SideChannel Inc. (OTCQB:SDCH) Q1 2023 Earnings Conference Call February 13, 2023 5:00 PM ET
Company Participants
Ryan Polk – CFO
Brian Haugli – Inside Director & CEO
Conference Call Participants
Operator
Thank you, and welcome, everyone to SideChannel First Quarter 2023 Financial Results Conference Call. With me this afternoon is SideChannel’s Chief Executive Officer, Brian Haugli; and Ryan Polk, the company’s Chief Financial Officer.
Before we begin, I need to read the following statement. Statements or comments made on this conference call may be forward-looking statements. Forward-looking statements may include, but are not necessarily limited to financial projections, or other statements of the company’s plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company’s actual results may differ significantly from those projected or suggested and any forward-looking statements due to a variety of factors which are discussed in detail in our SEC filings.
At this point, I’ll turn the call over to Ryan, who will discuss SideChannel’s first quarter financial results.
Ryan Polk
Thank you. SideChannel grew revenue 48% on a year-over-year basis. Current year quarterly revenue was $1.5 million compared to just over $1 million for the same quarter during our last fiscal year. We also achieved a quarter-over-quarter growth result of 26%. Revenue by category shows that vCISO services grew 61% on a year-over-year basis and revenue from cybersecurity software and services grew by 28%.
Gross margin increased to 56% this quarter compared to 55% one year ago. The gain was primarily due to lower costs on third-party software, however, some of this gain was offset by a slight decrease in margin on internal services. Operating expenses exceeded gross profit resulting in a net loss of $602,000 for the quarter compared to net income of $328,000 for the same period in fiscal year 2022.
Since the business combination completed on July 1, 2022, we have been making investments in growth initiatives such as research and development to advance Enclave, our first proprietary software product and in selling and marketing resources to acquire new clients. Second, the expenses associated with being a listed company are included in the current year results and are not reflected in the fiscal year 2022 results. We ended the quarter with cash of $2.6 million after using $480,000 of cash for operating activities during the three months ended December 31, 2022.
Also in our quarterly filing with the SEC, we reported total revenue for the trailing 12 months ended December 31, 2022 was $5.3 million. Following the company achieving $5.5 million of trailing 12 month revenue, we will be issuing approximately 60 million shares of common stock related to the July 1, 2022 business combination to see between SideChannel and Cipherloc.
Now Brian will provide business highlights from the quarter.
Brian Haugli
Thank you very much, Ryan. Good afternoon, everybody, on the East Coast, mid-day on the West Coast. The first quarter has been on target even exceeding our expectations for SideChannel. I’m very excited about the growth, the culture that continues to grow within the company and the general outlook of clients in looking to address their cybersecurity needs.
Looking ahead, we intend to continue delivering on our strategy, right. The middle market faces growing needs for cybersecurity and through software and through services, the rising costs and rapid turnover in vCISO, our Chief Information Security Officers, leave them priced out of the market for the talent that they truly need. Likewise, vCISO are burning out and looking for a better way to practice the profession they love and bring real value to companies in need of their services.
We at SideChannel marry these two together. We offer cyber programs as a service via very senior experienced Chief Information Security Officers or vCISO (ph) to those mid-market companies and emerging tech and startups on a fractional cost effective basis. This offers SideChannel customers unparalleled expertise and support, but at a price that’s appropriate to their budgets. Moreover, they can also benefit from our expansive team, deep vertical expertise and the opportunity to source from a wide array of software and other tools from across the industry.
For example, our micro segmentation platform, Enclave, this really allows our clients to do three things: reduce risk, enhance productivity and make zero trust a reality. This is a key area of both the executive order at the White House along with new regulations and really the industry at large and looking at how to address and concrete the concept of zero trust. Enclave, is a technical capability that becomes the underpinning for a zero trust strategy. We can deploy in a variety of different ways either through direct license sales or via a managed service.
And really the focus shift on Enclave is to not just deliver encryption but deliver through micro segmentation more than just encryption itself. We previously and I previously spoken about Fips, (ph) which is a nice requirement to be able to meet as you’re looking at federal and state contracts in that area because of the requirement that they have with Fips 140. But this clears the road for us to be able to [Technical Difficulty] spaces because we now have a FIPs certified product.
In association with that, we’re actually in the late stages of including Enclave on both the GSA and the NASA SEWP government contract vehicles. This again will allow us to sell Enclave to federal, state, local and municipal entities as they buy software and services-off of those two contracts. So the good news overall beyond just our own proprietary product Enclave, the platform that is side channel for our delivery is working.
