SideChannel, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS SIDECHANNEL, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) December 31, 2023 September 30, 2023 (Unaudited) ASSETS Current assets Cash $ 819 $ 1,053 Accounts receivable, net 868 834 Deferred costs 180 180 Prepaid expenses and other current assets 278 381 Total current assets 2,145 2,448 Fixed assets 27 30 Goodwill 1,356 1,356 Deferred costs 105 150 Total assets $ 3,633 $ 3,984 LIABILITIES & STOCKHOLDERS’ EQUITY Current liabilities Accounts payable and accrued liabilities $ 511 $ 613 Deferred revenue 238 280 Promissory note payable - 50 Income taxes payable 11 11 Total current liabilities 760 954 Other Liabilities - - Total liabilities 760 954 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 222 214 Additional paid-in capital 21,836 21,755 Accumulated Deficit ( 19,185 ) ( 18,939 ) Total stockholders’ equity 2,873 3,030 Total liabilities and stockholders’ equity $ 3,633 $ 3,984 The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 Table of Contents SIDECHANNEL, INC. CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except share and per share data) (Unaudited) Three Months Ended December 31, 2023 2022 Revenues $ 1,736 $ 1,546 Cost of revenues 891 681 Gross profit 845 865 Operating expenses General and administrative 709 1,030 Selling and marketing 269 307 Research and development 126 135 Total operating expenses 1,104 1,472 Operating loss ( 259 ) ( 607 ) Other income (expense), net 13 5 Net loss before income tax expense ( 246 ) ( 602 ) Income tax expense - - Net income (loss) after income tax expense $ ( 246 ) $ ( 602 ) Net income (loss) per common share – basic and diluted $ ( 0.00 ) $ ( 0.00 ) Weighted average common shares outstanding – basic and diluted 214,578,923 148,733,860 The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 Table of Contents SIDECHANNEL, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (In thousands, except share and per share data) (Unaudited) Preferred Shares Preferred Par Value Common Shares Common Par Value APIC Accumulated Deficit Total Equity Balance at September 30, 2023 - $ - 213,854,781 $ 214 $ 21,755 $ ( 18,939 ) $ 3,030 Shares issued for 2021 Investor Warrants - - 7,270,958 7 ( 7 ) - - Shares issued for services - - 257,085 - 8 - 8 Stock-based compensation expense - - - - 86 - 86 Stock issued for RSU vesting, net - - 262,486 1 ( 6 ) - ( 5 ) Net loss - - - - - ( 246 ) ( 246 ) Balance at December 31, 2023 - $ - 221,645,310 $ 222 $ 21,836 $ ( 19,185 ) $ 2,873 Preferred Shares Preferred Par Value Common Shares Common Par Value APIC Accumulated Deficit Total Equity Balance at September 30, 2022 100 $ - 148,724,056 $ 149 $ 21,180 $ ( 11,933 ) $ 9,396 Balance 100 $ - 148,724,056 $ 149 $ 21,180 $ ( 11,933 ) $ 9,396 Shares issued for services - - 180,557 - 18 - 18 Stock-based compensation expense - - - - 118 - 118 Net loss - - - - - ( 602 ) ( 602 ) Balance at December 31, 2022 100 $ - 148,904,613 $ 149 $ 21,316 $ ( 12,535 ) $ 8,930 Balance 100 $ - 148,904,613 $ 149 $ 21,316 $ ( 12,535 ) $ 8,930 The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 Table of Contents SIDECHANNEL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Three Months Ended December 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 246 ) $ ( 602 ) Adjustments to reconcile net (loss) income to net cash flows used in operating activities: Depreciation and Amortization 48 45 Stock-based compensation, shares issued for services, and RSU vesting, net 88 115 Changes in operating assets and liabilities: Accounts receivable ( 34 ) 42 Prepaid expenses and other assets 103 46 Accounts payable and accrued liabilities ( 101 ) ( 67 ) Deferred revenue ( 42 ) ( 56 ) Net cash used in operating activities ( 184 ) ( 477 ) CASH FLOWS FROM INVESTING ACTIVITIES: Net cash used in investing activities - - CASH FLOWS FROM FINANCING ACTIVITIES: Note payable ( 50 ) Net cash used in financing activities ( 50 ) - (DECREASE) INCREASE IN CASH ( 234 ) ( 477 ) CASH, BEGINNING OF PERIOD 1,053 3,030 CASH, END OF PERIOD $ 819 $ 2,553 NON-CASH INVESTING AND FINANCING ACTIVITIES: Stock-based compensation included in accounts payable and accrued liabilities $ - $ 21 Shares Issued for Services $ 8 $ 18 The accompanying notes are an integral part of these unaudited consolidated financial statements. 6 Table of Contents SIDECHANNEL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2023 AND 2022 (Dollars in thousands except shares and per share data) NOTE 1 – NATURE OF OPERATIONS Our 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. Our headquarters are located at 146 Main Street, Suite 405, Worcester, MA, 01608. Our website is https://sidechannel.com . History On July 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. 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 Business Combination 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. 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. NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Use of Estimates The 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. In 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. 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 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 Certain prior year amounts have been reclassified to be comparable with the current year’s presentation. Subsequent Events We 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 . Segment Information We manage our operations as a single operating segment for the purposes of assessing performance and making operating decisions. 7 Table of Contents Goodwill, Intangible, and Long-Lived Assets We account for goodwill and intangible assets in accordance with ASC Topic 350 (Intangibles – Goodwill and Other) and ASC Topic 360 (Property, Plant and Equipment). 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. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Long-lived 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. 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. Revenue Recognition We recognize revenue in accordance with the guidance in ASC Topic 606 (Revenue from Contracts with Customers). We recognize revenue for the sale of products or services when our performance obligations under the terms of a contract with a customer are satisfied and control of the product or service has been transferred to the customer. Generally, this occurs when we deliver a product or perform a service. In certain cases, recognition of revenue is deferred until the product or service is received by the customer or at some other point in the future when we have determined that we have satisfied our performance obligations under the contract. Our contracts with customers may include a combination of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. We do not have any material variable consideration arrangements, or any material payment terms with our customers other than standard payment terms which generally range from net 15 to net 90 days. Nature of Products and Services We identify, develop, and deploy cybersecurity and privacy risk management solutions for our clients and customers in North America. We categorize our products and services as either vCISO Services or Cybersecurity Software and Services. In addition to Enclave, our proprietary software product, we also sell third-party software and services through a network of strategic partnerships. 8 Table of Contents Types of Contracts with Customers Our contracts with customers are generally structured as annual subscription agreements or project specific statements of work. Our annual 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. Contract Balances We record accounts receivable at the time of invoicing. Accounts receivable, net of the allowance for doubtful accounts, is included in current assets on our balance sheet. To the extent that we do not recognize revenue at the same time as we invoice, we record a liability for deferred revenue. In certain instances, we also receive customer deposits in advance of invoicing and recording of accounts receivable. Deferred revenue and customer deposits are included in current liabilities on our consolidated balance sheets. 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 . Costs to Obtain a Contract with a Customer The 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. See Note 3 for further information about our revenue from contracts with customers. 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. The lease 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. 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. 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. Finance leases are included in property and equipment and financing lease liabilities. We do not currently have any financing leases. 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 the lease). 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. 9 Table of Contents Stock-Based Compensation We account for stock-based compensation in accordance with ASC Topic 718 (Compensation – Stock Compensation) which requires that employee share-based equity awards be accounted for under the fair value method and requires the use of an option pricing model for estimating fair value of awards, which is then amortized to expense over the service periods. See further disclosures related to our stock-based compensation plans in Note 7. Legal 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. These accruals are adjusted as additional information becomes available or circumstances change. Legal fees are charged to expense as they are incurred. Net Loss Per Common Share Basic 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. Due to the 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 . Warrants We 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. The 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. Liquidity and Capital Resources As of December 31, 2023 and September 30, 2023, we had $ 0.8 million and $ 1.1 million, respectively, of cash and cash equivalents. We have incurred a net loss during the three month period ended December 31, 2023. Our 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. Effect of Recently Issued Amendments to Authoritative Accounting Guidance In November 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. In December 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. 