SDCH 10-Q
SideChannel, Inc. (SDCH)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark one)
For
the quarterly period ended
For the transition period from ___________ to ___________
Commission
File No.
(Exact name of registrant as specified in its charter)
State or other jurisdiction of incorporation or organization |
I.R.S. Employer Identification No. |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90 days:
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of February 17, 2026, the registrant had shares of common stock outstanding.
SIDECHANNEL, INC.
TABLE OF CONTENTS
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIDECHANNEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| December 31, 2025 | September 30, 2025 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short-term investments | ||||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Fixed assets | ||||||||
| Goodwill | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Deferred revenue | ||||||||
| Income taxes payable | ||||||||
| Total current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 14) | ||||||||
| Common stock, $ par value, shares authorized; shares issued and outstanding as of December 31, 2025, and September 30, 2025 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The Company’s common stock shares issued and outstanding, common stock and additional paid-in capital as of December 31, 2025, and September 30, 2025, have been retroactively restated for the reverse stock split as described in Note 2 of the accompanying notes, which are an integral part of these unaudited condensed consolidated financial statements.
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SIDECHANNEL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
| Three Months Ended | ||||||||
| December 31, | ||||||||
| 2025 | 2024 | |||||||
| Revenues | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| 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 | $ | ( | ) | $ | ( | ) | ||
| Net loss per common share – basic and diluted | $ | ) | $ | ) | ||||
| Weighted average common shares outstanding – basic and diluted | ||||||||
The Company’s weighted average common shares outstanding and net loss per common share – basic and diluted for the three months ended December 31, 2025, and December 31, 2024, have been retroactively restated for the reverse stock split as described in Note 2 of the accompanying notes, which are an integral part of these unaudited condensed consolidated financial statements.
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SIDECHANNEL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
| Common Stock | Additional | Accumulated | Total | |||||||||||||||||
| Shares | Amount | Paid-in Capital |
Deficit |
Equity | ||||||||||||||||
| Balance at September 30, 2025 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at December 31, 2025 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common Stock | Additional | Accumulated | Total | |||||||||||||||||
| Shares | Amount | Paid-in Capital | Deficit | Equity | ||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Shares issued for legal settlement | ( | ) | ( | ) | ||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at December 31, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The Company’s common shares outstanding (shares and amount) and additional paid-in capital have been retroactively restated for the reverse stock split as described in Note 2 of the accompanying notes,
which are an integral part of these unaudited condensed consolidated financial statements.
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SIDECHANNEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended December 31, | ||||||||
| 2025 | 2024 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Legal settlement paid in stock | ( | ) | ||||||
| Stock-based compensation and payments for services, net | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ||||||
| Prepaid expenses and other assets | ||||||||
| Accounts payable and accrued liabilities | ( | ) | ( | ) | ||||
| Income taxes payable | ||||||||
| Deferred revenue | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Net cash provided by / (used in) investing activities | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Net cash used in financing activities | ||||||||
| INCREASE (DECREASE) IN CASH | ( | ) | ||||||
| CASH, BEGINNING OF PERIOD | ||||||||
| CASH, END OF PERIOD | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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SIDECHANNEL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2025 AND 2024
NOTE 1 – DESCRIPTION OF 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 product and service offerings provide cybersecurity and privacy 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 headquarters are located at 146 Main Street, Suite 405, Worcester, MA 01608. Our website is www.sidechannel.com.
NOTE 2 – REVERSE STOCK SPLIT
On February 12, 2025,
On January 16, 2026, the Company filed a certificate of correction to the Certificate of Amendment (the “Certificate of Correction”) to correct a scrivener’s error in the Certificate of Amendment. The Certificate of Amendment indicated that any fractional shares resulting from the Reverse Split would be rounded “to the nearest whole share” of common stock, rather than providing that any fractional shares would be rounded “up to the nearest whole share” of common stock, as the Company intended.
