UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(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, 2021June 30, 2022

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

For the transition period from ___________ to ___________

Commission File No. 000-28745

Cipherloc CorporationSideChannel, Inc.

(Exact name of registrant as specified in its charter)

(512)(508) 337-3728925-0114

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (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 registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ 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“large accelerated filer,” “accelerated“accelerated filer,” “smaller“smaller reporting company,” and “emerging“emerging growth company”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 ☒

As of February 11,August 12, 2022, the registrant had 83,449,535148,445,832 shares of common stock outstanding.

CIPHERLOC CORPORATIONSIDECHANNEL, INC.

INDEX TO FORM 10-Q FILING

FOR THE THREE AND NINE MONTHS ENDED December 31,JUNE 30, 2022 and 2021 AND 2020

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CIPHERLOC CORPORATIONSIDECHANNEL, INC.

CONDENSED BALANCE SHEETS

TheSee accompanying notes are an integral part ofto these unaudited condensed financial statements.

CIPHERLOC CORPORATIONSIDECHANNEL, INC.

CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

TheSee accompanying notes are an integral part ofto these unaudited condensed financial statements.

CIPHERLOC CORPORATIONSIDECHANNEL, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

TheSee accompanying notes are an integral part ofto these unaudited condensed financial statements.

CIPHERLOC CORPORATIONSIDECHANNEL, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

TheSee accompanying notes are an integral part ofto these unaudited condensed financial statements.

CIPHERLOC CORPORATIONSIDECHANNEL, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31,JUNE 30, 2022, AND 2021 AND 2020

(Unaudited)

NOTE 1 - DESCRIPTION OF BUSINESS

Cipherloc CorporationSideChannel, Inc. (the “Company” or “Cipherloc”“SideChannel”), formerly Cipherloc Corporation, was incorporated in the State of Texas on June 22, 1953, under the name “American Mortgage Company.Company.” Effective August 27, 2014, the Company changed its name to “Cipherloc Corporation.” Effective July 5, 2022, the Company changed its name to “SideChannel, Inc.” following its acquisition of SideChannel, Inc., a Massachusetts corporation, on July 1, 2022 (See Note 7 – Subsequent Events). Prior to September 30, 2021, the Company was a Texas corporation. The Company became a Delaware corporation effective as of September 30, 2021.

The Company’s headquartersCompany is located at 6836 Bee Cave Road, Building 1, Suite279, Austin, Texas 78746. Itsa provider of cybersecurity services and technology to middle market companies. The Company’s website is www.cipherloc.net.www.sidechannel.com.

On August 2, 2022, the Company changed its ticker symbol from CLOK to SDCH.

NOTE 2 - BASIS OF PRESENTATION OF INTERIM FINANCIAL STATEMENTS

The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America.America (“U.S. GAAP”). The accompanying interim unaudited financial statements have been prepared in accordance with generally accepted accounting principlesU.S. GAAP for interim financial information in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. In the Company’s opinion, it has included all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation.

OperatingThe Company’s operating results for the threenine months ended December 31, 2021June 30, 2022 are not necessarily indicative of the results that may be expected for the entire fiscal year ending September 30, 2022. The Company has omitted notes to the unaudited interim financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the fiscal year ended September 30, 2021 ; this2021. This report should be read in conjunction with the audited financial statements and the footnotes thereto for the fiscal year ended September 30, 2021 included within the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are as follows:

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase of three months or less to be cash equivalents. At December 31, 2021, theThe Company’s cash includes cash on hand and cash in the bank. The balance of such accounts, at times, may exceed federally insured limits, as guaranteed by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC insures these deposits up to $250,000. As of December 31, 2021,June 30, 2022, $5,071,5883,338,912 of the Company’s cash balance was uninsured. The Company has not experienced any losses related to uninsured cash balances.

Basic and Diluted Net Loss per Common Share

The Company’sCompany computes its basic net loss per share is computed by dividing the net loss available to common stockholders by the weighted average number of shares of common sharesstock outstanding during the reporting period. The weighted average number of shares is calculated by taking the number of shares outstanding and weighting that number by the amount of time that the applicable shares were outstanding. Diluted earningsnet loss per share reflects the potential dilution that could occur if vested stock options, warrants, and other commitments of the Company to issue shares of common stock were exercised, resulting in the issuance of additional shares of common stock that would share in the earnings of the Company. As of December 31, 2021,June 30, 2022, the Company had no shares of preferred stock outstanding.

The Company’s diluted loss per share was the same as the basic loss per share duringfor the periods in which the Company incurred net losses were incurred since the inclusion of potential common stock equivalents would be anti-dilutive due to the Company’s net loss. DuringFor the three months and nine months ended December 31, 2021,June 30, 2022, the Company excluded warrants to purchase 79,461,481 shares of common stock from the calculation of diluted loss per share warrants to purchase 79,461,481 shares of its common stock, and 1,981,484 shares of its common stock issued pursuant to restricted stock units because the effect of including those shares would be anti-dilutive. During the three and nine months ended December 31, 2020,June 30, 2021, the Company excluded warrants to purchase 24,216,866 shares of common stock and 1,000,000 shares of convertible preferred stock from the calculation of diluted loss per share warrants to purchase 79,461,481 shares of common stock because the effect of including those shares would be anti-dilutive.

Reclassification

The common stock and additional paid in capital line items on the balance sheet have been reclassified to be comparable to the current period’s presentation. The reclassification reflects the difference in the par value of the Company’s common stock when it was a Texas corporation, prior to September 30, 2021, and the par value of the Company’s common stock after it became a Delaware corporation, on September 30, 2021.