10 Table of Contents NOTE 3 – REVENUE FROM CONTRACTS FROM CUSTOMERS Customer Concentration One 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. Deferred Revenue Deferred revenue was $ 238,000 at December 31, 2023. The deferred revenue is expected to be earned within 12 months of the balance sheet date. Changes 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 $ 280 Deferral of revenue 128 Recognition of revenue ( 170 ) Balance at December 31, 2023 $ 238 NOTE 4 – DEBT Pursuant 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 us while we operated as an LLC. Mr. Desai was paid $ 50,000 at the execution of the Desai Redemption Agreement and the remaining $ 50,000 balance was paid in December 2023. NOTE 5 – RELATED PARTY TRANSACTIONS Brian 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 Inc. certain contracts and intellectual property. 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. No 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. We received $ 43,200 from RealCISO for software development services that we provided RealCISO during the three months ending December 31, 2023. No other related party transactions occurred during the three months ending December 31, 2023. NOTE 6 – COMMITMENTS AND CONTINGENCIES Litigation In 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. 20-0818). The lawsuit alleges causes of action for fraud against Mr. De La Garza (for misrepresentations allegedly made by Mr. De La Garza); breach of contract, for alleged breaches of Mr. Marquez’s alleged oral employment agreement, which Mr. Marquez claims required 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. 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. We are not currently involved in any additional litigation that we believe could have a material adverse effect on our financial condition or results of operations. 11 Table of Contents NOTE 7 – STOCK BASED COMPENSATION We grant equity compensation awards to directors, employees, and contractors under the 2021 Omnibus Equity Compensation Plan. In 2023 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 Outstanding Equity Compensation Grants (In thousands) Number of RSU’s Outstanding Grants at September 30, 2023 8,637 Granted 620 Vested ( 370 ) Canceled/Forfeited ( 1,704 ) Outstanding Grants at December 31, 2023 7,183 Outstanding Grants at September 30, 2022 4,309 Granted 2,883 Vested - Canceled/Forfeited - Outstanding Grants at December 31, 2022 7,192 The weighted average grant-date fair value of all awards granted during the quarter ended December 31, 2023 was $ 0.05 per share. 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 . We 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. NOTE 8 - STOCKHOLDERS’ EQUITY Common Stock As 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 . We had 213,854,781 shares of common stock outstanding as of September 30, 2023. Common Stock Issued for Cash We did not issue shares of common stock for cash during the three months ended December 31, 2023. Common Stock Issued for Business Combinations We did not issue shares for mergers or acquisitions related activity during the three months ended December 31, 2023. Common Stock Issued for Services Our 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 . 12 Table of Contents Common Stock Issued Under Equity Incentive Plan We 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 . Common Stock Issued Under Tender Offer On 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”). The 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: ● Each (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. ● The New Warrant can be exercised on a cash or cashless basis. ● The 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. New Warrant 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. ● The 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: ● We estimated volatility based primarily on historical monthly price changes of the Company’s stock equal to the expected life of the warrant. ● The risk-free interest rate was based on the U.S. Treasury yield in effect at the time of grant. ● The 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. Preferred Stock As of December 31, 2023, we had zero ( 0 ) shares of preferred stock outstanding. Warrants The 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 69,281 $ 0.39 3.31 Granted through November 2023 Warrant Exchange 17,415 0.18 5.00 Tendered during November 2023 Warrant Exchange ( 43,538 ) ( 0.36 ) ( 2.25 ) Canceled/Forfeited — — — Outstanding at December 31, 2023 43,158 $ 0.33 4.64 13 Table of Contents