Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
SideChannel, Inc. to Report Fiscal Third Quarter 2023 Financial Results & Provide Corporate Update
Conference call & webcast on August 9, 2023 at 4:30 pm ET
WORCESTER, MA / ACCESSWIRE / July 25, 2023 / SideChannel, Inc. (OTCQB:SDCH) ("SideChannel"), a provider of cybersecurity services and technology to middle market companies, announced it will release its financial results for the quarter ended June 30, 2023 before the market opens on Wednesday, August 9, 2023.
The company will discuss the results on a conference call and webcast at 4:30 pm Eastern Daylight Time on August 9, 2023.
CALL INFORMATION
Date: Wednesday, August 9, 2023 at 4:30 pm EDT
Dial In: Toll Free: 877-545-0523 International: 973-528-0016
Participant Access Code: 157177
A webcast of the call will also be available: https://www.webcaster4.com/Webcast/Page/2071/48675
The call will include management remarks and a Q&A session comprised of questions submitted in advance and during the meeting. Advance questions may be submitted to ir@sidechannel.com no later than 4:00 pm Eastern Time on Monday.
About SideChannel
SideChannel, founded in 2019, creates top-tier cybersecurity programs for mid-market companies to help protect their assets. SideChannel employs a combination of skilled and experienced talent, technology tools, and battle-tested processes to offer a complete program. SideChannel also offers Enclave; a network microsegmentation solution that simplifies securing a network in a zero-trust model. Learn more at sidechannel.com.
Interested investors and shareholders are encouraged to sign up for press releases and industry updates by registering for Email Alerts at and by following SideChannel on Twitter and LinkedIn.
SideChannel
146 Main Street Suite 405 Worcester, MA 01608
Investor Contact
Investor Relations IR@sidechannel.com
https://microcapclub.com/2023/06/from-hustle-to-scale/
Excellent read.
Scratchin’ my head, wondering if this sounds like any company I know?
What do you think?
June 27, 2023 11:00 AM
SideChannel Reveals a New Offer - SideChannel Complete & Brand Identity with Updated Website SideChannel.com
WORCESTER, MA / ACCESSWIRE / June 27, 2023 / Today cybersecurity services and technology provider, SideChannel Inc. (OTCQB:SDCH) ("SideChannel"), announces a new service offering; SideChannel Complete, and a brand-new look and feel at SideChannel.com.
SideChannel Complete, a tailored suite of cybersecurity services the company offers bundled together for client companies in need of a high-quality cybersecurity program. The change comes on the heels of business changes made to successfully serve a growing client base.
"It's been our experience that the full extent of what a client needs is multi-layered. No single solution creates a highly effective cybersecurity program. We're using lessons learned to reshape our offer. We know what makes a high-quality cybersecurity program and are moving to show clients what it looks like, even before they become a client," said CEO Brian Haugli.
Three SideChannel Complete plans are offered - Begin, Balance and Beyond - each created to best serve companies in various stages of their cybersecurity maturity journey.
SideChannel Complete plans are designed to implement the guidance provided by the NIST (National Institute of Standards and Technology) cybersecurity framework and consider specific regulations governing the industry a client company is subject to.
SideChannel's Enclave, is included in each plan. The company's micro segmentation solution solves a problem prevalent in IT (Information Technology) departments everywhere, by minimizing threats at the transport level of the OSI (Open Systems Interconnection) model. Each SideChannel Complete plan is designed to serve as a single comprehensive solution to cybersecurity, privacy and compliance concerns.
The new site more accurately presents how SideChannel's various services and tools work together to prevent business disruption and enable success. SideChannel.com now features simplified language, and a new quiz visitors can take to more quickly understand how the company can help them. In five taps or less visitors can understand which of the SideChannel Complete plans may be the best fit and schedule an introduction call.
The company also took the opportunity to revisit its visual identity and present a more relaxed, contemporary style.
"Some cybersecurity companies feel scary or mysterious. Our goal is to be as transparent as possible in our work with clients. It's our mission to simplify cybersecurity for them, not scare them into submission. Our visual identity now better represents our intent," said marketing director Lauren Jones.
The new site is live now at SideChannel.com
About SideChannel
SideChannel, founded in 2019, creates top-tier cybersecurity programs for mid-market companies to help protect their assets. SideChannel employs a combination of skilled and experienced talent, technology tools, and battle-tested processes to offer a complete program. SideChannel also offers Enclave; a network microsegmentation solution that simplifies securing a network in a zero-trust model. Learn more at sidechannel.com.
Interested investors and shareholders are encouraged to sign up for press releases and industry updates by registering for Email Alerts at and by following SideChannel on Twitter and LinkedIn.
SideChannel
146 Main Street Suite 405 Worcester, MA 01608
Forward-Looking Statements
This press release may contain forward-looking statements, including information about management's view of SideChannel's future expectations, plans and prospects, subject to the safe harbor provisions under The Private Securities Litigation Reform Act of 1995 (the "Act"). In particular, when used in the preceding discussion, the words "believes", "hopes", "expects", "intends", "plans", "anticipates", "potential", "could", "should", or "may", and similar conditional expressions are intended to identify forward-looking statements within the meaning of the Act and are subject to the safe harbor created by the Act and otherwise. Any statements made in this news release other than those of historical fact, about an action, event or development, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause the results of SideChannel to be materially different than those expressed or implied in such statements. These risk factors include, but are not limited to, our ability to integrate the operations of the acquired company into our company; that we have incurred net losses since inception, our need for additional funding, the substantial doubt about our ability to continue as a going concern, and the terms of any future funding we raise; our dependence on current management and our ability to attract and retain qualified employees; competition for our products; our ability to develop and successfully introduce new products, improve current products and innovate; unpredictability in our operating results; our ability to retain existing licensees and add new licensees; our ability to manage our growth; our ability to protect our intellectual property (IP), enforce our IP rights and defend against claims that we infringed on the IP of others; the risk associated with the concentration of our cash in one financial institution at levels above the amount protected by FDIC insurance; and other risk factors included from time to time in documents we file with the Securities and Exchange Commission, including, but not limited to, our Forms 10-K, 10-Q and 8-K. These reports are available at www.sec.gov. Other unknown or unpredictable factors also could have material adverse effects on SideChannel's future results. Further, factors that we do not presently deem material as of the date of this release may become material in the future. The forward-looking statements included in this press release are made only as of the date hereof. SideChannel cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, SideChannel undertakes no obligation to update these forward-looking statements after the date of this release, except as required by law, nor any obligation to update or correct information prepared by third parties.
Press Contact
Lauren Jones lauren@sidechannel.com
SOURCE: SideChannel
View source version on accesswire.com:
https://www.accesswire.com/763849/SideChannel-Reveals-a-New-Offer--SideChannel-Complete-Brand-Identity-with-Updated-Website-SideChannelcom
?
I hate that!
.
Great website. Looks great
Minor typo on side channel beyond page.
Two "your" words.
SideChannel has an excellent bunch of people. From ceo to our heavy hitting board members. I think we are in fantastic hands.
Something to think about, from savvy micro cap investor Ian Cassel:
The smaller the company the more important the CEO, founder, management becomes. Often times CEO-founders of microcap companies wear many hats so their influence is multiplied. Not only are they the CEO but also the COO, VP Sales, Garbage Man, Company Contact person, etc. Bad decisions can destroy a small company and great decisions have a compounding effect on a small company. If you don’t believe that founders and management are important to small companies like microcaps, just wait a little longer. You will.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 12, 2023
Shape
Description automatically generated with medium confidence
SideChannel, Inc.
(Exact name of registrant as specified in its charter)
Delaware 000-28745 86-0837077
(State or other jurisdiction (Commission IRS Employer
of incorporation or organization) File Number) Identification No.)
146 Main Street, Suite 405, Worcester, MA 01608
(Address of principal executive offices)
Registrant’s telephone number, including area code: (508) 925-0114
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
? Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
? Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
? Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
? Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.001 per share SDCH N/A
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ?
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ?
Item 8.01 Other Events (Conversion of Series A Preferred Stock)
On July 1, 2022 (the “Closing Date”), SideChannel, Inc. (the “Company”) completed its acquisition of all of the equity securities of SCS, Inc. (“SCS”) in exchange for shares of the Company’s equity securities (the “Acquisition”) pursuant to that certain Equity Securities Purchase Agreement dated May 16, 2022 (the “Purchase Agreement”) by and among the Company, SCS, SCS’s stockholders (collectively, the “Sellers”) and Brian Haugli, as the Sellers’ representative (the “Representative”) as previously disclosed in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 18, 2022 (the “May 2022 8-K”).
