SDCH 10-Q
SideChannel, Inc. (SDCH)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark one)
For
the quarterly period ended
For the transition period from ___________ to ___________
Commission
File No.
(Exact name of registrant as specified in its charter)
State of Incorporation |
IRS Employer Identification No. |
(Address of principal executive offices) (Zip Code)
(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 Each Exchange on Which Registered | ||
| 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:
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).
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 | ☐ |
| ☒ | 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 ☐
As of February 5, 2024, the registrant had shares of common stock outstanding.
SIDECHANNEL, INC.
TABLE OF CONTENTS
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIDECHANNEL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| December 31, 2023 | September 30, 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Deferred costs | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Fixed assets | ||||||||
| Goodwill | ||||||||
| Deferred costs | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Deferred revenue | ||||||||
| Promissory note payable | ||||||||
| Income taxes payable | ||||||||
| Total current liabilities | ||||||||
| Other Liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding as of Dec 31, 2023 and Sep 30, 2023 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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SIDECHANNEL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
| Three Months Ended | ||||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| General and administrative | ||||||||
| Selling and marketing | ||||||||
| Research and development | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income (expense), net | ||||||||
| Net loss before income tax expense | ( | ) | ( | ) | ||||
| Income tax expense | ||||||||
| Net income (loss) after income tax expense | $ | ( | ) | $ | ( | ) | ||
| Net income (loss) per common share – basic and diluted | $ | ) | $ | ) | ||||
| Weighted average common shares outstanding – basic and diluted | ||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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SIDECHANNEL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share and per share data)
(Unaudited)
| Preferred Shares | Preferred Par Value | Common Shares | Common Par Value | APIC | Accumulated Deficit | Total Equity | ||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Shares issued for 2021 Investor Warrants | - | ( | ) | |||||||||||||||||||||||||
| Shares issued for services | - | |||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||
| Stock issued for RSU vesting, net | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Preferred Shares | Preferred Par Value | Common Shares | Common Par Value | APIC | Accumulated Deficit | Total Equity | ||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Shares issued for services | - | |||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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SIDECHANNEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net (loss) income to net cash flows used in operating activities: | ||||||||
| Depreciation and Amortization | ||||||||
| Stock-based compensation, shares issued for services, and RSU vesting, net | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses and other assets | ||||||||
| Accounts payable and accrued liabilities | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Net cash used in investing activities | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Note payable | ( | ) | ||||||
| Net cash used in financing activities | ( | ) | ||||||
| (DECREASE) INCREASE IN CASH | ( | ) | ( | ) | ||||
| CASH, BEGINNING OF PERIOD | ||||||||
| CASH, END OF PERIOD | $ | $ | ||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Stock-based compensation included in accounts payable and accrued liabilities | $ | $ | ||||||
| Shares Issued for Services | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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SIDECHANNEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2023 AND 2022
(Dollars in thousands except shares and per share data)
NOTE 1 – NATURE OF OPERATIONS
Our mission is to make cybersecurity simple and accessible for mid-market and emerging companies, a market we that we believe is currently underserved. We believe that our cybersecurity product and service offerings provide cybersecurity and privacy 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 virtual Chief Information Security Officer (vCISO), zero trust, third-party risk management, due diligence, privacy, threat intelligence, and managed end-point security solutions.
Our headquarters are located at 146 Main Street, Suite 405, Worcester, MA, 01608. Our website is https://sidechannel.com.
History
On July 1, 2022 we, then known as Cipherloc Corporation (“Cipherloc”), a Delaware corporation, 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 subsidiary of the registrant, changed its name to SCS, Inc. (the “Subsidiary” or “SCS”) and Cipherloc Corporation, the Delaware parent company of the subsidiary has changed its name to SideChannel, Inc. The Business Combination was accounted for as a reverse acquisition (“reverse merger”) in accordance with GAAP. Under this method of accounting, SCS was deemed to be the accounting acquirer for financial reporting purposes.
