SideChannel, Inc 8-K/A, filed Sep 12, 2022
SideChannel, Inc. (SDCH)
About this 8-K/A
SideChannel, Inc filed this 8-K/A on September 12, 2022, reporting on events of July 1, 2022.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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EXPLANATORY NOTE
This Form 8-K/A (this “Amendment”) amends the Current Report on form 8-K of SideChannel, Inc. (the “Company”) as filed with the Securities and Exchange Commission on July 6, 2022 (the “Original Form 8-K”) that reported Cipherloc Corporation’s acquisition of SideChannel, Inc., a Massachusetts corporation (“SCS”) on July 1, 2022 (the “Acquisition”). Under the authority granted by Item 9.01 of Form 8-K, the Company did not file audited historical financial statements of SCS and unaudited pro forma financial information when the Original Form 8-K was filed.
Since filing the Original Form 8-K, SideChannel, Inc. the Massachusetts corporation and a subsidiary of the registrant, has initiated changing its name to SCS, Inc. and Cipherloc Corporation, the Delaware parent company of the subsidiary has changed its name to SideChannel, Inc. This Amendment will refer to the Combined Company as SideChannel, Inc. (the “Company” or “SideChannel”). SideChannel is the registrant filing this Amendment.
This Amendment will refer to the Massachusetts subsidiary as SCS, Inc. (“SCS”). Historical financial statements for SCS on a standalone basis are provided in Exhibit 99.2
Cipherloc Corporation (“Cipherloc”) will be referenced to identify historical financial information included in the pro forma financial statements provided in Exhibit 99.3 and as needed to describe the Acquisition in financial statement notes.
This Amendment is being filed solely to amend and supplement the Original Form 8-K to include audited historical financial statements of SCS, unaudited interim historical financial statements of SCS, and unaudited pro forma financial information for the combined businesses in accordance with the requirements of Item 9.01 of Form 8-K. This Amendment effects no other changes to the Original Form 8-K. The financial statements and unaudited pro forma financial information filed hereto should be read in conjunction with the Original Form 8-K and with the audited and unaudited financial statements and information included in the Company’s Form 10-K annual report filed with the SEC December 21, 2021 and our Form 10-Q quarterly reports respectively filed with the SEC February 14, 2022, May 13, 2022, and August 15, 2022.
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Item 9.01 Financial Statements, Pro Forma Financials and Exhibits
The Financial Accounting Standards Board (“FASB”) issues authoritative literature in the Accounting Standards Codification (“ASC”). 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 transaction. Applying ASC 805 to the Acquisition, the Company determined that SCS will be the accounting acquirer for financial reporting purposes.
| (a) | Financial Statements of SCS, Inc. (Business Acquired) |
In accordance with Item 9.01(a), the following are attached to this Form 8-K/A as Exhibit 99.2 for The Former SideChannel.
| ● | Audited Balance Sheets as of September 30, 2021 and September 30, 2020 | |
| ● | Audited Statements of Operations for the years ended September 30, 2021 and September 30, 2020 | |
| ● | Audited Statements of Stockholders’ Equity for the years ended September 30, 2021 and 2020 | |
| ● | Audited Statement of Cash Flows for the years ended September 30, 2021 and September 30, 2020 | |
| ● | Notes to the financial statements for the years ended September 30, 2021 and 2020 | |
| ● | Unaudited Condensed Balance Sheet as of June 30, 2022 | |
| ● | Unaudited Condensed Statements of Operations for the nine months ended June 30, 2022 | |
| ● | Unaudited Condensed Statement of Stockholders’ Equity for the nine months ended June 30, 2022 | |
| ● | Unaudited Condensed Statement of Cash Flows for the nine months ended June 30, 2022 | |
| ● | Notes to the Unaudited Financial Statements for the nine months ended June 30, 2022 |
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| (b) | Pro Forma Financial Information of SideChannel, Inc (Combined Cipherloc Corporation and SCS, Inc.) |
In accordance with Item 9.01(b), Unaudited pro forma condensed combined financial statements, the following are attached to this Form 8-K/A as Exhibit 99.3.
| ● | Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2022 | |
| ● | Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended September 30, 2021 | |
| ● | Unaudited Pro Forma Condensed Combined Statement of Operations for the nine months ended June 30, 2022 | |
| ● | Notes to the Pro Forma Balance Sheet and Income Statement |
| (c) | Exhibits |
| Exhibit | ||
| Number | Exhibit Description | |
| 3.1 | Certificate of Designation of Series A Preferred Stock* | |
| 3.2 | Certificate of Amendment filed with the Delaware Secretary of State on July 5, 2022* | |
| +10.1 | Brian Haugli Executive Employment Agreement* | |
| 10.2 | Independent Contractor Agreement by and between the Company and Sammy Davis dated July 1, 2022* | |
| 23.1 | Consent of Independent Registered Public Accounting Firm | |
| 99.1 | Press release dated July 5, 2022* | |
| 99.2 | Audited and Unaudited Condensed Financial Statements for The Former SideChannel | |
| 99.3 | Unaudited Condensed Combined Financial Statements | |
| 99.4 | Press release dated September 12, 2022 | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
+ Indicates a management contract, or any compensatory plan, contract or arrangement
* Previously filed with Form 8-K filed July 6, 2022
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Date: September 12, 2022 | SideChannel, Inc. | |
| By: | /s/ Ryan Polk | |
| Ryan Polk | ||
| Chief Financial Officer | ||
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Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of SideChannel, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of SCS, Inc., (“SCS”) formerly SideChannelSec, LLC, as of September 30, 2021 and 2020, and the related statements of operations, stockholders’ equity, and cash flows for the years ended September 30, 2021 and 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of SCS as of September 30, 2021 and 2020, and the results of its operations and its cash flows for the years ended September 30, 2021 and 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of SCS management. Our responsibility is to express an opinion on the SCS financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to SCS in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. SCS is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the SCS internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
RBSM LLP
| [Firm’s Signature] | |
| We have served as SCS, Inc.’s auditor since 2022. | |
| Las Vegas, NV | |
September 12, 2022 |
|
| PCAOB ID Number 587 | |
Exhibit 99.2
SCS, INC.
AUDITED BALANCE SHEETS
| September 30, 2021 | September 30, 2020 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 347,682 | $ | 491,210 | ||||
| Accounts receivable, net | 178,113 | 175,461 | ||||||
| Unbilled revenue | 306,677 | 68,193 | ||||||
| Total current assets | 832,472 | 734,864 | ||||||
| Fixed assets | 880 | 1,320 | ||||||
| Total assets | $ | 833,352 | $ | 736,184 | ||||
| LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 211,865 | $ | 225,869 | ||||
| Deferred revenue | 194,186 | 296,085 | ||||||
| Total current liabilities | 406,051 | 521.954 | ||||||
| Total liabilities | 406,051 | 521,954 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity | ||||||||
| Common stock, $0.01 par value, 1,000 shares authorized; 1,000 and 1,000 shares issued and outstanding as of September 30, 2021, and 2020, respectively | 10 | 10 | ||||||
| Additional paid-in capital | 23,055 | 23,055 | ||||||
| Retained earnings | 404,236 | 191,165 | ||||||
| Total stockholders’ equity | 427,301 | 214,230 | ||||||
| Total liabilities and stockholders’ equity | $ | 833,352 | $ | 736,184 | ||||
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SCS, INC.
