What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-02-17 compared with 2025-08-13 · 162 added, 166 removed, 52 unchanged (86% of the section changed)

2 unchanged sentences

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 2024

Form 10-K, and elsewhere in this Form 10-Q.

We undertake no obligation to update or revise publicly any forward-looking statements, whether

because of new information, future events, or otherwise.

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.

are based, are “forward-looking statements”.

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

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, 2025 (the “2025 Form 10-K”), and elsewhere in this Quarterly Report on Form 10-Q

(this “Quarterly Report”).

We undertake no obligation to update or revise publicly any forward-looking statements,

whether because of new information, future events, or otherwise.

information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this

Quarterly 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 2024 Form 10-K.

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 fully assert 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.

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 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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contained in our 2025 Form

logo and some of our trademarks and tradenames are used in this Quarterly Report.

Solely for convenience, trademarks, tradenames,

and service marks referred to in this Quarterly 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 fully assert 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.

market data and certain other statistical information used throughout this Quarterly 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 the disclosures contained in this

Quarterly 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 Quarterly 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 “ Part II Item

Risk Factors ” of this Quarterly 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.

the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “SideChannel,”

1 unchanged sentence

and its consolidated subsidiaries.

addition, unless the context otherwise requires and for the purposes of this report only:

Act ” refers to the Securities Exchange Act of 1934, as amended;

addition, unless the context otherwise requires and for the purposes of this Quarterly Report only:

“ Exchange Act ”

refers to the Securities Exchange Act of 1934, as amended;

or the “ Commission ” refers to the United States Securities and Exchange Commission;

Act ” refers to the Securities Act of 1933, as amended.

“ Securities Act ”

refers to the Securities Act of 1933, as amended.

references to years relate to the fiscal year ended September 30 of the particular year.

4 unchanged sentences

of services and solutions to address the cybersecurity needs of our customers, including virtual Chief Information Security Officer (“vCISO”),

or “vCISOs”), 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.

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.”

9 unchanged sentences

growth strategy focuses on these three initiatives:

adoption of Enclave,

new vCISO Services clients, and

new Cybersecurity Software and Services offerings.

Increasing adoption of

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.

Securing new vCISO Services

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.

Adding 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 generated by outsourcing

fractional, vCISOs to our clients on an ongoing basis.

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

vCISO Services:

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.

Services engagements typically include a fixed monthly subscription fee for durations longer than twelve (12) months.

Hourly rates for

vCISO Services 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 Services offering and include a full range of other cybersecurity products and services delivered

on an ongoing or project basis through our team of cybersecurity professionals 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.

This revenue category includes both licensing revenue from software

contracts, commissions from third-party service provider partnerships and sales of our proprietary software, Enclave.

following revenue metrics are for the nine months ended June 30, 2025, compared to the nine months ended June 30, 2024:

revenue grew by $69 thousand or 1.3%.

Services revenue decreased by $363 thousand or 10.1%.

Cybersecurity

Software and Services category revenue increased by $432 thousand or 22.8%.

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 and 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 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.

following revenue metrics are for the three months ended December 31, 2025, compared to the three months ended December 31, 2024:

Total revenue decreased

by $134 thousand or 7.0%.

vCISO Services revenue decreased

by $348 thousand or 29.2%.

Cybersecurity Software and

Services category revenue grew by $214 thousand or 29.9%

year-over-year decline in vCISO Services revenue reflects the loss of clients with a higher than average annual contract value and the

transitioning of vCISO Services clients into lower revenue generating Cybersecurity Software and Services.

Cybersecurity Software and

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

3 unchanged sentences

The following

chart provides details on our new and retained revenue for the nine months ended June 30, 2025, and 2024:

chart provides details on our new and retained revenue for the three months ended December 31, 2025 and 2024:

we consider revenue retention a key performance indicator.

1 unchanged sentence

year total revenue.

The following table shows the revenue retention for the trailing twelve months ended June 30, 2025, and September

The following table shows the revenue retention for the trailing twelve months ended December 31, 2025, and September

30, 2025, by revenue category:

Trailing Twelve Months Ended

December 31, 2025

September 30, 2025

vCISO Services

Cybersecurity Software & Services

Cybersecurity Software and Services

of Operations

Months Ended June 30, 2025, Compared to Three Months Ended June 30, 2024

and administrative

and marketing

and development

operating expenses

loss before income tax expense

Our revenue was $1,776 thousand for the quarter ended June 30, 2025, compared to $1,846 thousand for the quarter ended June 30, 2024,

a decrease of $70 thousand or 3.8%.

This decrease is primarily due to new vCISO client acquisition not exceeding vCISO client churn.

