SideChannel signals strategic expansion of Enclave and launches insider threat service while maintaining debt-free status

Earnings Call Insights: SideChannel Inc. (SDCH) Q3 2025

MANAGEMENT VIEW

* CEO Brian Wayne Haugli highlighted growing momentum for Enclave, describing it as "a go-to Zero Trust network platform for organizations that need secure segmentation, asset visibility and controlled access." He announced expanded engagement with the Department of Defense, now serving two agencies and actively pursuing additional contracts in both public and regulated sectors. Haugli stated, "Enclave is proving to be a differentiator for us, and we're doubling down on that momentum."
* The company is increasing investments in marketing and sales to support Enclave and generate more long-term client relationships. Haugli reiterated commitment to vCISO services as "a cornerstone of our business" and noted their role in deepening client engagements.
* A new Insider Threat service was launched at DEFCON 33, led by Vice President Lauren Trujillo. Haugli said, "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."
* CFO Ryan L. Polk reported, "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." Polk added, "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."
* Polk continued, "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. As a result, our operating loss for the quarter was $261,000."
* Polk stated, "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...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."

OUTLOOK

* Management remains focused on "driving growth in our core cybersecurity software, particularly Enclave, while expanding our service offerings." Polk highlighted the company's commitment to "judiciously investing in our selling and marketing infrastructure to support the growth of our proprietary software product, Enclave."
* No explicit guidance figures or new financial targets were provided in the transcript.

FINANCIAL RESULTS

* SideChannel reported $1.8 million in revenues for Q3 2025, a 3.8% decrease year-over-year, with gross margin of 47% compared to the prior year's 48.9%.
* Operating expenses increased to $1.1 million due to higher selling and marketing spend.
* The company reported an operating loss of $261,000 for the quarter.
* For the nine months ended June 30, 2025, total revenues were $5.6 million, up 1.3% year-over-year, with cybersecurity software and services revenue rising 22.8%.
* Cash and cash equivalents and short-term investments at quarter end were $1.2 million. SideChannel had no debt.

Q&A

* Luke Wheatly, private investor: Asked about the criteria for issuing 8-Ks related to new contracts and whether all new wins are disclosed. Haugli responded, "If we issued an 8-K for every deal we are winning, we would probably quickly run out of our PR Newswire subscription allotment...We're choosing the ones that we think are really meaningful. But by no means are we definitely talking about everything."
* An online participant inquired about Enclave pricing. Haugli explained that pricing varies by modules and volume, with a general range of "$3.75 and $7 per agent per month."
* A question on vCISO revenue sustainability was addressed by Haugli, who described efforts to "stay sticky with clients" by expanding engineering and cloud security services when vCISO contracts end.
* On managing net operating losses (NOLs), Polk said, "We reported at September 30, 2024, that the value of our NOLs were $7.5 million...When we begin recognizing -- when we begin having taxable income, then that asset will get activated."
* Polk clarified that a consulting agreement with Paulson Investment Company ended, with no cash paid and no ongoing relationship.
* Sami asked for a breakdown of Enclave revenue within cybersecurity software; Polk replied, "We are not doing that at this time...we are preparing to do so, and we'll have that disclosed when we've crossed that threshold."
* Alex Lattimore inquired about the Insider Threat program's initial traction. Haugli responded that the offering is in its early days but is seeing interest, with momentum expected to build.

SENTIMENT ANALYSIS

* Analysts and investors focused on transparency around contract wins, Enclave pricing, and the early performance of new offerings, reflecting a neutral to slightly positive tone with curiosity about growth drivers.
* Management's tone during prepared remarks was confident, with Haugli stating, "I'm confident in the path forward and excited about what's ahead for SideChannel." During the Q&A, management was candid and transparent, especially about disclosure practices and early-stage services, showing comfort in addressing sensitive topics.
* Compared to the previous quarter, management maintained a similar level of confidence, though this call contained more specific explanations regarding disclosure decisions and new service launches.

QUARTER-OVER-QUARTER COMPARISON

* The current quarter placed greater emphasis on expanding Enclave within the Department of Defense and launching the Insider Threat service, while the previous quarter focused on margin improvements and initial Enclave traction.
* Revenue declined quarter-over-quarter versus the previous year, contrasting with the prior quarter's slight revenue growth.
* The management tone remained confident but was more detailed in addressing investor questions about disclosures and service transitions.
* Analysts continued to seek clarity on contract disclosures, new service adoption, and financial thresholds for reporting product-specific revenues.
* There was a shift toward increased investment in marketing and sales, specifically for Enclave, compared to previous quarters where cost control and margin improvement were highlighted.

RISKS AND CONCERNS

* Management acknowledged a net decline in vCISO services clients impacting revenue.
* Gross margin pressure resulted from increased reliance on third-party software and lower employee utilization.
* No explicit guidance was provided, and Enclave revenue is not yet reported separately, though internal discussions are ongoing.
* There is early but unquantified interest in the new Insider Threat service, with management committing to future updates as traction is established.

FINAL TAKEAWAY

SideChannel is intensifying its strategic focus on Enclave, expanding within the Department of Defense, and introducing an Insider Threat service to address evolving client needs. While the company experienced a modest revenue decline due to reduced vCISO client counts, investments in marketing and sales are ramping up in support of proprietary software growth. Management remains confident in its ability to deliver value, maintain a debt-free balance sheet, and drive sustainable long-term growth, with further updates on new service traction and revenue mix expected in upcoming quarters.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/sdch/earnings/transcripts]

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