Accordingly,
at 4:00 p.m. ET on January 22, 2026, after the close of trading on the OTCQB,
The Reverse Split had no effect on our authorized number of shares of common stock, par value of common stock, total assets, total liabilities or stockholders’ equity. We restated our common shares outstanding (shares and amount) and the value of our additional paid-in capital (“APIC”) to reflect the number of shares outstanding after the Reverse Split.
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NOTE 3 – GOING CONCERN ASSESSMENT
Management has evaluated the Company’s ability to continue as a going concern within one year after the date that these financial statements are issued in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 205-40, Presentation of Financial Statements – Going Concern. Management’s evaluation considered the Company’s current financial condition, including its cash position, recurring operating losses, and historical negative cash flows from operations, as well as its forecasted results and cash flows for the twelve months following the date of issuance of these financial statements.
As of December 31, 2025, the Company had incurred recurring operating losses and experienced negative cash flows from operations, and it had limited cash on hand and constrained access to additional sources of capital. 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. These conditions initially raised substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these financial statements were issued. Based on its current cash balance, projected cash used in operations, and other obligations coming due during the next twelve months, management determined that, absent mitigating plans, the Company may not have had sufficient liquidity to fund operations and meet its obligations as they become due over that period.
In
response to these conditions, management has developed and begun implementing plans intended to improve liquidity and address the factors
that initially raised substantial doubt. These plans include a cost-reduction program that is expected to reduce annual operating expenses
by approximately $
After
considering the expected impact of these plans, including the anticipated $
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Use of Estimates
The accompanying unaudited condensed consolidated financial statements include our accounts and those of our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain of our accounts, including goodwill, identifiable intangibles, and deferred tax assets and liabilities, including related valuation allowances, are based upon estimates. References to fiscal year 2026 and fiscal year 2025 used throughout this report shall mean the current fiscal year ending September 30, 2026, and the prior fiscal year ended September 30, 2025, respectively.
Reclassifications
Certain prior year amounts have been reclassified to be comparable with the current year’s presentation or adjusted due to rounding and have had no impact on net income or stockholders’ equity.
Segment Information
The Company operates as a single reportable segment focused on cybersecurity solutions, which consists of two primary revenue-generating categories: (1) vCISO Services, and (2) Cybersecurity Software and Services.
| ● | 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. | |
| ● | 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. |
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Our Chief Executive Officer is our chief operating decision maker (“CODM”). Revenue is the primary segment performance measure reviewed by the CODM for operational and capital allocation decisions.
The following table presents revenue reviewed by the CODM for the three months ended December 31, 2025 and 2024:
| Three Months Ended | ||||||||
| (in thousands) | December 31, | |||||||
| 2025 | 2024 | |||||||
| vCISO Services | $ | $ | ||||||
| Cybersecurity Software and Services | ||||||||
| Total | $ | $ | ||||||
Cash, Cash Equivalents, and Short-Term Investments
Cash includes funds deposited in banks.
We consider all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. Highly liquid investments with original maturities of 91 days or more that will mature less than one year from the balance sheet date are classified as short-term investments. Securities with maturities of more than 360 days, if any, are included in “long-term investments.”
Our cash equivalents and short-term investments are placed primarily in money market funds and time deposits and are classified as held-to-maturity based on our positive intent and ability to hold the securities to maturity. We value cash equivalents at their original purchase prices plus interest that has accrued at the stated rate. We value short-term investments at their original purchase prices. Interest earned on short-term investments is accrued in interest receivable which is included on our balance sheet in “Accounts receivable, net.”
Interest income related to cash equivalents and short-term investments is reported in “Other income, net” on the Consolidated Statement of Operations.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amounts and do not bear interest. We grant credit to customers and generally require no collateral. To minimize our risk, we perform ongoing credit evaluations of our customers’ financial condition. Effective January 1, 2023, we follow the guidance in ASC Topic 326 (Financial Instruments – Credit Losses) in developing our estimate of the allowance for credit losses related to our accounts receivable. The allowance for credit losses is our best estimate of the amount of expected credit losses in our existing accounts receivable. In establishing the amount of allowance for credit losses, we consider all information available as of the reporting date including information related to past events, such as historical loss rates and actual incurred losses, as well as current conditions that may indicate future risk of loss and any other factors of which we are aware, that we believe could impact the ultimate collectability of the related receivables in future periods.
Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We do not have any significant off-balance sheet credit exposure related to our customers. Cash flows from accounts receivable are recorded in operating cash flows.
There was bad debt expense recorded for the three months ended December 31, 2025 and 2024.
Fair Value of Financial Instruments
Our financial instruments consisted primarily of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.
Fair value is focused on an exit price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Within the measurement of fair value, the use of market-based information is prioritized over entity specific information and a three-level hierarchy for fair value measurements is used based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.
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The three-level hierarchy for fair value measurements is defined as follows:
| ● | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; | |
| ● | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly, including inputs in markets that are not considered to be active; and | |
| ● | Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
For more information about the Company’s accounting policies surrounding fair value investments, see Note 7.
Goodwill, Intangible, and Long-Lived Assets
We account for goodwill and intangible assets in accordance with ASC Topic 350 (Intangibles – Goodwill and Other) and ASC Topic 360 (Property, Plant and Equipment). Finite-lived intangible assets are amortized over their estimated useful economic life and are carried at cost less accumulated amortization. Goodwill is assessed for impairment annually at the beginning of the fourth quarter on a reporting unit basis, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. Goodwill is considered to be impaired if the fair value of a reporting unit is less than its carrying amount.
If the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
Long-lived assets, which consist of finite-lived intangible assets and property and equipment, are assessed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the estimated undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value. The cash flow estimates used to determine the impairment, if any, contain management’s best estimates using appropriate assumptions and projections at that time. There have been no significant events or changes in circumstances during the three months ended December 31, 2025, that would indicate that the carrying amount of the Company’s intangible asset, goodwill, may be impaired as of December 31, 2025.
Revenue Recognition
We recognize revenue in accordance with the guidance in ASC Topic 606 (Revenue from Contracts with Customers).
Nature of Products and Services
We identify, develop, and deploy cybersecurity and privacy risk management solutions for our clients in North America. We categorize our products and services as either vCISO Services or Cybersecurity Software and Services. The revenue earned from Enclave, our proprietary software product, as well as the revenue from reselling third-party software and services, is included in Cybersecurity Software and Services.
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Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the client and is the unit of accounting in Topic 606. A significant portion of our revenue is from clients with whom we have a Master Service Agreement (“MSA”). Each MSA generally contains one or more Statement(s) of Work (“SOW”). Each SOW specifies the products and services and their respective transaction prices. We refer to an MSA and its SOW(s) as a “Contract”. Our Contracts generally contain monthly service subscriptions, annual software licenses, time and material based billing, or fixed fee projects.
A Contract’s transaction price is allocated to each distinct performance obligation. For Contracts with multiple performance obligations, we allocate the Contract’s transaction price to each performance obligation based on the relative standalone selling price.
Revenue is recognized over a period of time for monthly service subscriptions and software licenses. Revenue is recognized at a point in time when, or as, the performance obligation is satisfied for fixed fee projects and time and material based billing. The completed work products we create for our clients do not have alternative uses to SideChannel and our Contracts created a right to payment for work completed. Generally, each of the fixed fee project performance obligations we deliver is accompanied by an upfront payment. Our determination for point in time revenue recognition is based upon client acceptance of the performance obligation.
We do not have any material variable consideration arrangements, client-specific acceptance criteria, or any material payment terms with our clients other than standard payment terms which generally range from net 15 to net 30 days.
Principal versus Agent
We resell software and services provided by third parties. When we have discretion over the pricing used in the Contracts with our clients then we deem ourselves to be the principal for purposes of revenue recognition and record revenue on a gross basis using the price specified in the Contract. This is the case for almost all the third-party software and services we sell. Also consistent in our determinations to recognize revenue as the principal is our ability to direct the third party to provide the service to the client on our behalf.
