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 that 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, 2021, and elsewhere in this Current Report on 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.
Overview
With our acquisition of SideChannel, Inc., a Massachusetts corporation, on July
1, 2022, we expanded our capabilities to include providing cybersecurity
programs to mid-market companies, which are designed to help those companies
protect their assets. With the additional of SideChannel, we now employ what we
believe to be among the market's most skilled and experienced talent to help our
clients to improve their defenses against cybercrime. With the SideChannel
acquisition, we now have over 20 C-suite level information security officers,
who possess combined experience of over 400 years in the industry. To date,
SideChannel has created over 50 multi-layered cybersecurity programs for its
clients.
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.
We believe that our customers, and prospective customers, in the mid-market will
favor our approach, as it provides them with an efficient way to work with a
single vendor to manage and oversee their cybersecurity programs. We also
believe that our approach will reduce our customers' overall security costs and
streamline their ability to increase their sales, reduce regulatory risks and
monitor their risk posture.
We believe that we provide a full range of cybersecurity solutions through our
in-house delivery capabilities, and through our network of subcontractors. We
work with our clients to help them select the right cybersecurity tools,
products, and solutions. We believe that our use of subcontractors allows us to
quickly move directly into implementation of projects, which we believe reduces
the risk to our customer. Our subcontractors also provide us with sales leads
and referrals, and may resell our services to their own client base. We believe
that this allows us to maximize our sales efforts, reduce expense of sales, and
gain new customers.
Prior to our acquisition of SideChannel, we offered our customers a license to
use our Polymorphic Encryption Core ("PEC"), which is a secure, advanced
polymorphic data-in-motion product. Recently, one licensee, Castle Shield, began
to report early-stage product sales from its software tools that contain our
PEC.
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. On February 14, 2022, we announced the launch of Enclave, our first
internally developed product.
Enclave is a product 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 micro-segmentation available to everyone at
a low cost, and with minimum technical administration.
The Enclave platform is available through a free plan or a fee per user plan,
designed to fit the needs of the two types of end users of the platform. The
free plan will give individual users the ability to use the platform for hobby
and educational purposes. The fee per user plan will focus on business users,
allowing them to have a more private experience that addresses security and
optimization gaps that we believe many companies face in today's ever-changing
technology environment.
We anticipate that we will need between $2.0 million and $2.7 million of cash to
cover our operating expenses for the next twelve months. We expect to cover
those expenses with the net proceeds we received from a private placement of our
securities in the first quarter of our fiscal year 2021. We further anticipate
that the SideChannel acquisition may mitigate or reduce our use of cash for
operating expenses. We intend to manage our business such that our current cash
reserves will be sufficient to allow us to reach positive cash flow from our
operations, but we cannot assure you that will occur.
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Results of Operations
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
Our revenue was $198 for the three months ended June 30, 2022, compared to zero
revenue for the three months ended June 30, 2021. The revenue in fiscal 2022 was
related to our licensing agreement with Castle Shield.
Our general and administrative expense was $1,107,310 for the three months ended
June 30, 2022, compared to $197,534 for the three months ended June 30, 2021, an
increase of $909,776, or 461%. The increase was driven by several factors
including: (i) $479,075 in costs related to the SideChannel acquisition; (ii) an
increase in headcount related expenses of $335,232; and (iii) a $45,000 increase
in the amortization of deferred costs related to private placement fees. The
increase in general and administrative expense was partially offset by (i) a
reduction of $441,597 as a result of a recognized gain related to the write-off
of remaining right-of-use (ROU) assets and operating lease liability after the
early termination of our final operating lease; and (ii) decreases in other
items, including a reduction of $192,732 in legal expense, as well as a decrease
of $168,765 in rent expense.
Our selling and marketing expenses were $82,548 for the three months ended June
30, 2022, compared to zero for the three months ended June 30, 2021. Our sales
and marketing expenses in fiscal 2022 include (i) consultant expenses of
$37,500, (ii) $34,875 in brand and website marketing costs, and (iii) stock
compensation expense of $10,173.
Our research and development expenses were $191,258 for the three months ended
June 30, 2022, compared to $169,098 for the three months ended June 30, 2021, an
increase of $22,160 or 13%. The increase was primarily due to a $58,020 increase
in development expenses, as well as a $26,672 increase in personnel related
costs. These increases were partially offset by a $62,532 decrease in consultant
expenses.
Our other income (expense) was zero for the three months ended June 30, 2022,
compared to other income of $191,052 for the three months ended June 30, 2021.
The other income in fiscal 2021 was related to the Paycheck Protection Program,
or PPP, partial loan forgiveness we received, partially offset by a minor amount
of interest expense.
Nine Months Ended June 30, 2022, Compared to Nine Months Ended June 30, 2021
Our revenue was $449 for the nine months ended June 30, 2022, compared to
$15,417 for the nine months ended June 30, 2021, a decrease of $14,968, or 97%.
The reduction in our revenue in fiscal 2022 was due to low sales activity from
our licensees during the nine months ended June 30, 2022.
