NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – NATURE OF OPERATIONS
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:
|
1. |
Securing
new vCISO clients; |
|
2. |
Adding
new Cybersecurity Software and Services (“Cybersecurity Software and Services”) offerings; and |
|
3. |
Increasing
adoption of Cybersecurity Software, including Enclave, and Services offerings at vCISO clients. |
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 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.
As
part of the Business Combination, the former stockholders 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.
The number of the Second Tranche Shares may be reduced or increased, based upon whether the Subsidiary’ working capital as of the
Closing Date is less than or more than zero (“Closing Working Capital Adjustment”). The number of the Second Tranche Shares
may also be subject to adjustment based upon any successful indemnification claims made by the parties pursuant to the Purchase Agreement.
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.
Our
headquarters are located at 146 Main Street, Suite 405, Worcester, MA, 01608. Our website is www.sidechannel.com.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Use of Estimates
The
accompanying consolidated financial statements include our accounts and those of our wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated upon consolidation. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Certain of our accounts, including goodwill, identifiable intangibles, and deferred tax assets and liabilities, including related valuation
allowances, are based upon estimates.
In
the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position, results of operations, and changes in cash flows for the interim
periods presented. Certain footnote information has been condensed or omitted from these 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”).
Subsequent
Events
On
May 4, 2023, we filed a Form 8-K with the SEC for the change in the compensation of our Chief Financial Officer, Ryan Polk. These changes
include an increase in his annual base compensation from $150,000 to $175,000 and an increase in his potential annual equity incentive
from $50,000 to $150,000.
On
May 4, 2023 our Board of Directors authorized the issuance of 62,016,718 shares of common stock as part of the Business Combination.
This includes 59,900,000 shares for the Second Tranche and 2,116,618 shares for the Closing Working Capital Adjustment. Additionally,
the 100 shares of Series A Preferred Stock will convert to common stock and all rights in the Series A Preferred Stock will terminate
when the Second Tranche shares are issued.
The
combined shares were issued as follows:
| ● | David
Chasteen, 3,721,003 |
| ● | Brian
Haugli, 44,031,870 |
| ● | Nick
Hnatiw, 6,821,839 |
| ● | Joseph
Klein, 3,721,003 |
| ● | Miguel
San Mateo, 3,721,003 |
Following
the issuance of these shares, Brian Haugli owned 40.9% of the Company’s outstanding shares of common stock.
Segment
Information
We
manage our operations as a single operating segment for the purposes of assessing performance and making operating decisions.
Business
Combinations
Acquired
businesses are accounted for using the purchase method of accounting, which requires that the purchase price be allocated to the net
assets acquired at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired
is recorded as goodwill. Fair values of intangible assets are estimated by valuation models prepared by our management and third-party
advisors. The assets purchased and liabilities assumed have been reflected in our consolidated balance sheets, and the operating results
are included in the consolidated statements of operations and consolidated statements of cash flows from the date of acquisition. Any
change in the fair value of acquisition-related contingent consideration subsequent to the acquisition date, including changes from events
after the acquisition date, will be recognized in the consolidated statement of operations in the period of the estimated fair value
change. Acquisition-related transaction costs, including legal and accounting fees and other external costs directly related to the acquisition,
are recognized separately from the acquisition and expensed as incurred in general and administrative expense in the consolidated statements
of operations.
Fair
Value of Financial Instruments
Our
financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, our note payable, and
embedded conversion features in our stock warrants. Our cash 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 future when we have determined that we have satisfied our performance obligations under the contract. Our contracts with customers
may include a combination of products and services, which are generally capable of being distinct and accounted for as separate performance
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 North America. We
categorize our products and services as either vCISO Services or Cybersecurity Software and Services. As a result of the Business 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 outflows from operating activities on our consolidated statements of cash flows.
We
have made an accounting policy election not to apply the recognition requirements of ASC Topic 842 to short-term leases (leases with
a term of one year or less at the commencement date of the lease). 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 accordance with ASC Topic 718 (Compensation – Stock Compensation) which requires that employee
share-based equity awards be accounted for under the fair value method and requires the use of an option pricing model for estimating
fair value of awards, which is then amortized to expense over the service periods. See further disclosures related to our stock-based
compensation plans in Note 8.
Income
Taxes
We
utilize the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized
for operating loss and tax credit carryforwards and for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the 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 that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets
if it is more likely than not that such assets will not be realized.
Basic
and Diluted Net Loss per Common Share
Earnings
(loss) per common share - basic is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding
during each period. Earnings (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 anti-dilutive.
Warrants
We
account for warrants in accordance with ASC Topics 480 and 815. The result of this accounting treatment is that the fair value of the
embedded derivative, if required to be bifurcated, is marked-to-market at each balance sheet date and recorded as a liability. 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.
