What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-12-13 compared with 2023-12-27 · 703 added, 698 removed, 300 unchanged (82% of the section changed)

1 unchanged sentence

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

FINANCIAL STATEMENTS:

Balance Sheets as of September 30, 2024 and 2023

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

determined that there are no critical audit matters.

served as the Company’s auditor since 2021.

Vegas, Nevada

LLP (PCAOB ID Number 587)

SIDECHANNEL, INC.

We determined

that there are no critical audit matters.

We have served as the Company’s auditor since

Las Vegas, Nevada

December 12, 2024

RBSM LLP (PCAOB ID Number

BALANCE SHEETS

thousands, except share and per share data)

September 30, 2024

September 30, 2023

Current assets

Cash and cash equivalents

Short-term investments

Accounts receivable, net

Deferred costs

expenses and other current assets

Prepaid expenses and other current assets

Total current assets

Fixed assets, net

Intangible assets

LIABILITIES & STOCKHOLDERS’

Deferred costs

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable and accrued

Accounts payable and accrued liabilities

Deferred revenue

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Income taxes payable

current liabilities

tax liability

Commitments and contingencies

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

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

Total current liabilities

Other liabilities

Total liabilities

Commitments and contingencies (Note 16)

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

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Accumulated deficit

stockholders’ equity

liabilities and stockholders’ equity

SIDECHANNEL, INC.

Total stockholders’ equity

Total liabilities and stockholders’ equity

STATEMENTS OF OPERATIONS

thousands, except share and per share data)

Twelve Months

Twelve Months Ended

September 30,

Cost of revenues

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Research and development

Goodwill impairment

Intangible asset impairment

operating expenses

Business Combination related costs

Total operating expenses

Operating loss

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Income tax expense (benefit)

Net loss after income

tax expense (benefit)

common share – basic and diluted

Weighted average common

shares outstanding – basic and diluted

Net loss per common share – basic and diluted

Weighted average common shares outstanding – basic and diluted

STATEMENTS OF STOCKHOLDERS’ EQUITY

thousands, except preferred shares)

Paid-in-Capital

Earnings / (Deficit)

Stockholders’

the Twelve Months Ended September 30, 2023 and 2022

Paid-in-Capital

Earnings / (Deficit)

Stockholders’

at September 30, 2021

distributions

issued for services

issued for vesting of RSUs

costs – contingent consideration

Business Combination

at September 30, 2022

issued for services

compensation expense

of Preferred to Common

Combination – Contingent Consideration

at September 30, 2023

SIDECHANNEL, INC.

(In thousands, except share data)

Preferred Shares

Preferred Par Value

Common Shares

Common Par Value

Accumulated Deficit

For the Twelve Months Ended September 30, 2024 and 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

Conversion of Preferred to Common

Business Combination – Contingent Consideration

Balance at September 30, 2023

Shares issued for 2021 Investor Warrants

Legal settlement

Shares issued for services

Stock-based compensation

Balance at September 30, 2024

STATEMENTS OF CASH FLOWS

thousands, unaudited)

Ended September 30,

Twelve Months Ended September 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

Adjustments to reconcile net loss to

net cash flows used in operating activities:

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

Depreciation and amortization

Stock-based compensation

Legal settlement paid in stock

Stock-based compensation and payments for services, net

Provision for doubtful accounts

Business combination related costs

Goodwill impairment

Business Combination Costs

Intangible asset impairment

Changes in operating assets and liabilities:

Accounts receivable

Unbilled revenue

Accounts receivable, net

Prepaid expenses and other assets

Accounts payable and accrued liabilities

Income taxes payable

Deferred revenue

Net cash used in operating activities

Net cash provided by / (used in) operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Cash and cash equivalents acquired in connection

with the Business Combination

Purchase of short-term investments

Purchase of fixed assets

Net cash provided by (used in) investing

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Equity redemption

Equity distribution

Net cash used in financing

(DECREASE) INCREASE IN CASH

Payment of note payable

Net cash used in financing activities

INCREASE / (DECREASE) IN CASH

CASH, BEGINNING OF PERIOD

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

Equity redemption with notes payable

Stock-based compensation included in accounts

payable and accrued liabilities

Assets acquired and liabilities assumed

Purchase of RSUs sold by employees to pay for taxes due on vested RSUs

TO FINANCIAL STATEMENTS

THE YEARS ENDED SEPTEMBER 30, 2024, AND 2023

shown in thousands, except shares and per share amounts)

1 – DESCRIPTION OF BUSINESS

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

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

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

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

We intend to provide more tech-enabled services to address the needs of our customers, including virtual Chief

Information Security Officer (vCISO), zero trust, third-party risk management, due diligence, privacy, threat intelligence, and

managed end-point security solutions.

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.

growth strategy focuses on these three initiatives:

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

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

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

On July 1, 2022 (the “Closing Date”) the

Company, then known as Cipherloc Corporation, a Delaware corporation, completed its acquisition (“Business Combination”) of

all the outstanding equity securities of SideChannel, Inc., a Massachusetts corporation pursuant to an Equity Securities Purchase Agreement

dated May 16, 2022 (the “Purchase Agreement”).

augment our vCISO offering with a full range of other cybersecurity products and services including those delivered by our security

engineer employees and independent contractors in addition to reselling services and software provided by third-parties.

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

its acquisition (the “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

On September 9, 2022, SideChannel, Inc.

the acquired Massachusetts corporation

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

(the “Subsidiary” or “SCS”) and Cipherloc Corporation,

the Delaware parent company of the subsidiary has changed its name to SideChannel, Inc.

The transaction was accounted for as

a reverse acquisition (“reverse merger”) in accordance with GAAP.

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

reporting purposes.

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

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

terms of the Purchase Agreement;

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

Because SCS has been determined to be the accounting acquirer in the Business Combination, but not the legal acquirer, the

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

Accounting Standards Codification (“ASC”) Topic 805, Business Combinations.

