What changed in this filing

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Item 1. Financial Statements

2023-05-09 compared with 2023-02-09 · 153 added, 186 removed, 319 unchanged (52% of the section changed)

2 unchanged sentences

thousands, except share and per share data)

December 31, 2022

September 30, 2022

receivable, net

expenses and other current assets

current assets

Accounts receivable, net

Deferred costs

Prepaid expenses and other current assets

Total current assets

Deferred costs

LIABILITIES & STOCKHOLDERS’ EQUITY

& STOCKHOLDERS’ EQUITY

payable and accrued liabilities

taxes payable

current liabilities

Accounts payable and accrued liabilities

Deferred revenue

Promissory note payable

Income taxes payable

Total current liabilities

Deferred tax liability

Total liabilities

Commitments and contingencies

Series A convertible preferred stock, $ 0.001 par value, 10,000,000 shares authorized;

100 and 100 shares issued and outstanding as of December 31, 2022 and September 30, 2022

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

tax liability

and contingencies

A convertible preferred stock, $ 0.001 par value, 10,000,000 shares authorized;

100 and 100 shares issued and outstanding as of March

31, 2023 and September 30, 2022

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

149,571,281 and 148,724,056 shares issued and outstanding;

December 31, 2022 and September 30, 2022

Additional paid-in capital

Accumulated deficit

Total stockholders’ equity

Total liabilities and stockholders’ equity

March 31, 2023

and September 30, 2022

paid-in capital

stockholders’ equity

liabilities and stockholders’ equity

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

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thousands, except share and per share data)

Three Months Ended

Cost of revenues

and administrative

and marketing

and development

operating expenses

General and administrative

Sales and marketing

Research and development

Total operating expenses

Operating income (loss)

Other income (expenses)

Other income (expense), net

Net income (loss)

Net loss per common share – basic and diluted

Weighted average common shares outstanding – basic and diluted

income (loss)

income (loss) per common share – basic and diluted

average common shares outstanding – basic and diluted

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

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thousands, except preferred shares)

December 31, 2021

For the Three Months ended

Preferred Stock

the Six Months Ended March 31, 2023

Stockholders’

December 31, 2021

Balance at September 30, 2021

Equity redemptions

Equity distributions

Balance at December 31, 2021

For the Three Months ended

Preferred Stock

at September 30, 2022

issued for services

compensation expense

at December 31, 2022

issued for services

compensation expense

at March 31, 2023

the Six Months Ended March 31, 2022

Stockholders’

December 31, 2022

Balance at September 30, 2022

Shares issued for services

Stock-based compensation expense issued to directors & employees

Net income (loss)

Balance at December 31, 2022

at September 30, 2021

distributions

at December 31, 2021

at March 31, 2022

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

STATEMENTS OF CASH FLOWS

Three Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) income

Adjustments to reconcile net (loss) income to net cash flows used in operating activities:

Stock-based compensation

Changes in operating assets and liabilities:

Accounts receivable

Unbilled revenue

Prepaid expenses and other assets

Accounts payable and accrued liabilities

Deferred revenue

Net cash used in operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of fixed assets

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Equity redemption

Equity distribution

Net cash used in financing activities

(DECREASE) INCREASE IN CASH

CASH, BEGINNING OF PERIOD

CASH, END OF PERIOD

Stock-based compensation included in accounts payable and accrued liabilities

NON-CASH INVESTING AND FINANCING ACTIVITIES:

Equity redemption with notes payable

FLOWS FROM OPERATING ACTIVITIES:

income (loss)

to reconcile net (loss) income to net cash flows used in operating activities:

in operating assets and liabilities:

expenses and other assets

payable and accrued liabilities

cash provided by (used in) operating activities

FLOWS FROM INVESTING ACTIVITIES:

of fixed assets

cash used in investing activities

FLOWS FROM FINANCING ACTIVITIES:

cash used in financing activities

INCREASE IN CASH

BEGINNING OF PERIOD

END OF PERIOD

INVESTING AND FINANCING ACTIVITIES:

redemption with notes payable

compensation included in accounts payable and accrued liabilities

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

TO CONSOLIDATED FINANCIAL STATEMENTS

THE THREE MONTHS ENDED DECEMBER 31, 2022 AND 2021

in thousands except shares and per share data)

1 – NATURE OF OPERATIONS

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growth strategy focuses on these three initiatives:

Securing new vCISO clients;

Adding new Cybersecurity Software and Services (“Cybersecurity

Software and Services”) offerings;

Increasing adoption of Cybersecurity Software, including

Enclave, and Services offerings at vCISO clients.

new vCISO clients;

new Cybersecurity Software and Services (“Cybersecurity Software and Services”) offerings;

adoption of Cybersecurity Software, including Enclave, and Services offerings at vCISO clients.

clients typically enter into twelve (12) month engagements consisting of a monthly subscription with an annual renewal option, as well

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1, 2022, SCS, and its direct and indirect subsidiaries, as applicable.

