SideChannel, Inc. (PNK:SDCH) Q2 2025 Earnings Call Transcript

SideChannel, Inc. (PNK:SDCH) Q2 2025 Earnings Call Transcript May 10, 2025

Operator: Good day, and welcome to the SideChannel Fiscal Year 2025 Second Quarter Financial Results Update Call. At this time, all participants are in a listen-only mode. And a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Brian Haugli. Sir, the floor is yours.

Brian Haugli: Thank you. Good afternoon, everyone, and thank you for joining SideChannel’s Fiscal 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% decrease in year-over-year revenue, we delivered meaningful improvements in profitability and operational efficiency. Our gross margin rose to 49.7%, up nearly 5 percentage points from the same quarter last year. This improvement reflects disciplined 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 FY 2024. 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 vCISO 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 midsized 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. It 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 belief in SideChannel’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.

Q&A Session

Ryan Polk: 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 2 and 3, 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 in gross margin, as Brian highlighted, a decrease in operating expenses and a narrowing gap to — on our net losses, just a few thousand dollars, 50-some thousand 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 the summary from Brian. And now we’ll go to Q&A.

Operator: [Operator Instructions] We have a question from [Luke Wheatly] who is a private investor.

Unidentified Analyst: Congratulations on a good quarter. 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?

Brian Haugli: Yes. No, good question. Yes, Global Force was a good event. We had a full team down there, booth and a key partner of ours, Koniag, which is an Alaskan native-owned perpetual small business that does a lot of work within the Department of Defense and the 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 yes, 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 kind of validates 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, Koniag. I totally concentrated on that part of the question and — oh, headwinds for Enclave, that was the — yes. Okay. Yes. I mean, look, like with any technology, right, you’ve got competition in the space. So we’ve got to stand out as a brand against the likes of Illumio, what was Perimeter 81, they got bought up by CyberArk or somebody else to go die.

I think it’s Check Point. Zscaler and the other likes, some large behemoths. And I think what bodes well for us is we know what their weaknesses are. We know why 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 is better, in my opinion, than the competition. Where we — the headwinds are 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, 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 functionality to be able to handle nonperson identity or machine identity management. I mean that’s a huge, huge ask. You’ll see Venafi 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 almost 0 lit. And we’ve already got our second largest DoD client now, is really the genesis and reason for why we are pushing that feature because they ask for it, and we have the ability to deliver it through Enclave.

So for me, I don’t see like a solid wall, win — headwind is probably right because you can fight through a headwind, but it’s not going to keep us and hold us back. So I’m still very confident in what we’re doing from just a sales standpoint, getting that — into direct sales and into channel sales as well.

Unidentified Analyst: So I know on previous earnings calls, you all talked about the restrictive warrants that SideChannel 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?

Brian Haugli: 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 just — we don’t have a force that’s requiring us to do that, right? We don’t have any liquidity problems. We don’t have any issues on solvency. We don’t need to raise capital like a lot of other OTC companies do just to stay afloat. If we were going to raise capital, it would be to obviously kind of double or triple down on sales and marketing around Enclave. So that would be the investment in there. 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. Once those warrants expire, I feel like we actually have quite a bit of time.

I know it’s a year away, but like we have some time to kind of think about that. But yes, 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 I’ll be honest, like 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 we got to balance that with shareholder dilution. And we got to find the right banks, the right terms, the right banker. 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 uplift should we go that path and what we want to go do with it and what’s our overall plan.

So we’re going to be diligent about that, and we’re going to kind of continue to kind of see what the market is doing.

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

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

Ryan Polk: Yes, 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? And so 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 100 or 200 reverse — up to a 100 to 200 reverse stock split. We haven’t taken any action on that. It’s just — 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 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 yes, 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 do something like an uplift if we were getting — if we were preparing to do that.

Brian Haugli: Thanks, Ryan.

Ryan Polk: No more questions online.

Brian Haugli: 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, we can use it when we need to and not have to go out to the shareholders in some type of an emergency vote situation. So yes, 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. So — all right. So no other questions.

I just — I want to thank you all for joining us today and for your 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.

Operator: 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.