What changed in this filing

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Item 1. Business

2022-12-20 compared with 2021-12-21 · 238 added, 115 removed, 57 unchanged (86% of the section changed)

are developing products and services around our patented polymorphic encryption technology, which is designed to enable secure and private

data transmission.

Through our licensing program, we are offering what we believe to be the first secure, commercially viable, advanced

Polymorphic Encryption Core, or PEC, data-in-motion product that can be used in virtually any commercial data security industry or in

sensitive application.

We believe that our PEC data-in-motion product allows our customers to securely send data, with little setup time

in 2019, we retained an entirely new management team.

Our current management restructured our business to focus our resources on only

products and services that we believe are deliverable, have viable economic potential, and may be publicly disclosed without adversely

affecting our competitive position.

The core of our product and service offerings will continue to be built around our patents and encryption

We believe that our Cipherloc Polymorphic Encryption Engine Core technology is a highly secure data protection technology,

which has received a validation certificate from the National Institute of Standards and Technology (NIST).

to September 30, 2021, we were a Texas corporation.

We are now a Delaware corporation.

Our headquarters is located at 6836 Bee Cave Road,

Building 1, Suite 279, Austin, TX 78746.

transition to becoming a Delaware corporation was approved by our shareholders at our 2021 annual meeting

that was held on September 13, 2021.

In addition to the reincorporation in Delaware, our shareholders approved other governance

actions designed to reduce risk and accelerate our growth were approved by the shareholders.

Other actions by our shareholders

at the annual meeting included:

Election of Anthony Ambrose,

Sammy Davis, David Chasteen and Tom Wilkinson to our board of directors;

Ratification of the appointment

of Briggs & Veselka Co.

as our independent auditor;

Approval and adoption of our

2021 Omnibus Equity Incentive Plan;

Granting discretionary

authority to our board of directors to combine the outstanding shares of our common stock into a lesser number

of outstanding shares in a reverse stock split, with the exact ratio to be determined by our board of directors, within

a range of 1-for-2 to a maximum of 1-for-20;

Approval an amendment to

our Amended and Restated Articles of Incorporation to eliminate the statutory preemptive rights pursuant to Section 21.208 of

the Texas Business Organizations Code in the event that the reincorporation from the State of Texas to the State of Delaware is not

Approval , by non-binding

advisory vote, of a resolution approving named executive officer compensation;

Approval , by non-binding

advisory vote, of future non-binding advisory votes regarding future named executive officer compensation to occur

every three years.

March 31, 2021 and April 16, 2021, we entered into a securities purchase agreement with certain accredited investors, pursuant to which

we sold an aggregate of 55,549,615 shares of our common stock, and warrants to purchase an equal number shares of our common stock, for

$0.18 per share of common stock sold, in a private placement.

The price of $0.18 per share was equal to 80% of the closing sales price

of our common stock on the OTCQB Market on March 30, 2021.

The warrants issued with the shares of common stock have an exercise price

of $0.36 per share, and may be exercised at any time prior to March 31, 2026.

The warrants have anti-dilution protection that applies

if we issue shares of our common stock at less than the $0.36 per share exercise price of the warrants.

received approximately $10 million in gross proceeds from the sale of the shares and warrants.

In connection with the private placement,

we agreed to use the proceeds for working capital, and not for (i) debt repayment, other than the payment of trade payables in the ordinary

course of our business or the repayment of funds we received under the paycheck protection program of the Cares Act, (ii) redemption

of our stock, (iii) settlement of any litigation, or (iv) in violation of the law.

Investment Company, LLC acted as the placement agent for the offering.

Pursuant to our agreement then, we paid the placement agent a

cash commission of $1,334,861, 13% of the gross proceeds we received from the placement, and we granted to the placement agent a ten-year

warrant to purchase 8,332,439 shares of our common stock at the price of $0.18 per share.

