What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-09 compared with 2022-08-15 · 177 added, 166 removed, 24 unchanged (93% of the section changed)

9 unchanged sentences

Forward-looking statements

are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ

are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ

materially from the forward-looking statements.

1 unchanged sentence

events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” in our

Annual Report on Form 10-K for the fiscal year ended September 30, 2021, and elsewhere in this Current Report on Form 10-Q.

no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or

our acquisition of SideChannel, Inc., a Massachusetts corporation, on July 1, 2022, we expanded our capabilities to include providing

cybersecurity programs to mid-market companies, which are designed to help those companies protect their assets.

With the additional

of SideChannel, we now employ what we believe to be among the market’s most skilled and experienced talent to help our clients

to improve their defenses against cybercrime.

With the SideChannel acquisition, we now have over 20 C-suite level information security

officers, who possess combined experience of over 400 years in the industry.

To date, SideChannel has created over 50 multi-layered cybersecurity

programs for its clients.

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

believe that our cybersecurity offerings will identify and develop cybersecurity, privacy and risk management solutions for our customers.

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

We intend to provide more tech-enabled

services to address the needs of our customers, including third-party risk management, due diligence, privacy, threat intelligence, and

managed end-point security solutions.

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 in-house delivery capabilities, and through our network of

subcontractors.

We work with our clients to help them select the right cybersecurity tools, products, and solutions.

We believe that

our use of subcontractors allows us to quickly move directly into implementation of projects, which we believe reduces the risk to our

Our subcontractors also provide us with sales leads and referrals, and may resell our services to their own client base.

believe that this allows us to maximize our sales efforts, reduce expense of sales, and gain new customers.

to our acquisition of SideChannel, we offered our customers a license to use our Polymorphic Encryption Core (“PEC”), which

is a secure, advanced polymorphic data-in-motion product.

Recently, one licensee, Castle Shield, began to report early-stage product

sales from its software tools that contain our PEC.

supplement our legacy licensing program, we are building our own applications that we intend to sell directly to enterprises and managed

security service providers.

On February 14, 2022, we announced the launch of Enclave, our first internally developed product.

is a product designed to be an easy-to-use platform for organizations that are seeking to control communication between devices;

to fully encrypt traffic between those devices.

Enclave is designed to provide a simple and cost-effective solution for multiple devices,

as compared to current complex cost-prohibitive solutions, which we believe require technical personnel to operate.

Enclave is designed

to make micro-segmentation available to everyone at a low cost, and with minimum technical administration.

Enclave platform is available through a free plan or a fee per user plan, designed to fit the needs of the two types of end users of

the platform.

The free plan will give individual users the ability to use the platform for hobby and educational purposes.

user plan will focus on business users, allowing them to have a more private experience that addresses security and optimization gaps

that we believe many companies face in today’s ever-changing technology environment.

anticipate that we will need between $2.0 million and $2.7 million of cash to cover our operating expenses for the next twelve months.

We expect to cover those expenses with the net proceeds we received from a private placement of our securities in the first quarter of

our fiscal year 2021.

We further anticipate that the SideChannel acquisition may mitigate or reduce our use of cash for operating expenses.

We intend to manage our business such that our current cash reserves will be sufficient to allow us to reach positive cash flow from

our operations, but we cannot assure you that will occur.

Annual Report on Form 10-K for the fiscal year ended September 30, 2022 and elsewhere in this Form 10-Q.

We undertake no obligation to

update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Report,

and the audited financial statements and notes thereto and “Part II.

Other Information – Item 7.

Management’s Discussion

and Analysis of Financial Condition and Results of Operations”, contained in our Annual Report on Form 10-K for the year ended

September 30, 2022, filed with the Securities and Exchange Commission on December 20, 2022.

logo and some of our trademarks and tradenames are used in this Report.

Solely for convenience, trademarks, tradenames, and service marks

referred to in this Report may appear without the ®, ™ and SM symbols.

