Cycurion, Inc. 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with our audited consolidated financial statements and the related notes thereto for the fiscal years ended December 31, 2025 and 2024, included in Item 8. Financial Statements and Supplementary Data. The discussion below contains management's comments on our business strategy and outlook, and such discussions contain forward-looking statements. These forward-looking statements reflect the expectations, beliefs, plans, and objectives of management about future financial performance and assumptions underlying management's judgment concerning the matters discussed, and accordingly involve estimates, assumptions, judgments, and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements, and the discussion below is not necessarily indicative of future results. Factors that could cause or contribute to any differences include, but are not limited to, those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in "Item 1A. Risk Factors" and in "Special Note Regarding Forward-Looking Statements" at the beginning of this Form 10-K. General and Business Overview We were originally incorporated as KAE Holdings, Inc., under the laws of the State of Delaware in 2017, with the purpose of acquiring and holding operating entities in the cybersecurity industry. On July 14, 2020, we changed our corporate name from KAE Holdings, Inc. to Cyber Secure Solutions, Inc., and, on February 24, 2021, to Cycurion, Inc. We have two first-tier wholly-owned subsidiaries, Cycurion Sub, Inc. (formerly Cycurion, Inc., until February 14, 2025) and Cycurion Crypto, a Delaware corporation formed in July 2025, and three indirectly wholly-owned second-tier subsidiaries: (i) Axxum, a Virginia limited liability company formed in December 2006, (ii) Cloudburst, a Virginia limited liability company formed in January 2007, and (iii) Cycurion Innovation, Inc., a Delaware corporation formed in September 2021, in connection with our acquisition of assets from Sabres, a leading Israeli-based cybersecurity provider. We deliver high-quality, cybersecurity solutions to federal government civilian, defense, and judiciary agencies in addition to commercial clients across a variety of industries. We, through our operating subsidiaries and strategic partnerships, have numerous prime and subcontracts with key government agencies. Our growth engine is driven by organic business solutions and strategic acquisitions of cyber/ infrastructure service providers. Our Subsidiaries Cycurion Sub, Inc. We own our operating subsidiaries through Cycurion Sub., Inc., a Delaware corporation that, until the closing date of the de-SPAC, was known as "Cycurion, Inc." We continue to conduct our business through the three below-described entities, which are now indirectly wholly-owned second-tier subsidiaries by virtue of the recent closing of the de-SPAC transaction. Cycurion Crypto Inc. Our direct wholly-owned subsidiary, Cycurion Crypto, a Delaware corporation, was formed in July 2025 as part of our strategic initiative to position the Company within the expanding digital asset ecosystem and will manage a crypto treasury. Axxum Technologies LLC Organized in the Commonwealth of Virginia on December 29, 2006, Axxum is a cybersecurity provider with successful assignments within the multiple sub-agencies of the Department of Homeland Security. We acquired Axxum in November 2017. Following the acquisition, we continued Axxum's core operations of providing contractor services to its existing federal government customer base while leveraging our existing processes and tools to expand its commercial footprint. Cloudburst Security LLC Cloudburst is a cybersecurity provider with successful assignments within highly sensitive government agencies and other commercial organizations. We acquired Cloudburst in April 2019. Following the acquisition, we continued Cloudburst’s core operations of providing mission-critical and highly sensitive government agencies and other commercial organizations with high-quality, innovative cybersecurity services. Cloudburst focuses on providing tailored solutions that leverage the industry's best minds and technologies to predict, protect, detect, respond, and sustain our clients from the latest evolving cyber threats. 27 Table of Contents Cycurion Innovation, Inc. Cycurion Innovation, Inc. was formed in connection with our acquisition of assets from Sabres, a leading Israeli-based cybersecurity provider. It operates our Cycurion Security Platform’s line of products allows our customers to improve their cyber posture with its MDP SaaS platform. This platform efficiently bundles and easily implements the external protection of a WAF and the internal protection of Bot Mitigation. Bot Mitigation is the reduction of risk to applications, Application Program Interfaces ("APIs"), and backend services from malicious bot traffic that fuels common automated attacks, such as DoS campaigns and vulnerability probing. The costs of single-layer security can be measured in terms of money, time, and risk, as well as the damage wrought by a data breach, which millions of businesses experience each year. Through this interaction of the WAF and Bot Mitigation, the MDP is able to reinforce these layers of security and generate new security layers in real time in response to emerging threats. This process is directed by our Cycurion Security Platform's proprietary, cloud-based AI algorithm. Crucially, the AI underpinning the MDP platform is constantly evolving to counter new threats. Through a crowdsourcing process, the cloud-based MDP learns from every threat to any protected application and uses that newly acquired knowledge to protect all MDP clients better. Master Service Agreement with SLG Innovation, Inc. The SLG team has an average of over 25 years of experience in the development, planning, implementation, and management of information systems. SLG's leadership team offers years of combined success in answering the needs of government agencies and healthcare organizations across the country. The SLG team has worked nationally, as it has served over 25 Department of Health and Human Services agencies, all 50 state governments, and over 250 local governments. Since SLG's inception, it has primarily focused on customers in the middle of the country. The team of professionals has successfully delivered information technology, project management, and subject matter services to key health and human service projects, including, but not limited to, state Medicaid programs in Illinois, Indiana, Nebraska, and Tennessee, the Indiana Division of Aging, Illinois Early Intervention, the University of Illinois Division of Specialized Care for Children, the Multiple Myeloma Research Foundation, and many more. We established a subcontractor — prime contractor relationship with SLG in the fall of 2019, where we serviced several government agencies and commercial customers, State of New Mexico, Cognizant, KPMG, and the University of Illinois in support of SLG. Axxum Technologies and SLG Innovation that relationship in 2020. A subcontractor offers its specialized services to a prime contractor. Unlike prime contractors, who focus on the managerial side of the government contract, subcontractors tend to dedicate their efforts to lending subject matter expertise and delivery of service to the project. Technically strong subcontractors, along with a strong subcontractor plan are essential to boost the success of a project. As a result of the strong technical skills and experience of the cyber teams at Cycurion and its subsidiaries, SLG Innovation entered into a Master Services Agreement ("MSA") with Axxum Technologies to provide services to SLG customers. The MSA is task order driven and the number of task orders is modified periodically depending on actual customer requirements for IT and cybersecurity services. Over the last three years, Axxum Technologies has assisted SLG Innovation in growing its revenue and customer base. As a result, SLG Innovation now represents a majority of Cycurion revenues. RCR Acquisition Agreement RCR Technology Corporation ("RCR") performs certain services for SLG in its role as an SLG subcontractor and, in that context, became a creditor of SLG. In connection with the transactions contemplated by the term sheet with SLG (the "SLG Term Sheet"), on April 25, 2023, Cycurion Sub and RCR also entered into a term sheet (the "RCR Term Sheet") for a distinct, but related transaction. The RCR Term Sheet contemplates a transaction, pursuant to which RCR will sell to Cycurion all of the accounts receivable of SLG in favor of RCR (but for those accounts that are less than 90 days old as of the date of consummation of the contemplated transaction). The consummation of the transactions contemplated by the RCR Term Sheet is contingent upon the consummation of the transactions contemplated by the SLG Term Sheet. We consummated the transactions contemplated by the RCR Term Sheet on September 25, 2025. Cycurion issued 248,006 shares of common stock to RCR as a result of the consummation of the transaction contemplated by the RCR Term Sheet pursuant to the Securities Purchase Agreement, dated September 25, 2025. The foregoing brief summary description of certain terms and provisions of the RCR Term Sheet does not purport to be complete and is qualified in its entirety by reference to the full text of the RCR Term Sheet, a copy of which is filed as an exhibit to this Annual Report on Form 10-K as Exhibit 10.13 and the full text of the RCR Term Sheet amendments, a copy of each of which are filed as an exhibit to this Annual Report on Form 10-K as Exhibit 10.13a, 10.13b, 10.13c and 10.13d. Readers are encouraged to read those Exhibits in full for a more comprehensive understanding of the transaction contemplated by the RCR Term Sheet. 