Our gross profit was $835 thousand and gross margin was 47.0% for the quarter ended June 30, 2025, compared to $902 thousand

or 48.9% for the quarter ended June 30, 2024.

The decrease in our gross margin was the result of lower utilization of employees and the

growth of low-margin third-party software and services.

These negative factors were partially offset by an increase in high gross

margin Enclave revenue.

Our operating expenses increased $47 thousand or 4.5% for the three months ended June 30, 2025, compared to the three

months ended June 30, 2024.

The changes for each operating expense area are discussed below.

and Administrative Expenses.

Our general and administrative expense was $715 thousand for the three months ended June 30, 2025, compared

to $778 thousand for the three months ended June 30, 2024, a decrease of $63 thousand or 8.1%.

The decrease was achieved by reducing

costs related to being a publicly traded company combined with a decrease in stock-based compensation expenses which were partially offset

by an increase in personnel costs due to staff increases.

and Marketing Expenses.

Our selling and marketing expense was $242 thousand for the three months ended June 30, 2025, compared to $137

thousand for the three months ended June 30, 2024, an increase of $105 thousand or 76.6% due to an increase in employees and the use

of third-party service providers to promote Enclave.

and Development Expenses.

Our research and development expense was $146 thousand for the three months ended June 30, 2025,

compared to $141 thousand for the three months ended June 30, 2024, an increase of $5 thousand or 3.5%.

Increased salary expense was

partially offset by lower stock-based compensation.

Months Ended June 30, 2025, Compared to Nine Months Ended June 30, 2024

and administrative

and marketing

and development

Months Ended December 31, 2025, Compared to Three Months Ended December 31, 2024

Three Months Ended

(in thousands)

Cost of revenues

Operating expenses

loss before income tax expense

Our revenue was $5.6 million for the nine months ended June 30, 2025, compared to $5.5 million for the nine months ended June

30, 2024, an increase of $69 thousand or 1.3%.

This revenue increase is driven by growth in Cybersecurity Services and Software by our

new and existing clients, offset by a decrease in vCISO Services revenue.

Our gross profit was $2.7 million and gross margin was 47.5% for the nine months ended June 30, 2025, compared to $2.6 million or 47.5% for the nine months ended June 30, 2024.

Our operating expenses decreased $103 thousand or 3.1% for the nine months ended June 30, 2025, compared to the nine

months ended June 30, 2024.

General and administrative

Selling and marketing

Research and development

Total operating expenses

Operating loss

Other income, net

Net loss before income tax expense

Income tax expense

revenue was $1.8 million for the quarter ended December 31, 2025, compared to $1.9 million for the quarter ended December 31, 2024,

representing a decrease of $134 thousand or 7.0%.

This decrease was primarily due to the loss of clients with higher than average

contract value as discussed in the Overview.

Our gross profit was $909 thousand and gross margin was 51.2% for the quarter ended December 31, 2025, compared to $874

thousand or 45.8% for the quarter ended December 31, 2024.

The increase in our gross margin was the result of Enclave, which has a

high gross margin, contributing a larger percentage of our revenue in the three months ended December 31, 2025, than for the three

months ended December 31, 2024.

Additional factors contributing to our gross margin increase in the quarter ended December 31, 2025

were improved utilization of service delivery employees in the current fiscal year compared to the prior fiscal year and lower bonus

expense accrued in fiscal year 2026 compared to fiscal year 2025.

Operating expenses increased $229 thousand or 21.2% for the three months ended December 31, 2025, compared to the three

months ended December 31, 2024.

The changes for each operating expense area are discussed below.

and Administrative Expenses.

Our general and administrative expense was $2.0 million for the nine months ended June 30, 2025,

compared to $2.3 million for the nine months ended June 30, 2024, a decrease of $306 thousand or 13.1%.

The decrease was primarily

achieved by reducing costs related to being a publicly traded company combined with a decrease in consulting costs, and stock-based

compensation expense, which were partially offset by an increase in accounting fees and personnel

Our general and administrative expenses were $677 thousand for the three months ended December 31,

2025, compared to $660 thousand for the three months ended December 31, 2024, representing an increase of $17 thousand or 2.6%.

increase was the result of higher personnel expenses partially offset by lower consulting, legal, and amortization costs.

and Marketing Expenses.

Our selling and marketing expense was $736 thousand for the nine months ended June 30, 2025, compared to $562

thousand for the nine months ended June 30, 2024, an increase of $174 thousand or 31.0%.

An increase in personnel costs and the use of

third-party services to promote Enclave were partially offset by a decrease in stock-based compensation expense.