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 Sellers exchanged
all of their equity securities in the Subsidiary for a total of 59,900,000 shares of the Company’s common stock (First Tranche
Shares), and 100 shares of the Company’s newly designated Series A Preferred Stock, $0.001 par value. The Sellers are entitled
to receive up to an additional 59,900,000 shares of the Company’s common stock (Second Tranche Shares) at such time that the operations
of the Subsidiary, as a subsidiary of the Company, achieves at least $5.5 million in revenue (Milestone) for any twelve-month period
occurring after the Closing Date and before the 48-month anniversary of the execution of the Purchase Agreement. The Second Tranche shares
were valued using the closing price on July 1, 2022 of $0.10 per share which resulted in a fair value of $6.1 million.
During
the twelve months ending March 31, 2023, the Milestone was achieved by the operations of the Subsidiary with trailing twelve-month revenue
equaling $5.7 million. As discussed in the “Subsequent Events” section of Note 2, the Second Tranche shares along with the
Closing Working Capital Adjustment shares were issued on May 5, 2023
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 show activity for the three months and six months ended March 31, 2022.
SCHEDULE
OF UNAUDITED PROFORMA OPERATIONS RESULTS
| |
For
the Three Months Ended March 31, 2022 | | |
For
the Six Months Ended March 31, 2022 | |
(In
thousands, except share and per share data) | |
| | |
| |
Revenues | |
$ | 1,235 | | |
$ | 2,283 | |
Cost
of revenues | |
| 607 | | |
| 1,083 | |
Gross
profit | |
$ | 628 | | |
$ | 1,200 | |
Operating
expenses | |
| 1,070 | | |
| 1,970 | |
Operating
loss | |
$ | (442 | ) | |
$ | (770 | ) |
Other
income | |
| 3 | | |
| 7 | |
Net
loss before income taxes | |
| (439 | ) | |
| (763 | ) |
Income
taxes | |
$ | — | | |
$ | — | |
Net
loss | |
$ | (439 | ) | |
$ | (763 | ) |
| |
| | | |
| | |
Basic
loss per share (a) | |
$ | (0.00 | ) | |
$ | (0.00 | ) |
(a) |
Pro
forma weighted average shares outstanding were 148.1 million for the three months and six months ended March 31, 2022. |
NOTE
4 – REVENUE FROM CONTRACTS FROM CUSTOMERS
Customer
Concentration
No
customer individually accounted 10% or more of our revenue during the six months ended March 31, 2023 and 2022.
Deferred
Revenue
Deferred
revenue was $372,000 at March 31, 2023. The deferred revenue is expected to be earned within 12 months of the balance sheet date.
Changes
in deferred revenue for the six months ended March 31, 2023 were as follows:
SCHEDULE
OF CHANGES IN DEFERRED REVENUE
Balance
on September 30, 2022 | |
$ | 130 | |
Deferral
of revenue | |
| 386 | |
Recognition
of revenue | |
| (144 | ) |
Balance
at March 31, 2023 | |
$ | 372 | |
We
internally report our revenue using two categories. The first, “vCISO Services”, captures the revenue for the Chief Information
Security Officer services that we provide to our clients on a “virtual” or outsourced basis; thus, we use the acronym “vCISO”.
Services delivered by SideChannel through our team of vCISOs include assessing the cybersecurity risk profile, implementing policies
and programs to mitigate risks, and managing the day-to-day tasks to ensure compliance with the adopted cybersecurity framework. Most
of our clients use our vCISO services.
Our
second revenue category encompasses an array of “Cybersecurity Software and Services” that our clients deem necessary to
protect their digital assets. These 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 six months ended March 31, 2023 and 2022:
SCHEDULE
OF REVENUE BY CATEGORY
| |
Six
Months Ended March 31 | | |
| | |
| |
(In
thousands) | |
2023 | | |
2022 | | |
| | |
| |
| |
| | |
%
of Total | | |
| | |
%
of Total | | |
$
Change | | |
%
Change | |
Revenue | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
vCISO
Services | |
$ | 1,947 | | |
| 61.6 | % | |
$ | 1,430 | | |
| 62.7 | % | |
$ | 517 | | |
| 36.2 | % |
Cybersecurity
Software & Services | |
| 1,216 | | |
| 38.4 | % | |
| 853 | | |
| 37.3 | % | |
| 363 | | |
| 42.6 | % |
Total | |
$ | 3,163 | | |
| | | |
$ | 2,283 | | |
| | | |
$ | 880 | | |
| 38.5 | % |
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 note payable component of the Desai Redemption Agreement was deemed insignificant.
