UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] (Mark one)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 20172022

[  ] ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from N/A___________ to N/A___________

Commission File No. 000-28745

Cipherloc CorporationSideChannel, Inc.

(NameExact name of small business issuerregistrant as specified in its charter)

825146 Main St, Street, Suite 100405, Worcester, MA01608

Buda, TX 78610

(Address of principal executive offices) (Zip Code)

(702) 818-9011(508)925-0114

(Registrant’s telephone number, including area codecode)

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark whether the Registrantregistrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:Yes ☒ No ☐

Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes ☒ No ☐

Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act). Yes ☐ No ☒

Yes [  ] No [X]

IndicateAs of February 3, 2023, the number ofregistrant had 148,904,613 shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.outstanding.

CIPHERLOC CORPORATIONSIDECHANNEL, INC.

INDEX TO FORM 10-Q FILING

FOR THE THREE MONTHS ENDED DECEMBER 31, 20172022, AND 20162021

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

The accompanying interim financial statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders’ equity in conformity with accounting principles generally accepted in the United States of America. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2017. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included, and all such adjustments are of a normal recurring nature. Operating results for the three months ended December 31, 2017 are not necessarily indicative of the results that can be expected for the year ending September 30, 2018.SIDECHANNEL, INC.

CIPHERLOC CORPORATION

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)(In thousands, except share and per share data)

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

CIPHERLOC CORPORATIONSIDECHANNEL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)(In thousands, except share and per share data)

(Unaudited)

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

SIDECHANNEL, INC.

CIPHERLOC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY

(UNAUDITED)(In thousands, except preferred shares)

(Unaudited)

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

CIPHERLOC CORPORATIONSIDECHANNEL, INC.

STATEMENTCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICITCASH FLOWS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2017(In thousands)

(UNAUDITED)(Unaudited)

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

CIPHERLOC CORPORATIONSIDECHANNEL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED DECEMBER 31, 20172022 AND 20162021

(Unaudited)(Dollars in thousands except shares and per share data)

NOTE 1 - DESCRIPTION– NATURE OF BUSINESSOPERATIONS

Our mission is to make cybersecurity simple and accessible for mid-market and emerging companies, a market we believe is currently underserved. Our cybersecurity offerings identify and develop cybersecurity, privacy, and risk management solutions for our customers. We target customers that need cost-effective security solutions. Our growth plan to address the needs of our customers is to provide more effective and cost-efficient products and tech-enabled services cybersecurity and related 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:

vCISO clients typically enter into twelve (12) month engagements consisting of a monthly subscription with an annual renewal option, as well as additional vCISO time and material projects, which range from $350 to $450 per hour. Each vCISO is embedded into the C-suite of from two (2) to five (5) of our clients.

During September 2022, we announced a proprietary product called Enclave, which simplifies an important cybersecurity tactic called “microsegmentation”. Enclave seamlessly combines access control, microsegmentation, encryption, and other secure networking concepts to create a comprehensive solution. It allows information technology professionals to easily segment the enterprise network, place the right assets in those segments, and direct network traffic. We expect to begin recognizing revenue from Enclave during fiscal year 2023.

On July 1, 2022 (the “Closing Date”) we completed an acquisition (“Business Combination”) of all the outstanding equity securities of SideChannel, Inc., a Massachusetts corporation, pursuant to an Equity Securities Purchase Agreement dated May 16, 2022 (the “Purchase Agreement”). On September 9, 2022, SideChannel, Inc., the acquired Massachusetts corporation and a wholly owned subsidiary of the registrant, changed its name to SCS, Inc. (the “Subsidiary” or “SCS”). Cipherloc Corporation, (the “Company”the Delaware parent company of the Subsidiary, has changed its name to SideChannel, Inc. (“SideChannel”). As used herein, the words “the Company” refers to, for periods from July 1, 2022 and forward, SideChannel, and for periods prior to July 1, 2022, SCS, and its direct and indirect subsidiaries, as applicable.

The Business Combination was treated as a reverse acquisition (reverse merger), in accordance with U.S. 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 immediately following the Business Combination that: (1) a majority of the Board of Directors of the combined company will be composed of directors designated by the Sellers under the terms of the Purchase Agreement; and (2) existing members of SCS management constituted the management of the combined company. As 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations.

American Mortgage Company, the predecessor in interest to the Company was incorporated in the State of Texas on June 22, 1953 as1953. Effective August 27, 2014, American Mortgage Company. On March 15, 2015, the Company changed its name to “Cipherloc Corporation.” Cipherloc Corporation. TheCorporation (“Cipherloc”) reincorporated in Delaware effective September 30, 2021, and on July 5, 2022, Cipherloc changed its name change became effective byto “SideChannel, Inc.”

Our headquarters are located at 146 Main Street, Suite 405, Worcester, MA, 01608. Our website is www.sidechannel.com.

COVID-19 Pandemic

We are following the Amended Certificate asguidance of March 23, 2015.

Cipherloc is a data security solutions company. Our highly innovative, patented polymorphic encryption technology is designed to enable an iron-clad layerthe Centers for Disease Control and Prevention and the local regulatory authorities in regions outside the U.S. While the negative impact of protection toCOVID-19 on our business was reduced significantly throughout 2022, the spread of the virus or variants of the virus could worsen and one or more of our significant customers or suppliers could be added to existing solutions.

NOTE 2 - BASIS OF PRESENTATION OF INTERIM FINANCIAL STATEMENTS

The Company prepares its financial statements in accordance with accounting principles generally acceptedimpacted, or significant additional governmental regulations and restrictions could be imposed, thus negatively impacting our business in the United States of America. The accompanying interim unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information in accordance withfuture. We continue to monitor the instructions to Form 10-Q and Article 8 of Regulation S-X. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

Operating results for the three months ended December 31, 2017 are not necessarily indicative of the results that may be expected for the year ending September 30, 2018. Notes to the unaudited interim financial statements that would substantially duplicate the disclosures containedsituation closely in the audited financial statements for the year ended September 30, 2017 have been omitted; this report should be readregions in conjunction with the audited financial statements and the footnotes thereto for the fiscal year ended September 30, 2017 included within the Company’s Form 10-K as filed with the Securities and Exchange Commission.

