SideChannel, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS SIDECHANNEL, INC. TABLE OF CONTENTS Page REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID Number 587) 39 FINANCIAL STATEMENTS: Balance Sheets as of September 30, 2024 and 2023 40 Statements of Operations for the years ended September 30, 2024 and 2023 41 Statements of Stockholders’ Equity for the years ended September 30, 2024 and 2023 42 Statements of Cash Flows for the years ended September 30, 2024 and 2023 43 NOTES TO FINANCIAL STATEMENTS 44 38 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of SideChannel, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of SideChannel, Inc., (the Company) as of September 30, 2024 and 2023, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year period ended September 30, 2024, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2024, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. We determined that there are no critical audit matters. /s/ RBSM LLP We have served as the Company’s auditor since 2021. Las Vegas, Nevada December 12, 2024 RBSM LLP (PCAOB ID Number 587 ) 39 SIDECHANNEL, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) September 30, 2024 September 30, 2023 ASSETS Current assets Cash and cash equivalents $ 1,045 $ 1,053 Short-term investments 250 - Accounts receivable, net 732 834 Deferred costs 150 180 Prepaid expenses and other current assets 385 381 Total current assets 2,562 2,448 Fixed assets 33 30 Goodwill 1,356 1,356 Deferred costs - 150 Total assets $ 3,951 $ 3,984 LIABILITIES & STOCKHOLDERS’ EQUITY Current liabilities Accounts payable and accrued liabilities $ 729 $ 613 Deferred revenue 515 280 Promissory note payable - 50 Income taxes payable 3 11 Total current liabilities 1,247 954 Other liabilities - - Total liabilities 1,247 954 Commitments and contingencies (Note 16) - - Common stock, $ 0.001 par value, 681,000,000 shares authorized; 225,975,331 and 213,854,781 shares issued and outstanding as of September 30, 2024, and 2023, respectively 226 214 Additional paid-in capital 22,321 21,755 Accumulated deficit ( 19,843 ) ( 18,939 ) Total stockholders’ equity 2,704 3,030 Total liabilities and stockholders’ equity $ 3,951 $ 3,984 40 SIDECHANNEL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data) Twelve Months Ended September 30, 2024 2023 Revenues $ 7,400 $ 6,572 Cost of revenues 3,868 3,240 Gross profit 3,532 3,332 Operating expenses General and administrative 3,155 3,586 Selling and marketing 771 1,337 Research and development 546 669 Intangible asset impairment - 4,940 Business Combination related costs - 214 Total operating expenses 4,472 10,746 Operating loss ( 940 ) ( 7,414 ) Other income, net 41 29 Net loss before income tax expense ( 899 ) ( 7,385 ) Income tax expense (benefit) 5 ( 379 ) Net loss $ ( 904 ) $ ( 7,006 ) Net loss per common share – basic and diluted $ ( 0.00 ) $ ( 0.04 ) Weighted average common shares outstanding – basic and diluted 222,078,462 175,274,762 41 SIDECHANNEL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except share data) Preferred Shares Preferred Par Value Common Shares Common Par Value APIC Accumulated Deficit Total Equity For the Twelve Months Ended September 30, 2024 and 2023 Preferred Shares Preferred Par Value Common Shares Common Par Value APIC Accumulated Deficit Total Equity Balance at September 30, 2022 100 $ - 148,724,056 $ 149 $ 21,180 $ ( 11,933 ) $ 9,396 Shares issued for services - - 770,978 - 66 - 66 Stock-based compensation - - 2,343,029 3 357 - 360 Conversion of Preferred to Common ( 100 ) - 100 - - - - Business Combination – Contingent Consideration - - 62,016,618 62 152 - 214 Net loss - - - - - ( 7,006 ) ( 7,006 ) Balance at September 30, 2023 - $ - 213,854,781 $ 214 $ 21,755 $ ( 18,939 ) $ 3,030 Balance - - 213,854,781 214 21,755 ( 18,939 ) 3,030 Shares issued for 2021 Investor Warrants - - 7,270,958 7 ( 7 ) - - Legal settlement - - - - 15 - 15 Shares issued for services - - 437,643 - 20 - 20 Stock-based compensation - - 4,411,949 5 538 - 543 Net loss - - - - - ( 904 ) ( 904 ) Balance at September 30, 2024 - $ - 225,975,331 $ 226 $ 22,321 $ ( 19,843 ) $ 2,704 Balance - - 225,975,331 226 22,321 ( 19,843 ) 2,704 42 SIDECHANNEL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) 2024 2023 Twelve Months Ended September 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 904 ) $ ( 7,006 ) Adjustments to reconcile net loss to net cash flows provided by / (used in) operating activities: Depreciation and amortization 192 182 Legal settlement paid in stock 15 Stock-based compensation and payments for services, net 563 405 Provision for doubtful accounts - 3 Business Combination Costs - 214 Intangible asset impairment - 4,940 Changes in operating assets and liabilities: Accounts receivable, net 102 ( 225 ) Prepaid expenses and other assets ( 4 ) ( 61 ) Accounts payable and accrued liabilities 116 ( 363 ) Income taxes payable ( 8 ) ( 184 ) Deferred revenue 235 150 Net