What changed in this filing

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Item 1. Financial Statements

2025-02-05 compared with 2024-08-07 · 557 added, 437 removed, 51 unchanged (95% of the section changed)

FINANCIAL STATEMENTS

BALANCE SHEETS

CONSOLIDATED BALANCE SHEETS

thousands, except share and per share data)

December 31, 2024

September 30, 2024

receivable, net

expenses and other current assets

Current assets

& STOCKHOLDERS’ EQUITY

payable and accrued liabilities

taxes payable

Cash and cash equivalents

Short-term investments

Accounts receivable, net

Deferred costs

Prepaid expenses and other current assets

Total current assets

LIABILITIES & STOCKHOLDERS’ EQUITY

Current liabilities

and contingencies

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

225,975,331 and 213,854,781 shares issued and outstanding as of June 30,

2024 and September 30, 2023, respectively

paid-in capital

stockholders’ equity

liabilities and stockholders’ equity

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

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

complete financial statements.

accompanying notes to unaudited consolidated financial statements.

STATEMENTS OF OPERATIONS

Accounts payable and accrued liabilities

Deferred revenue

Income taxes payable

Total current liabilities

Total liabilities

Commitments and contingencies (Note 14)

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

226,331,731 and 225,975,331 shares issued and outstanding as of December 31, 2024, and September 30, 2024, respectively.

Additional paid-in capital

Accumulated deficit

Total stockholders’ equity

Total liabilities and stockholders’ equity

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

CONSOLIDATED STATEMENT OF OPERATIONS

thousands, except share and per share data)

and administrative

and marketing

and development

combination related costs

Three Months Ended

Cost of revenues

Operating expenses

loss before income tax expense

General and administrative

Selling and marketing

Research and development

Total operating expenses

Operating loss

Other income, net

Net loss before income tax expense

Income tax expense

Net loss after income tax expense

Net loss per common share – basic and diluted

average common shares outstanding – basic and diluted

accompanying notes to unaudited consolidated financial statements.

STATEMENTS OF STOCKHOLDERS’ EQUITY

Weighted average common shares outstanding – basic and diluted

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

thousands, except share data)

Additional Paid-in Capital

at September 30, 2023

issued for 2021 Investor Warrants

issued for services

at December 31, 2023

issued for services

at March 31, 2024

at June 30, 2024

Additional Paid-in Capital

at September 30, 2022

issued for services

at December 31, 2022

issued for services

at March 31, 2023

issued for services

compensation expense

of preferred to common

combination – contingent consideration

at June 30, 2023

accompanying notes to unaudited consolidated financial statements.

STATEMENTS OF CASH FLOWS

Months Ended June 30,

FLOWS FROM OPERATING ACTIVITIES:

to reconcile net loss to net cash flows used in operating activities:

and amortization

compensation and payments for services, net

combination costs

in operating assets and liabilities:

receivable, net

expenses and other assets

payable and accrued liabilities

cash provided by (used in) operating activities

FLOWS FROM INVESTING ACTIVITIES:

of fixed assets

cash used in investing activities

FLOWS FROM FINANCING ACTIVITIES:

of note payable

cash used in financing activities

of Shares Outstanding

Accumulated Deficit

Balance at September 30, 2024

Shares issued for legal settlement

Stock-based compensation

Balance at December 31, 2024

of Shares Outstanding

Accumulated Deficit

Balance at September 30, 2023

Shares issued for 2021 Investor Warrants

Shares issued for services

Stock-based compensation

Balance at December 31, 2023

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

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

Depreciation and amortization

Legal Settlement Paid in Stock

Stock-based compensation and payments for services, net

Changes in operating assets and liabilities:

Accounts receivable, net

Prepaid expenses and other assets

Accounts payable and accrued liabilities

Income taxes payable

Deferred revenue

Net cash provided by / (used in) operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Payment of note payable

Net cash used in financing activities

INCREASE / (DECREASE) IN CASH

BEGINNING OF PERIOD

END OF PERIOD

DISCLOSURES OF CASH FLOW INFORMATION:

compensation included in accounts payable and accrued liabilities

issued for services

of restricted stock units sold by employees to pay for taxes due on vested restricted stock units

accompanying notes to unaudited consolidated financial statements.

TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THE NINE MONTHS ENDED JUNE 30, 2024 AND 2023

1 – GENERAL INFORMATION

of the Company

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

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

Our headquarters are located at

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

Our website is https://sidechannel.com .

A history of the Company is

disclosed in our Annual Report on Form 10-K for the year ended September 30, 2023 (the “2023 Form 10-K”) filed on

December 27, 2023, with the Securities and Exchange Commission (“SEC”).

Our mission is to simplify cybersecurity for mid-market

and emerging companies, a market we believe is underserved.

Our products and services offer comprehensive cybersecurity and privacy risk

management solutions.

We anticipate ongoing demand for cost-effective security solutions and aim to provide tech-enabled services to meet

these needs, including virtual Chief Information Security Officer (“vCISO”), zero trust, third-party risk management, due

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

Enclave, our proprietary SaaS platform, streamlines critical cybersecurity tasks such as asset inventory and microsegmentation.

Enclave integrates access control, microsegmentation, encryption, and secure networking concepts into a unified solution, enabling IT

professionals to efficiently segment networks, assign staff, and manage traffic.

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

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

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

On September 9, 2022,

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

“Subsidiary” or “SCS”), and (ii) Cipherloc, the Delaware parent company of the Subsidiary,

changed its name to SideChannel, Inc.

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

in SCS for a total of 59,900,000 shares of the Company’s common stock (the “First Tranche Shares”), and 100 shares

of the Company’s newly designated Series A Preferred Stock, $ 0.001 par value (the “Series A Preferred Stock”).

In addition, the Sellers were entitled to receive up to an additional 59,900,000 shares of the Company’s common stock (the “Second

Tranche Shares” and together with the First Tranche Shares and the Series A Preferred Stock, the “Shares”) at such

time that the operations of SCS, as a subsidiary of the Company, achieved at least $ 5.5 million in revenue (the “Milestone”)

for any twelve-month period occurring after the closing date and before the 48-month anniversary of the execution of the Purchase Agreement.

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

date was less than or more than zero (“Closing Working Capital Adjustment”).

The number of the Second Tranche Shares was also

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

Working Capital Adjustment increased the Second Tranche Shares by 2,116,618 shares of common stock.

The 100 shares of Series A Preferred

Stock were converted to common stock on May 4, 2023.

CASH, BEGINNING OF PERIOD

CASH, END OF PERIOD

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Shares Issued for Services

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

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THE THREE MONTHS ENDED DECEMBER 31, 2024 AND 2023

in thousands except shares and per share data)

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 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.

are marketing and selling Enclave, a proprietary software product that simplifies important cybersecurity tasks to achieve “microsegmentation.”

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

It allows Information Technology to easily segment the enterprise network, place the right staff in those segments, and direct

Our growth strategy focuses on these three initiatives:

adoption of Enclave,

new vCISO clients, and

new Cybersecurity Software and Services offerings.

vCISO agreements are in the form of a monthly subscription;

some clients select a prepaid block of hours or time and materials

Rates for vCISO services range from $ 350

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, including third-party software and

services that we resell and those delivered by our security engineer employees and independent contractors.

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

Our website is www.sidechannel.com .

2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

have not made changes to the Significant Accounting Policies disclosed in our 2023 Form 10-K.

of Presentation

interim unaudited consolidated financial statements reflect all adjustments which in the opinion of management are necessary for a

fair statement of results of operations, comprehensive income, financial condition, cash flows and stockholders’ equity for the

periods presented.

Except as otherwise disclosed, all such adjustments are of a normal recurring nature.

Accordingly, they do not

include all of the information and footnotes required by United States generally accepted accounting principles (“U.S.

complete financial statements.

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

results for the three and nine months ended June 30, 2024, are not necessarily indicative of the results that may be expected for

the fiscal year ending September 30, 2024.

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

consolidated financial statements and notes included in the 2023 Form 10-K.

The year-end balance sheet data was derived from the

audited consolidated financial statements as of September 30, 2023, but does not include all the disclosures required by U.S.

Reclassifications

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 purposes of assessing performance and making operating decisions.

expect to incur continued operating losses until we generate revenues sufficient to cover our expected ongoing obligations and

For the nine months ended June 30, 2024, we have reported a net loss of $ 645

thousand which includes $ 587

thousand of non-cash expenses for stock-based compensation, depreciation, and amortization.