NOTE 3 - GOING CONCERN

The accompanying financial statements have been prepared in conformity with accounting principles generally acceptedwhich we operate in the United StatesU.S. and abroad and will adjust our operations as necessary to protect the health and well-being of America, which contemplate continuation ofour employees. To the Company as a going concern. The Company has incurred losses from operations and has an accumulated deficit at December 31, 2017 of $51,614,878. The Company issued two convertible notes, which may be repaid within 180 days from issuance, on September 26, 2017 and December 14, 2017, respectively, aggregating $849,000. If not repaid, the conversion features become variable, hindering our ability to raise capitalextent that further governmental mandates or restrictions are implemented in the future, on terms favorable to the Company. The Company’s continued existence is dependent upon our ability to obtain additional funding to explore potential strategic relationships, complete development and marketing of the Company’s technologies, and operate the business. These factors raise doubt about the Company’s ability to continue as a going concern.

Management iswe currently in the process of raising capital, which is expected to be completed by May 2018. Management intends to use the proceeds from this financing to repay the two outstanding convertible notes. There are no assurances that management will be successful in raising capitalexpect to be able to achievecontinue to operate our business in a manner similar to how we have operated over the needs of the business. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.past two years.

NOTE 4 - 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Use of Estimates

The Company prepares itsaccompanying 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 accordanceconformity with accounting principles generally accepted in the United States of America. Significant accounting policiesAmerica (“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 as follows:based upon estimates.

CashIn 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 Cash Equivalentschanges in cash flows for the interim periods presented. Certain footnote information has been condensed or omitted from these consolidated financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in our Form 10-K for the year ended September 30, 2022 (the “2022 Form 10-K”) filed on December 20, 2022, with the Securities and Exchange Commission (“SEC”).

The Company considers all highly liquid investments with an original maturity ofSubsequent Events

We have assessed our operations and determined that there were no material subsequent events requiring adjustment to, or disclosure in, our consolidated financial statements for the three months or less to be cash equivalents. Atended December 31, 20172022.

Segment Information

We manage our operations as a single operating segment for the purposes of assessing performance and September 30, 2017,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.

Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, includeaccounts receivable, accounts payable, accrued expenses, our note payable, and embedded conversion features in our stock warrants. Our cash on hand and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at cost which approximates fair value, due to the short maturities of the accounts. Our note payable’s carrying amount approximates it fair value due to the short remaining term.

ASC Topic 820 (Fair Value Measurement) establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs). The fair values of the warrants issued by us as part of the Business Combination were determined using Level 2 inputs in accordance with the guidance in ASC Topic 820.

Goodwill, Intangible, and Long-Lived Assets

We account for goodwill and intangible assets in accordance with ASC Topic 350 (Intangibles – Goodwill and Other) and ASC Topic 360 (Property, Plant and Equipment). Finite-lived intangible assets are amortized over their estimated useful economic life and are carried at cost less accumulated amortization. Goodwill is assessed for impairment annually at the beginning of the fourth quarter on a reporting unit basis, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. Goodwill is considered to be impaired if the fair value of a reporting unit is less than its carrying amount.

If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

Long-lived assets, which consist of finite-lived intangible assets and property and equipment, are assessed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the estimated undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value. The cash flow estimates used to determine the impairment, if any, contain management’s best estimates using appropriate assumptions and projections at that time.

Revenue Recognition

We recognize revenue in accordance with the guidance in ASC Topic 606 (Revenue from Contracts with Customers). We recognize revenue for the sale of products or services when our performance obligations under the terms of a contract with a customer are satisfied and control of the product or service has been transferred to the customer. Generally, this occurs when we deliver a product or perform a service. In certain cases, recognition of revenue is deferred until the product or service is received by the customer or at some other point in the bank. The Company maintains its cashfuture when we have determined that we have satisfied our performance obligations under the contract. Our contracts with customers may include a combination of products and services, which are generally capable of being distinct and accounted for as separate performance obligations.

We do not have any material variable consideration arrangements, or any material payment terms with our customers other than standard payment terms which generally range from net 30 to net 90 days.

Nature of Products and Services

We identify, develop, and deploy cybersecurity, privacy, and risk management solutions for our clients and customers in accounts held by large, globally recognized banks which, at times, may exceed federally insured limitsNorth America. We categorize our products and services as guaranteed by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures these deposits up to $250,000. At December 31, 2017either vCISO Services or Cybersecurity Software and September 30, 2017, noneServices. As a result of the Company’sBusiness Combination, we announced a proprietary cybersecurity software product called Enclave. We also sell third party software and services through a network of strategic partnerships.

Types of Contracts with Customers

Our contracts with customers are generally structured as annual subscription agreements or project specific statements of work. Our annual subscription agreements include a minimum number of service hours per year or month and a specified rate for the minimum amount of services to be delivered during the subscription period. Payment terms and any other customer-specific acceptance criteria are also specified in the contracts and statements of work.

Contract Balances

We record accounts receivable at the time of invoicing. Accounts receivable, net of the allowance for doubtful accounts, is included in current assets on our balance sheet. To the extent that we do not recognize revenue at the same time as we invoice, we record a liability for deferred revenue. In certain instances, we also receive customer deposits in advance of invoicing and recording of accounts receivable. Deferred revenue and customer deposits are included in current liabilities on our consolidated balance sheets.

When used, the allowance for doubtful accounts reflects our estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, if any, historical experience, and other currently available evidence.

Costs to Obtain a Contract with a Customer

The only costs we incur associated with obtaining contracts with customers are sales commissions that we pay to our internal sales personnel or third-party sales representatives. These costs are calculated based on set percentages of the revenue value of each product or service sold. Commissions are considered earned by our internal sales personnel at the time we recognize revenue for a particular transaction. Commissions are considered earned by third-party sales representatives at the time that revenue is recognized for a particular transaction. We record commission expense in our consolidated statements of operations at the time the commission is earned. Commissions earned but not yet paid are included in current liabilities on our balance sheets.

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

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. We do not currently have any operating lease ROU assets and operating lease liabilities. 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 balance was uninsured. The Company hasoutflows from operating activities on our consolidated statements of cash flows.

We have made an accounting policy election not experienced any lossesto 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.

Stock-Based Compensation

We account for stock-based compensation in such accounts.

Convertible Debt and Embedded Derivatives

Convertible debt isaccordance with ASC Topic 718 (Compensation – Stock Compensation) which requires that employee share-based equity awards be accounted for under the guidelines established by Accounting Standards Codification (“ASC”) 470-20,Debt with Conversionfair value method and Other Options. ASC 470-20 governsrequires the calculationuse of an embedded beneficial conversion, a derivative instrument,option pricing model for estimating fair value of awards, which is treated as an additional discountthen amortized to expense over the instruments where derivativeservice periods. See further disclosures related to our stock-based compensation plans in Note 8.