References to our trademarks, tradenames and service

marks are not intended to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights

of the applicable licensors if any, nor that respective owners to other intellectual property rights will not assert, to the fullest

extent under applicable law, their rights thereto.

We do not intend the use or display of other companies’ trademarks and trade

names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

market data and certain other statistical information used throughout this Report are based on independent industry publications, reports

by market research firms or other independent sources that we believe to be reliable sources.

Industry publications and third-party research,

surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do

not guarantee the accuracy or completeness of such information.

We are responsible for all of the disclosures contained in this Report,

and we believe these industry publications and third-party research, surveys and studies are reliable.

We are not aware of any misstatements

regarding any third-party information presented in this Report;

however, their estimates, in particular, as they relate to projections,

involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those

discussed under, and incorporated by reference in, the section entitled “ Item 1A.

Risk Factors ” of this Report.

These and other factors could cause our future performance to differ materially from our assumptions and estimates.

Some market and other

data included herein, as well as the data of competitors as they relate to SideChannel (as defined herein), is also based on our good

faith estimates.

the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “SideChannel,”

and “SideChannel, Inc.” refer specifically to SideChannel, Inc.

and its consolidated subsidiaries.

addition, unless the context otherwise requires and for the purposes of this report only:

“ Exchange Act ”

refers to the Securities Exchange Act of 1934, as amended;

or the “ Commission ” refers to the United States Securities and Exchange Commission;

“ Securities Act ”

refers to the Securities Act of 1933, as amended.

following discussion should be read in conjunction with our financial statements and accompanying notes included elsewhere in this Report

and our audited financial statements and accompanying notes, and the risk factors contained in our annual report on Form 10-K filed for

the 2022 fiscal year.

references to years relate to the fiscal year ended September 30 of the particular year.

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

Our cybersecurity offerings identify and develop cybersecurity, privacy, and risk management solutions for our customers.

We target customers

that need cost-effective security solutions.

Our growth plan to address the needs of our customers is to provide more effective and cost-efficient

products and tech-enabled services cybersecurity and related including virtual Chief Information Security Officer (“vCISO”),

zero trust, third-party risk management, due diligence, privacy, threat intelligence, and managed end-point security solutions.

Company’s website is www.sidechannel.com .

support of securing new vCISO clients, we expanded the sales and marketing team from one dedicated person to six between July 1, 2022

and December 31, 2022.

vCISO engagements are typically twelve (12) month engagements which consists of a monthly subscription and an

annual renewal option as well as additional vCISO time and material projects, which range from $350 to $450 per hour.

Each of our vCISOs

generally embed into the C-suite executive teams of between two (2) to five (5) of our clients.

Collectively,

our cybersecurity professionals collaborate on the development of proprietary software and pursue partnerships with cybersecurity software

value added resellers (“VARs”).

Commercial relationships with VARs provide SideChannel with additional internal capabilities

to mitigate cybersecurity risks.

We earn a commission on software engagements we generate through VARs.

For the quarter ended December

31, 2022 VAR commissions contributed 2.4% of our revenue versus 2.0% during same quarter in the prior year.

grew revenue by $498,000 or 47.5% in our first quarter of 2023 compared to our first quarter of 2022 as we execute the three phases of

our growth strategy:

Securing new vCISO clients;

Adding new Cybersecurity Software and Services offerings;

Increasing adoption of Cybersecurity Software, including

Enclave and Services offerings at vCISO clients.

associated with:

(i) securing new vCISO clients, and (ii) the addition of new Cybersecurity Software and Services had year-over-year

increases for the quarter.

Revenue from our vCISO services increased by $318,000 or 60.6%, and Revenue from our Cybersecurity Software

and Services category growing by $117,000 or 27.9%.

Both categories of revenue experienced an increase in the number of clients as well

as an increase in the average revenue per client.

services is the primary focus in our sales and marketing effort because we believe an effective cybersecurity program begins with leadership.

