{"url_path":"/sec/cycu/10-q/2026/item-7","section_key":"item-7","section_title":"Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations","topic":"sec","document":{"doc_type":"10-Q","doc_date":"2026-05-14","source_url":"https://www.sec.gov/Archives/edgar/data/1868419/0001868419-26-000028-index.html","accession_number":"0001868419-26-000028","cik":"0001868419","ticker":"CYCU","issuer_name":"Cycurion, Inc.","edgar_url":"https://www.sec.gov/Archives/edgar/data/1868419/0001868419-26-000028-index.html","primary_entity_key":"0001868419","primary_entity_name":"Cycurion, Inc."},"word_count":3735,"has_tables":true,"body_markdown":"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations\n\nThis Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with our audited consolidated financial statements and the related notes thereto for the fiscal years ended December 31, 2025 and 2024, included in Item 8. Financial Statements and Supplementary Data.\n\nThe discussion below contains management's comments on our business strategy and outlook, and such discussions contain forward-looking statements. These forward-looking statements reflect the expectations, beliefs, plans, and objectives of management about future financial performance and assumptions underlying management's judgment concerning the matters discussed, and accordingly involve estimates, assumptions, judgments, and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements, and the discussion below is not necessarily indicative of future results. Factors that could cause or contribute to any differences include, but are not limited to, those discussed below and elsewhere in our Annual Report on Form 10-K filed with the SEC on March 31, 2026, particularly in \"Item 1A. Risk Factors\" and in \"Special Note Regarding Forward-Looking Statements\" at the beginning of this Form 10-K.\n\nGeneral and Business Overview\n\nWe were originally incorporated as KAE Holdings, Inc., under the laws of the State of Delaware in 2017, with the purpose of acquiring and holding operating entities in the cybersecurity industry. On July 14, 2020, we changed our corporate name from KAE Holdings, Inc. to Cyber Secure Solutions, Inc., and, on February 24, 2021, to Cycurion, Inc.\n\nWe have two first-tier wholly-owned subsidiaries, Cycurion Sub, Inc. (formerly Cycurion, Inc., until February 14, 2025) and Cycurion Crypto, a Delaware corporation formed in July 2025, and three indirectly wholly-owned second-tier subsidiaries: (i) Axxum, a Virginia limited liability company formed in December 2006, (ii) Cloudburst, a Virginia limited liability company formed in January 2007, and (iii) Cycurion Innovation, Inc., a Delaware corporation formed in September 2021, in connection with our acquisition of assets from Sabres, a leading Israeli-based cybersecurity provider.\n\nWe deliver high-quality, cybersecurity solutions to federal government civilian, defense, and judiciary agencies in addition to commercial clients across a variety of industries. We, through our operating subsidiaries and strategic partnerships, have numerous prime and subcontracts with key government agencies. Our growth engine is driven by organic business solutions and strategic acquisitions of cyber/ infrastructure service providers.\n\nOur Subsidiaries\n\nCycurion Sub, Inc.\n\nWe own our operating subsidiaries through Cycurion Sub., Inc., a Delaware corporation that, until the closing date of the de-SPAC, was known as \"Cycurion, Inc.\" We continue to conduct our business through the three below-described entities, which are now indirectly wholly-owned second-tier subsidiaries by virtue of the recent closing of the de-SPAC transaction.\n\nCycurion Crypto Inc.\n\nOur direct wholly-owned subsidiary, Cycurion Crypto, a Delaware corporation, was formed in July 2025 as part of our strategic initiative to position the Company within the expanding digital asset ecosystem and will manage a crypto treasury.\n\nAxxum Technologies LLC\n\nOrganized in the Commonwealth of Virginia on December 29, 2006, Axxum is a cybersecurity provider with successful assignments within the multiple sub-agencies of the Department of Homeland Security. We acquired Axxum in November 2017. Following the acquisition, we continued Axxum's core operations of providing contractor services to its existing federal government customer base while leveraging our existing processes and tools to expand its commercial footprint.\n\nCloudburst Security LLC\n\nCloudburst is a cybersecurity provider with successful assignments within highly sensitive government agencies and other commercial organizations. We acquired Cloudburst in April 2019. Following the acquisition, we continued Cloudburst’s core operations of providing mission-critical and highly sensitive government agencies and other commercial organizations with high-quality, innovative cybersecurity services. Cloudburst focuses on providing tailored solutions that leverage the industry's best minds and technologies to predict, protect, detect, respond, and sustain our clients from the latest evolving cyber threats.