As a result, the historical financial

statements of SideChannel are the historical financial statements of the combined company.

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.

Following the closing of the Business

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Our website is www.sidechannel.com .

2 – GOING CONCERN ASSESSMENT

We are required to perform a going concern assessment for the annual reporting period.

The assessment uses a two-step

process to evaluate whether there are conditions and/or events that raise substantial doubt about our ability to continue as a going concern

within one year after the date on which the annual financial statements are issued.

The two steps are to:

if “substantial doubt” is raised regarding the entity’s ability to continue as a going concern.

If it is not raised,

the assessment stops there.

However, if substantial doubt is raised, management would proceed to the next assessment step.

if the substantial doubt continues to exist after considering any plan to address and mitigate the doubt.

However, regardless of

whether such a plan alleviates the initial doubt, the guidance will require some level of disclosure in the financial statements.

Substantial doubt exists when it is probable (within one year after the date on which the financial statements are

issued) that the Company will be unable to meet its obligations as they become due.

Probable is used consistently with its use in ASC

450, Contingencies (the future event or events are likely to occur, which is a higher threshold than “more likely than not”

but lower than “virtually certain”).

This assessment is through December 31, 2025, because our fiscal year 2024 financial statements will be issued during

December 2024.

For the year ended September 30, 2024, we reported a net loss of $ 904 thousand which includes $ 755 thousand of non-cash

expenses for depreciation, amortization, and stock-based compensation.

Our operating activities generated $ 307 thousand in cash for the

year ended September 30, 2024, and our cash balance decreased by $ 8 thousand during that same period after using $ 315 thousand of cash

for investing and financing activities, including the purchase of $ 250 thousand in short-term investments.

We may incur continued net

losses until we generate revenues in excess of our expenses;

however, we intend to manage our business such that our current cash balance

and net cash provided by operations will allow us to sustainably fund our business.

We cannot be certain that this will be achieved.

don’t currently have any credit facilities available to us.

We have determined that substantial doubt does not exist about our ability to continue as a going concern through

December 31, 2025.

3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

of Presentation and Use of Estimates

The accompanying consolidated financial

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

All significant intercompany accounts and transactions have

been eliminated upon consolidation.

accompanying consolidated financial statements include our accounts and those of our wholly owned subsidiaries.

All significant intercompany

accounts and transactions have been eliminated upon consolidation.

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

GAAP requires us to make estimates

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

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

Actual results could differ

from those estimates.

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

including related valuation allowances, are based upon estimates.

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

Actual results could differ from those estimates.

Certain of our accounts, including goodwill, identifiable intangibles, and

deferred tax assets and liabilities, including related valuation allowances, are based upon estimates.

Reclassifications

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

prior year amounts have been reclassified to be comparable with the current year’s presentation or adjusted due to rounding and

have had no impact on net income or stockholders’ equity.

manage our operations as a single operating segment for the purpose 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

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of operations.

and Cash Equivalents

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

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

As of September 30, 2023, and 2022, our cash included cash on hand

and cash in the bank.

We maintain our cash in accounts held by highly reputable financial institutions which, at times, may

exceed federally insured limits as guaranteed by the Federal Deposit Insurance Corporation (“FDIC”).

The FDIC insures these

deposits up to $ 250,000 .

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

We have not experienced any losses on cash.

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

We grant credit to customers and generally require

no collateral.

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

We had one (1) customer with

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

Cash flows from accounts receivable are

recorded in operating cash flows.

Cash Equivalents, and Short-Term Investments

Cash includes funds deposited in banks.

consider all highly liquid investments with an original maturity of 90 days or less to be cash equivalents.

Highly liquid investments with original maturities of 91 days or more that will mature less than one year from the

balance sheet date are classified as short-term investments.

Securities with maturities of more than 360 days, if any, are included in

“Long-term investments.”

Our cash equivalents and short-term

investments are placed primarily in money market funds and time deposits and are classified as held-to-maturity based on our positive

intent and ability to hold the securities to maturity.

We value cash equivalents at their original purchase prices plus interest that

has accrued at the stated rate.

We value short-term investments at their original purchase prices.

Interest earned on short-term investments

is accrued in interest receivable which is included on our balance sheet in “Accounts receivable, net.”

Interest income

related to cash equivalents and short-term investments is reported in “Other income, net” on the Consolidated Statement of Operations.

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

We grant credit to customers

and generally require no collateral.

To minimize our risk, we perform ongoing credit evaluations of our customers’

financial condition.

Effective January 1, 2023, we follow

the guidance in Accounting Standards Codification (“ ASC”) Topic 326 (Financial

Instruments – Credit Losses) in developing our estimate of the allowance for credit losses related to our accounts receivable.

allowance for credit losses is our best estimate of the amount of expected credit losses in our existing accounts receivable.

In establishing

the amount of allowance for credit losses, we consider all information available as of the reporting date including information related

to past events, such as historical loss rates and actual incurred losses, as well as current conditions that may indicate

future risk of loss and any other factors of which we are aware, that we believe could impact the ultimate collectability of the related

receivables in future periods.

Account balances are charged off against the allowance after all means of collection have been exhausted and the

potential for recovery is considered remote.

We do not have any

significant off-balance sheet credit exposure related to our customers.

Cash flows from accounts receivable are recorded in operating

For the year ended September 30, 2024 , there was no change in the amount of the allowance for credit

There was no bad debt expense recorded for the years ended September 30, 2024, and 2023.

Value of Financial Instruments

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

conversion features in stock warrants.

financial instruments consisted primarily of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses.

The carrying amounts of such financial instruments approximate their respective estimated

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three-level hierarchy for fair value measurements is defined as follows:

1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;

2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs

that are observable for the asset or liability other than quoted prices, either directly or indirectly, including inputs in markets

that are not considered to be active;

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

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

discussed in further detail in Note 3.

