What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-08-12 compared with 2026-05-12 · 101 added, 81 removed, 164 unchanged (53% of the section changed)

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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 10-K.

information should be read in conjunction with the interim unaudited condensed consolidated financial statements and the notes

thereto included in this Quarterly Report, and the audited financial statements and notes thereto and “Part II.

Information - Item 7.

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.

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

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.

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.

mission is to deliver security leadership and infrastructure to organizations.

Our cybersecurity Enclave platform and fractional security

service offerings provide cybersecurity and privacy risk management solutions for our customers, built on decades of experience across

government, manufacturing, and global enterprises.

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”)

services, 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.

Our vCISO practice helps growing and regulated organizations

build security programs that are practical, measurable, and built to last.

are offering Enclave, our proprietary zero-trust security platform that simplifies important cybersecurity tasks to achieve microsegmentation.

Enclave unifies asset intelligence, network segmentation, and certificate lifecycle management (“CLM”) in a single platform,

combining zero trust network access with machine identity to address 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 combination

strengthens security and allows organizations to implement microsegmentation strategies without adding headcount or operational complexity.

Organizations partner with SideChannel when they need security strategy and security infrastructure, from the same team.

growth strategy focuses on these three initiatives:

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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:

following revenue metrics are for the nine months ended June 30, 2026, compared to the nine months ended June 30, 2025:

revenue decreased by $431 thousand or 7.7%.

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The following

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

chart provides details on our new and retained revenue for the nine months ended June 30, 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 March 31, 2026, and September

The following table shows the revenue retention for the trailing twelve months ended June 30, 2026, and September

30, 2025, by revenue category:

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of Operations

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

Months Ended June 30, 2026, Compared to Three Months Ended June 30, 2025

Three Months Ended

(in thousands)

Cost of revenues

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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.

Our revenue was $1.8 million for the quarter ended June 30, 2026, compared to $1.8 million for the quarter ended June 30, 2025, representing

an increase of $21 thousand or 1.2%.

This increase was primarily due to a $85 thousand increase in cybersecurity software and services

partially offset by a $64 thousand decrease in vCISO services.

Our gross profit was $986 thousand and gross margin was 54.9% for the quarter ended June 30, 2026, compared to $835 thousand

or 47.0% for the quarter ended June 30, 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

contributing a larger percentage of our revenue in the three months ended June 30, 2026, than for the three months ended June 30, 2025.

Additional factors contributing to our gross margin increase in the quarter ended June 30, 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.

Operating expenses increased $18 thousand or 1.6% for the three months ended June 30, 2026, compared to the three months

ended June 30, 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.

Our general and administrative expenses were $551 thousand for the three months ended June 30, 2026,

compared to $715 thousand for the three months ended June 30, 2025, representing a decrease of $164 thousand or 22.9%.

The favorable

variance was driven by decreases in personnel costs, amortization, and professional services.

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.

Our sales and marketing expenses were $396 thousand for the three months ended June 30, 2026, compared to

$242 thousand for the three months ended June 30, 2025, representing an increase of $154 thousand or 63.6% due to increases in employees

and compensation, stock compensation expense, and travel and office supplies.

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

Our research and development expenses were $174 thousand for the three months ended June 30, 2026, compared

to $146 thousand for the three months ended June 30, 2025, representing an increase of $28 thousand or 19.2% due to an increase in employees

and compensation.

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

Six Months Ended

Months Ended June 30, 2026, Compared to Nine Months Ended June 30, 2025

Nine Months Ended

(in thousands)

Cost of revenues

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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,

Our revenue was $5.1 million for the nine months ended June 30, 2026, compared to $5.6 million for the nine months ended June 30,

2025, representing a decrease of $431 thousand or 7.7%.

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

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.

This decrease was primarily due to a $708 thousand decrease in vCISO services

partially offset by a $277 thousand increase in cybersecurity software and services.

Our gross profit was $2.7 million and gross margin was 53.2% for the nine months ended June 30, 2026, compared to $2.7 million

and gross margin was 47.5% for the nine months ended June 30, 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

has a high gross margin, contributing a larger percentage of our revenue in the nine months ended June 30, 2026, than for the nine months

ended June 30, 2025.

Additional factors contributing to our gross margin increase in the nine months ended June 30, 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.

Operating expenses increased $536 thousand or 16.8% for the nine months ended June 30, 2026, compared to the nine months

ended June 30, 2025.

The changes for each operating expense area are discussed below.

and Administrative Expenses.

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.

Our general and administrative expenses were $2.0 million for the nine months ended June 30, 2026, compared

to $2.0 million for the nine months ended June 30, 2025, representing a decrease of $79 thousand or 3.9%.

Decreases in stock compensation

expense, amortization, and professional services were partially offset by increases in personnel related costs.

and Marketing Expenses.

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

Our sales and marketing expenses were $1.2 million for the nine months ended June 30, 2026, compared to $736

thousand for the nine months ended June 30, 2025, representing an increase of $506 thousand or 68.8% due to an increase in employees

and compensation, consulting costs, advertising, and events.

and Development Expenses.

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

Our research and development expenses were $528 thousand for the nine months ended June 30, 2026, compared

to $419 thousand for the nine months ended June 30, 2025, representing an increase of $109 thousand or 26.0% due to an increase in employees

and compensation.

and Capital Resources

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.

the nine months ended June 30, 2026, we incurred a net loss of $974 thousand, and we used $839 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 $21.6 million as of March 31, 2026, which includes three non-operational expenses totaling

We had an accumulated deficit of $21.8 million as of June 30, 2026, which includes three non-operational expenses totaling

$16.8 million:

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

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

had net working capital of $15 thousand as of June 30, 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 caused by current year operating losses.

had $165 thousand of accounts receivable included in our deferred revenue balance of $663 thousand at June 30, 2026.

did not have any credit facilities available to us as of June 30, 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 nine months ended

(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 $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 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.

used in operating activities was $839 thousand during the nine months ended June 30, 2026, and we recorded a net loss of $974

During the same period, our non-cash charges totaled $219 thousand, comprised of $207 thousand in net stock-based

compensation expense and $12 thousand in depreciation and amortization.

The changes in our net operating assets and liabilities include $64 thousand

increase in accounts receivable and $138 thousand decrease in deferred revenue.

the nine months ended June 30, 2026, a $100 thousand certificate of deposit matured.

were no financing activities during the nine months ended June 30, 2026.

Critical Accounting Estimates

The preparation of unaudited

condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America

GAAP”) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue,

expenses and related disclosure of contingent assets and liabilities.

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

related to goodwill and deferred income tax 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 Unaudited Condensed 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.

As of June 30, 2026, there have been no significant

changes to the accounting estimates that we have deemed critical.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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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-Q

Item 2. Management’s Discussion and Analysis