April 29, 2021, we filed a registration statement on Form S-1 with the SEC, registering the resale of up to 119,431,669 shares of our

common stock, representing (i) the shares sold in the private placement referred to above, (i) the shares issuable upon exercise of warrants

issued in that private placement, and (iii) the shares issuable upon exercise of warrants issued to the placement agent in the private

As a result of the filing of that registration statement, the holders of the registered shares may sell those shares into

have focused our development efforts on the commercial application of our technology by advancing a Software Development Kit or SDK,

for our solution.

We believe that this effort has advanced our technology from theory to commercial application in the form of several

products, named Sentinel, Armor, and Shield, which we make available to licensees through our SDK.

In the past, we have relied on indirect

sales efforts.

We are currently developing new products and services designed for direct sales to customers, rather than sales through

third parties.

core technology is protected by six patents that expire between 2034 and 2037.

Reverse Merger

July 1, 2022 (the “Closing Date”) the Company, then known as Cipherloc Corporation, a Delaware corporation, completed its

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 subsidiary of the registrant, changed its name to SCS, Inc.

(the “Subsidiary”

or “SCS”) and Cipherloc Corporation, the Delaware parent company of the subsidiary has changed its name to SideChannel, Inc.

transaction was accounted for as a reverse acquisition in accordance with accounting principles generally accepted in the United States

of America (“GAAP”).

Under this method of accounting, SCS was deemed to be the accounting acquirer for financial reporting

This determination was primarily based on the facts that, immediately following the Business Combination:

(1) the majority of the Board of Directors of the combined company 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.

Because SDS has been determined to be

the accounting acquirer in the Business Combination, but not the legal acquirer, the transaction is deemed a reverse acquisition under

the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic

805, Business Combinations.

As a result, the historical financial statements of SideChannel are the historical financial statements of

the combined company.

the closing of the Business Combination, SCS, Inc.

became a wholly owned subsidiary of the Company.

As used herein, the words “the

Company” refers to, for periods following the Business Combination, SideChannel, together with its subsidiaries, and for periods

prior to the Business Combination, SideChannel Inc., and its direct and indirect subsidiaries, as applicable.

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

Overview & Strategy

Company is a provider of cybersecurity services and technology to middle market companies.

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

mission is to make cybersecurity easy and accessible for mid-market and emerging companies, a market that we believe is currently underserved.

We believe that our cybersecurity offerings will reduce risks for our customers through identifying and developing cybersecurity, privacy,

and risk management solutions.

We anticipate that our target customers will continue to need cost-effective security solutions beginning

with but not limited to what we refer to as virtual Chief Information Security Officer services (“vCISO” or “vCISO

We also have announced development of a new software product, Enclave, that we believe offers mid-market and emerging

companies the means to simplify several crucial cybersecurity infrastructure procedures, including encryption, microsegmentation and

access control (“Enclave”).

strategy focuses on growth from these three areas

Securing new vCISO clients

Adding new Cybersecurity

Software and Services offerings such as Enclave

Increasing adoption of

Cybersecurity Software and Services offerings at vCISO clients, including Enclave

support of securing new vCISO clients, we expanded the sales and marketing team from one dedicated person to five during the fiscal quarter

ended during September 30, 2022.

On October 27, 2022, we announced that during the same fiscal quarter we acquired six (6) new clients

with potential annual revenue of $1.3 million.

vCISO engagements are typically twelve (12) month engagements containing a monthly subscription

and an annual renewal option.

Hourly rates for vCISO time and material projects range from $350 to $400.

Each of our vCISO’s is

generally embedded into the C-suite executive teams of two (2) to four (4) of our clients.

have implemented an account management organization responsible for delivering services and software to our clients.

and the security and privacy engineers that support them are part of our account management organization.

As this team delivers vCISO

Services for our clients, we often identify projects to implement and maintain programs that reduce cybersecurity risks which expand

our scope of work and increase our revenue generating potential.

Similarly, as this team delivers a new cybersecurity service or installs

cybersecurity software at a client, we often learn about opportunities to improve the protection of our clients’ digital assets

through additional service and software engagements.

vCISO engagements provide our clients with the C-suite cybersecurity leadership needed to effectively mitigate cybersecurity risks and

support ongoing operation of critical business functions.