Our general and administrative expense was $2,183,340 for the nine months ended
June 30, 2022, compared to $1,748,398 for the nine months ended June 30, 2021,
an increase of $434,942, or 25%. The increase in our general and administrative
expense was driven by several factors including: (i) $479,075 in SideChannel
acquisition related costs in fiscal 2022; (ii) an increase in headcount related
expenses of $232,384; and (iii) a $135,000 increase in the amortization of
deferred costs related to private placements fees. These increases in general
and administrative expense were partially offset by decreases in other items,
including (i) a reduction of $441,597 in general and administrative expense in
fiscal 2021 as a result of a gain we recognized related to the write-off of our
remaining right-of-use (ROU) assets and an operating lease liability after the
early termination of our final operating lease; (ii) a reduction of $356,602 in
legal expense; (iii) a decrease of $302,811 in rent expense and (iv) a decrease
in professional fees of $165,485.
Our selling and marketing expense was $188,316 for the nine months ended June
30, 2022, compared to $56,250 for the nine months ended June 30, 2021, an
increase of $132,066, or 235%. The increase in our sales and marketing expense
was the result of several factors including: (i) an increase of $112,500 in
consultant expenses; and (ii) an increase of $64,625 in brand and website
marketing costs. These increased selling and marketing expenses were partially
offset by a $45,059 decrease in headcount related costs during fiscal 2021 that
were not incurred in the current fiscal year.
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Our research and development expense were $461,816 for the nine months ended
June 30, 2022, compared to $465,974 for the nine months ended June 30, 2021, a
decrease of $4,158 or 1%. The slight reduction in our research and development
expense was primarily the result of a $134,786 decrease in consulting related
costs, resulting from the spending reductions we initiated during the prior
fiscal year. This cost reduction was partially offset by an increase in payroll
related expense of $72,608 and an increase of $58,020 in product development
expenses.
Our other income (expense) was zero for the nine months ended June 30, 2022,
compared to other income of $191,052 for the nine months ended June 30, 2021.
The other income in fiscal 2021 was related to the partial forgiveness of our
PPP loan, partially offset by a minor amount of interest expense.
Liquidity and Capital Resources
We had an accumulated deficit of $74,363,914 as of June 30, 2022. We expect to
continue to incur expenses, and generate continued operating losses, until we
can generate revenues that are sufficient to cover our expected ongoing
expenses. We anticipate that our operating expenses for the next twelve months
will require between $2.0 million and $2.7 million of cash. We expect to cover
those expenses with some of the net proceeds we received from a private
placement of our equity securities in the first quarter of our fiscal year 2021.
We further anticipate the SideChannel acquisition will mitigate or reduce our
use of cash for operating expenses. We intend to manage our business so that our
current cash reserves will be sufficient to allow us to reach positive cash flow
from our operations, but we cannot assure you that will occur. We do not
currently have access to any credit facilities and we cannot guarantee that we
will be able to access any credit facilities if needed.
On June 30, 2022, we had cash and cash equivalents of $3,588,912, primarily
representing proceeds from the private placement of shares of our common stock
in March and April of 2021.
As of June 30, 2022, we had working capital of $3,010,376, compared to working
capital of $4,756,094 as of September 30, 2021.
Cash Flows
The following table summarizes, for the periods indicated, selected items in our
condensed Statements of Cash Flows:
Nine Months Ended
June,
2022 2021
Net cash provided by (used in):
Operating activities $ (2,195,082 ) $ (2,566,292 )
Investing activities $ - $ -
Financing activities $ - $ 8,334,961
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Operating Activities.
For the nine months ended June 30, 2022, we recorded a net loss of $2,833,023.
Our net cash used in operating activities during this period was $2,195,082.
During the nine months ended June 30, 2022, we had non-cash charges of $135,000
for amortization of deferred costs related to private placement fees. In
addition, we recorded $84,305 of stock-based compensation expense during the
period. Our prepaid expenses declined by $251,645, reflecting the amortization
of those prepaid expenses during fiscal 2022. We also settled $854,000 of our
accounts payable and accrued liabilities through the issuance of 4,744,448
shares of our common stock to our creditors. We issued another 200,000 shares of
our common stock to cover $14,000 in legal settlement expenses. Our accrued
compensation expense increased by $175,000 during fiscal 2022 as a result of
bonuses paid to our employees as of June 30, 2022.
Investing Activities. We had no investing activities during the nine months
ended June 30, 2022.
Financing Activities. We had no financing activities during the nine months
ended June 30, 2022.
Off-Balance Sheet Arrangements
During the nine months ended June 30, 2022, we had no off-balance sheet
arrangements that have, or are reasonably likely to have, a current or future
effect on our financial condition, revenue or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to our
interests.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires the use
of estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities at the date of the
financial statements and the reported amount of revenues and expenses during the
reporting period. Our management periodically evaluates the estimates and
judgments made. Our management bases its estimates and judgments on historical
experience and on various factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates as a result of
different assumptions or conditions. As of June 30, 2022, there have been no
significant changes to the accounting estimates and assumptions that we have
deemed critical in the past. Our critical accounting estimates and assumptions
are more fully described in our Annual Report on Form 10-K for our fiscal year
2021.
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