Sidechannel Inc

Greetings. Welcome to the Side Channel Fiscal Year 2025 Q1 Financial Results Update Conference 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, Brian Hoagley, Chief Executive Officer. You may begin.

Thank you, and good afternoon, everyone. It's Brian Hoag-Williams, CEO of SideChannel. So I just want to cover quickly kind of our view of how Q1 went. We won't rehash everything that's in the queue, but you will undoubtedly have some questions about it so we can answer those in a bit. I'm joined by our CFO, Ryan Polk. He'll touch some highlights on the financials Really, Q1 for us, obviously, it's an off-calendar quarter than our fiscal quarter, so we're looking at October, November, and December. From a services standpoint, as we've talked about previously, there's a bit of seasonality. There's also some differences in how people kind of treat the end of the year. The U.S. government, a lot of governments start on October 1, so that's, you know, we align with them, but a lot of other companies are ending their year and they start Jan 1, so it's good and bad. Some companies are looking to cut costs in that last quarter and they're not spending and they're waiting until Jan 1 when they get a new budget cycle to start, but we also see, you know, kind of last-minute spends pop up, especially right after Thanksgiving. Companies start saying, hey, we've got some extra budget. We've got to spend it this year. So we're definitely seeing all of that. It's just the natural way that the business goes, especially with services and software purchases. Overall, I think we started off 2025 very well. I'm excited us being already into February and what we're working on. in Q2, but it's kind of just looking at Q1. I want to touch on three major aspects and focus areas for the company. We've debuted this to the board, socialized this, instilled this internally in the company, and it's really our go-forward business strategy. I'll just hit some high points. A version of what I'm going to say will obviously be in a transcript from here, but we'll also have one that goes out in our monthly IR newsletter. If you don't receive that, shame on you. If you're on this call and you're not receiving our IR newsletter, go to our investor page and sign up there, and you will get added to that list, and we send that out monthly. Ryan and I work on that personally, and then through a couple other people doing some QA, then push that out for everyone. Really just trying to highlight some of the things that are happening from my desk, Ryan's desk, the company as a whole. We like to just try to keep the investors informed. So you'll see a version of what I'm about to say make its way into an upcoming monthly newsletter. We really have three areas for where our growth is going to sit on a go forward. We've aligned on this, we've agreed on it, and now the company is looking at resource planning to support hitting these three strategic objectives. And they are in order. Growing our proprietary software revenue with Enclave. Two, increasing our VC service engagements. And three, expanding program adoption at current clients. I'll briefly touch on the first one. Why do we want to obviously push the needle and everything with Enclave? It's reoccurring revenue for stability. It's a scalable product across markets. It allows us to penetrate larger markets in space, including mid-sized businesses and emerging industries, without a proportional increase in operational costs. If you've been following our story, you know that we're very keen on keeping operational costs under control and managed. Selling software has got a higher margin for sustainable growth. Proprietary software offers significantly higher profit margins compared to services. enabling us to reinvest in R&D, other strategic initiatives, while enhancing our overall profitability. These are all really good things to have as a software company, as a services company with access to software, especially if it's our own intellectual property. The product has been making some really great rounds. As you can see from announcements, we've added some additional salespeople, a new focus on Asia Pacific, the Middle East, and even looking at Latin America. So you're going to see our spend now really kind of focus on the next 12 months on growing the sales and marketing team, looking at new markets, looking at new sectors, and really focusing, again, on our number one business priority and objective, growing our proprietary software revenue through Enclave. Our second and third points are, you know, our business to date. And we're not you know, releasing ourselves from anything on what's going on with services. We love our services. Our clients love our services. You can see that it's growing. But again, we really want to focus our spend and any types of expenses or costs around the Enclave product. But what we are able to do with the vCISO engagements and increasing those, you'll see the sales team, you'll see the marketing initiatives, again, still support what we're doing from a services side. And that's really kind of going downstream too. It's not just this top-level VC. So we've really been able to do some phenomenal work through broadening our engineering services and capability, our new cloud security and architecture practice, as well as just kind of all-around advisory, risk assessments, strategic assessments at clients, which are great wedges and entry points for us to start working with new logos. Why is increasing VC engagement important for us? Well, we're meeting a market demand for fractional leadership. With the increasing cybersecurity threats and limited budgets, we're seeing this on our clients. Organizations are seeking cost-effective leadership solutions like our VC, and making this a high-growth market segment. We're seeing it take off. In other industries, we are seeing an increase in competition, although we still believe that we do stand alone on quality because We believe experience matters, and that's how we lead. We're strengthening long-term client relationships. VC's on engagements build trust and position side channel as a critical strategic partner, often leading to other additional services or product adoption, such as Enclave. So when you're in the position as a VC without a client, you're able to then say, hey, listen, this is what your program should look like. By the way, I've got a catalog of solutions I know works. This should work for you. And clients are looking to adopt that. Number two here really supports our number one objective, growing proprietary software revenue. By having our services in engagements at clients, we're in a much better position to be able to place Onclave in as the solution to address vulnerabilities, risks, gaps, whatever. We also have the ability And the focus number three, to expand our program adoption. What are we doing at our current clients? How can we broaden our client penetration? Expanding program adoption integrates multiple touchpoints within a client cybersecurity framework. It creates deeper relationships and it increases overall client value. We have the ability to cross-sell opportunities. We have a comprehensive approach to program adoption. Unlock opportunities to introduce complementary products and services. Boost total revenue per client. Again, supporting initiatives one and two. We're in a client, they trust us, we're doing the right thing, we have solutions like Enclave that we can then position for them to benefit from. And lastly, our ultimate goal for clients is driving their overall maturity and retaining them. So by helping clients implement structured and scalable cybersecurity programs, we can address their immediate needs and create pathways for longer-term retention as their cybersecurity partner. Again, this all leads back to the growth of our brand the revenue, and the value to shareholders. So I just wanted to kind of highlight really what we're looking at from a strategic standpoint for side channel going forward. And you're going to see everything we're doing is aligning to these three. In fact, internally, if kind of the cadence now is you need to kind of think about If you're working on something, is it supporting and how is it supporting one of these three initiatives? And if it's not, we really need to have a good reason as to why we're working on it. So this is where we centered the team. I'll speak on behalf of the board, on my executive leadership team, our ELP, and anyone else who we've talked about this with. We even did this all company-wide previous week, one of our all staffs. There's an excitement and understanding around this. It makes sense. It aligns everyone. It gives us a really nice go forward. It's clear, and we believe that this is going to be of substantial benefit for SideChannel's growth. So with that, I'll turn it over to Ryan. We'll go to Q&A, and then I'll come back to close this out.

