Sidechannel Inc

Greetings. Welcome to the SideChannel Fiscal Year 2025 Q3 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 Hooghly, CEO at SideChannel. Brian, you may begin.

Thank you. Good afternoon, everyone. Thank you for joining us today. I'm excited to talk about where SideChannel is headed and the momentum we're building. While our CFO, Ryan, will walk you through the details of the quarter, I want to focus on the strategic direction that's driving our growth. First, Enclave continues to gain traction as a go-to zero-trust network platform for organizations that need secure segmentation, asset visibility, and controlled access. We've expanded our footprint within the Department of Defense, now serving two agencies, and actively pursuing both expansion of current clients and new opportunities across the DOD and other regulated sectors. Onclave is proving to be a differentiator for us, and we're doubling down on that momentum. To support that, we're increasing our investment in marketing and sales, building more awareness, driving top-of-funnel engagement, and creating more opportunities for our team to convert into long-term client relationships. But at the same time, we remain committed to our vCISO services, which continue to be a cornerstone of our business. This offering allows us to deliver trusted strategic cybersecurity leadership to organizations that need it most, and it often serves as the entry point for deeper client engagements. Finally, I'm thrilled about our new Insider Threat Service, launched recently at DEF CON 33 and led by our Vice President, Lauren Trujillo. This program is already generating interest, helping clients identify and mitigate internal risks before they become major incidents. By integrating Enclave into this service, we're offering a unique and powerful solution that aligns with today's most pressing security challenges. We have the right solutions, the right team, and the right strategy in place to continue delivering value to our clients and to our shareholders. I'm confident in the path forward and excited about what's ahead for SideChannel. Thank you, and I'm going to turn it over to Ryan for more of a financial review.

Thank you, Brian. I am Ryan Polk, Chief Financial Officer of SideChannel. For the quarter into June 30, 2025, our third quarter, SideChannel recorded revenues of $1.8 million, representing a 3.8% decrease compared to Q3 of the prior year, largely attributable to a net decline in our B-CISO services Our gross margin of 47% was slightly lower than last year's 48.9%, reflecting both reduced employee utilization and increased revenue from third-party software and services, which carry a lower gross margin. These headwinds were partially counterbalanced by higher margin enclave software adoption rates. Operating expenses total $1.1 million for the quarter, up from the prior year slightly, driven by increased selling and marketing expenses to support Enclave. As a result, our operating loss for the quarter was $261,000. For the nine months into June 30, 2025, SideChannel achieved total revenues of $5.6 million, up 1.3% over the comparable year. one year ago with a stable year-over-year gross margin of 47.5%. Our revenue from cybersecurity software and services portfolio grew 22.8% year-over-year, offsetting the previously mentioned decrease in vCISO services revenue. And this shift reflects both the change in our service offering and the successful transition that we've had for our clients into our broader cybersecurity program. We continue to carefully steward our cash position. I mentioned earlier an operating loss for the quarter, but at quarter end, cash and cash equivalents and short-term investments stood at $1.2 million, down just $46,000 from the beginning of our fiscal year, which was October 1, 2024. We have zero debt, no outstanding debt, and our minimal cash burn over the last nine months suggests that no additional capital is needed to support our operations. Looking ahead, we, management, remain focused on driving growth in our core cybersecurity software, particularly Enclave. While expanding our service offerings, we are committed to judiciously investing in our selling and marketing infrastructure to support the growth of our proprietary software product, Enclave. Thank you for joining our fiscal year 25 third quarter call. And with that, we will turn it over now to questions.

Thank you. 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 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. Once again, that's star 1 if you wish to ask a question on today's call. And please hold while we pull for questions.

And we did have a question coming from Luke Wheatley.

Luke is a private investor. Luke, your line is live.

Hey, gentlemen. How are you all today? Hey, Luke. Good to hear from you again. Yes, sir. So I just had a quick question. I wanted to know how you all think about 8Ks. You know, you all sent a couple 8Ks out recently about new contracts. How material does a contract have to be in order for you all to issue an 8K? And, like, so, for example, if we don't get an 8K, should we assume contracts are being won or... How big does the contract have to be in order for you to issue an 8K?