As part of the Business Combination, the former stockholders of SCS (the “Sellers”) exchanged all of their equity securities in SCS for a total of shares of the Company’s common stock (the “First Tranche Shares”), and shares of the Company’s newly designated Series A Preferred Stock, $ par value (the “Series A Preferred Stock”). The In addition the Sellers were entitled to receive up to an additional 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 SCS, as a subsidiary of the Company, achieved at least $ 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 could have been reduced or increased, based upon whether SCS 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 was also subject to adjustment based upon any successful indemnification claims made by the parties pursuant to the Purchase Agreement. The Closing Working Capital Adjustment increased the Second Tranche Shares by shares of common stock. The shares of Series A Preferred Stock were converted to common stock on May 4, 2023.
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
twenty-four months after the Closing Date without the prior written consent of the Company. Notwithstanding the foregoing, pursuant to
the Lock-Up/Leak-Out
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Use of Estimates
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the disclosures required for complete financial statements and they do include our accounts and those of our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation. References to Fiscal 2024 and Fiscal 2023 used throughout this report shall mean the current fiscal year ending September 30, 2024 and the prior fiscal year ended September 30, 2023, respectively.
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, 2023 (the “2022 Form 10-K”) filed on December 27, 2023, with the Securities and Exchange Commission (“SEC”). The same accounting policies have been followed in these unaudited interim condensed consolidated financial statements as those applied in the preparation of our consolidated audited financial statements for the year ended September 30, 2023.
The preparation of financial statements in conformity with 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.
Reclassifications
Certain prior year amounts have been reclassified to be comparable with the current year’s presentation.
Subsequent Events
We have assessed our operations and determined that there were no material subsequent events requiring adjustment to, or disclosure in, our consolidated financial statements for the three months ended December 31, 2023.
Segment Information
We manage our operations as a single operating segment for the purposes of assessing performance and making operating decisions.
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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. There have been no significant events or changes in circumstances during the quarter ended December 31, 2023 that would indicate that the carrying amount of the Company’s intangible asset, goodwill, may be impaired as of December 31, 2023.
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.
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 15 to net 90 days.
Nature of Products and Services
We identify, develop, and deploy cybersecurity and privacy 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. In addition to Enclave, our proprietary software product, we also sell third-party software and services through a network of strategic partnerships.
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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 purchased during the subscription time 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.
We
maintain an allowance for doubtful accounts (“allowance”) equal to
Costs to Obtain a Contract with a Customer
The only costs we incur associated with obtaining contracts with customers are marketing costs incurred with third-party service providers and sales commissions that we pay to our employees, contractors, or third-party sales representatives. Commissions 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 3 for further information about our revenue from contracts with customers.
Leases
On December 10, 2021, we entered into a lease for approximately
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. 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.
Following the guidance of ASC Topic 842, we are not required to record ROU assets and operating lease liabilities.
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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 7.
Legal
We are subject to legal proceedings, claims, and liabilities which arise in the ordinary course of business, and we accrue for losses associated with legal claims when such losses are probable and can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Legal fees are charged to expense as they are incurred.
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the reporting period. The weighted average number of shares is calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding. Diluted earnings per share reflects the potential dilution that could occur if stock options, warrants, and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in our earnings. Diluted loss per share is the same as basic loss per share during periods where net losses are incurred since the inclusion of the potential common stock equivalents would be anti-dilutive as a result of the net loss.
Due to the loss from continuing operations for the three months ended December 31, 2023 and 2022, there are no common shares added to calculate dilutive EPS because the effect would be anti-dilutive. .
Warrants
We account for warrants in accordance with FASB 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.
Liquidity and Capital Resources
As of
December 31, 2023 and September 30, 2023, we had $
Our primary requirements for liquidity and capital are working capital, research and development and marketing activities, and other general corporate needs. Historically, these cash requirements have been met through cash provided by operating activities and cash and cash equivalents. As of December 31, 2023, we are not party to any off-balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. Significant cash requirements for the remainder of the fiscal year include our working capital requirement.