\n\n43\n\n[Table of Contents](#i374867f7b3de40769b8b4f2e06eaf83b_7)\n\nCycurion Innovation, Inc.\n\nCycurion Innovation, Inc. was formed in connection with our acquisition of assets from Sabres, a leading Israeli-based cybersecurity provider. It operates our Cycurion Security Platform’s line of products allows our customers to improve their cyber posture with its MDP SaaS platform. This platform efficiently bundles and easily implements the external protection of a WAF and the internal protection of Bot Mitigation. Bot Mitigation is the reduction of risk to applications, Application Program Interfaces (\"APIs\"), and backend services from malicious bot traffic that fuels common automated attacks, such as DoS campaigns and vulnerability probing. The costs of single-layer security can be measured in terms of money, time, and risk, as well as the damage wrought by a data breach, which millions of businesses experience each year. Through this interaction of the WAF and Bot Mitigation, the MDP is able to reinforce these layers of security and generate new security layers in real time in response to emerging threats. This process is directed by our Cycurion Security Platform's proprietary, cloud-based AI algorithm. Crucially, the AI underpinning the MDP platform is constantly evolving to counter new threats. Through a crowdsourcing process, the cloud-based MDP learns from every threat to any protected application and uses that newly acquired knowledge to protect all MDP clients better.\n\nMaster Service Agreement with SLG Innovation, Inc.\n\nThe SLG team has an average of over 25 years of experience in the development, planning, implementation, and management of information systems. SLG's leadership team offers years of combined success in answering the needs of government agencies and healthcare organizations across the country.\n\nThe SLG team has worked nationally, as it has served over 25 Department of Health and Human Services agencies, all 50 state governments, and over 250 local governments. Since SLG's inception, it has primarily focused on customers in the middle of the country. The team of professionals has successfully delivered information technology, project management, and subject matter services to key health and human service projects, including, but not limited to, state Medicaid programs in Illinois, Indiana, Nebraska, and Tennessee, the Indiana Division of Aging, Illinois Early Intervention, the University of Illinois Division of Specialized Care for Children, the Multiple Myeloma Research Foundation, and many more.\n\nWe established a subcontractor — prime contractor relationship with SLG in the fall of 2019, where we serviced several government agencies and commercial customers, State of New Mexico, Cognizant, KPMG, and the University of Illinois in support of SLG. Axxum Technologies and SLG Innovation that relationship in 2020. A subcontractor offers its specialized services to a prime contractor. Unlike prime contractors, who focus on the managerial side of the government contract, subcontractors tend to dedicate their efforts to lending subject matter expertise and delivery of service to the project. Technically strong subcontractors, along with a strong subcontractor plan are essential to boost the success of a project.\n\nAs a result of the strong technical skills and experience of the cyber teams at Cycurion and its subsidiaries, SLG Innovation entered into a Master Services Agreement (\"MSA\") with Axxum Technologies to provide services to SLG customers. The MSA is task order driven and the number of task orders is modified periodically depending on actual customer requirements for IT and cybersecurity services. Over the last three years, Axxum Technologies has assisted SLG Innovation in growing its revenue and customer base. As a result, SLG Innovation now represents a majority of Cycurion revenues.\n\nRCR Acquisition Agreement\n\nRCR Technology Corporation (\"RCR\") performs certain services for SLG in its role as an SLG subcontractor and, in that context, became a creditor of SLG. In connection with the transactions contemplated by the term sheet with SLG (the \"SLG Term Sheet\"), on April 25, 2023, Cycurion Sub and RCR also entered into a term sheet (the \"RCR Term Sheet\") for a distinct, but related transaction. The RCR Term Sheet contemplates a transaction, pursuant to which RCR will sell to Cycurion all of the accounts receivable of SLG in favor of RCR (but for those accounts that are less than 90 days old as of the date of consummation of the contemplated transaction). The consummation of the transactions contemplated by the RCR Term Sheet is contingent upon the consummation of the transactions contemplated by the SLG Term Sheet. We consummated the transactions contemplated by the RCR Term Sheet on September 25, 2025. Cycurion issued 248,006 shares of common stock to RCR as a result of the consummation of the transaction contemplated by the RCR Term Sheet pursuant to the Securities Purchase Agreement, dated September 25, 2025.