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Item 1. Financial Statements

2024-05-07 compared with 2024-02-07 · 355 added, 335 removed, 164 unchanged (81% of the section changed)

FINANCIAL STATEMENTS

SIDECHANNEL, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

December 31, 2023

September 30, 2023

BALANCE SHEETS

thousands, except share and per share data)

Current assets

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Total liabilities

Commitments and contingencies

Commitments and contingencies (Note 10)

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

224,355,805 and 213,854,781 shares issued and outstanding as of Mar 31, 2024 and Sep 30, 2023

Additional paid-in capital

2 unchanged sentences

Total liabilities and stockholders’ equity

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

SIDECHANNEL, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except share and per share data)

The consolidated balance sheet at September 30, 2023, has been derived from the audited consolidated financial statements at

that date but does not include all of the information and footnotes required by the United States generally accepted accounting principles

for complete financial statements.

accompanying notes to unaudited consolidated financial statements.

STATEMENTS OF OPERATIONS

thousands, except share and per share data)

Three Months Ended

Six Months Ended

Cost of revenues

4 unchanged sentences

Total operating expenses

Operating loss

Other income (expense), net

Net loss before income tax expense

Operating income (loss)

Other income, net

Net income (loss) before income tax expense

Income tax expense

2 unchanged sentences

Weighted average common shares outstanding – basic and diluted

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

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

accompanying notes to unaudited consolidated financial statements.

STATEMENTS OF STOCKHOLDERS’ EQUITY

thousands, except share and per share data)

Stockholders’

the Six Months Ended March 31, 2024

Stockholders’

Balance at September 30, 2023

1 unchanged sentence

Shares issued for services

Stock-based compensation expense

Stock issued for RSU vesting, net

Stock-based compensation

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 March 31, 2024

For the Six Months Ended March 31, 2023

Preferred Stock

Stockholders’

Balance at September 30, 2022

Shares issued for services

Stock-based compensation

Balance at December 31, 2022

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

SIDECHANNEL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Three Months Ended December 31,

Shares issued for services

Stock-based compensation

Stock-based compensation expense

Balance at March 31, 2023

accompanying notes to unaudited consolidated financial statements.

STATEMENTS OF CASH FLOWS

Six Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES:

1 unchanged sentence

Depreciation and amortization

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

Stock-based compensation and shares issued for services, net

Changes in operating assets and liabilities:

Accounts receivable

Accounts receivable, net

Prepaid expenses and other assets

Accounts payable and accrued liabilities

Income taxes payable

Deferred revenue

1 unchanged sentence

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of fixed assets

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Payment of note payable

Net cash used in financing activities

2 unchanged sentences

CASH, END OF PERIOD

NON-CASH INVESTING AND FINANCING ACTIVITIES:

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

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 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.

Purchase of restricted stock units (“RSUs”) sold by employees to pay for taxes due on vested RSUs

accompanying notes to unaudited consolidated financial statements.

TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THE SIX MONTHS ENDED MARCH 31, 2024 AND 2023

1 – GENERAL INFORMATION

of the Company

SDCH) (“SideChannel”, the “Company”, “we”, “us”, or “our”),

a Delaware Corporation organized in 2021, is a cybersecurity advisory services and software company.

Our headquarters are located at

146 Main Street, Suite 405, Worcester, MA, 01608.

Our website is https://sidechannel.com .

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

A history of the Company is disclosed

in our Form 10-K for the year ended September 30, 2023 (the “2023 Form 10-K”) filed on December 27, 2023, with the Securities and Exchange Commission (“SEC”).

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

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

for our customers.

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

are offering proprietary software called Enclave which simplifies important cybersecurity tasks called “asset inventory”

and “microsegmentation.” Enclave seamlessly combines access control, microsegmentation, encryption and other secure networking

concepts to create a comprehensive solution.

It allows IT professionals to easily segment the enterprise network, place the right staff

in those segments and direct traffic.