Occasionally, we receive a commission from the sale of third-party software and services, in which case we are an agent and record revenue on a net basis equal to the amount of the commission earned.
Contract Balances
We record accounts receivable at the time of invoicing. To the extent that we do not recognize revenue at the same time as we invoice, we record a liability for deferred revenue. In certain instances, we also receive customer deposits in advance of invoicing and recording of accounts receivable. Deferred revenue and customer deposits are included in current liabilities on our consolidated balance sheets. In these instances, the recognition of revenue is deferred until we have determined that we have satisfied our performance obligations under the Contract.
Costs to Obtain a Contract with a Customer
The costs we incur associated with obtaining contracts with customers are marketing costs incurred with third-party service providers and sales commissions that we pay to our employees, contractors, or third-party sales representatives. Commissions are calculated based on set percentages of the revenue value of each product or service sold. Commissions are considered earned by our internal sales personnel at the time we recognize revenue for a particular transaction. Commissions are considered earned by third-party sales representatives at the time that revenue is recognized for a particular transaction. We record commission expense in our consolidated statements of operations at the time the commission is earned. Commissions earned but not yet paid are included in current liabilities on our balance sheets.
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Leases
We account for leases in accordance with ASC Topic 842 (Leases). We determine if an arrangement is a lease at inception. A lease contract is within scope if the contract has an identified asset (property, plant, or equipment) and grants the lessee the right to control the use of the asset during the lease term. The identified asset may be either explicitly or implicitly specified in the contract. In addition, the supplier must not have any practical ability to substitute a different asset and would not economically benefit from doing so for the lease contract to be in scope. The lessee’s right to control the use of the asset during the term of the lease must include the ability to obtain substantially all the economic benefits from the use of the asset as well as decision-making authority over how the asset will be used. Leases are classified as either operating leases or finance leases based on the guidance in ASC Topic 842. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment and financing lease liabilities. We do not currently have any financing leases.
Operating lease payments are included in cash outflows from operating activities on our consolidated statements of cash flows.
We have made an accounting policy election not to apply the recognition requirements of ASC Topic 842 to short-term leases (leases with a term of one year or less at the commencement date of the lease). Our lease periods are less than one year in duration. Lease expense for short-term lease payments is recognized on a straight-line basis over the lease term.
Following the guidance of ASC Topic 842, we are not required to record ROU assets and operating lease liabilities.
See Note 6 for further disclosures regarding our leases.
Research and Development and Software Development Expenses
All research and development costs, including patent and software development costs, are expensed as incurred.
We account for stock-based compensation in accordance with ASC Topic 718 (Compensation – Stock Compensation) which requires that employee share-based equity awards be accounted for under the fair value method and requires the use of an option pricing model for estimating fair value of awards, which is then amortized to expense over the service periods. The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing mode or the fair value of our stock on the grant date. The value of the portion of the award that is ultimately expected to vest is recognized as stock compensation expense over the requisite service period in the Company’s consolidated statements of income. See further disclosures related to our stock-based compensation plans in Note 13.
Legal
We are subject to legal proceedings, claims, and liabilities which arise in the ordinary course of business, and we accrue for losses associated with legal claims when such losses are probable and can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. Legal fees are charged to general and administrative expenses as they are incurred.
Income Taxes
We utilize the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carryforwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that the value of such assets will be realized.
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We
use the two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition
by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest
amount, which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating
our tax positions and tax benefits, which may require periodic adjustments. We did
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the reporting period. The weighted average number of shares is calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding. Diluted earnings per share reflects the potential dilution that could occur if stock options, warrants, and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in our earnings. Diluted loss per share is the same as basic loss per share during periods where net losses are incurred since the inclusion of the potential common stock equivalents would be anti-dilutive because of the net loss.
Warrants
We evaluate warrants in accordance with ASC Topics 480 (Distinguishing Liabilities from Equity) and 815 (Derivatives and Hedging). The result of this accounting treatment is that the fair value of the embedded derivative, if required to be bifurcated, is marked-to-market at each balance sheet date and recorded as a liability. The change in fair value is recorded in the Statement of Operations as a component of other income or expense. Upon exercise of a warrant, it is marked to fair value at the exercise date and then that fair value is reclassified to equity.
Recent Accounting Announcements
FASB issues Accounting Standards Updates (“ASU”) to amend the authoritative literature in the ASC. There have been several ASUs to date that amend the original text of the ASCs. Other than those discussed below, we believe those ASUs issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to us, or (iv) are not expected to have a significant impact on us.
Accounting Pronouncements Adopted
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which provides guidance to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the guidance enhances interim disclosure requirements, clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, provides new segment disclosure requirements for entities with a single reportable segment, and contains other disclosure requirements. The purpose of the guidance is to enable investors to better understand an entity’s overall performance and assess potential future cash flows. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. For us, annual reporting requirements were effective for our fiscal year 2025 beginning on October 1, 2024, and interim reporting requirements were effective beginning with our first quarter of fiscal year 2026. We manage our operations as a single operating segment for the purpose of assessing performance and making operating decisions. Our Chief Executive Officer is our CODM. No changes have been made to the presentation of our financial statements because of this pronouncement.
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In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which updates income tax disclosure requirements primarily by requiring specific categories and greater disaggregation within the rate reconciliation table and disaggregation of income taxes paid, net of refunds, by jurisdiction. All entities are required to apply the guidance prospectively, with the option to apply it retrospectively. The guidance is effective for fiscal years beginning after December 15, 2024, which for us is our fiscal year 2026 beginning on October 1, 2025.
We did not adopt additional new accounting pronouncements during the three months ended December 31, 2025.
Accounting Pronouncements Not Yet Adopted
In November 2024, the FASB also issued ASU 2024-03, Disaggregation of Income Statement Expenses, which will require the disclosure of additional information about specific expense categories in the notes to the financial statements. The guidance is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. For us, annual reporting requirements will be effective for our fiscal year 2028 beginning on October 1, 2027, and interim reporting requirements will be effective beginning with our first quarter of fiscal year 2029. Early adoption is permitted. We are currently evaluating the impact of this amended disclosure guidance.
In March 2024, the Securities and Exchange Commission issued a rule which will require companies to make certain climate-related disclosures in periodic filings. The rule includes certain disclosures in the footnotes of the financial statements:
● capitalized costs, expenditures expensed, and losses incurred because of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise;
● capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates if they are used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals; and
● whether estimates and assumptions used to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans.
The climate-related footnote disclosures are effective for annual filings for the year ending September 30, 2026. The Company is currently evaluating the impact of the adoption of the rule.
The Company does not believe that the above recently issued, but not yet effective, accounting standards, if and when adopted, will have a material effect on the accompanying unaudited condensed consolidated financial statements.
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NOTE 5 – CASH EQUIVALENTS AND INVESTMENTS
We have financial instruments included as cash equivalents and short-term investments on our balance sheets. Money market funds and time deposits with maturities of less than 90 days from the purchase date are included in “Cash and cash equivalents.” Time deposits with maturities from 91-360 days are included in “Short-term investments.” As of December 31, 2025, the Company had no long-term investments.
The following table presents the carrying amounts of cash equivalents and short-term investments as of December 31, 2025, and September 30, 2025:
| December 31, | September 30, | |||||||
| 2025 | 2025 | |||||||
| Cash equivalents | ||||||||
| Money market funds | $ | $ | ||||||
| Total cash equivalents | $ | $ | ||||||
| Short-term investments | ||||||||
| Time deposits | ||||||||
| Total short-term investments | $ | $ | ||||||
| Short-Term Investment | Carrying Amount | Original Maturity Date | ||||||
| Time deposits | $ | |||||||
For more information about the fair value of the Company’s financial instruments, see Note 7.