28 Table of Contents Acquisition of Technology On September 30, 2021, we acquired certain technology assets of Sabres, a leading Israeli-based cybersecurity provider. As part of the asset purchase agreement, we acquired Multi-Dimensional Protection ("MDP"), WAF and Bot Mitigation SaaS platforms, and their associated intellectual property. Our Cycurion Security Platform's (formerly Sabres') line of products allows our customers to improve their cyber posture with its MDP SaaS platform. This platform efficiently bundles and easily implements the external protection of a WAF and the internal protection of Bot Mitigation. Bot Mitigation is the reduction of risk to applications, APIs, and backend services from malicious bot traffic that fuels common automated attacks, such as DoS campaigns and vulnerability probing. The costs of single-layer security can be measured in terms of money, time, and risk, as well as the damage wrought by a data breach, which millions of businesses experience each year. Through this interaction of the WAF and Bot Mitigation, the MDP is able to reinforce these layers of security and generate new security layers in real time in response to emerging threats. This process is directed by our Cycurion Security Platform's (formerly Sabres') proprietary, cloud-based AI algorithm. We do not have AI processing in the production version of the software. That version is in the testing and evaluation phase. Crucially, the AI underpinning the MDP platform is constantly evolving to counter new threats. Through a crowdsourcing process, the cloud-based MDP learns from every threat to any protected application and uses that newly acquired knowledge to protect all MDP clients better. Our Cycurion Security Platform's (formerly Sabres') line of products provides solutions for substantially all web application security needs. These products provide solutions, whether a client is in need of a web application firewall to comply with regulations and ensure it has a first line of defense against the hazards that the internet can present or is in need of enterprise-level products that empower SOC teams and security management. Our Cycurion Security Platform's constantly survey a client's data to detect security issues in need of attention, send automatic updates, and provide the client with a complete database of rules and threats. We have integrated the technology assets that we acquired from Sabres (which now constitutes our Cycurion Security Platform) into our Managed Security Services Practice. We believe that the platform will enhance our service offerings and assist with the expansion of our commercial business. Our dedicated support team will manage the Sabres platform, provide real time reporting, response to security incidents, and will manage all data privacy needs from a single security information and event management SaaS platform dashboard. 29 Table of Contents Financial Overview A number of factors have contributed to our fiscal year 2025 results of operations, the most significant of which are described below. More details on these changes are presented below within our "Results of Operations" section. • The execution of the SLG Innovation Inc. transaction. • The completion of the business combination with Western Acquisition Ventures Corp. Results of Operations Table MD&A 1: Consolidated Results of Operations For the Year Ended December 31, 2025 2024 Net revenues $ 15,133,647 $ 17,771,485 Cost of revenues 13,521,329 14,136,742 Gross profit 1,612,318 3,634,743 Gross profit percentage 10.7 % 20.5 % Operating expenses: Selling, general and administrative expenses 9,258,199 1,208,630 Stock compensation expenses 3,898,867 10,000 Business combination expenses 11,870,114 — Total operating expenses 25,027,180 1,218,630 Operating (loss)/income (23,414,862) 2,416,113 Interest income 27,538 20,211 Interest expense (1,763,831) (1,209,502) Gain on debt settlement, net 1,221,635 — Other (expense)/income (129,564) 2,779 Other expense, net (644,222) (1,186,512) (Loss)/income before income taxes (24,059,084) 1,229,601 Provision for income tax — — Net (loss)/income (24,059,084) 1,229,601 Less: Net loss attributable to non-controlling interest 393,376 — Net (loss)/income attributable to Cycurion $ (23,665,708) $ 1,229,601 Revenue Revenues for the year ended December 31, 2025 decreased $2.6 or 14.8% compared to the year ended December 31, 2024. We attribute this decrease in the revenues in 2025 compared to 2024 to delayed start dates of new federal, state and local contracts and the company’s focus on more profitable business. Cost of revenues The cost of revenue for the year ended December 31, 2025, was approximately $13.5 million, compared to $14.1 million for the year ended December 31, 2024. The cost of revenue is driven by the costs incurred while delivering services to our customers, therefore the decrease in costs is due to the decrease in revenues. Selling, general and administrative expenses Our selling, general and administrative ("SG&A") expenses increased in 2025 compared to 2024 due to additional expenses being recognized in 2025 due to increased costs associated with being a publicly traded company and the addition key individuals for the company's growth strategy. 