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.

Business Combination was treated as a reverse acquisition (reverse merger), in accordance with U.S.

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Accounting Standards Codification (“ASC”) Topic 805, Business Combinations.

Mortgage Company, the predecessor in interest to the Company was incorporated in the State of Texas on June 22, 1953.

Effective August

27, 2014, American Mortgage Company changed its name to “Cipherloc Corporation.” Cipherloc Corporation (“Cipherloc”)

reincorporated in Delaware effective September 30, 2021, and on July 5, 2022, Cipherloc changed its name to “SideChannel, Inc.”

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

Our website is www.sidechannel.com.

are following the guidance of the Centers for Disease Control and Prevention and the local regulatory authorities in regions outside

While the negative impact of COVID-19 on our business was reduced significantly throughout 2022, the spread of the virus or

variants of the virus could worsen and one or more of our significant customers or suppliers could be impacted, or significant additional

governmental regulations and restrictions could be imposed, thus negatively impacting our business in the future.

We continue to monitor

the situation closely in the regions in which we operate in the U.S.

and abroad and will adjust our operations as necessary to protect

the health and well-being of our employees.

To the extent that further governmental mandates or restrictions are implemented in the future,

we currently expect to be able to continue to operate our business in a manner similar to how we have operated over the past two years.

2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Use of Estimates

of Presentation and Use of Estimates

accompanying consolidated financial statements include our accounts and those of our wholly owned subsidiaries.

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Securities and Exchange Commission (“SEC”).

have assessed our operations and determined that there were no material subsequent events requiring adjustment to, or disclosure in,

our consolidated financial statements for the three months ended December 31, 2022 .

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 .

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.

combined shares were issued as follows:

Chasteen, 3,721,003

Haugli, 44,031,870

Hnatiw, 6,821,839

Klein, 3,721,003

San Mateo, 3,721,003

the issuance of these shares, Brian Haugli owned 40.9 % of the Company’s outstanding shares of common stock.

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

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expected to have a material impact on our consolidated financial statements.

December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.

This guidance removes

certain exceptions to the general principles in Topic 740 and enhances and simplifies various aspects of the income tax accounting guidance,

including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership

changes in investments, and interim-period accounting for enacted changes in tax law.

This standard is effective for fiscal years and

interim periods within those fiscal years beginning after December 15, 2021.

Early adoption is permitted.

The adoption of this standard

is not expected to have a material impact on our consolidated financial statements.

3 – ACQUISITIONS

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(now known as SCS, Inc.)

discussed further in Note 3 to our consolidated financial statements in our 2022 Form 10-K, on the Closing Date, the former stockholders

of the Subsidiary (the “Sellers”) exchanged all of their equity securities in the Subsidiary for a total of 59,900,000 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 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.

of December 31, 2022, our trailing twelve-month revenue was $ 5.3 million.

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.

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

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 ended December 31, 2021.

1, 2021, and show activity for the three months and six months ended March 31, 2022.

OF UNAUDITED PROFORMA OPERATIONS RESULTS

For the Three

December 31, 2021

Cost of revenues

Operating expenses

Operating loss

Net loss before income taxes

Basic loss per share (a)

forma weighted average shares outstanding were 148.1 million for the three months ended December 31, 2021.

the Three Months Ended March 31, 2022

the Six Months Ended March 31, 2022

thousands, except share and per share data)

loss before income taxes

loss per share ( a )

forma weighted average shares outstanding were 148.1 million for the three months and six months ended March 31, 2022.

4 – REVENUE FROM CONTRACTS FROM CUSTOMERS

Concentration

the three months ended December 31, 2022, eight customers accounted for approximately 42 % of our revenues.

During the three months ended

December 31, 2021, eight customers also accounted for approximately 38 % of our revenues.

None of the customers individually accounted

for over 10 % of our revenue during the three months ended December 31, 2022 and 2021.

revenue was $ 74,000 at December 31, 2022.

customer individually accounted 10 % or more of our revenue during the six months ended March 31, 2023 and 2022.

revenue was $ 372,000 at March 31, 2023.