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

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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.

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”).

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.

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 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

have not made changes to the Significant Accounting Policies disclosed in our 2023 Form 10-K for the year ended September 30, 2023

filed on December 27, 2023, with the SEC.

of Presentation

accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting

principles (“U.S.

GAAP”) for interim financial information and the rules and regulations of the SEC.

Accordingly, they do not include all of the information and footnotes required by U.S.

GAAP for complete financial

In the opinion of management, all adjustments considered necessary for a fair presentation have been included.

results for the three and six months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the

year ending September 30, 2024.

These unaudited consolidated financial statements should be read in conjunction with the consolidated

financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2023.

prior period amounts have been reclassified to conform to the current year presentation or adjusted due to rounding and have had no impact

on net income or stockholders’ equity.

Reclassifications

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

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

Accounting 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 2023 Form 10-K.

The same accounting policies have been followed in these unaudited interim consolidated financial

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

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.

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.

1 unchanged sentence

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.

Intangible, and Long-Lived Assets

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.

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

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.

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.

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.

We base our estimates on historical

experience and on appropriate and customary assumptions that we believe to be reasonable under the circumstances, the results of which

form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Some of these accounting estimates and assumptions are particularly sensitive because of their significance to our consolidated financial

statements and because of the possibility that future events affecting them may differ markedly from what had been assumed when the financial

statements were prepared.

of March 31, 2024, there have been no significant changes to the accounting estimates that we have deemed critical.

Our critical accounting

estimates are more fully described in our 2023 Form 10-K.

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

40 unchanged sentences

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.

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.

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.

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

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.

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

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

7 unchanged sentences

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

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.

Pronouncements

did not adopt new accounting pronouncements during the six months ended March 31, 2024.

Issued Accounting Standards Not Yet Adopted

November 2023, the Financial Accounting Standards Board (“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

Early adoption is permitted.

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

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.

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

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 three months ended December 31, 2023 were as follows:

We are currently evaluating the impact that the

new guidance will have on our consolidated financial statements.

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.

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 $ 967 per month.

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

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 (Leases) 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.

4 – DEFERRED REVENUE

Revenue is comprised of payments received from our clients and customers for products or services in advance of receiving the product

This primarily occurs for annual software and service contracts including Enclave.

While software contracts can be initiated

at any time of year, most of our annual agreements renew in our quarter ended March 31.

payment received from a client in advance of receiving the product or service will be deferred and increase the balance of Deferred Revenue.

We recognize the revenue for the product or service when it is delivered to the client according to ASC Topic 606.

The recognition of

revenue for a product or service paid for in advance by our clients will decrease the balance of Deferred Revenue.

revenue was $ 564,000 at March 31, 2024 and $ 280,000 at September 30, 2023.

The deferred revenue is expected to be earned within 12 months

of the balance sheet date.

in deferred revenue for the six months ended March 31, 2024 were as follows:

SCHEDULE OF CHANGES IN DEFERRED REVENUE

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Recognition of revenue

Balance at December 31, 2023

Balance at March 31, 2024

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

5 unchanged sentences

paid in December 2023.

6 - STOCKHOLDERS’ EQUITY

of March 31, 2024, we had 224,355,805 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 six months ended March 31, 2024.

Stock Issued for Business Combinations

did not issue shares for mergers or acquisitions related activity during the six months ended March 31, 2024.

Stock Issued for Services

shares of common stock issued for services during the six months ended March 31, 2024 is 437,643 with a total fair value of $ 20,000 .

Board of Directors (“Board”) had 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 February 15, 2024,

and March 28, 2024, the Company issued 20,834

shares of common stock, respectively, as compensation to the non-executive members of our Board for a fair value of $ 12,000

for the services rendered during the second quarter of fiscal year 2024.

For the six months ended March 31, 2024 we have issued 347,226

shares of common stock as compensation for a value of $ 17,000 .

the six months ended March 31, 2024 we have issued 90,417 shares of common stock to an independent contractor with a fair value of $ 3,000 .