Pursuant to the Purchase Agreement, on the Closing Date, the Sellers exchanged all of their equity securities of SCS for 59,900,000 shares (the “First Tranche Shares”) of the Company’s common stock, $0.001 par value (the “Common Stock”), and 100 shares of the Company’s newly designated Series A Preferred Stock, $0.001 par value (the “Series A Preferred Stock”) (which was erroneously referred to as Series B Preferred Stock in the May 2022 8-K). In addition, the Purchase Agreement provided that the Sellers were entitled to receive up to an additional 59,900,000 shares (the “Second Tranche Shares” and together with the First Tranche Shares and the Series A Preferred Stock, the “Shares”) at such time that the operations of SCS, as a subsidiary of the Company, achieve at least $5.5 million in revenue (the “Milestone”) for any twelve-month period occurring after the Closing Date and before the 48-month anniversary of the execution of the Purchase Agreement. The number of the Second Tranche Shares were subject to adjustment to the extent that SCS’s working capital as of the Closing Date was less than or greater than zero.
During April, 2023, the Company’s management reported to its Board of Directors (the “Board”) that the operations of SCS had achieved revenue of $5.7 million for the twelve months ended March 31, 2023 which is in excess of the Milestone. The Board engaged the Company’s independent registered public accounting firm, RBSM, LLP (“RBSM”), to perform certain agreed upon procedures in connection with the review of the revenue reported for the twelve months ended March 31, 2023. At its May 4, 2023 meeting, the Board received a letter from RBSM indicating that no exceptions were found in management’s accounting and reporting of the $5.7 million trailing twelve-month revenue based upon the agreed upon procedures performed by RBSM. Consequently, the Board approved the issuance of the Second Tranche to the Sellers including a Closing Working Capital Adjustment (the “Adjustment”) of 2,116,618 shares of common stock. The Adjustment was based upon $380,991 of SCS working capital as of the Closing Date.
As previously disclosed in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2023, the Sellers received 62,016,618 shares of common stock combined for the Second Tranche and the Adjustment.
The Certificate of Designation of Series A Preferred Stock (the “Series A Certificate of Designation”) provides that each share of Series A Preferred Stock is convertible into 1 share of common stock, subject to adjustment as provided therein. The Series A Certification of Designation provides for a mandatory conversion based on specific triggers including the issuance of the Second Tranche Shares pursuant to the terms of the Purchase Agreement. On June 12, 2023, the Sellers converted all of the Series A Preferred into 100 shares of common stock (the “Conversion”). All rights with respect to the converted Series A Preferred Stock terminated upon the issuance of the Second Tranche Shares.
As a result of the Acquisition and the Conversion, the Sellers hold approximately 57.6% of the Company’s 211,587,999 outstanding common stock as of June 12, 2023 and no Preferred Stock of the Company remained issued or outstanding.
As previously disclosed in the May 2022 8-K, the Shares are subject to a Lock-Up/Leak-Out Agreement pursuant to which, subject to certain exceptions, the Sellers may not directly or indirectly offer to sell, or otherwise transfer, any of the Shares for 24 months after the Closing Date without the prior written consent of the Company. Notwithstanding the foregoing, pursuant to the Lock-Up/Leak-Out Agreement, the Sellers may sell up to 20% of their shares of Common Stock beginning 12 months after the Closing Date, and the remaining 80% of their shares of Common Stock beginning 24 months after the Closing Date.
Item 9.01 Financial Statements and Exhibits
(d) Exhibits
Exhibit No. Description
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: June 15, 2023
SIDECHANNEL, INC.
By: /s/ Ryan Polk
Ryan Polk
Chief Financial Officer
Correct. Stock has moved above both 50 and 200 day moving avg. Little resistance till .30-.40 range.
Market ripping, cyber hot, sdch earnings growth + no debt, spells a move higher.
Enclave, me thinks, is legit.
volume and trades are picking up. Looks like there's more interest building.
https://www.manufacturing.net/iot/video/22862230/security-breach-making-hackers-pay-literally
Brian was interviewed again
Thanks! I checked the site and the API link works, it opens in a new tab. I'll tell the dev team about the typo; good eye!
https://docs.enclave.sidechannel.com/
Check out the latest rollout re Enclave entitled What is Enclave? found on the SC website.
Brian - the API documentation page popped a 404. Also a very minor typo on the Getting Started page. You choose to create a
Check it out, SDCH investors!
I'm really looking forward to this one! Very excited to be the keynote for this ISSA conference. I'll also be there to do a book signing of "Cybersecurity Risk Management: Mastering the Fundamentals Using the NIST Cybersecurity Framework"
https://www.wiley.com/en-us/Cybersecurity+Risk+Management:+Mastering+the+Fundamentals+Using+the+NIST+Cybersecurity+Framework-p-9781119816287
Enterprise CISOs do suffer from burn out. Our difference, and why you don't see turnover in the vCISO team at SideChannel, is our culture. We support our vCISOs on their delivery to clients and internally as employees. Our customers are also leaning in much more than F500 enterprises on making changes to better their security posture. This is professionally fulfilling to our vCISO (or anyone here!). The tech enablement we package with our vCISOs also reduces the impact because they have what they need to be successful.
I do believe that building programs based on standards and frameworks, coupled with the right leadership for governance and reporting is essential to reducing both the likelihood of a breach and the impact of one should it happen.
Brian. I have a question when you have some time. You previously mentioned, and I have been reading that there is a high burnout rate with CISO's at enterpise sized companies, and the job is often considered thankless and miserable. I was wondering how that may affect SideChannel's vCISOs. If you fractionate the CISO role as a vCISO, albeit at smaller companies, do you risk more burnout and unhappiness. To address the issue, maybe Enclave and other software products though automation and following standardized protocols will reduce some of this stress.
Also, as cyber attacks become more common and complicated, will software automation and standardized protocols and best practices reduce the potential liability risk to SideChannel in the event of a client breach.
Thanks again for your efforts.
Video on Enclave zero trust product
Click Here to Learn How Enclave Features Works
https://hubs.ly/Q01R4H-00
Brian will be key note speaker at conference in October
https://www.manufacturing.net/iot/video/22862230/security-breach-making-hackers-pay-literally
Interview with Rockwell automation
New kid on the block.
https://hubs.la/Q01PrlQr0
Maybe this is a hint of something brewing???? We need a major news event to jump this stock into a price point that actually reflects the value of the company. It's a matter of when....not if.... on this company.
https://www.linkedin.com/posts/brianhaugli_cybersecurity-zerotrust-microsegmentation-activity-7066759732358729728-k1FY?utm_source=share&utm_medium=member_android
I’d love to get your feedback on some of this information.
Let’s start with the Illumio, a zero trust segmentation player in the cybersecurity field.
Yearly revenues (2022): $65M
Employees: 350
Rev/employee: $185,000
Financing (starting in 2013): ~ $600M (in total) from the likes of Andressen Horowitz and March Benioff and Blackrock
SDCH
Revenues: ~ $6M (FY 2023) this number will be closer to $8 for FY 2024, based on guidance
Employees: 30-ish
Rev/employee: $200,000
Financing: Public company. Insiders own 60% of company - they are beholden to no one, except current shareholders.
Illumio has 15 or so Fortune 500 companies and services some rather large SAAS, whereas Side Channel’s niche is more mid to small companies, so it’s not exactly apples to apples. However the multiples deserve consideration.
Place a 10X multiple on SDCH revs and it’s easy to see a $60M market cap. Growth rates are an important consideration. Illumio is private and I am not privy to guidance.
Last thing. Currently, Side Channel’s market cap is approximately $16M. With 10x revs, that’s a .32 cent share price (400% upside) for those of you keeping score at home.
Good luck. Do your own DD. Spend QT time with your family.
Brian was on fox live news now with Josh breslow yesterday talking about Montana banning tictok
The webinar is available on youtube. The one they had on friday
210,000,000 shares outstanding
Float ~ 90,000,000
Back of the envelope holders...
Brian Haugli & other insiders ~ 120,000,000
Paulson clients from April 2021 private placement ~ 60,000,000 @.18c
Remaining 30,000,000?
17,000,000 from Paulson clients back in ‘19 @$1.00 (likely many / most have sold)
3,500,000 Manchester Management
Other ~ 10,000,000 shares?
Assorted investors, most of whom bought north of .50cents
Stock will, imho, run to .18-.25 with little resistance. Then I except *some* selling from the Paulson investors. Eat through that paper at and it's off to .50cents. From there, growth (or lack thereof) will dictate direction.
What am I missing?
Good luck and always do your own due diligence.
Fast-growing, huge payoff, hefty premium scenario…
I guess that’s where the action lies. IMHO, if SDCH was fast growing, they would have done more with the cash acquired from the reverse split (ie, what was donked by the CLOK mgmt) and should be increasing cash, not decreasing cash.
