What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-05-12 compared with 2026-02-17 · 157 added, 126 removed, 88 unchanged (76% of the section changed)

10 unchanged sentences

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.

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

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 2025 Form

Management’s Discussion

and Analysis of Financial Condition and Results of Operations,” contained in our 2025 Form 10-K.

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.

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,

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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;

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

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

“ Securities Act ”

refers to the Securities Act of 1933, as amended.

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.

mission is to make cybersecurity simple and accessible for mid-market and emerging 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.

mission is to make cybersecurity simple and accessible for emerging to enterprise companies, a market that we believe is currently

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 continue to expand our catalogue

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

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.

continue to expand our catalogue of services and solutions to address the cybersecurity needs of our customers, including virtual

Chief Information Security Officer (“vCISO”), cyber program strategy, zero trust, third-party risk management,

compliance readiness, cloud security services, privacy, threat intelligence, managed end-point security solutions, and cybersecurity

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

“microsegmentation.” By combining zero trust network access with asset intelligence, certificate management and machine

identity, Enclave seamlessly creates a unified security architecture that eliminates traditional network vulnerabilities.

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:

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.

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:

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.

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 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%

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”).

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 six months ended March 31, 2026, compared to the six months ended March 31, 2025:

revenue decreased by $452 thousand or 11.9%.

Services revenue decreased by $644 thousand or 28.4%.

Cybersecurity

Software and Services category revenue grew by $192 thousand or 12.5%.

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

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The following

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

chart provides details on our new and retained revenue for the six months ended March 31, 2026 and 2025:

we consider revenue retention a key performance indicator.

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year total revenue.

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

The following table shows the revenue retention for the trailing twelve months ended March 31, 2026, and September

30, 2025, by revenue category:

Trailing Twelve Months Ended

December 31, 2025

September 30,

vCISO Services

Cybersecurity Software and Services

Cybersecurity Software & Services

of Operations

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

Months Ended March 31, 2026, Compared to Three Months Ended March 31, 2025

Three Months Ended

(in thousands)

Cost of revenues

8 unchanged sentences

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,

Net loss per common share – basic and diluted

Weighted average common shares outstanding – basic and diluted

Our revenue was $1.6 million for the quarter ended March 31, 2026, compared to $1.9 million for the quarter ended March 31, 2025,

representing a decrease of $318 thousand or 16.8%.

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

Our gross profit was $843 thousand and gross margin was 53.5% for the quarter ended March 31, 2026, compared to $941 thousand

or 49.7% for the quarter ended March 31, 2025.

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 March 31, 2026, than for the three months ended March 31, 2025.

Additional factors contributing to our gross margin increase in the quarter ended March 31, 2026, were improved utilization of service

delivery employees in the current fiscal year compared to the prior fiscal year.

Operating expenses increased $289 thousand or 28.8% for the three months ended March 31, 2026, compared to the three months

ended March 31, 2025.

The changes for each operating expense area are discussed below.

and Administrative Expenses.

Our general and administrative expenses were $724 thousand for the three months ended March 31,

2026, compared to $655 thousand for the three months ended March 31, 2025, representing an increase of $69 thousand or 10.5%.

increase was the result of higher personnel and public entity expenses as well as the impact of the elimination of our allowance for

doubtful accounts in 2025, which was not the case in 2026, partially offset by lower consulting, legal, and amortization costs in

the current fiscal year.

and Marketing Expenses.

Our sales and marketing expenses were $388 thousand for the three months ended March 31, 2026, compared to

$227 thousand for the three months ended March 31, 2025, representing an increase of $161 thousand or 70.9% due to an increase in employees

and compensation, consulting costs, advertising, and events.

and Development Expenses.

Our research and development expenses were $179 thousand for the three months ended March 31, 2026, compared

to $120 thousand for the three months ended March 31, 2025, representing an increase of $59 thousand or 49.2% due to an increase in employees

and compensation.

Months Ended March 31, 2026, Compared to Six Months Ended March 31, 2025

Six Months Ended

Cost of revenues

Operating expenses

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

Net loss per common share – basic and diluted

Weighted average common shares outstanding – basic and diluted

Our revenue was $3.4 million for the six months ended March 31, 2026, compared to $3.8 million for the six months ended March 31,

2025, representing a decrease of $452 thousand or 11.9%.

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.

contract value.

Our gross profit was $1.8 million and gross margin was 52.3% for the six months ended March 31, 2026, compared to $1.8 million

and gross margin was 47.7% for the six months ended March 31, 2025.

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 six months ended March 31, 2026, than for the six months

ended March 31, 2025.

Additional factors contributing to our gross margin increase in the six months ended March 31, 2026, were improved

utilization of service delivery employees in the current fiscal year compared to the prior fiscal year.

Operating expenses increased $518 thousand or 24.9% for the six months ended March 31, 2026, compared to the six months

ended March 31, 2025.

The changes for each operating expense area are discussed below.

and Administrative Expenses.

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.

Our general and administrative expenses were $1.4 million for the six months ended March 31, 2026,

compared to $1.3 million for the six months ended March 31, 2025, representing an increase of $85 thousand or 6.5%.

The increase was

the result of higher personnel expenses as well as the impact of the elimination of our allowance for doubtful accounts in 2025,

which was not the case in 2026, partially offset by lower consulting, legal, and amortization costs in the current fiscal year.

and Marketing Expenses.

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.

Our sales and marketing expenses were $846 thousand for the six months ended March 31, 2026, compared to

$494 thousand for the six months ended March 31, 2025, representing an increase of $352 thousand or 71.3% due to an increase in employees

and compensation, consulting costs, advertising, and events.

and Development Expenses.

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.

Our research and development expenses were $354 thousand for the six months ended March 31, 2026, compared

to $273 thousand for the six months ended March 31, 2025, representing an increase of $81 thousand or 29.7% due to an increase in employees

and compensation.

and Capital Resources

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.

the six months ended March 31, 2026, we incurred a net loss of $840 thousand, and we used $854 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:

We had an accumulated deficit of $21.6 million as of March 31, 2026, 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 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:

had net working capital of $49 thousand as of March 31, 2026, compared to net working capital of $770 thousand as of September 30, 2025.

The decline in net working capital was primarily due to a decrease in cash partially offset by a decrease in accrued expenses.

had $82 thousand of accounts receivable included in our deferred revenue balance of $864 thousand at March 31, 2026.

did not have any credit facilities available to us as of March 31, 2026, 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 six months ended March

(in thousands)

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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

used in operating activities was $854 thousand during the six months ended March 31, 2026, and we recorded a net loss of $840

During the same period, our non-cash charges totaled $119 thousand, comprised of $111 thousand in stock-based compensation

expense and $8 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.

The changes in our net operating assets and liabilities include a $184 thousand decrease in

accounts payable and accrued liabilities, a $63 thousand increase in deferred revenue, and a $22 thousand increase in prepaid

expenses and other assets.

the six months ended March 31, 2026, a $100 thousand certificate of deposit matured.

were no financing activities during the six months ended March 31, 2026.

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

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