Sidechannel Inc

Welcome to the side channel fiscal year 2025 second quarter financial results update call. At this time all participants are on a listen only mode and 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 Hoagley. Sir, the floor is yours.

Thank you. Good afternoon, everyone, and thank you for joining SideChannel's Just Go Q2 2025 investor call. I'm pleased to report continued progress in our financial performance, operational execution, and strategic focus this quarter. Despite a modest 1.7 percent decrease in year-over-year revenue, we delivered meaningful improvements in profitability and operational efficiency. Our gross margin rose to 49.7 percent, up nearly five percentage points from the same quarter last year. This improvement reflects discipline, cost control, better service delivery margins, and early contribution from enclave sales. We also reduced operating expenses by 11.2%, narrowing our net loss to just $54,000. This is a significant step forward compared to the $253,000 loss reported in Q2 of last year. Year to date, we've generated 3.7 million in revenue, a 3.8% increase over the first half of FY2024, These results demonstrate resilience and execution across our core offerings, even as we reposition parts of the business for long-term growth. We acknowledge the challenges in our VC services segment. As previously mentioned, we've experienced the loss of a handful of larger contracts in the back half of last fiscal year, which has impacted our trailing 12-month revenue retention. That said, we've built a more scalable targeted go-to-market strategy and enhanced our sales capabilities, which are beginning to show traction. We believe these investments will yield strong results as the market demand for cybersecurity leadership continues to rise, particularly among mid-sized and regulated organizations. So looking ahead, we're highly focused on accelerating adoption of Enclave, our zero-trust network solution. Enclave continues to gain attention from both public and private sector organizations seeking secure segmented communication in increasingly complex environments. And we're confident in its role as a long-term growth driver. We also improved our cash position this quarter, ending March with $1.3 million in cash, cash equivalents, and short-term investments. So our ability to improve margin, reduce losses, and maintain a lean operational footprint all while continuing to fund product development and go-to-market activities is a testament to our disciplined approach. So really, in summary, we remain confident in our strategy. One, we're executing on our vision to be the leading cybersecurity partner for the mid-market. Two, we're expanding relationships and acquiring new clients across our advisory and our product lines. And three, we're investing where it matters to drive future growth, improve client outcomes, and enhance shareholder value. Thank you for your continued support and beliefs inside Channel's mission. We look forward to updating you again next quarter.

I'll now turn it over to our CFO, Ryan Polk, for a more detailed review of the financials.

Mr. Polk, sir, I believe you may be on mute.

Appreciate that, Brian. So for the fifth quarter in a row, we've had a growth in our cash balance with cash flow from operations being positive. And so I do note that this is the time of year when we have a fair amount of our annual contracts renewing, annual software contracts and annual service contracts where we use third parties to deliver those services. And a lot of that Invoicing helps us with cash flow during quarters two and three, which is one of the reasons why we're seeing this uptick in cash this quarter. And the rest of our financial statements, I think, are pretty straightforward. A growth and gross margin, as Brian highlighted. A decrease in operating expenses and a narrowing gap on our net losses, just a few points. $50,000 below, excuse me, a net loss of just under $50,000. So getting close to having a positive net income line as well. So that concludes my comments. Nothing really more to add to this summary from Brian. Now we'll go to Q&A.

Thank you sir. At this time we will be conducting our 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 would 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. Thank you. We have a question from Luke Wheatley, who is a private investor. Sir, your line is live.

Hey, guys. Congratulations on a good quarter. How are you all doing today?

I'm on mute. Good, good.

Okay, good deal. I was wondering if you all could update us a little bit about the Global Force Symposium, just how that went, and then talk a little bit about What are your biggest headwinds that you see with the enclave market, and what are you all trying to do to overcome those and really accelerate growth? Thank you.

Yeah, no, good question. Yeah, Global Force was a good event. We had a full team down there, Booth, and a key partner of ours, Coney Ag, which is an Alaskan native-owned perpetual small business, It does a lot of work within the Department of Defense and federal government. They're one of our key partners to sell into the federal space. And they are a great vehicle to be able to get into that space with very little friction and overhead for us, while also being just phenomenal partners and really understanding our business and respecting and appreciating the caliber of both our professional services and the product that we have. So, yeah, I think overall went really well. We had some really great meetings while we were there. Obviously, General Brown, who is on our board, also is the CEO of AUSA, the organization that throws and puts on the event that was in Huntsville for Global Force. So obviously having him in our corner, making introductions, you know, kind of validates, you know, what we're doing and why we're in the space. So I think overall the team is really pleased. With that, obviously the sales team is working the leads that came from that event, and we're pursuing other opportunities through our partner, Cognac. I totally concentrated on that part of the question. Oh, headwinds for Enclave. That's right. Okay. Yeah. I mean, look, like with any technology, right, you've got competition in space. So, you know, we've got to stand out as a brand against the likes of Illumio, what was Premier 81. You know, they got bought up by CyberArk or somebody else to go die. I think it's Checkpoint. Zscaler and the other likes, you know, some large behemoths. And I think what bodes well for us is, you know, we know what their weaknesses are. We know what clients aren't buying them and those are our strengths, right? We're easier to deploy. We don't have a cloud infrastructure as overhead or as a reliance to actually have our product work and we're lower cost. So the barrier to entry for us, you know, is, is better in my opinion than the competition. Where we, you know, the headwinds are, you know, obviously getting a sales team rallied around that, getting them spun up on it, educated, knowing how to sell it, where to sell it, where the right markets are, where the right thing. And that's with any sales team with any product. So I think we're just going through the regular, normal kind of process of launching and getting software product out to market. We're doing that while also developing new features and capabilities for that product. You'll see the new certificate management functionalities. to be able to handle non-person identity or machine identity management. I mean, that's a huge, huge ask. You'll see, you know, Venify was just bought by CyberArk because that's all they did. And that left a huge space and opening in the market for another player to step in. And that's exactly why we built out that functionality because we were already doing everything else that was so close and ancillary to it. For us to go enable that type of a feature was, you know, almost zero lift. And we've already got, you know, our... our second largest DOD client now is really the genesis and reason for why we are, you know, pushing that feature because they asked for it and we have the ability to deliver it through enclave. So, you know, for me, I don't see like a, like a solid wall wind, you know, headwinds probably right. Cause you can fight through a headwind, but it's not going to keep us and hold us back. So I'm, I'm still very confident in, you know, what we're doing from, you know, just a sales standpoint and getting that, you know, into direct sales and into, um, channel sales as well.