AUDITED STATEMENTS OF OPERATIONS
| For the Year Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Revenues | $ | 2,798,560 | $ | 1,248,948 | ||||
| Cost of revenues | 1,536,445 | 623,598 | ||||||
| Gross profit | 1,262,115 | 625,350 | ||||||
| Operating expenses: | ||||||||
| General and administrative | 656,521 | 203,914 | ||||||
| Sales and marketing | 95,597 | 118,063 | ||||||
| Research and development | — | — | ||||||
| Total operating expenses | 752,118 | 321,977 | ||||||
| Operating income | 509,997 | 303,373 | ||||||
| Other expenses (income): | ||||||||
| Miscellaneous income | (2,623 | ) | (566 | ) | ||||
| Total other (income) expense | (2,623 | ) | (566 | ) | ||||
| Net income | $ | 512,620 | $ | 303,939 | ||||
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SCS, INC.
AUDITED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2021, AND 2020
| Common Stock | Additional | |||||||||||||||||||
| Shares | Amount | Paid-in Capital | Accumulated Deficit | Stockholders’ Equity | ||||||||||||||||
| Balance at September 30, 2019 | 1,000 | $ | 10 | $ | 32,698 | $ | (22,532 | ) | $ | 10,177 | ||||||||||
| Equity contributions | — | — | 1,218 | — | 1,218 | |||||||||||||||
| Equity distributions | — | — | (10,861 | ) | (90,243 | ) | (101,104 | ) | ||||||||||||
| Net income | — | — | — | 303,939 | 303,939 | |||||||||||||||
| Balance at September 30, 2020 | 1,000 | $ | 10 | $ | 23,055 | $ | 191,165 | $ | 214,230 | |||||||||||
| Equity distributions | — | — | — | (209,549 | ) | (209,549 | ) | |||||||||||||
| Redemption | (90,000 | ) | (90,000 | ) | ||||||||||||||||
| Net income | — | — | — | 512,620 | 512,620 | |||||||||||||||
| Balance at September 30, 2021 | 1,000 | $ | 10 | $ | 23,055 | $ | 404,236 | $ | 427,301 | |||||||||||
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SCS, INC.
AUDITED STATEMENTS OF CASH FLOWS
| For the Year Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 512,620 | $ | 303,939 | ||||
| Adjustments to reconcile net income to net cash flows provided by operating activities: | ||||||||
| Depreciation | 440 | 440 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (2,652 | ) | (170,221 | ) | ||||
| Unbilled revenue | (238,484 | ) | (51,350 | ) | ||||
| Prepaid and other current assets | — | 7,525 | ||||||
| Accounts payable and accrued liabilities | (14,004 | ) | 175,450 | |||||
| Deferred revenue | (101,899 | ) | 263,685 | |||||
| Net cash provided by operating activities | 156,021 | 529,468 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of fixed assets | — | — | ||||||
| Net cash used in investing activities | — | — | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Redemption | (90,000 | ) | — | |||||
| Equity contributions | 1,218 | |||||||
| Equity distributions | (209,549 | ) | (101,104 | ) | ||||
| Net cash used in financing activities | (299,549 | ) | (99,886 | ) | ||||
| (DECREASE) INCREASE IN CASH | (143,528 | ) | 429,582 | |||||
| CASH, BEGINNING OF PERIOD | 491,210 | 61,268 | ||||||
| CASH, END OF PERIOD | $ | 347,682 | $ | 491,210 | ||||
| Income tax paid | $ | — | $ | — | ||||
| Interest paid | $ | — | $ | — | ||||
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SCS, Inc.
Footnotes to the Audited Financial Statements
NOTE 1 – DESCRIPTION OF BUSINESS
SideChannelSec, LLC, A Massachusetts Limited Liability Company, was organized on September 14, 2017. SideChannelSec, LLC converted to a Massachusetts corporation on December 29, 2021 and changed its name to SideChannel, Inc. On December 29, 2021, SideChannelSec, LLC converted (the “Conversion”) from a limited liability company into a corporation (the “Corporation”). SideChannel, Inc., was formed in the state of Massachusetts in connection with the corporate restructuring that occurred on December 29, 2021, or the Restructuring. In accordance with the terms of the operating agreement of SideChannelSEC LLC, or the LLC Operating Agreement, and on the effective date of the Restructuring; the membership units of SideChannelSec LLC, that were issued and outstanding immediately prior to the effective date of the Restructuring were converted into common share of SideChannel, Inc.
On July 1, 2022, SideChannel, Inc., the Massachusetts corporation, was acquired by Cipherloc Corporation. SideChannel, Inc., the Massachusetts corporation, has initiated changing its name to SCS, Inc. (“SCS”). The audited financial statements and these corresponding notes have been prepared for SCS.
SCS determined that the Restructuring lacked economic substance and was therefore accounted for in a manner consistent with a common control transaction. Similarly, as there was no change in fair value between shareholders, individually or as a class, we determined that the exchange of shares occurring in the Restructuring should be accounted for as a modification of the equity securities and presented as a reclassification of the components of equity.
SCS was founded with the belief that small and mid-sized organizations deserved the expertise of an experienced chief information security officer (CISO). SCS provides chief information security officer services and ancillary security and privacy solutions to companies that chose to outsource these capabilities rather than insourcing.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
SCS prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Significant accounting policies are as follows:
Use of Estimates and Assumptions. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net revenues and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates.
Cash. SCS considers all highly liquid investments with a maturity at the time of purchase of three months or less to be cash equivalents. At September 30, 2021 and 2020, SCS’s cash includes cash on hand and cash in the bank. The balance of such accounts, at times, may exceed federally insured limits, as guaranteed by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC insures these deposits up to $250,000. As of September 30, 2021 and 2020, $97,682 and $241,210, respectively, of the SCS cash balance was uninsured.
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Liquidity and Capital Resources. SCS had total equity of $427,301 as of September 30, 2021. SCS expects to continue to generate operating income. As of September 30, 2021, SCS had $347,682 in cash. SCS believes that its existing cash balances and cash flow from operations are sufficient to fund its operations for the next 12 months.
Receivables. SCS bills customers and collects monies within thirty days of invoice date. There are little to no delinquencies or bad debt. SCS had accounts receivable of $178,113 at September 30, 2021, and $175,461 at September 30, 2020. None of these receivables are used as collateral.
Fixed Assets. SCS capitalizes furniture and equipment with a cost in excess of $2,000 and depreciates over twenty-four months. SCS capitalizes autos and depreciates over thirty-six months. SCS had net fixed assets of $880 at September 30, 2021.
Long-Lived Assets. Long-lived assets are evaluated for impairment whenever events or changes in our business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted future cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value. During the years ended September 30, 2020 and 2021, SCS recorded no impairment loss.
Liabilities. SCS hires independent contractors to provide chief information security officer (“CISO”) services on behalf of its clients. The contractors are paid the month following the month when the services are delivered. As such, amounts due to contractors are accrued at month end for the costs incurred during the month. The amount of accrued liabilities at September 30, 2021 was $211,865 and $225,869 at September 30, 2020.
Revenue recognition. SCS recognizes revenues in accordance with the provisions of Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” and a series of amendments, issued by the Financial Accounting Standards Board (“FASB”).
Central to SCS’s revenue recognition guidance is a five-step revenue recognition model that requires the reporting entity to:
| 1. | Identify the contract, | |
| 2. | Identify the performance obligations of the contract, | |
| 3. | Determine the transaction price of the contract, | |
| 4. | Allocate the transaction price to the performance obligations, and | |
| 5. | Recognize revenue. |
SCS bills customers monthly in accordance with the customer contracts or agreements. From time to time, SCS bills customer in advance and treats these advance billings as deferred revenue.
