What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-02-07 compared with 2023-08-09 · 102 added, 126 removed, 105 unchanged (68% of the section changed)

57 unchanged sentences

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 (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,

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 licensing revenue on software engagements we generate through VARs.

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

Cybersecurity

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%.

internally report our revenue using two categories.

The first, “vCISO Services,” captures the revenue the Chief Information

Security Officer services that we provide to our clients on a “virtual” or outsourced basis, thus the acronym “vCISO.”

Services delivered by SideChannel through our team of vCISOs include assessing the cybersecurity risk profile, implementing policies

and programs to mitigate risks, and managing the day-to-day tasks to ensure compliance with the adopted cybersecurity framework.

of our clients use our vCISO services.

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

Hourly rates for vCISO

time and material projects range from $350 to $425.

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

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

second revenue category encompasses an array of Cybersecurity Software and Services that our clients deem necessary to protect their

digital assets.

These augment our vCISO offering and include a full range of other cybersecurity products and services delivered through

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

relationships with third-party service providers and VARs provide SideChannel with additional internal capabilities to mitigate cybersecurity

We earn licensing revenue from software contracts and commissions from third-party service provider partnerships which are included

in this revenue category.

growth strategy focuses on these three initiatives:

Securing new vCISO clients,

Adding new Cybersecurity Software and Services offerings, and

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

We are offering proprietary software called Enclave which simplifies important cybersecurity tasks called “asset inventory”

and “microsegmentation.” Enclave seamlessly combines access control, microsegmentation, encryption and other secure networking

concepts to create a comprehensive solution.

It allows Information Technology to easily segment the enterprise network, place the right

staff in those segments and direct traffic.

following revenue metrics are for the three months ended December 31, 2023, versus the same period in fiscal year 2023 and the table

reflects the revenue by category for the first three months of fiscal years 2024 and 2023.

Cybersecurity

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

with them is classified as “retained”.

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

months ended June 30, 2023 and 2022:

Twelve Months Ended June 30,

Software & Services

growth in vCISO Services reflects both growth in clients served and an increase in revenue per client.

Cybersecurity Software & Services

revenue grew from 2023 to 2024 primarily because of an increase in the use of these services by existing Cybersecurity Software and Services

clients and secondarily because of an expansion of the services and software offered.

also monitor new and retained revenue.

The revenue earned from clients during our first twelve months of working with them is classified

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 three months ended December 31, 2024 and 2023.

fewer vCISO Services engagements during the three months ended December 31.

2023 than we did during the three months ended December 31,

We attribute the decrease to ineffective lead generation campaigns launched during the last half of fiscal year 2023.

Cybersecurity

Software and Services

(vCISO Services and Cybersecurity Software and Services combined)

Software & Services

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 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

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

Trailing Twelve Months Ended

December 31, 2023

September 30, 2023

vCISO Services

Cybersecurity Software & Services

of Operations

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;

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

Our revenue was $1.7 million for the quarter ended December 31, 2023, compared to $1.5 million for the three-month comparable prior period;

an increase of $190,000 or 12%.

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 $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 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 $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%.

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 $180,000 for the three months ended June 30, 2023, compared to

$0 for the prior comparable period.

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.

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.

The factors driving this revenue increase include improved revenue retention and a growth in vCISO engagements.

Our gross margin was $845,000 or 48.7% for the quarter ended December 31, 2023, compared to $865K or 5 6 .0% for

the quarter ended December 31, 2022.

The decline in our gross margin was the result of less effective utilization of our service

delivery employees.

We initiated expense reductions from May 2023 to December 2023 that impacted all areas of our company.

These reductions

resulted in a $368,000 or 25.0% decrease in total operating expenses for the three months ended December 31, 2023 compared to the three months ended to December 31, 2022.

The changes for each operating expense area are discussed below.

The expense reductions were intended to increase the likelihood

of achieving positive cash flow from operating activities during fiscal year 2024.

and Administrative Expenses.

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 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.

Our general and administrative expense was $709,000 for the three months ended December 31, 2023, compared

to $1,030,000 for the prior comparable period, a decrease of $321,000 or 31.1%.

The decrease was achieved by reducing executive positions and eliminating investor communication costs.

and Marketing Expenses.

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%.

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.

Our sales and marketing expense was $269,000 for the three months ended December 31, 2023, compared to

$269,000 for the prior comparable period, a decrease of $38,000 or 12.4%.

The decrease was driven by a reduction in staff and

third-party service provider costs.

and Development Expenses.

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 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.

Our research and development expense was $126,000 for the three months ended December 31, 2023, compared to

$135,000 for the prior comparable period, a decrease of $9,000 or 6.7%.

The decrease is the result of a staff reduction.

and Capital Resources

had an accumulated deficit of $14.1 million as of June 30, 2023.

had an accumulated deficit of $19.2 million as of December 31, 2023.

Our accumulated deficit has been primarily driven by three non-recurring expenses totaling $16.8 million:

$6.2 million for acquisition costs, including $6.1 million related

to the contingent consideration from the Business Combination;

$5.7 million impairment of goodwill recorded as a result of the Business

Combination, and $4.9 million impairment of intangible assets.

We expect to incur continued operating losses until we generate revenues

sufficient to cover our expected ongoing obligations and expenses.

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

On December 31, 2023, we had cash of $819,000.

We maintain our cash

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

As of June 30, 2023, approximately $1.2 million

As of December 31, 2023, approximately $569,000

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):

had working capital of $1.4 million as of December 31, 2023, compared to working capital of $1.5 million as of September 30, 2023.

decline in working capital is primarily attributed to the use of cash to fund operating losses during the last three

following table summarizes selected items in our Consolidated Statements of Cash Flows for the three months ended December 31:

(In thousands)

Net cash provided by (used in):

Operating activities

Investing activities

Financing activities

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 $1.6 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.

used $184,000 of cash for operating activities during the three months ended December 31, 2023 and recorded a net loss of $246,000.

During the same period, our non-cash charges totaled $136,000 comprised of $88,000 in stock-based compensation expense and $48,000

in amortization and depreciation.

The change in our net operating assets and liabilities was primarily due to a $103,000 decrease in prepaid expenses as we recognized our annual

directors and officers insurance premium that is prepaid annually in July and a $101,000 decrease in accounts payable and accrued

liabilities because of payments made on our directors and officers insurance note payable.

were no cash activities in investing for this reporting period.

We paid a $50,000 note payable to Mr.

Akash Desai in December 2023.

The note payable was related to a December 2021

agreement for the redemption of Mr.

Desai’s interest in SideChannel LLC.

The December 2023 payment completed our obligations to

or Recently Adopted Accounting Standards

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statements were prepared.

As of June 30, 2023, there have been no significant changes to the accounting estimates that we have deemed

As of December 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 2023 Form 10-K .

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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