Research and Development and Software Development Costs

The Company expenses all research and development costs, including patent and software development costs. The research and development costs incurred for the three months ended December 31, 2021 and 2020 were $129,639 and $121,793, respectively.

Revenue Recognition

The Company recognizes revenues in accordance with the provisions of Accounting Standards UpdateCodification (“ASU”ASC”) 2014-09,Topic 606, “Revenue from Contracts with Customers,” andincluding a series of amendments, issued by the Financial Accounting Standards Board (“FASB”).

Central to the Company’s revenue recognition guidance is a five-step revenue recognition model that requires reporting entities to:

The Company accounts for a promise to provide a customer with a right to access the Company’s intellectual property as a performance obligation satisfied over time, because the customer will simultaneously receive and consume the benefit from the Company’s providing access to itsthe Company’s intellectual property as the performance occurs.

Software License Agreements

During the fiscal year ended September 30, 2019, the Company entered into a one-year agreement with SoundFi LLC (“SoundFi”) that automatically renews for subsequent one-year periods unless otherwise terminated by either party. The Company received $25,000 from SoundFi during the fiscal year ended September 30, 2020. The Company has not received any payments from SoundFi so far in the current fiscal year and is uncertain if such payments will resume.

The Company executed a software licensinglicense agreement with Castle Shield Holdings, LLC (“Castle Shield”) during the fiscal year ended September 30, 2020, which2020. That agreement includes an auto-renewing terms. The Company received a $10,000 payment from Castle Shield during the fiscal year ended September 30, 2020.annual term. The Company did not receive any payments from Castle Shield during the fiscal year ended September 30, 2021, or during the first quarter of the current fiscal year, but anticipates receiving payments2021. The Company recognized $449 in licensing revenues from Castle Shield during the remainder of the fiscal year.nine months ended June 30, 2022.

During the three months ended December 31, 2020, the Company recognized a total of $8,750 in licensing revenue from the Company’s agreements with SoundFi and Castle Shield. The Company did 0t recognize any licensing revenues from these agreements during the three months ended December 31, 2021.

Recent Accounting PronouncementsEffect of Recently Issued Amendments to Authoritative Guidance

The FASBFinancial Accounting Standards Board (“FASB”) issues ASUsAccounting Standards Updates (“ASU”) to amend the authoritative literature in the Accounting Standards Codification (“ASC”). There have been several ASUs to date that amend the original text of the ASC.ASCs. Other than those discussed below, the Company believes thethose ASUs 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.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance removedremoves 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. The Company adopted ASU 2019-12 on October 1, 2021, which adoption did not have a material impact on the Company’s financial position, results of operations and cash flows.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, to modify the disclosure requirements for fair value measurements. The ASU removes certain disclosure requirements related to transfers between fair value hierarchy levels and valuation processes for Level 3 fair value measurements. It modifies certain disclosure requirements for investments in entities that calculate net asset value. It adds certain disclosure requirements regarding gains and losses for recurring Level 3 fair value measurements and unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019.

2020. Early adoption is permitted. The Company adopted ASU 2018-132019-12 on October 1, 2020, which2021, and the adoption of this update did not have a material impact on the Company’s financial position, results of operations andor cash flows.

In July 2017, the FASB issued ASU 2017-11—Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 eliminates the requirement that a down round feature precludes equity classification when assessing whether an instrument is indexed to an entity’s own stock. As a result, a freestanding equity-linked financial instrument would no longer be accounted for as a derivative liability at fair value because of the existence of a down round feature. The Company has adopted ASU 2017-11 and implemented the pronouncement retrospectively. The adoption of this guidance did not have an impact on the Company’s financial statements.

As a result, a freestanding equity-linked financial instrument is no longer accounted for as a derivative liability at fair value because of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common stockholders in basic EPS.

During March and April 2021, the Company issued warrants to purchase 63,882,054shares of its common stock at an average exercise price of $0.33per share, which warrants have anti-dilution rights that provide for adjustments in the exercise price and number of shares exercisable upon exercise if there is an issuance of common stock or common stock equivalents at a lower price than the exercise price of the warrants (down round feature).

In October 2021, the FASB amended guidance to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination. Generally, this new guidance will result in the Company recognizing contract assets and contract liabilities consistent with those reported by the acquiree immediately before the acquisition date. The Company retroactively adopted the guidance in the fourth quarter of fiscal 2021 for all business combinations completed since the beginning of fiscal 2021. There was no material impact on the Company’s Financial Statements.

In January 2021, the FASB issued guidance to clarify that all derivative instruments affected by changes to the interest rates used for discounting, margining or contract price alignment can apply certain optional expedients and exceptions mentioned in its reference rate reform guidance even though they do not reference to LIBOR or a rate being discontinued. This guidance was effective upon issuance. The Company adopted the guidance in the first quarter of fiscal 2021. There was no impact on the Company’s Financial Statements upon such adoption.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The guidance is effective for fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), which pushes back the effective date for public business entities that are smaller reporting companies, as defined by the SEC, to fiscal years beginning after December 15, 2022. Early adoption is permitted.