cash provided by / (used in) operating activities 307 ( 1,945 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments ( 250 ) - Purchase of fixed assets ( 15 ) ( 32 ) Net cash used in investing activities ( 265 ) ( 32 ) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of note payable ( 50 ) - Net cash used in financing activities ( 50 ) - INCREASE / (DECREASE) IN CASH ( 8 ) ( 1,977 ) CASH, BEGINNING OF PERIOD 1,053 3,030 CASH, END OF PERIOD $ 1,045 $ 1,053 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Stock-based compensation included in accounts payable and accrued liabilities $ - $ 21 Shares Issued for Services 20 66 Purchase of RSUs sold by employees to pay for taxes due on vested RSUs 119 59 43 SIDECHANNEL, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2024, AND 2023 (Amounts shown in thousands, except shares and per share amounts) NOTE 1 – DESCRIPTION OF BUSINESS Our 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 solutions. We intend to provide more tech-enabled services to address the needs of our customers, including virtual Chief Information Security Officer (vCISO), zero trust, third-party risk management, due diligence, privacy, threat intelligence, and managed end-point security solutions. Our growth strategy focuses on these three initiatives: 1. Securing new vCISO clients 2. Adding new Cybersecurity Software and Services offerings 3. Increasing adoption of Cybersecurity Software, including Enclave and Services offerings, at vCISO clients vCISO engagements typically contain a monthly subscription and rates for vCISO time and material projects ranging from $ 350 to $ 450 per hour. Each of our vCISOs is generally embedded into the C-suite executive teams of two (2) to four (4) of our clients. We 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. On 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 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. Following the closing of the Business Combination, SCS, Inc. became a wholly owned subsidiary of the Company. As used herein, the words “the Company” refers to, for periods following the Business Combination, SideChannel, Inc., together with its subsidiaries. Our headquarters are located at 146 Main Street, Suite 405, Worcester, MA, 01608. Our website is www.sidechannel.com . NOTE 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: 1. Determine 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. 2. Determine 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. We 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. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Use of Estimates The accompanying consolidated financial statements include our accounts and those of our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain of our accounts, including goodwill, identifiable intangibles, and deferred tax assets and liabilities, including related valuation allowances, are based upon estimates. Reclassifications Certain 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. 44 Segment Information We manage our operations as a single operating segment for the purpose of assessing performance and making operating decisions. Business Combinations Acquired businesses are accounted for using the purchase method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Fair values of intangible assets are estimated by valuation models prepared by our management and third-party advisors. The assets purchased and liabilities assumed have been reflected in our consolidated balance sheets, and the operating results are included in the consolidated statements of operations and consolidated statements of cash flows from the date of acquisition. Any change in the fair value of acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, will be recognized in the consolidated statement of operations in the period of the estimated fair value change. Acquisition-related transaction costs, including legal and accounting fees and other external costs directly related to the acquisition, are recognized separately from the acquisition and expensed as incurred in general and administrative expense in the consolidated statements of operations. Cash, Cash Equivalents, and Short-Term Investments Cash includes funds deposited in banks. We 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. Accounts Receivable 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. The 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 cash flows. For the year ended September 30, 2024 , there was no change in the amount of the allowance for credit losses. There was no bad debt expense recorded for the years ended September 30, 2024, and 2023. 45 Fair Value of Financial Instruments Our 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 fair value due to the short-term maturities and approximate market interest rates of these instruments. Fair value is focused on an exit price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Within the measurement of fair value, the use of market-based information is prioritized over entity specific information and a three-level hierarchy for fair value measurements is used based on the nature of inputs used in the valuation of an asset or liability as of the measurement date. The three-level hierarchy for fair value measurements is defined as follows: ● 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 9. Goodwill, Intangible, and Long-Lived Assets We account for goodwill and intangible assets in accordance with ASC Topic 350 (Intangibles – Goodwill and Other). Finite-lived intangible assets are amortized over their estimated useful economic life and are carried at cost less accumulated amortization. Goodwill is assessed for impairment annually 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. 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. The quantitative goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The goodwill impairment assessment is based upon the income approach, which estimates the fair value of our reporting units based upon a discounted cash flow approach. This fair value is then reconciled to our market capitalization at year end with an appropriate control premium. The determination of the fair value of our reporting units requires management to make significant estimates and assumptions including the selection of control premiums, discount rates, terminal growth rates, forecasts of revenue and expense growth rates, income tax rates, changes in working capital, depreciation, amortization, and capital expenditures. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting unit or the amount of the goodwill impairment charge. The goodwill was evaluated at the balance sheet date of September 30, 2024. For fiscal years 2024 and 2023, we recorded no impairment of goodwill. 46 None of the goodwill associated with the Business Combination is deductible for income tax purposes. We did not record indefinite-lived intangible assets in the fiscal years ended September 30, 2024, and 2023. Long-lived assets, which consist of finite-lived intangible assets and property and equipment, are assessed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the estimated undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value. The cash flow estimates used to determine the impairment, if any, contain management’s best estimates using appropriate assumptions and projections at that time. We 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 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. Revenue Recognition We recognize revenue in accordance with the guidance in ASC Topic 606 (Revenue from Contracts with Customers). Nature of Products and Services 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. 47 Performance Obligations A 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. A 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. Revenue 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. We 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 earned. Contract Balances We record accounts receivable at the time of invoicing. 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. Costs to Obtain a Contract with a Customer 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. Commissions are calculated based on set percentages of the revenue value of each product or service sold. Commissions are considered earned by our internal sales personnel at the time we recognize revenue for a particular transaction. Commissions are considered earned by third-party sales representatives at the time that revenue is recognized for a particular transaction. We record commission expense in our consolidated statements of operations at the time the commission is earned. Commissions earned but not yet paid are included in current liabilities on our balance sheets. Leases We account for leases in accordance with ASC Topic 842 (Leases). We determine if an arrangement is a lease at inception. A lease contract is within scope if the contract has an identified asset (property, plant, or equipment) and grants the lessee the right to control the use of the asset during the lease term. The identified asset may be either explicitly or implicitly specified in the contract. In addition, the supplier must not have any practical ability to substitute a different asset and would not economically benefit from doing so for the lease contract to be in scope. The lessee’s right to control the use of the asset during the term of the lease must include the ability to obtain substantially all of the economic benefits from the use of the asset as well as decision-making authority over how the asset will be used. Leases are classified as either operating leases or finance leases based on the guidance in ASC Topic 842. Operating leases are included in operating lease ROU assets and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment and financing lease liabilities. We