This strategic cybersecurity leadership will often result in additional statements

of work for SideChannel to deliver the Cybersecurity Software and Services needed to address gaps in our clients’ cybersecurity

We track revenue and other key performance indicators using the vCISO Services category and Cybersecurity Software and Services

Detail on the performance of these categories is discussed in our Management’s Discussion and Analysis of Financial Condition

and Results of Operations in Part II, Item 7 later in this filing.

currently provide Cybersecurity Software and Services and intend to increase our delivery of more tech-enabled services to address the

needs of our customers, including:

Additional Virtual Chief

Information Security Officers

Third-party risk management

Due diligence

Threat intelligence, and

Managed end-point security

now have over 20 C-suite level information security officers, who possess combined experience of over 400 years in the industry.

inception, SideChannel has created over 50 multi-layered cybersecurity programs for its clients.

believe that our customers, and prospective customers, in the mid-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.

believe that we provide a full range of cybersecurity solutions through our employees, and through our network of subcontractors, and

our array of partnerships with third party service providers and software companies.

We work with our clients to help them select the

right cybersecurity tools, products, and solutions.

We believe that our use of a combination of employees and subcontractors allows us

to cost effectively grow our client base and broaden the subject matter expertise on our bench while maintaining the agility needed to

move directly into implementation of projects, which we believe reduces the risk to our customers.

Our subcontractors also provide us

with sales leads and referrals, and may resell our services to their own client base.

A SideChannel Proprietary Software Product

are developing products and services around our unique insight into mid-market and emerging companies.

During September 2022, SideChannel

announced a proprietary product, Enclave, which simplifies a particularly important cybersecurity task called “microsegmentation”.

Industry standard cybersecurity and risk management frameworks, such as National Institute of Standards and Technology Cybersecurity

Framework (“NIST CSF”) and Center for Internet Security Controls (“CIS”), prioritize inventory of assets and

access control as top requirements for a sustainable and compliant cybersecurity program.

CIS version 8 controls call for organizations

1 - “Establish and maintain an accurate, detailed, and up-to-date inventory of all enterprise assets with the potential to

store or process data”,

2 - “Actively manage (inventory, track, and correct) all software (operating systems and applications) on the network so that

only authorized software is installed and can execute, and that unauthorized and unmanaged software is found and prevented from installation

or execution.”

3 - “Configure data access control lists based on a user’s need to know.

Apply data access control lists, also known

as access permissions, to local and remote file systems, databases, and applications.”

built Enclave to address these extremely critical cybersecurity controls along with many others.

Enclave seamlessly combines access control,

microsegmentation, encryption and other secure networking concepts to create a comprehensive solution.

It allows Information Technology

(IT) to easily segment the enterprise network, place the right staff in those segments and direct traffic.

Unlike open, traditional models,

Enclave allows for near-limitless micro-segmented networks to operate insulated from one another.

to statistics published by Varonis , a global data protection company, organizations with a zero-trust approach to cybersecurity

saw an average breach cost $1.8 million less than organizations without.

Enclave reduces the attack surface;

which means there is less

surface area to search.

Checkpoint’s Cloud Security Report stated, forty-three percent (43%) of breaches start with an insider;

either intentional or unintentional.

Enclave reduces the time to containment by reducing the surface area visible to an intruder.

also limits the scope of a post-event search to uncover situational facts.

IBM reported that when remote work is a factor in causing

a data breach, the average cost per breach is $1.1 million higher.

Add that to productivity lost waiting for network slowdowns caused

by VPN (“Virtual Private Network”) tunnels, and the costs go up even more.

Security Operations

fast, no training required.

Deploy in minutes and configure in seconds.

confidence that only authorized systems, people and data are interacting at any time.

to Scale and Deploy

and scale across virtual machines, Kubernetes containers, on premises, or in the cloud

Visibility of Network Flows

application dependencies without the need for any knowledge of the underlying architecture.

stores flow records with workload context, enabling network and security teams to use this data for compliance reports.

deployable end-to-end encryption protects data in transit.

your environment scales, Enclave will adapt automatically – on premises or in the public cloud.

information about Enclave is available at https://sidechannel.com/product/enclave/.