NOTE
6 – RELATED PARTY TRANSACTIONS
Brian
Haugli, our Chief Executive Officer and one of our stockholders, is also a principal shareholder of RealCISO Inc. (“RealCISO”).
On September 22, 2020, SideChannel assigned to RealCISO certain contracts and intellectual property. We are a reseller of 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
six months ended March 31, 2023, we paid $36,000 to RealCISO for additional licenses that SideChannel can resell to its clients.
David
Chasteen, our Executive Vice President of Sales and Nick Hnatiw, our Chief Technology Officer each have amounts payable to the Company
in relation to the payroll taxes paid by the Company on their behalf for RSU’s that vested during calendar year 2022. The combined
balance due from these two individuals is $12,846 and is recorded in prepaid and other current assets as of March 31, 2023.
No
other related party transactions occurred during the three and six months ended March 31, 2023.
NOTE
7 – COMMITMENTS AND CONTINGENCIES
Litigation
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 20th 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 Mr. Marquez
claims required that we pay him cash and shares of stock; unjust enrichment; quantum meruit; and rescission of certain stock purchases
made by certain of the plaintiffs, as well as declaratory relief and fraud. Damages sought exceed $1,000,000. 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.
We
are not currently involved in any additional litigation that we believe could have a material adverse effect on our financial condition
or results of operations.
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 six months ended March
31, 2023:
SCHEDULE
OF UNVESTED RESTRICTED STOCK UNITS ACTIVITY
| |
Weighted
Average Grant Date Fair Value | | |
Number
of RSU’s | |
Outstanding
Grants at September 30, 2022 | |
$ | 0.11 | | |
| 4,309,262 | |
Granted | |
| 0.14 | | |
| 2,932,539 | |
Vested
and issued | |
| 0.10 | | |
| (500,000 | ) |
Canceled/Forfeited | |
| — | | |
| — | |
Outstanding
Grants at March 31, 2023 | |
$ | 0.12 | | |
| 6,741,801 | |
We
incurred stock-based compensation expense of $129,000 for the three months ended March 31, 2023 and $245,000 for the six months ended
March 31, 2023. Unamortized stock compensation expense is $616,000 as of March 31, 2023.
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 62,016,618 shares of Cipherloc Common Stock common stock and 100 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,
2020.
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 interest in SCS.
SideChannel
LLC, a predecessor entity to the Subsidiary, made profit sharing distributions of $461,000 during the three months ended December 31,
2021 in accordance with its partnership agreements.
Common
Stock
As
of March 31, 2023, and 2022, we had 149,571,281
and 62,016,618
shares of common stock outstanding, respectively. We had 148,724,056 shares of common stock outstanding at September 30, 2022.
Common
Stock Issued for Cash
We
did not issue shares of common stock for cash during six months ended March 31, 2023.
Common
Stock Issued for Business Combinations
We
did not issue shares for mergers or acquisitions related activity during the six months ended March 31, 2023. As noted above the Company
issued 62,016,618 shares of common stock on May 4 related to the Business Combination (Note 3).
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 March 31, 2023, the Company issued 166,668 shares of common
stock as compensation for a value of $13,000 to the Board for the second quarter of fiscal year 2023. For the six months ended March
31, 2023, we have issued 347,226 shares of common stock as compensation for a value of $31,000 to the Board.
Common
Stock Issued Under Equity Incentive Plan
We
have issued 500,000 shares of common stock as incentive compensation during the six months ended March 31, 2023 for the vesting of RSU’s
granted at an average grant date fair value of $0.10 per share.
Preferred
Stock
As
of March 31, 2023, we had 100 shares of Series A Preferred Stock outstanding. These shares were issued as part of the Business Combination.
The 100 shares of Series A Preferred Stock that were exchanged for SCS, Inc. common stock have been retroactively reflected as issued
and outstanding as of September 30, 2020. The Series A Preferred Stock contains a Board Designation Right which provides that the holders
of the majority of the Series A Preferred Stock have 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 continue to be binding on the Company after the Business
Combination.
The
following table summarizes warrant activity for the period from September 30, 2022 to March 31, 2023:
SCHEDULE
OF WARRANT ACTIVITY
| |
Number
of Warrants | | |
Weighted
Average Exercise Price | | |
Weighted
Average Remaining Life | |
Outstanding
at September 30, 2022 | |
| 87,793,920 | | |
$ | 0.56 | | |
| 5.02 | |
Granted | |
| — | | |
| — | | |
| — | |
Exercised | |
| — | | |
| — | | |
| — | |
Canceled/Forfeited | |
| (1,316,000 | ) | |
| 1.25 | | |
| — | |
Outstanding
at March 31, 2023 | |
| 86,477,920 | | |
$ | 0.54 | | |
| 4.34 | |