NOTE 6 - LEASES
On
December 10, 2021, we entered into a lease for approximately
Operating lease payments are included in cash outflows from operating activities on our consolidated statements of cash flows.
Operating
lease expenses were $
We have made an accounting policy election not to apply the recognition requirements of ASC Topic 842 (Leases) to short-term leases (leases with a term of one year or less at the commencement date of the lease). Lease expense for short-term lease payments is recognized on a straight-line basis over the lease term. We do not have any long-term operating leases or financing leases as of December 31, 2025.
We
expect to pay approximately $
| 15 |
NOTE 7 – FAIR VALUE MEASUREMENT
ASC Topic 820 “Fair Value Measurement” (“Topic 820”) defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. Topic 820 is applicable whenever assets and liabilities are measured and included in the financial statements at fair value.
The following tables present the carrying amounts, estimated fair values, and valuation input levels of certain financial instruments as of December 31, 2025, and September 30, 2025.
| December 31, 2025 | ||||||||||||||||||||
| Carrying | Fair Value Measured Using | Fair | ||||||||||||||||||
| (in thousands) | Amount | Level 1 | Level 2 | Level 3 | Value | |||||||||||||||
| Short-term investments | ||||||||||||||||||||
| Time deposits: 91 - 360 days | $ | $ | $ | $ | $ | |||||||||||||||
| Total short-term investments | $ | $ | $ | $ | $ | |||||||||||||||
| September 30, 2025 | ||||||||||||||||||||
| Carrying | Fair Value Measured Using | Fair | ||||||||||||||||||
| (in thousands) | Amount | Level 1 | Level 2 | Level 3 | Value | |||||||||||||||
| Short-term investments | ||||||||||||||||||||
| Time deposits: 91 - 360 days | $ | $ | $ | $ | $ | |||||||||||||||
| Total short-term investments | $ | $ | $ | $ | $ | |||||||||||||||
The
entire December 31, 2025, balance of time deposits maturing in 91 to 360 days are certificates of deposit issued by a bank at which total
deposits are less than the FDIC limit of $
NOTE 8 – DEBT
SideChannel
did
NOTE 9 – STOCKHOLDERS’ EQUITY
Common Stock
As
of December 31, 2025, and September 30, 2025, we had
shares of common stock outstanding. The outstanding shares were retroactively restated for the effect of the
Reverse Split from
The authorized shares and par value per share of common stock were unchanged by the Reverse Split and remain at shares and $, respectively.
We restated our common shares outstanding (shares and amount) and the value of our APIC to reflect the number of shares outstanding after the Reverse Split.
Preferred Stock
As of December 31, 2025, we had zero () shares of preferred stock outstanding and were authorized to issue shares of preferred stock at a par value of $ per share.
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Warrants
We have four categories of warrants outstanding which are summarized below along with exercise prices and expiration dates.
| (In thousands, except prices and lives) | Number of Warrants | Exercise Price | Expiration Date | |||||||
| 2018 Placement Agent | $ | |||||||||
| 2021 Private Placement | ||||||||||
| 2021 Placement Agent | ||||||||||
| 2023 Warrant Exchange | ||||||||||
| Total Outstanding Warrants | ||||||||||
The following table summarizes warrant activity for the three months ended December 31, 2025:
| (In thousands, except prices and lives) | Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Life | |||||||||
| Outstanding at September 30, 2025 | $ | |||||||||||
| Granted | — | |||||||||||
| Exercised | — | |||||||||||
| Canceled/Forfeited | — | |||||||||||
| Outstanding at December 31, 2025 | $ | |||||||||||
NOTE 10 – REVENUE FROM CONTRACTS WITH CLIENTS
Deferred revenue is comprised of payments received from our clients and customers for products or services in advance of receiving the product or service and primarily occurs for annual software and service contracts including Enclave. The deferred revenue is expected to be earned within 12 months of the balance sheet date.
