Sidechannel Inc

Good afternoon, and welcome to the Side Channel Fiscal Year 2024 Q2 Financial Results Update. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. If you wish to join the queue at any time, you may press star 1 on your telephone keypad. Should you wish to remove yourself from queue, you may press star 2. It's now my pleasure to turn the floor over to your host, SideChannel's CEO, Brian Hoagley. Brian, the floor is yours.

Thank you so much. Good afternoon, everybody. This is Brian Hoagley, SideChannel, joined today by our CFO, Ryan Polk. So today released our second quarter 10Q. Hopefully everybody had a chance to read that, went out this morning. Just want to highlight a couple areas. Ryan will touch on some key financial aspects we're quite proud of. But I really wanted to kind of go over a number of aspects of the company and where we are and what we're looking to do. You know, there's been a lot of questions about, you know, just volatility in the stock price, where we are as an OTC listed company, what our plans are for uplisting, how Enclave's looking, what's going on with the company structure and the direction. And look, overall, very confident in what we're doing. We're executing to our plan. I think our queue today and our press release this morning highlighting the components of the queue show that. We set out and said we were going to prioritize being cash flow positive and not prioritize on pure growth. We wanted to allow for being cash flow positive to set us up for the success of, for the future of the company. We don't believe right now is the right time to do any type of raise, dilute shareholders, remove value from current shareholders for the sake of growth. I mean, when you look at most companies that we're being compared to, we, we are not trying to be in the same, really category because we're not looking to run at massive losses for multiple years and not show profitability. Our focus has been on profitability, being cash flow positive, continuing to generate and increase our revenue, and maintaining a stance as being debt-free. We are hitting those. We're executing on those. We said we were going to do those things, and we are doing those things. And I think that is what makes for a good, sound, I think as Ryan kind of keeps reminding me, it's an old school business, you know, model. But you know what? It works. And it works for us. And I think it's what's going to really allow for us to be successful and go forward. And not just be successful, but ensure success. So that's really important. You know, I think a lot of the market that we hear back from feedback from brokers, from folks, retail traders, of what we're supposed to do as an OTC company. And we just don't fit that mold and we don't plan to. We are not going to prioritize doing a raise and getting new money into the stock so that legacy clients and holders can just make an exit. We are building something here that is going to produce long-term value. And that is I don't believe is a true north star for most OTC companies, right? If you have a legit path to profitability, the normal business model for OTC listed companies is tell a story, raise capital, advance the story, tell a story again, raise capital, repeat. We're not doing that. We haven't planned on doing that. I'd never set out to do this two years ago when we went public with a very successful services company. I don't plan on taking that approach. with bringing Enclave further out into the market, and I'll touch on what we're doing with that in a second. We just don't fit that standard OTC company. Look at anyone else that is out there in the same market cap and structure as us. We are significantly different in what we're doing and what we're executing on. Our financials show it, our marketing shows it, our team shows it. I just want to kind of put that to bed. because i think we keep getting asked you know why we're not following the playbook of what other otc listed companies are doing it's because we are not we are not what they are we are different and our clients recognize it um our team recognizes it and it's what you know i'm we're building this company for and it's what i'm very excited to lead i don't want to be when i'm i'm not one to just be like anybody else so i i never envisioned that we were going to run a company in a public market looking like what everybody else looks like. So, you know, that's an issue that keeps coming up, and I want to just kind of put that to bed. I want to give, you know, big kudos to the folks online that, you know, continually give positive feedback and good criticism to us, asking good questions. You know, everybody knows I read the board, so hello to everybody on Investors Hub. I'm glad that you guys keep asking questions and inquiring about what we're doing. So thank you. You know I read everything you guys put out there, so please continue to do that. Always looking for feedback from shareholders, no matter how small they are in their positions with us or how large they are. So your opinion matters, and we do want to hear about your questions and make sure you understand what we're doing and why we're executing on it. So let's talk about Enclave. You know, services have been great, and Ryan's going to touch on the financials and the success of that, but let's just talk about what we're doing at Enclave. We've had a number of really successful proof of concepts or POCs that have actually now turned into new deployments. We've had a number of deployments at startups. There seems to be a really good market fit for client base inside of the startup community for how we can use Enclave to present better asset intelligence, vulnerability discovery. We also have a good market fit for large manufacturing. organizations as well in fact we have a very large manufacturing client as a as a user of Enclave kudos to Nick our CTO on the recent deployment of our new Enclave hardware agent out to that client which was able to roll it out to their manufacturing floor to start doing micro segmentation as an underpinning concept to zero trust for that client I mean it's a great fit we're seeing a lot of success and interest from that sector on adopting micro-segmentation. And we believe we have an incredible product that allows us to meet that need in a simple, low-cost, affordable, and easily managed way. And that's what we're doing with Enclave, and that's where we're seeing a good fit. I think we're also seeing some good interest and the right interest from the U.S. federal government, specifically within the Department of Defense. We just recently started a multi-month paid proof of concept with a federal DOD agency to use Enclave inside of their environment to replace legacy means to do segmentation and some aspects of networking. We believe that we have an incredible product that can meet the needs of this client and clients and agencies that look and act just like them. And again, Nick, myself, David all came out of the DOD and the IC. So we're familiar with how these organizations are structured and what they're looking for. And we feel confident in what we're able to do with Enclave. We're very, very happy that this is being looked at as a real player for solving that space. So we're going to continue to make strides in the development to meet the needs for those types of clients, but we're also going to continue to push sales and look at those opportunities within the federal government space because we know that this is an issue that needs to be solved for, and we feel very good about how Enclave can solve for those issues. The services side of business continues to grow. We've had some really great new clients coming on board. We previously had worked with one of the largest bitcoin mining operations in the world we actually just acquired as a new client one of the other largest bitcoin mining operations you know in the world our ability to go into and really know this space and deliver our services and advisory to establish governance for companies like this to protect their digital assets and protect their underlying infrastructure i think it just it just shows the capability and the experience and the quality that clients expect and are looking for, and they're getting it from SideChannel. We've also been able to win a number of other very interesting clients, a large hotel operation globally, a major brand that has, again, looked to build out and bolster their cybersecurity posture and program, and they've turned to SideChannel to deliver that, and we're very happy to have them as a client. And then a slew of other ones, but one that I am actually very interested in also to kind of maybe highlight is, again, large manufacturing operations. Both, yes, obviously a need within the manufacturing space and their floor to segment their environment from a technical standpoint, but also from a governance standpoint. It's not just about the technical aspects of cybersecurity, the overarching leadership that's needed. We have a lot of clients where there is well-informed, well-intended CIO or, you know, IT leadership. And they just don't want to also hold the burden of, or maybe they just don't have the time or bandwidth to be able to manage the cybersecurity elements and requirements that their company should be, you know, addressing. And that's where they're turning the side channel. So we're getting more of these clients. We've been very excited about the last quarter or so. Um, and I'm, I'm continually impressed by what our team can do, what our message has been. Um, and it's being reflected in our sales pipeline. Um, and you know, the conversations we're having and really pushing ourselves further and further upstream to more established, uh, brands and logos, more, uh, larger, uh, average contract value on, uh, on our clients. And we're seeing our clients stay with us even longer. Ryan, as he pointed out in the 10Q, the retention rates that we have for our clients, there's a great story there. And when people are looking at, well, what does SideChannel do and why should I be an investor? You're investing in that experience and you're investing in that long-term play with clients. And that's really where the value that they see. And that's what we hope that you as investors see as well. So with that, I will turn it over to Ryan for some updates there, and then we'll go to some Q&A. Okay. Thank you, Brian.