Income Taxes

We utilize the asset and liability method in accounting does not apply. This applies duringfor 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 years 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 for which embedded conversion features are either fixed, contingently convertible, or cash or net settlementthat includes the enactment date. A valuation allowance is in control of the Company. When equity instruments, such as warrants, are issued with convertible debt, the net proceeds from the transaction are allocatedrecorded to the convertible debt and equity instruments based on their relative fair values. The proceeds allocated to the equity instruments may reduce the carrying valueamounts of the convertible debt, anddeferred tax assets if it is more likely than not that such discount is amortized to interest expense over the term of the debt. The amount of the warrants and beneficial conversion featureassets will reduce the carrying value of the debt instrument to zero, but no further. The Company has the option to pay the convertible notes at a premium ranging from 0% to 140% within the first six (6) months before they become convertible. The discount relating to the initial recording of the original issue discounts, issue costs, warrants and beneficial conversion feature are accreted, together with the premium, over the estimated term of the debt, which is generally 180 days from the date of issuance. We initially accounted for the embedded conversion feature in the FirstFire convertible note (see Note 5) in equity since management fully expected, at the time the loan was made, to repay the note upon its scheduled maturity.not be realized.

Many of the conversion features embedded in the Company’s notes become variable upon the event of default or upon the passage of time in the event the Company does not repay the notes, at a premium, at 180 days from issuance of the note. If the conversion price is adjusted based on a discount to the market price of the Company’s common stock, the number of shares upon conversion is potentially unlimited. In the event we cannot control the net share settlement and cash settlement, we record the embedded conversion feature as a derivate instrument, at fair value. The excess of fair value of the embedded conversion feature, together with the original issue discounts, warrants, and issue costs over the face value of the debt, is recorded as an immediate charge in the accompanying statements of operations and cash flows. Each reporting period, the Company will compute the estimated fair value of derivatives and record changes to operations. The discounts are accreted over the term of the debt, which is generally nine months after the notes become convertible, using the effective interest method. We accounted for the embedded conversion features in the FirstFire and Peak One convertible notes (see Note 5) as derivative liabilities in December 2017, even though we fully expect to repay the notes upon their scheduled maturity, because we have lost control of that ability as a result of the issuance of the Peak One note, and the financial burden these notes have placed on the Company. We continue to believe we will repay these notes before they become convertible after 180 days.

ASC 470-50,Extinguishments, require entities to record an extinguishment when the terms of the original note are significantly modified, defined as a greater than 10% change in expected cash flows. As a result of modifications made to one of the Company’s convertible notes during the reporting period, we recorded a loss as reported in the accompanying statements of operations and cash flows.

Basic and Diluted Net Loss per Common Share

Basic lossEarnings (loss) per common share - basic is computed by dividing net loss available to common shareholdersearnings (loss) by the weighted average number of common shares outstanding during the reportingeach period. TheEarnings (loss) per common share - diluted is computed by dividing earnings (loss) by the weighted average number of common shares and common share equivalents outstanding during each period. Common share equivalents represent unvested shares of restricted stock and stock options and are calculated using the treasury stock method. Common share equivalents are excluded from the calculation if their effect is calculated by takinganti-dilutive.

Warrants

We account for warrants in accordance with ASC Topics 480 and 815. The result of this accounting treatment is that the numberfair value of the embedded derivative, if required to be bifurcated, is marked-to-market at each balance sheet date and recorded as a liability. The change in fair value is recorded in our Consolidated Statement of Operations as a component of other income or expense. Upon exercise of a warrant, it is marked to fair value at the exercise date and then that fair value is reclassified to equity.

Effect of Recently Issued Amendments to Authoritative Accounting Guidance

In June 2016, the FASB issued amendments to the guidance for accounting for credit losses. In November 2019, the FASB deferred the effective date of these amendments for certain companies, including smaller reporting companies. As a result of the deferral, the amendments are effective for us for reporting periods beginning after September 30, 2023. The amendments replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The amendments require a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We plan to adopt the amendments when they become effective for us on October 1, 2023. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance removes certain exceptions to the general principles in Topic 740 and enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2021. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

NOTE 3 – ACQUISITIONS

Reverse Merger Between Cipherloc Corporation and SideChannel, Inc. (now known as SCS, Inc.)

As discussed further in Note 3 to our consolidated financial statements in our 2022 Form 10-K, on the Closing Date, the former stockholders of the Subsidiary (the “Sellers”) exchanged all of their equity securities in the Subsidiary for a total of 59,900,000shares outstandingof the Company’s common stock (the “First Tranche Shares”), and weighting them by100 shares of the amountCompany’s newly designated Series A Preferred Stock, $0.001 par value (the “Series A Preferred Stock”). The Sellers are 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 theythe operations of the Subsidiary, as a subsidiary of the Company, achieves 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 outstanding. Diluted earningsvalued using the closing price on July 1, 2022 of $0.10 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, resultingwhich resulted in the issuancea fair value of common stock that could share in the earnings of the Company. $6.1 million.

As of December 31, 20172022, our trailing twelve-month revenue was $5.3 million.

The following presents the unaudited proforma combined results of operations of Cipherloc with SCS as if the entities were combined on October 1, 2021, and September 30, 2017, the Company had 10,000,000 shares of preferred stock outstanding, which are convertible into 15,000,000 shares of common stock. The Company’s convertible notes are not yet convertible, and management expects to repay the notes.

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.

Research and Development and Software Development Costs

Capitalization of certain software development costs are recorded after the determination of technological feasibility. Based on our product development process, technological feasibility is determined upon the completion of a working model. To date, costs incurred by us from the completion of the working model to the point at which the product is ready for general release do not have technological feasibility. Accordingly, we have charged all such costs to research and development expense in the period incurred. Our research and development costsshow activity for the three months ended December 31, 2017 and 2016 were $114,852 and $599,959, respectively.2021.

SCHEDULE OF UNAUDITED PROFORMA OPERATIONS RESULTS

Recent Accounting AnnouncementsNOTE 4 – REVENUE FROM CONTRACTS FROM CUSTOMERS

The Financial Accounting Standards Board (“FASB”) issues Accounting Standards Updates (“ASU”) to amendCustomer Concentration

During the authoritative literature inthree months ended December 31, 2022, eight customers accounted for approximately 42% of our revenues. During the Accounting Standards Codification (“ASC”). There have been a numberthree months ended December 31, 2021, eight customers also accounted for approximately 38% of ASUs to date that amend the original textour revenues. None of the ASC. The Company believes those updates issued-to-date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company, or (iv) are not expected to have a significant impact on the Company.