In January 2020, the FASB issued guidance to clarify certain interactions between the guidance to account for equity securities, the guidance to account for investments under the equity method of accounting, and the guidance to account for derivatives and hedging. The new guidance clarifies the application of measurement alternatives and the accounting for certain forward contracts and purchased options to acquire investments. The Company is required to adoptadopted this guidance on October 1, 2021, and the guidance inadoption of this update did not have a material impact on the first quarterCompany’s financial position, results of fiscal 2022. Early adoption is permitted.operations or cash flows.

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU addresses an issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this guidance will have a material impact on its financial position, results of operations or cash flows.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s), to present the net carrying value at the amount expected to be collected on the financial asset. The guidance is effective for fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), which delays the effective date of the pronouncement for public business entities that are smaller reporting companies, as defined by the SEC, to fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company does not expect the adoption of this guidance will have a material impact on its financial position, results of operations or cash flows.

In November 2021, the FASB issued ASU 2021-10, Government Assistance, which provided guidance to increase the transparency of government assistance received by an entity by requiring disclosures relating to the accounting policy, nature of the assistance, and the effect of the assistance on the financial statements. The Company is required to adopt the guidance in the first quarter of its fiscal year 2023. Early adoption is permitted. The Company is currently evaluatingdoes not expect the impactadoption of this guidance will have a material impact on its Financial Statements.financial position, results of operations or cash flows.

In August 2020, the FASB issued ASU 2020-06—Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and edging—Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”) to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470- 20, Debt with Conversion and Other Options, for convertible instruments. Under the amendments in ASU 2020-06, the embedded conversion features in the instruments are no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, and a convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the interest rate of convertible debt instruments will typically will be closer to the coupon interest rate when applying the guidance in Topic 835, Interest. The amendments in ASU 2020-06 are designed to provide financial statement users with a simpler and more consistent starting point to perform analyses across entities. The amendments also improve the operability of the guidance and reduce, to a large extent, the complexities in the accounting for convertible instruments and the difficulties with the interpretation and application of the relevant guidance.

Additionally, for convertible debt instruments with substantial premiums accounted for as paid-in capital, amendments in ASU 2020-06 added disclosures about (1) the fair value amount and the level of fair value hierarchy of the entire instrument for public business entities and (2) the premium amount recorded as paid-in capital.

The amendments inCompany adopted ASU 2020-06 are effective for public business entities, excluding entities eligible to be smaller reporting companies, as defined by the SEC, for fiscal years beginning after December 15,on October 1, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Earlywhich adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Entities should adopt the guidance as of the beginning of its annual fiscal year and are allowed to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. In applying the modified retrospective method, entities should apply the guidance to transactions outstanding as of the beginning of the fiscal year in which the amendments are adopted. Transactions that were settled (or expired) during prior reporting periods are unaffected. The cumulative effect of the change should be recognized as an adjustment to the opening balance of retained earnings at the date of adoption. If an entity elects the fully retrospective method of transition, the cumulative effect of the change should be recognized as an adjustment to the opening balance of retained earnings in the first comparative period presented. The Company is evaluating the impact of the revised guidance and believes that it willdid not have a significantmaterial impact on itsthe Company’s financial statements.position, results of operations or cash flows.

NOTE 4– COMMITMENTS AND CONTINGENCIES

Litigation

The Company is currently not involved in any litigation that it believes could have a material adverse effect on its financial condition or results of operations.

In December 2017, Robert LeBlanc a disgruntled former consultant of the Company, filed a petition against the Company and Michael De La Garza, the Company’s former Chief Executive Officer and President, in the 20th Judicial District for Hays County, Texas (Cause No. 18-0005). The petition (which has been amended) alleges causes of actionMr. LeBlanc sought damages against us for alleged violation of the Texas Securities Act (based onCompany exceeding $1 million, but less than $10 million. On May 19, 2022, Mr. LeBlanc entered into a joint settlement agreement with the allegation thatCompany, the defendants sold securities by means of untrue statements of material facts), common law fraud againstCompany’s directors and officer’s liability carrier, and Mr. De La Garza (for alleged misrepresentations alleged made by Mr. De La Garza); breachGarza. As part of fiduciary duty against Mr. De La Garza; breach of contract; as well as declaratory relief. Damages sought exceed $1,000,000 but are less than $10,000,000. Thethis settlement agreement, the Company believes it has made all required payments and delivered the stock to the plaintiff and that the plaintiff’s claims are without merit.paid Mr. LeBlanc also made a claim of partial ownership of certain$109,432 in cash and issued him 200,000 shares of the Company’s patents, whichcommon stock in exchange for his release of the Company believes is without merit. The case is currently being defended by the Company. The Company believes it has meritorious defenses to the allegations,from all past and the Company intends to continue to vigorously defend against the litigation.future liabilities associated with this matter.

In April 2020, Eric Marquez, the former Secretary/Treasurer and Chief Financial Officer of the Company, and certain other plaintiffs filed a lawsuit against the Company and Michael De La Garza, the Company’s former Chief Executive Officer and President, 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 allegedallegedly made by Mr. De La Garza),; breach of contract, for alleged breaches of Mr. Marquez’s alleged oral employment agreement which provided forwith the Company, which Mr. Marquez claims required the Company to pay him cash and issue him shares of the Company’s stock; unjust enrichment; quantum meruit; and rescission of certain stock purchases made by certain of the plaintiffs, as well as requests for declaratory relief and fraud.relief. Damages sought exceed $1,000,000. The Company believes it has made all required payments and delivered all required shares of stock to the plaintiffs. The case is currently being defended by the Company. The Company believes it has meritorious defenses to the allegations, and the Company intends to continue to vigorously defend against the litigation.