do not currently have any financing leases. Operating lease payments are included in cash outflows from operating activities on our consolidated statements of cash flows. We have made an accounting policy election not to apply the recognition requirements of ASC Topic 842 to short-term leases (leases with a term of one year or less at the commencement date of the lease). Our lease periods are less than one-year in duration. Lease expense for short-term lease payments is recognized on a straight-line basis over the lease term. 48 Following the guidance of ASC Topic 842, we are not required to record ROU assets and operating lease liabilities. See Note 8 for further disclosures regarding our leases. Research and Development and Software Development Expenses All research and development costs, including patent and software development costs, are expensed as incurred. Stock-Based Compensation We account for stock-based compensation in accordance with ASC Topic 718 (Compensation – Stock Compensation) which requires that employee share-based equity awards be accounted for under the fair value method and requires the use of an option pricing model for estimating fair value of awards, which is then amortized to expense over the service periods. 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 date. 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. As stock compensation expense recognized in the accompanying consolidated statements of income is based on awards ultimately expected to vest. 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 estimates. Excess tax benefits or deficiencies from stock compensation are recognized in the income tax provision and are not estimated in the effective tax rate. Rather, 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. Legal We are subject to legal proceedings, claims, and liabilities which arise in the ordinary course of business, and we accrue for losses associated with legal claims when such losses are probable and can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Legal fees are charged to general and administrative expenses as they are incurred. Income Taxes 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, 2024, or 2023. Net Loss Per Common Share Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the reporting period. The weighted average number of shares is calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding. Diluted earnings per share reflects the potential dilution that could occur if stock options, warrants, and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in our earnings. Diluted loss per share is the same as basic loss per share during periods where net losses are incurred since the inclusion of the potential common stock equivalents would be anti-dilutive as a result of the net loss. 49 Warrants We 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. Recent Accounting Announcements The 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. Accounting Pronouncements Adopted We did not adopt new accounting pronouncements during the year ended September 30, 2024. Accounting Pronouncements Not Yet Adopted In November 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, 2024. In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which updates income tax disclosure requirements primarily by requiring specific categories and greater disaggregation within the rate reconciliation table and disaggregation of income taxes paid, net of refunds, by jurisdiction. All entities are required to apply the guidance prospectively, with the option to apply it retrospectively. The guidance is effective for fiscal years beginning after December 15, 2024, which for us is our fiscal year 2026 beginning on October 1, 2025. Early adoption is permitted. The 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. In 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; 50 ● 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; and ● 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. The 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. NOTE 4 – REVERSE MERGER BETWEEN CIPHERLOC CORPORATION AND SIDECHANNEL, INC. (now known as SCS, Inc.) Overview of the Business Combination The Business Combination was accounted for as a reverse acquisition (“reverse merger”) in accordance with GAAP. Under this method of accounting, SCS was deemed to be the accounting acquirer for financial reporting purposes. 