Our clients also ask us to provide day-to-day operational support in the form of security and privacy services and software.

of vCISO clients using our Cybersecurity Software & Services offering grew on a year-over-year basis.

also monitor new and retained revenue on a trailing twelve-month basis.

The revenue earned from clients during our first twelve months

of working with them is classified as “new”;

while the revenue earned with clients after our first twelve months of

working with them is classified as “retained”.

The following table provides details on our new and retained revenue for the

twelve months ended December 31, 2022 and 2021:

Trailing Twelve Months Ended December 31,

vCISO Services

Cybersecurity Software and Services

Total (vCISO Services and Cybersecurity Software and Services combined)

we consider trailing twelve revenue retention a key performance indicator.

Revenue retention is calculated by dividing retained

revenue in the measurement period by the total revenue for the previous twelve-month time frame.

The following table shows the

revenue retention by category for the twelve months ended December 31, 2022 and September 30, 2022.

Twelve Months Ended

December 31, 2022

September 30, 2022

Revenue Retention

vCISO Services

Cybersecurity Software and Services

of Operations

Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

revenue was $198 for the three months ended June 30, 2022, compared to zero revenue for the three months ended June 30, 2021.

in fiscal 2022 was related to our licensing agreement with Castle Shield.

general and administrative expense was $1,107,310 for the three months ended June 30, 2022, compared to $197,534 for the three months

ended June 30, 2021, an increase of $909,776, or 461%.

The increase was driven by several factors including:

(i) $479,075 in costs related

to the SideChannel acquisition;

(ii) an increase in headcount related expenses of $335,232;

and (iii) a $45,000 increase in the amortization

of deferred costs related to private placement fees.

The increase in general and administrative expense was partially offset by (i) a

reduction of $441,597 as a result of a recognized gain related to the write-off of remaining right-of-use (ROU) assets and operating

lease liability after the early termination of our final operating lease;

and (ii) decreases in other items, including a reduction of

$192,732 in legal expense, as well as a decrease of $168,765 in rent expense.

selling and marketing expenses were $82,548 for the three months ended June 30, 2022, compared to zero for the three months ended June

Our sales and marketing expenses in fiscal 2022 include (i) consultant expenses of $37,500, (ii) $34,875 in brand and website

marketing costs, and (iii) stock compensation expense of $10,173.

research and development expenses were $191,258 for the three months ended June 30, 2022, compared to $169,098 for the three months ended

June 30, 2021, an increase of $22,160 or 13%.

The increase was primarily due to a $58,020 increase in development expenses, as well as

a $26,672 increase in personnel related costs.

These increases were partially offset by a $62,532 decrease in consultant expenses.

other income (expense) was zero for the three months ended June 30, 2022, compared to other income of $191,052 for the three months ended

June 30, 2021.

The other income in fiscal 2021 was related to the Paycheck Protection Program, or PPP, partial loan forgiveness we received,

partially offset by a minor amount of interest expense.

Months Ended June 30, 2022, Compared to Nine Months Ended June 30, 2021

revenue was $449 for the nine months ended June 30, 2022, compared to $15,417 for the nine months ended June 30, 2021, a decrease of

$14,968, or 97%.

The reduction in our revenue in fiscal 2022 was due to low sales activity from our licensees during the nine months

ended June 30, 2022.

general and administrative expense was $2,183,340 for the nine months ended June 30, 2022, compared to $1,748,398 for the nine months

ended June 30, 2021, an increase of $434,942, or 25%.

The increase in our general and administrative expense was driven by several factors

(i) $479,075 in SideChannel acquisition related costs in fiscal 2022;

(ii) an increase in headcount related expenses of $232,384;

and (iii) a $135,000 increase in the amortization of deferred costs related to private placements fees.