Leases

All of the Company’s leases that were in place during the fiscal year ended September 30, 2020 have been terminated. As of December 31, 2021,June 30, 2022, the Company hashad no financial obligations for facility lease agreements, except as set forth below.

Prior to December 1, 2021, Tom Wilkinson, the Company’s Chairman of the Board, of Directors, providesprovided the Company with the use of office space whichthat he rents, located at 6836 Bee Caves Road, Building 1, Suite 279, Austin, TX 78746, for its corporate headquarters. There is a sublease agreement with Mr. Wilkinson and Mr. Wilkinson chargesAfter December 1, 2021, the Company entered into a month-to-month lease agreement for this office space with Nolen & Associates, under which the Company pays Nolen & Associates $500 aper month rental fee.

This lease agreement does not contain any material residual value guarantees or material restrictive covenant.

Cash Flows

The Company recognized an initial right-of-use asset of $233,751 as a non-cash asset addition with the adoption of the new lease accounting standard. Cash the Company paid for amounts included in the present value of operating lease liabilities was $80,402 during the fiscal year ended September 30, 2021, and is included in operating cash flows.rent.

The Company’s rent expense totaled $5001,500 and $38,2793,641 for the three and nine months ended December 31,June 30, 2022, and $170,265 and $306,453 for the three and nine months ended June 30, 2021, and 2020, respectively.

NOTE 5 – DEBT

On April 6, 2020, the Company submitted itsan application for a $365,430 loan under the Paycheck Protection Program (“PPP”) loan sponsored by the U.S. Small Business Administration (the “SBA Loan”). On April 12, 2020, the SBA Loan application was approved, and the Company received the loan proceeds on April 22, 2020. The SBA Loan had an interest rate ofmatured on 1% and was scheduled to mature on April 12, 2022.2022.

As of September 30, 2020,On January 29, 2021, the SBA Loan balance was $365,430. The Company filed for partial loan forgiveness on January 29, 2021,of $192,052 of the SBA Loan, which was approved on June 11, 2021 in the amount of $192,052.2021. The Company’s reductions in staff reductions that occurred in 2020 prevented the Company from qualifying for full forgiveness of the entire principal balance of the SBA Loan.

TheOn April 15, 2021, the Company placed the fullentire $365,430 principal balance of the SBA Loan, plus an additional $1,000 of interest, in, into an escrow account on April 15, 2021.account. Upon receiptreceiving the partial forgiveness of the partial loan forgiveness,SBA Loan described above, the Company paid the remaining amountbalance of the SBA Loan, using funds in the escrow account, andaccount. The Company transferred the remaining balance was returnedof the escrow account to the Company’s operating account. The balance of the SBA Loan was $0 as of September 30, 2021.

NOTE 6 - STOCKHOLDERS’ EQUITY

The Company is authorizedCompany’s certificate of incorporation authorizes the issuance of up to issue 681,000,000 shares of common stock and 10,000,000 shares of Series A convertibleblank check preferred stock, each with a par value of $0.001 per share. As of June 30, 2022, the Company had 88,445,832 shares of common stock outstanding, and had 0 shares of preferred stock outstanding.

Common Stock

During the threenine months ended December 31, 2020, and the three months ended December 31, 2021,June 30, 2022, the Company did not issue anyissued 5,518,521 shares of its common stock or preferred stock, except as set forthdescribed below.

Beginning with the last quarter duringof the Company’s fiscal year endingended September 30, 2021, its Boardthe Company’s board of Directorsdirectors elected to begin receivinghave each of its members receive one-half of theirsuch member’s quarterly Board compensation in the form of shares of the Company’s common stock, instead of cash. At its meeting in April 2021, meeting, the Company’s Boardboard of Directorsdirectors also approved a one timeone-time award of 100,000 shares of the Company’s common stock to each director,member of the board of directors, subject to the pending approval of the Company’s Equity Incentive Compensation Plan by its stockholders, which wasthe Company’s stockholders. The Company received that approval at the Company’s annual meeting of stockholders held in September 2021. To date,As a result, the members of the Company’s board of directors have received a total of 522,224744,448 shares of the Company’s common stock through the grants described above. The Company issued the shares for the one-time grant and two quarterly compensation payments. The one-time awardawards, and the fiscal year 2021 fourth quarter award of a total ofawards, totaling 411,112 shares, was made on January 13, 2022. The Company issued the remaining shares for the fiscal year 2022, first quarter awards were madetotaling 111,112 shares, on each of January 31, 2022, March 28, 2022 and June 15, 2022.

On July 23, 2021, the Company entered into a four year financial advisory and consulting agreement with Paulson Investment Company, LLC (“Paulson”). Pursuant to that agreement, at the Company’s request, Paulson provides the following services: (a) familiarizing itself with the Company’s business, assets and financial condition; (b) assisting the Company in developing strategic and financial objectives; (c) assisting the Company in increasing its exposure in the software industry; (d) assisting 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; € identifying potentially attractive merger and acquisition opportunities; (f) reviewing possible innovative financing opportunities and (g) rendering other financial advisory services as may be reasonably requested by the Company. The Paulson agreement may be terminated prior to the end of the four year term by either party, as provided in the agreement with Paulson. As compensation for the services provided by Paulson under the agreement, on March 20, 2022, the Company issued to Paulson and three of its employees a total of 4,000,000 shares of the Company’s common stock. The shares of common stock issued to Paulson and its employees were valued at $720,000 as of the date of the consulting agreement. The Company capitalized the value of the common shares issued to Paulson as deferred contract costs, which the Company is amortizing to expense straight-line over the four year contract term.

