Sidechannel Inc

Welcome to the SciChannel Incorporated third quarter financial results call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Brian Houtley. You may begin.

Thank you. Good afternoon, everyone. Brian Hoagley, CEO of SideChannel. I'm joined by our CFO, Ryan Polk, and we welcome everybody to our Q3 call. I'm going to go over a number of highlights of the company, and then Ryan will dig into some financial aspects and highlights. Obviously, the queue was released this morning before the bell. And then we will also go into Q&A. So we have some, I believe, pre-submitted, and then we can obviously take calls, or sorry, we can take questions during this. So I will begin. Make sure I've got my phone set. Good. So overall, another good quarter for SideChannel. I believe we are still in the right space at the right time, focusing on the right types of clients with the right types of solutions. I like to have discussions internally with the team from top down, so I'll take that same approach with everyone here. Really starting in the industry as a whole, Looking at the macroeconomic factors of what we're seeing across the U.S. and the globe, we are seeing clients becoming a little bit more budget aware or being more budget conscious. This is actually advantageous to SideChannel because we are focusing our capabilities towards budget aware, budget conscious clients, specifically, obviously, the mid-market and emerging companies. So we're seeing some benefits out of this, obviously, but to be honest, we are seeing clients make some decisions about their security posture that is factored into sales and marketing, although I think our numbers are showing and our approach is showing that we're able to overcome that. The industry as a whole is also changing and adopting a lot more regulation, and I'll touch on two of these areas a little bit later that are definitely benefiting the work that we're able to do and what makes us attractive to clients. Digging into the organization itself, looking at and starting with sales, we've grown the team to six members of the sales team. We've moved around, and I think we've structured that part of the organization correctly for where we are right now as a company in its growth trajectory. We've been able to bring on a new account manager, and this person's role, his name is Matt, is able to focus on expansion inside of current clients. So it's not just enough to be able to land new clients. We want to be able to bring them more capabilities, more services, obviously then increasing our revenue. So with a new focus on account management within the client base, we're looking forward to a lot of really good things from the sales team on a go-forward basis. Our sales development reps are SDRs who are folks who are outbound, really outbound focused. They're calling, they're on social, they're doing outreach to prospective clients and they're setting up leads and those leads are turning into discussions, demos, proofs of concept, and then eventually sales. our close rate is still very high. We're very proud of and very excited about the fact that when we are getting in front of clients, our close rate, our ability to actually become or getting in front of leads, our ability to make them a client is still very high for us, and we've been holding those numbers all along. And I feel like that's just an indicator to what we're actually providing to the market and that's what the market is looking for. So we have the right products and services at the right time that the market is looking for those types of things. We've also started the sale of our Enclave product. We have landed two clients of our Enclave micro-segmentation and Zero Trust product. We've been able to do this actually through a channel partner, and I think this is an indicator that the MSPs, the managed service providers out there, and eventually as we move over to managed security service providers out there, see the value that they can bring to their client base with our product. And we're very excited about that. I want to give a lot of kudos to the sales team for their ability to make that happen and bring that through the entire sales cycle. Moving over to marketing, the campaigns that we've got are still working. They are increasing. They are a variety. We go across social and email, and there's a lot of great impact. There's a lot of good interest in our message, and that's obviously bringing in leads, potential clients and clients, and then ultimately revenue to SideChannel itself. So we're still strong. On social, if you're not following us, I definitely recommend all of you to subscribe to what we're doing on both LinkedIn, Twitter, but also we're putting out a tremendous amount of content on YouTube, both educational and informative on just what's going on in the industry, what's going on within cybersecurity as a risk, but also what we're doing with our products and our services directly. So you'll continue to see that. I know there's a number of people here from some of the... from the online channels, and I welcome you all. Also, we do respond and hear what you're saying. We're listening to you both as investors and as clients, what you're seeing in the world, and we want to be able to factor that into our go-forward and our go-to-market. When I'm looking at our ops our operations internally, it's really focused on excellence and still focused on excellence We've moved David chase Dean Into the chief operating officer role and he's just