Nature of Products and Services
Revenue is allocated generally to CISO, Risk management and other professional services which are recognized ratably over the contractual support period or in proportion to the time incurred at the agreed upon billing rate.
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Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. SCS records a contract asset or receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing.
Deferred revenue is comprised mainly of unearned revenue related to CISO, Risk management and other professional services. Deferred revenue also includes contracts for professional services to be performed in the future which are recognized as revenue when SCS delivers the related service pursuant to the terms of the customer arrangement.
Deferred revenue includes invoiced revenue allocated to remaining performance obligations that has not yet been recognized and will be recognized as revenue in future periods. Deferred revenue was $194,186 at September 30, 2021, and $296,085 at September 30, 2020. The deferred revenue is expected to be earned within 12 months of the balance sheet date,
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 90 days. In instances where the timing of revenue recognition differs from the timing of invoicing, SCS has determined its contracts generally do not include a significant financing component. The primary purpose of SCS’s invoicing terms is to provide customers with simplified and predictable ways of purchasing its products and services, not to receive financing from our customers or to provide customers with financing.
Significant Judgments
SCS’s contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.
Assets Recognized from Costs to Obtain a Contract with a Customer
SCS recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. SCS has determined that its sales commission program meets the requirements for cost capitalization. Total capitalized costs to obtain a contract were immaterial during the periods presented. SCS applies a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less.
Recently Issued Accounting Pronouncements Not Yet Adopted. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of the standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this standard replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The update is effective for SCS beginning January 1, 2023 with early adoption permitted. SCS is still evaluating the impact of the adoption of this standard.
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NOTE 3 – INCOME TAXES
From SCS’s inception to December 29, 2021, SCS was not subject to federal and state income taxes since it was operating as a Limited Liability Company (LLC). Effective with the conversion to a corporation, the stockholders of SCS elected to be taxed as a Subchapter C corporation under the provisions of Subchapter C of the Internal Revenue Code. Federal income taxes were the responsibility of SCS’s stockholders during the audited periods, as were certain state income taxes. Therefore, no provision or liability for income taxes is reflected in the financial statements.
SCS has adopted the provisions related to accounting for uncertainty in income taxes, which defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Management has considered its tax positions and believes that all of the positions taken by SCS in its federal and state tax returns are more likely than not to be sustained upon examination.
SCS is subject to tax examinations by federal and state tax authorities for years after 2018.
SideChannelSec, LLC converted to a Massachusetts corporation on December 29, 2021. Upon this conversion SCS will be taxed as a corporation. SCS utilizes the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carryforwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that the value of such assets will be realized.
NOTE 4 – DEBT
Pursuant to a Membership Interest Redemption Agreement, dated November 3, 2021 by and between SCS and Akash Desai (“Desai Redemption Agreement”), SCS promises to pay Mr. Desai $100,000, without interest, in exchange for Mr. Desai’s right, title, and interest in SCS. Mr. Desai was paid $50,000 in November 2021 and the remaining $50,000 is due on or before December 31, 2023.
NOTE 5 - STOCKHOLDERS’ EQUITY
Effective December 29, 2021 SCS is authorized to issue 1,000 shares of common stock with a $0.01 per share par value.
Five individuals own 100% of SCS’s 1,000 shares of issued common stock with one individual owning 71% and a second individual owning 11%. The remaining three shareholders each own 6% of the common stock. SCS does not have any convertible debt or issued preferred stock.
SideChannel LLC redeemed units from Taylor Lehmann in exchange for $90,000 as stated in a Membership Interest Redemption Agreement executed on November 20, 2020. Mr. Lehmann received a total of $90,000 in redemption payments between November 23, 2020 and December 21, 2020.
SideChannel LLC made profit sharing distributions of $209,549 during the fiscal year ended September 30, 2021 and $101,104 during the year ended September 30, 2020 in accordance with its partnership agreements.
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NOTE 6 – CONTINGENCIES AND COMMITMENTS
SCS does not have any contingencies and commitments other than what is disclosed in Note 4 – Debt.
SCS may be subject to legal proceedings, claims and liabilities which arise in the ordinary course of business. When appropriate, SCS accrues for losses associated with legal claims when such losses are probable and can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Legal fees are charged to expense as they are incurred.
NOTE 7 – RELATED PARTY TRANSACTIONS
Two of SCS’s shareholders are shareholders of RealCISO Inc. (“RealCISO”). SCS is a reseller of the RealCISO software. SCS receives revenue from its customers for the use of RealCISO software and pays licensing fees to RealCISO for such use. On September 22, 2020 SideChannel assigned to RealCISO Inc. certain contracts and intellectual property. SideChannel paid $54,600 to RealCISO and $20,900 to Bema Technologies for development services for RealCISO during the year ended September 30, 2021.
NOTE 8 – SUBSEQUENT EVENTS
On November 3, 2021 SideChannel LLC entered into a Membership Interest Redemption Agreement with Akash Desai, formerly a member of SideChannel LLC (see Note 4).
Pursuant to the Articles of Organization, dated December 28, 2021 (“Articles of Organization”), SideChannel, Inc. became a Massachusetts corporation, formed on December 29, 2021, whose business is to provide cybersecurity consulting and services. On December 29, 2021, SideChannel LLC was converted to a corporation from a Massachusetts limited liability company, which was comprised of five members, the same of whom were then the respective shareholders of 100 percent of new corporation’s shares. SideChannel, Inc., the Massachusetts corporation, has initiated changing its name to SCS, Inc. (“SCS”).
On July 1, 2022 (the “Closing Date”), Cipherloc Corporation completed its acquisition of all of the outstanding equity securities of SCS, in exchange for shares of Cipherloc Corporations equity securities (the “Acquisition”), pursuant to an Equity Securities Purchase Agreement, dated May 16, 2022 (the “Purchase Agreement”).
Pursuant to the Purchase Agreement, on the Closing Date, the former shareholders of SCS (the “Sellers”) exchanged all of their equity securities in SCS for a total of 59,900,000 shares of Cipherloc Corporation’s common stock (the “First Tranche Shares”), and 100 shares of Cipherloc Corporation’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 Cipherloc Corporation’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 combined entity, 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.
On the Closing Date, the Sellers acquired approximately 40.4% of Cipherloc Corporation’s outstanding common stock. If SCS 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 Cipherloc Corporation’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 zero. The number of the Second Tranche Shares may also be subject to adjustment based upon any successful indemnification claims made pursuant to the Purchase Agreement.
The 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 Cipherloc Corporation. 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 months after the Closing Date, and the remaining 80% of their shares of Common Stock beginning twenty-four months after the Closing Date.
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SCS, INC.
CONDENSED BALANCE SHEET
| June 30, 2022 | ||||
| (UNAUDITED) | ||||
| ASSETS | ||||
| Current assets | ||||
| Cash and cash equivalents | $ | 428,904 | ||
| Accounts receivable, net | 535,648 | |||
| Unbilled revenue | 12,600 | |||
| Total current assets | 977,152 | |||
| Fixed assets | 880 | |||
| Total assets | $ | 978,032 | ||
| LIABILITIES & STOCKHOLDERS’ EQUITY | ||||
| Current liabilities | ||||
| Accounts payable and accrued liabilities | $ | 317,714 | ||
| Deferred revenue | 143,002 | |||
| Total current liabilities | 460,716 | |||
| Promissory note payable | 50,000 | |||
| Total liabilities | 510,716 | |||
| Commitments and contingencies | ||||
| Stockholders’ equity | ||||
| Common stock, $0.01 par value, 1,000 shares authorized; 1,000 shares issued and outstanding as of June 30, 2022 | 10 | |||
| Additional paid-in capital | 23,055 | |||
| Retained earnings | 444,251 | |||
| Total stockholders’ equity | 467,316 | |||
| Total liabilities and stockholders’ equity | $ | 978,032 | ||
| 10 |
SCS, INC.