Yeah, that's a great question. No, there's plenty going on. I think if we issued an 8K for every deal we were winning, we would probably quickly run out of our PR Newswire subscription allotment of press releases we get with our current subscription. I think we're pretty diligent about the things that we want to kind of come out the market with. And look, we're listening to investors like you and other folks. Folks want to hear about enclave deals. They want to hear about expansion. They want to hear about new services. So we've got to balance that with just, hey, we won another new client. I don't think we have a material kind of litmus test yet where we're like, hey, if it's over this dollar amount, we announce it. I think we've been pretty subjective, honestly, in, like, what we want to talk about. And I think that subjectiveness comes down to, like, what are we excited about that we're doing that we can then turn around and showcase and say, hey, this is what we're capable of. So, look, we obviously did the three enclave deals, right, the two in the DOD and then the large Arizona city. You know, what's unfortunate is all three of these clients, you know, we reached out to them, and they're like, you can't say, you know, it's us. right? And that's kind of the nature of cybersecurity. You know, people don't want to say really what they're using or what they're doing. Some organizations are just super, super close to the chest on like who they are. We can talk about what they kind of do, kind of where they are and let, you know, the reader, you know, draw their own conclusion. What we're going to be honest and transparent about is, you know, yeah, was this a small city? Was it a large city? Was it, you know, a large agency? A small agency? Was it part of an agency? That honestly kind of matters more than just like, you know, Was it the army, you know, all of DOD, right? Like that's, I think there's more, it's more impactful about, you know, how we're talking about it. And then what we're choosing to talk about, I think right now is you're going to see more focus on enclave deals are going to probably be the things that come out in PR, press releases that have the associated 8K with it, large service deals, anything that we're doing now with cloud, anything we're doing with insider threat and then partnerships, you know, that's, that's another big one. You know, I think we've done that previously. So that's right now what we're choosing to do, but yeah, by no means are we, is nothing happening outside the AKs. Like we're winning deals and services. We're winning new clients. We're just not talking about all of them because honestly, I think that would be, it would also be kind of a negative because people just be like, okay, these guys are just like a, an 8K and PR factory. And you see some of that, right? We're definitely not trying to just issue press releases or 8Ks to just generate interest in the stock. We're choosing the ones that we think are really meaningful, but by no means are we definitely talking about everything. And that's kind of what we have to do in the 10K, the queues, right? That's the time for us to say, hey, listen, this is where our growth has happened. This is the story. And then on these calls, this is where we want to share you know, hey, these are some stuff that we've talked about. Hopefully that kind of gives you a little bit more of a... Yeah, that makes a lot of sense, Brian.

I think you all are thinking about it the right way. I appreciate the clarity.

Yeah, no, no problem. Thanks for joining again. Thank you. And once again, I'll start one.

There's four questions that I found online in one of our boards. So if we don't have any other call-in questions, I'll go through these four. And I don't know if we have any on the web portal. If anybody's monitoring that.

There were no questions from the lines at this time.

All right. Well, why don't I, in the interest of time, why don't I just go through these four? So a kind of a regular poster on one of these forums that I keep reading. Good, insightful stuff. Thank you to 22 Rover, whoever you are. You seem to understand everything. what we're doing with the company and actually reading our filings. So thank you. Your first question, I'll just kind of go through this. You guys can find this online at the investor hub boards. Can you give us some color on the recent DOD contract? We've got some back of the envelope math and pricing and kind of these in the ballpark. So, and I'll just kind of address this. You know, there's a misconception here about kind of pricing on enclave. Enclave is an agent that gets installed on servers, systems, laptops. Those agents are what we're charging, right, per agent per month. But the agents are modular. So clients are using either some or all aspects of Enclave. And you've got to remember, Enclave can do multiple different things, which we have set up in modules. It can do asset intelligence with vulnerability discovery. It can do secure web gateway. It can do certificate management. It can do segmentation. Did I get them all right? Yeah, okay. There's like four or five modules, and they can also be combined. You can use two or three or all of them in combination. So the pricing for these is important. The misnomer here in this poster's question is thinking that it's $50 per agent per month. That's no agent out there right now in the space, CrowdStrike, Sentinel, Warren, any solution, nobody. no agents are that costly. That's outside the ballpark considerably for any cybersecurity product at a per-agent, per-month basis. We're generally between, and again, based on bulk pricing, we're going to charge more actually if you're only buying 100 per agent than if you're buying 1,000 or 10,000. So there's bulk volume pricing that happens. But generally pricing is anywhere between $375,000 and $7 per agent per month, depending on, again, which modules, combination of modules you're using, and which bulk pricing you're in. So that should kind of give people an understanding of how we're pricing and what we're doing with Enclave. But, yeah, I mean, like as you get into super large accounts and 5,000 agents with our one DOD client is not considered super large, pricing changes even more, you know, dramatically. And this has been standard in the industry, you know, forever. So hopefully that answers and gives a little bit more color on, you know, how we're looking at pricing. On the services side, there was a question kind of about impacting VC sale revenues and what are we doing to accelerate new client acquisition and ensure sustainable revenues growth. You know, account management inside of our sales is a big piece and having a really, you know, more effort and focus on current client management. People want to continue to work with people they know. And so we've structured and continue to invest in that account management and that sales team as we're looking to kind of grow that sales team as well. We're looking to have those roles, be able to improve relationships with clients as well. And we're also looking for where somebody might outgrow or we might have churn on VC services, We have the ability to introduce and stay sticky with our engineering services, our cloud security services. Maybe we can start introducing other products and capabilities that keep us sticky at a client. I mean, we do have clients where we started with the vCISO, we implemented and introduced engineering, and then introduced Enclave, and we're no longer doing vCISO. But they're still a client because they're using engineering services and Enclave. as a capability. And that's natural, right? So we're going to kind of continue to see that cycle happen with clients, not all clients, but that's really what our strategy is, is to stay sticky with clients. What else can we introduce to help them build, manage, and improve their cybersecurity, you know, program? The next two questions, I think Ryan is going to be better set up to answer. So Ryan, I'll just read these. The question is, assuming there's, there are significant net oper, am I reading this right? Assuming there are significant net operating losses, the poster doesn't recall the amount, how is SideChannel managing NOLS, N-O-L-S, to optimize future tax benefits? Ryan, can you touch on how we're managing NOLS?