excelling at that and you know that focus now for all of operations and delivery to have a COO in place and who can guide and oversee and lead that part of the organization for delivery to our client base. And that's very important for us because that not only shows our clients that we're serious about delivery to them, but it also shows our team and our staff that we're serious about our ability to keep them informed, keep them educated and trained, keep them as part of the side channel mission, and then also be able to deliver delivery a very high-quality capability set of services and products to those clients. So we're very excited about how that's shaping up. It's leading to a standardization across our client base, which will eventually reduce costs for us. It'll increase our ability to really execute within new clients when we get similar clients to our current ones. we'll be able to really scale what we're doing with those new clients because of our standardization. And we're able to expand our other services. We're seeing an increase, as you can kind of read from the 10Q. I'll let Ryan hit the real highlights, but we're able to position more of our other services, not just virtual CISO and vCISO, into our current client base and provide a very robust capability that allows them to address their cybersecurity posture. And it's appreciated by clients, obviously, because they're expanding their spend with us, but they're lowering their risk in actually a much more financially feasible and cost-effective way. And then we're also increasing our ability to sell products, not only our own products, but others. While we don't want to be necessarily in a VAR or evaluated reseller category, we are in a position where we can defensively sell the products that we know address the controls to meet the gaps identified at clients and, again, better their posture and lower their risk. So two things I want to touch on before I really hand over to Ryan is kind of forward-looking, both with Enclave and kind of the regulatory environments that we're seeing change that SideChannel is going to be in a position to benefit from. First, with Enclave, obviously, we've had our first sales, which is phenomenal. And, you know, it's always gratifying to see customers, paying customers, see the value of something that you've put an idea from, you know, conception into creation and then implementation. We didn't stop there. What you're gonna see over the next couple months is the customer feedback and the industry feedback that we've gotten on Enclave. You're gonna see the features and the capabilities that we're able to now start debuting and bringing out. We've listened to our clients, we've listened to our customers, and we've heard what they would also like to see in a product like this, and we've built those capabilities. So, our focus around asset identification, asset management, our ability to do data flow mapping inside of an environment, our ability to identify vulnerabilities on endpoint devices and assets. These are all really key controls within any cybersecurity program that's being built. and yet they are traditionally not focused on. And it's because they're difficult to do. I'm not gonna lie, as a former CISO, these are generally difficult controls to put in place. And that's why we focused on them. We wanted to go after what was hard. And we knew that it ends up being a priority for clients to be able to do these things, yet knowing that they don't address them, causes them pain later. So our ability to release these new features over the next couple of months, you'll see in August and September, the new feature releases is just going to make this product so much more attractive to our current client base, but also to new clients because of how we're approaching addressing these cyber risks with the Onclave product. And then I think looking at the regulatory environment, there's two components that have come out recently that we're going to be able to capitalize on. And the first one is the Department of Defense's new CMMC requirements. We've been kind of waiting, the industry as a whole has been waiting very patiently for the DoD to finally kind of put their stamp of approval on and finalize the CMMC requirement. If anybody's not familiar with CMMC, the high level is this. There's over 300,000 defense industrial-based contractors out there in the United States. And what is that? Those are all the organizations, manufacturing and non-manufacturing, that support the Department of Defense. And the Department of Defense has built a new regulation that going forward, in order to do work with the DOD, to be able to have a contract with the DoD, to be able to gain any revenue from the DoD, you will need to meet the CMMC regulation. We are positioned to be able to build the programs for those clients and help them meet those regulations. This is going to be an area that is going to significantly pick up because many organizations in the mid-market space, in emerging tech, which I can tell you the Defense Department loves emerging tech, they do not have the in-house capabilities to be able to address what's needed. And we feel very confident in our ability to build those programs. I can say that because it's evidenced by the fact that we build today for our clients their programs, and we build CMMC-ready programs for our clients. So that's one aspect that we're looking forward to and we see as a growing market for SideChannel to be part of as a solution provider. The