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
| Nine Months Ended June 30, 2022 | ||||
| Revenues | $ | 3,558,629 | ||
| Cost of revenues | 1,796,409 | |||
| Gross profit | 1,762,220 | |||
| Operating expenses | ||||
| General and administrative | 845,489 | |||
| Selling and marketing | 130,027 | |||
| Research and development | — | |||
| Total operating expenses | 975,516 | |||
| Operating income | 786,704 | |||
| Other income (expense) | ||||
| Miscellaneous income | 9,197 | |||
| Interest expense | — | |||
| Net income before income tax expense | 795,901 | |||
| Income taxes | (195,000 | ) | ||
| Net income | $ | 600,901 | ||
| 11 |
SCS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
| Common Stock | Additional | |||||||||||||||||||
| For the Nine Months Ended June 30,2022 | Shares | Amount | Paid-in Capital | Accumulated Earnings | Stockholders’ Equity | |||||||||||||||
| Balance at September 30, 2021 | 1,000 | $ | 10 | $ | 23,055 | $ | 404,236 | $ | 427,301 | |||||||||||
| Equity redemptions | — | — | — | (100,000 | ) | (100,000 | ) | |||||||||||||
| Equity distributions | — | — | — | (460,886 | ) | (460,886 | ) | |||||||||||||
| Net income | — | — | — | 600,901 | 600,901 | |||||||||||||||
| Balance at June 30, 2022 | 1,000 | $ | 10 | $ | 23,055 | $ | 444,251 | $ | 467,316 | |||||||||||
| 12 |
SCS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| June 30, 2022 | ||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||
| Net income | $ | 600,901 | ||
| Adjustments to reconcile net income to net cash flows provided by operating activities: | ||||
| Depreciation | — | |||
| Changes in operating assets and liabilities: | ||||
| Accounts receivable | (357,534 | ) | ||
| Unbilled revenue | 294,077 | |||
| Accounts payable and accrued liabilities | 105,848 | |||
| Deferred revenue | (51,184 | ) | ||
| Net cash provided by operating activities | 592,108 | |||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||
| Purchases of fixed assets | — | |||
| Net cash used in investing activities | — | |||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||
| Equity redemptions | (50,000 | ) | ||
| Equity distributions | (460,886 | ) | ||
| Net cash used in financing activities | (510,886 | ) | ||
| INCREASE IN CASH | 81,222 | |||
| CASH, BEGINNING OF PERIOD | 347,682 | |||
| CASH, END OF PERIOD | $ | 428,904 | ||
Income tax paid | $ | — | ||
| Interest paid | $ | — | ||
| NON CASH INVESTING AND FINANCING ACTIVITIES | ||||
| Redemption with promissory note payable | $ | 50,000 | ||
| 13 |
SCS, INC.
Notes to the Unaudited Interim Financial Statements
NOTE 1 - DESCRIPTION OF BUSINESS
SideChannelSec, LLC, A Massachusetts Limited Liability Company, was organized on September 14, 2017. SideChannelSec, LLC converted to a Massachusetts corporation on December 29, 2021 and changed its name to SideChannel, Inc. On December 29, 2021, SideChannelSec, LLC converted (the “Conversion”) from a limited liability company into a corporation (the “Corporation”). SideChannel, Inc., was formed in the state of Massachusetts in connection with the corporate restructuring that occurred on December 29, 2021, or the Restructuring. In accordance with the terms of the operating agreement of SideChannelSEC LLC, or the LLC Operating Agreement, and on the effective date of the Restructuring; the membership units of SideChannelSec LLC, that were issued and outstanding immediately prior to the effective date of the Restructuring were converted into common share of SideChannel, Inc.
On July 1, 2022, SideChannel, Inc., the Massachusetts corporation, was acquired by Cipherloc Corporation. SideChannel, Inc., the Massachusetts corporation, has initiated changing its name to SCS, Inc. (“SCS”). The unaudited interim financial statements and these corresponding notes have been prepared for SCS, Inc,
SCS determined that the Restructuring lacked economic substance and was therefore accounted for in a manner consistent with a common control transaction. Similarly, as there was no change in fair value between shareholders, individually or as a class, we determined that the exchange of shares occurring in the Restructuring should be accounted for as a modification of the equity securities and presented as a reclassification of the components of equity.
SCS was founded with the belief that small and mid-sized organizations deserved the expertise of an experienced chief information security officer (CISO). SCS provides chief information security officer services and ancillary security and privacy solutions to companies that chose to outsource these capabilities rather than insourcing.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
SCS prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Significant accounting policies are as follows:
Use of Estimates and Assumptions. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net revenues and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates.
Cash. SCS considers all highly liquid investments with a maturity at the time of purchase of three months or less to be cash equivalents. At June 30, 2022, SCS’s cash includes cash on hand and cash in the bank. The balance of such accounts, at times, may exceed federally insured limits, as guaranteed by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC insures these deposits up to $250,000. As of June 30, 2022 $178,904 of SCS’s cash balance was uninsured.
Liquidity and Capital Resources. SCS had total equity of $467,316 as of June 30, 2022. SCS expects to continue to generate operating income. As of June 30, 2022, SCS had $428,904 in cash. SCS believes that its existing cash balances and cash flow from operations are sufficient to fund its operations for the next 12 months.
| 14 |
Receivables. SCS bills customers and collects monies within thirty days of invoice date. There are little to no delinquencies or bad debt. SCS had accounts receivable of $535,648 at June 30, 2022. None of these receivables are used as collateral.
Fixed Assets. SCS capitalizes furniture and equipment with a cost in excess of $2,000 and depreciates over twenty-four months. SCS capitalizes autos and depreciates over thirty-six months. SCS had net fixed assets of $880 at June 30, 2022.
Long-Lived Assets. Long-lived assets are evaluated for impairment whenever events or changes in our business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted future cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value. During the nine months ended June 30, 2022, SCS recorded no impairment loss.
Liabilities. SCS hires independent contractors to provide chief information security officer (“CISO”) services on behalf of its clients. Prior to May 31, 2022, the contractors were paid the month following the month when the services are delivered. As such, amounts due to contractors are accrued at month end for the costs incurred during the month. Beginning on May 31, 2022 and for June 30, 2002 the majority of the contractors were paid at the end of the month that they provided services.
Revenue recognition. SCS recognizes revenues in accordance with the provisions of Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” and a series of amendments, issued by the Financial Accounting Standards Board (“FASB”).
Central to SCS’s revenue recognition guidance is a five-step revenue recognition model that requires the reporting entity to:
| 1. | Identify the contract, | |
| 2. | Identify the performance obligations of the contract, | |
| 3. | Determine the transaction price of the contract, | |
| 4. | Allocate the transaction price to the performance obligations, and | |
| 5. | Recognize revenue. |
SCS bills customers monthly in accordance with the customer contracts or agreements. From time to time, SCS bills customer in advance and treats these advance billings as deferred revenue.
Nature of Products and Services
Revenue is allocated generally to CISO, risk management and other professional services which are recognized ratably over the contractual support period or in proportion to the time incurred at the agreed upon billing rate.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. SCS records a contract asset or receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing.