So cash flow is, I think, the big story in our second quarter results. It is the first quarter that we've reported an increase in cash flow from operations cash. At the end of December was just over 800,000. It was 819,000. And at March 31, 2024, we had increased cash to a balance of $851,000. So a slight increase of $32,000 has been a focal point of ours to get to a point where we can be sustainably generating cash flow from operations each quarter. Now that we've reached this moment, we do expect there to be some volatility. There'll be some quarters where we grow cash. There'll be some quarters where we're going to go negative on quarter-over-quarter cash flow, just as we work through working capital and some timing issues that we have, some seasonality, let's say, in some of our expenses. But we do expect to have more quarters than not where cash flow is positive from one quarter to the next. And so it's really been an across-the-board focus and effort. Every area, every leader in our company has identified ways for us to reduce operating expenses. We're on pace to be, uh, 1.7 to have 1.7 million less in operating expenses this year, uh, than we did last year. Um, and that takes a lot of leadership and it takes a commitment to, um, takes a commitment to being disciplined on how we, uh, on how we manage our operations and how we, uh, how we approach, uh, approach our, uh, our spending opportunities. I really appreciate the team that I get to work with and, and, uh, value their partnership in achieving good financial results. We have had a lot of success in improving our retention. We're at 74.6% on what we call retained revenue. And what that means is that 74.6% of the revenue that we generated one year ago we, sorry, 74% of the revenue we generated from clients we worked with one year ago, we're able to retain that revenue in this current fiscal year. A lot of times I like to say that we are in, we are not a project company, we're a relationship company, and I think we can back that up with the statistics. Again, 74, 74-ish percent of the clients that we work with, that we've been working with for for 13 months or longer. So we're doing a good job of increasing our revenue retention. And one of the ways that we're doing that is by following Brian's strategy, executing Brian's strategy to add to our vCISO engagements additional products and services that our clients need to improve their cybersecurity risk profile. As SideChannel grows in its growth, client base and its revenue, it attracts the attention of companies that are ancillary to what we do, people that sell software, people that sell services that reduce cybersecurity risk. We are selective in which one of those partnership invitations we take, but every time we accept one of those partnerships, it allows us to increase our catalogs. and the light items that we're delivering to our clients. And we're seeing the benefit of that in our retention line. We have revenue besides just traditional service and consulting revenue that's helping us increase our revenue retention. One of the downsides of that, though, is that third-party services and software revenue is typically less profitable to us on the gross margin line than our traditional services. And you're seeing a little bit of that in the margin lag that we have to the prior year. We do expect that to reverse as we go through the next two quarters. We have some things that our service delivery team is focused on that we think will improve the margin. We think second half margin, gross margin for us will be better than our first half gross margin. And on the revenue line, we don't see any reason why that revenue trend that you're used to seeing with us would change. We are you know, for the year plus, I think we're plus 16%, just under that 15.8% for the year, six months ended March 31 compared to a year ago. We don't see any reason why that revenue trend is going to change drastically one way or the other. And so we feel like we've got a good trajectory, a committed team, a team that's committed to achieving a cashflow positive operation on a quarter-over-quarter basis. And, you know, sort of the cornerstone to all of that is just focusing on our customer service and staying ahead of any attempts that the bad guys might be doing to weaken the cybersecurity posture of our clients. So with that, Brian, I'm going to wrap up my comments and pass it back over, I guess, to the moderator for Q&A.