Our sales and marketing expenses were $457 thousand for the three months ended December 31, 2025,

compared to $267 thousand for the three months ended December 31, 2024, representing an increase of $190 thousand or 71.2% due to an

increase in employees and compensation, consulting costs, and advertising and events.

and Development Expenses.

Our research and development expense was $419 thousand for the nine months ended June 30, 2025, compared

to $390 thousand for the nine months ended June 30, 2024, an increase of $29 thousand or 7.4%.

The increase is the result of higher personnel

costs partially offset by a decrease in stock-based compensation expense.

Our research and development expenses were $175 thousand for the three months ended December 31, 2025,

compared to $153 thousand for the three months ended December 31, 2024, representing an increase of $22 thousand or 14.4% due to an

increase in employees and compensation.

and Capital Resources

the nine months ended June 30, 2025, we incurred a net loss of $510 thousand, and we had $104 thousand of cash provided by operating

and investing activities.

Our primary source of liquidity and capital resources has been the $1.0 million of cash and cash

equivalents at the beginning of the fiscal year supplemented with the cash provided by operating and investing activities during the fiscal year.

had an accumulated deficit of $20.4 million as of June 30, 2025, comprised primarily of three (3) non-operational expenses totaling

$16.8 million:

the three months ended December 31, 2025, we incurred a net loss of $396 thousand, and we used $570 thousand of cash in operating activities.

Our primary source of liquidity and capital resources has been the $1.1 million of cash and cash equivalents at the beginning of fiscal

We had an accumulated deficit of $21.1 million as of December 31, 2025, which includes three non-operational expenses

totaling $16.8 million:

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

of goodwill, and $4.9 million for the impairment of intangible assets.

had working capital of $1.1 million as of June 30, 2025, compared to working capital of $1.3 million as of September 30, 2024.

in working capital is primarily due to operating losses incurred during the fiscal year.

following table summarizes selected items in our Condensed Consolidated Statements of Cash Flows for the nine months ended June 30:

cash provided by (used in):

receive cash each month from client payments.

We use this cash and, if necessary, a portion of our cash reserves to pay for our

monthly expenses.

Material cash requirements include personnel costs, third-party software and services, and the expenses associated

with being a public reporting company.

used by operating activities was $46 thousand during the nine months ended June 30, 2025, and we recorded a net loss of $510

had net working capital of $478 thousand as of December 31, 2025, compared to net working capital of $770 thousand as of September 30,

The decline in net working capital was primarily due to a decrease in cash partially offset by a decrease in deferred revenue and

accrued expenses.

We had $157 thousand of accounts receivable included in our deferred revenue

balance of $677 thousand at December 31, 2025.

We did not have any credit

facilities available to us as of December 31, 2025, or as of the filing date of this Quarterly Report.

following table summarizes selected items in our unaudited Condensed Consolidated Statements of Cash Flows for the three months

ended December 31:

(In thousands)

Net cash provided by (used in):

Operating activities

Investing activities

Financing activities

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

Material cash requirements include personnel costs and the expenses associated with being a public reporting company.

used in operating activities was $570 thousand during the three months ended December 31, 2025, and we recorded a net loss of $396

During the same period, our non-cash charges totaled $104 thousand, comprised of $100 thousand in stock-based compensation

expense net of RSUs sold by employees and $148 thousand in amortization and depreciation, offset by a $1 thousand adjustment to the

legal settlement paid in stock.

We typically invoice clients annually for third-party service contracts and software licenses during

our second fiscal quarter which resulted in an increase in deferred revenue of $367 thousand at June 30, 2025, compared to September

The deferred revenue increase was partially offset by increases in accounts receivable and prepaid expenses along with the

$199 thousand use of cash for the payment of accounts payable and accrued liabilities.

$250 thousand certificate of deposit matured on February 5, 2025, of which $100 thousand was reinvested in a certificate of deposit

maturing on August 5, 2025, resulting in $150 thousand provided by the sale of short-term investments.

were no financing activities for this reporting period.

expense and $4 thousand in depreciation.

The change in our net operating assets and liabilities was primarily due to a $133 thousand

increase in accounts receivable due to the invoice volume in the final month of the fiscal quarter, as well as a $124 thousand

decrease in deferred revenue.

In addition, there was a $70 thousand decrease in accounts payable and accrued liabilities and a $46

thousand decrease in prepaid expenses.

were no investing activities for this reporting period during the three months ended December 31, 2025.

were no financing activities during the three months ended December 31, 2025.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

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 in Item 10(f) of Regulation S-K.

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-Q

Item 2. Management’s Discussion and Analysis