Good afternoon, and welcome to the SideChannel fiscal year 2026 Q1 financial results update. 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 SideChannel, Brian Haugli. Brian, the floor is yours.
Thank you. Good afternoon, everyone, and thank you for joining us. This quarter continues our transition from a labor-driven cybersecurity services company into a scalable security platform company built around repeatable programs, recurring revenue, and our proprietary technology. Our mission remains clear. We make enterprise-grade cybersecurity operational for organizations that cannot hire or retain a full security leadership team, and we do that through three integrated capabilities. One, our proprietary technology, Enclave. Two, vCISO leadership, and three, compliance and risk management programs. Our strategy is simple: move customers from consulting engagements into operational security platforms. I want to touch high level on 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 top-line services revenue, but it strengthens long-term economics and customer retention. We are deliberately trading short-term revenue for durable revenue. With that, I want to go over to Ryan Polk, our CFO, for his comments. Ryan? Sorry, folks, we're having a little bit of technical difficulties at the beginning of this call.
Thank you, Brian.
Oh, there he is. Thank you, Ryan.
Thanks, Brian. Yeah. Yeah. No, no problems. Thank you. 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 ends September 30, 2026. So we just completed our first quarter on December 31, 2025, and in that quarter, as Brian mentioned, revenue modestly down about 7% from the prior year Q1 numbers. Revenue just under $1.8 million for December 31, 2025, and gross margin 540 basis points higher for that quarter, reflecting the shift in our revenue mix, as Brian mentioned. Operating expenses have increased for reflecting some investments that we have made, primarily in marketing and in selling activities.
Most recently, with the investment in 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 expenses. We announced today that we will be 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 areas of spending. So that $930,000 annual reduction in operating expenses, we believe, will 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. So the most important signal this quarter is not revenue, it's pipeline quality and origin. Marketing and partnerships are now the primary driver of company growth. As Ryan just mentioned, we just brought on Jamie Wolf, our new Chief Marketing Officer, who's overseeing partnerships. And year to date, marketing is the leading contributor to lead and pipeline creation across the company. We are 35% towards our best-case pipeline goal just four 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. Our partner growth, lead growth and the ecosystem is now the largest source of opportunities across SideChannel. Year- to- date, partner performance are three major areas.
400% increase in partner source pipeline dollars, a 45% increase in partner deal count, and the largest deal this year is originated through partner relationships. We also launched a structured partner program focused on high-value MDRs, 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 really key 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.... The customers today are not just asking for tools. They're asking: Can you help us operate security? Our model combines leadership, process, and technology into one 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 as services normalize, increasing pipeline conversion driven by partners and inbound. Long-term, higher margins, larger contracts, predictable recurring revenue, lower customer acquisition cost. To 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 bookings, it's demand creation. Pipeline sources, partner growth, and inbound activity all indicate a company moving towards repeatable scale. We believe this strategy positions SideChannel 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 one 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 one on your keypad at this time if you wish to join queue to ask a question. Please hold a moment while we poll for questions. The first question today is coming from Luke Wheatley. Luke, your line is live. Please go ahead.
Hey, Brian, how are you doing?
Good, Luke. Good to hear from you again.
So it feels like, you know, in 2025, there was a 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 raise, when the warrants expire in April. How are you all thinking about that?
It's, I mean, 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 warrants expire in April. And because, you know, the warrants have a number of toxic clauses that would just be... We don't, we don't like what that would do, I think, for all shareholders. You know, the reason we were really focused on cash flow positivity, you know, in 2025 was to generate cash to be able to support sales and marketing efforts going into this year. We then decided to spend that cash, right, instead of doing a raise.
You know, we, we had to come up with the money somehow to be able to start making the bets on sales and marketing, and, you know, we did that in 2025 to set us up for what we were doing. And now going into 2026, we're, we're executing, you know, on that plan. Marketing takes time, you know, sales takes time. 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. I'm very bullish on what I'm seeing out of my sales team, what we're, 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.
As far as a raise goes, you know, specifically, you know, right now, I like what we're doing without having to raise any money. I think Ryan knows this. I've kept this company debt-free and without, you know, kind of really outside capital, you know, when I was a private company and then even, you know, post-merger, to be able to give us the most control over what our destiny is, you know, what we're working on. So I'm trying to hold off on doing any type of equity raise that would be impactful for the shareholders at this time. But look, it's... You know, we're one of the valuable things about being a public company is the ability to go to public markets and do a raise.
I do have 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 what could we do if I raised $1 million or $2 million? You know, how would we use that? And deliberately put together plans for, okay, that would be used for sales and marketing, right? And then how and where and exactly. So yes, we've thought about those plans, but we're not, you know, in a position right now where we're actively raising any any funds at this time.