Company was incorporated in the State of Texas on June 22, 1953 as American Mortgage Company.

During 1996, the Company acquired the operations

of Eden Systems, Inc.

(“Eden”) as a wholly owned subsidiary.

Eden was engaged in water treatment and the retailing of cleaning

Eden’s operations were sold on October 1, 1997.

On May 16, 1996, the Company changed its name to National Scientific

From September 30, 1997 through the year ended September 30, 2001, the company aimed its efforts in the research and development

of semiconductor proprietary technology and processes and in raising capital to fund its operations and research.

Effective August 27,

2014, the Company changed its name to “Cipherloc Corporation.” The Company became a Delaware corporation on September 30,

Combination Between Cipherloc Corporation and SideChannel, Inc.

(now known as SCS, Inc.)

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”) 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

June 30, 2026, the 48-month anniversary of the execution of the Purchase Agreement.

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 $0.

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.

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 (12) months after the Closing Date, and the remaining 80% of their shares of Common Stock beginning

twenty-four (24) months after the Closing Date.

July 1, 2022, Sammy Davis and David Chasteen resigned from the Company’s Board of Directors (the “Board”).

date, (i) the Board appointed Deborah MacConnel and Kevin Powers to fill the vacancies resulting from those resignations.

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 new seats.

Haugli’s and Mr.

Regan’s appointment were effective on July 19, 2022.

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.

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.

Chasteen was appointed of Executive Vice President of the Company on the same date.

issues authoritative literature in the Accounting Standards Codification.

ASC 805 Business Combinations (“ASC 805”) provides

guidance for accounting for mergers and acquisitions.

The standard defines a business combination, including criteria for both the transaction

to qualify as a business combination and determining whether an entity is a business, and then provides details how to account for the

Applying ASC 805 to the Acquisition, the Company determined that SCS will be the accounting acquirer for financial reporting

In order to account for the acquisition, management closed the books of Cipherloc on the Closing Date, closed all equity accounts

to additional paid in capital and merged the balance sheets as of the Closing Date.

SCS maintained its historical financial statements,

only consolidating Cipherloc’s assets, liabilities, and equity as of the Closing Date.

and Development

research and development expenditures for the fiscal years ended September 30, 2021 and September 30, 2020 were $616,746 and $1,689,455,

respectively.

During December of 2019, our management determined that the pending maturity of our patented technology justified a cessation

of our academic research activities, including the elimination of our chief scientist’s role in leading various academic efforts.

We allocated the cost savings from ceasing those activities entirely to product development, product engineering, and revenue-generating

sales activities.

Our management continued to emphasis these three areas during fiscal year 2021 and intends to continue that emphasis

in our fiscal year 2022 and beyond.

encryption software market sector is highly competitive, subject to rapid change, and significantly affected by new product introductions

and other activities of market participants.

research and development expenditures for the fiscal years ended September 30, 2022 and September 30, 2021 were $178,000 and $0, respectively.

These costs were incurred to develop Enclave which is a product acquired in the Business Combination.

cybersecurity software and services market sectors are highly competitive, subject to rapid change, and significantly affected by new

product introductions and other activities of market participants.

of our competitors have greater financial, technical, sales, marketing and other resources than we do.

Because of these and other factors,

competitive conditions in the markets we compete in are likely to continue to intensify in the future.

Increased competition could result

in price reductions for our products and services, reductions in our net revenue and profit margins and the loss of our market share,

any of which would likely harm our business.

believe that our future results depend largely upon our ability to serve our customers better than our competitors, and by offering new

product enhancements, whether by internal development or acquisition.

We also believe that we must provide product offerings that compete

favorably against those of our competitors with respect to ease of use, reliability, performance, range of useful features, reputation

competitive conditions in the markets we compete in are likely to continue to intensify in the future, as participants compete for market

Increased competition could result in price reductions for our products and services, possibly reducing our net revenue and profit

margins and resulting in a loss of our market share, any of which would likely harm our business.

believe that our future results depend largely upon our ability to serve our clients and customers with the products and services described

above better than our competitors, and by offering new services and product enhancements, whether such product and service offerings

are developed internally or through acquisition.