On June 1, 2022, the Company issued a total of 574,073 shares of the Company’s common stock to four employees pursuant to the vesting of restricted stock units held by those employees.

On June 6, 2022, the Company entered into the mediated settlement agreement with Robert LeBlanc described above. Pursuant to that agreement, the Company issued a total of 200,000 shares of the Company’s common stock to Mr. LeBlanc.

Restricted Common Stock Units

On October 22, 2021, the Company entered into restricted stock unit award agreements with five separate individuals. Thefour employees and one contractor. Under those agreements, the Company granted a total of 2,000,001 shares of restricted stock. The restricted stock to these individuals, which sharesunit awards vest in three equal tranches on the next three anniversary datesanniversaries of the award.date of the applicable award agreements. The value of the issued shares of restricted stock on the grant date was $260,000, based upon the then current$0.13 per share market price of the Company’s common stock on the date of grant.

On June 1, 2022, the Company entered into restricted stock unit award agreements with two employees. Under those agreements, the Company granted a total of 555,556 shares of restricted stock. The granted restricted stock vests in three equal tranches on the next three anniversaries of the date of the applicable award agreements. The value of the granted restricted stock was $0.1353,889, based upon the $0.10 per share market price of the Company’s common stock on October 22, 2021. During the threedate of grant. For the nine months ended December 31, 2021,June 30, 2022, the Company recorded $22,56184,305 in stock compensation expense related to thesethe restricted unit award agreements.agreements described above.

NOTE 7 – SUBSEQUENT EVENTS

On February 14,July 1, 2022 (the “Closing Date”), the Company completed its acquisition of all of the outstanding equity securities of SideChannel, Inc., a Massachusetts corporation (the “Subsidiary”), in exchange for shares of the Company’s equity securities (the “Acquisition”), pursuant to an Equity Securities Purchase Agreement, dated May 16, 2022 (the “Purchase Agreement”). The Acquisition was previously disclosed in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 18, 2022.

Pursuant to the Purchase Agreement, on the Closing Date, the former shareholders of the Subsidiary (the “Sellers”) exchanged all of their equity securities in the Subsidiary for a total of 59,900,000 shares of the Company’s common stock (the “First Tranche Shares”), and 100 shares of the Company’s newly designated Series A Preferred Stock, $0.001 par value (the “Series A Preferred Stock”). The Sellers 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 the 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.

On the Closing Date, the Sellers acquired approximately 40.4% of the Company’s outstanding common stock. If the Subsidiary achieves the Milestone, and the Sellers are issued the Second Tranche Shares, and assuming that there is no other change in the number of shares outstanding prior to the issuance of the Second Tranche Shares, the Sellers will hold a total of approximately 57.5% of the Company’s outstanding common stock. The number of the Second Tranche Shares may be reduced or increased, based upon whether the Subsidiary’s working capital as of the Closing Date was less than or more than zero. The number of the Second Tranche Shares may also be subject to adjustment based upon any successful indemnification claims made by the Company pursuant to the Purchase Agreement.

The Shares are subject to a Lock-Up/Leak-Out Agreement, pursuant to which, subject to certain exceptions, the Sellers may not directly or indirectly offer to sell, or otherwise transfer, any of the Shares for twenty-four months after the Closing Date without the prior written consent of the Company. Notwithstanding the foregoing, pursuant to the Lock-Up/Leak-Out Agreement, each of the Sellers may sell up to 20% of their Shares beginning twelve months after the Closing Date, and the remaining 80% of their shares of Common Stock beginning twenty-four months after the Closing Date. The Company is currently performing a formal valuation of the acquisition, including an analysis of any purchase price adjustments, and a review of the assts and liabilities acquired to determine appropriate fair values.

On July 1, 2022, Sammy Davis and David Chasteen resigned from the Company’s Board of Directors (the “Board”). On that same date, the Board appointed Deborah MacConnel and Kevin Powers to fill the vacancies resulting from those resignations. On that same date, the Board expanded the number of members of the Board by two members and approved the appointments of Brian Haugli and Hugh Regan to fill the vacancies caused by the expansion, to be effective on July 19, 2022. Ms. MacConnel, Mr. Powers, and Mr. Regan are considered independent directors. As of July 19, 2022, the total number of members of the Board was six (6), including four (4) independent directors.

On July 1, 2022, the Board appointed Brian Haugli to the position of Chief Executive Officer of the Company, following the resignation of David Chasteen from that position. Mr. Chasteen assumed the role of Executive Vice President of the Company on that same date.

On July 1, 2022, the Board approved the Company’s entry into restricted stock unit award agreements with two employees and five members of the Board. Under those agreements, the Company granted a total of 2,705,556 shares of restricted stock. The restricted stock awards vest in three equal tranches on the next three anniversaries of the date of the applicable awards. The total value of the shares of restricted stock awarded was $270,556, based upon the market price of $0.10 per share of the Company’s common stock on the grant date.

On July 5, 2022, the Company announcedfiled a Schedule 14-F Information Statement with the launchSecurities and Exchange Commission disclosing the change in the majority of Cipherloc Enclave, a new micro-segmentation product, through a press release and a Form 8-K. Cipherloc Enclavethe members of the Board.

On July 5, 2022, the Company changed its name to SideChannel, Inc., the same name as the Subsidiary The Company is further discussed in Itemthe process of changing the name of the Subsidiary.