NOTE 5 – CONVERTIBLE NOTE PAYABLE

FirstFire Global Opportunities Fund, LLC

On September 26, 2017, the Company issued a convertible note to FirstFire Global Opportunities Fund, LLC (“FirstFire”) with a principal amount of $330,000, which includes an original issue discount of $30,000. The Company incurred $8,500 in direct costs. The note accrues interest at 5% per annum and matures on March 26, 2018, six months following the issuance date. The note was convertible at $2.00 per share, subject to adjustment. The Company issued 50,000 shares of its common stock, as well as warrants to purchase an additional 165,000 shares of common stock at $4.50 per share with a term of two years. The note was amended on December 20, 2017, which reduced the conversion price of the note to $1.00 per share, subject to adjustment, reduced the exercise price of the warrants from $4.50 to $2.00 and required the Company to issue an additional 87,500 shares of common stock to FirstFire, which resulted in an extinguishment loss (see below).

The note, as amended, provides the holder with the right, at any time on or after the note’s maturity date, to convert all or a portion of the outstanding principal balance and accrued interest to shares of the Company’s common stock at a conversion price of $1.00 per share, subject to certain adjustments to the conversion price under certain circumstances. In the event of default, the conversion price shall equal the lower of $1.00 per share or 70% multiplied by the lowest bid price of the Company’s common stock during the 25 trading days preceding the conversion date. An event of default, among other events, is the non-payment of the note at maturity.

If shares of the Company’s common stock trade below $1.00 per share on the day following the conversion date, the conversion price shall be retroactively adjusted to equal 75% multiplied by the lowest traded price on the day following the conversion date. If the Company consummates a registered or unregistered primary offering of its securities for capital raising purposes, the holder of the note shall have the right to demand repayment in full or convert the outstanding principal balance and accrued interest into shares of the Company’s common stock at the lower of $1.00 per share or a 20% discount to the offering price to investors in the primary offering.

The Companycustomers individually accounted for the amendmentover 10% of the FirstFire note using derivative accounting and recognized a loss on extinguishment of $358,038our revenue during the three months ended December 31, 2017.2022 and 2021.

Deferred Revenue

Deferred revenue was $74,000 at December 31, 2022. The Company also recognized a derivative liability of $320,312 asdeferred revenue is expected to be earned within 12 months of the note’s amendmentbalance sheet date.

Changes in deferred revenue were as follows:

SCHEDULE OF CHANGES IN DEFERRED REVENUE

We internally report our revenue using two categories. The Company valuedfirst, “vCISO Services”, captures the derivative liabilityrevenue for 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 Black-Scholes valuation modeladopted 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 include cybersecurity software owned by SideChannel and software sourced from third parties. SideChannel earns commissions on third-party software sales which it recognizes as revenue. Cybersecurity services are also delivered directly by SideChannel employees and indirectly by third party service providers.

The table below reflects the revenue by category for the three months ended December 31, 2022 and 2021:

SCHEDULE OF REVENUE BY CATEGORY

NOTE 5 – DEBT

Pursuant to a Membership Interest Redemption Agreement, dated November 3, 2021, by and between the SCS and Akash Desai (“Desai Redemption Agreement”), we promised to pay Mr. Desai $100,000, without interest, in exchange for Mr. Desai’s right, title, and interest SCS. Mr. Desai was paid $50,000 at the execution of the Desai Redemption Agreement and the remaining $50,000 is due on or before December 31, 2023.

The implied interest on the datenote payable component of the amendment using an expected lifeDesai Redemption Agreement was deemed insignificant.

NOTE 6 – RELATED PARTY TRANSACTIONS

Brian Haugli, our Chief Executive Officer and one of one (1) year, volatilityour stockholders, is also a principal shareholder of 150%, and risk-free rate of 1.87%RealCISO Inc. (“RealCISO”). On September 22, 2020, SideChannel assigned to RealCISO certain contracts and intellectual property. We are a reseller of RealCISO software. We receive revenue from our customers for the use of RealCISO software and we pay licensing fees to RealCISO for such use. During the three months ended December 31, 2017,2022, we paid $36,000 to RealCISO for additional licenses that SideChannel can resell to its clients.

Ryan Polk, our Chief Financial Officer, David Chasteen, our Executive Vice President of Sales and Nick Hnatiw, our Chief Technology Officer each have amounts payable to the Company recognized a loss of $48,911 relatedin relation to the changepayroll taxes paid by the Company on their behalf for RSU’s that vested during calendar year 2022. The combined balance due from these three individuals is $16,622 and is recorded in fair value of the FirstFire derivative liability. The change in fair value was calculated using the stock priceprepaid and other current assets as of December 31, 20172022. At the time of $1.18 and an exercise price of $0.70, which is 70% multiplied by the lowest bid price of the Company’s common stock during the preceding 25 trading days, per the terms of the note.

Upon amendment of the FirstFire note,this Quarterly Report on Form 10-Q (“this Report”) was filed, Mr. Polk had paid the Company recorded a debt discountin full for his portion of $330,000. The Company amortized $37,813 of the debt discount to interest expensethis obligation.

No other related party transactions occurred during the three months endingended December 31, 2017. The remaining debt discount of $292,187 as of December 31, 2017 will be amortized to interest expense over the remaining term of the note. Total interest expense related to the FirstFire note, including the debt discount amortization prior to the amendment, was $178,700 for the three months ending December 31, 2017.2022.

Peak One Opportunity Fund LP

On December 14, 2017, the Company issued a convertible note to Peak One Opportunity Fund LP (“Peak One”) with a principal amount of $300,000, which includes an original issue discount of $30,000. The Company incurred $27,400 in direct costs. The note matures three years from the issuance date and provides the holder with the right to convert all or a portion of the outstanding principal balance to shares of the Company’s common stock at a conversion price of $1.00 per share, subject to certain adjustments to the conversion price under certain circumstances. If an event of default has occurred or if the conversion occurs more than 180 days from the issuance date, the conversion price shall equal the lower $1.00 per share or 70% of the lowest traded price of the Company’s common stock during the 20 trading days preceding the conversion date. However, if the Company’s common stock is not eligible for clearing through the Depository Trust Company’s Deposit Withdrawal Agent Commission system on the conversion date, the conversion price shall equal the lower of $1.00 per share or 65% of the lowest traded price of the Company’s common stock during the 20 trading days preceding the conversion date.

Together with the convertible note, the Company also issued 275,000 shares of its common stock, as well as warrants to purchase an additional 75,000 shares of common stock at $2.00 per share with a term of five years. The Company accounted for the convertible note to Peak One using derivative accounting and recognized a derivative liability of $267,750 as of the note’s issuance date. The Company valued the derivative liability with the Black-Scholes valuation model on the date of issuance using an expected life of 1.25 years, volatility of 150%, and risk-free rate of 1.82%. The Company also recognized a loss of $486,745 resulting from the excess fair value of the derivative in the convertible note and of the equity instruments issued with the convertible note. On December 31, 2017, the Company recognized a loss of $87,021 related to the change in fair value of the Peak One derivative liability. The change in fair value was calculated using the stock price as of December 31, 2017 of $1.18 and an exercise price of $0.70, which is 70% multiplied by the lowest bid price of the Company’s common stock during the preceding 25 trading days, per the terms of the note.

The Company recorded a debt discount of $300,000 upon issuance of the Peak One note. The Company amortized $4,645 of the debt discount to interest expense during the three months ending December 31, 2017. The remaining debt discount of $295,355 as of December 31, 2017 will be amortized to interest expense over the remaining term of the note. The Peak One note was included in current liabilities as management intends to repay the loan within the next 12 months.

Additionally, the transaction with Peak One included a stock purchase agreement setting forth the details above, including the option for an additional convertible note in the amount of $300,000 and an equity purchase agreement for up to $7,000,000 of the Company’s common stock and related registration rights agreement, which will require a registration statement to be filed.

NOTE 6 - 7 – COMMITMENTS AND CONTINGENCIES

Terminated Employment Agreement with Former Chief Financial OfficerLitigation

The Company previously had an employment agreement with itsWe are not currently involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations.

In April 2021, Eric Marquez, our former Secretary/Treasurer and Chief Financial Officer, and certain other plaintiffs, filed a lawsuit against Michael De La Garza, our former Chief Executive Officer and President, and us in the 20^th Judicial District for Hays County, Texas (Cause No. 20-0818). The lawsuit alleges causes of action for fraud against Mr. De La Garza (for misrepresentations allegedly made by Mr. De La Garza); breach of contract, for alleged breaches of Mr. Marquez’s alleged oral employment agreement, which terminated in 2015. There were amountsMr. Marquez claims required that were accruedwe pay him cash and unpaid shares of stock; unjust enrichment; quantum meruit; and rescission of certain stock purchases made by certain of the plaintiffs, as well as declaratory relief and fraud. Damages sought exceed $1,000,000. We believe we have made all required payments and delivered the stock to the plaintiffs. We believe we have meritorious defenses to the allegations, and we intend to continue to vigorously defend against the litigation.

NOTE 8 – STOCK BASED COMPENSATION

We grant equity compensation awards to employees, directors, and contractors under the 2021 Omnibus Equity Compensation Plan (“Equity Incentive Plan”) approved by stockholders on September 13, 2021.

In 2022 the Company granted restricted stock units (“RSU’s”) to directors and employees with service-based vesting conditions. The restricted stock units vest over a 3-year service period.

The following table summarizes the activity for unvested RSU’s granted to directors and employees during the quarter ended December 31, 2022:

SCHEDULE OF UNVESTED RESTRICTED STOCK UNITS ACTIVITY

We incurred stock-based compensation expense of $115,000 for the three months ended December 31, 2022. Unamortized stock compensation expense is $727,000 as of December 31, 20172022.

NOTE 9 - STOCKHOLDERS’ EQUITY

Effective December 29, 2021, SCS was authorized to issue 1,000 shares of common stock with a $0.01 per share par value. The 1,000 shares of common stock were exchanged for 59,900,000 shares of Cipherloc Common Stock common stock and100 shares of Series A Preferred Stock of Cipherloc. As a result, the financial statements have been adjusted retroactively to reflect these shares as being outstanding as of September 30, 2017, totaling $351,1282020.

As explained in Note 5, in December 2021, we promised to pay Mr. Desai $100,000, without interest, in exchange for Mr. Desai’s right, title, and $338,437, respectively. According to the original agreement, the unpaid salaries were to accrue interest at each reporting date. Interest expense related to this matter was $12,691 and $10,939in SCS.

SideChannel LLC made profit sharing distributions of $489,000 during the three months ended December 31, 2017 and 2016, respectively. Management believes that such amounts were previously satisfied through the issuance of common stock and does not intend to pay such amounts.2021. in accordance with its partnership agreements.

Common Stock

NOTE 7 - STOCKHOLDERS’ DEFICIT

As of December 31, 2017, the Company was2022, and 2021, we had 148,904,613 and 59,900,000 shares of common stock outstanding, respectively, and were authorized to issue 650,000,000681,000,000 shares of common shares and 10,000,000 preferred sharesstock at a par value of $0.01.$0.001.

Common Stock Issued for Cash

Management determines the fair valueWe did not issue shares of common stock issuances using the closing stock price on the grant date.

Duringfor cash during the three months ended December 31, 2017, there were 37,0002022.

Common Stock Issued for Business Combinations

We did not issue shares of common stock sold for $57,200, net of $16,800 in offering costs.

Duringmergers or acquisitions related activity during the three months ended December 31, 2017,2022.

Common Stock Issued for Services

Our Board of Directors (“Board”) has 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. On December 27, 2022, the Company issued 5,537180,557 shares of common stock withas compensation for a fair value of $10,000$18,000 to its employeesthe Board for the first quarter of fiscal year 2023.

Common Stock Issued Under Equity Incentive Plan

We did not issue shares of common stock as partincentive compensation during the three months ended December 31, 2022.

Preferred Stock

As of their compensation.

Preferred Stock

The Company’sDecember 31, 2022, we had 100 shares of Series A Preferred Stock is convertible intooutstanding. These shares were issued as part of the Company’sBusiness Combination. The 100 shares of Series A Preferred Stock that were exchanged for SCS, Inc. common stock athave been retroactively reflected as issued and outstanding as of September 30, 2020. The Series A Preferred Stock contains a rateBoard Designation Right which provides that the holders of 1 to 1.5 common shares. As of December 31, 2017, there are a total of 10,000,000 sharesthe majority of the Series A Preferred Stock authorized andhave the right to elect a majority of our Board of Directors.

Warrants

Prior to the July 1, 2022 Business Combination, Cipherloc had outstanding warrants which are convertible into a total of 15,000,000 shares of common stock. Each share of the Preferred Stock has 150 votes on all matters presentedcontinue to be voted by the holders of common stock. The holders of the Series A Preferred Stock can only convert the shares if agreed upon by 50.1% vote of all preferred shareholders.

NOTE 8 – SUBSEQUENT EVENTS

On January 22, 2018, the Board of Directors authorized Michael De La Garza, Chief Executive Officer ofbinding on the Company after the Business Combination.

The following table summarizes warrant activity for the period from September 30, 2022 to convert his 9,000,000 preferred shares, at a conversion rate of 1 to 1.5 common shares, to 13,500,000 common shares, restricted pursuant to Rule 144. On February 15, 2018, Michael De La Garza converted his 9,000,000 preferred shares to 13,500,000 common shares.December 31, 2022:

SCHEDULE OF WARRANT ACTIVITY

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

InCertain statements in our Management’s Discussion and Analysis of Financial Condition and Results of Operations, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 and elsewhere in this QuarterlyForm 10-Q. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Report, and the audited financial statements and notes thereto and “Part II. Other Information – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contained in our Annual Report on Form 10-K for the year ended September 30, 2022, filed with the Securities and Exchange Commission on December 20, 2022.

Our logo and some of our trademarks and tradenames are used in this Report. Solely for convenience, trademarks, tradenames, and service marks referred to in this Report may appear without the ®, ™ and SM symbols. References to our trademarks, tradenames and service marks are not intended to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable licensors if any, nor that respective owners to other intellectual property rights will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

The market data and certain other statistical information used throughout this Report are based on independent industry publications, reports by market research firms or other independent sources that we believe to be reliable sources. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. We are responsible for all of the disclosures contained in this Report, and we believe these industry publications and third-party research, surveys and studies are reliable. We are not aware of any misstatements regarding any third-party information presented in this Report; however, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed under, and incorporated by reference in, the section entitled “Item 1A. Risk Factors” of this Report. These and other factors could cause our future performance to differ materially from our assumptions and estimates. Some market and other data included herein, as well as the data of competitors as they relate to SideChannel (as defined herein), is also based on our good faith estimates.

Unless the context requires otherwise, references to the “Company,” “our company,“we,” “us,” “our,” “SideChannel,” and “our”“SideChannel, Inc.” refer specifically to Cipherloc CorporationSideChannel, Inc. and its subsidiaries,consolidated subsidiaries.

In addition, unless the context otherwise requires otherwiseand for the purposes of this report only:

Forward-Looking Statements

The following information contains certain forward-looking statements. Forward-lookingdiscussion should be read in conjunction with our financial statements and accompanying notes included elsewhere in this Report and our audited financial statements and accompanying notes, and the risk factors contained in our annual report on Form 10-K filed for the 2022 fiscal year.

All references to years relate to the fiscal year ended September 30 of the particular year.

Overview

Our Business

Our mission is to make cybersecurity simple and accessible for mid-market and emerging companies, a market we believe is currently underserved. Our cybersecurity offerings identify and develop cybersecurity, privacy, and risk management solutions for our customers. We target customers that need cost-effective security solutions. Our growth plan to address the needs of our customers is to provide more effective and cost-efficient products and tech-enabled services cybersecurity and related including virtual Chief Information Security Officer (“vCISO”), zero trust, third-party risk management, due diligence, privacy, threat intelligence, and managed end-point security solutions.

The Company’s website is www.sidechannel.com.

In support of securing new vCISO clients, we expanded the sales and marketing team from one dedicated person to six between July 1, 2022 and December 31, 2022. vCISO engagements are statements that estimatetypically twelve (12) month engagements which consists of a monthly subscription and an annual renewal option as well as additional vCISO time and material projects, which range from $350 to $450 per hour. Each of our vCISOs generally embed into the happeningC-suite executive teams of future eventsbetween two (2) to five (5) of our clients.

Collectively, our cybersecurity professionals collaborate on the development of proprietary software and are not basedpursue partnerships with cybersecurity software value added resellers (“VARs”). Commercial relationships with VARs provide SideChannel with additional internal capabilities to mitigate cybersecurity risks. We earn a commission on historical fact. Forward-looking statements may be identifiedsoftware engagements we generate through VARs. For the quarter ended December 31, 2022 VAR commissions contributed 2.4% of our revenue versus 2.0% during same quarter in the prior year.

We grew revenue by $498,000 or 47.5% in our first quarter of 2023 compared to our first quarter of 2022 as we execute the three phases of our growth strategy:

Revenue associated with: (i) securing new vCISO clients, and (ii) the addition of new Cybersecurity Software and Services had year-over-year increases for the quarter. Revenue from our vCISO services increased by $318,000 or 60.6%, and Revenue from our Cybersecurity Software and Services category growing by $117,000 or 27.9%. Both categories of revenue experienced an increase in the number of clients as well as an increase in the average revenue per client.

vCISO services is the primary focus in our sales and marketing effort because we believe an effective cybersecurity program begins with leadership. Our clients also ask us to provide day-to-day operational support in the form of security and privacy services and software. The number of vCISO clients using our Cybersecurity Software & Services offering grew on a year-over-year basis.

We also monitor new and retained revenue on a trailing twelve-month basis. The revenue earned from clients during our first twelve months of working with them is classified as “new”; while the revenue earned with clients after our first twelve months of working with them is classified as “retained”. The following table provides details on our new and retained revenue for the twelve months ended December 31, 2022 and 2021:

Further, we consider trailing twelve revenue retention a key performance indicator. Revenue retention is calculated by dividing retained revenue in the measurement period by the use of forward-looking terminology, such as “may,” “could,” “expect,” “estimate,” “anticipate,” “plan,” “predict,” “probable,” “possible,” “should,” “continue,” or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.

Our Business

Cipherloc Corporation is a technology and services solutions companytotal revenue for the rapidly expanding cloud-based cyber security industry. Cipherloc is based in Buda, Texas.previous twelve-month time frame. The following table shows the revenue retention by category for the twelve months ended December 31, 2022 and September 30, 2022.

The Company has introduced an innovative and revolutionary new type of encryption technology with five international patents and two US patents pending and is the industry’s first “Polymorphic Cipher Engine”, called CipherLoc®. It is the first secure commercially viable advanced “Polymorphic Key Progression Algorithmic Cipher Engine” (PKPA). This morphing cipher can be used in any commercial data security industry and/or in sensitive applications.

The Company’s initial products are focused on protecting “data in motion” and will consist of three different offerings: CipherLoc EDGE (for mobile platforms), CipherLoc ENTERPRISE (for desktops, laptops, and tablets), and CipherLoc GATEWAY (for servers). Summaries for each of these products can be found on the Company’s website. The end goal with the release of these products is to offer end-to-end data security (i.e., data can be securely sent to/from any mobile device, any PC, and any server).

With a business-to-business model, the Company will directly pursue businesses that will embed Cipherloc’s technology within their own product offering. We will be offering these potential clients a fairly standard software licensing-maintenance model, under which they will license our software for use within their own products. Any company today that is currently using encryption technology becomes a potential customer for us. By targeting companies who are already building solutions that have encryption built-in to their products, we are planning to achieve scale much faster.

Financial Results and Trends

Results of Operations

Three Months Ended December 31, 2022 Versus Three Months Ended December 31, 2021

Comparison of Results

Revenue. Our revenue was $1.5 million for the quarter ended December 31, 2022, compared to $1.0 million for the three-month comparable prior period; an increase of $498,000 or 48%. We believe this increase substantiates our business strategies.

Gross Margins. Gross margins increased to 56.0% for the quarter ended December 31, 2022, from 54.6% for the quarter ended December 31, 2021, which is the result of improved margin on third party services used in the current fiscal year compared to the prior fiscal year being partially offset by a year-over-year decrease in the gross margin on our internally delivered services.

General and Administrative Expenses. Our general and administrative expenses were $1.0 million for the three months ended December 31, 20172022, compared to $205,000 for the prior year, an increase of $825,000 or 402%. The significant increase in general and 2016administrative expenses primarily resulted from adding the costs associated with the Company’s public reporting obligations and three (3) additional administrative personnel. New costs related to public reporting include stock-based compensation, board compensation, additional insurance, investor relations services, and professional services.

Revenue increased to $115,642 from $112,500Sales and Marketing Expenses. Our sales and marketing expenses were $307,000 for the three months ended December 31, 20172022, compared to $43,000 for the prior year, an increase of $264,000 or 614%. The increase was driven by the recent increase in sales and 2016, respectively. Revenue is comprised of a software license sale that is being recognized ratably through June 2018.marketing staff discussed earlier and the related salary and independent contractor expense along with higher spend on third-party marketing services.

Cost of revenue remained the same at $30,300 for both the three months ended December 31, 2017Research and 2016. Cost of revenue is comprised of salariesDevelopment Expenses. Our research and maintenance costs related to the Company’s core Cipherloc products. The current software license contract is being recognized ratably through June 2018.

General and administrativedevelopment expenses decreased to $183,920 from $2,430,937were $135,000 for the three months ended December 31, 20172022, compared to $0 for the prior year. These costs are driven by personnel expenses and 2016, respectively. General and administrative expenses decreased asincurred from independent contractors related to the development of Enclave.

Net Income (Loss). We incurred a resultnet loss of lower stock-based compensation.

Sales and marketing expenses decreased to $22,967 from $98,374$602,000, or $0.00 per share, for the three months ended December 31, 2017 and 2016, respectively. Sales and marketing expenses decreased as a result2022, compared to net income of lower stock-based compensation and lower payroll expenses.

Research and development costs decreased to $114,852 from $599,959$328,000, or $0.01 per share, for the three months ended December 31, 2017 and 2016, respectively. Research and development costs decreased as a result of lower stock-based compensation.

Settlement expense decreased to $0 from $106,250 the three months ended December 31, 2017 and 2016, respectively. Settlement expense2021. The net loss for the three months ended December 31, 2016 related to the issuance of 25,000 shares of common stock for a software termination settlement.

Interest expense increased to $196,036 from $10,939 for the three months ended December 31, 2017 and 2016, respectively. Interest expense increased2022 was primarily due to the issuance of convertible debt to FirstFire Global Opportunities Fund, LLC and Peak One Opportunity Fund LP.an increase in operating expenses.

Liquidity and Capital Resources

We havehad an accumulated deficit atof $12.5 million as of December 31, 2017 of $51,614,878.2022. We expect to incur substantial expenses and generate continued operating losses until we generate revenues sufficient to meetcover our expected ongoing obligations. AtOn December 31, 2017, the Company2022, we had cash of $155,730.$2.6 million. We believe thatmaintain our existing cash balances are insufficient to fund future operations for the next 12 months. These factors raise doubt about the Company’s ability to continuein accounts held by reputable financial institutions which, at times, may exceed federally insured limits as a going concern.

On September 26, 2017, the Company issued a convertible note to FirstFire Global Opportunities Fund, LLC with a principal amount of $330,000, and on December 14, 2017, the Company issued a convertible note to Peak One Opportunity Fund LP with a principal amount of $300,000. The notes require a premium of 130% to 140% (if paidguaranteed by the 180th day) in an aggregate amountFederal Deposit Insurance Corporation (“FDIC”). The FDIC insures these deposits up to $250,000. As of $849,000. Non-payment by the Company on either or both of these notes could result in the creditors receiving an unlimited amountDecember 31, 2022, approximately $2.0 million of the Company’s stock in ordercash balance was uninsured. The Company has not experienced any losses on cash.

We had working capital of $2.6 million as of December 31, 2022, compared to satisfy the notes, adversely impacting our ability to raiseworking capital on more favorable terms. It is the intent of the Company to repay these notes before through funds received from Private Placement Memorandums.$3.0 million as of September 30, 2022.

We depend upon the continued participation of Private Placement Memorandums (PPM) and the issuance of debt to finance our operations and need to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resources for the further development and marketing of our products and business.Cash Flows

There is no assurance that such funding, if required, will be available to us or, if available, will be available upon terms favorable to us. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Cash Flow

The following table summarizes, for the periods indicated, selected items in our condensedConsolidated Statements of Cash Flows:

Operating Activities

CashWe receive cash each month from revenue generated with our clients. We use this cash and a portion of our cash reserves to pay for our monthly expenses. Material cash requirements include personnel costs and the expenses associated with being a listed entity.

We used cash in operating activities was $371,466 and $487,780in the amount of $477,000 for the three months ended December 31, 20172022. For the quarter ended December 31, 2022, we recorded a net loss of $602,000. During the same period, our non-cash charges primarily consisted of $115,000 in stock compensation expense and 2016, respectively.$45,000 in amortization. The decreasechange in cash used inour net operating activitiesassets and liabilities was primarily due to lower net loss, partially offset by higher working capital usage.decreases in accounts receivable and prepaid assets of $88,000 along with decreases in accounts payable and accrued liabilities of $123,00.

Investing Activities

Cash usedThere were no cash activities in investing activities was $0 and $3,171 for the three months ended December 31, 2017 and 2016, respectively. The decrease in cash used in investing activities was the result of no fixed asset purchases during the three months ended December 31, 2017.2022.

Financing Activities

Cash provided byThe were no cash activities in financing activities was $299,800 and $233,120 for the three months ended December 31, 2017 and 2016, respectively. The increase in cash provided by financing activities was primarily due to the issuance of convertible debt, partially offset by fewer issuances of common stock for cash.2022.

Off-Balance Sheet Arrangements

We did not have noany off-balance sheet arrangements, including arrangementsas defined under applicable SEC rules, during the periods presented, nor do we currently have any such arrangements.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires the use of estimates and assumptions that would affect the liquidity, capital resources, market risk support,reported amounts of assets and credit risk support or other benefits.