Deferred revenue is comprised mainly of unearned revenue related to CISO, risk management and other professional services. Deferred revenue also includes contracts for professional services to be performed in the future which are recognized as revenue when SCS delivers the related service pursuant to the terms of the customer arrangement.
| 15 |
Deferred revenue includes invoiced revenue allocated to remaining performance obligations that has not yet been recognized and will be recognized as revenue in future periods. Deferred revenue was $143,002 at June 30, 2022. The deferred revenue is expected to be earned within 12 months of the balance sheet date,
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 90 days. In instances where the timing of revenue recognition differs from the timing of invoicing, SCS has determined its contracts generally do not include a significant financing component. The primary purpose of SCS’s invoicing terms is to provide customers with simplified and predictable ways of purchasing its products and services, not to receive financing from our customers or to provide customers with financing.
Significant Judgments
SCS’s contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.
Assets Recognized from Costs to Obtain a Contract with a Customer
SCS recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. SCS has determined that its sales commission program meets the requirements for cost capitalization. Total capitalized costs to obtain a contract were immaterial during the periods presented. SCS applies a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less.
Recently Issued Accounting Pronouncements Not Yet Adopted. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of the standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this standard replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The update is effective for SCS beginning January 1, 2023 with early adoption permitted. SCS is still evaluating the impact of the adoption of this standard.
NOTE 3 – INCOME TAXES
From SCS’s inception to December 29, 2021, SCS was not subject to federal and state income taxes since it was operating as a Limited Liability Company (LLC). Effective with the conversion to a corporation, the stockholders of SCS elected to be taxed as a C corporation under the provisions of Subchapter C of the Internal Revenue Code. Federal income taxes were the responsibility of SCS’s stockholders for the period from October 1, 2021 through December 29, 2021, as were certain state income taxes. Therefore, no provision or liability for income taxes is reflected in the financial statements during that period. Beginning December 30, 2021 through June 30, 2022 SCS was responsible for federal income taxes.
| 16 |
Provision for Income Taxes and Effective Tax Rate
The provision for income taxes for the nine months ended June 30, 2022 consisted of the following:
| Federal: | ||||
| Current | $ | 136,000 | ||
| Deferred | (-) | |||
| Total | 136,000 | |||
| State: | ||||
| Current | 59,000 | |||
| Deferred | - | |||
| Total | 59,000 | |||
| Provision for income taxes | $ | 195,000 |
A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (21% in 2022) to income before provision for income taxes for 2022, is as follows:
| Computed expected tax | $ | 136,000 | ||
| State taxes, net of federal effect | 59,000 | |||
| Research and development credit, net | - | |||
| Other | - | |||
| Provision for income taxes | $ | 195,000 | ||
| Effective tax rate | 29.31 | % |
SCS’s provision for tax expense (benefit) amount computed by applying the statutory federal income tax rate of 21% in 2021 to income before taxes differs from the effective tax rate, due to the state income tax rate of 8.31%.
Deferred Tax Assets and Liabilities
As of June 30, 2022, the there was no significant component of SCS’s deferred tax assets and liabilities and the net carrying amount of deferred tax assets was $0.
SCS recognized $195,000 of income tax expense for the nine months ended June 30, 2022.
| 17 |
NOTE 4 – DEBT
Pursuant to a Membership Interest Redemption Agreement, dated November 3, 2021 by and between SCS and Akash Desai (“Desai Redemption Agreement”), SCS promises to pay Mr. Desai $100,000, without interest, in exchange for Mr. Desai’s right, title, and interest in SCS. Mr. Desai was paid $50,000 in November 2021 and the remaining $50,000 is due on or before December 31, 2023.
NOTE 5 - STOCKHOLDERS’ EQUITY
Effective December 29, 2021 SCS is authorized to issue 1,000 shares of common stock with a $0.01 per share par value.
On July 1, 2022 Cipherloc Corporation, a Delaware corporation, purchased 100% of the SideChannel, Inc. common stock outstanding. Following the business combination, Cipherloc Corporation changed its name to SideChannel, Inc.
NOTE 6 – CONTINGENCIES AND COMMITMENTS
SCS does not have any contingencies and commitments other than what is disclosed in Note 4 – Debt.
SCS may be subject to legal proceedings, claims and liabilities which arise in the ordinary course of business. When appropriate, SCS accrues for losses associated with legal claims when such losses are probable and can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Legal fees are charged to expense as they are incurred.
NOTE 7 – RELATED PARTY TRANSACTIONS
Two of SCS’s shareholders are shareholders of RealCISO Inc. (“RealCISO”). SCS is a reseller of the RealCISO software. SCS receives revenue from its customers for the use of RealCISO software and pays licensing fees to RealCISO for such use. On September 22, 2020 SideChannel assigned to RealCISO Inc. certain contracts and intellectual property. SideChannel paid $70,750 to RealCISO for development services for RealCISO during the nine-months ended June 30, 2022.
NOTE 8 – SUBSEQUENT EVENTS
On July 1, 2022 (the “Closing Date”), Cipherloc Corporation completed its acquisition of all of the outstanding equity securities of SCS, in exchange for shares of Cipherloc Corporations equity securities (the “Acquisition”), pursuant to an Equity Securities Purchase Agreement, dated May 16, 2022 (the “Purchase Agreement”).
Pursuant to the Purchase Agreement, on the Closing Date, the former shareholders of SCS (the “Sellers”) exchanged all of their equity securities in SCS for a total of 59,900,000 shares of Cipherloc Corporation’s common stock (the “First Tranche Shares”), and 100 shares of Cipherloc Corporation’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 Cipherloc Corporation’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 combined entity, 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.
On the Closing Date, the Sellers acquired approximately 40.4% of Cipherloc Corporation’s outstanding common stock. If SCS 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 Cipherloc Corporation’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 zero. The number of the Second Tranche Shares may also be subject to adjustment based upon any successful indemnification claims made pursuant to the Purchase Agreement.
The 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 Cipherloc Corporation. 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 months after the Closing Date, and the remaining 80% of their shares of Common Stock beginning twenty-four months after the Closing Date.