\n\nThe foregoing brief summary description of certain terms and provisions of the RCR Term Sheet does not purport to be complete and is qualified in its entirety by reference to the full text of the RCR Term Sheet, a copy of which is filed as an exhibit to this Annual Report on Form 10-K as Exhibit 10.13 and the full text of the RCR Term Sheet amendments, a copy of each of which are filed as an exhibit to this Annual Report on Form 10-K as Exhibit 10.13a, 10.13b, 10.13c and 10.13d. Readers are encouraged to read those Exhibits in full for a more comprehensive understanding of the transaction contemplated by the RCR Term Sheet.\n\n44\n\n[Table of Contents](#i374867f7b3de40769b8b4f2e06eaf83b_7)\n\nAcquisition of Technology\n\nOn September 30, 2021, we acquired certain technology assets of Sabres, a leading Israeli-based cybersecurity provider. As part of the asset purchase agreement, we acquired Multi-Dimensional Protection (\"MDP\"), WAF and Bot Mitigation SaaS platforms, and their associated intellectual property.\n\nOur Cycurion Security Platform's (formerly Sabres') line of products allows our customers to improve their cyber posture with its MDP SaaS platform. This platform efficiently bundles and easily implements the external protection of a WAF and the internal protection of Bot Mitigation. Bot Mitigation is the reduction of risk to applications, APIs, and backend services from malicious bot traffic that fuels common automated attacks, such as DoS campaigns and vulnerability probing. The costs of single-layer security can be measured in terms of money, time, and risk, as well as the damage wrought by a data breach, which millions of businesses experience each year. Through this interaction of the WAF and Bot Mitigation, the MDP is able to reinforce these layers of security and generate new security layers in real time in response to emerging threats. This process is directed by our Cycurion Security Platform's (formerly Sabres') proprietary, cloud-based AI algorithm. We do not have AI processing in the production version of the software. That version is in the testing and evaluation phase. Crucially, the AI underpinning the MDP platform is constantly evolving to counter new threats. Through a crowdsourcing process, the cloud-based MDP learns from every threat to any protected application and uses that newly acquired knowledge to protect all MDP clients better.\n\nOur Cycurion Security Platform's (formerly Sabres') line of products provides solutions for substantially all web application security needs. These products provide solutions, whether a client is in need of a web application firewall to comply with regulations and ensure it has a first line of defense against the hazards that the internet can present or is in need of enterprise-level products that empower SOC teams and security management. Our Cycurion Security Platform's constantly survey a client's data to detect security issues in need of attention, send automatic updates, and provide the client with a complete database of rules and threats.\n\nWe have integrated the technology assets that we acquired from Sabres (which now constitutes our Cycurion Security Platform) into our Managed Security Services Practice. We believe that the platform will enhance our service offerings and assist with the expansion of our commercial business. Our dedicated support team will manage the Sabres platform, provide real time reporting, response to security incidents, and will manage all data privacy needs from a single security information and event management SaaS platform dashboard.\n\n45\n\n[Table of Contents](#i374867f7b3de40769b8b4f2e06eaf83b_7)\n\nFinancial Overview\n\nA number of factors have contributed to first quarter 2026 results of operations, the most significant of which are described below. More details on these changes are presented below within our \"Results of Operations\" section.\n\n•The execution of cost saving efforts have improved our gross margin.\n\n•The completion of the business combination with Western Acquisition Ventures Corp. resulted in first quarter 2025 losses.\n\nResults of Operations\n\nTable MD&A 1: Consolidated Results of Operations\n\nFor the Three Months Ended March 31,\n\n20262025\n\nRevenue$3,268,620 $3,870,050 \n\nCost of revenue2,580,262 3,192,287 \n\nGross profit688,358 677,763 \n\nGross margin21.1 %17.5 %\n\nOperating expenses:\n\nSelling, general and administrative expenses2,743,695 337,374 \n\nStock compensation expenses315,833 — \n\nBusiness combination expenses— 10,437,894 \n\nTotal operating expenses3,059,528 10,775,268 \n\nOperating loss(2,371,170)(10,097,505)\n\nInterest income14,236 — \n\nInterest expense(204,852)(178,890)\n\nGain on debt settlement, net— 141,653 \n\nOther expense— (113,744)\n\nOther expense, net(190,616)(150,981)\n\nLoss before income taxes(2,561,786)(10,248,486)\n\nProvision for income tax— — \n\nNet loss(2,561,786)(10,248,486)\n\nLess: Net loss attributable to non-controlling interest433,324 — \n\nNet loss attributable to Cycurion$(2,128,462)$(10,248,486)\n\nRevenue\n\nRevenues for the three months March 31, 2026 decreased $0.6 million or 15.5% compared to the three months ended March 31, 2025. We attribute this decrease in the revenues for the three months ended March 31, 2026 compared to the same period in 2025 to planned wind-down of certain legacy contracts ahead of the ramp of higher-margin replacement work and the delayed start dates of new federal, state and local contracts.\n\nCost of revenues\n\nThe cost of revenue for the three months ended March 31, 2026, was approximately $2.6 million, compared to $3.2 million for comparable period in 2025. The gross margin improved from 17.5 % to 21.1 % as management focuses on cost cutting efforts and works to improve the overall portfolio of contracts.\n\nSelling, general and administrative expenses\n\nOur selling, general and administrative expenses increased significantly for the three months ended March 31, 2026 compared to the same period in 2025 due to the additional expenses associated with being a publicly traded company, full consolidation of SLG selling, general and administrative expenses and the addition of key individuals for the company's growth strategy.\n\n46\n\n[Table of Contents](#i374867f7b3de40769b8b4f2e06eaf83b_7)\n\nStock compensation expenses\n\nStock compensation expenses were $315,833 for the three months ended March 31, 2026, compared to zero amounts being recognized in the same period 2025.\n\nBusiness combination expenses\n\nBusiness combination expenses in the three months ended March 31, 2025 are a result of the business combination with Western.\n\nInterest income\n\nInterest income was $14,236 for the three months ended March 31, 2026 as the company was able to invest cash in money market accounts. No interest earning assets existed in the three months ended March 31, 2025.\n\nInterest expense\n\nInterest expense for both the three months ended March 31, 2026 and 2025, was $0.2 million. Although approximately the same interest expense was incurred, the underlying interest-bearing liabilities varied were different during the two periods. For further information refer to debt footnotes.\n\nGain on debt settlement, net\n\nThe $0.1 million gain on debt settlement, net for the three months ended March 31, 2025 is the result of the conversion of debt to various equity instruments at a lower fair market value than the exchanged debt on the books. No conversions occurred in the three months ended March 31, 2026.\n\nLiquidity and Capital Resources\n\nOur primary sources of liquidity are cash on hand, cash from operations, borrowings under our debt financing arrangements and equity raises through our equity line. As of March 31, 2026, we had $2.0 million in cash and cash equivalents. As of March 31, 2026, there was substantial doubt regarding the Company's ability to continue as a going concern, as the Company had a net working capital deficit and an accumulated deficit resulting from substantial losses incurred during the three months ended March 31, 2026 and from prior periods. The Company's ability to continue as a going concern depends upon its ability to market and sell its products to generate positive operating cash flows. As of March 31, 2026, the Company had an accumulated deficit of $29.0 million and a working capital deficit of $12.0 million. In addition, the Company had a net cash outflow of $2.9 million from operating activities during the three months ended March 31, 2026. These circumstances continued to give rise to substantial doubt as to whether the Company will be able to continue as a going concern and did not alleviate the doubt outstanding from 2025.\n\nManagement's plan is to continue improving operations to generate positive cash flows and register shares of its common stock in order to undertake a public offering to raise additional capital. Management believes that the valuation and liquidity brought by a public offering of its securities will allow holders of convertibles notes, and convertible preferred stockholders the mechanism to convert their securities into common stock that will reduce the Company's overall leverage and debt service requirement. If the Company is not able to continue generating positive operating cash flows, and raise additional capital, there is the risk that the Company may become insolvent.