What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-07 compared with 2024-02-07 · 151 added, 136 removed, 71 unchanged (80% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

statements in our Management’s Discussion and Analysis of Financial Condition and Results of Operations, including estimates, projections,

statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements

are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section

27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

These forward-looking statements generally

are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,”

“intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,”

“will be,” “will continue,” “will likely result,” and similar expressions.

Forward-looking statements

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.

A detailed discussion of risks and uncertainties that could cause actual results and

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, 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, 2023, filed with the Securities and Exchange Commission on December 27, 2023.

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 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

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.

following information should be read in conjunction with the unaudited consolidated financial statements and the accompanying

notes included in Part I, Item 1 of this Report.

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

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

efforts are focused on protecting and enabling the critical business functions of our clients and customers through comprehensive cybersecurity

This specifically includes:

virtual Chief Information Security Officers (“vCISOs”) as a fractional resource into the leadership teams of our clients,

a proprietary SaaS platform called Enclave that simplifies the segmentation of digital networks,

identifying, and mitigating cybersecurity and privacy risks through tech-enabled security engineering processes, and

third-party cybersecurity services and software when appropriate.

internally report our revenue using two categories.

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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 & Services

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

“vulnerability management”, and “microsegmentation.” Enclave seamlessly combines access control, microsegmentation,

encryption and other secure networking concepts to create a novel solution for simplifying the deployment and management of these cybersecurity

It allows IT professionals to easily segment the enterprise network, place the right staff in those segments and direct traffic.

Enclave revenue is currently included within the Cybersecurity Software and Services category.

Category Performance for the Six Months Ended March 31, 2024 and 2023

revenue metrics discussed in this section are for the six months ended March 31, 2024, versus the same period in fiscal year 2023.

following table contains the revenue by category.

(in thousands)

vCISO Services

Cybersecurity 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.

revenue grew from 2023 to 2024 because of an increase in the use of these services by existing clients and because of an expansion of

the services and software offered.

also monitor new and retained revenue.

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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,

table provides details on our new and retained revenue for the six months ended March 31, 2024 and 2023.

(in thousands)

Cybersecurity Software & Services

Total Revenue

initiated fewer new vCISO Services engagements during the six months ended March 31.

2024 than we did during the six months ended March

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

Cybersecurity

Software & Services

more success at securing Cybersecurity Software and Services work in new engagements during the six months ended March 31, 2024 than

we did during the prior year.

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 December 31, 2023 and September 30, 2023.

by category for the twelve months ended March 31, 2024 and September 30, 2023.

Trailing Twelve Months Ended

December 31, 2023

March 31, 2024

September 30, 2023

1 unchanged sentence

Cybersecurity Software & Services

Increase in Cash from December 31, 2023 to March 31, 2024

May 2023, we announced our intention to accelerate the attainment of positive cash flow from operations by making significant

reductions in operating expenses.

For the three months ended March 31, 2024, our operating expenses are $467,000 lower than the

For the six months ended March 31, 2024, our operating expenses are $837,000 lower than the prior year.

On a percentage

basis these decreases equate to a 29.3% reduction for the three month period and a 27.2% reduction for the six month period.

expect decreases compared to the prior year to occur in the remaining two quarters of this fiscal year.

reductions have had the desired impact.

Our cash balance grew slightly, $32,000, from December 31, 2023 to March 31, 2024.

growth is also contributing to our improved profitability and cash flow.

If revenue continues to grow on a year-over-year basis and we

maintain our operating expenses in line with current revenues, then we may experience further improvements in profitability and cash

OF OPERATIONS

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;

Months Ended March 31, 2024, Compared to the Three Months Ended March 31, 2023

consolidated financial data for the three months ended March 31, 2024 and 2023 are as follows:

Three Months Ended

Cost of revenues

Operating expenses

General and administrative

Selling and marketing

Research and development

Total operating expenses

Operating loss

Our revenue was $1.9 million for the quarter ended March 31, 2024, compared to $1.6 million for the three-month comparable prior

an increase of $310,000 or 19.5%.

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.

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

both consulting engagements and sales of third-party services.

Our gross margin was 45.0% for the quarter ended March 31, 2024, compared 45.6% for the quarter ended March 31, 2023.

decline in our gross margin was the result of less effective utilization of our service delivery employees and an increase in sales of

third-party software and services, which have a lower margin.

We initiated expense reductions beginning in May 2023 that were fully implemented by March 2024.

These reductions impacted

all areas of our company.

These reductions resulted in a $467,000 or 29.3% decrease in total operating expenses for the three months

ended March 31, 2024, compared to the three months ended to March 31, 2023.