Thank you, Brian, appreciate that. Before we get into the comments around the first quarter, I want to remind anyone on the call who has not yet participated in our annual meeting that voting is still open for our annual meeting, which is held next Wednesday, February 12th at 9 a.m. Eastern Time. So please reach out to me if you need some help accessing our voting site. and I will assist you in casting your ballot in our annual meeting. It's been kind of a same-story type quarter for us. Revenue growth just under 10% this quarter on a year-over-year basis. Cash increase, I think our fourth consecutive quarter, I should say. Fourth consecutive quarter of cash increase, cash provided by operations. We end the quarter with 1.4 million dollars of cash and cash equivalents and short-term investments of our short-term investments uh as noted in the uh in the q our time deposits another way of saying certificates of deposit we are putting our cash into some interest-bearing accounts like certificates of deposit to generate a little bit of interest income and so that's um That's really the nature of our short-term investments. We're not doing anything with mutual funds or other forms of securities. And so looking ahead, we've been saying that the cash line is – there's plenty of things in place that would likely allow us to increase our cash from operations. Brian just mentioned three things in our strategy and some plans that are being developed to support that strategy that are likely to use some of that cash provided by operations. So we don't give guidance on any of our financial measures. And I think if you've seen us grow cash for the last four quarters, just keep in mind we are going to be making some investments using that cash to do things that we think get the word out about our products and services to more people with the intent of having that generate revenue increases in in future quarters. So those conclude our summary comments on the financial statements for this quarter. John, we'll take questions now from the phone line.

Absolutely. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Once again, please press star 1 if you have a question or comment. And it looks like our first question is coming from Luke Wheatley, private investor. Please proceed.

Hey, Brian. How's it going? Good. Thanks for joining. Yes, sir. So just a couple questions. I saw the team. How you thought about wanting to expand internationally before really, you know, getting things home at home? You know, 10%, that's a good growth number, but it's not excellent, and I know you all want excellent. So how did you think about building out that sales team internationally before adding more salespeople at home?