Okay, got you. 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 rate. Has your opinion changed on that?
Well, 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 who wanted to build a position, any, any type of, you know, raise would have been centered around just, you know, $0.10, $0.05, $0.10, wherever it was. You know, we did the reverse split to give us better mechanics. You know, we heard the investment community say, "Hey, listen, I can't invest in you," because, you know, they have rules around, you know, certain, certain types of, you know, spend or, or certain types of, investment, right? Certain companies, certain offices can't invest in companies under, you know, $0.50 or $1. 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 $0.06, I mean, really almost impossible. Very, very difficult. Stock's now trading at $2-$3, you know, it's in that space. You can now actually build a meaningful position if you want to, and we want to attract those type of investors who want to build meaningful positions. I do wanna give Ryan the floor. He's obviously very close to this in the investor community as well. So, Ryan, do you have any thoughts you wanna maybe share?
Yeah, Brian, I can think of one thing. Yeah, I can think of one thing. Luke, for a long time, the warrants have been a sort of a muting voice. It's been like a bucket of cold water in our strategic planning room. 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 conversations, as they approach us with different ideas.
But I think the number one thing I would wanna underscore in this question, or in our answer to this question, is that we've also needed some time to mature our Enclave voice, to mature the marketing message, and put some assets around that voice. We've talked a little bit about our new Chief Marketing Officer, Jamie. She's a reflection of those new assets. And I think gaining confidence in that voice is really the catalyst that we all ought to be thinking about as a reason to secure additional sources of capital, whether it's equity or some form of some form of debt. Because once we have confidence in that voice, we just wanna amplify it so that we can accelerate the growth of the Enclave product.
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. The Enclave adoption is gonna be the catalyst that makes the value of this company, the market capitalization of SideChannel larger. So we're looking at... I think we're assessing our ability to effectively deploy capital in a way that drives that or accelerates that Enclave adoption. So I think we've had both those things happen. I think we've had a maturation of our... You know, we've certainly reached closer to the end of 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 two more questions, if that's okay with you all.
Yeah, shoot.
Okay. So last year, you know, the way that individual investors kind of track the company day to day is 8-Ks. I mean, that's kind of most of 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 eight months, it feels like we're not getting those, "Hey, we won a deal," 8-Ks. It feels like momentum has shifted. Is that the case, or are we reading that wrong?
Yeah, no, it's a great question. I think we... You know, one, I don't 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 cybersecurity companies that are in the micro space and even in the, you know, listed in NYSE and Nasdaq. And, you know, Ryan will tell you this, like, I hate PR, like, just 8-K 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 posted, we would probably blow through our access, our PR account pretty, pretty, pretty quickly in a year, if we posted every time we won a contract.
You know, part of what we're doing is trying to tell the story, you know, at the 10-Ks or the 10-Qs. We could probably do a better job of socializing, you know, when we're winning deals. But, you know, we are winning. I mean, we have a pretty robust sales pipeline. I think I saw this morning, we have five, you know, five million in the pipeline that marketing has outlined to me, today. I think that's what Jamie was going over with me. You know, when we close, you know, how much of that do I close? Do I publish an 8-K for $250,000, at $500,000? You know, like, like what kind of... Like, you know, when I close three deals in one week versus...
So there's a balance that has to happen. So it's not like there's nothing going on. There is obviously new activity. There's still growth. We're, you know, selling and landing more deals with clients. I think we just need a better strategy, I guess, on how to do those types of PRs that we did last year. Also last year, I'll be honest, like, we were really excited about those two DoD deals, right? Those were really big for us. That was pretty, you know, needle moving for us. Nick and I, especially coming out of, you know, working in the DoD. So that was just exciting, I think, from that standpoint. But yeah, I think, you know, going forward, we're gonna 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, two, three days, right, Ryan? It's like... And-
Yeah, exactly.
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 one of the biggest takeaways was, we need a CMO. We need somebody to fully own, who is classically trained in marketing. 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's why you have a CMO.
And that was one of the things that we all realized at our executive, you know, off-site here in Boston, Worcester, was that we really need that role. We really need somebody who's living and breathing and thinking about marketing. And because this was one of those areas where we're like: We're just not doing okay, but we're not, we're not consistently doing very well with marketing. We should do better. And that's what led us to hiring her. And it was a very competitive field. You know, we were actually very lucky.