| (In thousands) | ||||
| Balance at September 30, 2025 | $ | |||
| Deferral of revenue | ||||
| Recognition of revenue | ( | ) | ||
| Balance at December 31, 2025 | $ | |||
NOTE 11 – BUSINESS RISK AND CREDIT RISK CONCENTRATION INVOLVING CASH
No
client individually accounted for over
We
had three clients each with an accounts receivable balance that exceeded
We
maintain our cash, cash equivalents, and short-term investments in accounts held by highly reputable financial institutions (collectively
“Deposits”). The Federal Deposit Insurance Corporation (“FDIC”) insures these Deposits up to $
NOTE 12 – RELATED PARTY TRANSACTIONS
We did not have any new related party transactions or material changes to existing related party transactions during the three months ended December 31, 2025.
Brian Haugli, our Chief Executive Officer, a member of our Board of Directors, and a significant stockholder in the Company, is also a principal shareholder of RealCISO Inc. (“RealCISO”). We are a reseller of the RealCISO software. We receive revenue from our customers for the use of RealCISO software and pay licensing fees to RealCISO for such use.
For
the three months ended December 31, 2025, we paid $
No other related party transactions occurred during the three months ended December 31, 2025.
For
fiscal years ended September 30, 2025 and 2024, SideChannel paid $
On
October 13, 2023, the Association of the US Army (“AUSA”) signed an agreement for a cybersecurity risk assessment for approximately
$
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We grant equity compensation awards to directors, employees, and contractors under the 2021 Omnibus Equity Compensation Plan. We have granted restricted stock units (“RSUs”) and stock options with service-based vesting conditions with vesting typically occurring over a -year period.
The award quantities and grant date fair values have been retroactively adjusted to reflect the Reverse Split.
Restricted Stock Units
| (In thousands) | Number of RSUs | |||
| Outstanding RSUs at September 30, 2025 | ||||
| Granted | ||||
| Vested | ( | ) | ||
| Canceled/Forfeited | ( | ) | ||
| Outstanding RSUs at December 31, 2025 | ||||
During the quarter ended December 31, 2025, we awarded RSUs to new employees. Vesting occurs over . The average grant date fair value of RSUs granted during the three months ended December 31, 2025, was $. The Company recognizes compensation cost for unvested share-based awards on a straight-line basis over the requisite service period.
Our total stock-based compensation expense for the three months ended December 31, 2025, was $ thousand for the amortization of outstanding equity compensation grants. Stock-based compensation of $ thousand is included in general and administrative expense, $ thousand in selling and marketing expense, and $ thousand in research and development expense.
The unamortized stock compensation expense at December 31, 2025, was $ thousand, and the remaining weighted average term to vesting was years.
NOTE 14 – COMMITMENTS AND CONTINGENCIES
We are currently not involved in any litigation that we believe could have a material adverse effect on its financial condition or results of operations.
NOTE 15 - SUBSEQUENT EVENTS
On February 12, 2025,
On January 16, 2026, the Company filed a Certificate of Correction to correct a scrivener’s error in the Certificate of Amendment. The Certificate of Amendment indicated that any fractional shares resulting from the Reverse Split would be rounded “to the nearest whole share” of common stock, rather than providing that any fractional shares would be rounded “up to the nearest whole share” of common stock, as the Company intended.
Accordingly, at 4:00 p.m.
ET on January 22, 2026, after the close of trading on the OTCQB,
The Reverse Split had no effect on our authorized number of shares of common stock, par value of common stock, total assets, total liabilities or stockholders’ equity. We restated our common shares outstanding (shares and amount) and the value of our APIC to reflect the number of shares outstanding after the Reverse Split.
