What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-09 · 101 added, 104 removed, 130 unchanged (61% of the section changed)

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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 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 persons’ companies.

marks herein 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 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 herein to imply a relationship with, or endorsement or sponsorship of us by, any other persons, firm or entity, except as

otherwise so expressly indicated.

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

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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 (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.

Each of our vCISOs

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

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

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 such additional time’s cost to customers ranges from $350 to $450 per

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

report to the chief executive officer, chief financial officer, or general counsel.

Collectively,

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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:

following are revenue metrics for the three months ended June 30, 2023 versus the comparable prior year period:

revenue grew by $474,000 or 37.1%.

Services grew by $98,000 or 11.6%.

Services category revenue grew by $516,000 or 64.8%.

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 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%.

Software and Services category revenue decreased by $42,000 or 8.8%.

licensing revenue contributed 1.7% of our total revenue versus 3.0% during same quarter in the prior comparable period.

selling and marketing efforts are gaining new vCISO Services clients which is the primary reason for the growth in that category.

new Cybersecurity Software and Services revenue combined with the growth of this category at existing clients was not enough to exceed

revenue from the unusually high number of non-recurring Cybersecurity Software and Services projects executed during the prior year quarter

ended June 30, 2022.

following are revenue metrics for the nine months ended June 30, 2023 versus the comparable prior year period.

revenue grew by $1.4 million or 38.0%.

Services category revenue grew by $1.0 million or 45.9%.

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.

The revenue earned from clients during our first twelve months

of working with them is classified as “new”;

Software and Services category revenue grew by $0.3 million or 24.9%.

licensing revenue contributed 6.1% during fiscal year 2023 versus 2.9% in the prior comparable period.

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

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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

Cybersecurity Software and Services

Total (vCISO Services and Cybersecurity Software and Services combined)

months ended June 30, 2023 and 2022:

Twelve Months Ended June 30,

Cybersecurity

Software and Services

(vCISO Services and Cybersecurity Software and Services combined)

we consider trailing twelve revenue retention a key performance indicator.

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The following table shows the revenue retention

by category for the twelve months ended March 31, 2023 and September 30, 2022.

Twelve Months Ended

March 31, 2023

September 30, 2022

Revenue Retention

vCISO Services

Cybersecurity Software and Services

by category for the twelve months ended June 30, 2023 and September 30, 2022.

We changed the revenue classification for certain invoice

line items between vCISO and Cybersecurity Software and Services which impacted the retention calculations for each category for the

twelve months ended September 30, 2022.

The originally reported numbers from the Form 10-K and the revised retention rates after the

line item classification changes are provided in the table below.

Cybersecurity

Software and Services

of Operations

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

Months Ended June 30, 2023 Versus Three Months Ended June 30, 2022

increases noted in each operating expense area are a trend that we expect to recur in the final quarter of the current fiscal year (three

months ended September 30, 2023).

We do not anticipate the same level of year-over-year variances during each quarter of our fiscal year

ended September 30, 2024.

Our revenue was $1.8 million for the quarter ended June 30, 2023, compared to $1.3 million for the three-month comparable prior period;

an increase of $474,000 or 37%.

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.

The factors driving this this revenue increase is a growth in vCISO Services revenue which was slightly

offset by a decrease in Cybersecurity Software and Services revenue.

Our gross margins increased to 49.9% for the quarter ended June 30, 2023, from 44.0% for the quarter ended June 30, 2022,

as a result of better utilization of service delivery employees and a more favorable mix of services.

and Administrative Expenses.

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

Our general and administrative expense was $834,000 for the three months ended June 30, 2023, compared

to $407,000 for the prior comparable period, an increase of $427,000 or 105%.

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.

expenses primarily resulted from the costs associated with being a public company and the addition of administrative personnel.

related to being a public company include stock-based compensation, board compensation, investor relations services, and increased insurance

and professional services.