We also believe that we must provide product and service offerings that compete favorably

against those of our competitors with respect to ease of use, reliability, performance, range of useful features, reputation and price.

anticipate that we will face increasing pricing pressures from our competitors in the future.

Since there are low barriers to entry into

the encryption software market, which is subject to rapid technological change, we believe that competition in our market will persist

and intensify in the future.

the cybersecurity services and software markets, which are both subject to rapid technological change, we believe competition in our

market will persist and intensify in the future.

believe that our intellectual property is an important and vital asset, which enables us to develop, market, and sell our products and

8 unchanged sentences

In addition, our license agreements related to our software and proprietary information

includes confidentiality terms.

include confidentiality terms.

These agreements are generally non-transferable.

10 unchanged sentences

and our intellectual property rights may be challenged.

Cipherloc logo is a registered trademark with the U.S.

SideChannel and Enclave logos are registered trademarks with the U.S.

Patent and Trademark Office.

In the United States, we are generally able to maintain

In the United States, we can maintain

our trademark rights and renew trademark registrations for as long as the trademarks are in use.

4 unchanged sentences

The level of such control generally depends on the nature of the products in question.

the level of export control is impacted by the nature of the software and encryption incorporated into our products.

the level of export control is impacted by the nature of the software and cybersecurity incorporated into our products.

In those countries

5 unchanged sentences

export restrictions apply to

all our products, whether or not they perform encryption functions.

If we become a Department of Defense contractor in the future, certain

registration requirements may be triggered by our sales.

In addition, certain of our products and related services may be subject to

the International Traffic in Arms Regulations (ITAR) if our software or services are specifically designed or modified for defense purposes.

If we become engaged in manufacturing or exporting ITAR-controlled goods and services (even if we do not export such items), we will

be required to register with the U.S.

all our products, whether or not they perform cybersecurity functions.

If we become a Department of Defense contractor in the future,

certain registration requirements may be triggered by our sales.

In addition, certain of our products and related services may be subject

to the International Traffic in Arms Regulations (ITAR) if our software or services are specifically designed or modified for defense

If we become engaged in manufacturing or exporting ITAR-controlled goods and services (even if we do not export such items),

we will be required to register with the U.S.

State Department.

date, Export Control Regulations have had no material impact on our business.

to our existing products may be subject to review under the Export Administration Act to determine what export classification they will

In addition, any new products that we release in the future will also be subject to such review before we can export them.

Congress continues to discuss t the correct level of export control in possible anti-terrorism legislation.

Congress continues to discuss the correct level of export control in possible anti-terrorism legislation.

Such export regulations

10 unchanged sentences

federal laws and implementing regulations, such as the

[GLBA and HIPAA], as well as state and international laws and regulations, including the European Union General Data Protection Regulation

Some of these laws have requirements on the transmittal of data from one jurisdiction to another.

In the event our systems are

compromised, many of these privacy laws require that we provide notices to our customers whose personally identifiable data may have

been compromised.

Additionally, if we transfer data in violation of these laws, we could be subjected to substantial fines.

the risk of having such data compromised, we use encryption and other security to protect our databases.

of the date of this Annual Report on Form 10-K, we have three full-time employees and one part-time employee.

We also have four independent

contractors that provide services to us.

GLBA and HIPAA, as well as state and international laws and regulations, including the California Consumer Privacy Act (CCPA) and the

European Union General Data Protection Regulation (GDPR).

Some of these laws have requirements on the transmittal of data from one jurisdiction

In the event our systems are compromised, many of these privacy laws require that we provide notices to our customers whose

personally identifiable data may have been compromised.

Additionally, if we transfer data in violation of these laws, we could be subjected

to substantial fines.

To mitigate the risk of having such data compromised, we use cybersecurity, software and other security procedures

to protect our databases.

of November 30, 2022, we had nineteen (19) full-time employees.

We also have thirteen (13) independent contractors that provide services

We anticipate that we will need to increase our staffing in the foreseeable future.

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

What changed 10-K

Item 1. Business