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; and (2) 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. Summary of the Business Combination Terms Pursuant to the Purchase Agreement, on the Closing Date, the former shareholders of the Subsidiary (the “Sellers”) exchanged all of their equity securities in the Subsidiary for a total of 59,900,000 shares of the Company’s common stock (the “First Tranche Shares”), and 100 shares of the Company’s newly designated Series A Preferred Stock, $ 0.001 par value (the “Series A Preferred Stock”). The Sellers were entitled to receive up to an additional 59,900,000 shares of the Company’s common stock (the “Second Tranche Shares” and together with the First Tranche Shares and the Series A Preferred Stock, the “Shares”) at such time that the operations of the Subsidiary, as a subsidiary of the Company, achieved at least $ 5.5 million in revenue (the “Milestone”) for any twelve-month period occurring after the Closing Date and before the 48-month anniversary of the execution of the Purchase Agreement. The Second Tranche shares were valued using the closing price on July 1, 2022, of $ 0.10 per share which resulted in a fair value of $ 6.1 million. The number of the Second Tranche Shares was increased, based upon the Subsidiary’s working capital as of the Closing Date was more than zero. As 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. 51 NOTE 5 – CASH EQUIVALENTS AND INVESTMENTS We 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. The following table presents the carrying amounts of cash equivalents and short-term investments as of September 30, 2024 and 2023: SCHEDULE OF CASH AND CASH EQUIVALENTS AND SHORT TERM INVESTMENTS September 30, 2024 September 30, 2023 Cash equivalents Money market funds $ 6 $ 42 Time deposits - - Total cash equivalents $ 6 $ 42 Short-term investments Time deposits 250 - Total short-term investments $ 250 $ - For more information about the fair value of the Company’s financial instruments, see Note 9. NOTE 6 – DEFERRED COSTS On July 23, 2021, we entered into a financial advisory and consulting agreement with Paulson Investment Company, LLC (“Paulson”). The agreement with Paulson remains in place after the Business Combination. Pursuant to the agreement, Paulson will provide the following services at the Company’s request: (a) familiarize itself with the Company’s business, assets, and financial condition; (b) assist the Company in developing strategic and financial objectives; (c) assist the 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 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 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 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. NOTE 7 – IDENTIFIABLE INTANGIBLE ASSETS The 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 (“MPEEM”). We 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 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 the product. We did no t have identifiable intangible assets at September 30, 2024. NOTE 8 - LEASES On December 10, 2021, we entered into a lease for approximately 500 square feet of office space at 146 Main Street in Worcester, Massachusetts, with the option to renew annually for three 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. Operating 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. We 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. We expect to pay approximately $ 12 thousand over the next twelve (12) months for the Worcester lease . 52 NOTE 9 – FAIR VALUE MEASUREMENT ASC 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. The following tables present the carrying amounts, estimated fair values, and valuation input levels of certain financial instruments as of September 30, 2024, and 2023. SCHEDULE OF FAIR VALUE OF FINANCIAL INSTRUMENTS September 30, 2024 Carrying Fair Value Measured Using Fair (in thousands) Amount Level 1 Level 2 Level 3 Value Short-term investments Time deposits: 91 - 360 days $ 250 $ - $ 250 $ - $ 250 Total Short-term investments $ 250 $ - $ 250 $ - $ 250 September 30, 2023 Carrying Fair Value Measured Using Fair (in thousands) Amount Level 1 Level 2 Level 3 Value 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. NOTE 10 – DEBT Pursuant to a Membership Interest Redemption Agreement, dated November 3, 2021, by and between us and Akash Desai (“Desai Redemption Agreement”), we promised to pay Mr. Desai $ 100 thousand, without interest, in exchange for Mr. Desai’s right, title, and interest in us. Mr. Desai was paid $ 50 thousand at the execution of the Desai Redemption Agreement and the remaining $ 50 thousand was paid in December 2023. NOTE 11 – STOCKHOLDERS’ EQUITY Common Stock As 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 . Common Stock Issued for Cash We did no t issue shares of common stock for cash during the years ended September 30, 2024, and September 30, 2023. Common Stock Issued for Business Combinations 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). No shares were issued for Business Combinations in fiscal year 2024. Common Stock Issued for Services Until 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. Our Board of Directors elected to cease receiving quarterly compensation in the form of shares of the Company’s common stock after April 1, 2024. 