Anna Seacat, who joined our board, actually interviewed for that role, and, 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 depth 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, we won out by getting really two very exceptional, marketing professionals because we knew we had, we had to do better in this area. 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 C-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 area. Like, 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 gonna see over the next year is a better job of that. And I'll be honest, Luke, I mean, I don't know if what we posted last year was, like, the right cadence or, 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 gonna see out of Jamie and Melizza and the team that, that Jamie has under her and she's working with, is gonna be what good marketing looks like, and then you can get a much better, I think, expectation of, "Oh, okay, this is what's coming out. This is the cadence that I'm gonna start getting to see of this type of messaging and when." You'll see a lot going on on LinkedIn. You'll see a lot going on on social, on the web. I mean, the campaigns that she's beginning to put together, and actually has already launched, are, are very poignant, very focused, very thoughtful, and I've been very impressed so far. But, you know, she's only three months into the job, so we're gonna see how that kind of keeps going.
That's a long answer for you, but I just wanted to really give you the whole picture.
Yeah.
It's a really good question.
Yeah, I appreciate that. And I think your head's in the right space when you say it needs, in order to 8-K 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.
Sure.
Then just one more question.
I will say, Luke, on that point, Ryan, I don't know if... Ryan's explained this to me. You know, like, when we... Especially with Enclave, right? Enclave software, we can't state, you know, we're not... You know, say we sell, just round numbers, you know, a $100,000 deal. You know, we don't see or we don't get to recognize that $100,000 day one, right? We recognize 1/12 of that every month, right? So, 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 deferred revenue, you know, our accounts receivable. That's why I'm really honed in on our accounts receivable and our deferred revenue.
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 described it right, Ryan.
Oh.
I wouldn't say it any different.
I damn. Okay. All right. You've taught me enough. That's great. That's good.
All right. Well done.
No, agreed. I mean, noted. It's not, it's not all gonna hit immediately. Yeah, but one final question.
Sure.
When looking at the financials, I know you all have, 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 vCISO revenue. So from a high level or an outsider looking in, sometimes it feels like we're just replacing the vCISO revenue with the Enclave revenue, or we're saying: "Hey, our CISO clients, we need you to switch over to this. If not, we're dropping you, or 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?
Yeah, it does. That's, yeah, that's not happening. We're definitely not giving clients an ultimatum that they have to switch over to Enclave, right? Our services, right, our vCISO services and our Enclave, and our Enclave product fit different needs, right? You can't. vCISO is building, you know, like, listen, you've got somebody who's got to understand what the program is 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 sail, but take away the captain of the ship, and then it'll, the ship will know where to go, and 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 SentinelOnes, the CrowdStrikes that are doing detection and response. Enclave is focusing on keeping the breach from happening, handling things, and identify 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." 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 gonna come in, right, and do the same thing as vCISO." 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? These security programs are complex, right? So we're definitely not going to clients and saying, "Hey, you need to do this now instead of vCISO." What we are trying to sell and moving to sell into current clients who are using our vCISO service, again, because we know inside those clients that they have problems that Enclave can solve for. But we're also going out to market and trying to sell Enclave to, you know, net new organizations.
Organizations that vCISO would not be a fit for, organizations that probably have a full-time CISO or a head of security or some variation of that title. They already have somebody at the helm of the cybersecurity 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 vCISO. So it's never an either or an or. We're always trying to position both, but when we position one, it's gonna be Enclave, and that's to solve for problems that that organization is gonna have. I think, you know, what we saw was just regular churn in service clients, right?
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 out one for the other, but when in reality, we're just having, you know, sales came down a little bit on vCISO services. We're now starting to see that pick back up because of marketing. But we're not trading out one for the other. So hopefully, that is clear for folks.
Got it. Thanks for your time.
Yeah. Thanks. Great questions, man. I'm glad you tuned into this, and it's great to hear from an investor who stays close to this and consistently kinda jumps on the 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 one to join the queue. Once again, it'll be star one 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 Haugli for closing remarks.
All right, thank you so much. I do appreciate everybody's time today. I was just thinking about this, Luke, if you connect with me on, on LinkedIn, and I got a sweatshirt for you. We have our new Enclave sweatshirts that we've printed up for our new campaigns. I think you deserve one. So, we'll get you one of those. Just connect with me and get your size and your address, and we'll ship it out. I do wanna thank everybody else for tuning in. I do appreciate the commentary, the questions. We do love that people are following the company. Really looking forward to 2026, that we're in, and going forward. I am excited about what we're doing as a company, what we're solving for.
On behalf of the Board of Directors, Ryan Polk, Nick Hnatiw, our entire executive leadership team, my name is Brian Haugli, CEO, and I do wanna thank everybody for this opportunity and for today's call. We'll talk to you next time. Please follow us on LinkedIn. Be sure to check out what we're doing on our blog for any of the latest and greatest updates, and 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.