SideChannel, Inc. (OTC:SDCH) Q3 2025 Earnings Call Transcript

SideChannel, Inc. (OTC:SDCH) Q3 2025 Earnings Call Transcript August 13, 2025

Operator: Greetings. Welcome to the SideChannel Fiscal Year 2025 Q3 Financial Results Update Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Brian Haugli, CEO at SideChannel. Brian, you may begin.

Brian Wayne Haugli: 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 2 agencies and actively pursuing both expansion of current clients and new opportunities across the DoD and other regulated sectors. Enclave 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 DEFCON 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.

Ryan L. Polk: Thank you, Brian. I am Ryan Polk, Chief Financial Officer of SideChannel. For the quarter ended 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 vCISO services clients. 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. Operating expenses totaled $1.1 million for the quarter, up from the prior year slightly, driven by increased selling and marketing expenses to support Enclave.

Q&A Session

As a result, our operating loss for the quarter was $261,000. For the 9 months ended June 30, 2025, SideChannel achieved total revenues of $5.6 million, up 1.3% over the comparable year 1 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 0 debt, no outstanding debt, and our minimal cash burn over the last 9 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.

Operator: [Operator Instructions] And we did have a question coming from [ Luke Wheatly ], Luke is a private investor.

Unidentified Participant: So I just had a quick question. I wanted to know how you all think about 8-K. You all sent a couple of 8-Ks out recently about new contracts. How material does the contract have to be in order for you all to issue an 8-K? And like so, for example, if we don’t get an 8-K, should we assume contracts are being won? Or how big does the contract have to be in order for you to issue an 8-K?

Brian Wayne Haugli: Yes, it’s a great question. No, there’s plenty going on. I think if we issued an 8-K for every deal we are 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 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 3 Enclave deals, right, the 2 in the DoD and then the large Arizona city. What’s unfortunate is all 3 of these clients, we reached out to them and they’re like, you can’t say it’s us, right? And that’s kind of the nature of cybersecurity. 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 the reader draw their own conclusion. What we’re going to be honest and transparent about is, yes, was this a small city, was a large city?

Was it a large agency, a small agency, was it part of an agency? That honestly kind of matters more than just like was it the army, all of DoD, right? Like that’s I think there’s more — it’s more impactful about 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 8-K with it, large service deals, anything that we’re doing now with cloud, anything we’re doing with insider threat and then partnerships. That’s another big one. And I think we’ve done that previously. So that’s right now what we’re choosing to do. But yes, by no means are we — is nothing happening outside the 8-Ks, 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 an 8-K and PR factory. And you see some of that, right? We’re definitely not trying to just issue press releases or 8-Ks to just generate interest in the stock. Like 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 10-K, the Qs, 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, “Hey, these are some stuff that we’ve talked about.” Hopefully, that kind of gives you a little bit more.

Unidentified Participant: Yes, that makes a lot of sense, Brian. I think you are thinking about it the right way. I appreciate the clarity.

Brian Wayne Haugli: There’s 4 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 4. And I don’t know if we have any on the web portal, anybody is monitoring that.

Operator: There were no questions from the lines at this time.

Brian Wayne Haugli: All right. Well, why don’t I — in the interest of time, why don’t just go through these 4. So kind of a regular poster on one of these forums that I keep reading good insightful stuff. Thank you to 22Rover, whoever you are. You seem to understand 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. Could you give us some color on the recent DoD contract? We’ve got some back of the envelope math and pricing and kind of is in the ballpark. So — and I’ll just kind of address this. 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 got to remember, Enclave can do multiple different things, which we have set up the modules. Can do asset intelligence with vulnerability discovery. It can do secure web gateway. It can do certificate management, you can do segmentation. I get them all right? Yes, Okay. There’s like 4 or 5 modules. And they can also be combined. You can use 2 or 3 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 agents out there right now in the space, CrowdStrike, SentinelOne, any solution, 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, are you — 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 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 yes, I mean, like as you get into super large accounts and 5,000 agents with our DoD client is not considered super large, pricing changes even more dramatically.

And this has been standard in the industry forever. So hopefully, that answers and gives a little bit more color on how we’re looking at pricing. On the services side, there was a question kind of about impacting vCISO revenues. And what are we doing to accelerate new client acquisition and ensure sustainable revenue growth. Account management inside of our sales is a big piece and having a really 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 vCISO 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. So 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 program. The next 2 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 are significant — 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-Ls to optimize future tax benefits? Ryan, can you touch on how we’re managing NOLs?