Yep, happy to do that. In our 10-K, I believe it's our last footnote. I don't remember the footnote number, note 18 or something like that. I think I may have it open here. sorry, note 17. We have a calculation on the value of our federal and state net operating loss carried forward. Our September, when we calculate that, we update that calculation once a year in conjunction with our tax firm. We reported at September 30, 2024, that the value of our NOLs We're $7.5 million. We are, as you can see from the financial statements, we're still reporting net losses for the year. A lot of that is non-cash expenses. Some of those non-cash expenses get added back, and so our tax loss is not going to be equal to our book loss. But we do have a sizable asset. that we don't have on the balance sheet right now, but if we recognize the full amount of our net, the value of our net operating losses at 7.5 million, it's not on the balance sheet because we aren't generating net income yet, taxable net income. And so it would not be, it doesn't make sense to have it thought of as an asset at this point. And so when we begin recognizing, when we begin having taxable net then that asset will get activated and we'll be offsetting that taxable income with our net operating losses. And over time, we'll begin recognizing the value of that asset on our balance sheet.

Thanks. Thanks, Ryan. All right. And then my computer screen just went to screensavering. Okay, let me bring it back here. Here we go. All right, so the last question here, I think this is a misunderstanding of maybe how somebody might be reading the 10Qs or Ks, but the question is, when will SideChannel stop paying Paulson a monthly or quarterly gift? Wouldn't that consultation allotment be better spent on new salesperson R&D? So I think really just the first question, the misconception here is that we're paying Paulson, who is a broker firm, Ryan, can you kind of outline the past relationship back in 2021 and what happened with Paulson and what's actually happening today, if any?

Sure. Happy to do that. In July 2021, then Cypherlock Corporation entered into a four-year consulting agreement with Paulson Investment Company, in which Paulson would assist Cypherlock in evaluating various strategic options for things like acquisitions or dispositions of assets, capital raising, those types of events. Again, it was a four-year contract. Paulson was paid in stock only. There was no cash involved in that consulting agreement. We recognized the cost of that as a deferred cost on our balance sheet, and we've been amortizing that deferred cost over 16 quarters. We amortize it each quarter over four years. This is the last quarter. RQ4 is the last quarter. It'll be reported as a zero. This deferred cost that you note on our balance sheet will be zero at September 30, 2025. And there will just be, I think, $15 million of amortization recognized in Q4 for that asset. But yeah, there's no cash involved. It's a four-year-old amortized asset, deferred cost asset created when we entered a consulting agreement with them in 2021.

Yeah, I'll just piggyback that. That relationship in 2021 was prior to when I commenced the reverse takeover of Cypherlock with SideChannel, the private company. So that predates me. We didn't have a relationship with Paulson after I became CEO and took over the company and we took it in the new direction. We currently do not have a relationship with Paulson. We're not paying them for anything. They have no services for us today. so we're not working with them in any regard. So, yeah, hopefully that answers your question, 22 Rover. Keep them up. I didn't see any others. I'll just check real quick. Anybody else drop one while we were doing this? Nobody else. Looks like they dropped a question on here. So those are the only online questions that I could find across the Webernet. Any other call-ins or anything else?

Currently no questions in queue. Looks like there were two webcast questions. Ryan, you should have those.