So you cut out, maybe it's my phone, I apologize. I just want to make sure I get your question right because it cut out a little bit. So you're asking about the sales team just as we're building it. We've recently added DT. His real name is David Tran, but he goes by DT because it's really beneficial for us because we have now like three Davids on the sales team. So DT's focus is on APEC. Nick and I know him from just working in the industry, and he's just very well regarded. It was kind of opportunistic, honestly. He was kind of looking around at other products from a sales standpoint and started talking to Nick, our CTO, and I about what we're doing with Enclave, and he was very intrigued. He's got a deep background in network engineering, so he's got the skill set to do this. And his entire network is Asia Pacific, South Korea, China, Japan, Kuala Lumpur, Malaysia, Australia, and then also in the Middle East. So he was just like, hey, listen, I would really love to get involved. I really like Enclave. I think you could do really well. Let me bring this out into these markets. You guys aren't really out there in He's got some insights into what these markets are looking for. It's actually kind of informing our product roadmap. So, you know, honestly, it was kind of opportunistic. You know, I think we started out Enclave just trying to focus on U.S. and Canada. Also, you know, obviously U.S. federal markets, specifically DOD markets. And, you know, look, this opportunity came up and it just seemed like a very, very good one. And it's the early days. But like I said, Nick and I know him from, from, from elsewhere and we've seen him in action and he's, he does have the network. He does have the cred. So we're just, we're just looking to kind of capitalize on an opportunity and get out there to, to some of these other markets. Hopefully that kind of answers your question. Okay.

Gotcha. No. Yeah. That, that definitely helps you answer the question. I really appreciate that. And then just a quick followup, if that's okay. Yeah.

Yeah. Just real quick, I kind of missed what are we doing with the U.S. team, right? And the core team here. So you would have noticed we just brought on Rachel. We stole her from CrowdStrike. Very, very motivated individual. Really understands the space. And, you know, just really personable. And, you know, she's just doing business development. So she's getting us building us kind of that top of funnel, those qualified leads. And she's already showing a lot of promise and she's already actually getting things into the sales pipeline. And I think she's on, I mean, we hired her right before Christmas. So what you're going to see from the sales team is growing that type of role, getting more people who are going to focus on getting meetings, getting us in front of the right opportunities. And then the rest of the team that we have is obviously there to support that and then close those deals and get us into accounts, manage those accounts, grow those accounts. And you're going to see kind of the sales-specific strategy is focusing on direct outbound, obviously via like Rachel and what Dave Barton are doing, but also you're going to see kind of this channel approach where we've had a lot of success with building channel partnerships under Dave Menichello And now we're going to take that with Enclave and be able to bring Enclave into the channel. And that's important because that channel is filled with managed service providers, managed security service providers, other types of VARs and service providers. And each of them have 10, 20, hundreds of clients. So we're able to sell to one and effectively sell to many. Ideally, we're able to get into any of these service providers' tech stacks. and replace current technologies that they have, and they start using enclaves with all their clients, you're going to start seeing a focus on that as well. So that's really how we're kind of nailing things down from a sales execution, but also I just didn't want to discount what we are still growing locally, if you will, if you want to say locally from a U.S. standpoint.

Okay. Got it. Yeah. Thank you very much. And then just two more pieces. Um, I'd love to hear about how you think about compensating your sales associates. What sort of mix is incentive based and then what sort of mixes just straight salary. And then also on the last call we had, uh, you all, you couldn't give a ton of background with the department of defense contract. I was just wondering if you could give some more background with how that's going. And what sort of revenue you all are seeing from that?