Our operating activities have provided

thousand in cash for the nine months ended June 30, 2024, and our cash balance increased by $ 52

thousand from September 30, 2023, to June 30, 2024, after using $ 65

thousand of cash for investing and financing activities.

intend to manage our business such that our current cash reserves will allow us to reach sustainable, positive cash flow from

our operations, but we cannot assure if and when that will be achieved.

We don’t currently have any credit facilities available

We believe that our existing cash and net working capital are sufficient to fund our operations through at least September 30,

Accounting Estimates

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

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

for the interim periods presented.

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

financial statements.

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

consolidated financial statements and accompanying footnotes included in our 2023 Form 10-K.

The same accounting policies have been

followed in these unaudited interim consolidated financial statements as those applied in the preparation of our consolidated

audited financial statements for the fiscal year ended September 30, 2023.

of Presentation and Use of Estimates

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

principles generally accepted in the United States of America (“U.S.

GAAP”) for interim financial information with the

instructions to Form 10-Q and Rule 8-01 of Regulation S-X.

Accordingly, they do not include all the disclosures required

for complete financial statements, and they do include our accounts and those of our wholly owned subsidiaries.

All significant

intercompany accounts and transactions have been eliminated upon consolidation.

References to fiscal year 2025 and fiscal year 2024

used throughout this report shall mean the current fiscal year ending September 30, 2025, and the prior fiscal year ended September

30, 2024, respectively.

the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments

(consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations, and

changes in cash flows for the interim periods presented.

Certain footnote information has been condensed or omitted from these

consolidated financial statements.

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

consolidated financial statements and accompanying footnotes included in our 2024 Form 10-K for the year ended September 30, 2024.

The same accounting policies have been followed in these unaudited interim condensed consolidated financial statements as those

applied in the preparation of our consolidated audited financial statements for the year ended September 30, 2024.

preparation of financial statements in conformity with U.S.

4 unchanged sentences

Certain of our

accounts, including goodwill, identifiable intangibles, and deferred tax assets and liabilities, including related valuation allowances,

are based upon estimates.

We base our estimates on historical experience and on appropriate and customary assumptions that we believe

to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets

and liabilities that are not readily apparent from other sources.

Some of these accounting estimates and assumptions are particularly

sensitive because of their significance to our consolidated financial statements and because of the possibility that future events affecting

them may differ markedly from what had been assumed when the financial statements were prepared.

of June 30, 2024, there have been no significant changes to the accounting estimates that we have deemed critical.

Our critical accounting

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

Loss Per Share

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

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.

Pronouncements

did not adopt new accounting pronouncements during the nine months ended June 30, 2024.

Issued Accounting Standards Not Yet Adopted

November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07,

“Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures,” which provides guidance to improve

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

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

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

other disclosure requirements.

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

performance and assess potential future cash flows.

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

interim periods within fiscal years beginning December 15, 2024.

For us, annual reporting requirements will be effective for our

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

of fiscal year 2025.

Early adoption is permitted.

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.

accounts, including goodwill 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.

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

Cash Equivalents, and Short-Term Investments

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

Securities with maturities of more than 360 days, if any, are included in “Long-term investments.”

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.”

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

of Operations.

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.

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.

balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered

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.

the three months ended December 31, 2024 , there was no change in the amount of the allowance for credit losses.

was no bad debt expense recorded for the three months ended December 31, 2024, and 2023.

Value of Financial Instruments

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.

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.

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.

more information about the Company’s accounting policies surrounding fair value investments, see Note 7.

Intangible, and Long-Lived Assets

account for goodwill and intangible assets in accordance with ASC Topic 350 (Intangibles – Goodwill and Other) and ASC Topic 360

(Property, Plant and Equipment).

Finite-lived intangible assets are amortized over their estimated useful economic life and are carried

at cost less accumulated amortization.

Goodwill is assessed for impairment annually at the beginning of the fourth quarter on a reporting

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

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

the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired.

If the carrying

amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to

the total amount of goodwill allocated to that reporting unit.

assets, which consist of finite-lived intangible assets and property and equipment, are assessed for impairment whenever events or changes

in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these

assets are no longer appropriate.