The changes for each operating expense area are discussed

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 $709,000 for the three months ended December 31, 2023, compared

Our general and administrative expense was $849,000 for the three months ended March 31, 2024, compared

to $990,000 for the prior comparable period, a decrease of $141,000 or 14.2%.

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

The decrease was achieved by reducing executive positions

and eliminating investor relations costs.

and Marketing Expenses.

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

Our sales and marketing expense was $156,000 for the three months ended March 31, 2024, compared to $437,000

for the prior comparable period, a decrease of $281,000 or 64.3%.

The decrease was driven by a reduction in staff and

third-party service provider costs.

The decrease was driven by a reduction in staff and third-party

service provider costs.

and Development Expenses.

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

Our research and development expense was $123,000 for the three months ended March 31, 2024, compared

to $168,000 for the prior comparable period, a decrease of $45,000 or 26.8%.

The decrease is the result of a staff reduction as well

as some expenses being reallocated to cost of goods sold following the launch of Enclave.

Months Ended March 31, 2024, Compared to the Six Months Ended March 31, 2023

consolidated financial data for the six months ended March 31, 2024 and 2023 are as follows:

Six Months Ended

Cost of revenues

Operating expenses

General and administrative

Selling and marketing

Research and development

Total operating expenses

Operating loss

Our revenue was $3.7 million for the six months ended March 31, 2024, compared to $3.2 million for the six-month comparable prior

an increase of $500,000 or 15.8%.

The factors driving this revenue increase include improved revenue retention and growth in

vCISO engagements.

Our gross margin was 46.8% for the six months ended March 31, 2024, compared to 50.6% for the six months ended March 31,

The decline in our gross margin was the result of less effective utilization of our service delivery employees and an increase

in sales of third-party software and services, which have a lower margin.

We initiated expense reductions beginning in May 2023 that were fully implemented by March 2024.

These reductions impacted

all areas of our company.

These reductions resulted in a $835,000 or 27.2% decrease in total operating expenses for the six months ended

March 31, 2024 compared to the six months ended March 31, 2023.

The changes for each operating expense area are discussed below.

expense reductions were intended to increase the likelihood of achieving positive cash flow from operating activities during fiscal year

and Administrative Expenses.

Our general and administrative expense was $1.6 million for the six months ended March 31, 2024,

compared to $2.0 million for the prior comparable period, a decrease of $462,000 or 22.9%.

The decrease was achieved by reducing

executive positions and eliminating investor relations costs.

and Marketing Expenses.

Our sales and marketing expense was $425,000 for the six months ended March 31, 2024, compared to $744,000

for the prior comparable period, a decrease of $319,000 or 42.9%.

The decrease is the result of a staff reduction.

The decrease was driven by a reduction in staff and third-party

service provider costs.

and Development Expenses.

Our research and development expense was $249,000 for the six months ended March 31, 2024, compared

to $303,000 for the prior comparable period, a decrease of $54,000 or 17.8%.

The decrease is the result of a staff reduction as well

as some expenses being reallocated to cost of goods sold as Enclave has been launched.

AND CAPITAL RESOURCES

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

We maintain our cash

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, 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 $1.4 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:

had an accumulated deficit of $19.4 million as of March 31, 2024.

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.

On March 31, 2024, we had cash of $851,000.

We maintain our cash 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 March 31, 2024, approximately $601,000 of the Company’s cash balance was uninsured.

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

had working capital of $1.3 million as of March 31, 2024, compared to working capital of $1.5 million as of September 30, 2023.

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

We expect to incur continued operating losses until we generate revenues sufficient to cover our expected ongoing

obligations and expenses.

W e intend to manage our business such that our

current cash reserves will allow us to reach sustainable, positive cash flow from our operations, but we cannot assure if and when that

will be achieved.

We don’t currently have any credit facilities available to us.

We believe that our existing cash balance is sufficient

to fund our operations through at least June 30, 2025.

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

(In thousands)

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

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.

used $152,000 of cash for operating activities during the six months ended March 31, 2024 and recorded a net loss of $499,000.

the same period, our non-cash charges totaled $330,000 comprised of $234,000 in stock-based compensation expense net of cash used to

purchase RSUs from employees to cover income taxes due on vested RSU’s and $96,000 in amortization and depreciation.

in our net operating assets and liabilities was primarily due to a $126,000 decrease in accounts payable and accrued liabilities primarily

because of payments made on our directors and officers insurance note payable and a $284,000 increase in our deferred revenue balance.

were no cash activities in investing for this reporting period.

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

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.

The note payable was related to a December 2021 agreement for the redemption

Desai’s interest in SideChannel LLC.

The December 2023 payment completed our obligations to

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 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 .

Sheet Arrangements

The December 2023 payment completed our obligations to Mr.

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.

have been no material updates to our expectations for our short-term and long-term liquidity and operating capital requirements since

our 2023 Form 10-K.

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