Again, we’ve added several new logos to our client roster over the past few months. This being an audio call, I wish you could show them to you, but you’ll have to really tune in and look forward to our call on Wednesday, our Investor Call at 9:00 AM I’ll talk about that again in a minute. But we’ve been very excited about our growth opportunities, which can be lumpy throughout the year. I’ve said this before, for example, November, December can traditionally be slow months for companies as they close out the year. And then January, we see a wave of new activity corresponding to the new budget year. But I think annual and seasonal assumptions that we have made seem to have really gone out the window with the growth that we’ve shown in this queue.
Our goal is to continue building on a strong base of customers generating predictable revenue and then augment it with a broad funnel of new business prospects. And who’s at the helm to be able to do that, but our growing sales team actually, want to highlight one of our new hires. John, who’s a sales development rep or otherwise known as an STR was recently hired in our first quarter. And I think there’s some misconceptions about when you’re building a sales team that it’s just top-heavy, expensive, sales individual or executives and that’s really not the case. It’s a stack of individuals working as a team across a variety of experiences and focus.
And really the STR, the sale development rep, is a junior sales role that focuses on attracting the higher year of potential customers and then booking meetings to see demos. This is a low cost sales hire that nets large results and we’re incredibly proud that John has joined us and will speak more about the growing sales team and the capabilities that that sales team is delivering. But they are definitely the direction that we want to go and the growth is proving out to be the right investment in our own staff.
We also want to keep our eye on select list to M&A targets in areas that are complementary to our services and where we traditionally have gone to partners and could instead deliver directly ourselves. So we have a very rich pipeline, Ryan and myself and small team within side channel along with some outside advisory that figured out really the areas that we want to hone in on for these services that will complement what we do today. And we’re very excited about the capabilities that we’re looking at as well as looking to bring those on underneath the side channel brand. We’re excited about our path forward, both our team and the opportunities for growth and we look forward to reporting further progress ahead.
With that, we’ll go to Q&A.
Question-and-Answer Session
A – Brian Haugli
And I really like this first one. I think this is a good question that was posed. But somebody asked, why is the company having an Investor Day without any new information?
And again, our investor day is this Wednesday, February 15th at 9:00 AM Eastern Time. The information is on our Investor page on SideChannel, if you aren’t aware, but please click on the Investor link of the sidechannel.com and the Investor Day Information for February 15 at 09:00 AM is available on there.
So the question is, why are we having Investor Day without any new information? I know the 10 Q will be coming out, but unless there’s some pretty interesting stuff in there, I see no reason at this point in time. Well, that’s a great question, very candid. I get it.
We’re setting a new precedence in how we are communicating to all of our investors. The entire investor community hopefully potential as well as current. We know that some of our investors are up to date on all the company’s recent activity, but we’re also aware that there are many that are not. So with that, we are putting a heavy emphasis on investor communication in 2023 and we feel that this Investor Day is a great way to kick off and meeting that pledge.
Let me go on to the second question. And this again is another question we’ve heard before. Does the company see any opportunities in the polymorphic encryption technology or what was referred to previously as the PEC. Going forward, NIST is in the process of finalizing its new encryption standards, but Cipherloc, the legacy organization of SideChannel, did not enter this competition. And it’s — this is a factual and this is in the process of finalizing that.
Right now, we’re uncertain about the commercialization, about the PEC itself. And what we’ve done is, we shifted our attention to a product that is a vehicle and delivery for encryption, micro segmentation and access and we have this in Enclave. So again, just kind of remind people, NIST has been running a six-year competition since 2016 to choose the first group of encryption tools that were designed to withstand a salt of a future quantum computer, which could potentially crack security, use to protect the privacy, digital systems rely on every day such as banking and email software.
But in July 5 of 2022, NIST had chosen for selected algorithms that would become part of NIST’s post quantum cryptographic standard expected to be finalized in the next two years. When NIST chose its finalist the Cipherloc TEC, which was not one of the four that were in the competition. So while I realize we get this question a lot, where is it in the process? The four has been already chosen by NIST and have been outlined communicated publicly and written in their papers. So our shift and focus is not so much within the encryption algorithm itself. But again, the vehicle to be able to deliver encryption, the ability to deliver micro segmentation, control and manage access and that we see as a broader, much better capability actually from a commercialization standpoint with what we’ve developed and are producing with Enclave.
So with that, I’ll end the other questions, the two questions we had. And again, I ask for folks to send questions in to our Investor Relations team. We love getting questions. I would love to answer more of them. Please send them in. Really curious what investors and potential investors are thinking about SideChannel and what we’re doing. But before we close this call, I’d really like to thank everybody for joining us today and their support throughout the past year. We look forward to our Investor Day on Wednesday, February 15 at 09:00 AM Eastern.
And with that, I’d like to conclude today’s call. Thank you so much.
Operator
This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation
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