What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-07 compared with 2025-02-05 · 126 added, 93 removed, 94 unchanged (70% of the section changed)

12 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, 2024, filed with the Securities and Exchange Commission on December

13, 2024 (“2024 Form 10-K”), and elsewhere in this Form 10-Q.

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

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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 (“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.

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

Enclave seamlessly combines access control, microsegmentation, encryption and other secure networking concepts to create a comprehensive

It allows Information Technology to easily segment the enterprise network, place the right staff in those segments, and direct

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:

adoption of Enclave,

new vCISO clients, and

new vCISO Services clients, and

new Cybersecurity Software and Services offerings.

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 for 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.

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 with the adopted cybersecurity framework.

Most of our clients use our vCISO

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

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

our 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.

Sales of our proprietary software, Enclave, are also included in this revenue category.

following revenue metrics are for the three months ended December 31, 2024, compared to the three months ended December 31, 2023.

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 and commissions from third-party service provider partnerships and sales of our

proprietary software, Enclave.

following revenue metrics are for the six months ended March 31, 2025, compared to the six months ended March 31, 2024:

revenue grew by $139 thousand or 3.8%.

Services revenue grew by $93 thousand or 8.0%.

Services revenue decreased by $109 thousand or 4.4%.

Cybersecurity

Software and Services category revenue grew by $248 thousand or 21.2%

In the accompanying charts, “2025” refers

the first three months of fiscal year 2025 and “2024” refers to the first three months of fiscal year 2024.

Fiscal year 2025

ends on September 30, 2025.

year-over-year growth in vCISO Services revenue reflects both an increase in clients served and an increase in revenue per client.

Cybersecurity Software & Services revenue grew 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

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 &

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

also monitor new and retained revenue.

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The following

chart provides details on our new and retained revenue for the three months ended December 31, 2024, and 2023:

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

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, 2024, and September

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

30, 2024, by revenue category:

Trailing Twelve Months Ended

December 31, 2024

September 30, 2024

vCISO Services

Cybersecurity Software & Services

Twelve Months Ended

Cybersecurity

Software & Services

of Operations

Months Ended December 31, 2024, Compared to Three Months Ended December 31, 2023

Three Months Ended

Cost of revenues

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

(in thousands)

and administrative

and marketing

and development

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

Our revenue was $1.9 million for the quarter ended December 31, 2024, compared to $1.7 million for the three-month comparable prior

period, an increase of $172 thousand or 9.9%.

The factors driving this revenue increase include growth in vCISO engagements and higher

adoption of Cybersecurity Services and Software by our new and existing clients.

Our gross profit was $874 thousand and gross margin was 45.8% for the quarter ended December 31, 2024, compared to $845

thousand or 48.7% for the quarter ended December 31, 2023.

The decline in our gross margin was the result of an increase in revenue

derived from third-party software and services, which have a lower gross margin than our direct software and services.

Operating expenses decreased $24 thousand or 2.2% for the three months ended December 31, 2024, compared to the three months

ended to December 31, 2023.

loss before income tax expense

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

a decrease of $33 thousand or 1.7%.

This decrease is primarily due to the loss of clients with higher than average contract value during the second half of fiscal year 2024 and the first half of

fiscal year 2025.

Our gross profit was $941 thousand and gross margin was 49.7% for the quarter ended March 31, 2025, compared to $868

thousand or 45.0% for the quarter ended March 31, 2024.

The increase in our gross margin was the result of lower bonus expense

accrued in the current fiscal year than what was accrued in the prior fiscal year.

Another factor contributing to our gross margin

improvement was that Enclave had positive gross margin in the three months ended March 31, 2025, on higher sales volume versus a

negative gross for the three months ended March 31, 2024, on a lower amount of revenue.

Operating expenses decreased $126 thousand or 11.2% for the three months ended March 31, 2025, compared to the three months

ended March 31, 2024.

The changes for each operating expense area are discussed below.

and Administrative Expenses.

Our general and administrative expense was $660 thousand for the three months ended December 31, 2024,

compared to $709 thousand for the prior comparable period, a decrease of $49 thousand or 6.9%.

Our general and administrative expense was $655 thousand for the three months ended March 31, 2025,

compared to $849 thousand for the three months ended March 31, 2024, a decrease of $194 thousand or 22.9%.

The decrease was achieved by reducing

costs related to being a publicly traded company combined with a decrease in personnel costs, which have been partially offset by an increase

in accounting professional fees and stock-based compensation expenses.

costs related to being a publicly traded company combined with a decrease in stock-based compensation expenses as well as adjusting our

allowance for doubtful accounts to zero.

and Marketing Expenses.

Our sales and marketing expense was $267 thousand for the three months ended December 31, 2024, compared

to $269 thousand for the prior comparable period, a decrease of $2 thousand or 0.7%.

An increase in staffing costs was offset by a decrease in third-party providers.

Our sales and marketing expense was $227 thousand for the three months ended March 31, 2025, compared to

$156 thousand for the three months ended March 31, 2024, an increase of $71 thousand or 45.5% due to an increase in employees and compensation.

and Development Expenses.

Our research and development expense was $153 thousand for the three months ended December 31, 2024, compared

to $126 thousand for the prior comparable period, an increase of $27 thousand or 21.4%.

Our research and development expense was $120 thousand for the three months ended March 31, 2025,

compared to $123 thousand for the three months ended March 31, 2024, a decrease of $3 thousand or 2.4%.

Lower stock-based compensation was

partially offset by an increase in salaries.

Months Ended March 31, 2025, Compared to Six Months Ended March 31, 2024

(in thousands)

and administrative

and marketing

and development

operating expenses

loss before income tax expense

Our revenue was $3.8 million for the six months ended March 31, 2025, compared to $3.7 million for the six-month ended March 31, 2024, an increase of $139 thousand or 3.8%.

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 $1.8 million and gross margin was 47.7% for the six months ended March 31, 2025, compared to

$1.7 million or 46.8% for the six months ended March 31, 2024.

The increase in our gross margin was the result of an increase in

margin on Cybersecurity Software and Services, largely driven by increased Enclave sales and the elimination of certain fixed costs related to the delivery of Enclave.

Operating expenses decreased $150 thousand or 6.7% for the six months ended March 31, 2025, compared to the six months

ended March 31, 2024.

The changes for each operating expense area are discussed below.

and Administrative Expenses.

Our general and administrative expense was $1.3 million for the six months ended March 31, 2025,

compared to $1.6 million for the six months ended March 31, 2024, a decrease of $243 thousand or 15.6%.

The decrease was achieved by reducing

costs related to being a publicly traded company combined with a decrease in consulting costs, travel costs, stock-based compensation

expense, and our allowance for doubtful accounts, which have been partially offset by an increase in accounting professional fees.

and Marketing Expenses.

Our sales and marketing expense was $494 thousand for the six months ended March 31, 2025, compared to

$425 thousand for the six months ended March 31, 2024, an increase of $69 thousand or 16.2%.

An increase in employees and compensation was partially

offset by a decrease in consultant-related costs and a decrease in stock-based compensation expense.

and Development Expenses.

Our research and development expense was $273 thousand for the six months ended March 31, 2025, compared

to $249 thousand for the six months ended March 31, 2024, an increase of $24 thousand or 9.6%.

The increase is the result of higher personnel

and Capital Resources

the three months ended December 31, 2024, we incurred a net loss of $195 thousand, and we had $75 thousand of cash provided by

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

beginning of fiscal year 2025 supplemented with the cash provided by operations during the fiscal year.

the six months ended March 31, 2025, we incurred a net loss of $249 thousand, and we had $199 thousand of cash provided by operations

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 fiscal year 2025 supplemented with the cash provided by operations during the fiscal year.

We had an accumulated

deficit of $20.0 million as of December 31, 2024, comprised primarily of three (3) non-operational expenses totalling $16.8 million:

for the contingent consideration and business combination related costs, $5.7 million for the impairment of goodwill, and $4.9

deficit of $20.0 million as of March 31, 2025, comprised primarily of three (3) non-operational expenses totaling $16.8 million:

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 $1.2 million as of December 31, 2024, compared to working capital of $1.3 million as of September 30, 2024.

decline in working capital is due to a $147 thousand decrease in accounts receivable and a $96 thousand decrease in prepaid expenses

offset by a $139 thousand decrease in accounts payable and accrued liabilities.

following table summarizes selected items in our 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

had working capital of $1.2 million as of March 31, 2025, compared to working capital of $1.3 million as of September 30, 2024.

decline in working capital is primarily due to a seasonal increase in deferred revenue.

following table summarizes selected items in our Condensed Consolidated Statements of Cash Flows for the six months ended March

cash provided by (used in):

receive cash each month from revenue generated from our clients.

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

activities provided $75 thousand of cash during the three months ended December 31, 2024, and we recorded a net loss of $195

During the same period, our non-cash charges totalled $160 thousand, primarily comprised of $112 thousand in stock-based compensation

expense and $49 thousand in amortization and depreciation.

change in our net operating assets and liabilities was primarily due to a $147 thousand decrease in accounts receivable due to

accelerated customer collections, a $96 thousand decrease in prepaid expenses as we recognized third party software and services and

a $139 thousand decrease in accounts payable and accrued liabilities because of payments of bonuses, our directors and officers

insurance note payable, and our litigation settlement.

There were no investing activities for this reporting period.

provided by operating activities was $49 thousand during the six months ended March 31, 2025, and we recorded a net loss of $249

During the same period, our non-cash charges totaled $252 thousand, comprised of $155 thousand in stock-based compensation

expense net of RSUs sold by employees and $98 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.

The volume of annual billing is higher this year compared to the prior year, resulting in an increase in

deferred revenue of $337 thousand partially offset by increases in accounts receivable and prepaid expenses along with the $128

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

$250 thousand certificate of deposit matured on February 5, 2025;

$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.

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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