other one is the SEC. If anybody isn't following, I mean, this is all investors on the call, so maybe you've seen this, but if you haven't, the SEC just laid out their brand new final rule on cybersecurity requirements around disclosures for publicly traded companies. There's around 8,500 to 9,000 publicly traded companies underneath SEC registered guidance. They have mandated now that that by the end of this year, companies will need to start disclosing their cybersecurity posture across a variety of different aspects. Things like, you know, does your board have oversight on cyber? Does management have oversight? What do they do around cybersecurity? Who has experience in cybersecurity? What are your processes to be able to address cyber risks? Your ability to protect, detect, and respond to risks that manifest into actual incidents and then obviously reporting within four days any material risk or any material incident to the SEC. We are in a position to be able to build those programs for those clients. And again, when you look at the Fortune 500 and only two-thirds have a CISO, really, what does that say for the other almost 8,000 companies about where's their security leadership? Who's making security decisions? Who's really at the helm? And SlideChannel's in a position to be able to be that leader and be that driver for a security program, which leads to us bringing in other new capabilities, selling new products, positioning more of our services. So while the economic factors that we're seeing kind of across companies is leading to them tightening their belts, the regulations are working in our favor, and we are in a very good position to be able to capitalize on the fact that those regulations are now in place. And honestly, they're going to impact more mid-market, small business, and emerging companies than they're actually going to impact the larger companies. Because again, you've got to remember, enterprises have the resources to be able to have these programs in place. But the mid-market and emerging companies traditionally do not. And I can evidence that by the five years that we've been running this company. we really know the mid-market, and this is exactly what we see day in, day out. So regulations like this mandating that these controls now be put in place is going to cause these companies to go searching for providers, and we are very, very well positioned to be that provider to those clients. So with that, I will turn it over to Ryan, who will highlight aspects of our financial, and then we'll go into some Q&A. Ryan? Okay.

Thank you, Brian. Another good revenue quarter for SideChannel, revenue $1.8 million in the quarter, which is just a little over 37% higher than the same quarter last year. Sequentially, we grew by 8%, or just over a little over $100,000, or $33,000. Our margin improved over the the second quarter of 2023, and our margin improved significantly over the prior year. This year, in the third quarter, we reported gross margin of 49.9%, which is 4.3% higher than the prior quarter, second quarter of 2023, and which was 5.9% higher than the third quarter of 2022. Net loss for the quarter was just about $700,000. a little less than one cent a share. That includes $214,000 in a non-recurring, non-cash business combination related expense for the shares that were issued on May 4th, 2023, as part of our consolidation or business combination between SideChannel and Cypherlock, which closed on July 1, 2022. Our trailing 12-month revenue reached $6.1 million for the 12 months into June 30, 2023. Revenue retention was 70.8% for that same 12-month period ending June 30, 2023. We ended the quarter with just over $1.4 million in cash. Cash used in operations during the quarter was $432,000, which is a significant reduction from the prior quarter. And operating expenses really were flat if you looked at the reported numbers in our 10-Q compared to the second quarter. But when you remove the non-recurring, non-cash business combination expenses, we're actually showing a decrease that's over $200,000. We announced last quarter in this call and in our report press release around this call, that we had initiated almost $900,000 of annualized cost reductions, and so the reduction in our operating expenses that we're reporting in this quarter reflects the announcement that we made last quarter about the annualized operating expense reductions. In other words, we expect the reduction that you're seeing in our operating expenses to persist in future quarters. We also mentioned one quarter ago that we expected full year revenue to range between $6.3 and $6.5 million. We're not changing or altering that projection. We said the gross margin would be somewhere in the range of 50% to 52%. Again, we're holding on that projection, and that's for the full fiscal year. And we also noted that we expected operating losses to be lower in the second half of the year compared to the first, and you're seeing that with these results after you adjust for the non-recurring, non-cash business-related, I'm sorry, business combination-related costs. So we have the growth in revenue continuing, we have an increase in margin continuing, and we have a reduction in operating expenses. And that's why we are I'm confident that we can say that at this point in time, we do not believe that any further cash is needed to fund the operations of the company. So Brian has summarized the financial results, and I'll, I think, pass it back to you and to Jenny for Q&A.