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Item 7. Management’s Discussion and Analysis

2025-12-18 compared with 2024-12-13 · 139 added, 156 removed, 82 unchanged (78% of the section changed)

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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.

We continue to expand our catalogue

of services and solutions to address the cybersecurity needs of our customers, including virtual Chief Information Security Officer, cyber program strategy, zero trust, third-party risk management, compliance readiness, cloud security services,

privacy, threat intelligence, managed end-point security solutions, and cybersecurity awareness.

are marketing and selling Enclave, a proprietary software product that simplifies important cybersecurity tasks to achieve “microsegmentation.”

By combining zero trust network access with certificate management and machine identity, Enclave seamlessly creates a unified security

architecture that eliminates traditional network vulnerabilities.

This integration enables IT teams to enforce precise access policies

based on verified machine identities.

Certificate-based identities allow a simplified management for any certificate-based communication,

while the zero trust framework continuously validates every connection attempt.

This powerful combination delivers robust security without

the typical management overhead, allowing organizations to implement sophisticated microsegmentation strategies with remarkable simplicity

and minimal resource requirements.

growth strategy focuses on these three initiatives:

Securing new vCISO clients

Adding new Cybersecurity Software and Services offerings

Increasing adoption of Cybersecurity Software, including Enclave and Services offerings at vCISO clients

adoption of Enclave:

By promoting Enclave and our other cybersecurity solutions to our existing vCISO clients, we aim to deepen

our relationships and provide comprehensive, integrated security solutions.

This supports the increased demand for zero trust strategies

and remote worker technologies.

new vCISO Services Clients:

As organizations plan to increase security investments due to breaches and the rising complexity

of cyber threats, we aim to expand our client base by offering flexible, expert vCISO services that address budget constraints and

the need for rapid security posture establishment.

new Cybersecurity Software and Services offerings:

We plan to enhance our portfolio by incorporating transformational technologies

such as AI-based security operations, data security posture management, polymorphic encryption, cyber-physical system

security, and application security posture management.

This aligns with industry trends and the anticipated incremental spend

on application and data security due to generative AI.

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.

of our clients use our vCISO services.

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 $450.

Each of our vCISOs is generally embedded into the C-suite executive teams of two

(2) to four (4) of our clients.

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”).

relationships with third-party service providers and VARs provide SideChannel with additional internal capabilities to mitigate cybersecurity

We earn licensing revenue from software contracts and commissions from third-party service provider partnerships which are included

in this revenue category.

September 2022 we announced a proprietary product 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.

This category captures the revenue from the Chief Information Security Officer services that we provide to our clients

on a “virtual” or outsourced basis.

Embedded into the C-suite executive teams of our clients, our vCISOs deliver services

including 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.

Engagements typically

include a fixed monthly subscription fee and exceed 12 months because of renewal options of 1, 3, 6, or 12 months.

Cybersecurity

Software and Services:

This category encompasses an array of cybersecurity software and services that our clients deem necessary

to protect their digital assets, including Enclave.

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 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.

following revenue metrics are for the twelve months ended September 30, 2025, versus the same period in 2024.

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accompanied by pie charts that reflect the revenue by category in fiscal years 2025 and 2024:

revenue grew by $828 thousand or 12.6%.

Services category revenue grew by $223 thousand or 5.1%.

revenue declined by $49 thousand or 0.7%.

Services category revenue decreased by $715 thousand or 14.9%.

Cybersecurity

Software and Services category revenue grew by $666 thousand or 25.6%.

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.

year-over-year decline in vCISO Services revenue reflects new vCISO client acquisition not exceeding vCISO client churn and the transitioning

of vCISO Services clients into lower revenue generating Cybersecurity Software & Services.

Cybersecurity Software & Services

revenue benefited from these transitions along with the expansion of the software and services offered.

also monitor new and retained revenue.

The revenue earned from clients during our first twelve months of working with them is classified

while the revenue earned with clients after our first twelve months of working with them is classified as retained.

as new, while the revenue earned with clients after our first twelve months of working with them is classified as retained.