Don’t get me wrong, Haugli pretty much wins in every scenario. Paulson Investment wins every time. But viewing SDCH as an investment, as an “outsider”, the common shareholder doesn’t stand a chance. As you mentioned, it would take a 10x gain to allow most to break even. And applying the rule of 72 suggests that at 20% increase in sales for a professional services company, it would take almost 11 years for SDCH to be in a position to sell and provide a realistic gain to the current common shareholders.
I feel sorry for those who invested in NSCT, then CLOK and then let it ride with SDCH. The market returns over the last 10+ years are hard to ignore.
Message in reply to:
Tron - I understand your point, and based on what I’ve read, you’ve been pretty much spot on.
But, why take a fast-growing company public? Access to capital public markets, right? And, down the road, a huge payoff. Brian Haugli owns approximately 50% of the company. He must envision a scenario where Side Channel fetches a hefty premium from a well-heeled suitor, making him an extremely wealthy man.
And it’s not like he’s some charlatan peddling X one day, and something new the next. He’s a bona fide expert in the field.
Cash on the books has gone towards R&D and overhead (expansion). Perfectly reasonable capex for a nascent company, gaining a foothold in the space.
Will Side Channel succeed? Time will tell. There are certainly plenty of risks. The rewards, too, are significant
Webcast is on the website for shareholders only. ;)
Tron - I understand your point, and based on what I’ve read, you’ve been pretty much spot on.
But, why take a fast-growing company public? Access to capital public markets, right? And, down the road, a huge payoff. Brian Haugli owns approximately 50% of the company. He must envision a scenario where Side Channel fetches a hefty premium from a well-heeled suitor, making him an extremely wealthy man.
And it’s not like he’s some charlatan peddling X one day, and something new the next. He’s a bona fide expert in the field.
Cash on the books has gone towards R&D and overhead (expansion). Perfectly reasonable capex for a nascent company, gaining a foothold in the space.
Will Side Channel succeed? Time will tell. There are certainly plenty of risks. The rewards, too, are significant.
Look at Sales&Marketing and A/R.
Study financials quarter over quarter.
Now tell us where the money is going.
And far from profitable…wtf??
The financials answered the questions. Why do we need Haugli to apply lipstick to this piggie??
Sure would be nice to hear the call.
How about a little HTML action on the ol’ investors’ page? Looking forward to hearing the particulars . . .
I thought the numbers were decent. Sure there was a drop in current cash, as expected.
But, to those who highlighted the cash balance, do you you *really* think the company’s running out of cash?! I mean think about it. So, Side Channel merges with Cipherloc a year ago—at a time when SC would have been perfectly fine as a go-alone entity—in order to access the public markets.
Now, roughly 12 months later (with accelerating growth), the company brass sees the cash balance and declares - “oh sh*t, we are almost out of money!”
Silly, right?
We are talking top of the second inning here, folks.
Buckle up.
For those unable to participate in the live call, a replay will be available shortly after the call. Interested parties can access the replay by visiting the Company's website https://investors.sidechannel.com/events-presentations.
2 questions I have are that sequential quarter revenue growth was only 5% which appears to be a slowdown. There is 2 million in annual new contract revenue over the past 6 months so maybe company is expecting revenues to increase significantly over the next 2 quarters.
The other question is that they are looking to do all stock acquisitions in the future at valuations at or lower than Sidechannel's. This is good but obviously we will need the stockprice to be much higher than 6 cents to make this happen. Even the SideChannel acquisition was done at a stock price of 18 cents so we will have to go above that to justify another acquisition without heavy dilution.
Outside of those 2 questions, it was a good call.
They did address it on the call yesterday.
I'd expect they are using the cash to invest in sales and growth, while building back up to being profitable. What else would the cash be used for? It'd be useless to just sit in a bank account.
I believe this was addressed in the conference call.....maybe Brian can address this here on ihub also.
Quote....Do you see a pattern? Cash is disappearing!
March 31, 2023 $1.902 mil
December 31, 2022 $2.553 mil
September 30, 2022 $3,030 mil
Unless something drastically changes it seems to me that the company will be out of cash in 9 - 12 months. Yes? No??
Do you see a pattern? Cash is disappearing!
March 31, 2023 $1.902 mil
December 31, 2022 $2.553 mil
September 30, 2022 $3,030 mil
Unless something drastically changes it seems to me that the company will be out of cash in 9 - 12 months. Yes? No??
If we were on another exchange right now our share price would be rising this morning. It's only a matter of time for this stock. Another great report.
Conference Call Information
A conference call discussing financial results for the quarter ended March 31, 2023 will follow this release today at 4:00 pm EDT.
Date: Tuesday, May 9, 2023 – 4:00 PM EDT
Dial
Toll Free: 877-545-0523
International: 973-528-0016
Participant Access Code: 551349
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
? QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
? TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 000-28745
SideChannel, Inc.
(Exact name of registrant as specified in its charter)
Delaware ? 86-0837077
State of
Incorporation
?
IRS Employer
Identification No.
146 Main Street, Suite 405, Worcester, MA 01608
(Address of principal executive offices) (Zip Code)
?
(508) 925-0114
(Registrant’s telephone number, including area code)
?
Securities registered pursuant to Section 12(b) of the Act: None.
?
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Trading Symbol Name of Exchange on Which Registered
Common Stock, par value $0.001 per share SDCH N/A
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes ? No ?
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ? No ?
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ? Accelerated filer ?
Non-Accelerated filer ? Smaller reporting company ?
Emerging growth company ?
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ?
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act). Yes ? No ?
As of May 8, 2023, the registrant had 149,571,281 shares of common stock outstanding.
SIDECHANNEL, INC.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets as of March 31, 2023 (Unaudited), and September 30, 2022 3
Unaudited Consolidated Statements of Operations for the three months and six months ended March 31, 2023 and 2022 4
Unaudited Consolidated Statement of Stockholders’ Equity for the three months and six months ended March 31, 2023 and 2022 5
Unaudited Consolidated Statements of Cash Flows for the six months ended March 31, 2023 and 2022 6
Notes to Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3 Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 1A. Risk Factors 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Mine Safety Disclosures 21
Item 5 Other Information 21
Item 6. Exhibits 21
2
Table of Contents
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIDECHANNEL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
March 31, 2023 September 30, 2022
(Unaudited)
ASSETS
Current assets
Cash $ 1,902 $ 3,030
Accounts receivable, net 896 612
Deferred costs 180 180
Prepaid expenses and other current assets 283 320
Total current assets 3,261 4,142
Fixed assets — —
Goodwill 1,356 1,356
Intangibles 4,940 4,940
Deferred costs 240 330
Total assets $ 9,797 $ 10,768
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 765 $ 786
Deferred revenue 372 130
Promissory note payable 50 50
Income taxes payable 195 195
Total current liabilities 1,382 1,161
Deferred tax liability 211 211
Total liabilities 1,593 1,372
Commitments and contingencies
Series A convertible preferred stock, $0.001 par value, 10,000,000 shares authorized; 100 and 100 shares issued and outstanding as of March 31, 2023 and September 30, 2022 — —
Common stock, $0.001 par value, 681,000,000 shares authorized; 149,571,281 and 148,724,056 shares issued and outstanding; March 31, 2023 and September 30, 2022 150 149
Additional paid-in capital 21,445 21,180
Accumulated deficit (13,391 ) (11,933 )
Total stockholders’ equity 8,204 9,396
Total liabilities and stockholders’ equity $ 9,797 $ 10,768
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
Table of Contents
SIDECHANNEL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2023 2022 2023 2022
Revenues $ 1,617 $ 1,235 $ 3,163 $ 2,283
Cost of revenues 880 607 1,561 1,083
Gross profit 737 628 1,602 1,200
Operating expenses
General and administrative 990 233 2,020 $ 438
Selling and marketing 437 37 744 80
Research and development 168 303
Total operating expenses 1,595 270 3,067 518
Operating income (loss) (858 ) 358 (1,465 ) 682
Other income, net 2 3 7 7
Net income (loss) $ (856 ) $ 361 $ (1,458 ) $ 689
Net income (loss) per common share – basic and diluted $ (0.01 ) $ 0.01 $ (0.01 ) $ 0.01
Weighted average common shares outstanding – basic and diluted 148,928,663 62,016,618 148,830,224 62,016,618
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
Table of Contents
SIDECHANNEL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except preferred shares)
(Unaudited)
For the Six Months Ended March 31, 2023
Preferred Stock Common Stock
Additional
Paid-in
Accumulated Stockholders’
Shares Amount Shares Amount Capital Deficit Equity
Balance at September 30, 2022 100 $ — 148,724 $ 149 $ 21,180 $ (11,933 ) $ 9,396
Shares issued for services — — 181 18 18
Stock-based compensation expense — — — — 118 — 118
Net loss — — — — — (602 ) (602 )
Balance at December 31, 2022 100 $ — 148,905 $ 149 $ 21,316 $ (12,535 ) $ 8,930
Shares issued for services — — 167 — 13 — 13
Stock-based compensation expense — — 500 1 116 — 117
Net loss — — — — — (856 ) (856 )
Balance at March 31, 2023 100 $ — 149,572 $ 150 $ 21,445 $ (13,391 ) $ 8,204
For the Six Months Ended March 31, 2022
Preferred Stock Common Stock
Additional
Paid-in
Accumulated Stockholders’
Shares Amount Shares Amount Capital Earnings Equity
Balance at September 30, 2021 100 $ — 62,017 $ 62 $ 21 $ 344 $ 427
Equity redemptions — — — — (100 ) (100 )
Equity distributions — — — — — (461 ) (461 )
Net income — — — — — 328 328
Balance at December 31, 2021 100 $ — 62,017 $ 62 $ 21 $ 111 $ 194
Net income — — — — — 361 361
Balance at March 31, 2022 100 $ — 62,017 $ 62 $ 21 $ 472 $ 555
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
Table of Contents
SIDECHANNEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
March 31,
2023 2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,458 ) $ 689
Adjustments to reconcile net (loss) income to net cash flows used in operating activities:
Amortization 90 —
Stock-based compensation 245 —
Changes in operating assets and liabilities:
Accounts receivable (284 ) 8
Unbilled revenue — (140 )
Prepaid expenses and other assets 37 —
Accounts payable and accrued liabilities — 269
Deferred revenue 242 (124 )
Net cash provided by (used in) operating activities (1,128 ) 702
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets — —
Net cash used in investing activities — —
CASH FLOWS FROM FINANCING ACTIVITIES:
Equity redemption — (50 )
Equity distribution — (461 )
Net cash used in financing activities — (511 )
(DECREASE) INCREASE IN CASH (1,128 ) 191
CASH, BEGINNING OF PERIOD 3,030 348
CASH, END OF PERIOD $ 1,902 $ 539
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equity redemption with notes payable $ — $ 50
Stock-based compensation included in accounts payable and accrued liabilities $ 21 $ —
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
Table of Contents
SIDECHANNEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – NATURE OF OPERATIONS
Our 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.
Our growth strategy focuses on these three initiatives:
1. Securing new vCISO clients;
2. Adding new Cybersecurity Software and Services (“Cybersecurity Software and Services”) offerings; and
3. Increasing adoption of Cybersecurity Software, including Enclave, and Services offerings at vCISO clients.
vCISO clients typically enter into twelve (12) month engagements consisting of a monthly subscription with an annual renewal option, as well as additional vCISO time and material projects, which range from $350 to $450 per hour. Each vCISO is embedded into the C-suite of from two (2) to five (5) of our clients.
During September 2022, we announced a proprietary product called Enclave, which simplifies an important cybersecurity tactic called “microsegmentation”. Enclave seamlessly combines access control, microsegmentation, encryption, and other secure networking concepts to create a comprehensive solution. It allows information technology professionals to easily segment the enterprise network, place the right assets in those segments, and direct network traffic. We expect to begin recognizing revenue from Enclave during fiscal year 2023.
On July 1, 2022 (the “Closing Date”) we completed an acquisition (“Business Combination”) of all the outstanding equity securities of SideChannel, Inc., a Massachusetts corporation, pursuant to an Equity Securities Purchase Agreement dated May 16, 2022 (the “Purchase Agreement”). On September 9, 2022, SideChannel, Inc., the acquired Massachusetts corporation and a wholly owned subsidiary of the registrant, changed its name to SCS, Inc. (the “Subsidiary” or “SCS”). Cipherloc Corporation, the Delaware parent company of the Subsidiary, has changed its name to SideChannel, Inc. (“SideChannel”). As used herein, the words “the Company” refers to, for periods from July 1, 2022 and forward, SideChannel, and for periods prior to July 1, 2022, SCS, and its direct and indirect subsidiaries, as applicable.
As part of the Business Combination, the former stockholders of the Subsidiary (the “Sellers”) exchanged all of their equity securities in the Subsidiary for a total of 59,900,000 shares of the Company’s common stock (the “First Tranche Shares”), and 100 shares of the Company’s newly designated Series A Preferred Stock, $0.001 par value (the “Series A Preferred Stock”). The Sellers are entitled to receive up to an additional 59,900,000 shares of the Company’s common stock (the “Second Tranche Shares” and together with the First Tranche Shares and the Series A Preferred Stock, the “Shares”) at such time that the operations of the Subsidiary, as a subsidiary of the Company, achieves at least $5.5 million in revenue (the “Milestone”) for any twelve-month period occurring after the Closing Date and before the 48-month anniversary of the execution of the Purchase Agreement. The number of the Second Tranche Shares may be reduced or increased, based upon whether the Subsidiary’ working capital as of the Closing Date is less than or more than zero (“Closing Working Capital Adjustment”). The number of the Second Tranche Shares may also be subject to adjustment based upon any successful indemnification claims made by the parties pursuant to the Purchase Agreement.
The Business Combination was treated as a reverse acquisition (reverse merger), in accordance with U.S. GAAP. Under this method of accounting, SCS was deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the facts immediately following the Business Combination that: (1) a majority of the Board of Directors of the combined company will be composed of directors designated by the Sellers under the terms of the Purchase Agreement; and (2) existing members of SCS management constituted the management of the combined company. As SCS was determined to be the accounting acquirer in the Business Combination, but not the legal acquirer, the transaction was deemed a reverse acquisition under the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations.
7
Table of Contents
Our headquarters are located at 146 Main Street, Suite 405, Worcester, MA, 01608. Our website is www.sidechannel.com.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements include our accounts and those of our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation. The 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.
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations, and changes in cash flows for the interim periods presented. Certain footnote information has been condensed or omitted from these consolidated financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in our Form 10-K for the year ended September 30, 2022 (the “2022 Form 10-K”) filed on December 20, 2022, with the Securities and Exchange Commission (“SEC”).
Subsequent Events
On May 4, 2023, we filed a Form 8-K with the SEC for the change in the compensation of our Chief Financial Officer, Ryan Polk. These changes include an increase in his annual base compensation from $150,000 to $175,000 and an increase in his potential annual equity incentive from $50,000 to $150,000.
On May 4, 2023 our Board of Directors authorized the issuance of 62,016,718 shares of common stock as part of the Business Combination. This includes 59,900,000 shares for the Second Tranche and 2,116,618 shares for the Closing Working Capital Adjustment. Additionally, the 100 shares of Series A Preferred Stock will convert to common stock and all rights in the Series A Preferred Stock will terminate when the Second Tranche shares are issued.
The combined shares were issued as follows:
? David Chasteen, 3,721,003
? Brian Haugli, 44,031,870
? Nick Hnatiw, 6,821,839
? Joseph Klein, 3,721,003
? Miguel San Mateo, 3,721,003
Following the issuance of these shares, Brian Haugli owned 40.9% of the Company’s outstanding shares of common stock.
Segment Information
We manage our operations as a single operating segment for the purposes of assessing performance and making operating decisions.
8
Table of Contents
Business Combinations
Acquired businesses are accounted for using the purchase method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Fair values of intangible assets are estimated by valuation models prepared by our management and third-party advisors. The assets purchased and liabilities assumed have been reflected in our consolidated balance sheets, and the operating results are included in the consolidated statements of operations and consolidated statements of cash flows from the date of acquisition. Any change in the fair value of acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, will be recognized in the consolidated statement of operations in the period of the estimated fair value change. Acquisition-related transaction costs, including legal and accounting fees and other external costs directly related to the acquisition, are recognized separately from the acquisition and expensed as incurred in general and administrative expense in the consolidated statements of operations.
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, our note payable, and embedded conversion features in our stock warrants. Our cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at cost which approximates fair value, due to the short maturities of the accounts. Our note payable’s carrying amount approximates it fair value due to the short remaining term.
ASC Topic 820 (Fair Value Measurement) establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs). The fair values of the warrants issued by us as part of the Business Combination were determined using Level 2 inputs in accordance with the guidance in ASC Topic 820.
Goodwill, Intangible, and Long-Lived Assets
We account for goodwill and intangible assets in accordance with ASC Topic 350 (Intangibles – Goodwill and Other) and ASC Topic 360 (Property, Plant and Equipment). Finite-lived intangible assets are amortized over their estimated useful economic life and are carried at cost less accumulated amortization. Goodwill is assessed for impairment annually at the beginning of the fourth quarter on a reporting unit basis, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. Goodwill is considered to be impaired if the fair value of a reporting unit is less than its carrying amount.
If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
Long-lived assets, which consist of finite-lived intangible assets and property and equipment, are assessed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the estimated undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value. The cash flow estimates used to determine the impairment, if any, contain management’s best estimates using appropriate assumptions and projections at that time.
Revenue Recognition
We recognize revenue in accordance with the guidance in ASC Topic 606 (Revenue from Contracts with Customers). We recognize revenue for the sale of products or services when our performance obligations under the terms of a contract with a customer are satisfied and control of the product or service has been transferred to the customer. Generally, this occurs when we deliver a product or perform a service. In certain cases, recognition of revenue is deferred until the product or service is received by the customer or at some other point in the future when we have determined that we have satisfied our performance obligations under the contract. Our contracts with customers may include a combination of products and services, which are generally capable of being distinct and accounted for as separate performance obligations.
9
Table of Contents
We do not have any material variable consideration arrangements, or any material payment terms with our customers other than standard payment terms which generally range from net 30 to net 90 days.
Nature of Products and Services
We identify, develop, and deploy cybersecurity, privacy, and risk management solutions for our clients and customers in North America. We categorize our products and services as either vCISO Services or Cybersecurity Software and Services. As a result of the Business Combination, we announced a proprietary cybersecurity software product called Enclave. We also sell third party software and services through a network of strategic partnerships.
Types of Contracts with Customers
Our contracts with customers are generally structured as annual subscription agreements or project specific statements of work. Our annual subscription agreements include a minimum number of service hours per year or month and a specified rate for the minimum amount of services to be delivered during the subscription period. Payment terms and any other customer-specific acceptance criteria are also specified in the contracts and statements of work.
Contract Balances
We record accounts receivable at the time of invoicing. Accounts receivable, net of the allowance for doubtful accounts, is included in current assets on our balance sheet. To the extent that we do not recognize revenue at the same time as we invoice, we record a liability for deferred revenue. In certain instances, we also receive customer deposits in advance of invoicing and recording of accounts receivable. Deferred revenue and customer deposits are included in current liabilities on our consolidated balance sheets.
When used, the allowance for doubtful accounts reflects our estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, if any, historical experience, and other currently available evidence.
Costs to Obtain a Contract with a Customer
The only costs we incur associated with obtaining contracts with customers are sales commissions that we pay to our internal sales personnel or third-party sales representatives. These costs are calculated based on set percentages of the revenue value of each product or service sold. Commissions are considered earned by our internal sales personnel at the time we recognize revenue for a particular transaction. Commissions are considered earned by third-party sales representatives at the time that revenue is recognized for a particular transaction. We record commission expense in our consolidated statements of operations at the time the commission is earned. Commissions earned but not yet paid are included in current liabilities on our balance sheets.
See Note 4 for further information about our revenue from contracts with customers.
10
Table of Contents
Leases
We account for leases in accordance with ASC Topic 842 (Leases). We determine if an arrangement is a lease at inception. A lease contract is within scope if the contract has an identified asset (property, plant or equipment) and grants the lessee the right to control the use of the asset during the lease term. The identified asset may be either explicitly or implicitly specified in the contract. In addition, the supplier must not have any practical ability to substitute a different asset and would not economically benefit from doing so for the lease contract to be in scope. The lessee’s right to control the use of the asset during the term of the lease must include the ability to obtain substantially all of the economic benefits from the use of the asset as well as decision-making authority over how the asset will be used. Leases are classified as either operating leases or finance leases based on the guidance in ASC Topic 842. Operating leases are included in operating lease ROU assets and operating lease liabilities in our consolidated balance sheets. We do not currently have any operating lease ROU assets and operating lease liabilities. Finance leases are included in property and equipment and financing lease liabilities. We do not currently have any financing leases.
Operating lease payments are included in cash outflows from operating activities on our consolidated statements of cash flows.
We have made an accounting policy election not to apply the recognition requirements of ASC Topic 842 to short-term leases (leases with a term of one year or less at the commencement date of the lease). Lease expense for short-term lease payments is recognized on a straight-line basis over the lease term.
Stock-Based Compensation
We account for stock-based compensation in accordance with ASC Topic 718 (Compensation – Stock Compensation) which requires that employee share-based equity awards be accounted for under the fair value method and requires the use of an option pricing model for estimating fair value of awards, which is then amortized to expense over the service periods. See further disclosures related to our stock-based compensation plans in Note 8.
Income Taxes
We utilize the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carryforwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.
Basic and Diluted Net Loss per Common Share
Earnings (loss) per common share - basic is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during each period. Earnings (loss) per common share - diluted is computed by dividing earnings (loss) by the weighted average number of common shares and common share equivalents outstanding during each period. Common share equivalents represent unvested shares of restricted stock and stock options and are calculated using the treasury stock method. Common share equivalents are excluded from the calculation if their effect is anti-dilutive.
Warrants
We account for warrants in accordance with ASC Topics 480 and 815. The result of this accounting treatment is that the fair value of the embedded derivative, if required to be bifurcated, is marked-to-market at each balance sheet date and recorded as a liability. The change in fair value is recorded in our Consolidated Statement of Operations as a component of other income or expense. Upon exercise of a warrant, it is marked to fair value at the exercise date and then that fair value is reclassified to equity.
Effect of Recently Issued Amendments to Authoritative Accounting Guidance
In June 2016, the FASB issued amendments to the guidance for accounting for credit losses. In November 2019, the FASB deferred the effective date of these amendments for certain companies, including smaller reporting companies. As a result of the deferral, the amendments are effective for us for reporting periods beginning after September 30, 2023. The amendments replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The amendments require a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We plan to adopt the amendments when they become effective for us on October 1, 2023. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.
11
Table of Contents
NOTE 3 – ACQUISITIONS
Reverse Merger Between Cipherloc Corporation and SideChannel, Inc. (now known as SCS, Inc.)
As discussed further in Note 3 to our consolidated financial statements in our 2022 Form 10-K, on the Closing Date, the Sellers exchanged all of their equity securities in the Subsidiary for a total of 59,900,000 shares of the Company’s common stock (First Tranche Shares), and 100 shares of the Company’s newly designated Series A Preferred Stock, $0.001 par value. The Sellers are entitled to receive up to an additional 59,900,000 shares of the Company’s common stock (Second Tranche Shares) at such time that the operations of the Subsidiary, as a subsidiary of the Company, achieves at least $5.5 million in revenue (Milestone) for any twelve-month period occurring after the Closing Date and before the 48-month anniversary of the execution of the Purchase Agreement. The Second Tranche shares were valued using the closing price on July 1, 2022 of $0.10 per share which resulted in a fair value of $6.1 million.
During the twelve months ending March 31, 2023, the Milestone was achieved by the operations of the Subsidiary with trailing twelve-month revenue equaling $5.7 million. As discussed in the “Subsequent Events” section of Note 2, the Second Tranche shares along with the Closing Working Capital Adjustment shares were issued on May 5, 2023
The following presents the unaudited proforma combined results of operations of Cipherloc with SCS as if the entities were combined on October 1, 2021, and show activity for the three months and six months ended March 31, 2022.
For the Three Months Ended March 31, 2022 For the Six Months Ended March 31, 2022
(In thousands, except share and per share data)
Revenues $ 1,235 $ 2,283
Cost of revenues 607 1,083
Gross profit $ 628 $ 1,200
Operating expenses 1,070 1,970
Operating loss $ (442 ) $ (770 )
Other income 3 7
Net loss before income taxes (439 ) (763 )
Income taxes $ — $ —
Net loss $ (439 ) $ (763 )
Basic loss per share (a) $ (0.00 ) $ (0.00 )
(a) Pro forma weighted average shares outstanding were 148.1 million for the three months and six months ended March 31, 2022.
12
Table of Contents
NOTE 4 – REVENUE FROM CONTRACTS FROM CUSTOMERS
Customer Concentration
No customer individually accounted 10% or more of our revenue during the six months ended March 31, 2023 and 2022.
Deferred Revenue
Deferred revenue was $372,000 at March 31, 2023. The deferred revenue is expected to be earned within 12 months of the balance sheet date.
Changes in deferred revenue for the six months ended March 31, 2023 were as follows:
Balance on September 30, 2022 $ 130
Deferral of revenue 386
Recognition of revenue (144 )
Balance at March 31, 2023 $ 372
We internally report our revenue using two categories. The first, “vCISO Services”, captures the revenue for the Chief Information Security Officer services that we provide to our clients on a “virtual” or outsourced basis; thus, we use 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. Most of our clients use our vCISO services.
Our second revenue category encompasses an array of “Cybersecurity Software and Services” that our clients deem necessary to protect their digital assets. These include cybersecurity software owned by SideChannel and software sourced from third parties. SideChannel earns commissions on third-party software sales which it recognizes as revenue. Cybersecurity services are also delivered directly by SideChannel employees and indirectly by third party service providers.
The table below reflects the revenue by category for the six months ended March 31, 2023 and 2022:
Six Months Ended March 31
(In thousands) 2023 2022
% of Total % of Total $ Change % Change
Revenue
vCISO Services $ 1,947 61.6 % $ 1,430 62.7 % $ 517 36.2 %
Cybersecurity Software & Services 1,216 38.4 % 853 37.3 % 363 42.6 %
Total $ 3,163 $ 2,283 $ 880 38.5 %
13
Table of Contents
NOTE 5 – DEBT
Pursuant to a Membership Interest Redemption Agreement, dated November 3, 2021, by and between the SCS and Akash Desai (“Desai Redemption Agreement”), we promised to pay Mr. Desai $100,000, without interest, in exchange for Mr. Desai’s right, title, and interest SCS. Mr. Desai was paid $50,000 at the execution of the Desai Redemption Agreement and the remaining $50,000 is due on or before December 31, 2023.
The implied interest on the note payable component of the Desai Redemption Agreement was deemed insignificant.
NOTE 6 – RELATED PARTY TRANSACTIONS
Brian Haugli, our Chief Executive Officer and one of our stockholders, is also a principal shareholder of RealCISO Inc. (“RealCISO”). On September 22, 2020, SideChannel assigned to RealCISO certain contracts and intellectual property. We are a reseller of RealCISO software. We receive revenue from our customers for the use of RealCISO software and we pay licensing fees to RealCISO for such use. During the six months ended March 31, 2023, we paid $36,000 to RealCISO for additional licenses that SideChannel can resell to its clients.
David Chasteen, our Executive Vice President of Sales and Nick Hnatiw, our Chief Technology Officer each have amounts payable to the Company in relation to the payroll taxes paid by the Company on their behalf for RSU’s that vested during calendar year 2022. The combined balance due from these two individuals is $12,846 and is recorded in prepaid and other current assets as of March 31, 2023.
No other related party transactions occurred during the three and six months ended March 31, 2023.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Litigation
In April 2021, Eric Marquez, our former Secretary/Treasurer and Chief Financial Officer, and certain other plaintiffs, filed a lawsuit against Michael De La Garza, our former Chief Executive Officer and President, and us in the 20th Judicial District for Hays County, Texas (Cause No. 20-0818). The lawsuit alleges causes of action for fraud against Mr. De La Garza (for misrepresentations allegedly made by Mr. De La Garza); breach of contract, for alleged breaches of Mr. Marquez’s alleged oral employment agreement, which Mr. Marquez claims required that we pay him cash and shares of stock; unjust enrichment; quantum meruit; and rescission of certain stock purchases made by certain of the plaintiffs, as well as declaratory relief and fraud. Damages sought exceed $1,000,000. We believe we have made all required payments and delivered the stock to the plaintiffs. We believe we have meritorious defenses to the allegations, and we intend to continue to vigorously defend against the litigation.
We are not currently involved in any additional litigation that we believe could have a material adverse effect on our financial condition or results of operations.
NOTE 8 – STOCK BASED COMPENSATION
We grant equity compensation awards to employees, directors, and contractors under the 2021 Omnibus Equity Compensation Plan (“Equity Incentive Plan”) approved by stockholders on September 13, 2021.
In 2022 the Company granted restricted stock units (“RSU’s”) to directors and employees with service-based vesting conditions. The restricted stock units vest over a 3-year service period.
14
Table of Contents
The following table summarizes the activity for unvested RSU’s granted to directors and employees during the six months ended March 31, 2023:
Weighted Average Grant Date Fair Value Number of RSU’s
Outstanding Grants at September 30, 2022 $ 0.11 4,309,262
Granted 0.14 2,932,539
Vested and issued 0.10 (500,000 )
Canceled/Forfeited — —
Outstanding Grants at March 31, 2023 $ 0.12 6,741,801
We incurred stock-based compensation expense of $129,000 for the three months ended March 31, 2023 and $245,000 for the six months ended March 31, 2023. Unamortized stock compensation expense is $616,000 as of March 31, 2023.
NOTE 9 - STOCKHOLDERS’ EQUITY
Effective December 29, 2021, SCS was authorized to issue 1,000 shares of common stock with a $0.01 per share par value. The 1,000 shares of common stock were exchanged for 62,016,618 shares of Cipherloc Common Stock common stock and 100 shares of Series A Preferred Stock of Cipherloc. As a result, the financial statements have been adjusted retroactively to reflect these shares as being outstanding as of September 30, 2020.
As explained in Note 5, in December 2021, we promised to pay Mr. Desai $100,000, without interest, in exchange for Mr. Desai’s right, title, and interest in SCS.
SideChannel LLC, a predecessor entity to the Subsidiary, made profit sharing distributions of $461,000 during the three months ended December 31, 2021 in accordance with its partnership agreements.
Common Stock
As of March 31, 2023, and 2022, we had 149,571,281 and 62,016,618 shares of common stock outstanding, respectively. We had 148,724,056 shares of common stock outstanding at September 30, 2022.
Common Stock Issued for Cash
We did not issue shares of common stock for cash during six months ended March 31, 2023.
Common Stock Issued for Business Combinations
We did not issue shares for mergers or acquisitions related activity during the six months ended March 31, 2023. As noted above the Company issued 62,016,618 shares of common stock on May 4 related to the Business Combination (Note 3).
Common Stock Issued for Services
Our Board of Directors (“Board”) has elected to have each of its members receive one-half of such member’s quarterly compensation in the form of shares of the Company’s common stock, instead of cash. On March 31, 2023, the Company issued 166,668 shares of common stock as compensation for a value of $13,000 to the Board for the second quarter of fiscal year 2023. For the six months ended March 31, 2023, we have issued 347,226 shares of common stock as compensation for a value of $31,000 to the Board.
Common Stock Issued Under Equity Incentive Plan
We have issued 500,000 shares of common stock as incentive compensation during the six months ended March 31, 2023 for the vesting of RSU’s granted at an average grant date fair value of $0.10 per share.
Preferred Stock
As of March 31, 2023, we had 100 shares of Series A Preferred Stock outstanding. These shares were issued as part of the Business Combination. The 100 shares of Series A Preferred Stock that were exchanged for SCS, Inc. common stock have been retroactively reflected as issued and outstanding as of September 30, 2020. The Series A Preferred Stock contains a Board Designation Right which provides that the holders of the majority of the Series A Preferred Stock have the right to elect a majority of our Board of Directors.
Warrants
Prior to the July 1, 2022 Business Combination, Cipherloc had outstanding warrants which continue to be binding on the Company after the Business Combination.
The following table summarizes warrant activity for the period from September 30, 2022 to March 31, 2023:
Number of Warrants Weighted Average Exercise Price Weighted Average Remaining Life
Outstanding at September 30, 2022 87,793,920 $ 0.56 5.02
Granted — — —
Exercised — — —
Canceled/Forfeited (1,316,000 ) 1.25 —
Outstanding at March 31, 2023 86,477,920 $ 0.54 4.34
15
Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain 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.
This 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.
Our 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 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.
The 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.
Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “SideChannel,” and “SideChannel, Inc.” refer specifically to SideChannel, Inc. and its consolidated subsidiaries.
In 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;
? “SEC” or the “Commission” refers to the United States Securities and Exchange Commission; and
? “Securities Act” refers to the Securities Act of 1933, as amended.
16
Table of Contents
The 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.
All references to years relate to the fiscal year ended September 30 of the particular year.
Overview
Our Business
Our 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.
The Company’s website is www.sidechannel.com.
In 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.
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.
The following are revenue metrics for the three months ended March 31, 2023 versus the comparable prior year period:
? Total revenue grew by $382,000 or 30.9%.
? vCISO Services grew by $98,000 or 11.6%.
? Cybersecurity Software Services grew by $284,000 or 72.9%.
? VAR licensing revenue contributed 12.7% of our total revenue versus 3.2% during same quarter in the prior comparable period.
We attribute these successes to the effective execution of our growth strategy:
1. Securing new vCISO clients;
2. Adding new Cybersecurity Software and Services offerings; and
3. Increasing adoption of Cybersecurity Software, including Enclave and Services offerings at vCISO clients.
vCISO 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. The number of vCISO clients using our Cybersecurity Software & Services offering increased on a year-over-year basis.
The following are revenue metrics for the six months ended March 31, 2023 versus the comparable prior year period.
? Total revenue grew by $880,000 or 38.5%.
? vCISO Services grew by $516,000 or 36.1%.
? Cybersecurity Software Services grew by $364,000 or 42.7%.
? VAR licensing revenue contributed 7.7% during fiscal year 2023 versus 2.6% in the prior comparable period.
We 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 March 31, 2023 and 2022:
Trailing Twelve Months Ended March 31,
(In thousands) 2023 2022
% of Total % of Total $ Change % Change
vCISO Services
New $ 2,085 58.2 % $ 1,756 79.3 % $ 329 18.7 %
Retained 1,495 41.8 % 458 20.7 % 1,037 226.4 %
Total $ 3,580 $ 2,214 $ 1,366 61.7 %
Cybersecurity Software and Services
New $ 701 33.6 % $ 847 68.0 % $ (146 ) -17.2 %
Retained 1,388 66.4 % 398 32.0 % 990 248.7 %
Total $ 2,089 $ 1,245 $ 844 67.8 %
Total (vCISO Services and Cybersecurity Software and Services combined)
New $ 2,786 49.1 % $ 2,602 75.2 % $ 184 7.1 %
Retained 2,883 50.9 % 856 24.8 % 2,027 236.8 %
Total $ 5,669 $ 3,458 $ 2,211 63.9 %
Further, 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 March 31, 2023 and September 30, 2022.
Twelve Months Ended
March 31, 2023 September 30, 2022
Revenue Retention
vCISO Services 67.5 % 75.0 %
Cybersecurity Software and Services 111.5 % 104.8 %
Total 83.4 % 86.6 %
17
Table of Contents
Results of Operations
Three Months Ended March 31, 2023 Versus Three Months Ended March 31, 2022
Comparison of Results
Revenue. Our revenue was $1.6 million for the quarter ended March 31, 2023, compared to $1.2 million for the three-month comparable prior period; an increase of $382,000 or 31%. The factors driving this are discussed above in Overview.
Gross Margins. 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.
General and Administrative Expenses. 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 personnel. 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.
Selling and Marketing Expenses. 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.
Research and Development Expenses. 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.
Six Months Ended March 31, 2023 Versus Six Months Ended March 31, 2022
Comparison of Results
Revenue. 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 period; 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.
Gross Margins. 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.
General 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 personnel. New costs related to being a public company include stock-based compensation, board compensation, investor relations services, and increased insurance and professional services.
Selling 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.
Research 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. 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.
Liquidity and Capital Resources
We 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 guaranteed by the Federal Deposit Insurance Corporation (“FDIC”). 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.
We 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.
Cash Flows
The following table summarizes, for the six months ended March 31, selected items in our Consolidated Statements of Cash Flows:
(In thousands) 2023 2022
Net cash provided by (used in):
Operating activities $ (1,128 ) $ 702
Investing activities $ — $ —
Financing activities $ — $ (511 )
18
Table of Contents
Operating Activities
We 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 expenses. Material cash requirements include personnel costs and the expenses associated with being a public reporting company.
We 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. During 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.
Investing Activities
There were no cash activities in investing for the six months ended March 31, 2023.
Financing Activities
The were no cash activities in financing for the six months ended March 31, 2023.
New or Recently Adopted Accounting Standards
See the Notes to our consolidated financial statements in this Report for information concerning the implementation and impact of new or recently adopted accounting standards.
Critical Accounting Estimates
The 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 critical. Our critical accounting estimates are more fully described in our 2022 Form 10-K.
Off-Balance Sheet Arrangements
We 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant 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).
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this quarterly report, at the reasonable assurance level.
The material weaknesses identified relate to the fact that we did not design and maintain an effective control environment commensurate with our financial reporting requirements, including (a) lack of a sufficient number of trained professionals with an appropriate level of accounting knowledge, training and experience and (b) lack of accounting research on critical accounting policies including business combinations and specifically the valuation of warrants in calculating the consideration paid during the Business Combination. Management’s general assessment of the above processes in light of the company’s size, maturity and complexity, as to the design and effectiveness of the internal controls over financial reporting is that the key controls and procedures in each of these processes provide reasonable assurance regarding reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
19
Table of Contents
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the six months ended March 31, 2023, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting, including any corrective actions regarding significant deficiencies and material weaknesses.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business.
Such current litigation or other legal proceedings are described in and incorporated by reference in this “Part II - Item 1. Legal Proceedings” of this Form 10-Q from, “Part I - Item 1. Financial Statements” in the notes to financial statements in “Litigation” in Note 7 – Commitments and Contingencies. We believe that the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect on our financial condition or results of operations. Our assessment of current litigation or other legal claims could change in light of the discovery of facts not presently known to us, or by decisions of judges, juries, or other finders of fact, that are not in accord with management’s evaluation of the possible liability or outcome of such litigation or claims.
Additionally, the outcome of litigation is inherently uncertain. If one or more legal matters are resolved against us in a reporting period for amounts in excess of management’s expectations, our financial condition and operating results for that reporting period could be materially adversely affected.
ITEM 1A. RISK FACTORS
We currently maintain all our cash in one financial institution and our deposits exceed the Federal Deposit Insurance limits leaving most of our cash uninsured.
Disruptions to the economy, and the US banking system caused by recent bank failures, and the related costs or losses associated with uninsured deposits, responsive measures by federal or state, governments, or banking regulators, potential future disruptions in access to bank deposits or lending commitments, could materially adversely affect our income, net income and other results of operations by increasing our cost and decreasing our access to capital, suppressing the resources of our customers and potential customers to purchase our products and services, and otherwise generally depressing activity in the economy.
There have been no further material changes from the risk factors previously disclosed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended September 30, 2022, filed with the Commission on December 20, 2022 (the “Form 10-K”).
20
Table of Contents
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sales of Securities
There have been no sales of unregistered securities during the quarter ended March 31, 2023, and from the period from September 30, 2022, to the filing date of this Report, which have not previously been disclosed in the Company’s Quarterly Reports on Form 10-Q or in a Current Report on Form 8-K.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Incorporated by Reference
Exhibit
No.
Description Form File No. Exhibit
Filing
Date
Filed/Furnished Herewith
31.1* Certification of Principal Executive Officer Pursuant to the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X
31.2* Certification of Principal Financial Officer Pursuant to the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X
32.1** Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X
32.2** Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X
101.INS* Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. XBRL Instance Document X
101.SCH* Inline XBRL Taxonomy Extension Schema Document XBRL Taxonomy Extension Schema Document X
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension Calculation Linkbase Document X
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document XBRL Taxonomy Extension Definition Linkbase Document X
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document XBRL Taxonomy Extension Label Linkbase Document X
101.LAB* Inline XBRL Taxonomy Extension Presentation Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document X
104* Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set X
* Filed electronically herewith.
** Furnished electronically herewith, not filed.
21
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIDECHANNEL, INC.
Date: May 9, 2023 By: /s/ Brian Haugli
Brian Haugli
Chief Executive Officer
(Principal Executive Officer)
SIDECHANNEL, INC.
Date: May 9, 2023 By: /s/ Ryan Polk
Ryan Polk
Chief Financial Officer
(Principal Accounting/Financial Officer)
22
Exhibit 31.1
Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
I, Brian Haugli, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of SIDECHANNEL, INC.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, considering the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 9, 2023 By:
/s/ Brian Haugli
Name: Brian Haugli
Title: Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
Certification Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
I, Ryan Polk, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of SideChannel, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, considering the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 9, 2023 By:
/s/ Ryan Polk
Name: Ryan Polk
Title: Chief Financial Officer
(Principal Financial/Accounting Officer)
Exhibit 32.1
CERTIFICATIONS
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (A) and (B) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), I, Brian Haugli, Principal Executive Officer of SideChannel, Inc., a Delaware corporation (the “Company”), hereby certify, to my knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the “Form 10-Q”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.
Date: May 9, 2023
SideChannel Strategy Validated by Revenue Growth of 30.9% Year-over-year in Second Quarter 2023
Financial results conference call on Tuesday, May 9 @ 4:00 p.m. EDT
WORCESTER, MA / ACCESSWIRE / May 9, 2023 / SideChannel, Inc. (OTCQB:SDCH) ("SideChannel"), a provider of cybersecurity services and technology to emerging and middle market companies, today announced its financial results for the three months and six months ended March 31, 2023.
Second Quarter 2023 Highlights
Revenue of $1.6 million up 30.9% versus the second quarter of 2022
Sequential quarter growth of 4.6%
Gross margin of 45.6%
Net loss of $0.9 million or $0.01 per share
Trailing twelve-month revenue reaches $5.7 million as of March 31, 2023
Revenue Retention was 83% for the twelve months ended March 31, 2023
New client contracts from October 1, 2022 through March 31, 2023 with $2.0 million of potential annual revenue
Cash of $1.9 million as of March 31, 2023; cash used in operations during the quarter of $0.7 million
Began implementing operating expense decreases of up to $0.9 million on an annualized basis
Management Comments
Commenting on the fiscal second quarter ended March 31, 2023, Brian Haugli, President and CEO of SideChannel, Inc., said, "We are delighted to see our strategy substantiated by our year-over-year revenue growth of 30.9% for the quarter and 38.5% for the year-to-date. We believe our new client pipeline remains strong as reflected by the new contracts with $2.0 million of potential annual revenue we secured during the first six months of this fiscal year. These new contracts will fuel our growth during the second half of the year. We anticipate gaining additional new clients during the next six months to set us up for further growth going into the next fiscal year."
"Cybersecurity Software and Services outpaced the growth of our vCISO Services, demonstrating the eagerness of emerging and mid-market companies to embrace our complete program. Cybersecurity Software and Services grew 59.3% and vCISO Services grew 16.2% for the quarter. Year-to-date, the growth rate for Cybersecurity Software and Services is 43.4% and the growth rate for vCISO Services is 35.7%. Our strategic focus remains on expanding our vCISO partnerships, while incorporating complementary products, cybersecurity solutions, and privacy services to empower our clients in their pursuit of cost-effective risk reduction."
Mr. Haugli concluded, "We made investments in growth since closing the business combination in July 2022, and we are seeing the benefits. We expect to experience continued revenue growth from these investments. Recently our team put a more focused emphasis on achieving net income and positive cash flow by improving gross margins and reducing non-customer facing operating expenses."
Financial Outlook for Fiscal 2023
The Company provided a financial outlook expected for fiscal year 2023 as follows:
Revenue ranging from $6.3 million to $6.5 million
Gross margin ranging from 50.0% to 52.0%
Operating losses to be lower in the second half of the year compared to the first half
Conference Call Information
A conference call discussing financial results for the quarter ended March 31, 2023 will follow this release today at 4:00 pm EDT.
Date: Tuesday, May 9, 2023 - 4:00 PM EDT
Dial: Toll Free: 877-545-0523
International: 973-528-0016
Participant Access Code: 551349
For those unable to participate in the live call, a replay will be available shortly after the call. Interested parties can access the replay by visiting the Company's website https://investors.sidechannel.com/events-presentations.
Second Quarter 2023 Review
The second quarter Form 10-Q is accessible in its entirety at https://investors.sidechannel.com/sec-filings.
In thousands, except shares and per share data
Three Months Ended
Change Change
3/31/2023 3/31/2022 $ % 12/31/2022 $ %
Revenue
$ 1,617 $ 1,235 $ 382 30.9% $ 1,546 $ 71 4.6%
Gross profit
737 628 109 17.4% 865 (128) -14.8%
Gross margin
45.6% 50.9% 56.0%
Operating expenses
1,595 270 1,325 490.1% 1,472 123 8.4%
Operating income (loss)
(858) 358 (1,216) (607) (251)
Net income (loss)
(856) 361 (1,217) (602) (254)
Net income (loss) per common share
$ (0.01) $ 0.01 $ (0.02) $ (0.00) $ (0.01)
Weighted average common shares outstanding - basic and diluted
148,928,663 62,016,618 148,733,860
As of
March 31, 2023
As of
September 30, 2022
Cash
$ 1,902 $ 3,030
Current Assets
3,261 4,142
Current Liabilities
1,382 1,161
Share Issuance for Revenue Milestone
SideChannel also announced the issuance of 62,016,618 shares of common stock associated with the business combination which occurred on July 1, 2022 comprised of 59,900,000 shares issued for exceeding $5.5 million of trailing twelve-month revenue and 2,116,618 shares of common stock for the closing working capital adjustment. After this issuance, the Company had 211,587,899 common stock shares outstanding as of May 4, 2023.
About SideChannel
SideChannel, founded in 2019, creates top-tier cybersecurity programs for mid-market companies to help protect their assets. SideChannel employs a combination of skilled and experienced talent, technology tools, and battle-tested processes to offer a complete program. SideChannel also offers Enclave; a network microsegmentation solution that simplifies securing a network in a zero-trust model. Learn more at sidechannel.com.
Interested investors and shareholders are encouraged to sign up for press releases and industry updates by registering for Email Alerts at and by following SideChannel on Twitter and LinkedIn.
SideChannel
146 Main Street
Suite 405
Worcester, MA 01608
Investor Contact
Ryan Polk
ir@sidechannel.com
Business Description: SideChannel, Inc. (the “Company” or “SideChannel”). Effective July 5, 2022, the Company changed its name to “SideChannel, Inc.” following its acquisition of SideChannel, Inc., a Massachusetts corporation, on July 1, 2022. SideChannel is committed to creating top-tier cybersecurity programs for mid-market companies to help them protect their assets.
Our mission is to make cybersecurity easy and accessible for mid-market companies, a market that we believe is currently underserved. We 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. To supplement our legacy licensing program, we are building our own applications that we intend to sell directly to enterprises and managed security service providers. Enclave our first internally launched product, is designed to be an easy-to-use platform for organizations that are seeking to control communication between devices; and 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 microsegmentation available to everyone at a low cost, and with minimum technical administration.
IR Page: https://investors.sidechannel.com/
IR Email: ir@sidechannel.com
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The CEO, directors, and officers of the Company will hold office until additional members or officers are duly elected. The background and principal occupations of the directors and officers of the Company are as follows:
Debbie MacConnel, Chairwoman of the Board, Independent Director, has been involved in the computer industry for 34 years, retiring recently from the IBM Corporation after 28 years. Prior to her retirement, Ms. MacConnel was instrumental in transforming information technology for IBM’s human resources function, which supported up to 450,000 employees. Ms. MacConnel’s team at IBM was also responsible for transforming the succession planning process for executive selection and promotion, along with enhancing the processes for mergers and acquisition management and talent acquisition. Ms. MacConnel qualifies as an independent member of the Company’s Board of Directors. LinkedIn bio: https://www.linkedin.com/in/debbie-macconnel/
Brian Haugli, Director, President & Chief Executive Officer, has been the CEO of SideChannel since September 2017. Since October 2020, Mr. Haugli has been the founder of RealCISO, a cybersecurity risk assessment SaaS platform, and has been the creator and host of #CISOlife YouTube and Podcast since August 2019. Mr. Haugli was an Adjunct Professor at Boston College from June 2020 through January 2022, an advisor to Zscaler from September 2019 to 2020, and worked for the Hanover Group from May 2015 to April 2019, most recently as VP, Chief Security Officer. LinkedIn bio: https://www.linkedin.com/in/brianhaugli/
Ryan Polk, Chief Financial Officer, brings more than 25 years of experience in executive and financial roles at companies ranging from emerging growth to the Fortune 500. Mr. Polk has been the principal of Perissos Partners, an executive consulting firm, since June 2017. While at Perissos, Mr. Polk served in CFO roles at Generation Next and Cellpoint Corporation. From July 2011 to May 2017, Mr. Polk served in executive roles in the portfolio companies owned by Lacy Diversified, a family office based in Indianapolis, IN which actively managed investments in distribution, light manufacturing, and supply chain management with combined revenue approaching $2 billion. He also led the mergers and acquisition team for Lacy. From August 2008 to June 2011, Mr. Polk served as the Vice President for Corporate Financial Planning and Analysis for Brightpoint, a publicly traded, Fortune 500 mobile device logistics company, based in Indianapolis, IN prior to its sale to Ingram Micro. He began his career at Ernst & Young in the firm’s tax consulting group. Mr. Polk earned a Bachelor of Science in Accounting and Industrial Management from Purdue University – Krannert School of Management in 1990. Mr. Polk is also a certified public accountant (inactive). LinkedIn bio: https://www.linkedin.com/in/ryan-polk/
Hugh Regan, Independent Director, recently retired from his role as Secretary, Treasurer and Chief Financial Officer of inTEST Corporation, a publicly traded manufacturer of capital equipment used in the semiconductor industry and other markets, and currently works as a private consultant to businesses, assisting them with various strategic issues. Mr. Regan served in his roles at inTEST for just over 25 years, from April 1996 until June 2021. From 1985 to April 1996, Mr. Regan served in various financial capacities for Value Property Trust, a publicly traded real estate investment trust, including Vice President of Finance from 1989 to September 1995 and Chief Financial Officer from September 1995 until April 1996. Mr. Regan qualifies as an independent member of the Company’s Board of Directors and will serve as the Chairperson of the Company’s Audit Committee. LinkedIn bio: https://www.linkedin.com/in/hugh-regan-50a1201/
Kevin Powers, Independent Director, is the founder and director of the Master of Science in Cybersecurity Policy and Governance Programs at Boston College and is an Assistant Professor of the Practice at Boston College Law School and in Boston College’s Carroll School of Management’s Business Law and Society Department. Mr. Powers is also a Cybersecurity Research Affiliate at the MIT Sloan School of Management, and he has taught courses at the U.S. Naval Academy, where he was also the Deputy General Counsel to the Superintendent. Mr. Powers qualifies as an independent member of the Company’s Board of Directors. LinkedIn bio: https://www.linkedin.com/in/kevin-powers-54893a8/
5/17/22 - 87,560,647
4/3/23 - 149,571,281
11/24/23 - 214,041,082
Volume | |
Day Range: | |
Bid Price | |
Ask Price | |
Last Trade Time: |