30 Table of Contents Stock compensation expenses Stock compensation expenses increased in 2025 compared to 2024 as a result of new compensation agreements with executives. Business combination expenses Business combination expenses in 2025 are a result of the business combination with Western. Interest income Interest income was $27,538 and $20,211 for the year ended December 31, 2025 and 2024, respectively. The change in interest income is a result of the balance of the underlying interesting earning assets. Interest expense Interest expense for the year ended December 31, 2025 and 2024, was $1.8 million and $1.2 million, respectively. The change in interest expense is a result of the underlying debt instruments. For further information refer to debt footnotes. Gain on debt settlement, net The $1.2 million gain on debt settlement, net for the year ended December 31, 2025 is the result of the conversion of debt to various equity instruments at a lower fair market value than the exchanged debt on the books. Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, cash from operations, borrowings under our debt financing arrangements and equity raises through our equity line. As of December 31, 2025, we had $5.3 million in cash and cash equivalents. We believe that our current cash position, access to the capital markets and cash flow generated from operations should be sufficient for our operating requirements through the next several fiscal years. Cash Flow Table MD&A 2: Net Changes in Cash and Cash Equivalents For the Year Ended December 31, 2025 2024 Net cash used in operating activities $ (12,086,357) $ (1,371,281) Net cash provided by/(used in) investing activities 1,414,523 (885,066) Net cash provided by financing activities 15,886,279 1,689,268 Net increase/(decrease) in cash and cash equivalents $ 5,214,445 $ (567,079) Net Cash Used In Operating Activities For the year ended December 31, 2025, net cash used by operating activities was $12.1 million, compared to $1.4 million for the year ended December 31, 2024. The main drivers of this increase are the additional merger expenses incurred in 2025 and the additional corporate level costs to build out a management team and brand for organic growth and acquisitions. Net Cash Provided By/(Used In) Investing Activities For the year ended December 31, 2025, net cash provided in investing activities was approximately $1.4 million, compared to a $0.9 million use of cash for the year ended December 31, 2024. The cash inflow in 2025 was a result of the Trust Account (as defined below) for redemption and cash released from the Trust Account to the Company. 31 Table of Contents Net Cash Provided by Financing Activities For the year ended December 31, 2025, net cash provided by financing activities was $15.9 million. The net cash provided includes $7.0 million in proceeds from the equity line of credit, $4.8 million of proceeds from the private placement capital raise in December 2025, $3.7 million proceeds provided from the exercise of warrants, $2.4 million in proceeds from convertible notes payable, $0.5 million in proceeds provided from notes payable, partially offset by a cash outflow of $1.0 million cash used in redemption of common stock. For the year ended December 31, 2024, net cash provided by financing activities was $1.7 million. The Company received $1.0 million from a private placement. Going Concern We have incurred operating losses since inception through the period ended December 31, 2025, having had negative cash flow from operations. As of December 31, 2025, we had an accumulated deficit of approximately $26.9 million, as compared to our accumulated deficit of approximately $3.2 million as of December 31, 2024. The increase of our accumulated deficit was a result of our net losses for 2025. Furthermore, we expect continued, significant operating losses for the next few years. We also utilized cash in operations of approximately $12.1 million for the year ended December 31, 2025. As of December 31, 2025, we had unrestricted cash of approximately $5.3 million, an increase of $5.2 million from approximately $38,742 as of December 31, 2024. As of December 31, 2025, our total assets increased to approximately $33.5 million from approximately $25.6 million as of December 31, 2024, primarily due to increases in goodwill. Based on our current capital resources as of December 31, 2025, including our unrestricted cash and accounts receivable, net of $7.9 million, we expect to be able to continue our operations for a minimum of 12 months as of the date of this annual report. Nevertheless, our continuation as a going concern is dependent on our ability to obtain additional financing until we can generate sufficient, consistent cash flow from operations to meet the expected growth in our obligations. We intend to continue to seek additional debt or equity financing to continue our operations. Our consolidated financial statements have been prepared on a going concern basis, which implies we may not continue to meet our obligations and continue our operations for the next fiscal year. The continuation of our Company as a going concern is dependent upon our ability to obtain necessary debt or equity financing to continue operations until we begin generating positive cash flow. There is no assurance that we will ever be consistently profitable or, notwithstanding our recent financing activities, that debt or equity financing will be available to us in the amounts, on terms, and at times deemed acceptable to us, if at all. The issuance of additional equity securities by us would result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, would increase our liabilities and future cash commitments. If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to continue our business, as planned, and as a result may be required to scale back or cease operations for our business, the result of which would be that our stockholders would lose some or all of their investment. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue as a going concern. Off-balance sheet arrangements We did not have any off-balance sheet arrangements during the periods presented, and we do not currently have any off-balance sheet arrangements, as defined in the SEC rules and regulations. Critical Accounting Policies and Estimates Goodwill and Other Long-Lived Assets We evaluate the impairment of goodwill and other long-lived assets in accordance with Accounting Standards Codification ("ASC") 350, "Intangibles Goodwill and Other." Management annually reviews goodwill and other long-lived assets for impairment or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If we determine that the carrying value of the goodwill and other long-lived assets may not be recoverable, we will record an impairment charge for the amount by which the carrying value of the goodwill and other long-lived assets exceeds its fair value. 32 Table of Contents Goodwill is not amortized, but rather tested for potential impairment as of December 31 each year. The goodwill impairment test is performed at the reporting unit level, which is only one for our company. Accounting requirements provide that a reporting entity may perform an optional qualitative assessment on an annual basis to determine whether events occurred or circumstances changed that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If an initial qualitative assessment identifies that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or the optional qualitative assessment is not performed, a quantitative analysis is performed. In testing goodwill for impairment, we first assess the qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, after the assessment, we determine that an impairment indicator exists, we perform the quantitative goodwill impairment test. The Company performs the quantitative goodwill impairment test by calculating the fair value of the reporting unit and comparing it to its respective carrying value including goodwill. If the fair value is less than the carrying value, the amount of impairment expense is equal to the difference between the reporting unit's fair value and the reporting unit's carrying value. Determining the fair value of a reporting unit requires management's judgment and involves the use of significant estimates and assumptions, including forecasted revenue, operating margins, capital expenditures, and selection and use of an appropriate discount rate commensurate with the risk inherent in each of our reporting units' current business models. We utilize the weighted average cost of capital as derived by certain assumptions specific to our facts and circumstances as the discount rate. Our estimate of cash flows and discount rate are subject to change due to the economic environment. A relatively small change in the underlying assumptions, including if the financial performance of the reporting unit does not meet expectations in future years, may cause a change in the results of the impairment assessment in future periods and, as such, could result in goodwill impairment. We use a discounted cash flow approach to determine the fair value of a reporting unit. The determination of discounted cash flows of the reporting units and assets and liabilities within the reporting units requires significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the discount rate being the weighted average cost of capital ("WACC") for the firm, terminal growth rates, earnings before depreciation and amortization, and capital expenditures forecasts. Given the fact we are operating in a net loss position, for the year ended December 31, 2025, management performed a quantitative assessment of our one reporting unit and determined that the fair value of goodwill exceeds the carrying value. Due to the nature of our business and other factors described in Item 1A, "Risk Factors," of this Annual Report on Form 10-K, the profitability of our individual reporting units may periodically be affected by downturns in customer demand, operational challenges, and other factors. If material adverse conditions occur that impact one or all of our reporting units, our determination of future fair value might not support the carrying amount of our reporting units, and the related goodwill may be impaired. We will continue to monitor any changes to our assumptions and will evaluate goodwill as deemed warranted during future periods.