023 was $ 0.05

The Company recognizes compensation cost for unvested share-based awards on a straight-line basis over the

requisite service period.

Total stock-based compensation is included in general and administrative expense, selling and marketing expense,

and research and development expense in our accompanying Consolidated Statements of Earnings.

Our total stock-based compensation

expense for the three months ended December 31, 2023 was $ 93,000

comprised of $ 8,000

for shares issued for services and $ 85,000

for the amortization of outstanding equity compensation grants.

The unamortized stock compensation expense at December 31, 2023, is $ 545,000 ,

and the remaining weighted average term to vesting is 2.0 years.

Some employees opted to sell shares back to the Company at the fair market

value on the vesting date to fund their portion of payroll taxes due on the taxable income generated by the vested restricted stock units.

For the three months ended December 31, 2023, we have purchased shares with a vesting date value of $ 5,000 .

incurred stock-based compensation expense of $ 115,000 for the three months ended December 31, 2022 which is comprised of $ 18,000 for

shares issued for services and $ 97,000 for the amortization of outstanding equity compensation grants.

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 all of which were issued

and outstanding at December 29, 2021.

The 1,000 shares of common stock were exchanged for 62,016,618 shares of Cipherloc common stock

and 100 shares of Series A Preferred Stock of Cipherloc.

As a result, the financial statements have been adjusted retroactively to reflect

these shares as being outstanding as of September 30, 2020.

explained in Note 5, in December 2021, we promised to pay Mr.

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

Desai’s right,

title, and interest in SCS.

The balance of $ 50,000 is due and payable by December 31, 2023.

LLC, a predecessor entity to SCS, made profit sharing distributions of $ 461,000 during the three months ended December 31, 2021 in accordance

with its partnership agreements.

of June 30, 2023, and 2022, we had 212,765,780 and 62,016,618 shares of common stock outstanding, respectively.

We had 148,724,056 shares

of common stock outstanding at September 30, 2022.

of December 31, 2023, we had 221,645,310

shares of common stock outstanding and were authorized to issue 681,000,000

shares of common stock at a par value of $ 0.001 .

had 213,854,781 shares of common stock outstanding as of September 30, 2023.

Stock Issued for Cash

did not issue shares of common stock for cash during the nine months ended June 30, 2023.

did not issue shares of common stock for cash during the three months ended December 31, 2023.

Stock Issued for Business Combinations

issued 62,016,618 shares for Business Combination related activity during the nine months ended June 30, 2023 (Note 3).

did not issue shares for mergers or acquisitions related activity during the three months ended December 31, 2023.

Stock Issued for Services

Board has elected to have each of its non-executive 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 June 30, 2023, the Company issued 166,668 shares of common stock as

compensation for a value of $ 16,000 to the non-executive members of the Board for services received during the third quarter of fiscal

For the nine months ended June 30, 2023, we have issued 513,893 shares of common stock as compensation for a value of $ 47,000

to the non-executive members of our Board.

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.

On December 29, 2023, the Company issued 166,668

shares of common stock as compensation to the non-executive members of our Board for a fair value of $ 5,000

for the services rendered during the first quarter of fiscal year 2024 and 90,417

shares to an independent contractor with a fair value of $ 3,000 .

Stock Issued Under Equity Incentive Plan

have issued 1,511,114 shares of common stock as incentive compensation during the nine months ended June 30, 2023 for the vesting of

1,768,517 restricted stock units granted at an average grant date fair value of $ 0.14 per share.

The grant date fair value of the common stock issued as incentive compensation

during the nine months ended June 30, 2023 is $ 212,000 .

Some employees opted to sell shares

to fund the payroll taxes due on the taxable income generated by the vested restricted stock units.

The number of shares sold by these

employees to fund payroll taxes through June 30, 2023 was 257,403 .