We believe that our existing cash, cash equivalents and our anticipated cash flows from operations will be sufficient to meet our working capital, expenditure, and contractual obligation requirements for the next 12 months. Although we believe we have adequate sources of liquidity for the next 12 months and the foreseeable future, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets could impact our business and liquidity.
Effect of Recently Issued Amendments to Authoritative Accounting Guidance
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” which provides guidance to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the guidance enhances interim disclosure requirements, clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, provides new segment disclosure requirements for entities with a single reportable segment and contains other disclosure requirements. The purpose of the guidance is to enable investors to better understand an entity’s overall performance and assess potential future cash flows. The guidance is effective for fiscal years beginning December 15, 2023, and interim periods within fiscal years beginning December 15, 2024. For us, annual reporting requirements will be effective for our fiscal year 2025 beginning on October 1, 2024 and interim reporting requirements will be effective beginning with our fourth quarter of fiscal year 2025. Early adoption is permitted. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” which updates income tax disclosure requirements primarily by requiring specific categories and greater disaggregation within the rate reconciliation table and disaggregation of income taxes paid, net of refunds, by jurisdiction. All entities are required to apply the guidance prospectively, with the option to apply it retrospectively. The guidance is effective for fiscal years beginning after December 15, 2024, which for us is our fiscal year 2026 beginning on October 1, 2025. Early adoption is permitted. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
The Company does not believe that any recently issued, but not yet effective accounting standards, when adopted, will have a material effect on the accompanying consolidated financial statements.
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NOTE 3 – REVENUE FROM CONTRACTS FROM CUSTOMERS
Customer Concentration
One
client individually accounted for
Deferred Revenue
Deferred
revenue was $
Changes in deferred revenue for the three months ended December 31, 2023 were as follows:
Deferred Revenue (In thousands) | ||||
| Balance at September 30, 2023 | $ | |||
| Deferral of revenue | ||||
| Recognition of revenue | ( | ) | ||
| Balance at December 31, 2023 | $ | |||
NOTE 4 – DEBT
Pursuant
to a Membership Interest Redemption Agreement, dated November 3, 2021, by and between us and Akash Desai (“Desai Redemption Agreement”),
we promised to pay Mr. Desai $
NOTE 5 – RELATED PARTY TRANSACTIONS
Brian
Haugli, our Chief Executive Officer and our stockholder in the Company, is also a principal shareholder of RealCISO Inc. (“RealCISO”).
On September 22, 2020, SideChannel assigned to RealCISO Inc. certain contracts and intellectual property. We are a reseller of the RealCISO
software. We receive revenue from our customers for the use of RealCISO software and pays licensing fees to RealCISO for such use.
We
received $
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Litigation
In
April 2021, Eric Marquez, the former Secretary/Treasurer and Chief Financial Officer of Cipherloc Corporation, and certain other plaintiffs,
filed a lawsuit against Cipherloc Corporation and Michael De La Garza, Cipherloc’s former Chief Executive Officer and President,
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 Cipherloc 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 $
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.
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We grant equity compensation awards to directors, employees, and contractors under the 2021 Omnibus Equity Compensation Plan. In 2023 and 2024 we granted restricted stock units (RSUs) with service-based vesting conditions with vesting typically occurring over a 3-year period. The following table summarizes the activity of our restricted stock units granted under our Equity Incentive Plan during the three months ended December 31, 2023 and 2022.
Outstanding Equity Compensation Grants (In thousands) | Number
of RSU’s | |||
| Outstanding Grants at September 30, 2023 | ||||
| Granted | ||||
| Vested | ( | ) | ||
| Canceled/Forfeited | ( | ) | ||
| Outstanding Grants at December 31, 2023 | ||||
| Outstanding Grants at September 30, 2022 | ||||
Granted | ||||
Vested | ||||
Canceled/Forfeited | ||||
Outstanding Grants at December 31, 2022 | ||||
The weighted average grant-date fair value of all awards granted during the quarter ended December 31, 2023 was $ per share. The Company recognizes compensation cost for unvested share-based awards on a straight-line basis over the requisite service period.