Stock Issued Under Equity Incentive Plan

issued 2,792,423 shares of common stock for 4,039,824 Restricted Stock Units (“RSUs”) that vested during the six months ended March 31, 2024.

of RSUs sold by these employees to fund payroll taxes for the six months ended March 31, 2024 was 1,247,401 .

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”).

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:

(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.

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.

New Warrants will be adjusted for stock dividends and stock splits should such an event occur during the term of the New Warrant.

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

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.

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 March 31, 2024, we had zero ( 0 ) shares of preferred stock outstanding.

following table summarizes warrant activity for the six months ended March 31, 2024:

SCHEDULE OF WARRANT ACTIVITY

Outstanding Warrants

(In thousands, except prices and remaining lives)

Outstanding at September 30, 2023

Granted through November 2023 Warrant Exchange

Tendered during November 2023 Warrant Exchange

Canceled/Forfeited

Outstanding at March 31, 2024

7 – RELATED PARTY TRANSACTIONS

5 unchanged sentences

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.

paid $ 20,160 to RealCISO in the six months ending March 31, 2024.

We paid $ 36,000 to RealCISO during the six months ended March 31, 2023.

received $ 76,500 from RealCISO for software development services that we provided RealCISO during the six months ending March 31, 2024.

October 13, 2023, the Association of the US Army (“AUSA”) signed an agreement for a cybersecurity risk assessment for

On February 15, 2024, the President of AUSA, Retired U.S.

Army General Robert Brown, joined our Board.

The final payment of $ 6,106

for the agreement for the assessment was invoiced and paid during March 2024.

Hnatiw, our Chief Technology Officer and Director, has an amount payable to the Company in relation to the payroll taxes paid by the Company on

his behalf for RSUs that vested during calendar year 2022.

The balance due from Mr.

Hnatiw is $ 2,551

and is recorded in prepaid and other current assets as of March 31, 2024.

other related party transactions occurred during the six months ending March 31, 2024.

8 – CUSTOMER CONCENTRATION RISK

client individually accounted for over 10 % of our revenue during the three months or six months ended March 31, 2024;

no client individually

accounted for over 10 % of our revenue during the three months or six months ended March 31, 2023.

9 – STOCK BASED COMPENSATION

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

We have granted RSUs with service-based vesting conditions with vesting typically occurring over a 3-year period.

The following table summarizes the activity of our RSUs granted under our Equity Incentive Plan during the six months

ended March 31, 2024, and March 31, 2023.

SCHEDULE OF RESTRICTED STOCK UNITS VESTING

Outstanding Equity Compensation Grants

(In thousands)

Outstanding Grants at September 30, 2023

Canceled/Forfeited

Outstanding Grants at March 31, 2024

Outstanding Grants at September 30, 2022

Canceled/Forfeited

Outstanding Grants at March 31, 2023

weighted average grant-date fair value was $ 0.05 per share for all awards granted during the six months ended March 31, 2024 and $ 0.14 per share for all awards granted during the six months ended March

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 Operations.

total stock-based compensation expense for the six months ended March 31, 2024 was $ 300,000 comprised of $ 20,000 for shares issued for

services and $ 280,000 for the amortization of outstanding equity compensation grants.

The unamortized stock compensation expense at March

31, 2024, is $ 757,000 , and the remaining weighted average term to vesting is 2.4 years.

employees opted to sell RSUs 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 RSUs.

For the six months ended March 31, 2024, we have purchased RSUs with a vesting

date value of $ 66,000 .

Our Statement of Stockholders Equity reflects the net increase of $ 214,000 as of March 31, 2024 or $ 280,000 of

total stock-based compensation expense less the $ 66,000 of RSUs purchased.

incurred stock-based compensation expense of $ 266,000 for the six months ended March 31, 2023 which is comprised of $ 31,000 for shares

issued for services and $ 235,000 for the amortization of outstanding equity compensation grants.