Stock Issued For Conversion of Series A Preferred Stock

the quarter ended June 30, 2023, we issued 100 shares of common stock for the conversion of 100 shares Series A Preferred stock.

of June 30, 2023, we had no shares of Series A Preferred Stock outstanding.

During the three months ended June 30, 2023, 100 shares of

Series A Preferred Stock were converted into 100 shares of common stock.

The Series A Preferred Stock shares were issued as part of the

Business Combination .

100 shares of Series A Preferred Stock that were exchanged for SCS, Inc.

common stock have been retroactively reflected as issued and

outstanding as of September 30, 2021.

to the July 1, 2022 Business Combination, Cipherloc had outstanding warrants which continue to be binding on the Company after the Business

following table summarizes warrant activity for the period from September 30, 2022 to June 30, 2023:

OF WARRANT ACTIVITY

Weighted Average

Exercise Price

Weighted Average

Remaining Life

at September 30, 2022

issued 262,486

shares of common stock for 369,997 RSU’s that vested during the three months ended December 31, 2023.

The number of shares

sold by these employees to fund payroll taxes for the three months ended December 31, 2023 was 112,594 .

Stock Issued Under Tender Offer

December 26, 2023 we closed a tender offer to exchange approximately 55.5

million 2021 Investor Warrants for shares of common stock and new warrants (“November 2023 Warrant Exchange”).

November 2023 Warrant Exchange had 43,538,501 2021 Investor warrants tendered (78.4% of the outstanding 2021 Investor Warrants)

resulting in the issuance of 7,270,958

shares of common stock and 17,415,437 new warrants (“New Warrants”).

The New Warrants include these terms:

(1) New Warrant can subscribe for and purchase one (1) share of common stock from the Company

at an exercise price of eighteen cents ($ 0.18 ) on or before December 29, 2028.

New Warrant can be exercised on a cash or cashless basis.

New Warrants will automatically convert if the common stock trades at a bid price equal to

or greater than thirty-six cents ($ 0.36 ) for thirty (30) consecutive trading days.

holders will be notified if the automatic conversion is triggered and will be provided with

twenty (20) trading days to deliver a notice of exercise to the Company.

New Warrants will be adjusted for stock dividends and stock splits should such an event occur

during the term of the New Warrant.

The weighted average warrant fair value of the 2021

Investor Warrants successfully tendered, as determined using the Black-Scholes option valuation model, was in excess of the value of the

consideration paid by the Company to the 2021 Investor Warrant holders who successfully tendered their warrants during the November 2023

Warrant Exchange.

We did not recognize a gain as a result of the November 2023 Warrant Exchange.

The assumptions used to estimate

the weighted average warrant fair value for the successfully tendered 2021 Investor Warrants include:

estimated volatility based primarily on historical monthly price changes of the Company’s

stock equal to the expected life of the warrant.

risk-free interest rate was based on the U.S.

Treasury yield in effect at the time of grant.

expected warrant term was the number of years the Company estimates the warrants will be

outstanding prior to exercise based on expected historical exercise patterns.

After the November 2023 Warrant Exchange, we had a total of 43.2 million warrants outstanding comprised of 5.4 million from 2018 issued

to placement agents, 8.4 million from 2021 issued to placement agents, 12.0 million remaining 2021 investor warrants, and 17.4 million

new warrants issued on December 26, 2023.

of December 31, 2023, we had zero ( 0 )

shares of preferred stock outstanding.

following table summarizes warrant activity for the three months ended December 31, 2023:

SCHEDULE OF WARRANT ACTIVITY

Outstanding Warrants

(In thousands, except prices and remaining lives)

Number of Warrants

Weighted Average Exercise Price

Weighted Average Remaining Life

Outstanding at September 30, 2023

Granted through November 2023 Warrant Exchange

Tendered during November 2023 Warrant Exchange

Canceled/Forfeited

( 11,410,400 )

at June 30, 2023

Outstanding at December 31, 2023

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-Q

Item 1. Financial Statements