Each impairment test is based on a comparison of the estimated undiscounted cash flows to the recorded

value of the asset.

If impairment is indicated, the asset is written down to its estimated fair value.

The cash flow estimates used to

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

There have been no significant events or changes in circumstances during the quarter ended December 31, 2024, that would indicate that

the carrying amount of the Company’s intangible asset, goodwill, may be impaired as of December 31, 2024.

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 in North America.

We categorize our

products and services as either vCISO Services or Cybersecurity Software and Services.

Cybersecurity Software and Services includes revenue earned from both Enclave, our proprietary software product,

and third-party software and services that we resell.

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 materials 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 materials 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.

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.

resell the software and services provided by third parties.

When we have discretion over the pricing used in the Contracts with our

clients, 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 the third-party software and services we sell.

Also consistent with

our determination 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.

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.

to Obtain a Contract with a Customer

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 invoice value of each product or service sold.

Commissions are considered earned by our internal

sales personnel and third-party sales representatives at the time we receive payment from our customers.

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.

All costs to acquire new customers and contracts are reported in operating expenses.

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

We determine if an arrangement is a lease at inception.

A lease contract

is within scope if the contract has an identified asset (property, plant, or equipment) and grants the lessee the right to control the

use of the asset during the lease term.

The identified asset may be either explicitly or implicitly specified in the contract.

the supplier must not have any practical ability to substitute a different asset and would not economically benefit from doing so for

the lease contract to be in scope.

The lessee’s right to control the use of the asset during the term of the lease must include

the ability to obtain substantially all 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.

leases are included in property and equipment and financing lease liabilities.

We do not currently have any financing leases.

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

have made an accounting policy election not to apply the recognition requirements of ASC Topic 842 to short-term leases (leases with

a term of one year or less at the commencement date of the lease).

Lease expense for short-term lease payments is recognized on a straight-line

basis over the lease term.

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

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

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

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

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.

See further disclosures related to our stock-based compensation plans in Note 13.

are subject to legal proceedings, claims, and liabilities that 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.

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 carry forwards 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.

Loss Per Common Share

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

outstanding during the reporting period.

The weighted average number of shares is calculated by taking the number of shares

outstanding and weighting them by the amount of time that they were outstanding.

Diluted earnings per share reflects the potential

dilution that could occur if stock options, warrants, and other commitments to issue common stock were exercised or equity awards

vest resulting in the issuance of common stock that could share in our earnings.

Diluted loss per share is the same as basic loss

per share during periods where net losses are incurred since the inclusion of the potential common stock equivalents would be

anti-dilutive because of the net loss.

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

The result of this accounting treatment is that the fair value of

the embedded derivative, if required to be bifurcated, is marked-to-market at each balance sheet date and recorded as a liability.

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

Upon exercise

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

of Recently Issued Amendments to Authoritative Accounting Guidance

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

Improvements to Reportable Segment

Disclosures,” which provides guidance to improve reportable segment disclosure requirements, primarily through enhanced

disclosures about significant segment expenses.

In addition, the guidance enhances interim disclosure requirements, clarifies

circumstances in which an entity can disclose multiple segment measures of profit or loss, provides new segment disclosure

requirements for entities with a single reportable segment, and contains other disclosure requirements.

The purpose of the guidance

is to enable investors to better understand an entity’s overall performance and assess potential future cash flows.

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

December 15, 2024.

For us, annual reporting requirements will be effective for our fiscal year 2025 beginning on October 1, 2024,

and interim reporting requirements will be effective beginning with our first quarter of fiscal year 2026.

Early adoption is

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

December 2023, the FASB also 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

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

In November 2024, the FASB also issued ASU 2024-03, Disaggregation of Income

Statement Expenses, which will require the disclosure of additional information about specific expense categories in the notes to the

financial statements.

The guidance is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal

years beginning after December 15, 2027.

For us, annual reporting requirements will be effective for our fiscal year 2028 beginning on

October 1, 2027, and interim reporting requirements will be effective beginning with our first quarter of fiscal year 2029.

Early adoption

is permitted.

We are currently evaluating the impact of this amended disclosure guidance.

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

on the accompanying consolidated financial statements.

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;

● 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.

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.

3 – LIQUIDITY AND CAPITAL RESOURCES

of December 31, 2024, and September 30, 2024, we had $ 1.1

million and $ 1.0

million, respectively, of cash and cash equivalents.