WHERE YOU CAN FIND MORE INFORMATION

You are advised to read this Quarterly Report on Form 10-Q in conjunction with other reportsliabilities and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q, Annual Report on Form 10-K, and Current Reports on Form 8-K that we file from time to time. You may obtain copiesdisclosure of these reports directly from us or from the SECcontingent liabilities at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549,date of the financial statements and youthe reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may obtain information about obtaining access todiffer from these estimates as a result of different assumptions or conditions.

See Note 2 of the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains informationunaudited financial statements included in “Part I—Item 1. Financial Statements”, above, for electronic filers at its websitehttp://www.sec.gov.a discussion of our significant accounting policies.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We had no material changes in market risk from those described in “Part II,Pursuant to Item 7A — Quantitative and Qualitative Disclosures about Market Risk”305(e) of our Annual Report on Form 10-K forRegulation S-K (§ 229.305(e)), the year ended September 30, 2017.Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

ITEM 4. CONTROLS AND PROCEDURES

This report includes the certifications of our Chief Executive OfficerDisclosure Controls and Chief Financial OfficerProcedures

As required by Rule 13a-1413a-15(b) of the Securities Exchange Act, we have evaluated, under the supervision and with the participation of 1934 (the “Exchange Act”). See Exhibits 31.1our management, including our principal executive officer and 31.2. This Item 4 includes information concerningprincipal financial officer, the controls and control evaluations revered to in those certifications.

Evaluationeffectiveness of Disclosure Controls and Procedures

We maintainour disclosure controls and procedures that(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Our disclosure controls and procedures are designed to ensureprovide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) rules and forms of the SEC. Based upon that evaluation, our principal executive officer and principal financial officer concluded that such informationour disclosure controls and procedures were not effective as of the end of the period covered by this quarterly report, at the reasonable assurance level.

The material weaknesses identified relate to the fact that we did not design and maintain an effective control environment commensurate with our financial reporting requirements, including (a) lack of a sufficient number of trained professionals with an appropriate level of accounting knowledge, training and experience and (b) lack of accounting research on critical accounting policies including business combinations and specifically the valuation of warrants in calculating the consideration paid during the Business Combination. Management’s general assessment of the above processes in light of the company’s size, maturity and complexity, as to the design and effectiveness of the internal controls over financial reporting is accumulatedthat the key controls and communicatedprocedures in each of these processes provide reasonable assurance regarding reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended December 31, 2022, that have materially affected or are reasonably likely to materially affect, our Chief Executive Officerinternal control over financial reporting, including any corrective actions regarding significant deficiencies and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. material weaknesses.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives,objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the cost-benefit relationshipbenefits of possible controls and procedures. Our disclosure controls and procedures were designedrelative to provide reasonable assurance that the controls and procedures would meet their objectives.costs.

As required by SEC Rule 13a-15(b), our Chief Executive Officer and Chief Financial Officer need to carry out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2017 due to 1) no formal evaluation has been performed by us and 2) the existence of the material weaknesses in internal control over financial reporting described below (which we view as an integral part of our disclosure controls and procedures). Based on the performance of additional procedures designed to ensure the reliability of our financial reporting, we believe that the financial statements included in this Quarterly Report fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented, in conformity with U.S. GAAP.

Management’s Report on Internal Control over Financial Reporting

Our Chief Executive Officer and the Chief Financial Officer are responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of our internal control over financial reporting. Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d(f) under the Exchange Act) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, (c) provide reasonable assurance that receipts and expenditures are being made only in accordance with appropriate authorization of management and the Board of Directors, and (d) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.

In connection with the preparation of our Annual Report on Form 10-K for the year ended September 30, 2017, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our internal control over financial reporting as of September 30, 2017 and concluded that we did not maintain effective internal control over financial reporting as of September 30, 2017 due to the identification of material weaknesses. These material weaknesses remain as of December 31, 2017.

Management identified a number of deficiencies in the design and operating effectiveness of the Company’s internal controls as of September 30, 2017 that represent material weaknesses in our internal control over financial reporting. These deficiencies are the result of management’s failure to design, implement and maintain adequate operational and internal controls and processes, including a lack of sufficient accounting staff which resulted in inadequate segregation of duties, the inability to prove delivery of software, an insufficient number of personnel familiar with financial and SEC reporting requirements, inadequate monitoring and review controls over financial reporting and disclosures as well as transaction processing, and insufficient written policies and procedures for accounting and financial reporting.

Remediation Plan

Management has executed a remediation plan intended to address the material weaknesses discussed above. These remediation efforts are focused on:

During the three months ended December 31, 2017, management engaged additional resources to support the remediation efforts outlined above. In addition, management has continued to train key accounting staff to improve controls that will ultimately eliminate the material weaknesses discussed above, as well as improve the accounting and financial reporting process.

We expect that remediation, including testing of related controls, will be completed by the end of third quarter 2018.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2017 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting, other than the remediation actions discussed above.

Inherent Limitations on Internal Controls

It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the control system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Limitations inherent in any control system include the following:

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

AsFrom time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business.

Such current litigation or other legal proceedings are described in, and incorporated by reference in this “Part II - Item 1. Legal Proceedings” of this Form 10-Q from, “Part I - Item 1. Financial Statements” in the notes to financial statements in “Litigation” in Note 7 – Commitments and Contingencies. We believe that the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect on our financial condition or results of operations. However, assessment of current litigation or other legal claims could change in light of the discovery of facts not presently known to us, or by decisions of judges, juries, or other finders of fact, that are not in accord with management’s evaluation of the possible liability or outcome of such litigation or claims.

Additionally, the outcome of litigation is inherently uncertain. If one or more legal matters are resolved against us in a reporting period for amounts in excess of management’s expectations, our financial condition and operating results for that reporting period could be materially adversely affected.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2022, filed with the Commission on December 31, 2017,20, 2022 (the “Form 10-K”), under the Company is not involved in any material litigation.heading “Risk Factors.”

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company has unregisteredSales of Securities

There have been no sales of unregistered securities through an active Private Placement Memorandum. Duringduring the three months endingquarter ended December 31, 2017, through2022, and from the utilization of a Private Placement Memorandum and upon receipt of executed Subscription Agreements, the Company sold and issued 37,000 shares of common stock for $57,200 in net cash proceeds pursuantperiod from September 30, 2022, to the exemption fromfiling date of this Report, which have not previously been disclosed in the registration provisionsCompany’s Quarterly Reports on Form 10-Q or in a Current Report on Form 8-K.

Purchases of Equity Securities by the Securities Act of 1933, as amended (the “Act”), afforded by Rule 506 of Regulation D.Issuer and Affiliated Purchasers

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

There were no defaults upon senior securities during the three months ended December 31, 2017.None.

ITEM 4. MININGMINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

There is no information with respect to which information is not otherwise called for by this form.None.

ITEM 6. EXHIBITS