Earnings call transcript: SideChannel Q3 2025 sees sales drop, stock dips

SideChannel, a cybersecurity firm with a market capitalization of $22 million, reported its Q3 2025 earnings, revealing a decline in revenue and operating losses. According to InvestingPro analysis, the company currently appears overvalued based on its Fair Value estimate. The company’s stock price experienced a notable decline of 10.27% following the announcement. Despite the decline, SideChannel continues to focus on expanding its product offerings and market reach.

Key Takeaways

• Q3 revenue fell by 3.8% year-over-year.
• Gross margin decreased to 47%.
• Stock price dropped by 10.27% post-earnings.
• Continued investment in cybersecurity solutions and services.
• No additional capital is expected to be needed.

Company Performance

SideChannel’s performance in the third quarter of 2025 showed a decrease in revenue to $1.8 million, a 3.8% decline compared to the same period last year. The company reported a gross margin of 47%, slightly down from the previous year’s 48.9%. While the nine-month total revenues increased by 1.3% year-over-year to $5.6 million, the company faced an operating loss of $261,000 for the quarter. InvestingPro data shows trailing twelve-month revenue growth of 6.6%, with a gross margin of 48.2%, indicating relatively stable operational efficiency despite recent challenges.

Financial Highlights

• Revenue: $1,800,000 (down 3.8% year-over-year)
• Gross Margin: 47% (down from 48.9% year-over-year)
• Operating Loss: $261,000 for the quarter
• Cash and Equivalents: $1,200,000
• Zero outstanding debt

Market Reaction

Following the earnings announcement, SideChannel’s stock price experienced a decline of 10.27%, closing at $0.1003. This movement places the stock closer to its 52-week low of $0.0236, significantly below its 52-week high of $0.1865. Despite recent volatility, InvestingPro data reveals impressive year-to-date returns of 195% and six-month gains of 162%. The platform offers 12 additional exclusive ProTips about SideChannel’s performance and potential. The market sentiment appears cautious as investors react to the company’s financial performance and future outlook.

Outlook & Guidance

Looking ahead, SideChannel plans to continue investing in its Enclave software and expand its Insider Threat Service. The company’s strong financial health is reflected in its current ratio of 1.84, indicating sufficient liquidity to cover short-term obligations. The company remains focused on growing its cybersecurity software offerings and has indicated that no additional capital is expected to be needed in the near future. For deeper insights into SideChannel’s financial health and growth prospects, investors can access the comprehensive Pro Research Report available exclusively on InvestingPro.

Executive Commentary

CEO Brian Hugley stated, "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." CFO Ryan Polk explained, "We’re not generating net income yet, and so it doesn’t make sense to have it thought of as an asset at this point."

Risks and Challenges

• Market competition in the cybersecurity sector remains intense.
• The decline in gross margin could affect profitability.
• Continued operating losses may impact financial stability.
• The need to maintain and grow client relationships is critical.
• Economic uncertainties could affect client spending on cybersecurity.

Q&A

During the earnings call, analysts inquired about the company’s 8-K filing strategy and the management of Net Operating Losses (NOL). SideChannel also addressed questions regarding its past consulting agreement with Paulson Investment Company and clarified pricing and revenue recognition for its Enclave platform.

Full transcript - SideChannel Ord Shs (SDCH) Q3 2025:

Conference Operator: Greetings. Welcome to the Sai Channel Fiscal Year twenty twenty five 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. Please note this conference is being recorded.

I will now turn the conference over to your host, Brian Hugley, CEO at Side Channel. Brian, you may begin.

Brian Hugley, CEO, Side Channel: Thank you. Good afternoon, everyone. Thank you for joining us today. I’m excited to talk about where Side Channel 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. 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 thirty three 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 Side Channel. Thank you, and I’m going turn it over to Ryan for more of a financial review.

Ryan Polk, CFO, Side Channel: Thank you, Brian. I am Ryan Polk, Chief Financial Officer of Side Channel. For the quarter ended 06/30/2025, our third quarter, Side Channel recorded revenues of $1,800,000 representing a 3.8% decrease compared to Q3 of the prior year, largely attributable to a net decline in our BCSO 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 1,100,000 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 06/30/2025, Side Channel achieved total revenues of 5,600,000.0 up 1.3% over the comparable year one year ago with a stable year over year gross margin of 47.5%. Our revenue from Cyber Security 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 $1,200,000 down just $46,000 from the beginning of our fiscal year which was 10/01/2024. 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 twenty five third quarter call.

And with that, we will turn it over now to questions.

Conference Operator: Thank you. At this time, we will be conducting a question and answer you. And we did have a question coming from Luke Wheatley. Luke is a Private Investor. Luke, your line is live.

Brian Hugley, CEO, Side Channel: 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 eight k. You you all sent a couple eight k’s out recently about new contracts. How material does the contract have to be in order for you all to issue an eight k? And, like, so, for example, if we don’t get an eight k, should we assume contracts are being won, or how big does the contract have to be in order for you to issue an eight k?

Yeah. That’s a great question. No. There’s plenty going on. I think if we issued an eight k 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 grab new services.

So we gotta 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 wanna 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. What’s unfortunate is all three 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 wanna 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 gonna be honest and transparent about is, yeah, 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 gonna see more focus on Enclave deals are gonna probably be the things that come out in PR, press releases that have the associated eight ks 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. 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 eight k’s? 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, you know, an eight k and PR factory. And you see some of that. Right? We’re definitely not trying to just issue press releases or eight k to just generate interest in the stock.

Like, we’re we’re choosing the ones that we think are meaning 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 ks, 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 wanna share, you know, hey. These are some stuff that we’ve talked about. Hopefully, that’s kinda gives you a little bit more of Yeah. A That makes a lot of sense, Brian. I think you all are thinking about it the right way.

I appreciate the clarity. Yeah, no problem. Thanks for joining again.

Conference Operator: You. Once again,

Brian Hugley, CEO, Side Channel: four questions 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. Anybody’s monitoring that.

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

Brian Hugley, CEO, Side Channel: Alright. Well, why don’t I in the interest of time, why I just go through these four? So kind of a regular poster on one of these forums that I keep reading. Good, insightful stuff. Thank you to twenty two Rover, 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. Can you give us some color on the recent DoD contract?

So you’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. 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 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 in modules. You can do asset intelligence with vulnerability discovery. You can do secure web gateway.

You can do certificate management. You can do segmentation. Did I get them all right? Yeah. Get 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 posters question is thinking that it’s $50 per agent per month.

That’s no agent out there right now in the space, CrowdStrike, seven zero one, 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, 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, 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 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 the CECL revenues and what are we doing to accelerate new client acquisition and share sustainable revenues growth.

Account management inside of our sales is a big piece in having a really more effort and focus on current client management. People wanna continue to work with people they know. And so we’ve structured and continue to invest in, excuse me, that account management and that sales team as we’re looking to kind of grow that sales team as well. You know, we’re we’re looking to 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 BCSO 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 VC, so we implemented and introduced engineering and then introduced Enclave, and we’re no longer doing VC. 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 gonna 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 two questions, I think Ryan is gonna be better set up to answer. So Ryan, I’ll just read these. The question is assuming there’s there are significant net am I reading this right? Assuming there are significant net operating losses losses, the poster doesn’t recall the amount. How is SideChannel managing NOLS, NOLS, to optimize future tax benefits?

Ryan, can you touch on, how we’re managing NOLS?

Ryan Polk, CFO, Side Channel: Yep. Happy to do that. In our 10 k, we believe it’s our last footnote, I don’t remember the footnote number, note 18 or something like that. Think I may have it open here. Sorry, note 17.

We have an calculation on the value of our federal and state net operating loss carryforward. When we calculate that, we update that calculation once a year in conjunction with our tax firm. We reported at 09/30/2024 that the value of our NOLs were $7,500,000 We are, as you can see from our financial statements, are 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, it’s 7,500,000.0. It’s not on the balance sheet because we aren’t generating net income yet, taxable net income, and so it 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 will 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 Hugley, CEO, Side Channel: Thanks. Thanks, Ryan. Mhmm. Alright. And then let’s my computer screen just went to screen saver.

Okay. Let me bring it back here. Here we go. Alright. So the last question here, I think this is a a 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 and 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 past relationship back in 2021 and what happened with Paulson and what what’s actually happening today, if any.

Ryan Polk, CFO, Side Channel: Sure. Happy to do that. In July 2021, then Cipherlock Corporation entered into a four year consulting agreement with Paulson Investment Company in which Paulson would assist Cipherlock 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. Our Q4 is the last quarter.

It will be reported as a zero. This deferred cost that you note on our balance sheet will be zero at 09/30/2025. And there will just be $15,000,000 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.

Brian Hugley, CEO, Side Channel: Yeah. I’ll just I’ll piggyback that that relationship in 2021 was prior to when I commenced the reverse takeover of Cyperloc with Side Channel as a private company. So that predates me. We didn’t have a relationship with Paulson after, you know, I became CEO and took over the company, and and we took it in the direction. We currently do not have a relationship with Paulson.

We’re not paying them for anything. They have no service for us today. So we’re not working with them in any regard. So, yeah, hopefully, that answers your question. Twenty two Rover.

Keep them up. I didn’t see any others. I’ll just check real quick. 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 Webinets. Any other call ins or anything else?

Conference Operator: Currently no questions in queue. There looks like there were two webcast questions. Ryan, you should have those.

Ryan Polk, CFO, Side Channel: 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 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 VCSO category of course and then we would break the cybersecurity software and services category into two. But right now we are 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 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 Hugley, CEO, Side Channel: 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’s a well known quantity and an amazing, amazing professional in the space with a real passion for insider threat. She comes with 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 Side Channel 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 out.

And I think the side channel is the right place to be able to deliver that out of. I mean, the theme of DEF CON this year was insider threat. So, 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 gonna 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 was an interest in the market if we didn’t have a line or 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 remotely. Yeah, just stay tuned on that. Great question.

I definitely look forward to talking more about the success of this. And I wanna be able to answer that same question next call in three months, next quarter, or I guess it’d be the end of the fiscal year. So either way, we will answer that question as we can. Maybe back to Luke’s point, you’ll probably see an eight ks about a press release as this ramps up. I do wanna actually hit one topic before we close if there’s no other questions.

Forgot to mention something.

Conference Operator: Currently no other Great.

Brian Hugley, CEO, Side Channel: 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 forty five to sixty days. 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 the six months and the year to date charts, really what’s been happening since June, there’s been interest. People are taking note of what we’re doing. We said what we were going 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 slack early on because past iterations of this company that we are people who we are gonna do what we say we’re gonna 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 think it’s very interesting the increased attention and interest in the company that’s reflected in the stock price.

Obviously, shareholders, Ryan and I are gonna really start kind of digging into the lists that we’re able to get through our third parties 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 calling, following us. They’ve got Analyst Report Out. But some of these other pure online places like Wall there’s like a Wall Street one. There’s StockTwits and others that there’s some 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 gonna 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 wanted 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.

Like, are actually paying attention in there. 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 appreciate it, and we look forward to speaking with you again. Enjoy the day. Be safe. Be good to each other.

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

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