Total stock-based compensation is included in general and administrative expense, selling and marketing expense, and research and development expense in our accompanying Consolidated Statements of Earnings.
Our total stock-based compensation
expense for the three months ended December 31, 2023 was $
comprised of $
for shares issued for services and $
Some employees opted to sell shares back to the Company at the fair market
value on the vesting date to fund their portion of payroll taxes due on the taxable income generated by the vested restricted stock units.
For the three months ended December 31, 2023, we have purchased shares with a vesting date value of $
We
incurred stock-based compensation expense of $ for the three months ended December 31, 2022 which is comprised of $ for
shares issued for services and $
NOTE 8 - STOCKHOLDERS’ EQUITY
Common Stock
As of December 31, 2023, we had shares of common stock outstanding and were authorized to issue shares of common stock at a par value of $.
We had shares of common stock outstanding as of September 30, 2023.
Common Stock Issued for Cash
We did not issue shares of common stock for cash during the three months ended December 31, 2023.
Common Stock Issued for Business Combinations
We did not issue shares for mergers or acquisitions related activity during the three months ended December 31, 2023.
Common Stock Issued for Services
Our
Board of Directors have 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. We also use stock as a form of compensation for independent
contractors who provide professional services to us in sales, marketing, or administration. On December 29, 2023, the Company issued
shares of common stock as compensation to the non-executive members of our Board for a fair value of $
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Common Stock Issued Under Equity Incentive Plan
We issued shares of common stock for RSU’s that vested during the three months ended December 31, 2023. The number of shares sold by these employees to fund payroll taxes for the three months ended December 31, 2023 was .
Common Stock Issued Under Tender Offer
On
December 26, 2023 we closed a tender offer to exchange approximately
million 2021 Investor Warrants for shares of common stock and new warrants (“November 2023 Warrant Exchange”). The
November 2023 Warrant Exchange had
| ● | Each (1) New Warrant can subscribe for and purchase one (1) share of common stock from the Company at an exercise price of eighteen cents ($) on or before December 29, 2028. | |
| ● | The New Warrant can be exercised on a cash or cashless basis. | |
| ● | The New Warrants will automatically convert if the common stock trades at a bid price equal to or greater than thirty-six cents ($) for thirty (30) consecutive trading days. New Warrant holders will be notified if the automatic conversion is triggered and will be provided with twenty (20) trading days to deliver a notice of exercise to the Company. | |
| ● | The New Warrants will be adjusted for stock dividends and stock splits should such an event occur during the term of the New Warrant. |
The weighted average warrant fair value of the 2021 Investor Warrants successfully tendered, as determined using the Black-Scholes option valuation model, was in excess of the value of the consideration paid by the Company to the 2021 Investor Warrant holders who successfully tendered their warrants during the November 2023 Warrant Exchange. We did not recognize a gain as a result of the November 2023 Warrant Exchange.
The assumptions used to estimate the weighted average warrant fair value for the successfully tendered 2021 Investor Warrants include:
| ● | We estimated volatility based primarily on historical monthly price changes of the Company’s stock equal to the expected life of the warrant. | |
| ● | The risk-free interest rate was based on the U.S. Treasury yield in effect at the time of grant. | |
| ● | The expected warrant term was the number of years the Company estimates the warrants will be outstanding prior to exercise based on expected historical exercise patterns. |
After the November 2023 Warrant Exchange, we had a total of
Preferred Stock
As of December 31, 2023, we had zero () shares of preferred stock outstanding.