The costs associated with being a public company became part of our expense structure as a result of the Business

and Marketing Expenses.

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

Our sales and marketing expense was $340,000 for the three months ended June 30, 2023, compared to $50,000

for the prior comparable period, an increase of $290,000 or 580%.

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

Our research and development expense was $180,000 for the three months ended June 30, 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.

These costs are driven by the personnel and independent contractor expenses related to the development

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.

Combination Related Costs – We recorded Business Combination related costs of $214,000 for the three months ended June 30, 2023.

These costs were associated with the shares issued during the quarter in connection with the working capital adjustment related to the

Business Combination.

Months Ended June 30, 2023 Versus Nine Months Ended June 30, 2022

Our revenue was $4.9 million for the nine months ended June 30, 2023, compared to $3.6 million for the nine-month comparable prior

an increase of $1.3 million or 38%.

The growth is attributed to gaining new clients which was partially offset by a reduction

in non-recurring project compared to the prior year.

Our gross margins increased to 50.4% for the nine months ended June 30, 2023, from 49.5% for the nine months ended June

30, 2022, which reflects cost reductions we achieved on our service lines through the increased use of employees versus independent contractors.

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%.

Our general and administrative expense was $2.9 million for the nine months ended June 30, 2023, compared

to $0.8 million for the prior comparable period, an increase of $2.1 million or 263%.

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.

expenses primarily resulted from the costs associated with being a public company and the addition of administrative personnel.

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

Our selling and marketing expense was $1.1 million for the nine months ended June 30, 2023, compared to $130,000

for the prior comparable period, an increase of $970,000 or 734%.

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and Development Expenses.

Our research and development expense was $303,000 for the six months ended March 31, 2023, compared to

Our research and development expense was $483,000 for the nine months ended June 30, 2023, 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.

These costs are driven by the personnel and independent contractor expenses related to the development of Enclave.

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

Combination Related Costs – We recorded Business Combination related costs of $214,000 for the three months ended June 30, 2023.

These costs were associated with the shares issued during the quarter in connection with the working capital adjustment related to the

Business Combination.

and Capital Resources

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

had an accumulated deficit of $14.1 million as of June 30, 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.

On June 30, 2023, we had cash of $1.4 million.

We maintain our cash

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

As of March 31, 2023, approximately $1.5

million of the Company’s cash balance was uninsured.

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):

Operating activities

Investing activities

Financing activities

As of June 30, 2023, approximately $1.2 million

of the Company’s cash balance was uninsured.

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

had working capital of $1.6 million as of June 30, 2023, compared to working capital of $3.0 million as of September 30, 2022.

in working capital is primarily attributed to the use of cash to fund operating losses during the last nine months.

following table summarizes, for the nine months ended June 30, selected items in our Consolidated Statements of Cash Flows:

cash provided by (used in):

receive cash each month from revenue generated from our clients.

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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.

used $1.6 million of cash reserves for operating activities during the nine months ended June 30, 2023 and recorded a net loss of

$2.1 million.

During the same period, our non-cash charges totaled $721,000 comprised of $372,000 in stock-based compensation

expense, $135,000 in amortization, and $214,000 in Business Combination related costs.

The change in our net operating assets and

liabilities was due to an $262,000 increase in accounts receivable due to a growth in monthly invoicing, a $158,000 decrease in

prepaid expenses as we recognized our annual directors and officers insurance premium that is prepaid annually in July, a $247,000

decrease in accounts payable and accrued liabilities because of payments made on our directors and officers insurance note payable,

and a $228,000 increase in deferred revenue due to a growth in annual software invoicing with our clients.

had fixed asset purchases of $24,000 during the nine months ended June 30, 2023 related to an upgrade in our website.

were no cash activities in financing for the nine months ended June 30, 2023.

or Recently Adopted Accounting Standards

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statements were prepared.

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

As of June 30, 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 .

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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).

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

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