Ryan L. Polk: Yes, happy to do that. In our 10-K, we — I believe it’s our last footnote. I don’t remember the footnote number, Note 18 or something like that. We — 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 carryforward. 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 were $7.5 million. We are — as you can see from our financial statements, we’re still reporting net losses for the year. A lot of that is noncash expenses. Some of those noncash 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, it’s $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 income, 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.

Brian Wayne Haugli: All right. And then my computer screen. Okay. Let me bring back. Here we go. All right. So the last question here, I think this is the misunderstanding of maybe how somebody might be reading the 10-Qs 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 is 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?

Ryan L. Polk: Sure. Happy to do that. In July 2021, then Cipherloc Corporation entered into a 4-year consulting agreement with Paulson Investment Company. in which Paulson would assist Cipherloc in evaluating various strategic options for things like acquisitions or dispositions of assets, capital raising, those types of events. Again, it was a 4-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 40 — I’m sorry, over 16 quarters. We amortize it each quarter over 4 years. We — this is the last quarter, our Q4 is the last quarter. It will be reported as a 0 — this deferred cost that you note on our balance sheet will be 0 at September 30, 2025.

And there will just be, I think, $15 million of amortization recognized in Q4 for that asset. And — but yes, there’s no cash involved. It’s a 4-year-old amortized asset — deferred cost asset created when we entered the consulting agreement with them in 2021.

Brian Wayne Haugli: Yes. And I’ll just — I’ll piggyback that, that relationship in 2021 was prior to when I commenced the reverse takeover of Cipherloc with SideChannel as a 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 a 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 yes, hopefully, that answers your question, 22Rover. Keep them up. I didn’t see any others. I’ll just check real quick. If anybody else dropped 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 [ web or net ]. Any other call-ins or anything else?

Operator: Currently, no questions in queue, and — it looks like there were 2 email or webcast questions. Ryan, you should have those.

Ryan L. Polk: Yes. The first question is, can you break out how much of cybersecurity software revenue Enclave represents? We are not doing that at this time. Sami, thanks for asking. We do have — we are in some discussions internally and 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 2. But right now, we’re not disclosing that, but we are preparing to do so, and we’ll have that disclosed 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.

Brian Wayne Haugli: Thanks, Alex. Great question. Really early. I mean DEFCON 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 is 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 relationships in her network. She’s been focused on this type of service delivery for a while, and SideChannel is 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 in the space. And I know it and I see it, and I want to be able to deliver that.

And I think SideChannel is the right place to be able to deliver that out of. I mean the theme of DEFCON this year was Insider Threat. So — and that had nothing to do with what we are 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 beat 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 remote.

So — but yes, just stay tuned on that. It’s a 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 in 3 months, next quarter or I guess it would be the end of the fiscal year. So either way, we will answer that question as we can. And maybe back to Luke’s point, you’ll probably see an 8-K 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.

Operator: Currently, no other questions.

Brian Wayne Haugli: Great. So obviously, if anybody is kind of paying attention, which you are, if you’re on this call, thank you again for following us and the interest. You’d noticed the stock over the last 45 to 60 days. When I look at the 6 months, we’re up 163%. When I look at the year-to-date, 194% and really over the year, 92%. But the 6 months and the year-to-date charts, 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. I think we caught a lot of flack early on because past iterations of this company that 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 shareholders the value of what we’re able to bring to the market and bring back to them. So I just — I think it’s very interesting, the increased attention and interest in the company that’s reflected in the stock price. Obviously, new shareholders, Ryan and I are going to really start kind of digging into the lists that we’re able to get through our third parties for stock on like who are our 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. Sign up for the Investor Relations newsletter. Ryan and I personally put that together every month. We’re putting that message out to folks. So please sign up for that. And then it’s been interesting, the different coverages.

Trickle Research is obviously following us. They’ve got analyst report out. But some of these other pure online places like there’s like a Wall Street one, there’s Stocktwits and others that there’s some — it’s — and even Reddit, 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 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 I just want to really just kind of say thank you to folks because it’s always great — as a CEO, like for me to read that, it’s me seeing somebody appreciating what we’ve done, right?

That’s the feedback that I get. And reading that kind of thing is it makes me happy because I’m like, oh good, people are actually paying attention and 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 we look forward to speaking with you again. Enjoy the day, be safe, be good to each other.

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