Warrants
The following table summarizes warrant activity for the three months ended December 31, 2023:
Outstanding Warrants (In thousands, except prices and remaining lives) | Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Life | |||||||||
| Outstanding at September 30, 2023 | $ | |||||||||||
| Granted through November 2023 Warrant Exchange | ||||||||||||
| Tendered during November 2023 Warrant Exchange | ( | ) | ( | ) | ( | ) | ||||||
| Canceled/Forfeited | — | |||||||||||
| Outstanding at December 31, 2023 | $ | |||||||||||
| 13 |
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, 2023, filed with the Securities and Exchange Commission on December 27, 2023.
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 herein are not intended to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable licensors if any, nor that respective owners of other intellectual property rights will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names herein to imply a relationship with, or endorsement or sponsorship of us by, any other persons, firm or entity, except as otherwise so expressly indicated.
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. |
| 14 |
All references to years relate to the fiscal year ended September 30 of the particular year.
Overview
Our Business
We internally report our revenue using two categories. The first, “vCISO Services,” captures the revenue the Chief Information Security Officer services that we provide to our clients on a “virtual” or outsourced basis, thus the acronym “vCISO.” Services delivered by SideChannel through our team of vCISOs include assessing the cybersecurity risk profile, implementing policies and programs to mitigate risks, and managing the day-to-day tasks to ensure compliance with the adopted cybersecurity framework. Most of our clients use our vCISO services.
vCISO engagements typically include a fixed monthly subscription fee with durations longer than twelve (12) months. Hourly rates for vCISO time and material projects range from $350 to $425. Each of our vCISOs is generally embedded into the C-suite executive teams of two (2) to four (4) of our clients.
Our second revenue category encompasses an array of Cybersecurity Software and Services that our clients deem necessary to protect their digital assets. These augment our vCISO offering and include a full range of other cybersecurity products and services delivered through a team of security engineers along with a network of third-party service providers and value-added resellers (“VARs”). Commercial relationships with third-party service providers and VARs provide SideChannel with additional internal capabilities to mitigate cybersecurity risks. We earn licensing revenue from software contracts and commissions from third-party service provider partnerships which are included in this revenue category.
Our growth strategy focuses on these three initiatives:
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
We are offering proprietary software called Enclave which simplifies important cybersecurity tasks called “asset inventory” and “microsegmentation.” Enclave seamlessly combines access control, microsegmentation, encryption and other secure networking concepts to create a comprehensive solution. It allows Information Technology to easily segment the enterprise network, place the right staff in those segments and direct traffic.
Revenue
The following revenue metrics are for the three months ended December 31, 2023, versus the same period in fiscal year 2023 and the table reflects the revenue by category for the first three months of fiscal years 2024 and 2023.
| (in thousands) | 2024 | 2023 | ||||||||||||||||||||||
| % of Total | % of Total | $ Change | % Change | |||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||
| vCISO Services | $ | 1,161 | 66.9 | % | $ | 1,019 | 65.9 | % | $ | 142 | 13.9 | % | ||||||||||||
| Cybersecurity Software & Services | 575 | 33.1 | % | 527 | 34.1 | % | 48 | 9.1 | % | |||||||||||||||
| Total | $ | 1,736 | $ | 1,546 | $ | 190 | 12.3 | % | ||||||||||||||||
The growth in vCISO Services reflects both growth in clients served and an increase in revenue per client. Cybersecurity Software & Services revenue grew from 2023 to 2024 primarily because of an increase in the use of these services by existing Cybersecurity Software and Services clients and secondarily because of an expansion of the services and software offered.
We also monitor new and retained revenue. 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 three months ended December 31, 2024 and 2023. We initiated fewer vCISO Services engagements during the three months ended December 31. 2023 than we did during the three months ended December 31, 2022. We attribute the decrease to ineffective lead generation campaigns launched during the last half of fiscal year 2023.
| (in thousands) | 2024 | 2023 | ||||||||||||||||||||||
| % of Total | % of Total | $ Change | % Change | |||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||
| vCISO | ||||||||||||||||||||||||
| New | $ | 355 | 30.6 | % | $ | 641 | 62.9 | % | $ | (286 | ) | (44.6 | )% | |||||||||||
| Retained | 806 | 69.4 | % | 378 | 37.1 | % | 428 | 113.2 | % | |||||||||||||||
| Total | $ | 1,161 | $ | 1,019 | $ | 152 | 13.9 | % | ||||||||||||||||
| Cybersecurity Software & Services | ||||||||||||||||||||||||
| New | $ | 188 | 32.7 | % | $ | 177 | 33.6 | % | $ | 11 | 6.2 | % | ||||||||||||
| Retained | 387 | 67.3 | % | 350 | 66.4 | % | 37 | 10.6 | % | |||||||||||||||
| Total | $ | 575 | $ | 527 | $ | 47 | 9.1 | % | ||||||||||||||||
| Total Revenue | ||||||||||||||||||||||||
| New | $ | 543 | 31.3 | % | $ | 818 | 52.9 | % | $ | (275 | ) | (33.6 | )% | |||||||||||
| Retained | 1,193 | 68.7 | % | 728 | 47.1 | % | 465 | 63.9 | % | |||||||||||||||
| Total | $ | 1,736 | $ | 1,546 | $ | 190 | 12.3 | % | ||||||||||||||||
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 December 31, 2023 and September 30, 2023.
| Trailing Twelve Months Ended | ||||||||
| December 31, 2023 | September 30, 2023 | |||||||
| vCISO Services | 65.6 | % | 60.8 | % | ||||
| Cybersecurity Software & Services | 86.2 | % | 89.4 | % | ||||
| Total | 72.7 | % | 71.0 | % | ||||
| 15 |
Results of Operations
Three Months Ended December 31, 2023 Versus Three Months Ended December 31, 2022
Comparison of Results
Revenue. Our revenue was $1.7 million for the quarter ended December 31, 2023, compared to $1.5 million for the three-month comparable prior period; an increase of $190,000 or 12%. The factors driving this revenue increase include improved revenue retention and a growth in vCISO engagements.
Gross Margins. Our gross margin was $845,000 or 48.7% for the quarter ended December 31, 2023, compared to $865K or 56.0% for the quarter ended December 31, 2022. The decline in our gross margin was the result of less effective utilization of our service delivery employees.
Operating Expenses. We initiated expense reductions from May 2023 to December 2023 that impacted all areas of our company. These reductions resulted in a $368,000 or 25.0% decrease in total operating expenses for the three months ended December 31, 2023 compared to the three months ended to December 31, 2022. The changes for each operating expense area are discussed below. The expense reductions were intended to increase the likelihood of achieving positive cash flow from operating activities during fiscal year 2024.
General and Administrative Expenses. Our general and administrative expense was $709,000 for the three months ended December 31, 2023, compared to $1,030,000 for the prior comparable period, a decrease of $321,000 or 31.1%. The decrease was achieved by reducing executive positions and eliminating investor communication costs.
Selling and Marketing Expenses. Our sales and marketing expense was $269,000 for the three months ended December 31, 2023, compared to $269,000 for the prior comparable period, a decrease of $38,000 or 12.4%. The decrease was driven by a reduction in staff and third-party service provider costs.
Research and Development Expenses. Our research and development expense was $126,000 for the three months ended December 31, 2023, compared to $135,000 for the prior comparable period, a decrease of $9,000 or 6.7%. The decrease is the result of a staff reduction.
Liquidity and Capital Resources
We had an accumulated deficit of $19.2 million as of December 31, 2023. Our accumulated deficit has been primarily driven by three non-recurring expenses totaling $16.8 million: $6.2 million for acquisition costs, including $6.1 million related to the contingent consideration from the Business Combination; $5.7 million impairment of goodwill recorded as a result of the Business Combination, and $4.9 million impairment of intangible assets.
We expect to incur continued operating losses until we generate revenues sufficient to cover our expected ongoing obligations and expenses. On December 31, 2023, we had cash of $819,000. We maintain our cash in accounts held by reputable financial institutions which, at times, may exceed federally insured limits guaranteed by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC insures these deposits up to $250,000. As of December 31, 2023, approximately $569,000 of the Company’s cash balance was uninsured. The Company has not experienced any losses of cash in any of these financial institutions.
We had working capital of $1.4 million as of December 31, 2023, compared to working capital of $1.5 million as of September 30, 2023. The decline in working capital is primarily attributed to the use of cash to fund operating losses during the last three months.
Cash Flows
The following table summarizes selected items in our Consolidated Statements of Cash Flows for the three months ended December 31:
| (In thousands) | 2023 | 2022 | ||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | (184 | ) | $ | (477 | ) | ||
| Investing activities | - | - | ||||||
| Financing activities | (50 | ) | - | |||||
| 16 |
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 $184,000 of cash for operating activities during the three months ended December 31, 2023 and recorded a net loss of $246,000. During the same period, our non-cash charges totaled $136,000 comprised of $88,000 in stock-based compensation expense and $48,000 in amortization and depreciation. The change in our net operating assets and liabilities was primarily due to a $103,000 decrease in prepaid expenses as we recognized our annual directors and officers insurance premium that is prepaid annually in July and a $101,000 decrease in accounts payable and accrued liabilities because of payments made on our directors and officers insurance note payable.
Investing Activities
There were no cash activities in investing for this reporting period.
Financing Activities
We paid a $50,000 note payable to Mr. Akash Desai in December 2023. The note payable was related to a December 2021 agreement for the redemption of Mr. Desai’s interest in SideChannel LLC. The December 2023 payment completed our obligations to Mr. Desai.
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 December 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 2023 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) of the SEC.
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, and the related remediation plan are more fully described in our 2023 Form 10-K. The material weaknesses, summarized in the table below, related to the fact that we did not design and maintain accounting policies, procedures and controls to ensure complete, accurate and timely financial reporting in accordance with U.S. GAAP.
| ● | We did not design and maintain formal accounting policies, procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over the preparation and review of account reconciliations, journal entries and classification of certain costs; | |
| ● | We had not developed and effectively communicated to our employees our accounting policies and procedures, which resulted in inconsistent practices. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness; | |
| ● | We do not have sufficient, qualified finance and accounting staff with the appropriate U.S. GAAP technical accounting expertise to identify, evaluate and account for accounting and financial reporting, and effectively design and implement systems and processes that allow for the timely production of accurate financial information in accordance with internal financial reporting timelines. As a result, we did not design and maintain formal accounting policies, processes and controls related to complex transactions necessary for an effective financial reporting process; and | |
| ● | As a high-growth, smaller reporting company that became responsible for listed financial reporting within the last eighteen (18) months, we have a limited staff and budget available to adequately test and monitor the effectiveness of certain internal controls. |
| 17 |
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended December 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 6 - 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
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, 2023, filed with the Commission on December 27, 2023 (the “Form 10-K”).
| 18 |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sales of Securities
There were no sales of unregistered securities during the quarter ended December 31, 2023, and from the period from September 30, 2023, to the filing date of this Report.
On December 29, 2023, the Company issued 166,668 shares of common stock as compensation to the non-executive members of our Board for a fair value of $5,000 for the services rendered during the first quarter of fiscal year 2024 and 90,417 shares to an independent contractor with a fair value of $3,000.
Common Stock Issued Under Equity Incentive Plan
We issued 262,486 shares of common stock for 369,997 RSU’s that vested during the three months ended December 31, 2023. The number of shares sold by these employees to fund payroll taxes for the three months ended December 31, 2023 was 112,594.