In addition, we had $250 thousand in short-term investments in both periods.

incurred net losses during the three-month periods ended December 31, 2024 and 2023, of $ 195

thousand and $ 246 thousand, respectively.

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

corporate needs.

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

As of December 31, 2024, we are not party to any off-balance sheet arrangements that have had or are reasonably likely to

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

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

believe that our existing cash, cash equivalents, and our anticipated cash flows from operations will be sufficient to meet our working

capital, expenditure, and contractual obligation requirements for the next 12 months.

Although we believe we have adequate sources of

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

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

4 – 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 original maturities of less than 90 days are included in “Cash and cash equivalents.” Time deposits

with original maturities from 91-360 days are included in “Short-term investments.” As of December 31, 2024, and

September 30, 2024, the Company had no long-term investments.

following table presents the carrying amounts of cash equivalents and short-term investments:

OF CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

December 31, 2024

September 30, 2024

Cash equivalents

Money market funds

Total cash equivalents

Short-term investments

Time deposits

Total short-term investments

Short Term Investment

Carrying Amount

Original Maturity Date

Time deposits

February 5, 2025

more information about the fair value of the Company’s financial instruments, see Note 7.

5 – DEFERRED COSTS

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;

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;

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 $ 45 thousand in each of the quarters ended December

31, 2024, and 2023.

The unamortized balance of the deferred costs was $ 105 thousand at December 31, 2024.

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

3 unchanged sentences

The annual renewal date is January 1 st .

Our current lease payment is $ 967 per

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.

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 June 30, 2024.

4 – DEFERRED REVENUE

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

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

While software contracts can be initiated

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

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

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

The recognition of

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

revenue was $ 647 thousand at June 30, 2024 and

Our current lease payment is $ 986 per month.

The lease allows

for a 2% increase effective at the beginning of each renewal period.

lease expenses were $ 3 thousand and $ 3 thousand for the three months ended December 31, 2024, and 2023, respectively.

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

7 – 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:

OF FAIR VALUE OF FINANCIAL INSTRUMENTS

December 31, 2024

Fair Value Measured Using

(in thousands)

Short-term investments

Time deposits:

91 - 360 days

Total Short-term investments

September 30, 2024

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

in deferred revenue for the nine months ended June 30, 2024 were as follows:

SCHEDULE OF CHANGES IN DEFERRED REVENUE

at September 30, 2023

at June 30, 2024

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.

thousand, without interest, in exchange for Mr.

Desai’s right, title, and interest in us while we operated as a limited

liability company.

Desai was paid $ 50

the execution of the Desai Redemption Agreement and the remaining $ 50

thousand balance

was paid in December 2023.

Fair Value Measured Using

(in thousands)

Short-term investments

Time deposits:

91 - 360 days

Total Short-term investments

entire balance of time deposits maturing in 91 to 360 days at December 31, 2024, and September 30, 2024, are certificates of deposit

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

Company has no debt.

9 - STOCKHOLDERS’ EQUITY

of June 30, 2024, we had 225,975,331

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

shares of common stock, par value $ 0.001

of December 31, 2024, we had 226,331,731 shares of common stock outstanding and were authorized to issue 681,000,000 shares of common

stock at a par value of $ 0.001 .

had 225,975,331 shares of common stock outstanding as of September 30, 2024.

Stock Issued for Legal Settlement

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.

We executed a settlement agreement with the plaintiffs

on December 13, 2024, resulting in the dismissal of the lawsuit with prejudice on January 2, 2025.

The settlement agreement required

the Company to issue the plaintiffs a combined 356,400 shares of common stock, which was done on December 20, 2024, with a fair market

value of $ 14 thousand.

Stock Issued for Cash

did no t issue shares of common stock for cash during the three months ended December 31, 2024.

Stock Issued for Business Combinations

did no t issue shares for mergers or acquisitions related activity during the three months ended December 31, 2024.

Stock Issued for Services

shares of common stock issued for services during the nine months ended June 30, 2024, was 437,643

with a total grant date fair value of $ 20 thousand.

May 6, 2024, our Board of Directors (“Board”) decided to eliminate quarterly Board fees paid in cash and stock.

May 6, 2024, our Board had elected to have each of its members receive one-half of such member’s quarterly compensation in the

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

We did not issue shares to the members of our Board for services

provided to us during the quarter ended June 30, 2024.

For the nine months ended June 30, 2024, we issued 347,226

shares of common stock as compensation with a total grant date fair value of $ 17 thousand.

also use stock as a form of compensation for independent contractors who provide professional services to us in sales, marketing, or

administration.

For the nine months ended June 30, 2024, we issued 90,417

shares of common stock to an independent contractor with a grant date fair value of $ 3 thousand.

did no t issue shares for services during the three months ended December 31, 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 nine months

ended June 30, 2024.

The number of RSUs sold by these employees to fund payroll taxes for the nine months ended June 30, 2024, was 2,125,096 .

Stock Issued Under Tender Offer

December 26, 2023, we closed a tender offer to exchange approximately 55.5 million 2021 Investor Warrants for shares of common stock and

new warrants (“November 2023 Warrant Exchange”).

The November 2023 Warrant Exchange had 43,538,501 2021 Investor Warrants

tendered ( 78.4 % of the outstanding 2021 Investor Warrants), resulting in the issuance of 7,270,958 shares of common stock and 17,415,437

new warrants (“New Warrants”).

The New Warrants include these terms:

New Warrant can subscribe for and purchase one share of common stock from the Company at an exercise price of $ 0.18

per share on or before December 29, 2028.

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

New Warrants will automatically convert if the common stock trades at a bid price equal to or greater than $ 0.36

per share for 30 consecutive trading days.

New Warrant holders will be notified if the automatic conversion is triggered and will

be provided with 20 trading days to deliver a notice of exercise to the Company.

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

weighted average warrant fair value of the 2021 Investor Warrants successfully tendered, as determined using the Black-Scholes option

valuation model, was in excess of the value of the consideration paid by the Company to the 2021 Investor Warrant holders who successfully

tendered their warrants during the November 2023 Warrant Exchange.

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

assumptions used to estimate the weighted average warrant fair value for the successfully tendered 2021 Investor Warrants include:

estimated volatility based primarily on historical monthly price changes of the Company’s stock equal to the expected life

of the warrant.

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

Treasury yield in effect at the time of grant.

expected warrant term was the number of years the Company estimates the warrants will be outstanding prior to exercise based on expected

historical exercise patterns.

the November 2023 Warrant Exchange, we had a total of 43.2

million warrants outstanding comprised of 5.4

million warrants from 2018 issued to placement agents, 8.4

million warrants from 2021 issued to placement agents, 12.0

million remaining 2021 Investor Warrants, and 17.4

million New Warrants issued on December 26, 2023.

of June 30, 2024, we had no

shares of preferred stock outstanding.

following table summarizes warrant activity for the nine months ended June 30, 2024:

SCHEDULE OF WARRANT ACTIVITY

did no t issue shares for vested equity grants during the three months ended December 31, 2024.

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

following table summarizes warrant activity for the three months ended December 31, 2024:

OF WARRANT ACTIVITY

Outstanding Warrants

(In thousands, except prices and remaining lives)

Number of Warrants

Weighted Average Exercise Price

Weighted Average Remaining Life

Outstanding at September 30, 2024

Granted through November 2023 Warrant Exchange

Tendered during November 2023 Warrant Exchange

Canceled/Forfeited

Outstanding at June 30, 2024

7 – DISAGGREGATED REVENUE

We internally report our revenue using two categories.

The first, “vCISO Services,” captures the revenue the Chief Information Security Officer services that we provide to our clients

on a “virtual” or outsourced basis, thus the acronym “vCISO.” Services delivered by SideChannel through our team

of vCISOs include assessing the cybersecurity risk profile, implementing policies and programs to mitigate risks, and managing the day-to-day

tasks to ensure compliance with the adopted cybersecurity framework.

Most of our clients use our vCISO services.

Our second revenue category encompasses an array of

cybersecurity software and services that our clients deem necessary to protect their digital assets.

These augment our vCISO offering

and include a full range of other cybersecurity products and services delivered through a team of security engineers along with a network

of third-party service providers and value-added resellers (“VARs”).

Commercial relationships with third-party service providers

and VARs provide SideChannel with additional internal capabilities to mitigate cybersecurity risks.

