Quarterly Report for Quarter Ending December 31, 2025 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements in our Management's Discussion and Analysis of Financial Condition and Results of Operations, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements 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 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 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.

This 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.

Our 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.

The 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 1A. 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.

Unless the context requires otherwise, references to the "Company," "we," "us," "our," "SideChannel," and "SideChannel, Inc." refer specifically to SideChannel, Inc. and its consolidated subsidiaries.

In 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;
●	"SEC" or the "Commission" refers to the United States Securities and Exchange Commission; and
●	"Securities Act" refers to the Securities Act of 1933, as amended.

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

Overview

Our Business

Our 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. 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.

We 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.

Our growth strategy focuses on these three initiatives:

	●	Increasing 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.
	●	Securing 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.
	●	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.

We internally report our revenue using two categories:

	●	vCISO Services: 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"). 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.

Revenue

The 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%

The 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.

We also monitor new and retained revenue. The revenue earned from clients during our first twelve months of working with them is classified as new, while the revenue earned with clients after our first twelve months of working with them is classified as retained. The following chart provides details on our new and retained revenue for the three months ended December 31, 2025 and 2024:

Further, we consider revenue retention a key performance indicator. Revenue retention is calculated by dividing retained revenue by the prior year total revenue. 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			56.0	%			56.4	%
Cybersecurity Software and Services			81.7	%			76.9	%
Total			65.3	%			63.6	%

Results of Operations

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

		Three Months Ended
		December 31,
(in thousands)		2025				2024
Revenues		$	1,774			$	1,908
Cost of revenues			865				1,034
Gross profit			909				874
Gross margin			51.2	%			45.8	%
Operating expenses
General and administrative			677				660
Selling and marketing			457				267
Research and development			175				153
Total operating expenses			1,309				1,080
Operating loss			(400	)			(206	)
Other income, net			7				13
Net loss before income tax expense			(393	)			(193	)
Income tax expense			3				2
Net loss		$	(396	)		$	(195	)

Revenue. Our 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.

Gross Profit. 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. 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.

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

Selling 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.

Research 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.

Liquidity and Capital Resources

During 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 year 2026. 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.

We had net working capital of $478 thousand as of December 31, 2025, 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 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.

Cash Flows

The following table summarizes selected items in our unaudited Condensed Consolidated Statements of Cash Flows for the three months ended December 31:

(In thousands)		2025				2024
Net cash provided by (used in):
Operating activities		$	(570	)		$	75
Investing activities			-				-
Financing activities			-				-

Operating Activities

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

Cash used in operating activities was $570 thousand during the three months ended December 31, 2025, and we recorded a net loss of $396 thousand. During the same period, our non-cash charges totaled $104 thousand, comprised of $100 thousand in stock-based compensation 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.

Investing Activities

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

Financing Activities

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