On August 2, of this Form 10-Q.2022 the Company changed its ticker symbol from CLOK to SDCH.

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

Certain 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 whichthat 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, 2021, and elsewhere in this Current Report on Form 10-Q. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, 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, 2021, filed with the Securities and Exchange Commission on December 21, 2021.

Our logo and some of our trademarks and tradenames are used in this Report. This Report also includes trademarks, tradenames and service marks that are the property of others. 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. While we are not aware of any misstatements regarding any third-party information presented in this Report, 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 Cipherloc Corp., is also based on our good faith estimates.

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

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

Introduction

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. This MD&A is organized as follows:

The following discussion should be read in conjunction with our financial statements and accompanying notes included elsewhere in this report.

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

Overview

WeWith our acquisition of SideChannel, Inc., a Massachusetts corporation, on July 1, 2022, we expanded our capabilities to include providing cybersecurity programs to mid-market companies, which are developing products and services around our core encryption technology, which is designed to enable securehelp those companies protect their assets. With the additional of SideChannel, we now employ what we believe to be among the market’s most skilled and private data transmissionexperienced talent to help our clients to improve their defenses against cybercrime. With the SideChannel acquisition, we now have over 20 C-suite level information security officers, who possess combined experience of over 400 years in the industry. To date, SideChannel has created over 50 multi-layered cybersecurity programs for its clients.

Our mission is to make cybersecurity easy and accessible for mid-market companies, a post-quantum computing world. We plan to offer a new suite of productsmarket that can be used in virtually any commercial data security industry.we believe is currently underserved. We believe that our productscybersecurity offerings will allowidentify and develop cybersecurity, privacy and 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, to securely send sensitive data to others, with little setup time required.

Beginning in calendar 2019, we retained an entirely newincluding third-party risk management, team. That management team restructured our business to focus our resources on only productsdue diligence, privacy, threat intelligence, and services that we believe will be deliverable, will have viable economic potential, and may be publicly disseminated without adversely affecting our competitive position. The core of our product and service offerings will be built around our patents and proprietary encryption technology. We believe that we have developed a highly secure data protection technology, which has received a validation certificate from the National Institute of Standards and Technology (NIST).managed end-point security solutions.

We have focusedbelieve that our product development efforts oncustomers, and prospective customers, in the commercial applicationmid-market will favor our approach, as it provides them with an efficient way to work with a single vendor to manage and oversee their cybersecurity programs. We also believe that our approach will reduce our customers’ overall security costs and streamline their ability to increase their sales, reduce regulatory risks and monitor their risk posture.

We believe that we provide a full range of cybersecurity solutions through our technology by advancing what we call a Software Development Kit, or “SDK.”in-house delivery capabilities, and through our network of subcontractors. We work with our clients to help them select the right cybersecurity tools, products, and solutions. We believe that our product development efforts have advanced our technologyuse of subcontractors allows us to be ready for commercial application, inquickly move directly into implementation of projects, which we believe reduces the form of products we have named Sentinel, Armor, and Shield. We intend to make these products availablerisk to our future licensees throughcustomer. Our subcontractors also provide us with sales leads and referrals, and may resell our SDK.services to their own client base. We believe that this allows us to maximize our sales efforts, reduce expense of sales, and gain new customers.

In the past,Prior to our acquisition of SideChannel, we have primarily marketedoffered our products through indirectcustomers a license to use our Polymorphic Encryption Core (“PEC”), which is a secure, advanced polymorphic data-in-motion product. Recently, one licensee, Castle Shield, began to report early-stage product sales efforts. We are currently developing new products and services designed for direct sales to customers, rather than sales through third parties.from its software tools that contain our PEC.

To supplement our legacy licensing program, we are building our own applications that we intend to sell directly to enterprises and managed security service providers. On February 14, 2022, we announced the launch of Cipherloc Enclave, our first internally developed product. Cipherloc

Enclave is a micro-segmentation product designed asto be an easy-to-use platform designed for organizations that are seeking to control communication between devicesdevices; and to fully encrypt traffic between those devices. Enclave is designed to provide a simple and cost-effective solution for multiple devices, as compared to current complex cost-prohibitive solutions, which we believe require technical personnel to operate. Cipherloc Enclave is designed to make micro-segmentation available to everyone at a low cost, and with minimum technical administration.

Cipherloc’sThe Enclave platform will beis available through a free plan or a fee per user plan, designed to fit the needs of the two types of end users of the platform. The free tierplan will give individualsindividual users the ability to use the platform for hobby and educational purposes. The paid tierfee per user plan will focus on business users, allowing them to have a more private experience that addresses security and optimization gaps that we believe many companies face in today’s ever-changing technology environment.

We have six patents relatedanticipate that we will need between $2.0 million and $2.7 million of cash to cover our core technology, which expire between 2034 and 2037.operating expenses for the next twelve months. We expect to cover those expenses with the net proceeds we received from a private placement of our securities in the first quarter of our fiscal year 2021. We further anticipate that the SideChannel acquisition may mitigate or reduce our use of cash for operating expenses. We intend to manage our business such that our current cash reserves will be sufficient to allow us to reach positive cash flow from our operations, but we cannot assure you that will occur.

