What changed in this filing

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Item 1. Financial Statements

2023-08-09 compared with 2023-05-09 · 160 added, 148 removed, 324 unchanged (49% of the section changed)

12 unchanged sentences

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

0 and 100 shares issued and outstanding as of June

30, 2023 and September 30, 2022, respectively

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

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

March 31, 2023

and September 30, 2022

212,765,780 and 148,724,056 shares issued and outstanding as of June 30,

2023 and September 30, 2022, respectively

paid-in capital

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and development

Combination related costs

operating expenses

income (loss)

income (expense), net

income (loss) before income tax expense

income (loss) after income tax expense

income (loss) per common share – basic and diluted

income (loss) per common share – basic

average common shares outstanding – basic and diluted

average common shares outstanding – basic

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

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thousands, except preferred shares)

the Six Months Ended March 31, 2023

the Nine Months Ended June 30, 2023

Stockholders’

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at March 31, 2023

the Six Months Ended March 31, 2022

issued for services

compensation expense

of Preferred to Common

Combination – Contingent Consideration

at June 30, 2023

the Nine Months Ended June 30, 2022

Stockholders’

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at March 31, 2022

income (loss)

at June 30, 2022

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

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income (loss)

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

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

Combination related costs

in operating assets and liabilities:

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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.

growth strategy focuses on these three initiatives:

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

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.

plan to address the needs of our customers is to provide more effective and cost-efficient products and tech-enabled services cybersecurity

and related services including virtual Chief Information Security Officer (“vCISO”), zero trust, third-party risk management,

due diligence, privacy, threat intelligence, and managed end-point security solutions.

Zero trust is a security framework requiring all

users to be continuously validated being granted or keeping access to digital assets, data, and applications.

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

Enclave seamlessly combines access control, microsegmentation, encryption, and other secure networking concepts creating a comprehensive

It allows information technology professionals to easily segment the enterprise network, place the right assets in those segments,

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We expect to begin recognizing revenue from Enclave during fiscal year 2023.

growth strategy focuses on these three initiatives:

new vCISO clients;

new Cybersecurity Software and Services (“Cybersecurity Software and Services”) offerings, such as Enclave;

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

as additional vCISO time and material projects, which additional time’s cost to customers ranges from $ 350 to $ 450 per hour.

vCISO is embedded as a member of the C-suite personnel from two (2) to five (5) of our vCISO clients reporting to the chief executive

officer, chief financial officer, or general counsel of most such vCISO clients.

July 1, 2022 (the “Closing Date”) we completed an acquisition (“Business Combination”) of all the outstanding

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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.

Cipherloc Corporation, the Delaware parent company

of SCS, 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.

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”)

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.

part of the Business Combination, the former stockholders of SCS (the “Sellers”) transferred all of their equity securities

in SCS 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”).

In addition the Sellers were 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 SCS, as a subsidiary of the Company, achieved 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

The number of the Second Tranche Shares could have been reduced or increased, based upon whether SCS’ 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.

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.

was also 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 accounting principles generally accepted

in the United States of America (“U.S.

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

(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.

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.

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

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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.

The preparation of financial statements in conformity with U.S.

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

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.

Certain of our accounts, including goodwill, identifiable intangibles, and

deferred tax assets and liabilities, including related valuation allowances, are based upon estimates.

the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of normal

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Securities and Exchange Commission (“SEC”).

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.

July 1, 2023 Brian Haugli, our chief executive officer, was granted 666,667 restricted stock units as stated in his annual employment

agreement and approved by our Board of Directors (“Board”).

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

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after the acquisition date, will be recognized in the consolidated statement of operations in the period of the estimated fair value

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.

Business Combination 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.

Value of Financial Instruments

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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

In cases when customers are invoiced in advance or pay in advance of our product or service delivery, recognition of revenue is deferred

until 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.

do not have any material variable consideration arrangements, or any material payment terms with our customers other than standard payment

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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

all of their equity securities in SCS for a total of 59,900,000 shares of the Company’s common stock (“First Tranche Shares”),

and 100 shares of the Company’s Series A Preferred Stock, $ 0.001 par value.

The Sellers were 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 SCS,

as a subsidiary of the Company, achieved 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 SCS with trailing twelve-month revenue equaling

$ 5.7 million.

The combined 62,016,618 Second Tranche shares and 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 and six months ended March 31, 2022.

1, 2021, and show activity for the three months and nine months ended June 30, 2022.

OF UNAUDITED PROFORMA OPERATIONS RESULTS

the Three Months Ended March 31, 2022

the Six Months Ended March 31, 2022

For the Three Months

Ended June 30, 2022

the Nine Months

Ended June 30, 2022

thousands, except share and per share data)

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loss per share (a)

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

forma weighted average shares outstanding were 148.1 million for the three months and nine months ended June 30, 2022.

4 – REVENUE FROM CONTRACTS FROM CUSTOMERS

Concentration

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.

customer individually accounted 10 % or more of our revenue during the nine months ended June 30, 2023 and 2022.

revenue was $ 358,000 at June 30, 2023.

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

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

in deferred revenue for the nine months ended June 30, 2023 were as follows:

OF CHANGES IN DEFERRED REVENUE

on September 30, 2022

at March 31, 2023

at June 30, 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;

Security Officer services that we provide to our clients on a fractional, virtual or outsourced basis;

thus, we use the acronym “vCISO”.

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SideChannel employees and indirectly by third party service providers.

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

table below reflects the revenue by category for the nine months ended June, 2023 and 2022:

OF REVENUE BY CATEGORY

Months Ended March 31

Months Ended June 30

Cybersecurity

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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.

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.

nine months ended June 30, 2023, we paid $ 36,000 to RealCISO for licenses that we can resell to our clients.

For the nine months ended

June 30, 2023, we have invoiced our clients $ 180,100 for the annual use of RealCISO licenses.

Chasteen, our Executive Vice President of Sales, has an amount payable to the Company in relation to the payroll taxes paid by the Company

on his behalf for restricted stock units that vested during calendar year 2022.

The balance due is $ 6,864 and is recorded in prepaid

and other current assets as of June 30, 2023.

other related party transactions occurred during the three and nine months ended June 30, 2023.

7 – COMMITMENTS AND CONTINGENCIES

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Incentive Plan”) approved by stockholders on September 13, 2021.

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.

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

2022 the Company granted restricted stock units to directors and employees with service-based vesting conditions.

The restricted stock

units vest over a 3 -year service period.

following table summarizes the activity for unvested restricted stock units granted to directors and employees during the nine months

ended June 30, 2023:

OF UNVESTED RESTRICTED STOCK UNITS ACTIVITY

Average Grant Date Fair Value

Average Grant

Date Fair Value

Grants at September 30, 2022

( 1,768,517 )

Canceled/Forfeited

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.

Grants at June 30, 2023

incurred stock-based compensation expense of $ 127,000 and $ 372,000 respectively for the three months and nine months ended June 30, 2023.

Unamortized stock compensation expense is $ 764,000 as of June 30, 2023.

9 - STOCKHOLDERS’ EQUITY

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,

December 29, 2021, SCS was authorized to issue 1,000 shares of common stock with a $ 0.01 per share par value all of which were issued

and outstanding at December 29, 2021.

The 1,000 shares of common stock were exchanged for 62,016,618 shares of Cipherloc 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.

explained in Note 5, in December 2021, we promised to pay Mr.

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title, and interest in SCS.

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.

The balance of $ 50,000 is due and payable by December 31, 2023.

LLC, a predecessor entity to SCS, made profit sharing distributions of $ 461,000 during the three months ended December 31, 2021 in accordance

with its partnership agreements.

of June 30, 2023, and 2022, we had 212,765,780 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 six months ended March 31, 2023.

did not issue shares of common stock for cash during the nine months ended June 30, 2023.

Stock Issued for Business Combinations

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).

issued 62,016,618 shares for Business Combination related activity during the nine months ended June 30, 2023 (Note 3).

Stock Issued for Services

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.

Board has elected to have each of its non-executive 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 June 30, 2023, the Company issued 166,668 shares of common stock as

compensation for a value of $ 16,000 to the non-executive members of the Board for services received during the third quarter of fiscal

For the nine months ended June 30, 2023, we have issued 513,893 shares of common stock as compensation for a value of $ 47,000

to the non-executive members of our Board.

Stock Issued Under Equity Incentive Plan

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 .

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.

have issued 1,511,114 shares of common stock as incentive compensation during the nine months ended June 30, 2023 for the vesting of

1,768,517 restricted stock units granted at an average grant date fair value of $ 0.14 per share.

The grant date fair value of the common stock issued as incentive compensation

during the nine months ended June 30, 2023 is $ 212,000 .

Some employees opted to sell shares

to fund the payroll taxes due on the taxable income generated by the vested restricted stock units.

The number of shares sold by these

employees to fund payroll taxes through June 30, 2023 was 257,403 .

Stock Issued For Conversion of Series A Preferred Stock

the quarter ended June 30, 2023, we issued 100 shares of common stock for the conversion of 100 shares Series A Preferred stock.

of June 30, 2023, we had no shares of Series A Preferred Stock outstanding.

During the three months ended June 30, 2023, 100 shares of

Series A Preferred Stock were converted into 100 shares of common stock.

The Series A Preferred Stock shares were issued as part of the

Business Combination .

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, 2021.

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 March 31, 2023:

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

OF WARRANT ACTIVITY

Average Exercise Price

Average Remaining Life

Weighted Average

Exercise Price

Weighted Average

Remaining Life

at September 30, 2022

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( 11,410,400 )

at March 31, 2023

at June 30, 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