What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-08-13 compared with 2025-05-07 · 98 added, 100 removed, 120 unchanged (62% 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 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 as a result of new information, future events, or otherwise.

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,

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References to our trademarks, tradenames and service

marks herein are not intended to indicate in any way that we will not assert to the fullest extent 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.

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

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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” 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.

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.”

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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 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.

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.

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 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:

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%.

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Cybersecurity

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

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

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.

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The following

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

chart provides details on our new and retained revenue for the nine months ended June 30, 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 March 31, 2025, and September

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

30, 2024, by revenue category:

Twelve Months Ended

Cybersecurity

Software & Services

Trailing Twelve Months Ended

September 30, 2024

vCISO Services

Cybersecurity Software & Services

of Operations

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

(in thousands)

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

and administrative

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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,

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 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.

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 $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%.

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 as well as adjusting our

allowance for doubtful accounts to zero.

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 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.

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 $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)

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

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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%.

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 $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.

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.

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.

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

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.

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.

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%.

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.

and Capital Resources

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

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 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 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 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

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:

$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 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.

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

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

During the same period, our non-cash charges totaled $390 thousand, comprised of $243 thousand in stock-based compensation

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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

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;

$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.

$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.

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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