Common Stock Issued Under Tender Offer
On December 26, 2023 we closed a tender offer to exchange approximately 55.5 million 2021 Investor Warrants for shares of common stock and new warrants (“November 2023 Warrant Exchange”). The November 2023 Warrant Exchange had 43,538,501 2021 Investor warrants tendered (78.4% of the outstanding 2021 Investor Warrants) resulting in the issuance of 7,270,958 shares of common stock and 17,415,437 new warrants (“New Warrants”). The New Warrants include these terms:
| ● | Each (1) New Warrant can subscribe for and purchase one (1) share of common stock from the Company at an exercise price of eighteen cents ($0.18) on or before December 29, 2028. | |
| ● | The New Warrant can be exercised on a cash or cashless basis. | |
| ● | The New Warrants will automatically convert if the common stock trades at a bid price equal to or greater than thirty-six cents ($0.36) for thirty (30) consecutive trading days. New Warrant holders will be notified if the automatic conversion is triggered and will be provided with twenty (20) trading days to deliver a notice of exercise to the Company. | |
| ● | The New Warrants will be adjusted for stock dividends and stock splits should such an event occur during the term of the New Warrant. |
The weighted average warrant fair value of the 2021 Investor Warrants successfully tendered, as determined using the Black-Scholes option valuation model, was in excess of the value of the consideration paid by the Company to the 2021 Investor Warrant holders who successfully tendered their warrants during the November 2023 Warrant Exchange. We did not recognize a gain as a result of the November 2023 Warrant Exchange.
The assumptions used to estimate the weighted average warrant fair value for the successfully tendered 2021 Investor Warrants include:
| ● | We estimated volatility based primarily on historical monthly price changes of the Company’s stock equal to the expected life of the warrant. | |
| ● | The risk-free interest rate was based on the U.S. Treasury yield in effect at the time of grant. | |
| ● | The expected warrant term was the number of years the Company estimates the warrants will be outstanding prior to exercise based on expected historical exercise patterns. |
After the November 2023 Warrant Exchange, we had a total of 43.2 million warrants outstanding comprised of 5.4 million from 2018 issued to placement agents, 8.4 million from 2021 issued to placement agents, 12.0 million remaining 2021 investor warrants, and 17.4 million new warrants issued on December 26, 2023.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
There were no purchases of equity securities by the issuer or affiliated purchasers during the quarter ended December 31, 2023, and from the period from September 30, 2023, to the filing date of this Report.
As noted above, on December 26, 2023 we closed a tender offer to exchange approximately 55.5 million 2021 Investor Warrants for shares of common stock and new warrants (“November 2023 Warrant Exchange”). The November 2023 Warrant Exchange had 43,538,501 2021 Investor warrants tendered (78.4% of the outstanding 2021 Investor Warrants) resulting in the issuance of 7,270,958 shares of common stock and 17,415,437 new warrants (“New Warrants”). The New Warrants include these terms:
| ● | Each (1) New Warrant can subscribe for and purchase one (1) share of common stock from the Company at an exercise price of eighteen cents ($0.18) on or before December 29, 2028. | |
| ● | The New Warrant can be exercised on a cash or cashless basis. | |
| ● | The New Warrants will automatically convert if the common stock trades at a bid price equal to or greater than thirty-six cents ($0.36) for thirty (30) consecutive trading days. New Warrant holders will be notified if the automatic conversion is triggered and will be provided with twenty (20) trading days to deliver a notice of exercise to the Company. | |
| ● | The New Warrants will be adjusted for stock dividends and stock splits should such an event occur during the term of the New Warrant. |
We did not recognize a gain as a result of the November 2023 Warrant Exchange. After the November 2023 Warrant Exchange, we had a total of 43.2 million warrants outstanding comprised of 5.4 million from 2018 issued to placement agents, 8.4 million from 2021 issued to placement agents, 12.0 million remaining 2021 investor warrants, and 17.4 million new warrants issued on December 26, 2023.
| 19 |
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. |
| 20 |
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: February 7, 2024 | By: | /s/ Brian Haugli |
| Brian Haugli | ||
Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| SIDECHANNEL, INC. | ||
| Date: February 7, 2024 | By: | /s/ Ryan Polk |
| Ryan Polk | ||
Chief Financial Officer | ||
| (Principal Accounting/Financial Officer) | ||
| 21 |