The following

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The following table shows the revenue retention for fiscal years 2025 and 2024 by revenue category.

Twelve Months Ended

Cybersecurity

Software & Services

Trailing Twelve Months Ended

September 30, 2025

September 30, 2024

vCISO Services

Cybersecurity Software & Services

of Operations

Year Ended September 30, 2025, Compared to Fiscal Year Ended September 30, 2024

Twelve Months Ended

September 30,

Cost of revenues

Operating expenses

General and administrative

Selling and marketing

Research and development

Intangible asset impairment

Business Combination related costs

Total operating expenses

and administrative

and marketing

and development

operating expenses

Operating loss

Other income, net

Net loss before income tax expense

Income tax expense (benefit)

Our revenue was $7.4 million for the year ended September 30, 2024, compared to $6.6 million in the prior year, an increase of $0.8

million or 12.6%.

We believe this increase reflects the factors previously discussed in the Overview section above.

Gross margins decreased to 47.7% in fiscal year 2024 from 50.7% in fiscal year 2023, which we attribute to lower

utilization of our service delivery team employees and an increase in revenue from third-party software and services which have a

lower gross margin.

Total operating expenses during fiscal year 2024 were $4.5 million compared to fiscal year 2023 total operating

expenses of $5.6 million excluding $214 thousand of prior year acquisition costs and intangible asset impairment of $4.9 million.

May 2023, we began eliminating operating expenses which, combined with our increase in gross profit, have enabled us to lower our

breakeven revenue point and attain positive cash flow from operations during fiscal year 2024.

The operating expense reductions were

achieved by staff reductions in all areas of the business and the elimination of non-essential third-party supplier

relationships.

Net loss before income tax

Net loss after income tax

Our revenue was $7.4 million for the year ended September 30, 2025, compared to $7.4 million in the prior year, a decrease of $49

thousand or 0.7%.

We believe this decrease reflects the factors previously discussed in the Overview section above.

Gross margin was 47.7% in each of the fiscal years 2025 and 2024.

We have experienced an increase in higher gross margin Enclave revenue which was offset by increased revenue

from lower gross margin third-party services and software.

Total operating expenses during fiscal year 2025 were $4.4 million compared to fiscal year 2024 total operating expenses

of $4.5 million, a decrease of $50 thousand or 1.1%.

and Administrative Expenses.

Our general and administrative expenses were $2.9 million for the year ended September 30, 2025, compared

to $3.6 million for the prior year, a decrease of $0.4 million or 12.0%.

to $3.2 million for the prior year, a decrease of $261 thousand or 8.3%.

The decrease in general and administrative expenses primarily

resulted from decreased staff and related costs and lower professional fees and insurance related to the listed nature of the Company.

These favorable variances were partially offset by an increase in stock-based compensation and costs incurred for the settlement of a litigation matter.

resulted from lower professional services, stock-based compensation, and insurance costs.

These favorable variances were partially offset

by an increase in personnel related costs.

and Marketing Expenses.

Our selling and marketing expenses were $966 thousand for the year ended September 30, 2025, compared to

thousand for the prior year, a decrease of $566 thousand or 42.3% resulting from our decrease in sales and marketing staff and partially

offset by increased spend on third-party marketing services.

$771 thousand for the prior year, an increase of $195 thousand or 25.3% resulting from an increase in personnel costs and advertising

and Development Expenses.

Our research and development expenses were $546 thousand for the year ended September 30, 2024, compared to $669

thousand for the prior year, a decrease of $123 thousand or 18.4%.

The decrease is the result of lower personnel related costs and reduction

of software development expenses.

Asset Impairment.

The intangible asset impairment was zero ($0) for the year ended September 30, 2024, and $4.9 million for the prior

We recorded a finite-lived intangible asset of $4.9 million as a result of acquiring Enclave in the Business Combination.

Our impairment

testing indicated the full value of this finite-lived intangible asset should be impaired as of September 30, 2023.

Incurring impairment

neither indicated a decrease in our emphasis on Enclave as a key initiative nor did it suggest a lack of market interest in the product.

Combination related costs.

Business Combination related costs were zero ($0) in fiscal year 2024 and $214 thousand for the year ended September

30, 2023, which are attributed to an increase in the Second Tranche shares due to the Closing Working Capital Adjustment from the

Business Combination.

Other Income was $41 thousand and $29 thousand for fiscal years 2024 and 2023 respectively, which reflect interest income

Our research and development expenses were $562 thousand for the year ended September 30, 2025, compared

to $546 thousand for the prior year, an increase of $16 thousand or 2.9%.

Increases in personnel and consulting costs were partially

offset by a decrease in stock-based compensation.

Other Income was $40 thousand and $41 thousand for fiscal years 2025 and 2024 respectively, which reflects interest income

from the cash on deposit at our bank.

Tax Expense (Benefit).

We recorded income tax expense of $14 thousand in the fiscal year ended September 30, 2025, compared to $5

an income tax benefit of $379 thousand for the year ended September 30, 2023.

The fiscal year 2024 expense is attributed to accruals for state income taxes in the various jurisdictions where

we have customers, employees, or property while the fiscal year 2023 benefit occurred because of a favorable

difference between actual and projected tax accounting at the time of the Business Combination.

thousand for the year ended September 30, 2024.

Our income tax expense is attributed to accruals for state income taxes in the various

jurisdictions where we have customers, employees, or property.

and Capital Resources

fiscal year 2024, we incurred a net loss of $904 thousand, and we had $307 thousand of cash provided by operations.

Our primary source

of liquidity and capital resources has been the $1.1 million of cash at the beginning of fiscal year 2024 supplemented with the cash

provided by operations during the fiscal year.

fiscal year 2025, we incurred a net loss of $878 thousand, and we had $130 thousand of cash used by operations.

Our primary source of

liquidity and capital resources was the $1.3 million of cash, cash equivalents, and short-term investments at the beginning of fiscal

We had an accumulated deficit of $20.7 million as of September 30, 2025.

Three (3) non-operational

expenses related to the Business Combination totaling $16.8 million are included in our accumulated deficit.

The non-operational expenses

are $6.2 million for the contingent consideration and business combination related costs, $5.7 million for the impairment of goodwill

recorded as a result of the Business Combination, and $4.9 million for the impairment of intangible assets.

following table summarizes, for the periods indicated, selected items in our Statements of Cash Flows:

cash provided by (used in):

Cash Provided / (Used)

Net cash provided by operations for the year ended September 30, 2024, was $307 thousand as compared to $1.9

million used in operations for the year ended September 30, 2023.

During fiscal year 2024, we recorded net, non-cash charges of $755

thousand for depreciation, amortization and stock-based compensation expense.

Our net accounts receivable decreased by $102 thousand

due to earlier payment of invoices by our clients and we experienced a $235 thousand increase in deferred

revenue because of an increase in clients paying in advance of receiving software and services.

We purchased short-term investments of $250 thousand in the form of time deposits and used $15 thousand on the

purchase of fixed assets related to the upgrade of our website during the twelve months ended September 30, 2024.

We paid a $50 thousand note to Akash Desai in December 2023.

The note 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

(In thousands)

Net cash provided by (used in):

Operating activities

Investing activities

Financing activities

cash provided by (used)

Net cash used by operations for the year ended September 30, 2025, was $130 thousand compared to $307 thousand provided

by operations for the year ended September 30, 2024.

During fiscal year 2025, we recorded net, non-cash charges of $498 thousand for

depreciation, amortization and stock-based compensation expense.

Our net accounts receivable decreased by $179 thousand due to earlier

payment of invoices by our clients as well as a decrease in revenue.

We also experienced a $286 thousand increase in deferred revenue

because of higher payments from clients in advance of receiving software and services.

These two sources of cash were partially offset by

a $214 thousand decrease in accounts payable and accrued liabilities.

We purchased and sold short-term investments in the form of time deposits during fiscal year 2025, yielding a net

of $150 thousand provided by investing activities.