We earn licensing revenue from software

contracts and commissions from third-party service provider partnerships which are included in this revenue category.

Cancelled/Forfeited

Outstanding at December 31, 2024

10 – REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation

disaggregate our revenue from contracts with customers (clients) by service type.

See the below table:

OF DISAGGREGATED REVENUE

Nine Months Ended

Three Months Ended

(in thousands)

1 unchanged sentence

Cybersecurity software and services

revenue is comprised of payments received from our clients 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 software agreements renew in our second fiscal quarter ending March 31, 2025.

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

in deferred revenue were as follows:

OF CHANGES IN DEFERRED REVENUE

(In thousands)

Balance at September 30, 2024

Deferral of revenue

Recognition of revenue

Balance at December 31, 2024

11 – BUSINESS RISK AND CREDIT RISK CONCENTRATION INVOLVING CASH

client individually accounted for over 10% of our revenue during the three months ended December 31, 2024, or 2023.

had one client with an accounts receivable balance equal to approximately 18 % of total accounts receivable at December 31, 2024.

maintain our cash, cash equivalents, and short-term investments 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 December 31, 2024, approximately $ 870 thousand of our cash and cash equivalent balance and $ 250 thousand of our short-term investment balance were uninsured.

experienced any losses on cash.

12 – RELATED PARTY TRANSACTIONS

Haugli, our Chief Executive Officer, a member of the Board, and a significant stockholder of the Company, is also a principal

shareholder of RealCISO Inc.

Haugli, our Chief Executive Officer and stockholder in the Company, is also a principal shareholder of RealCISO Inc.

(“RealCISO”).

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

intellectual property.

We are a reseller of the RealCISO software.

We are a reseller of RealCISO software.

We receive revenue from our customers for the use of RealCISO

software and pay licensing fees to RealCISO for such use.

thousand to RealCISO in the nine months ended June 30, 2024.

RealCISO during the nine months ended June 30, 2023.

received $ 119

thousand from RealCISO for software development services that we provided RealCISO during the nine months ended June 30,

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

For the three months ending December 31, 2024, we paid $ 14

thousand to RealCISO.

No amounts were paid to RealCISO for the three months ended December 31, 2023.

also received $ 4

thousand and $ 43 thousand from RealCISO for software development services that we provided RealCISO during the three months ended

December 31, 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

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

Army General Robert Brown, joined our Board.

other material related party transactions occurred during the nine months ended June 30, 2024.

9 – CUSTOMER CONCENTRATION RISK

client individually accounted for over 10 %

of our revenue during the three or nine months ended June 30, 2024 or 2023.

No client individually accounted for over 10 % of accounts receivable on June 30, 2024.

One client accounted for 14.8 %

of accounts receivable on June 30, 2023.

On July 8, 2024,

AUSA signed an agreement for recurring vCISO Services, which generated $ 27

thousand of revenue during the three months ended December 31, 2024.

SideChannel has reserved booth space at the AUSA Global Force

Symposium, to be held in March 2025.

In the three months ended December 31, 2024, the Company has paid $ 8

thousand to AUSA for this event.

other related party transactions occurred during the three months ended December 31, 2024.

13 – STOCK BASED COMPENSATION

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

Equity Compensation Plan (the “2021 Plan”).

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

service-based vesting period.

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

As of June 30, 2024, total compensation

expense to be recognized in future periods was $ 782

thousand over 2.4 years.

total stock-based compensation expense for the nine months ended June 30, 2024 was $ 561

thousand, comprised of $ 20

thousand for shares

issued for services and $ 541

thousand for the

cost 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 nine months ended June 30, 2024, we purchased RSUs with a vesting

date value of $ 118

Our Statement of Stockholders Equity reflects the net increase of $ 423

of June 30, 2024 or $ 541

total stock-based compensation expense, less the $ 118

RSUs purchased.

incurred stock-based compensation expense of $ 372

thousand for the nine months ended June 30, 2023, which is comprised of $ 47

thousand for shares

issued for services and $ 325

thousand for the

amortization of outstanding equity compensation grants.

Total stock-based compensation is included in general

and administrative expense, selling and marketing expense, and research and development expense in our accompanying Consolidated Statements

of Operations.