| 18 |
Exhibit 99.3
SIDECHANNEL, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2022
(UNAUDITED)
| SCS, Inc. Historical | Cipherloc Corporation Historical | Pro Forma Adjustments | Ref. Note | Pro forma Combined | ||||||||||||||
| ASSETS | ||||||||||||||||||
| Current assets | ||||||||||||||||||
| Cash and cash equivalents | $ | 428,904 | $ | 3,588,912 | $ | — | $ | 4,017,816 | ||||||||||
| Accounts receivable, net | 535,648 | — | — | 535,648 | ||||||||||||||
| Unbilled revenue | 12,600 | — | — | 12,600 | ||||||||||||||
| Deferred costs | — | 180,000 | — | 180,000 | ||||||||||||||
| Other assets | — | 28,187 | — | 28,187 | ||||||||||||||
| Total current assets | 977,152 | 3,797,099 | — | 4,774,251 | ||||||||||||||
| Fixed assets, net | 880 | — | — | 880 | ||||||||||||||
| Deferred costs | — | 375,000 | — | 375,000 | ||||||||||||||
| In process research and development | — | — | 4,970,000 | a | 4,970,000 | |||||||||||||
| Goodwill | — | — | 1,054,682 | b | 1,054,682 | |||||||||||||
| Total assets | $ | 978,032 | $ | 4,172,099 | $ | 6,024,682 | $ | 11,174,813 | ||||||||||
| LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||||||||||||
| Current liabilities | ||||||||||||||||||
| Accounts payable and accrued liabilities | $ | 317,714 | $ | 786,723 | $ | — | $ | 1,104,437 | ||||||||||
| Deferred revenue | 143,002 | — | — | 143,002 | ||||||||||||||
| Total current liabilities | 460,716 | 786,723 | — | 1,247,439 | ||||||||||||||
| Promissory note payable | 50,000 | — | — | 50,000 | ||||||||||||||
| Total liabilities | 510,716 | 786,723 | — | 1,297,439 | ||||||||||||||
| Commitments and contingencies | ||||||||||||||||||
| Stockholders’ equity | ||||||||||||||||||
| Series A Preferred stock, $0.001 par value, 100 shares issued and outstanding at June 30, 2022 | — | — | — | — | ||||||||||||||
| Common Stock | ||||||||||||||||||
| Cipherloc Corporation, $0.001 par value, 681,000,000 shares authorized; 148,345,832 shares outstanding; as of June 30, 2022 | 101,860 | 46,486 | c | 148,346 | ||||||||||||||
| SCS, Inc. $0.01 par value, 1,000 shares authorized; 1,000 shares issued and outstanding as of June 30, 2022 | 10 | (10 | ) | c | ||||||||||||||
| Additional Paid-In Capital | ||||||||||||||||||
| Cipherloc Corporation | 78,237,430 | (68,952,653 | ) | d | 9,284,777 | |||||||||||||
| SCS, Inc. | 23,055 | — | 6,038,226 | e | 6,061,281 | |||||||||||||
| Treasury stock | — | (590,000 | ) | 590,000 | f | — | ||||||||||||
| Retained earnings | ||||||||||||||||||
| Cipherloc Corporation | (74,363,914 | ) | 74,363,914 | f | — | |||||||||||||
| SCS, Inc. | 444,251 | (6,061,281 | ) | e | (5,617,030 | ) | ||||||||||||
| Total stockholders’ equity | 467,316 | 3,385,376 | 6,024,682 | 9,877,374 | ||||||||||||||
| Total liabilities and stockholders’ equity | $ | 978,032 | $ | 4,172,099 | $ | 6,024,682 | $ | 11,174,813 | ||||||||||
| 1 |
SIDECHANNEL, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 2021
(UNAUDITED)
| SCS, Inc. Historical | Cipherloc Corporation Historical | Cipherloc Corporation Pro Forma Adjustments | Ref. Note | SCS, Inc. Pro Forma Adjustments | Ref. Note | Pro Forma Combined | ||||||||||||||||||
| Revenues | $ | 2,798,560 | $ | 15,417 | $ | — | $ | — | $ | 2,813,977 | ||||||||||||||
| Cost of revenues | 1,536,445 | — | — | — | 1,536,445 | |||||||||||||||||||
| Gross profit | 1,262,115 | 15,417 | — | — | 1,277,532 | |||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| General and administrative | 656,521 | 2,597,881 | — | — | 3,254,402 | |||||||||||||||||||
| Selling and marketing | 95,597 | 96,125 | — | — | 191,722 | |||||||||||||||||||
| Research and development | — | 616,746 | — | — | 616,746 | |||||||||||||||||||
| Total operating expenses | 752,118 | 3,310,752 | — | — | 4,062,870 | |||||||||||||||||||
| Operating income (loss) | 509,997 | (3,295,335 | ) | — | — | (2,785,338 | ) | |||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||
| Miscellaneous income | 2,623 | 191,052 | — | — | 193,675 | |||||||||||||||||||
| Net income (loss) before taxes | $ | 512,620 | $ | (3,104,283 | ) | $ | — | $ | — | $ | (2,591,663 | ) | ||||||||||||
| Income tax expense | — | — | — | — | — | |||||||||||||||||||
| Net income (loss) | $ | 512,620 | $ | (3,104,283 | ) | $ | — | — | $ | (2,591,663 | ) | |||||||||||||
| Net income (loss) per common share – basic and diluted | $ | 0.01 | $ | (0.04 | ) | $ | (0.02 | ) | ||||||||||||||||
| Weighted average common shares outstanding – basic and diluted | 59,900,000 | 54,864,945 | 114,764,945 | |||||||||||||||||||||
| 2 |
SIDECHANNEL, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 2022
(UNAUDITED)
SCS, Inc. Historical | Cipherloc Corporation Historical | Cipherloc Corporation Pro Forma Adjustments | Ref. Note | SCS, Inc. Pro Forma Adjustments | Ref. Note | Pro Forma Combined | ||||||||||||||||||
| Revenues | $ | 3,558,629 | $ | 449 | $ | — | $ | — | $ | 3,559,078 | ||||||||||||||
| Cost of revenues | 1,796,409 | — | — | — | 1,796,409 | |||||||||||||||||||
| Gross profit | 1,762,220 | 449 | — | — | 1,762,669 | |||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| General and administrative | 845,489 | 2,183,340 | (479,075 | ) | g | (108,655 | ) | g | 2,441,099 | |||||||||||||||
| Contingent consideration | — | — | — | 6,061,281 | e | 6,061,281 | ||||||||||||||||||
| Selling and marketing | 130,027 | 188,316 | — | — | 318,343 | |||||||||||||||||||
| Research and development | — | 461,816 | — | — | 461,816 | |||||||||||||||||||
| Total operating expenses | 975,516 | 2,833,472 | (479,075 | ) | 5,952,626 | 9,282,539 | ||||||||||||||||||
| Operating income (loss) | 786,704 | (2,833,023 | ) | 479,075 | 5,952,626 | (7,519,870 | ) | |||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||
| Miscellaneous income | 9,197 | — | — | — | 9,197 | |||||||||||||||||||
| Net income (loss) before taxes | $ | 795,901 | $ | (2,833,023 | ) | $ | 479,075 | $ | 5,952,626 | $ | (7,512,673 | ) | ||||||||||||
| Income tax expense | (195,000 | ) | — | — | — | (195,000 | ) | |||||||||||||||||
| Net income (loss) | $ | 600,901 | $ | (2,833,023 | ) | $ | 479,075 | (5,952,626 | ) | $ | (7,705,673 | ) | ||||||||||||
| Net income (loss) per common share – basic and diluted | $ | 0.01 | $ | (0.03 | ) | $ | (0.05 | ) | ||||||||||||||||
| Weighted average common shares outstanding – basic and diluted | 59,900,000 | 85,240,812 | 145,140,812 | |||||||||||||||||||||
| 3 |
SIDECHANNEL, INC.
Notes to the Unaudited Proforma Financial Statements
NOTE 1 - DESCRIPTION OF TRANSACTION
On July 1, 2022 (the “Closing Date”), Cipherloc Corporation (“Cipherloc”) completed its acquisition of all of the outstanding equity securities of SCS, Inc. (“SCS”), in exchange for shares of Cipherloc’s equity securities (the “Acquisition”), pursuant to an Equity Securities Purchase Agreement, dated May 16, 2022 (the “Purchase Agreement”).
Pursuant to the Purchase Agreement, on the Closing Date, the former shareholders of SCS (the “Sellers”) exchanged all of their equity securities SCS for a total of 59,900,000 shares of Cipherloc’s common stock (the “First Tranche Shares”), and 100 shares of Cipherloc’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 Cipherloc’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 combined entity, 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.
On the Closing Date, the Sellers acquired approximately 40.4% of Cipherloc’s outstanding common stock. If SCS 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 Cipherloc Corporation’s outstanding common stock. The number of the Second Tranche Shares may be reduced or increased, based upon whether SCS’s working capital as of the Closing Date was less than or more than zero. The number of the Second Tranche Shares may also be subject to adjustment based upon any successful indemnification claims made pursuant to the Purchase Agreement.