These increases in general and

administrative expense were partially offset by decreases in other items, including (i) a reduction of $441,597 in general and administrative

expense in fiscal 2021 as a result of a gain we recognized related to the write-off of our remaining right-of-use (ROU) assets and an

operating lease liability after the early termination of our final operating lease;

(ii) a reduction of $356,602 in legal expense;

a decrease of $302,811 in rent expense and (iv) a decrease in professional fees of $165,485.

selling and marketing expense was $188,316 for the nine months ended June 30, 2022, compared to $56,250 for the nine months ended June

Months Ended December 31, 2022 Versus Three Months Ended December 31, 2021

Our revenue was $1.5 million for the quarter ended December 31, 2022, compared to $1.0 million for the three-month comparable prior

an increase of $498,000 or 48%.

The increase in our sales and marketing expense was the result of several factors including:

(i) an increase of $112,500 in consultant expenses;

and (ii) an increase of $64,625 in brand and website marketing costs.

These increased

selling and marketing expenses were partially offset by a $45,059 decrease in headcount related costs during fiscal 2021 that were not

incurred in the current fiscal year.

research and development expense were $461,816 for the nine months ended June 30, 2022, compared to $465,974 for the nine months ended

June 30, 2021, a decrease of $4,158 or 1%.

The slight reduction in our research and development expense was primarily the result of a

$134,786 decrease in consulting related costs, resulting from the spending reductions we initiated during the prior fiscal year.

cost reduction was partially offset by an increase in payroll related expense of $72,608 and an increase of $58,020 in product development

other income (expense) was zero for the nine months ended June 30, 2022, compared to other income of $191,052 for the nine months ended

June 30, 2021.

The other income in fiscal 2021 was related to the partial forgiveness of our PPP loan, partially offset by a minor amount

of interest expense.

We believe this increase substantiates our business strategies.

Gross margins increased to 56.0% for the quarter ended December 31, 2022, from 54.6% for the quarter ended December 31,

2021, which is the result of improved margin on third party services used in the current fiscal year compared to the prior fiscal

year being partially offset by a year-over-year decrease in the gross margin on our internally delivered services.

and Administrative Expenses.

Our general and administrative expenses were $1.0 million for the three months ended December 31, 2022, compared

to $205,000 for the prior year, an increase of $825,000 or 402%.

The significant increase in general and administrative expenses primarily

resulted from adding the costs associated with the Company’s public reporting obligations and three (3) additional administrative

New costs related to public reporting include stock-based compensation, board compensation, additional insurance, investor

relations services, and professional services.

and Marketing Expenses.

Our sales and marketing expenses were $307,000 for the three months ended December 31, 2022, compared to $43,000

for the prior year, an increase of $264,000 or 614%.

The increase was driven by the recent increase in sales and marketing staff discussed

earlier and the related salary and independent contractor expense along with higher spend on third-party marketing services.

and Development Expenses.

Our research and development expenses were $135,000 for the three months ended December 31, 2022, compared to

$0 for the prior year.

These costs are driven by personnel expenses and expenses incurred from independent contractors related to the

development of Enclave.

Income (Loss).

We incurred a net loss of $602,000, or $0.00 per share, for the three months ended December 31, 2022, compared to

net income of $328,000, or $0.01 per share, for the three months ended December 31, 2021.

The net loss for the three months ended December

31, 2022 was primarily due to an increase in operating expenses.

and Capital Resources

had an accumulated deficit of $74,363,914 as of June 30, 2022.

We expect to continue to incur expenses, and generate continued operating

losses, until we can generate revenues that are sufficient to cover our expected ongoing expenses.

We anticipate that our operating expenses

for the next twelve months will require between $2.0 million and $2.7 million of cash.

We expect to cover those expenses with some of

the net proceeds we received from a private placement of our equity securities in the first quarter of our fiscal year 2021.

anticipate the SideChannel acquisition will mitigate or reduce our use of cash for operating expenses.

We intend to manage our business

so that our current cash reserves will be sufficient to allow us to reach positive cash flow from our operations, but we cannot assure

you that will occur.

We do not currently have access to any credit facilities and we cannot guarantee that we will be able to access

any credit facilities if needed.

June 30, 2022, we had cash and cash equivalents of $3,588,912, primarily representing proceeds from the private placement of shares of

our common stock in March and April of 2021.

of June 30, 2022, we had working capital of $3,010,376, compared to working capital of $4,756,094 as of September 30, 2021.

following table summarizes, for the periods indicated, selected items in our condensed Statements of Cash Flows:

Nine Months Ended

had an accumulated deficit of $12.5 million as of December 31, 2022.

We expect to incur continued operating losses until we generate

revenues sufficient to cover our expected ongoing obligations.

On December 31, 2022, we had cash of $2.6 million.

We maintain our cash

in accounts held by reputable financial institutions which, 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 December 31, 2022, approximately

$2.0 million of the Company’s cash balance was uninsured.

The Company has not experienced any losses on cash.

had working capital of $2.6 million as of December 31, 2022, compared to working capital of $3.0 million as of September 30, 2022.

following table summarizes, for the periods indicated, selected items in our Consolidated Statements of Cash Flows:

Three Months Ended

Net cash provided by (used in):

Operating activities

$ (2,195,082 )

$ (2,566,292 )

Investing activities

Financing activities

the nine months ended June 30, 2022, we recorded a net loss of $2,833,023.

Our net cash used in operating activities during this period

was $2,195,082.

During the nine months ended June 30, 2022, we had non-cash charges of $135,000 for amortization of deferred costs related

to private placement fees.

In addition, we recorded $84,305 of stock-based compensation expense during the period.

Our prepaid expenses

declined by $251,645, reflecting the amortization of those prepaid expenses during fiscal 2022.

We also settled $854,000 of our accounts

payable and accrued liabilities through the issuance of 4,744,448 shares of our common stock to our creditors.

We issued another 200,000

shares of our common stock to cover $14,000 in legal settlement expenses.

Our accrued compensation expense increased by $175,000 during

fiscal 2022 as a result of bonuses paid to our employees as of June 30, 2022.

We had no investing activities during the nine months ended June 30, 2022.

We had no financing activities during the nine months ended June 30, 2022.

receive cash each month from revenue generated with our clients.

We use this cash and a portion of our cash reserves to pay for our monthly

Material cash requirements include personnel costs and the expenses associated with being a listed entity.

used cash in operating activities in the amount of $477,000 for the three months ended December 31, 2022.

For the quarter ended December

31, 2022, we recorded a net loss of $602,000.

During the same period, our non-cash charges primarily consisted of $115,000 in stock compensation

expense and $45,000 in amortization.

The change in our net operating assets and liabilities was primarily due to decreases in accounts

receivable and prepaid assets of $88,000 along with decreases in accounts payable and accrued liabilities of $123,00.

were no cash activities in investing for the three months ended December 31, 2022.

were no cash activities in financing for the three months ended December 31, 2022.

Sheet Arrangements

the nine months ended June 30, 2022, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current

or future effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources

that is material to our interests.

did not have any off-balance sheet arrangements, as defined under applicable SEC rules, during the periods presented, nor do we currently

have any such arrangements.

Accounting Policies and Estimates

preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts

of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amount

of revenues and expenses during the reporting period.

financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).

The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets

and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amount of revenues

and expenses during the reporting period.

Our management periodically evaluates the estimates and judgments made.

Our management

bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances.

Actual results may differ from these estimates as a result of different assumptions or conditions.

As of June 30, 2022, there have been

no significant changes to the accounting estimates and assumptions that we have deemed critical in the past.

Our critical accounting

estimates and assumptions are more fully described in our Annual Report on Form 10-K for our fiscal year 2021.

Management bases its

estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances.

results may differ from these estimates as a result of different assumptions or conditions.

Note 2 of the unaudited financial statements included in “Part I—Item 1.

Financial Statements”, above, for a discussion

of our significant accounting policies.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

to Item 305(e) of Regulation S-K (§ 229.305(e)), we are not required to provide the information required by this Item, as we are

a “smaller reporting company,” as defined by Rule 229.10(f)(1).

to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as

it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis