Q1 2026 SideChannel Inc Earnings Call
At this time.
All participants are in a listen-only mode. We will open the floor for your questions and comments. After the presentation, it is now my pleasure to turn the floor over to your host CEO of side Channel Brian hogly. Brian the floor is yours.
Thank you. Good afternoon, everyone and thank you for joining us. Uh, this quarter continues our transition from a labor driven cyber security services company into a scalable security platform company. Built around repeatable programs, recurring revenue, and our proprietary technology.
Um our remission or sorry, our mission remains clear. We make Enterprise grade cyber security operational for organizations that that cannot hire or retain a full security leadership team. And we do that through 3, integrated capabilities
1, our proprietary technology, Enclave 2 VC, so leadership and 3 compliance and risk management programs
our strategy is simple, move customers from Consulting engagements into operational, security platforms,
Want to touch high level as a financial results and then we'll go to Ryan for some more details, revenues declined, modestly year-over-year, but gross margins improved, and that's intentional. We're prioritizing higher value, repeatable engagements, and Technology enabled programs over staff, augmentation style Consulting in the short term. That reduces Topline Services Revenue, but is strengthens long-term, economics and customer retention. We are deliberately trading short-term re
Venue for durable Revenue.
With that, I want to go over to Ryan pulk, our CFO um for for his comments. Ryan.
Sorry folks. We're having a little bit of a technical difficulties at the beginning of this call, we might, oh, there he is. Thank you, Ryan. Take a bite. Yeah. Yeah. No, no problem. Thanks. Yeah, thank you. Yeah. I just want to remind everyone on the call that our fiscal year ends in September. So we are currently in what we call fiscal year 2026, which, which ends September 30th 2026. So, we just completed our first quarter, uh, on December 31st 2025 and in that quarter. As Brian mentioned Revenue modestly down about 7% from the prior year. Q1 numbers Revenue just under 1. 8.
For December 3120, 2025 and gross margin 540 basis points, higher for that quarter reflecting, uh, the shift in our Revenue, mix as Brian mentioned.
Operating expenses have increased, um, for reflecting some Investments that we have made primarily in marketing and in selling activities. Most recently uh, with the investment in uh a chief marketing officer position, which is staffed by Jamie wolf.
Our loss increased as a result of the declining Revenue combined with the increasing, uh expenses.
and we, um, announced today that we will be uh,
Initiating. A 930,000 annual reduction in operating, expenses, reflecting the shift in our strategy to invest in the proprietary product, marketing of enclave and to transition away from some Legacy Legacy areas of spending. So that 930,000 annual reduction in operating expenses, We Believe will, uh, be part of our profitability Improvement, cash flow Improvement.
Program over the rest of this fiscal year.
Brian that concludes my prepared comments.
Thank you, Ryan.
Um, so the most important signal, this quarter is not Revenue its pipeline quality and origin, marketing and Partnerships are now the primary driver of company growth. As Ryan just mentioned, we just brought on a Jamie wolf, our new Chief marketing officer, um, who's overseeing Partnerships, um, and year to date marketing is the leading contributor, uh, to lead and pipeline creation across the company. We are 35% towards our best case pipeline goal, Just 4 months into the fiscal year, which is on industry pace.
We are already 79% toward our good pipeline goal ahead of schedule.
That matters because our growth is shifting from outbound selling to inbound demand.
We also uh launched a structured partner program focused on high-value mdr's, msps, mssps and strategic technology alliances built around Enclave. We're seeing real field reciprocity joint events. Enablement. And co-selling not just referral agreements. That's important. Because partner Revenue scales without proportional headcount.
We're also seeing a major shift towards organic demand Generation website, inbound pipeline, has a number of uh really key uh, performance indicators, or kpis 322% increase in inbound Source dollars 56% increase in inbound deal, count and around. 20% increase in overall sessions, social awareness is accelerating as well LinkedIn impressions are up 800%. Year-over-year. Subscriber retention is extremely high. We're not measuring marketing by clicks. We measure it by Pipeline and inbound. Is now, our second largest source of opportunities. That's exactly why a platform transition should look like,
Customers today are not just asking for tools. They're asking, can you help us operate security, our model combined leadership process and Technology into 1 program Enclave, plays a critical role enabling identity based system access and eliminating implicit Network trust assumptions. This moves us from advisory vendor to operational security infrastructure. Provider,
Consulting scales linearly operational security platforms, scale exponentially.