The 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 Cipherloc. 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 months after the Closing Date, and the remaining 80% of their shares of Common Stock beginning twenty-four months after the Closing Date.
On July 5, 2022 Cipherloc changed its name to SideChannel, Inc. (the “Company” or “SideChannel” or the “Combined Company”).
NOTE 2 – BASIS OF PRENSENTATION
The unaudited pro forma combined financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the SEC, and present the pro forma financial position and results of operations of the Combined Company after the effect of the Purchase Agreement.
The Company has concluded the Purchase Agreement represents a business combination pursuant to FASB Codification Topic 805, Business Combinations. Based on the terms of the Purchase Agreement, SCS, Inc. is deemed to be the acquiring company for accounting purposes and the transaction has been accounted for as a reverse acquisition under the guidance of ASC 805. Accordingly, assets and liabilities of SCS, Inc. have been recorded as of the Purchase Agreement closing date at their respective carrying value and assets and liabilities of Cipherloc Corporation have been recorded as of the Purchase Agreement closing date at their estimated fair value. The Company has completed an external valuation analysis of the fair market value of the assets acquired and the liabilities to be assumed. Using the estimated total consideration for the transaction, the Company has estimated the allocations to such assets and liabilities. This preliminary purchase price allocation has been used to prepare pro forma adjustments in the unaudited pro forma condensed combined balance sheets.
| 4 |
NOTE 3 – PRELIMINARY PRO FORMA PURCHASE PRICE ALLOCATION
The following table presents the preliminary allocation of the $9.4 million consideration for the transaction as of the acquisition date as follows:
Preliminary Pro forma Purchase Price Allocation
| Amount ($) | ||||
| FV of deemed issuance of SideChannel’s stock – Common stock | 125,281 | |||
| FV of deemed issuance of SideChannel’s stock - APIC | 9,284,777 | |||
| Total Purchase Price | 9,410,058 | |||
| Net assets (liabilities) of Cipherloc Corporation: | ||||
| Cash and cash equivalents | 3,588,912 | |||
| Other assets | 583,187 | |||
| Other liabilities | (786,723 | ) | ||
| IP R&D acquired | 4,970,000 | |||
| Goodwill | 1,054,682 | |||
| Total Purchase Price | 9,410,058 | |||
NOTE 4 – PRO FORMA ADJUSTMENTS
Management has made significant estimates and assumption in its determination of the pro forma adjustments. As the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented. The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma consolidated financial information:
| (a) | The fair value of in process research and development has been determined to be $4,970,000 as of June 30, 2022. | |
| (b) | Goodwill of $1,054,682 is being recognized related to the closing the of the Purchase Agreement. In accordance with ASC 805, the Purchase Agreement will be accounted for as a reverse merger in which SCS. will be treated as the accounting acquirer and Cipherloc will be treated as the accounting acquiree. The relevant portion of ASC 805 provides that in a reverse acquisition, goodwill should be recorded for and attributed to any difference between the total consideration deemed to be transferred by the accounting acquirer and the total net assets of the accounting acquiree. For purposes of the goodwill analysis under ASC 805, the total “consideration” transferred by SideChannel, as the accounting acquirer in the Purchase Agreement, and as outlined in note 1, is primarily based on the market value of the number of SCS shares that would have to be issued to Cipherloc, as the accounting acquiree in the Purchase Agreement, that would result in SideChannel owning approximate 40% of the outstanding Combined Company Shares after the Closing of the Purchase Agreement. Based on the market value of the Shares on June 30, 2022, and along with other components of the consideration, this would result in pro forma total consideration being transferred to the Company of approximately $9.4 million. Further, the pro forma total net assets of Cipherloc to be transferred to SCS as the accounting acquirer, would be approximately $3.4 million. The difference between the $9.4 million of consideration and the $3.4 million of net assets yields in progress research and development of approximately $4.9 million and goodwill of approximately $1.1 million. In addition to the cash being transferred, Cipherloc is delivering an OTC listed legal entity in good standing that will provide the Combined Company with ready access to significant capital sources in the future to fund its growth plans. The value of this listing is a contribution factor to the goodwill but is difficult to quantify and may be difficult to support in any subsequent goodwill impairment testing. |
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Accounting Standard Codification Topic 350 provides the Combined Company’s recorded goodwill is not to be amortized and is to be tested at least annually for impairment. Impairment of goodwill is the condition that exists when the carrying amount of the Combined Company unit that includes goodwill exceeds its fair value. A goodwill impairment loss is to be recognized for the amount that the carrying amount including goodwill, exceeds its fair value, limited to the total amount of goodwill. The pro forma goodwill of the Combined Company is highly sensitive to change in Cipherloc Corporation’s assets and liabilities between the date of presentation of the “Unaudited Pro Forma Financial information” included in form 8-K/A and the date the complete valuation of Cipherloc Corporation assets and liabilities is performed, as well as fluctuations in the market price of the shares. The volatility of the trading price of the Combined Company’s common stock could also have a material impact on the pro forma goodwill and the fair value of the Combined Company. The impairment analysis is intended to be performed in conjunction with audits of the Combined Company’s annual financial statements.
| (c) | Common Stock on a combined basis should reflect the par value of the 148,345,832 shares outstanding following the business combination which is $148,346. | |
| (d) | A $9,410,058 fair value of Cipherloc was determined by adding $460,224 for the value of restricted stock units at July 1, 2022 to the market capitalization on July 1, 2022 of 88,445,832 shares outstanding and a closing share price of $0.1012. It was further determined that $9,284,777 of the total Cipherloc fair value should be reported as additional paid-in capital. | |
| (e) | The Company deems it highly probable that SCS will achieve the revenue milestone which triggers contingent consideration of common stock being issued to the Sellers. This issuance is being recorded as a $6,061,281 increase in additional paid in capital and $6,061,281 of transaction expense. The historical $23,055 balance of adjusted paid in capital for SCS is removed from the pro forma balance sheet. | |
| (f) | Treasury stock and Cipherloc’s accumulated deficit are removed from the pro forma balance sheet. | |
| (g) | All costs incurred in connection with the acquisition have been removed from general and administrative expenses in the pro forma statement of operations. Cipherloc incurred $479,055 of transaction expenses and SCS incurred $108,655 of transaction expenses. |
NOTE 5 – Loss per share
For the purposes of the Pro Forma Statements, loss per share has been calculated using the weighted average number of Cipherloc Corporation Shares which would have been outstanding for the nine-month ended June 30, 2022 after giving effect to the Purchase Agreement as of it had occurred on October 1, 2021. The following information on pro forma basic and diluted weighted average common shares outstanding:
| Nine Months Ended June 30, 2022 | ||||
| Cipherloc Corporation actual weighted average common shares outstanding-basic and diluted | 85,240,812 | |||
| Cipherloc Corporation shares to be issued to SideChannel, Inc. upon closing of the transaction | 59,900,000 | |||
| Total weighted average common shares outstanding basic and diluted | 145,140,812 | |||
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Exhibit 99.4
FOR IMMEDIATE RELEASE
SideChannel, Inc. Reports Acquiree Pre-acquisition Financial Results for the Nine Months Ended June 30, 2022
WORCESTER, MA – September 12, 2022 – On July 1, 2022, SideChannel, Inc. a provider of cybersecurity services and technology to middle market companies, was acquired by Cipherloc Corporation. The combined entity changed its name to SideChannel, Inc. (“SideChannel” or “Company”), and its ticker symbol to SDCH (OTCQB:SDCH). The acquiree is now named SCS, Inc. (“SCS”) and for accounting purposes, is a subsidiary of the Company.