We had zero ($0) cash provided by or used in financing activities during fiscal year 2025.

of September 30, 2025, we had $1.2 million in cash, cash equivalents, and short-term investments;

and our working capital was $0.8 million.

We believe that our existing cash balances

are sufficient to fund our operations through at least December 31, 2025.

expect to continue to generate cash flow from operations during fiscal year 2025;

however, if this does not materialize, then our operations

will be funded with our existing cash balance.

We believe that our existing cash balances are sufficient to fund our operations through at least December 31, 2026.

expect to fund our operations

with our existing cash balance and any cash flow generated by operations.

We intend to manage our business such that our expenses will allow us to sustain positive

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On an on-going basis, we evaluate our estimates, including those related to

long-lived assets, goodwill, identifiable intangibles and deferred income tax assets and liabilities including their related

valuation allowances.

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.

long-lived assets, goodwill, identifiable intangibles and deferred income tax assets and liabilities including their related valuation

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.

Intangible and Long-Lived Assets

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fair value of a reporting unit is less than its carrying amount.

If, as a result of our qualitative assessment, we determine this is

the case, we are required to perform a goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill

If, because of our qualitative assessment, we determine this is the

case, we are required to perform a goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill

impairment loss to be recognized.

The test is discussed below.

If, as a result of our qualitative assessment, we determine that it is

more-likely-than-not that the fair value of the reporting unit is greater than its carrying amounts, the goodwill impairment test is

not required.

If, because of our qualitative assessment, we determine that it is more-likely-than-not

that the fair value of the reporting unit is greater than its carrying amounts, the goodwill impairment test is not required.

quantitative goodwill impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares

the fair value of a reporting unit with its carrying amount, including goodwill.

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 shall be recognized in an amount equal to that excess, limited to the total amount of goodwill

allocated to that reporting unit.

The goodwill impairment assessment is based upon the income approach, which estimates the fair

value of our reporting units based upon a discounted cash flow approach.

This fair value is then reconciled to our market

capitalization at year end with an appropriate control premium.

The determination of the fair value of our reporting units requires

management to make significant estimates and assumptions including the selection of control premiums, discount rates, terminal

growth rates, forecasts of revenue and expense growth rates, income tax rates, changes in working capital, depreciation,

amortization and capital expenditures.

Changes in assumptions concerning future financial results or other underlying assumptions

could have a significant impact on either the fair value of the reporting unit or the amount of the goodwill impairment charge.

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 shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting

The goodwill impairment assessment is based upon the income approach, which estimates the fair value of our reporting units based

upon a discounted cash flow approach.

This fair value is then reconciled to our market capitalization at year end with an appropriate

control premium.

The determination of the fair value of our reporting units requires management to make significant estimates and assumptions

including the selection of control premiums, discount rates, terminal growth rates, forecasts of revenue and expense growth rates, income

tax rates, changes in working capital, depreciation, amortization and capital expenditures.

Changes in assumptions concerning future

financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting unit or the

amount of the goodwill impairment charge.

Goodwill was $1.4 million at both September 30, 2025 and 2024.

The fair value of the goodwill at September 30, 2024, as determined

by our impairment analysis, was in excess of the carrying value;

thus, we had no impairment of goodwill in fiscal year

The fair value of the goodwill

at September 30, 2025, as determined by our impairment analysis, was more than the carrying value;

thus, we had no impairment of goodwill

in fiscal year 2025.

did not record indefinite-lived intangible assets in the fiscal years ended September 30, 2025 and 2024.

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assets were zero ($0) and zero ($0), respectively.

The intangible impairment was $4.9 million for the year ended September 30, 2023.

We recorded a finite-lived intangible asset of $4.9 million as a result of acquiring Enclave through the Business Combination.

The difficulty

of projecting the amount and timing of future revenues caused us to conclude a full impairment of the asset was appropriate.

impairment in fiscal year 2023 neither indicated a decrease in our emphasis on Enclave as a key initiative nor did it suggest a lack

of market interest in the product.

Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis