What changed in this filing

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Item 1. Business

2023-12-27 compared with 2022-12-20 · 112 added, 150 removed, 145 unchanged (64% of the section changed)

Reverse Merger

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

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On September 9, 2022,

SideChannel, Inc.

the acquired Massachusetts corporation and a subsidiary of the registrant, changed its name to SCS, Inc.

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”).

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

transaction was accounted for as a reverse acquisition merger, 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;

(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

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.

Because SCS 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 became a wholly owned subsidiary of the Company.

As used herein, the words “the Company”

refers to SideChannel, Inc., together with its subsidiaries.

Overview & Strategy

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

Company is a provider of cybersecurity services and technology to companies;

national, state and local municipalities;

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

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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.

We have developed a new software product, Enclave, that we believe offers companies of all sizes the means to simplify

several crucial cybersecurity infrastructure procedures, including encryption, microsegmentation and access control.

Enclave is a modern network segmentation platform that combines access control, asset inventory, encryption and zero trust network

access to create a microsegmentation solution that prioritizes both IT and cybersecurity’s highest-level needs.

Enclave is purpose-built to:

Simultaneously secure and

segment networks

the damage a bad actor can do by decreasing the digital square footage they can explore

implement access controls for employees, support staff, and third-party vendors while never disrupting current operations

strategy focuses on growth from the following three areas:

new vCISO clients

new Cybersecurity Software and Services offerings such as Enclave

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

engagements typically include a fixed monthly subscription fee with durations longer than twelve (12) months.

Rates for vCISO time

and material projects range from $350 to $425 per hour.

Each of our vCISOs is generally embedded into the C-suite executive teams of

two (2) to four (4) of our clients.

We augment our vCISO offering with a full range of other cybersecurity services through a team

of security engineers combined with a network of third-party service providers and value-added resellers (“VARs”).

Commercial relationships with VARs provide SideChannel with additional internal capabilities to mitigate cybersecurity risks.

earn a commission on software engagements we generate through VARs.

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

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As this team delivers vCISO

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

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

our scope of work and increase our revenue generating potential.

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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.

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 framework.

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

Cybersecurity Software and Services category.

Detail on the revenue performance of these categories is discussed in

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this

Annual Report on Form 10-K.

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

Virtual Chief Information Security Officers

risk management

intelligence, and

end-point security solutions

believe that our current 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, our network of subcontractors, and

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

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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

to cost effectively grow our client base and broaden the subject matter expertise of our service delivery teams while maintaining the agility needed to

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

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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/.

Enclave seamlessly combines access

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

Through software it

allows Information Technology (IT) to easily segment the enterprise network, place the right staff in those segments and direct

Unlike open, traditional models, Enclave allows for near-limitless micro-segmented networks to operate insulated from one

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

During 1996, the Company acquired the

operations of Eden Systems, Inc.

(“Eden”), making it a wholly owned subsidiary.

Eden was engaged in water treatment and the

retailing of cleaning products.

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,

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

National Scientific Corporation.

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

Effective August 27, 2014, the Company changed its name to “Cipherloc Corporation.” The Company became a Delaware

corporation on September 30, 2021.

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.

part of the Business Combination, the former stockholders of SCS (the “Sellers”) exchanged 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

The 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 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 was also subject to adjustment based upon any successful

indemnification claims made by the parties pursuant to the Purchase Agreement.

The Closing Working Capital Adjustment increased the Second Tranche Shares by 2,116,618 shares of common stock.

100 shares of Series A Preferred Stock were converted to common stock on May 4, 2023.

Shares are subject to a Lock-Up/Leak-Out Agreement, pursuant to which, subject to certain exceptions, the Sellers may not directly or

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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, 2022 and September 30, 2021 were $178,000 and $0, respectively.

Since Enclave is a proprietary software product, we classify all of our software development activities to be research

and development.

The success of our software product, Enclave,

depends on our ability to provide our customers with reliable, innovative features and benefits that are delivered before, or at least

no later than, our competitors.

At September 30, 2023, we employed a total of three (3) software engineers engaged in product development.

In addition, when the demands of product development exceed the capacity or knowledge of our in-house staff, we retain temporary third-party

consultants to assist us.

research and development expenditures for the fiscal years ended September 30, 2023 and September 30, 2022 were $669,000 and $178,000,

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

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

product introductions and other activities of market participants.

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Because of these and other factors,

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

competitive conditions in the markets we operate 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

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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

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

are developed internally or through acquisition.

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Since there are low barriers to entry into

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.

the cybersecurity services and software markets, we believe competition in these

markets will persist and intensify in the future.

Our chief services competitors include companies such as Optiv, NCC, Coalfire, PwC, EY, Deloitte, and GuidePoint.

Our primary software competitors are companies such as Perimeter 81, Zscaler, Palo Alto, and Illumio.

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

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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

of September 30, 2023, we had 23 full-time employees.

We also have approximately 11 independent contractors that provide services to

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