Results of Operations

Three Months Ended December 31, 2021 VersusJune 30, 2022 Compared to Three Months Ended December 31, 2020

Comparison of ResultsJune 30, 2021

Our revenue decreased to zerowas $198 for the three months ended December 31, 2021, from $8,750June 30, 2022, compared to zero revenue for the three months ended December 31, 2020. This decreaseJune 30, 2021. The revenue in fiscal 2022 was duerelated to our having no new invoicing activity taking place in the reporting period. Neither of our current licensees generated any licensing revenue during the period.agreement with Castle Shield.

Our general and administrative expenses were $469,016 and $661,692, respectively,expense was $1,107,310 for the three months ended December 31,June 30, 2022, compared to $197,534 for the three months ended June 30, 2021, and 2020. General and administrative expenses decreased in fiscal 2021, primarily as a result of $140,000 in accrued board fees in fiscal 2020 that did not occur in fiscal 2021, a decrease in legal expenses of $82,486 as a result of the settlement of various litigations matters in 2020, and a decrease in rent of $37,779, which was partially offset by an increase of $909,776, or 461%. The increase was driven by several factors including: (i) $479,075 in costs related to the SideChannel acquisition; (ii) an increase in headcount related expenses of $335,232; and (iii) a $45,000 increase in the amortization of deferred costs related to the private placement fees paidfees. The increase in general and administrative expense was partially offset by (i) a reduction of $441,597 as a result of a recognized gain related to the placement agent for a private placementwrite-off of sharesremaining right-of-use (ROU) assets and operating lease liability after the early termination of our common stockfinal operating lease; and (ii) decreases in March and April 2021.other items, including a reduction of $192,732 in legal expense, as well as a decrease of $168,765 in rent expense.

Our salesselling and marketing expenses were $53,393 and $25,000, respectively,$82,548 for the three months ended December 31, 2021, and 2020. SalesJune 30, 2022, compared to zero for the three months ended June 30, 2021. Our sales and marketing expenses increased in fiscal 2021 due to new costs incurred for2022 include (i) consultant expenses of $37,500, (ii) $34,875 in brand and website marketing costs, and business development consulting.(iii) stock compensation expense of $10,173.

Our research and development expenses were $129,639 and $121,793$191,258 for the three months ended December 31,June 30, 2022, compared to $169,098 for the three months ended June 30, 2021, an increase of $22,160 or 13%. The increase was primarily due to a $58,020 increase in development expenses, as well as a $26,672 increase in personnel related costs. These increases were partially offset by a $62,532 decrease in consultant expenses.

Our other income (expense) was zero for the three months ended June 30, 2022, compared to other income of $191,052 for the three months ended June 30, 2021. The other income in fiscal 2021 was related to the Paycheck Protection Program, or PPP, partial loan forgiveness we received, partially offset by a minor amount of interest expense.

Nine Months Ended June 30, 2022, Compared to Nine Months Ended June 30, 2021

Our revenue was $449 for the nine months ended June 30, 2022, compared to $15,417 for the nine months ended June 30, 2021, a decrease of $14,968, or 97%. The reduction in our revenue in fiscal 2022 was due to low sales activity from our licensees during the nine months ended June 30, 2022.

Our general and 2020, respectively. administrative expense was $2,183,340 for the nine months ended June 30, 2022, compared to $1,748,398 for the nine months ended June 30, 2021, an increase of $434,942, or 25%. The increase in our general and administrative expense was driven by several factors including: (i) $479,075 in SideChannel acquisition related costs in fiscal 2022; (ii) an increase in headcount related expenses of $232,384; and (iii) a $135,000 increase in the amortization of deferred costs related to private placements fees. These increases in general and administrative expense were partially offset by decreases in other items, including (i) a reduction of $441,597 in general and administrative expense in fiscal 2021 as a result of a gain we recognized related to the write-off of our remaining right-of-use (ROU) assets and an operating lease liability after the early termination of our final operating lease; (ii) a reduction of $356,602 in legal expense; (iii) a decrease of $302,811 in rent expense and (iv) a decrease in professional fees of $165,485.

Our selling and marketing expense was $188,316 for the nine months ended June 30, 2022, compared to $56,250 for the nine months ended June 30, 2021, an increase of $132,066, or 235%. The increase in our sales and marketing expense was the result of several factors including: (i) an increase of $112,500 in consultant expenses; and (ii) an increase of $64,625 in brand and website marketing costs. These increased selling and marketing expenses were partially offset by a $45,059 decrease in headcount related costs during fiscal 2021 that were not incurred in the current fiscal year.

Our research and development expense increasedwere $461,816 for the nine months ended June 30, 2022, compared to $465,974 for the nine months ended June 30, 2021, a decrease of $4,158 or 1%. The slight reduction in our research and development expense was primarily the result of a $134,786 decrease in consulting related costs, resulting from the spending reductions we initiated during the prior fiscal 2021 primarily due to personnelyear. This cost reduction was partially offset by an increase in payroll related costs.expense of $72,608 and an increase of $58,020 in product development expenses.

We had a net loss of $652,048, or $0.01 per share,Our other income (expense) was zero for the threenine months ended December 31, 2021,June 30, 2022, compared to a net lossother income of $799,735, or $0.03 per share,$191,052 for the threenine months ended December 31, 2020.June 30, 2021. The year-over-year decreaseother income in net loss for the three months ended December 31,fiscal 2021 was primarily duerelated to the partial forgiveness of our PPP loan, partially offset by a decrease in operating expenses.minor amount of interest expense.