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 following table summarizes the activity

of our RSUs granted under the 2021 Plan during the nine months ended June 30, 2024, and June 30, 2023.

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

We have granted

restricted stock units (“RSUs”) and stock options with service-based vesting conditions with vesting typically occurring

over a 3 -year period.

following table summarizes the activity of our RSUs granted under our Equity Incentive Plan during the three months ended December 31,

SCHEDULE OF RESTRICTED STOCK UNITS VESTING

Restricted Stock Units

(In thousands)

grants at September 30, 2023

Canceled/forfeited

grants at June 30, 2024

grants at September 30, 2022

Canceled/forfeited

grants at June 30, 2023

weighted average grant-date fair value was $ 0.05 per share for all RSUs granted during the nine months ended June 30, 2024, and $ 0.10

per share for all awards granted during the nine months ended June 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.

fair value for stock options granted during the three months ended June 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)

The following table summarizes the activity of our

stock options granted under the 2021 Plan during the nine months ended June 30, 2024.

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

Outstanding at September 30, 2024

Cancelled/Forfeited

Outstanding at December 31, 2024

December 20, 2024, our Board of Directors authorized awarding 1.1 million RSUs to each of the three independent directors with three-year vesting schedules beginning on March 1, 2025, and ending on March 1, 2027 .

The weighted average grant-date fair value of the RSUs

granted during the quarter ended December 31, 2024, was $ 0.03 per share.

The Company recognizes compensation cost for unvested share-based

awards on a straight-line basis over the requisite service period.

total stock-based compensation expense for the three months ended December 31, 2024, was $ 112

thousand for the amortization of outstanding equity compensation grants.

Stock-based compensation of $ 95

thousand is included in general and administrative expense, $ 4

thousand in selling and marketing expense, and $ 13

thousand in research and development expense.

unamortized stock compensation expense at December 31, 2024, is $ 555

thousand, and the remaining weighted average term to vesting is 1.8

following table summarizes the activity of our stock options granted under our Equity Incentive Plan during the three months ended December

OF STOCK OPTION OUTSTANDING TRANSACTIONS

Outstanding Stock Options

(In thousands)

Stock Options

Outstanding grants at September 30, 2023

Canceled/forfeited

Outstanding grants at June 30, 2024

No stock options were awarded prior to September 30, 2023

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

One independent director resigned from our Board on June 18, 2024, resulting in the forfeiture of 1.1 million stock options.

Outstanding at September 30, 2024

Cancelled/Forfeited

Outstanding at December 31, 2024

December 20, 2024, our Board of Directors authorized the termination of stock options previously awarded to independent directors.

14 – COMMITMENTS AND CONTINGENCIES

April 2020, Eric Marquez, the former Secretary/Treasurer and Chief Financial Officer of Cipherloc, and certain other plaintiffs, filed

a lawsuit against Cipherloc 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 Mr.

Garza (for misrepresentations allegedly made by Mr.

De La Garza);

breach of contract, for alleged breaches of Mr.

Marquez’s alleged

oral employment agreement, which Mr.

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

unjust enrichment;

quantum meruit;

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

Damages sought

exceed $ 1.0 million.

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

The case is currently being defended by us.

We believe we have meritorious defenses to the allegations, and we intend to continue to vigorously defend against the litigation.

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

or results of operations.

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

of operations.

Settled 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.

We executed a settlement

agreement with the plaintiffs on December 13, 2024, resulting in the dismissal of the lawsuit with prejudice on January 2, 2025.

settlement agreement requires 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 instalments of approximately $ 16

thousand each, beginning by January 1, 2025, and ending by April 1, 2026.

The expenses associated with this settlement were included

in our results for the fiscal year ended September 30, 2024.

15 – SUBSEQUENT EVENTS

On July 25, 2024, the Company filed Form 8-K, stating that Matt Klein had been appointed Chief Operating Officer.

The Company does not deem Mr.

Klein to be an “executive officer,” as such term is defined in Rule 3b-7, promulgated under

the Securities Exchange Act of 1934, as amended.

have assessed our operations through the filing date of this Quarterly Report on Form 10-Q and determined that there were no

material subsequent events requiring adjustment to, or disclosure in, our consolidated financial statements for the three months

ended December 31, 2024 .

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

What changed 10-Q

Item 1. Financial Statements