What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2023-02-09 · 127 added, 94 removed, 107 unchanged (67% of the section changed)

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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

of the applicable licensors if any, nor that respective owners of 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.

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

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

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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;

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.

Act ” refers to the Securities Act of 1933, as amended.

following discussion should be read in conjunction with our unaudited, consolidated financial statements and accompanying notes included

elsewhere in this Report and our audited, consolidated 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.

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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

support of securing new vCISO clients, we expanded the sales and marketing team from one (1) dedicated person to six (6) from July 1,

2022 through February 1, 2023.

vCISO engagements are typically multi-year relationships which consist 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.

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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.

We earn licensing revenue on software engagements we generate through VARs.

following are revenue metrics for the three months ended March 31, 2023 versus the comparable prior year period:

revenue grew by $382,000 or 30.9%.

Services grew by $98,000 or 11.6%.

● Cybersecurity

Software Services grew by $284,000 or 72.9%.

licensing revenue contributed 12.7% of our total revenue versus 3.2% during same quarter

in the prior comparable period.

attribute these successes to the effective execution of our growth strategy:

new vCISO clients;

new Cybersecurity Software and Services offerings;

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

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.

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

following are revenue metrics for the six months ended March 31, 2023 versus the comparable prior year period.

revenue grew by $880,000 or 38.5%.

Services grew by $516,000 or 36.1%.

● Cybersecurity

Software Services grew by $364,000 or 42.7%.

licensing revenue contributed 7.7% during fiscal year 2023 versus 2.6% in the prior comparable

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

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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,

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 March 31, 2023 and 2022:

Trailing Twelve Months Ended March 31,

(In thousands)

vCISO Services

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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.

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 March 31, 2023 and September 30, 2022.

Twelve Months Ended

December 31, 2022

March 31, 2023

September 30, 2022

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of Operations

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

Months Ended March 31, 2023 Versus Three Months Ended March 31, 2022

Our revenue was $1.6 million for the quarter ended March 31, 2023, compared to $1.2 million for the three-month comparable prior

an increase of $382,000 or 31%.

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.

The factors driving this are discussed above in Overview.

Our gross margins decreased to 45.6% for the quarter ended March 31, 2023, from 50.9% for the quarter ended March 31, 2022,

as a result of lower utilization of vCISO’s added during the quarter to support new client growth.

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.

Our general and administrative expense was $990,000 for the three months ended March 31, 2023, compared

to $233,000 for the prior comparable period, an increase of $757,000 or 325%.

The significant increase in general and administrative

expenses primarily resulted from the incurrence of the costs associated with being a public company and the addition of three (3) administrative

New costs related to being a public company include stock-based compensation, board compensation, investor relations services,

and increased insurance professional services.

The costs associated with being a public company became part of our expense structure

as a result of the Business Combination.

These increases are a trend that we expect to recur future quarters.

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

Our sales and marketing expense was $437,000 for the three months ended March 31, 2023, compared to $37,000

for the prior comparable period, an increase of $400,000 or 1,081%.

The increase was driven by the recent additions to our staff discussed

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

These increases

are a trend that we expect to recur future quarters.

and Development Expenses.

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

Our research and development expense was $168,000 for the three months ended March 31, 2023, compared to

$0 for the prior comparable period.

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

to the development of Enclave.

The Enclave development costs became part of our expense structure as a result of the Business Combination.

These increases are a trend that we expect to recur future quarters.

Months Ended March 31, 2023 Versus Six Months Ended March 31, 2022

Our revenue was $3.2 million for the six months ended March 31, 2023, compared to $2.3 million for the six-month comparable prior

an increase of $880,000 or 39%.

The growth is attributed to gaining new clients and growing revenue at existing clients which

is partially offset by non-recurring project work completed in the prior year.

Our gross margins decreased to 50.6% for the six months ended March 31, 2023, from 52.6% for the six months ended March

31, 2022, as a result of lower utilization of vCISO’s added during the period to support new client growth which was partially

offset by the benefit of improved margin on third party services.

and Administrative Expenses.

Our general and administrative expense was $2.0 million for the six months ended March 31, 2023, compared

to $438,000 for the prior comparable period, an increase of $1,582,000 or 361%.

The significant increase in general and administrative

expenses primarily resulted from adding the costs associated with being a public company and the addition of three (3) administrative

New costs related to being a public company include stock-based compensation, board compensation, investor relations services,

and increased insurance and professional services.

and Marketing Expenses.

Our selling and marketing expense was $744,000 for the six months ended March 31, 2023, compared to $80,000

for the prior comparable period, an increase of $664,000 or 830%.

The increase was driven by the recent additions to our 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 expense was $303,000 for the six months ended March 31, 2023, compared to

$0 for the prior year.

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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.

The Enclave development costs became part of our expense structure as a result of the Business Combination.

and Capital Resources

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.

had an accumulated deficit of $13.4 million as of March 31, 2023.

We expect to incur continued operating losses until we generate revenues

sufficient to cover our expected ongoing obligations and expenses.

On March 31, 2023, we had cash of $1.9 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”).

in accounts held by reputable financial institutions which, at times, may exceed federally insured limits guaranteed by the Federal Deposit

Insurance Corporation (“FDIC”).

The FDIC insures these deposits up to $250,000.

As of December 31, 2022, approximately

As of March 31, 2023, approximately $1.5

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

The Company has not experienced any losses of cash in any of these financial

institutions.

had working capital of $1.9 million as of March 31, 2023, compared to working capital of $3.0 million as of September 30, 2022.

following table summarizes, for the six months ended March 31, selected items in our Consolidated Statements of Cash Flows:

(In thousands)

Net cash provided by (used in):

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Financing activities

receive cash each month from revenue generated with our clients.

receive cash each month from revenue generated from 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.

Material cash requirements include personnel costs and the expenses associated with being a public reporting company.

used $1,128,000 of cash in operating activities during the six months ended March 31, 2023 and recorded a net loss of $1,458,000.

the same period, our non-cash charges primarily consisted of $244,000 in stock-based compensation expense and $90,000 in amortization.

The change in our net operating assets and liabilities was primarily due to net increases in accounts receivable and prepaid assets of

$247,000, an increase in deferred revenue of $242,000 because of increased business activity.

were no cash activities in investing for the six months ended March 31, 2023.

were no cash activities in financing for the six months ended March 31, 2023.

or Recently Adopted Accounting Standards

the Notes to our consolidated financial statements in this Report for information concerning the implementation and impact of new or

recently adopted accounting standards.

Accounting Estimates

preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure

of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during

the reporting period.

Actual results could differ from those estimates.

Certain of our accounts, including goodwill, identifiable intangibles,

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

We base our estimates on historical

experience and on appropriate and customary assumptions that we believe to be reasonable under the circumstances, the results of which

form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Some of these accounting estimates and assumptions are particularly sensitive because of their significance to our consolidated financial

statements and because of the possibility that future events affecting them may differ markedly from what had been assumed when the financial

statements were prepared.

As of March 31, 2023, there have been no significant changes to the accounting estimates that we have deemed

Our critical accounting estimates are more fully described in our 2022 Form 10-K.

Sheet Arrangements

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have any such arrangements.

Accounting Policies and Estimates

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.

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

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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