Level 1 – inputs to

the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;

Level 2 – inputs to

the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable

for the asset or liability other than quoted prices, either directly or indirectly, including inputs in markets that are not considered

to be active;

Level 3 – inputs to

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

For more information about the Company’s accounting policies surrounding fair value investments, see Note

Intangible, and Long-Lived Assets

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

account for goodwill and intangible assets in accordance with ASC Topic 350 (Intangibles

– Goodwill and Other).

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cost less accumulated amortization.

Goodwill is assessed for impairment annually during the fourth quarter on a reporting

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

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

As a part of the goodwill impairment

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

of a reporting unit is less than its carrying amount.

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

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

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

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

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

Goodwill is assessed for impairment annually during the fourth quarter on a reporting unit basis,

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

Goodwill is considered

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

As a part of the goodwill impairment assessment,

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

unit is less than its carrying amount.

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

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

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

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

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

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

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The goodwill was evaluated at

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

by $ 5.702 thousands.

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

amount of goodwill was $ 1.4 million as of September 30, 2022.

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

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

For fiscal year 2022, we incurred $ 5.7

million of goodwill impairment.

the balance sheet date of September 30, 2024.

For fiscal years 2024 and 2023, we recorded no impairment of goodwill.

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

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

recorded $ 4.9 million

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

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

Under ASC 805, AIPR&D are initially recognized

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

and development efforts.

recorded $ 4.9

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

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

Under ASC 805, AIPR&D are initially

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

research and development efforts.

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

instead, these

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

An impairment

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

Our impairment testing as of

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

The difficulty of projecting

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

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

in the product.

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

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

We recognize revenue for

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

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

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

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

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

Our contracts with customers

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

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

the contract,

the performance obligations of the contract,

the transaction price of the contract,

the transaction price to the performance obligations, and

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

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.

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

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

Our impairment testing as

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

The difficulty of projecting the

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

The $ 4.9 million of

intangible asset impairment charge recorded during fiscal year 2023 neither indicated a decrease in our emphasis on Enclave as a key

initiative nor did it suggest a lack of market interest in the product.

The Company did not record any finite-lived intangible asset

impairment for the year ended September 30, 2024.

We recognize revenue in accordance with the guidance in ASC Topic 606 (Revenue

from Contracts with Customers).

of Products and Services

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.

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 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.

We identify, develop, and deploy cybersecurity and privacy risk management

solutions for our clients in North America.

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

and Services.

The revenue earned from Enclave, our proprietary software product, as well as the revenue from reselling third-party software and services

are included in Cybersecurity Software and Services.

performance obligation is a promise in a contract to transfer a distinct good or service to the client and is the unit of accounting

in Topic 606.

A significant portion of our revenue is from clients with whom we have a Master Service Agreement (“MSA”).

Each MSA generally contains one or more Statement(s) of Work (“SOW”).

Each SOW specifies the products and services and their respective transaction prices.

We refer to an MSA and its SOW(s)

as a “Contract”.

Our Contracts generally contain monthly service subscriptions, annual software licenses, time and material

based billing, or fixed fee projects.

Contract’s transaction price is allocated to each distinct performance obligation.

For Contracts with multiple performance obligations,

we allocate the Contract’s transaction price to each performance obligation based on the relative standalone selling price.

is recognized over a period of time for monthly service subscriptions and software licenses.

Revenue is recognized at a point in

time when, or as, the performance obligation is satisfied for fixed fee projects and time and material based billing.

The assets we create for our clients do not have alternative uses to SideChannel and our Contracts created a right

to payment for work completed.

Each of the fixed fee project performance obligations we delivered in fiscal year 2024 were accompanied

by an upfront payment.

Our determination for point in time revenue recognition is based upon client acceptance of the performance obligation.

do not have any material variable consideration arrangements, client-specific acceptance criteria, or any material payment terms with

our clients other than standard payment terms which generally range from net 15 to net 45 days.

Principal vs Agent

We resell the software and services provided by third-parties.

When we have discretion over the pricing used in the Contracts with our clients then we deem ourselves to be the principal for purposes

of revenue recognition and record revenue on a gross basis using the price specified in the Contract.

This is the case for almost all

of the third-party software and services we sell.

Also consistent in our determinations to recognize revenue as the principal is our ability

to direct the third-party to provide the service to the client on our behalf.

Occasionally, we receive a commission from the sale

of third-party software and services in which case we are an agent and record revenue on a net basis equal to the amount of the commission

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.

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.

In these instances, the recognition of revenue is deferred until we have determined that we have satisfied

our performance obligations under the Contract.

to Obtain a Contract with a Customer

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

The 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.

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

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

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

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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.

Our lease periods are less than one-year in duration.

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

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

Note 8 for further disclosures regarding our leases.

and Development and Software Development Costs

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

Our research and development costs

incurred for the year ended September 30, 2023, were $ 669,000 .

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

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

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

and Development and Software Development Expenses

research and development costs, including patent and software development costs, are expensed as incurred.

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.

The Company estimates the fair

value of share-based payment awards on the date of grant using an option-pricing mode or the fair value of our stock on the grant

The value of the portion of the award that is ultimately expected to vest is recognized as stock compensation expense over the

requisite service period in the Company’s consolidated statements of income.

stock compensation expense recognized in the accompanying consolidated statements of income is based on awards ultimately expected to

Accounting guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods

if actual forfeitures differ from those estimates.

The Company has limited historical experience with forfeitures and were based on management’s

Excess tax benefits

or deficiencies from stock compensation are recognized in the income tax provision and are not estimated in the effective tax rate.

they are recorded as discrete tax items in the period they occur.

Excess income tax benefits from stock compensation arrangements are

classified as a cash flow from operations.

See further disclosures related to our stock-based

compensation plans in Note 15.

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.

We 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 year in which those temporary differences are expected

to be recovered or settled.

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

operations in the period that includes the enactment date.