Sure. So on the comp standpoint, it's kind of a variety. It's base plus commissions. We try to do tiered commissions. So you kind of unlock different commission levels at different levels. Because look, you want these guys and girls to be hungry. You want them to be incentivized by doing better at sales. And that's what we're trying to align their commission structure towards. pretty industry standard stuff. I mean, I don't think we're doing anything that's outside the norm when you look at how tiered compensation structures are built for folks. And obviously more senior level people command, you know, more senior commissions and structures than more junior level people. But yeah, I think what we're doing is pretty standard for what you'd see. Anybody who's come to want to join us, it's kind of understood, you know, where they're going to fit and what we're able to do because, again, we're kind of following some standard structures. On the DOD side, yeah, I mean, again, we really can't dig into and disclose a whole lot just on the nature of the clients, but we do have two Defense Department clients now, completely different Defense Department clients. We're doing this through subcontracts because the cost for us to be able to build a direct contract federal or DoD sales model, that would just be the length on that is longer and the costs, we're not seeing it. So through partnerships, we're now able to do this. And actually the second new client, which looks to be significantly larger than our first DoD client, is actually not just a resale and an implementation, but it's actually an integration into a solution that our partner has been able to position there. So it's very exciting from our standpoint, the use case. You'll notice actually the new feature of Enclave, it's called machine identity management or non-person identity, where you and I have a user account that we log on to, email our computers, but the computer itself actually has an account, and that needs to be managed, and that's managed through certificates. We were actually able to develop a capability into Enclave. Actually, Nick will tell you, we already had the capability. We just had to expose the dashboard in it to be able to win this client because that sector is looking for this type of solution, and believe it or not, the commercial solutions that are out there aren't as appealing from everything we've heard and learned from the DoD. So, yeah, we're up to two federal clients now with the product. That second one just started in the beginning of January, first or second week of January. But, you know, basically initial proof of concept, paid proof of concept, and with the intention of you know, once we tick all the boxes on the technical, you know, they got to make sure it works. It does what we say it does, which it does. Once they check all those boxes, you know, they look to implement and roll out to their enterprise environments. So, yeah, hopefully we will be able to share more on that as the year progresses. We probably won't be able to share who or where exactly those are, but I think you will see the revenue numbers come through, uh, on Enclave to be able to then determine, you know, how big of a solution this is, uh, an opportunity this has been for us.

Okay. Gotcha. So that's still mostly stuck in your deferred or not even yet. Just still getting it implemented and set up.

Um, right. Actually, I don't know.

Is that, yeah, that's, yeah, that is, uh, that's, that's true. Um, we, To date, our invoicing for Enclave has been done at an annual license basis. And so when that invoice goes into our deferred revenue account on the balance sheet as a liability, and then we recognize one-twelfth of that license fee each month as revenue.

Okay, got it. I appreciate it. And then final question, if you'll allow me, I really appreciate the back and forth here. Is that, um, give me one second here. Is that Carolina advanced digital that you all are working with, um, when you're selling these products to the DOD?

We, we have a partnership with them. Um, but we, they are not our partner on these two opportunities that we've, uh, in these two deals now, but, um, Yeah, Susan and John Jadabush, the two principals at CAD, phenomenal people, really love working with them. We did work with them to get Enclave onto the GSA and the NASA SUP federal vehicles. But, you know, our other partners also have those opportunities. So they're really focused on state level in the southeast. I think some federal, but they really do quite a bit more southeastern state level, state college, universities, because they're headquartered down there in North Carolina. So the southeast states are really where their focus has been. But no, these opportunities have not been through them. But why are you familiar with them? Because they're really great, great folks.

I do not know them personally, but I was just trying to learn more about your contracts with, uh, that you can access to the GSA and that sort of thing. And I ran into them, so not familiar with them, but ran into the name. Got it. Got it. All right. Well, I really appreciate it. That's all I had. Thank you.

Once again, if there are any remaining questions or comments, please indicate so by pressing star one on your touchtone phone. We have no further questions from the phone lines. Ryan, I'd like to turn it back to you, see if you have any questions in your queue.

No questions visible to me in the webcast, in the webcast console. So, Brian, I think ready for closing comments. Sure, sure.

Yeah, I just checked the boards online and all my other messages. I didn't see anything else that we didn't cover. So hopefully we have covered everything around. There was a nice ask about plans for overseas, but I think we just went over that and new government contracts. So yeah, again, look, we're excited about another quarter in the books. We're already working well within Q2 here. So It's kind of, I'll be honest, it's a little weird kind of looking back to a month and a half ago when we're honestly just kind of thinking about what we're doing right now and going forward. So hopefully this was valuable for everyone to kind of learn and hear about what our strategy now is, what we're set and what we're going to grow towards. Obviously, if you have any questions, please reach out. There is an IR... email address that you can reach out to. That is obviously just ir at sidechannel.com. Feel free to, if you have any questions or you want to follow up, you can get in contact with us that way. Check out sidechannel.com. We have the newsletter, like I mentioned. Please get yourself added to that list so you can stay up to date with our monthly newsletter on investor relations, really just trying to tailor it towards you as shareholders. and interested parties. So with that, you know, let's keep going. I look forward to speaking to you in a couple months and, you know, moving things on for 2025. Thank you.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

All right, John, thank you.

Yeah, thanks, John. Good stuff. Thank you. Thank you, gentlemen.

Take care. Bye.