On January 23, 2026, in connection with the rounding up of fractional shares resulting from the Reverse Split, the Company issued an aggregate of shares of common stock. Of this amount, shares of common stock were issued to to stockholders of record and shares of common stock were issued to CEDE & Co.
The Company has evaluated events through February 17, 2026, the filing date of this Quarterly Report on Form 10-Q and determined that there have been no additional subsequent events that occurred that would require adjustments to our disclosures in the unaudited condensed consolidated financial statements.
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ITEM 2. 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.
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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. |
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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.
| 21 |
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 | % | ||||
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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.
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant 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.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report, at the reasonable assurance level.
The material weaknesses identified, and the related remediation plan are more fully described in our 2025 Form 10-K. The material weaknesses, summarized in the bullet points below, relate to the fact that we did not design and maintain accounting policies, procedures and controls to ensure complete, accurate and timely financial reporting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Specifically, the material weaknesses identified included the following:
| ● | We did not design and maintain formal accounting policies, procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over the preparation and review of account reconciliations, journal entries and classification of certain costs; | |
| ● | We had not developed and effectively communicated to our employees our accounting policies and procedures, which resulted in inconsistent practices. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness; | |
| ● | We do not have sufficient, qualified finance and accounting staff with the appropriate U.S. GAAP technical accounting expertise to identify, evaluate and account for accounting and financial reporting, and effectively design and implement systems and processes that allow for the timely production of accurate financial information in accordance with internal financial reporting timelines. As a result, we did not design and maintain formal accounting policies, processes and controls related to complex transactions necessary for an effective financial reporting process; and | |
| ● | As a high-growth, smaller reporting company that became responsible for listed financial reporting, we have a limited staff and budget available to adequately test and monitor the effectiveness of certain internal controls. |
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended December 31, 2025, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting, including any corrective actions regarding significant deficiencies and material weaknesses.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter ended December 31, 2025 and through the filing date of this Quarterly Report, there were no material developments to the legal proceedings as disclosed in Part I, Item 3 of the 2025 Form 10-K.
ITEM 1A. RISK FACTORS
Except as set forth below, there have been no material changes from the risk factors previously disclosed in Part I, Item 1A “Risk Factors” of our 2025 Form 10-K.
A reverse stock split may not increase the market price of our common stock or improve liquidity.
On January 23, 2026, we effectuated a reverse stock split of our outstanding common stock at a ratio of 1-for-52. There can be no assurance that the reverse stock split will result in a sustained increase in the market price of our common stock, or that it will have the intended effect of improving liquidity or market perception of our common stock. The market price of our common stock may decline following the reverse stock split, and the reduced number of shares outstanding may adversely affect the liquidity of our common stock.
In addition, reverse stock splits are often viewed negatively by the market, which may adversely affect the trading price of our common stock. If the market price of our common stock does not increase proportionately with the reverse stock split ratio, our stockholders may experience a loss in value. Further, the reverse stock split may result in some stockholders owning fewer shares, which could limit their ability to sell shares at desired prices or times.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sales of Securities
There were no sales of unregistered securities during the three months ended December 31, 2025, or from the period beginning January 1, 2026, through the filing date of this Quarterly Report.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
There were no purchases of equity securities by the issuer or affiliated purchasers during the three months ended December 31, 2025, and from the period from January 1, 2026, to the filing date of this Quarterly Report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(a) None.
(b) There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors since the Company last provided disclosure in response to the requirements of Item 407(c)(3) of Regulation S-K.
(c)
During the quarter ended December 31, 2025, no director or officer of the Company
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ITEM 6. EXHIBITS
| * | Filed electronically herewith. |
| ** | Furnished electronically herewith, not filed. |
| 27 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SIDECHANNEL, INC. | ||
| Date: February 17, 2026 | By: | /s/ Brian Haugli |
| Brian Haugli | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: February 17, 2026 | By: | /s/ Ryan Polk |
| Ryan Polk | ||
| Chief Financial Officer | ||
| (Principal Accounting/Financial Officer) | ||
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