Yeah, the first question is, can you break out how much of cybersecurity software revenue Enclave represents? We are not doing that at this time. Sammy, thanks for asking. We are in some discussions internally and with our with our auditors about what the threshold should be for when we begin revealing enclave revenue as a, it would be a third category. We would still have the VCISO category, of course, and then we would break the cybersecurity software and services category into two. But right now, we're not disclosing that, but we are preparing to do so, and we'll have that disclosed when the when we've crossed that threshold. And the next question is the new insider threat program is highlighted as an early strategic initiative. What level of customer interest or paid trials have been secured so far? And when do you anticipate first revenue? Brian, this question comes from Alex Lattimore. So I'll let you respond to Alex.

Thanks, Alex. Great question. Really early. I mean, DEF CON just ended on Sunday. We announced this and just started this program last week. And we were able to do that because we were able to secure the employment of Lauren, who's a well-known quantity and an amazing, amazing professional in the space with a real passion for insider threat. She comes with a good following and a good book of business and in her network. She's been focused on this type of service delivery for a while, and SideChannel was able to give her a home where we can really kind of bring this to market. And she and I have just had some really great conversations about this passion of hers and the need and the space. And, you know, I know it and I see it, and I want to be able to deliver that. I think SideChannel is the right place to be able to deliver that out of. I mean, the theme of DEF CON this year was insider threat. And that had nothing to do with what we were doing here. But she's phenomenal. So really just kind of stay tuned to the story. If you're on LinkedIn, follow what we're doing over there. You're going to probably see a tremendous amount of outbound social media content around this from her and the marketing team here as this really does ramp up. But We wouldn't be standing this up if there wasn't interest in the market, if we didn't have a line and a bead on companies already looking and actually asking for this. So we're literally, she's still trying to figure out where the water cooler is, if we actually had an office to operate out of remotely. But yeah, just stay tuned on that. Great question. And I definitely look forward to talking more about the success of this. And I want to be able to answer that same question next call. you know, in three months, you know, next quarter. Or I guess it would be the end of the fiscal year or so. Either way, we will answer that question as we can. And maybe back to Luke's point, you'll probably see an 8K about a press release as this ramps up. I do want to actually hit one topic before we close. If there's no other questions, I forgot to mention something.

Currently no other questions.

Great. So obviously if anybody's kind of paying attention, which you are if you're on this call, thank you again for following us and the interest. You'd notice the stock over the last 45 to 60 days. You know, when I look at the six months, we're up 163%. When I look at the year-to-date, 194%. And really over the year, 92%. But, you know, the six months and the year-to-date charts are really what's been happening since june there's been interest right people are taking note of what we're doing right we said what we were going to go do we've been executing on it we're showing what we're doing we're still debt free we're still growing we're still focusing on our strategic priorities um i i i think we caught a lot of slack early on because you know past iterations of this company that you know we are people who we are going to do what we say we're going to go do. And I hope we're proving that. And we're showing, you know, shareholders the value of what we're able to bring to the market and bring back to them. So, um, you know, I just, I think it's very interesting, the increased, um, attention and interest, um, and, you know, in, in the company that's reflected in the stock price, um, obviously new shareholders, Ryan and I are going to really start kind of digging into, you know, the lists that we're able to get through, um, our third parties you know for for for stock on like you know who are new shareholders and hopefully we can reach out and talk to them and kind of better understand what their interests are what they're looking for um sign up for the investor relations newsletter uh ryan and i personally put that together um every every month um you know we're putting that message out to folks so please sign up for that um and then you know it's been interesting the different coverages, you know, trickle research is obviously calling, uh, uh, following us. They've got analysts report out, but some of these other on pure online, um, places like, uh, like wall, like there's like a wall street one. Um, there's, uh, uh, stock twits, uh, and others that there's some, it's even read it. There's some really great insight that people are drawing on their own about our story and what we're doing based on our fundamentals and our growth and what we're saying. I love reading all of it because it's phenomenal to see people realize we're doing what we said we were going to do. What we're publishing is, you know, accurate. If there's a story there of growth, there's a story of need in the market for what we're doing. So I love that people are attuned to that. And, you know, I just want to really just kind of say thank you to folks because it's always great as a CEO, you know, like for me to read that it's, me seeing somebody appreciating, you know, what we've done, right? That's the feedback that I get. And reading that kind of thing is, you know, it makes me happy because I'm like, oh, good. People are actually paying attention. They get our story. They get what we're doing. And it's hitting home somewhere. So, again, thank you, everybody, for that. I just wanted to kind of end on that note. So I appreciate it. And, you know, we look forward to speaking with you again. Enjoy the day. Be safe. Be good to each other.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.