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

in deferred revenue were as follows:

in deferred revenue for the six months ended March 31, 2023 were as follows:

OF CHANGES IN DEFERRED REVENUE

Three Months Ended December 31, 2022

Balance on September 30, 2022

Deferral of revenue

Recognition of revenue

Balance at December 31, 2022

on September 30, 2022

at March 31, 2023

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 the acronym “vCISO”.

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

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SideChannel employees and indirectly by third party service providers.

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

table below reflects the revenue by category for the six months ended March 31, 2023 and 2022:

OF REVENUE BY CATEGORY

Three Months Ended December 31

vCISO Services

Cybersecurity Software & Services

Months Ended March 31

Cybersecurity

Software & Services

to a Membership Interest Redemption Agreement, dated November 3, 2021, by and between the SCS and Akash Desai (“Desai Redemption

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We receive revenue from our customers for the use of RealCISO software and we pay licensing fees to RealCISO for such use.

three months ended December 31, 2022, we paid $ 36,000 to RealCISO for additional licenses that SideChannel can resell to its clients.

Polk, our Chief Financial Officer, David Chasteen, our Executive Vice President of Sales and Nick Hnatiw, our Chief Technology Officer

each have amounts payable to the Company 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 three individuals is $ 16,622 and is recorded in prepaid and other current

assets as of December 31, 2022.

At the time of this Quarterly Report on Form 10-Q (“this Report”) was filed, Mr.

paid the Company in full for his portion of this obligation.

other related party transactions occurred during the three months ended December 31, 2022.

six months ended March 31, 2023, we paid $ 36,000 to RealCISO for additional licenses that SideChannel can resell to its clients.

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.

balance due from these two individuals is $ 12,846 and is recorded in prepaid and other current assets as of March 31, 2023.

other related party transactions occurred during the three and six months ended March 31, 2023.

7 – COMMITMENTS AND CONTINGENCIES

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

of operations.

April 2021, Eric Marquez, our former Secretary/Treasurer and Chief Financial Officer, and certain other plaintiffs, filed a lawsuit against

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to continue to vigorously defend against the litigation.

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

or results of operations.

8 – STOCK BASED COMPENSATION

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The restricted stock units vest over a 3 -year service period.

following table summarizes the activity for unvested RSU’s granted to directors and employees during the quarter ended December

following table summarizes the activity for unvested RSU’s granted to directors and employees during the six months ended March

OF UNVESTED RESTRICTED STOCK UNITS ACTIVITY

Weighted Average Grant Date Fair Value

Number of RSU’s

Outstanding Grants at September 30, 2022

Average Grant Date Fair Value

Grants at September 30, 2022

Canceled/Forfeited

Outstanding Grants at December 31, 2022

We incurred stock-based compensation

expense of $ 115,000 for the three months ended December 31, 2022.

stock compensation expense is $ 727,000 as

of December 31, 2022.

Grants at March 31, 2023

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.

9 - STOCKHOLDERS’ EQUITY

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title, and interest in SCS.

LLC made profit sharing distributions of $ 489,000 during the three months ended December 31, 2021.

in accordance with its partnership

of December 31, 2022, and 2021, we had 148,904,613 and 59,900,000 shares of common stock outstanding, respectively, and were authorized

to issue 681,000,000 shares of common stock at a par value of $ 0.001 .

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.

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.

Stock Issued for Cash

did not issue shares of common stock for cash during the three months ended December 31, 2022.

did not issue shares of common stock for cash during six months ended March 31, 2023.

Stock Issued for Business Combinations

did not issue shares for mergers or acquisitions related activity during the three months ended December 31, 2022.

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).

Stock Issued for Services

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

On December 27, 2022, the Company issued 180,557 shares of

common stock as compensation for a value of $ 18,000 to the Board for the first quarter of fiscal year 2023.

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.

Stock Issued Under Equity Incentive Plan

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

of December 31, 2022, we had 100 shares of Series A Preferred Stock outstanding.

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.

of March 31, 2023, we had 100 shares of Series A Preferred Stock outstanding.

These shares were issued as part of the Business Combination .

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to the July 1, 2022 Business Combination, Cipherloc had outstanding warrants which continue to be binding on the Company after the Business

following table summarizes warrant activity for the period from September 30, 2022 to December 31, 2022:

following table summarizes warrant activity for the period from September 30, 2022 to March 31, 2023:

OF WARRANT ACTIVITY

Number of Warrants

Weighted Average Exercise Price

Weighted Average Remaining Life

Outstanding at September 30, 2022

Average Exercise Price

Average Remaining Life

at September 30, 2022

Canceled/Forfeited

Outstanding at December 31, 2022

( 1,316,000 )

at March 31, 2023

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

What changed 10-Q

Item 1. Financial Statements