53 Common Stock Issued Under Equity Incentive Plan We issued 4,411,949 shares of common stock for 6,537,045 restricted stock units (“RSUs”) that vested during the year ended September 30, 2024. The number of RSUs sold by these employees to fund payroll taxes for the year September 30, 2024, was 2,125,096 . Common Stock Issued for Tender Offer On August 22, 2023, the Company commenced a Tender Offer for the 69,281,020 Warrants subject to our Offer to Exchange. A new 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 . Preferred Stock As of September 30, 2024, and 2023, we had zero ( 0 ) shares of preferred stock outstanding. Warrants Warrant activity for years ended September 30, 2024, and 2023, is as follows: SCHEDULE 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 87,794 $ 0.56 3.57 Granted — — — Tendered during November 2023 Warrant Exchange - - - Exercised — — — Canceled/Forfeited ( 18,513 ) 1.20 — Outstanding at September 30, 2023 69,281 $ 0.39 3.31 Outstanding at September 30, 2023 69,281 $ 0.39 3.31 Granted through November 2023 Warrant Exchange 17,415 0.18 4.25 Tendered during November 2023 Warrant Exchange ( 43,538 ) ( 0.36 ) ( 2.25 ) Exercised — — — Canceled/Forfeited — — — Outstanding at September 30, 2024 43,158 $ 0.33 3.89 NOTE 12 – REVENUE FROM CONTRACTS WITH CLIENTS Disaggregation of Revenues We disaggregate our revenue from contracts with clients by service type. See the below table: SCHEDULE OF DISAGGREGATED REVENUE 2024 2023 Year Ended (in thousands) September 30, 2024 2023 vCISO services $ 4,606 $ 4,383 Cybersecurity software and services 2,794 2,189 Total $ 7,400 $ 6,572 54 Deferred Revenue Deferred 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. Changes in deferred revenue were as follows: SCHEDULE OF CHANGES IN DEFERRED REVENUE Deferred Revenue (In thousands) Year Ended September 30, 2023 Balance at September 30, 2022 $ 130 Deferral of revenue 553 Recognition of revenue ( 403 ) Balance at September 30, 2023 $ 280 Year Ended September 30, 2024 Balance at September 30, 2023 $ 280 Deferral of revenue 1,258 Recognition of revenue ( 1,023 ) Balance at September 30, 2024 $ 515 NOTE 13 – BUSINESS RISK AND CREDIT RISK CONCENTRATION INVOLVING CASH No client individually accounted for over 10 % of our revenue during the years ended September 30, 2024, or 2023. We 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. NOTE 14 – RELATED PARTY TRANSACTIONS Brian Haugli, our Chief Executive Officer and our stockholder in the Company, is also a principal shareholder of RealCISO Inc. (“RealCISO”). 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, 2024, and 2023, SideChannel paid $ 30 thousand and $ 26 thousand to RealCISO for licenses, respectively. We 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. On 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. No other related party transactions occurred during the years ending September 30, 2024, and September 30, 2023. NOTE 15 – STOCK-BASED COMPENSATION As 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. The 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 8,186,106 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 Plan. Awards granted under the 2021 Equity Incentive Plan in lieu of compensation are exempt from counting against the reserve. SCHEDULE OF COMMON STOCK SHARES RESERVED FOR EQUITY GRANTS 2021 Omnibus Equity Incentive Plan Reserve (In thousands) Initial Reserve at September 13, 2021 8,000 Non-exempt Awards ( 24,783 ) Forfeitures 3,036 Annual Reserve Increases 21,786 Reserve at September 30, 2024 8,039 Reserve percent of outstanding shares at September 30, 2024 3.6 % 55 We 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. As of September 30, 2024, total compensation expense to be recognized in future periods was $ 667 thousand. That cost is expected to be recognized over the remaining vesting period. Our 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. Certain 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. We 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. Stock-based 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. Restricted Stock Units We 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. The 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 Restricted Stock Unit Grants Number of RSU’s Weighted Average Grant Date Value Per RSU (In thousands) Outstanding Grants at September 30, 2022 4,309 $ 0.11 Granted 8,174 0.10 Vested ( 2,988 ) 0.12 Canceled/Forfeited ( 858 ) 0.12 Outstanding Grants at September 30, 2023 8,637 0.10 Outstanding Grants at September 30, 2023 8,637 0.10 Granted 11,048 0.05 Vested ( 6,537 ) 0.08 Canceled/Forfeited ( 2,000 ) 0.10 Outstanding Grants at September 30, 2024 11,148 $ 0.06 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 thousand. 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 was $ 0.04 on September 30, 2024, and $ 0.07 on September 30, 2023. Stock Options We record compensation expense for the stock options based on the fair market value of the options as of the grant date. The 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: SCHEDULE OF STOCK OPTIONS WEIGHTED AVERAGE ASSUMPTIONS USED IN THE FAIR VALUE 2024 Risk-free interest rate 4.36 % Dividend yield 0.00 % Expected common stock market price volatility factor 182.97 % Weighted average expected live of stock options (years) 10.00 56 The following table summarizes the activity of our stock options granted under the 2021 Plan during the year ended September 30, 2024. We did not grant stock options during the year ended September 30, 2023. SCHEDULE OF STOCK OPTION OUTSTANDING TRANSACTIONS Outstanding Stock Option Grants Number of (In thousands) Stock Options Outstanding grants at September 30, 2023 — Granted 4,400 Vested — Canceled/forfeited ( 1,100 ) Outstanding grants at September 30, 2024 3,300 Stock 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. The weighted-average remaining vesting period of stock options at September 30, 2024, was 2.67 years. NOTE 16 – COMMITMENTS AND CONTINGENCIES Litigation 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. Currently Pending Litigation In April 2021, Eric Marquez, the former Secretary/Treasurer and Chief Financial Officer of Cipherloc Corporation, and certain other plaintiffs, filed a lawsuit against Cipherloc Corporation and Michael De La Garza, Cipherloc’s former Chief Executive Officer and President, in the 20 th Judicial District for Hays County, Texas (Cause No. 20-0818) (“OLWM Matter”). The lawsuit alleges causes of action for fraud against Mr. De La Garza (for misrepresentations allegedly made by Mr. De La Garza); breach of contract, for alleged breaches of Mr. Marquez’s alleged oral employment agreement, which Mr. Marquez claims required Cipherloc pay him cash and shares of stock; unjust enrichment; quantum meruit; and rescission of certain stock purchases made by certain of the plaintiffs, as well as declaratory relief and fraud. Damages sought exceeded $ 1 million. 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. 57 NOTE 17 - INCOME TAXES We 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. 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. The provision (benefit) for income taxes from continued operations for the years ended September 30, 2024, and 2023 consist of the following: SCHEDULE OF PROVISION (BENEFIT) FOR INCOME TAXES FROM CONTINUED OPERATIONS (In thousands) 2024 2023 September 30, (In thousands) 2024 2023 Current: Federal $ — $ ( 136 ) State 5 ( 32 ) Total $ 5 $ ( 168 ) Deferred: Federal $ — $ — State — ( 211 ) Total — ( 211 ) Provision (benefit) for income taxes, net $ 5 $ ( 379 ) The difference between income tax expense computed by applying the federal statutory corporate tax rate and actual income tax expense is as follows: SCHEDULE OF FEDERAL STATUTORY CORPORATE TAX RATE AND ACTUAL INCOME TAX EXPENSE September 30, 2024 2023 Statutory federal income tax rate 21.00 % 21.00 % Non-deductible meals & entertainment ( 0.27 ) ( 0.22 ) Non-deductible contingent consideration — ( 1.89 ) Prior Year Adjustment ( 12.88 ) 1.58 State tax ( 26.91 ) 3.02 Loss of NOL due to statute ( 36.65 ) — Change in valuation allowance 55.71 ( 18.36 ) Effective tax rate 0.00 % 5.13 % For 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. 58 Deferred income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes. The tax effect of these temporary differences representing deferred tax asset and liabilities result principally from the following: Federal SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES 2024 2023 September 30, 2024 2023 Net operating loss carry forward $ 7,190 $ 7,603 Intangible asset – not deductible for tax — ( 1,038 ) AIPR&D capitalization 188 126 Other 34 7 Deferred compensation 124 38 Valuation allowance ( 7,536 ) ( 6,736 ) Deferred income tax asset $ — $ — State 2024 2023 September 30, 2024 2023 Net operating loss carry forward $ 230 $ 225 Intangible asset – not deductible for tax — ( 218 ) Other 90 36 Valuation allowance ( 320 ) ( 43 ) Deferred income tax asset $ — $ — The 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. Utilization of the pre-Business Combination net operating loss carryforwards (“pre-Combination NOL’s”) attributable to Cipherloc may become subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership changes occurred during the tax year associated with the Business Combination. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. Future ownership changes may trigger Section 382 and therefore, substantially limit the amount of pre-Combination NOLs that can be utilized annually to offset future taxable income. The Company is current on all its federal income tax filings. The Company is subject to IRS examinations for periods beginning after September 30, 2019, and all net operating losses we may use in future federal tax filings are subject to IRS examination. NOTE 18 - SUBSEQUENT EVENTS 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 lawsuit. 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. 59 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.