10 – COMMITMENTS AND CONTINGENCIES

18 unchanged sentences

or results of operations.

7 – STOCK BASED COMPENSATION

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

Canceled/Forfeited

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

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 three months ended December 31, 2023.

Stock Issued for Business Combinations

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

Stock Issued for Services

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

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

Outstanding at December 31, 2023

11 – SUBSEQUENT EVENTS

April 15, 2024, we filed a Form 8-K with the SEC for the following resolutions passed with unanimous vote by our Board:

Board eliminated two of the Committees of the Board of Directors including:

Compensation Committee comprised of the following directors:

Robert Brown, Deborah MacConnel, and Kevin Powers

Nomination and Corporate Governance Committee comprised of the following directors:

James Hansen, Brian Haugli, Deborah MacConnel,

Kevin Powers, and Hugh Regan, Jr.

Board eliminated all cash compensation paid to its directors.

Board eliminated all stock compensation paid to its directors.

No agreements have been entered for this arrangement

but are forthcoming.

Board has determined to implement an equity incentive plan for its directors.

Board determined to compensate Director Hugh Regan, Jr.

at a rate of $ 7,500 per quarter for services provided as chair of the

Audit Committee.

No agreements have been entered for this arrangement but are forthcoming.

LOOKING STATEMENTS

Quarterly Report on Form 10-Q, including estimates, projections, statements relating to our business plans, objectives and expected operating

results, and the assumptions upon which those statements are based, contains “forward-looking statements” within the meaning

of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities

Exchange Act of 1934.

These forward-looking statements generally are identified by the words “believe,” “project,”

“expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,”

“may,” “should,” “will,” “would,” “will be,” “will continue,”

“will likely result,” and similar expressions.

Forward-looking statements are based on current expectations and assumptions

that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements.

A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking

statements is included in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended

September 30, 2023 and elsewhere in this Form 10-Q.

We undertake no obligation to update or revise publicly any forward-looking statements,

whether as a result of new information, future events, or otherwise.

forward-looking statements are based on management’s current expectations.

These statements are neither promises nor guarantees,

but involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements

to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.

we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate;

therefore, we cannot assure you that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate.

In light of the significant uncertainties inherent in our forward-looking statements, the inclusion of such information should not be

regarded as a representation by us or any other person that our objectives and plans will be achieved.

Some of these and other risks

and uncertainties that could cause actual results to differ materially from such forward-looking statements are more fully described

in our 2023 Annual Report on Form 10-K, elsewhere in this Quarterly Report on Form 10-Q, or those discussed in other documents we filed

with the SEC.

Except as may be required by applicable law, we undertake no obligation to publicly update or advise of any change in any

forward-looking statement, whether as a result of new information, future events, or otherwise.

In making these statements, we disclaim

any obligation to address or update each factor in future filings with the SEC or communications regarding our business or results, and

we do not undertake to address how any of these factors may have caused changes to discussions or information contained in previous filings

or communications.

In addition, any of the matters discussed above may have affected our past results and may affect future results,

so that our actual results may differ materially from those expressed in this Quarterly Report on Form 10-Q and in prior or subsequent

communications.

information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Report,

and the audited financial statements and notes thereto and “Part II.

Other Information - Item 7.

Management’s Discussion

and Analysis of Financial Condition and Results of Operations”, contained in our 2023 Form 10-K.

are not aware of any misstatements regarding any third-party information presented in this Report;

however, their estimates, in particular,

as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based

on various factors, including those discussed under, and incorporated by reference in, the section entitled “ Item 1A.

Factors ” of this Report.

These and other factors could cause our future performance to differ materially from our assumptions

and estimates.

Some market and other data included herein, as well as the data of competitors as they relate to SideChannel (as defined

herein), is also based on our good faith estimates.

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