What should investors expect near-term continued investment and go to market and product quarter to quarter Revenue variability, at service is normalized. Increasing pipeline, conversion driven by partners and inbound, long-term higher margins, larger contracts predictable, reoccurring Revenue, lower customer acquisition cost.
The summarize we are intentionally transitioning from Services Revenue to scalable Security Programs that transition temporarily compresses Revenue, but strengthens the business model the key signal. This quarter is not booking its demand creation.
Pipeline sources, partner growth and inbound activity. All indicate a company moving towards repeatable scale, we believe this strategy positions side channel for long term, shareholder value creation,
Thank you for your continued support. And now, we want to open the call for questions.
Thank you, ladies and gentlemen. The floor is now open for questions. If you would like to join the queue to ask a question at this time, please press star 1 on your telephone keypad, we do ask if listening on speakerphone today that you pick up your handset while asking your question to provide optimal sound quality. Once again, please press star 1 on your keypad at this time, if you wish to join queue to ask a question, please hold a moment while we pull for questions.
And the first question today is coming from Luke Wheatley, Luke, your line is live. Please go ahead.
Hey Brian. How you doing?
Good luck. Good to hear from you again.
So it feels like, you know in 2025 there was the big emphasis on being cash flow positive. Now with the transition that the business is going through, we've been cash, flow negative for multiple quarters. It feels like the business is trending towards some sort of cash rates.
Uh, when the warranty expired in April, how are you all thinking about that?
Yes, I mean, it's, it's definitely an option. It's, it's always been an option, but not something that we've ever, you know, even considered until the warrant expire in,
Takes time, you know, sales takes time. Um and you know, the my pipeline reviews My marketing reviews with the sales team. I mean that's why the comments I made today are centered on. Um, I'm very bullish on what I'm seeing out of my sales team. Um, what we're um what we're seeing as far as the types of contracts, the types of deals, the length of deals, the value of the deals and where we're fitting. Um as far as our raise goes, you know, specifically
Without having to raise any money. Uh, I think.
I Ryan knows this. I've I've kept this company debt-free and without you know kind of really outside Capital um you know when I was a private company and then even you know, post merger um to be able to give us the the most control over what our our destiny is, you know what we're working on. So I'm trying to hold off on
doing any type of
equity raised, um, that would be impactful, uh, for the shareholders at this time.
but,
Look, it's, you know, we're we 1 of the valuable things about being a public company, is the ability to go to public markets and do a raise. Um, I do have, uh, some ideas out for, you know, and we have to be thinking about this. It'd be, it'd be foolish for us to not think about, um, what could we do if I raised a million or 2 million dollars, you know, how do we use that and deliberately put together plans for okay? That would be used for sales and marketing, right? Um, and then how and where, and exactly. So yes, we've thought about those plans but we're not, um, you know, in a position right now where we're actively raising any uh, any funds at this time.
Okay, gotcha. Yeah. Previously, when I've asked similar questions on these calls, you've said that you feel like the stock is at a level where it makes zero sense to do any sort of at the market rates. Has your opinion changed on that.
Well, um,
I think pre- reverse split. It would have been very difficult to.
I think raise and use the share price that we had, right? Because just being you know anybody wanted to build a position. Any any type of you know raise would have been centered around just you know 10 cents 5 cents 10 cents wherever it was. Um,
you know, we did the reverse split to give us better mechanics be, you know, we heard the investment Community say, Hey, listen, I can't invest in you because, you know, they have rules around, um, you know, certain uh, certain types of, you know, spend or or certain types of, um,
uh,
Investment. Right, certain companies, certain offices, can't invest in companies under you know 50 cents or a dollar. You know, even though we're not a penny stock, they still kind of view it like that. So part of our reverse split was to give us the ability to get in front of organizations like that investors like that but also allow people who want to build a meaningful position. I mean for you to build a meaningful position when our stock was 6 cents.
I mean, really, almost almost impossible. Very, very difficult.
Stocks now trading at 2 dollars to 3 dollars, you know, it's in that space. You can now actually build a meaningful position if you want to. We want to attract those type of investors who want to build meaningful positions. Um, I do want to, um, give Ryan the floor. He's, he's obviously very close to this and the investor Community as well. So, Ryan, do you have any thoughts? You want to maybe share?
Uh, yeah, Brian. I can think of 1. Yeah, I I can think of 1 Thing. Uh, Luke. Yeah. For for a long time. The
The warrant have been a sort of a muting voice. It's been like a bucket of cold water in our strategic planning room. Um, and as we get closer to the expiration date of those, it certainly opens the door for us to think a little more creatively. Freeze our minds a little bit to be thinking about what we can do and not just that. But really engage people in in in conversations. Um, as they approached us with different ideas but I think the, the the, the number 1 thing I would I would want to understand.
In this question, in our answer to this question.
Is that we've also needed some time to mature, our Enclave voice to mature, the marketing message, um, and put some assets around that, that voice. We've talked a little bit about our, our new Chief marketing officer. Jamie, she's a reflection of those new assets and I think, uh, gaining confidence in that voice,
Voice is really uh the Catalyst that we all ought to be thinking about as a reason to.
Uh, to secure additional sources of capital, whether its Equity, or some form of, uh, some form of debt. Because once that, once we have confidence in that voice, we just want to amplify it so that we can accelerate the growth of The Enclave product.
Um, it's really about the size of the pie versus the size of the slices of the pie that I think we're all most interested in and The Enclave, uh, adoption is going to be the Catalyst that makes the the value of this company, the market capitalization of, of side Channel larger. And so we're looking at, I think we're, we're assessing our ability.
That drives, that accelerates that Enclave. Adoption. And, and so, um, I think we've had both those things happen. I think we've had a maturation of our, you know, we certainly reached closer to the end of those those those prohibitive warrants. But we've also matured our ability to understand the problems that Enclave solves, and how to communicate, effectively that solution.
Got it. Thank you all very much for the color. I appreciate that. I have 2 more questions if that's okay with you all.
Yeah. Shoot.
Okay, so, last year, um, you know, the way that individual investors kind of tracked the company day today is 8 KS, I mean, um, that's kind of most the news that we get and last year it seemed like we were getting really, really positive news. Winning deals, the Arizona deal, the Department of Defense deal over the past 8 months. It feels like we're not getting those. Hey, we want a deal 8K.
It feels like momentum has shifted. Is that the case or are we reading that wrong?
Yeah, no, it's a it's a great question. Um
I think we,
You know, 1, I I don't, I, I read other. You know, I follow other companies, I'm an investor myself, right? I follow a lot of our competition. A lot of the other competitive cyber security companies that are in the, um, microspace. And even in the, you know, listed in NYC and NASDAQ
and,
You know, Ryan. I'll tell you this, like, I I hate PR like just 8K factories, you know? Just publish stuff because you got to put something out.
I want things to be, you know, really meaningful. But man if I told you if we, if we posted
We would probably blow through our access our, our PR account, pretty, pretty, pretty quickly. In a year if we posted every time we want to contract
um, you know, part of what we're doing is
trying to tell the story, you know, at the 10ks or the 10 cues. Um, we we could probably do a better job of socializing.
Uh, you know, when we're winning deals. But you know, we, we are winning. I mean, we we have a pretty robust sales pipeline. Um, we, I think I saw this morning, we have 5, you know, 5 million in the pipeline that marketing has outlined to me. Um,
Today, I think that's what uh, Jamie was going over with me.
You know, when we close, you know, how much of that do I close do? I do? I publish an AK for 250,000 at 500,000? You know like like what kind of like you know when I close 3 deals in 1 week versus
So there's a balance that has to happen. Um, so it's not like there's nothing going on. Um, there is obviously new activity. There's still growth for, you know, spelling and and Landing more deals with clients. Um, I think we just need a better strategy, I guess on how to do the
Do those types of PRS that we did last year also last year it will be honest like we were really excited about those 2 DOD deals. Right? Those those were those were really big for us. That was
That was pretty, you know.
Needle moving for for us Nick and I especially coming out of you know, working in the dod. Um so that was just exciting. I think from from that standpoint.
um but yeah I think, you know, going forward, we're going to need to do a little bit more better diligence and
Again, I think this is something that we recognized last year, which is what led us to realizing that we needed a CMO. Last September, I had the entire leadership team here in Boston, and we sat together for like, 2 3 days, right Ryan. It's like, and yeah, we just, we just
We just noodled on the entire strategy for the company. I mean we fine tooth comb, you know, on everything, Luke just went through all of it. And 1 of the biggest takeaways was we need a CMO. We need somebody to fully own who is classically trained in marketing, um, because prior to that it was me, you know, I was leading a lot of the marketing efforts.
And I'm not, you know, I'm I'm okay but you know, I'm not great. I mean, you know, Jamie loves that I'm, you know, on the marketing team. She's pretty impressed by the stuff that we've done. But yeah, I'm not classically trained in marketing. I don't think about that, you know, full-time all the time. That that's why you have a CMO and that was 1 of the things that we all realized that our executive, um, you know, offsite here in Boston, uh, Worcester was that we really need that role. We really need somebody who's living and breathing and thinking about marketing. And because this is 1 of those areas where like we're just not, we're doing okay, but we're not.
Very lucky, uh, and a Seacat who joined our board actually interviewed for that role. And, um, you know, we ended up taking offering the position to Jamie and then immediately talking to Anna about joining our board, because of her marketing experience and death, and her belief in the company and now, you know, her her desire to work with us and help us expand it, even more. So, we won out by getting really 2, very exceptional, uh, marketing professionals because we knew we had, we had to do better in this area. Um, and, you know, Ryan's heard me say this, like, right now, I feel like we have the right team. You know, we have all aspects, you know, all the sea level kind of, like all the leadership roles and oversight in the company, the management in place to be able to, like really focus in on each areas, right? Sales can focus on sales marketing and Partnerships can be focused in under there, right? Matt can focus on operations. Nick can focus on technology. Ryan can focus on finance.
So, you know,
I think what you're going to see over the next year, is a better job of that. And, I'll be honest with you, I mean, I don't know if what we posted last year was like the right Cadence of, like, the right thing, you know, maybe we shouldn't have done all those PRS.
You know, again like we did it based on our experience but none of us were marketing experts. I think what you're going to see out of Jamie and Melissa and the team that that Jamie has under her and she's working with is going to be what good marketing looks like, and then you can get a much better.
I think expectation of okay this is what's coming out. This is the Cadence that I'm going to start getting to see of this type of messaging and when, um, you'll see a lot going on on LinkedIn. You'll see a lot going on on social uh, on the web. I mean, the campaigns that she's beginning to put together and actually, there's already launched our, our very poignant, very focused, very thoughtful and I've been very impressed so far, but you know, she's only 3 months into the job.
So we're going to see how that kind of keeps going as long as the long answer for you, but I just wanted to really give you the whole picture. It's a really good question. Yeah.
Yeah, I appreciate that. And I think your head's in the right space when you say it needs in order to 8 pay a deal like that, there needs to be a materiality threshold because I think investors including myself were a bit confused last year. It felt like we, we had all this momentum. We won both these huge deals or perceived huge deals and then we get the income statement the next quarter and it just didn't seem like it was additive.
So I think that drove a lot of volatility and I I think there's a lingering effect for investors when when looking at those facts.
And then just 1 more question on Luke on that on that. On that point Ryan. I don't know. Can you
Ryan's explained this to me, you know, like when we especially with Enclave right, Enclave software, we we can't
State.
You know, we're not, you know, say say we have sell just round numbers, you know, uh 100,000 dollar deal, you know, we don't see or we don't get to recognize that $100,000.
Day 1, right? We recognize 112th of that every month.
Right. So um the dollars that come in, you know, over the course of the year and then at renewal are kind of reflected like that. So that's why you got to look at, you know, our, uh, deferred revenue, you know, our accounts receivable. That's why I'm really honed in on our accounts receivable and our deferred revenue. Uh, but Ryan, I don't know if you want to add any color to that because you've kind of explained that pretty well to me.
I think you I think you described it. Right, right. I wouldn't say any of the I am.
Okay. All right. So you've taught me enough. That's great. That's good. All right, well done. No, absolutely. Agreed. I mean noted, it's not, it's not all going to hit immediately. Um,
Yeah. But uh, 1 final question.
When when looking at the financials, I know you all have, uh, you all are creating a focus of growing Enclave revenue, and you can see it in the footnotes, that, that is happening.
However, there's a sequential, even a greater decline in the VC, so Revenue. So from a high level or an outsider looking in, sometimes, it feels like we're just replacing the VC. So Revenue with The Enclave revenue or we're saying, hey, our CEO clients. We need you to switch over to this. If not, we're dropping you or we're, we're not providing these Services anymore.
How can you give investors confidence? That the deal pipeline is not coming strictly.
From current clients.
And just switching the services that you're providing them basically. Does that make sense?
Product, fit different, um needs right? You can't vcco is building, you know like listen you've got somebody who's got to understand.
um,
what the program supposed to look like, like, why do we have a security program? You know, for this company for this client, somebody's, got to be at the helm, okay? But you know, that doesn't just say, hey, let's add a sale but take away the captain of the ship and then it'll the ship will know where to go. It'll be fine. Like you can't you can't do that, right?
Same thing. You can't just say, okay, take away the leadership and just put this product in and now,
it's all going, because
Enclave is is solving for control gaps.
Basically left of boom. Right left of somebody being breached right? But but there are other great products out there that are handling right of boom. Right. You see the Sentinel ones, the crowd strikes that are doing detection and response. Enclave is focusing on keeping the breach from happening.
Handling things and identifying and protect other products are doing things. Like hey, something did get through or something came through another Avenue,
We need to detect and respond to that and then you still have traditional it needs to recover, backup Solutions and other things like that.
Well so you can't say, okay, well Enclave is going to come in, right? And and do the same thing as a VC because somebody's got to really look at all of it and manage. Are we doing everything we need to for this organization across all these different areas are your Security Programs are
Complex. Right. So we're definitely not going to clients and saying hey you need to do this now instead of vcso.
what we, we are trying to sell and moving to sell into current clients who are using our vcso services,
Again, because we know inside those clients that they have problems that enclaves can solve for. But we're also going out to Market and trying to, and, and selling and trying to sell Enclave to, you know, net, new organizations organizations that VC. So, would not be a fit for organizations that probably have a full-time Co or a head of security or some variation of that title. They already have somebody at the Helm of the cyber security program for that organization.
And we're selling to them The Enclave product to solve for the controls and address the gaps that we know that they have because we saw those same controls and gaps in our entire ecosystem of clients that we've been servicing with VC. So,
So it's it's never either or an or we're always trying to position both, but when we position 1, it's going to be it's going to be enclave and that's to solve for an organization. You know, uh, solve for problems that that organization is going to have. Um I think, you know what we saw was um just you know regular churn in service clients.
Right. Um we saw that and then we just also saw you know which we've been looking to do an uptick in Enclave sales. So you know it might look on paper that we're just trading at 1 for the other. But when reality, we're just having um, you know, sales came down a little bit on BC so Services. We're now starting to see that pick back up because of marketing, um, but we're not trading out 1 for the other. So I hopefully that is clear for folks.
Got it. Thank you for your time.
Yeah thanks. Great question, man. I'm glad you um, you tune in to this and it's um
It's great to hear from an investor who stays close to this and and consistently kind of jumps on a call. So I do appreciate you joining and listening in.
Yes sir. Thank you.
Thank you. And as a reminder, if anyone wishes to ask a question at this time, you may press star 1 to join the queue. Once again, it will be star 1. If there are any further questions at this time,
And there are no further questions in queue. At this time, this does conclude our Q&A session. I'd now like to turn the floor back to Brian, hogly for closing remarks.
All right. Uh, thank you so much. Um, do appreciate everybody's time today. Um, I was just thinking about this, uh, Luke if you connect with me, on the on LinkedIn, uh, and I got a sweatshirt for you. We have our new Enclave, uh, sweatshirts that we've uh, uh, uh, printed up for our new campaigns. Uh, I think you uh, you deserve 1
Follow us on LinkedIn. Uh be sure to check out what we're doing, on our blog for any of the latest greatest updates and uh, we'll talk to you next time. Thank you.
Thank you. This does conclude today's conference call, you may disconnect at this time and have a wonderful day. Thank you. Once again for your participation.