Today the Company announced it has filed a Form 8-K/A with the Securities and Exchange Commission (“SEC”) to provide financial information required in connection with the Form 8-K filed on July 6, 2022 announcing the acquisition. The Form 8-K/A includes audited financial statements of SCS, the acquiree, for the fiscal years ended September 30, 2021 and September 30, 2020, unaudited financial statements of the acquired company for the nine-months ended June 30, 2022 along with combined pro forma financial statements as of June 30, 2022 and September 30, 2021.
Prior to the business combination, SCS reported operating income of $0.9 million (excluding acquisition expenses of $0.1 million) on revenue of $3.6 million for the nine months ended June 30, 2022. Also prior to the combination, SCS operating income grew to $0.5 million on revenue of $2.8 million for the fiscal year ended September 30, 2021 from $0.3 million on revenue of $1.2 million for the prior fiscal year.
“SideChannel’s innovative cybersecurity service model delivered by a growing team of experienced chief information security officers and security engineers provides a unique opportunity for middle-market companies to benefit from some of the most experienced professionals in the industry on terms and costs designed specifically to fit their operating budgets,” said Brian Haugli, Chief Executive Officer. “Our growing lists of clients, projects, and products validate the importance and relevance of our solutions in providing industry leading cybersecurity services and solutions to this diverse but underserved market.”
Haugli added, “During the last six months, we filled three new sales and marketing roles to expand our reach and communication with prospective clients and expect to have five people on this team by the end of the year. Prior to these additions, we had only one person dedicated full time to new client acquisition.”
The financial information in the Form 8-K/A should be read together with the audited and unaudited financial statements and information included in the Company’s Form 10-K annual report filed with the SEC December 21, 2021 and our Form 10-Q quarterly reports filed with the SEC on February 14, 2022, May 13, 2022, and August 15, 2022, respectively.
The stand-alone financial statements for SCS, the acquiree, are included in this announcement.
SCS, INC.
BALANCE SHEETS
June 30, 2022 | September 30, 2021 | September 30, 2020 | ||||||||||
| (UNAUDITED) | (AUDITED) | (AUDITED) | ||||||||||
| ASSETS | ||||||||||||
| Current assets | ||||||||||||
| Cash and cash equivalents | $ | 428,904 | $ | 347,682 | $ | 491,210 | ||||||
| Accounts receivable, net | 535,648 | 178,113 | 175,461 | |||||||||
| Unbilled revenue | 12,600 | 306,677 | 68,193 | |||||||||
| Total current assets | 977,152 | 832,472 | 734,864 | |||||||||
| Fixed assets | 880 | 880 | 1,320 | |||||||||
| Total assets | $ | 978,032 | $ | 833,352 | $ | 736,184 | ||||||
| LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||||||
| Current liabilities | ||||||||||||
| Accounts payable and accrued liabilities | $ | 317,714 | $ | 211,865 | $ | 225,869 | ||||||
| Deferred revenue | 143,002 | 194,186 | 296,085 | |||||||||
| Total current liabilities | 460,716 | 406,051 | 521,954 | |||||||||
| Promissory note payable | 50,000 | — | — | |||||||||
| Total liabilities | 510,716 | 406,051 | 521,954 | |||||||||
| Stockholders’ equity | ||||||||||||
| Common stock | 10 | 10 | 10 | |||||||||
| Additional paid-in capital | 23,055 | 23,055 | 23,055 | |||||||||
| Retained earnings | 444,251 | 404,236 | 191,165 | |||||||||
| Total stockholders’ equity | 467,316 | 427,301 | 214,230 | |||||||||
| Total liabilities and stockholders’ equity | $ | 978,032 | $ | 833,352 | $ | 736,184 | ||||||
SCS, INC.
STATEMENTS OF OPERATIONS
For the Nine Months Ended June 30, | For the Year Ended September 30, | |||||||||||
| 2022 | 2021 | 2020 | ||||||||||
| (UNAUDITED) | (AUDITED) | (AUDITED) | ||||||||||
| Revenues | $ | 3,558,629 | $ | 2,798,560 | $ | 1,248,948 | ||||||
| Cost of revenues | 1,796,409 | 1,536,445 | 623,598 | |||||||||
| Gross profit | 1,762,220 | 1,262,115 | 625,350 | |||||||||
| Operating expenses: | ||||||||||||
| General and administrative | 845,489 | 656,521 | 203,914 | |||||||||
| Sales and marketing | 130,027 | 95,597 | 118,063 | |||||||||
| Research and development | — | — | — | |||||||||
| Total operating expenses | 975,516 | 752,118 | 321,977 | |||||||||
| Operating income | 786,704 | 509,997 | 303,373 | |||||||||
| Other expenses (income): | ||||||||||||
| Miscellaneous income | (9,197 | ) | (2,623 | ) | (566 | ) | ||||||
| Net income before income tax | 795,901 | 512,620 | 303,939 | |||||||||
| Income taxes | (195,000 | ) | — | — | ||||||||
| Net income | $ | 600,901 | $ | 512,620 | $ | 303,939 | ||||||
| Note: Acquisition expenses | $ | 108,655 | — | — | ||||||||
About SideChannel
SideChannel is committed to creating top-tier cybersecurity programs for mid-market companies to help them protect their assets. SideChannel employs what it believes to be skilled and experienced talent to harden these companies’ defenses against cybercrime, in its many forms. SideChannel’s team of C-suite level information security officers possess a combined experience of over 400 years in the industry. To date, SideChannel has created more than 50 multi-layered cybersecurity programs for its clients. Learn more at sidechannel.com.
Forward-Looking Statements
This press release may contain forward-looking statements, including information about management’s view of SideChannel’s future expectations, plans and prospects, subject to the safe harbor provisions under The Private Securities Litigation Reform Act of 1995 (the “Act”). In particular, when used in the preceding discussion, the words “believes”, “hopes”, “expects”, “intends”, “plans”, “anticipates”, or “may”, and similar conditional expressions are intended to identify forward-looking statements within the meaning of the Act and are subject to the safe harbor created by the Act and otherwise. Any statements made in this news release other than those of historical fact, about an action, event or development, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause the results of SideChannel to be materially different than those expressed or implied in such statements. These risk factors include, but are not limited to, our ability to integrate the operations of the acquired company into our company; that we have incurred net losses since inception, our need for additional funding, the substantial doubt about our ability to continue as a going concern, and the terms of any future funding we raise; that COVID-19 has materially adversely affected our operations and may continue to have a material adverse impact on our operating results in the future; our dependence on current management and our ability to attract and retain qualified employees; competition for our products; our ability to develop new products, improve current products and innovate; unpredictability in our operating results; our ability to retain existing licensees and add new licensees; our ability to manage our growth; our ability to protect our intellectual property (IP), enforce our IP rights and defend against claims that we infringed on the IP of others; and other risk factors included from time to time in documents we file with the Securities and Exchange Commission, including, but not limited to, our Forms 10-K, 10-Q and 8-K. These reports are available at www.sec.gov. Other unknown or unpredictable factors also could have material adverse effects on SideChannel’s future results. Further, factors that we do not presently deem material as of the date of this release may become material in the future. The forward-looking statements included in this press release are made only as of the date hereof. SideChannel cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, SideChannel undertakes no obligation to update these forward-looking statements after the date of this release, except as required by law, nor any obligation to update or correct information prepared by third parties.
Investor Contact:
Matt Kreps
Darrow Associates Investor Relations
214-597-8200
mkreps@darrowir.com