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

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

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

The first step is to evaluate the tax position for

recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained

on audit, including resolution of related appeals or litigation processes, if any.

The second step is to measure the tax benefit as the

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

We consider many factors when evaluating

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

We did no t record

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

Net Loss Per Common Share

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 general and administrative expenses as

they are incurred.

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 year in which those temporary differences are expected to

be recovered or settled.

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

in the period that includes the enactment date.

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

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

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

The first step is to evaluate the tax position for recognition

by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit,

including resolution of related appeals or litigation processes, if any.

The second step is to measure the tax benefit as the largest

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

We consider many factors when evaluating and estimating

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

We did no t record any liabilities for uncertain tax positions

during the years ended September 30, 2024, or 2023.

Loss Per Common Share

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

5 unchanged sentences

common stock that could share in our earnings.

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

common stock equivalents would be anti-dilutive as a result of the net loss.

During the year ended September 30, 2023, 69,281,020 warrants

and 8,636,973 restricted stock units were excluded from the calculation of diluted loss per share because their effect would be anti-dilutive.

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

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

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

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

The result of this accounting

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

date and recorded as a liability.

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

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

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.

evaluate warrants in accordance with ASC Topics 480 (Distinguishing Liabilities from Equity) and 815 (Derivatives and Hedging).

The result of

this accounting treatment is that the fair value of the embedded derivative, if required to be bifurcated, is marked-to-market at

each balance sheet date and recorded as a liability.

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

component of other income 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.

Accounting Announcements

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

There have been several ASUs

to date that amend the original text of the ASCs.

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

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

have a significant impact on us.

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

authoritative literature in the ASC.

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

Other than those

discussed below, we believe those ASUs issued to date either (i) provide supplemental guidance, (ii) are technical corrections,

(iii) are not applicable to us, or (iv) are not expected to have a significant impact on us.

Pronouncements Adopted

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

Simplifying the Accounting for Income Taxes.

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

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

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

This standard

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

We adopted it on

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

did not adopt new accounting pronouncements during the year ended September 30, 2024.

Pronouncements Not Yet Adopted

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

In November 2019, the FASB deferred the effective

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

As a result of the deferral, the amendments are

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

The amendments replace the incurred loss impairment methodology

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

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

The amendments require a modified retrospective approach

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

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

The adoption of this standard is not

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

2023, the FASB issued amendments to the guidance for disclosures about reportable segments which require disclosures of

significant expenses by segment and interim disclosure of items that were previously required on an annual basis.

The amendments are

to be applied on a retrospective basis and are effective for fiscal years beginning after December

15, 2023, and interim periods within fiscal years beginning after December 15,

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.

Company does not believe that the above recently issued, but not yet effective accounting standards, when adopted, will have a material

effect on the accompanying consolidated financial statements.

March 2024, the Securities and Exchange Commission issued a rule which will require companies to make certain climate-related disclosures

in periodic filings.

The rule includes certain disclosures in the footnotes of the financial statements:

capitalized costs, expenditures expensed, and losses incurred as a result of severe weather events and other natural conditions, such

as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise;

capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates if they are

used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals;

whether estimates and assumptions used to produce the financial statements were materially impacted by risks and uncertainties associated

with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans.

footnote disclosures are effective for annual filings for the year ended September 30, 2026.

The Company is currently evaluating the

impact of the adoption of the rule.

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

(now known as SCS, Inc.)

Overview of the Business Combination

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

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

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

On September 9, 2022,

SideChannel, Inc.

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

(the “Subsidiary”

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

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

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

for financial reporting purposes.

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

(1) the majority of the Board of Directors of the combined company will be composed of directors designated by the Sellers under the

terms of the Purchase Agreement;

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

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

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

(“ASC”) Topic 805, Business Combinations.

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

financial statements of the combined company.

the closing of the Business Combination, SCS, Inc.

became a wholly owned subsidiary of the Company.

As used herein, the words

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

subsidiaries.

of the Business Combination

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.

This determination was

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

(1) the majority of the Board of Directors of the

combined company would be composed of directors designated by the Sellers under the terms of the Purchase Agreement;

existing members of SCS management constituted the management of the combined company.

Because 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 ASC Topic 805, Business Combinations.

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

historical financial statements of the combined company.

of the Business Combination Terms

8 unchanged sentences

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

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

of the Closing Date was less than or more than zero.

The number of the Second Tranche Shares was also subject to adjustment based upon

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

number of the Second Tranche Shares was increased, based upon the Subsidiary’s working capital as

of the Closing Date was more than zero.

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

Closing Working Capital Adjustment.

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

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

consent of the Company.

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

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

months after the Closing Date.

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

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

Merger Accounting

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

SCS is the accounting acquirer and

Cipherloc is the legal acquirer.

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

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

SCS maintained its historical

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

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

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

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

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

The historical

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

the Business Combination in all future filings with the SEC.

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

the Company’s name to SideChannel, Inc.

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

Consideration

consideration paid was determined as follows:

OF CONSIDERATION PAID

Shares outstanding

stock price on July 1, 2022

Market capitalization on

value of warrants vested at July 1, 2022

fair value of Cipherloc at July 1, 2022

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

the financing warrants as of July 1, 2022:

$ 0.18 to $ 1.20 ($ 0.56 weighted average)

life in years:

1 to 8.5 years ( 3.7 weighted average)

2.9 % to 3.0 %

Rate of dividends:

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

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

The Company estimates expected volatility by considering

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

from historical volatility.

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

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

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

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

Price Allocation

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

estimates and third-party appraisals.

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

in part relied upon in completing its purchase price allocation.

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

of net assets acquired was allocated to goodwill.

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

of the closing date (in thousands):

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

expenses and deferred costs

assets (AIPR&D)

payable and accrued liabilities

Tax Liability

Consideration

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

5 – CASH EQUIVALENTS AND INVESTMENTS

have financial instruments included as cash equivalents and short-term investments on our balance sheets.

Money market funds and time

deposits with maturities of less than 90 days from the purchase date are included in “Cash and cash equivalents.” Time deposits

with maturities from 91-360 days are included in “Short-term investments.” As of September 30, 2024, and 2023, the Company

had no long-term investments.

following table presents the carrying amounts of cash equivalents and short-term investments as of September 30, 2024 and 2023:

OF CASH AND CASH EQUIVALENTS AND SHORT TERM INVESTMENTS

September 30, 2024

September 30, 2023

Cash equivalents

Money market funds

Time deposits

Total cash equivalents

Short-term investments

Time deposits

Total short-term investments

more information about the fair value of the Company’s financial instruments, see Note 9.

6 – DEFERRED COSTS

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

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

Pursuant to the agreement, Paulson will provide the following

services at the Company’s request:

(a) familiarize itself with the Company’s business, assets, and financial condition;

assist the Company in developing strategic and financial objectives;

(d) assist the Company in increasing its profile in the investment and financial community through introductions to analysts

and potential investors, participation in investment conferences and exploitation of reasonably available media opportunities;

identify potentially attractive merger and acquisition opportunities;

(f) review possible innovative financing opportunities and (g)

render other financial advisory services as may be reasonably requested.

The term of the agreement is four years from the date of the

agreement, unless terminated earlier by either party as provided therein.

As compensation for these services, the Company issued

to Paulson 4,000,000 shares of the Company’s common stock and agreed to reimburse Paulson for all reasonable and documented expenses

Pursuant to the agreement,

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

(a) familiarize itself with the Company’s

business, assets, and financial condition;

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

Company in increasing its exposure in the software industry;

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

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

exploitation of reasonably available media opportunities;

(e) identify potentially attractive merger and acquisition opportunities;

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

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

provided therein.

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

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

incurred by Paulson in connection with providing such services.

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

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

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

June 30, 2022.

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

expenses respectively.

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

The fair value of the shares issued was $ 720

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

thousand per quarter.

The Company expensed $ 180

thousand in each of the fiscal years ended September 30, 2024, and 2023.

The unamortized balance of the deferred costs was $ 150

thousand at September 30, 2024.

7 – IDENTIFIABLE INTANGIBLE ASSETS

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

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

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

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

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

follows as of September 30, 2022:

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

Fair Value (in thousands)

Life in Years

Income (MPEEM)

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

value of this asset should be impaired.

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

of this asset should be impaired.

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

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

Tax Liability

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

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

two items were offset and resulted in a deferred tax asset of approximately $ 7.0 million, which was fully reserved.

state tax purposes, there were only limited state net operating loss carryforwards;

consequently, the temporary difference from the

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

at September 30, 2022.

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

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

Pro Forma Operating Results

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

OF UNAUDITED PROFORMA OPERATIONS RESULTS

Incurring impairment in fiscal

year 2023 neither indicated a decrease in our emphasis on Enclave as a key initiative nor did it suggest a lack of market interest in

did no t have identifiable intangible assets at September 30, 2024.

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 twelve-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 2% increase effective at the beginning of each renewal period.

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

Operating lease expenses were $ 12 thousand and $ 10 thousand for

the fiscal years ended September 30, 2024, and 2023, respectively.

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.

We do not have any long-term operating leases or financing leases as of September 30, 2024.

expect to pay approximately $ 12 thousand over the next twelve (12) months for the Worcester lease .

NOTE 9 – FAIR VALUE MEASUREMENT

Topic 820 “Fair Value Measurement” (“Topic 820”) defines fair value, establishes a market-based framework or

hierarchy for measuring fair value, and expands disclosures about fair value measurements.

Topic 820 is applicable whenever assets and

liabilities are measured and included in the financial statements at fair value.

following tables present the carrying amounts, estimated fair values, and valuation input levels of certain financial instruments as

of September 30, 2024, and 2023.

OF FAIR VALUE OF FINANCIAL INSTRUMENTS

September 30, 2024

Fair Value Measured Using

(in thousands)

except per share data)

the Year Ended

Short-term investments

Time deposits:

91 - 360 days

Total Short-term investments

September 30, 2023

Cost of revenues

Operating expenses (a)

Operating income (loss)

Other income and (expenses)

Net income (loss) before

Net income (loss)

Basic loss per share (b)

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

In fiscal year 2022, Cipherloc incurred $ 479,000

of transaction expenses and

SCS incurred $ 109,000

of transaction expenses.

forma weighted average shares outstanding are 82.0

for the year ended September 30, 2022.

Concentration

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

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

Deferred revenue also

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

service pursuant to the terms of the customer arrangement.

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

as revenue in future periods.

Deferred revenue was $ 280,000 at September 30, 2023, and $ 130,000 at September 30, 2022.

The deferred revenue

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

Fair Value Measured Using

(in thousands)

Short-term investments

Time deposits:

91 - 360 days

Total Short-term investments

The entire balance of time deposits maturing in 91 to 360 days are certificates

of deposit issued by a bank at which total deposits exceed the FDIC limit of $ 250 thousand.

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 thousand, without interest, in exchange for Mr.

Desai’s right, title, and interest in us.

Desai was paid $ 50 thousand at the execution of the Desai Redemption Agreement and the remaining $ 50 thousand was paid in December 2023.

11 – STOCKHOLDERS’ EQUITY

of September 30, 2024, and 2023, we had 225,975,331 and 213,854,781 shares of common stock outstanding, respectively, and were authorized

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

Stock Issued for Cash

did no t issue shares of common stock for cash during the years ended September 30, 2024, and September 30, 2023.

Stock Issued for Business Combinations

May 4, 2023, we issued a total of 62,016,618 shares of common stock for the Second Tranche ( 59,900,000 shares) and Closing Working Capital

Adjustment ( 2,116,618 shares).

shares were issued for Business Combinations in fiscal year 2024.

Stock Issued for Services

March 31, 2024, our Board of Directors elected to have each of its members receive one-half of such member’s quarterly compensation

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

We also use stock as a form of compensation for independent

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

During fiscal year 2024, the fair market

value of stock issued for services totaled $ 20 thousand for 437,643 shares of common stock compared to $ 66 thousand for 770,978 shares

of common stock in fiscal year 2023.

Board of Directors elected to cease receiving quarterly compensation in the form of shares of the Company’s common stock after

April 1, 2024.

Stock Issued Under Equity Incentive Plan

issued 4,411,949 shares of common stock for 6,537,045 restricted stock units (“RSUs”) that vested during the year ended September

The number of RSUs sold by these employees to fund payroll taxes for the year September 30, 2024, was 2,125,096 .

Stock Issued for Tender Offer

August 22, 2023, the Company commenced a Tender Offer for the 69,281,020

Warrants subject to our Offer to Exchange.

Tender Offer (“Offer to Exchange”) was filed on November 7, 2023.

We closed the

November 7 Offer to Exchange on December 26, 2023, resulting in the issuance of 7,270,958

shares of common stock and 17,415,437

new warrants in exchange for 2021 Investor Warrants totaling 43,538,501 .

of September 30, 2024, and 2023, we had zero ( 0 ) shares of preferred stock outstanding.

activity for years ended September 30, 2024, and 2023, is as follows:

OF WARRANT ACTIVITY

Outstanding Warrants

Number of Warrants

Weighted Average Exercise Price

Weighted Average Remaining Life

(In thousands, except prices and remaining lives)

Outstanding at September 30, 2022

Tendered during November 2023 Warrant Exchange

Canceled/Forfeited

Outstanding at September 30, 2023

Granted through November 2023 Warrant Exchange

Tendered during November 2023 Warrant Exchange

Canceled/Forfeited

Outstanding at September 30, 2024

12 – REVENUE FROM CONTRACTS WITH CLIENTS

Disaggregation

We disaggregate our revenue from contracts with clients by service type.

See the below table:

OF DISAGGREGATED REVENUE

(in thousands)

September 30,

vCISO services

Cybersecurity software and services

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

or service and 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 second fiscal quarter ending March 31.

The deferred revenue is expected to be

earned within 12 months of the balance sheet date.

in deferred revenue were as follows:

1 unchanged sentence

Ended September 30, 2023

Balance on September

Revenue deferred

Revenue recognized

at September 30, 2022

at September 30, 2023

Ended September 30, 2024

Balance on September 30,

Revenue deferred

Revenue recognized

at September 30, 2023

License Agreements

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

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

We and Castle Shield mutually agreed to terminate this agreement

on October 14, 2022.

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

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

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.

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

is due on or before December 31, 2023.

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

at September 30, 2024

13 – BUSINESS RISK AND CREDIT RISK CONCENTRATION INVOLVING CASH

client individually accounted for over 10 % of our revenue during the years ended September 30, 2024, or 2023.

did not have any customers with an accounts receivable balance that exceeded 10 % of accounts receivable at September 30, 2024.

We maintain our cash and cash equivalents

in accounts held by a highly reputable financial institution which, at times, may exceed federally insured limits as guaranteed by the

Federal Deposit Insurance Corporation (“FDIC”).

The FDIC insures these deposits up to $ 250 thousand.

As of September 30,

2024, approximately $ 795 thousand of our cash and cash equivalent balance was uninsured.

We have not experienced any losses on cash.

14 – RELATED PARTY TRANSACTIONS

1 unchanged sentence

(“RealCISO”).

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

In September 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.

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

SideChannel paid $ 26,000

to RealCISO for licenses, respectively.

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

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.

the years ended September 30, 2024, and 2023, SideChannel paid $ 30 thousand and $ 26 thousand to RealCISO for licenses, respectively.

also received $ 122 thousand and $ 63 thousand from RealCISO for software development services that we provided Real CISO during fiscal

years 2024 and 2023, respectively.

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

$ 24 thousand.

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

Army General Robert Brown, joined our Board.

On July 8, 2024,

AUSA signed an agreement for recurring vCISO Services which will generate approximately $ 108 thousand of annual revenue for the Company.

other related party transactions occurred during the years ending September 30, 2024, and September 30, 2023.

7 – COMMITMENTS AND CONTINGENCIES

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

or results of operations.

Pending Litigation

April 2021, Eric Marquez, the former Secretary/Treasurer and Chief Financial Officer of 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.

alleged oral employment agreement, which Mr.

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

unjust enrichment;

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.

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.

December 2021, we and our landlord for our leased office space in Worcester, Massachusetts, entered into a lease agreement.

The lease became

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

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

increase, per the lease agreement.

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

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

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

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

Flow Impact of Leases

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

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

over the next twelve (12) months .

8 - STOCKHOLDERS’ EQUITY

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

shares of common stock with a $ 0.01

per share par value.

shares of common stock were exchanged for 59,900,000

shares of Cipherloc common stock and 100

shares of Series A Preferred stock as a result of the Business Combination.

The financial statements have been adjusted

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

shares of SCS as of September 30, 2020.

did not have any convertible debt or issued preferred stock.

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

Desai $ 50,000 , without interest,

in exchange for Mr.

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

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

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

of September 30, 2023, and 2022, we had 213,854,781 and 148,724,056 shares of common stock outstanding, respectively, and was

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

Stock Issued for Cash

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

Stock Issued for Business Combinations

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

this Form 10-K.

On May 4, 2023, we

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

Adjustment ( 2,116,618 shares).

Stock Issued for Services

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

of shares of the Company’s common stock instead of cash.

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

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

During fiscal year 2023, the fair market value of stock

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

Stock Issued for Legal Settlement

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

Pursuant to that agreement, Cipherloc had issued

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

shares were issued for legal settlement during fiscal year 2023.

Stock and Restricted Stock Units Issued to Directors and Officers

of this filing, we are granting equity compensation awards to employees, directors, and contractors using the 2021 Omnibus Equity

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

The approval on September 13,

2021, included a reserve of 8.0 million shares for awards.

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

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

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

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

SCHEDULE OF STOCK OPTIONS

2021 Omnibus Equity Incentive

15 – STOCK-BASED COMPENSATION

of September 30, 2024, we had unvested restricted stock awards (“RSUs”) and stock options granted under the 2021 Omnibus

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

stockholder approval of the 2021 Equity Incentive Plan included a reserve of 8.0

million shares for awards.

The 2021 Equity Incentive

Plan also allows for an annual increase in the reserve up to an amount approximately equal to five percent ( 5 %)

of the fully diluted outstanding shares at the end of the prior calendar year.

On June 29, 2022, the Board of Directors authorized an

increase in the shares reserved for the 2021 Equity

Incentive Plan.

On February 15, 2024, the Board of Directors authorized an increase of 13,599,834

in the shares reserved for the 2021 Equity Incentive

Awards granted under the 2021 Equity Incentive Plan in lieu of compensation are exempt from counting against the reserve.

OF COMMON STOCK SHARES RESERVED FOR EQUITY GRANTS

2021 Omnibus Equity Incentive Plan Reserve

(In thousands)

Initial Reserve at September 13, 2021

3 unchanged sentences

Reserve percent of outstanding shares at September 30, 2024

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

contractors with service-based vesting conditions.

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

The following table

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

typically have granted RSUs and stock options with a 3 -year,

service-based vesting period.

Our unvested RSUs and stock options are accounted for based on their grant date fair value.

September 30, 2024, total compensation expense to be recognized in future periods was $ 667

That cost is expected to be recognized over the remaining vesting period.

total stock-based compensation expense for the year ended September 30, 2024, was $ 682

thousand, comprised of $ 20

thousand for shares issued for services and $ 662

thousand for the amortization of outstanding equity compensation grants.

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 year ended September 30, 2024, we purchased RSUs with a vesting date

value of $ 119 thousand.

Our Statement of Stockholders Equity reflects the net increase of $ 543 thousand as of September 30, 2024, or

$ 662 thousand of total stock-based compensation expense, less the $ 119 thousand of RSUs purchased.

incurred stock-based compensation expense of $ 485 thousand for the year ended September 30, 2023, which is comprised of $ 66 thousand

for shares issued for services and $ 419 thousand for the amortization of outstanding equity compensation grants.

For the year ended September

30, 2023, we purchased RSUs with a vesting date value of $ 59 thousand.

compensation of $ 568 thousand, $ 22 thousand, and $ 92 thousand was included in general and administrative expense, selling and

marketing expense, and research and development expense respectively in our accompanying Consolidated Statements of Operations for

the year ended September 30, 2024.

record compensation expense for RSUs based on the closing market price of our stock at the grant date and amortize the expense over the

vesting period which is typically three years.

For RSUs, the Company recognizes compensation cost for unvested share-based awards on

a straight-line basis over the requisite service period.

The fair value of stock awards is based on the quoted price of our common stock on the grant date.

following table summarizes the activity of our RSUs granted under the 2021 Equity Incentive Plan during the years ended September 30,

2024, and September 30, 2023.

SCHEDULE OF RESTRICTED STOCK UNITS VESTING

Outstanding Equity Compensation Grants

Outstanding Restricted Stock Unit Grants

Weighted Average Grant Date

Value Per RSU

(In thousands)

Acquired at July 1, 2022

Canceled/Forfeited

Outstanding Grants at September 30, 2022

1 unchanged sentence

Outstanding Grants at September 30, 2023

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

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

of September 30, 2023, and 2022, we had zero ( 0 ) and 100 shares of preferred stock outstanding, respectively.

The shares of Series

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

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

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

A The Series A Preferred Stock contained

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

of our Board of Directors.

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

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

activities for the period from July 1, 2022, to September 30, 2023, are as follows:

OF WARRANT ACTIVITY

of Warrants (000’s)

Average Exercise Price

Average Remaining Life

Warrants Acquired

at July 1, 2022

Outstanding Grants at September 30, 2023

Canceled/Forfeited

Outstanding at September

Outstanding Grants at September 30, 2024

The weighted-average remaining vesting period of RSUs

at September 30, 2024 was 1.92 years.

The total grant-date fair value of RSUs vested

during 2024 and 2023, was $ 190

thousand, and $ 353

thousand, respectively.

The approximate aggregate intrinsic value of RSUs outstanding at September 30, 2024 was $ 479

The approximate aggregate intrinsic values of RSUs awarded during 2024 and 2023 were $ 475

thousand and $ 572

thousand, respectively.

Aggregate intrinsic value of RSUs represents the applicable number of awards multiplied by the

Company’s closing share price on the last trading day of the relevant fiscal period.

The Company’s closing share price

on September 30, 2024, and $ 0.07

on September 30, 2023.

record compensation expense for the stock options based on the fair market value of the options as of the grant date.

fair value for stock options granted during the twelve months ended September 30, 2024, was estimated at the date of grant using the Black-Scholes

option pricing model with the following weighted average assumptions:

OF STOCK OPTIONS WEIGHTED AVERAGE ASSUMPTIONS USED IN THE FAIR VALUE

Risk-free interest rate

Dividend yield

Expected common stock market price volatility factor

Weighted average expected live of stock options (years)

following table summarizes the activity of our stock options granted under the 2021 Plan during the year ended September 30, 2024.

did not grant stock options during the year ended September 30, 2023.

OF STOCK OPTION OUTSTANDING TRANSACTIONS

Outstanding Stock Option Grants

(In thousands)

Stock Options

Outstanding grants at September 30, 2023

Canceled/forfeited

at September 30, 2023

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

Outstanding grants at September 30, 2024

options were issued to our independent directors on June 10, 2024.

Each of our four independent directors received 1.1 million stock

options priced at $ 0.18 with a 3 -year vesting period, expiring on June 10, 2034.

One independent director resigned from our Board on

June 18, 2024, resulting in the forfeiture of 1.1 million stock options.

weighted-average remaining vesting period of stock options at September 30, 2024, was 2.67 years.

16 – COMMITMENTS AND CONTINGENCIES

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

of operations.

Pending Litigation

April 2021, Eric Marquez, the former Secretary/Treasurer and Chief Financial Officer of 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) (“OLWM Matter”).

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 exceeded $ 1

We reached a preliminary agreement with the plaintiffs on November 13, 2024.

A written settlement agreement was negotiated

and circulated to the plaintiffs on November 25, 2024.

The execution of the settlement agreement is in progress and, when complete, will trigger the formal dismissal of the lawsuit.

The terms of the

agreement require the Company to issue the plaintiffs a combined 356,400

shares of common stock and pay a total of $ 95

thousand in cash in six equal, quarterly installments of approximately $ 16

thousand beginning on January 1, 2025, and ending on April 1, 2026.

We estimate the cost of the settlement fee paid as stock to be

approximately $ 15

thousand using the closing price of our common stock at September 30, 2024.

A total of $ 110

thousand of expense has been recognized in our results for the year ended September 30, 2024.

17 - INCOME TAXES

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

Liability Company (LLC).

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

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

Federal income taxes were the responsibility of SCS’s

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

Therefore, no provision or liability for income taxes is

reflected in the financial statements.

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

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

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

than not to be sustained upon examination.

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

SideChannelSec,

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

Upon this conversion SCS will be taxed as a corporation.

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

began filing consolidated federal and state income tax returns beginning for the tax year ended September 30, 2023.

We have adopted the

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

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

We have considered

our tax positions and believe that all of the positions taken by us in our federal and state tax returns are more likely than not to

be sustained upon examination.

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

Under this method, deferred tax assets and liabilities are recognized

10 unchanged sentences

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

(In thousands)

September 30,

3 unchanged sentences

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

Statutory federal income tax

September 30,

Statutory federal income tax rate

Non-deductible meals & entertainment

Non-deductible contingent consideration

Non-deductible impairment of goodwill

Non-deductible stock-based compensation

Prior Year Adjustment

Non-deductible meals & entertainment

Loss of NOL due to statute

Change in valuation allowance

Effective tax rate

the years ended September 30, 2023, and 2022, the difference between the amounts of income tax expense or benefit that would result

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

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

for the year ended September 30, 2022.

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

due by SCS, Inc.

for activity prior to the Business Combination.

The actual taxes due by SCS, Inc.

for such activity was zero ($ 0 )

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

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

income taxes incurred by the Company during fiscal year 2023.

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

upon the business combination with Cipherloc in 2022.

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

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

the years ended September 30, 2024, and 2023, the difference between the amounts of income tax expense or benefit that would result from

applying the statutory rates to pretax income to the reported income tax expense of $ 5 thousand for the year ended September 30, 2024

due to state income taxes payable to the jurisdictions in which we have nexus, and income tax benefit of $ 379 thousand for the year ended

September 30, 2023.

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

2 unchanged sentences

SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES

September 30,

Net operating loss carry forward

Intangible asset – not deductible for

Intangible asset – not deductible for tax

AIPR&D capitalization

2 unchanged sentences

Deferred income tax asset

September 30,

Net operating loss carry forward

Intangible asset – not deductible for

Intangible asset – not deductible for tax

Valuation allowance

Deferred income tax asset

Company has a net operating loss carry forward of $ 36.2

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

million will expire within the next five years, $ 12.5

million will expire thereafter, and the remaining $ 21.1

million will not expire.

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

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

The Company has adjusted the net operating losses

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

The Company has provided for a valuation reserve

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

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

For income tax reporting purposes, Management has determined that net

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

Company has a net operating loss carry forward of $ 34.2 million

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

will expire within the next five years, $ 10.9 million

will expire thereafter, and the remaining $ 20.7 million

will not expire.

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

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

The Company has adjusted the net operating losses incurred

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

The Company has provided for a valuation reserve against the net

operating loss benefit, because in the opinion of management based upon the earning history of the Company, it is more likely than

not that the benefits will not be realized.

For income tax reporting purposes, Management has determined that net operating losses

prior to February 5, 2015, are subject to an annual limitation of approximately $ 525 thousand.

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

10 unchanged sentences

18 - SUBSEQUENT EVENTS

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

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

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

at which time Mr.

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

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

recognition of Mr.

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

Board, we will accelerate the vesting of Mr.

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

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

The full amount of unvested restricted

stock units will now vest on January 2, 2024.

The full terms of Mr.

Ambrose’s separation will be formalized in a forthcoming Separation

Agreement between us and Mr.

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

of our warrants issued during 2021 with an exercise

price of $ 0.36

and expiration

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

The Offer to Exchange provided 2021 Investor

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

(2.5) 2021 Investor Warrants.

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

The New Warrants being offered have a five ( 5 )

year term, an exercise price of $ 0.18 ,

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

for 30 consecutive days.

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

exercise of the New Warrant.

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

On December 1, 2023 we filed a response with

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

requested by the SEC.

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

At its meeting on December 11, 2023, our Board

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

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

The Expiration Date

was also changed to December 26, 2023.

On December 11, 2023, we received a Comment

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

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

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

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

As stated in Note 16, we reached a preliminary agreement with the plaintiffs in the OLWM Matter on November 13, 2024.

A written settlement agreement was circulated to the plaintiffs on November 25, 2024, and the execution of the settlement agreement in progress and, when complete, will trigger the formal dismissal of the

Company has evaluated events through, December 12, 2024, the filing date of this Annual Report on Form 10-K, and determined that

there have been no additional subsequent events that occurred that would require adjustments to our disclosures in the consolidated

financial statements.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data