\n\nCash Flow\n\nTable MD&A 2: Net Changes in Cash and Cash Equivalents\n\nFor the Three Months Ended March 31,\n\n20262025\n\nNet cash used in operating activities$(2,889,834)$(2,745,109)\n\nNet cash (used in)/provided by investing activities(129,000)1,799,523 \n\nNet cash (used in)/provided by financing activities(207,683)3,173,991 \n\nNet (decrease)/increase in cash and cash equivalents$(3,226,517)$2,228,405 \n\n47\n\n[Table of Contents](#i374867f7b3de40769b8b4f2e06eaf83b_7)\n\nNet Cash Used In Operating Activities\n\nFor the three months ended March 31, 2026, net cash used by operating activities was $2.9 million, compared to $2.7 million for the three months ended March 31, 2025. The slight increase in cash used in operating activities is the result numerous factors since the first quarter of 2025 had many business combinations expenses. The company has expanded the corporate level team compared to first quarter 2025, but has been able to partially offset some of those cash outflows by focusing on cost saving initiatives through the organization.\n\nNet Cash (Used in)/Provided By Investing Activities\n\nFor the three months ended March 31, 2026, net cash used in by investing activities was approximately $0.1 million, compared to $1.8 million net cash provided by investing activities for the three months ended March 31, 2025. The cash inflow in 2025 was a result of the Trust Account in connection with redemption and cash released from the Trust Account to the Company.\n\nNet Cash (Used in)/Provided by Financing Activities\n\nFor the three months ended March 31, 2026, net cash used by financing activities was $0.2 million, which was repayments on the revolving line of credit. For the three months ended March 31, 2025, net cash provided by financing activities was $3.2 million, driven by $3.3 million in proceeds from exercise of warrants, partially offset by cash outflow of $1.0 million related to the redemption of common stock subject to redemption. Other inflows and outflows are the result of various proceeds and repayments on notes and bank borrowings.\n\nGoing Concern\n\nWe have incurred operating losses since inception through the period ended March 31, 2026, having had negative cash flow from operations. As of March 31, 2026, we had an accumulated deficit of approximately $29.0 million, as compared to our accumulated deficit of approximately $26.9 million as of December 31, 2025. The increase of our accumulated deficit was a result of our net losses for the three months ended March 31, 2026.\n\nFurthermore, we expect continued, significant operating losses for the next few years. We also utilized cash in operations of approximately $2.9 million for the three months ended March 31, 2026. As of March 31, 2026, we had unrestricted cash of approximately $2.0 million, a decrease of $3.2 million from approximately $5.3 million as of December 31, 2025. As of March 31, 2026, our total assets decreased to approximately $31.4 million from approximately $33.5 million as of December 31, 2025, primarily due to decreases in cash. Based on our current capital resources as of March 31, 2026, including our unrestricted cash and accounts receivable, net of $5.4 million, we expect to be able to continue our operations for a minimum of 12 months as of the date of this report. Nevertheless, our continuation as a going concern is dependent on our ability to obtain additional financing until we can generate sufficient, consistent cash flow from operations to meet the expected growth in our obligations. We intend to continue to seek additional debt or equity financing to continue our operations.\n\nOur unaudited consolidated financial statements have been prepared on a going concern basis, which implies we may not continue to meet our obligations and continue our operations for the next fiscal year. The continuation of our Company as a going concern is dependent upon our ability to obtain necessary debt or equity financing to continue operations until we begin generating positive cash flow.\n\nThere is no assurance that we will ever be consistently profitable or, notwithstanding our recent financing activities, that debt or equity financing will be available to us in the amounts, on terms, and at times deemed acceptable to us, if at all. The issuance of additional equity securities by us would result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, would increase our liabilities and future cash commitments. If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to continue our business, as planned, and as a result may be required to scale back or cease operations for our business, the result of which would be that our stockholders would lose some or all of their investment. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue as a going concern.\n\nOff-balance sheet arrangements\n\nWe did not have any off-balance sheet arrangements during the periods presented, and we do not currently have any off-balance sheet arrangements, as defined in the SEC rules and regulations.\n\n48\n\n[Table of Contents](#i374867f7b3de40769b8b4f2e06eaf83b_7)\n\nCritical Accounting Policies and Estimates\n\nThe preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates, judgments, and assumptions that affect the amounts reported. Actual results could differ from those estimates. The 2025 Form 10-K, as filed with the SEC on March 31, 2026, includes a summary of critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenues, or expenses during the three months ended March 31, 2026."}