Liquidity and Capital Resources

We had an accumulated deficit of $72,182,939$74,363,914 as of December 31, 2021.June 30, 2022. We expect to continue to incur substantial expenses, and generate continued operating losses, until we can generate revenues that are sufficient to cover our expected ongoing obligations. expenses. We anticipate that our operating expenses for the next twelve months will require between $2.0 million and $2.7 million of cash. We expect to cover those expenses with some of the net proceeds we received from a private placement of our equity securities in the first quarter of our fiscal year 2021. We further anticipate the SideChannel acquisition will mitigate or reduce our use of cash for operating expenses. We intend to manage our business so that our current cash reserves will be sufficient to allow us to reach positive cash flow from our operations, but we cannot assure you that will occur. We do not currently have access to any credit facilities and we cannot guarantee that we will be able to access any credit facilities if needed.

On December 31, 2021,June 30, 2022, we had cash and cash equivalents of $5,071,588,$3,588,912, primarily from therepresenting proceeds offrom the private placement of shares of our common stock in March and April 2021 for $0.18 per share.of 2021.

WeAs of June 30, 2022, we had working capital of $4,171,607 as of December 31, 2021,$3,010,376, compared to working capital of $4,756,094 as of September 30, 2021.

Cash Flows

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

Operating ActivitiesActivities.

We used cash in operating activities inFor the amounts of $712,406 and $629,963 for the threenine months ended December 31, 2021, and 2020, respectively. Our uses of cash during the three months ended December 31, 2021, were mainly attributable toJune 30, 2022, we recorded a net loss of $652,048, which$2,833,023. Our net cash used in operating activities during this period was partially offset by $45,000 in$2,195,082. During the nine months ended June 30, 2022, we had non-cash charges of $135,000 for amortization of deferred costs $22,561 in stockrelated to private placement fees. In addition, we recorded $84,305 of stock-based compensation expense and an increase induring the period. Our prepaid expenses declined by $251,645, reflecting the amortization of those prepaid expenses during fiscal 2022. We also settled $854,000 of our net operating assets and liabilities of $127,919. The change in our net operating assets and liabilities was primarily due to an increase in accounts payable and accrued liabilities through the issuance of $198,921, which was partially offset by a decrease4,744,448 shares of our common stock to our creditors. We issued another 200,000 shares of our common stock to cover $14,000 in prepaid and other assets of $71,002.

legal settlement expenses. Our uses of cash during the quarter ended December 31, 2020, were attributable to a net loss of $799,735, which was partially offset by a non-cash stockaccrued compensation expense increased by $175,000 during fiscal 2022 as a result of $41,025 and a decrease in net operating assets and liabilitiesbonuses paid to our employees as of $128,747. The decrease in our net operating assets and liabilities was primarily due to a decrease in prepaid and other assets of $136,392, which was partially offset by an increase in accounts payable and accrued liabilities of $7,645.June 30, 2022.

Investing ActivitiesActivities. We had no investing activities during the nine months ended June 30, 2022.

Cash used in investingFinancing Activities. We had no financing activities was zero and zero forduring the threenine months ended December 31, 2021, and 2020, respectively. The cash used in financing activities was in relation to the settlement of a lawsuit in which we paid $50,000 in exchange for the return of 1,000,000 shares of our Series A Preferred Stock and 127,500 shares of our common stock.

Off-Balance Sheet ArrangementsJune 30, 2022.

We did not have anyOff-Balance Sheet Arrangements

During the nine months ended June 30, 2022, we had no off-balance sheet arrangements as defined under applicable SEC rules, during the periods presented, nor do we currentlythat have, any such arrangements.or are reasonably likely to have, a current or future effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.

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 in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. ManagementOur 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 differ from these estimates as a result of different assumptions or conditions. As of June 30, 2022, there have been no significant changes to the accounting estimates and assumptions that we have deemed critical in the past. Our critical accounting estimates and assumptions are more fully described in our Annual Report on Form 10-K for our fiscal year 2021.

See Note 4 of the unaudited financial statements included in “Part I—Item 1. Financial Statements”, above, for a discussion of our significant accounting policies.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company iswe are not required to provide the information required by this Item, as it iswe are a “smaller reporting company,” as defined by Rule 229.10(f)(1).

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (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 provide reasonable assurance that the information required to be disclosed by us in reports that we file 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 rules and forms of the SEC. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report, at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

ThereDuring the nine months ended June 30, 2022, there were no changes in our internal control over financial reporting during the three months ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, including any corrective actions regarding significant deficiencies and material weaknesses.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, our 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. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that our management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From 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,into, 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 54 – 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’sour 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’sour 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, 2021, filed with the Securities and Exchange Commission on December 21, 20210 (the “Form 10-K”),2021, under the heading “Risk Factors.” [Should these be updated to reflect the acquisition?]

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

Sales of Securities

There have beenExcept as set forth below, we had no unregistered sales of unregisteredour securities during the quarter ended December 31, 2021,June 30, 2022, and from the period from SeptemberJune 30, 2021,2022 to the filing date of this Report, whichthat have not previously been disclosed in the Company’sour Quarterly Reports on Form 10-Q or in a Current Report on Form 8-K. On July 6, 2022, we filed a Current Report on From 8-K disclosing that we had issued the First Tranche Shares and the Series A Preferred Stock to the Sellers pursuant to the terms of the Purchase Agreement, as described above. The First Tranche Shares and the Series A Preferred Stock have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any state, and were offered and sold in reliance on the exemption from registration under the Securities Act, afforded by Section 4(a)(2) and/or Rule 506 promulgated thereunder.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINING SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.