Okay. Got it. Thank you very much. Uh, is it okay if I ask one more question just while I've got, so I know on previous earnings calls, you all talked about the restrictive warrants that side channel has. And I think those are due to expire in about a year. What sort of plans do you all have for the business after those expire?

I think we have the ability to act more like a public company and kind of raise capital if we needed to, although right now we don't have a force that's requiring us to do that. We don't have any liquidity problems. You know, we don't have any issues on solvency. We don't need to raise capital like a lot of OTC companies do just to stay afloat. You know, if we were going to raise capital, it would be to, you know, obviously kind of double or triple down on sales and marketing around Enclave. So, you know, that would be the investment in there. You know, right now, I just, I don't think, I think we've purposely kind of held back from trying to think about what to do specifically. You know, once those warrants expire, I feel like we actually have quite a bit of time I know it's a year away, but we have some time to kind of think about that. But yeah, definitely a plan for what can we now go do post-warrants. And that's really all those warrants are holding us back on is really the ability to raise really all other facets of our public company structure, our business as a whole. Those are not really holding us back in any regard. But yeah, I'll be honest, that is the one thing that we can do once those expire. But again, I don't think we're really pressured to go do that because, you know, we've got to balance that with shareholder dilution. And, you know, we've got to find the, you know, the right banks, the right terms, you know, the right banker. You know, there's a lot of options out there, and they're not all good when it comes to banking. So we have to find the right partner that's going to understand our business, respect what we want to go do with a raise and a potential up list should we go that path. and what we want to go do with it and what's our overall plan. So, you know, we're going to be diligent about that, you know, and we're going to kind of continue to kind of see what the market's doing.

Awesome. Thanks for the information. Appreciate it, guys. Sure. Yeah, no, thanks for jumping on again. Good to hear from you.

Thank you. As we have no further questions on the lines at this time, I would like to hand the call back over to Mr. Hoagley for any closing remarks.

Sure. Ryan, did you have any online that you captured?

Yeah, we've got one question, Brian. The question is, what is the outcome of the large reverse split? What are the next steps going to the next level index? This question is referring to a proposal that was in our most recent annual meeting in which our shareholders authorized our board to execute a 1 or 200 reverse, up to a 1 to 200 reverse stock split. We haven't taken any action on that. We just asked the shareholders for that authorization, and we received it. We're grateful for that. At this point, we don't have any plans to anything, any specific timing in mind of when we might use that opportunity. But we do, we are considering how we can use that and when we might use that, but nothing specific at this time. And, of course, for the reason Brian just mentioned, these warrants kind of put us off from doing anything that relates to a move to a Another exchange, oftentimes the people that would help us do that want us to raise some capital at the same time. And as Brian mentioned, we're not really in the market for that. And we're really precluded from doing that because of these warrants. So, yeah, on the reverse stock split, no actions have been taken other than the shareholders granting us the right or granting our board the right to take that and we would time that probably something like an up list if we were preparing to do that.

Thanks, Ryan. No other questions online. I think it's good to point out, Ryan, and correct me if I'm wrong, this is our second or third year in a row where we have asked the shareholders to give us this option. So it's something that we've been asking for in previous years to be able to have so that we can use it if we need to. And I think we're going to continue to ask that so that we have that tool available to us should we need it. That way, you know, we can use it when we need to and not have to go out to the shareholders, you know, in some type of an emergency vote situation. So, yeah, I don't think, I don't see it as It's not indicative of anything right now. It's just a tool that we want to be able to have available to us should we use it. All right. So no other questions. I want to thank you all for joining us today and for continued interest in SideChannel. As we move forward, our focus remains on execution, delivering value to our clients, innovating through our solutions like Enclave, and driving sustainable growth for our shareholders. We appreciate your time, your questions, and your support. And we look forward to speaking with you again next quarter.

So everybody stay safe, and thank you again.

Thank you. Ladies and gentlemen, this concludes today's call. You may disconnect your lines at this time, and we thank you for your participation.