SideChannel, Inc. SEC 10-K Report

SideChannel, Inc., a cybersecurity advisory services and software company, has released its annual 10-K report, detailing significant financial and operational achievements for the fiscal year. The company, which focuses on simplifying cybersecurity for mid-market and emerging companies, has shown notable improvements in revenue, profitability, and strategic initiatives aimed at expanding its market presence and service offerings.

Financial Highlights

Total Revenue: $7.4 million, an increase of $0.8 million or 12.6% from the prior year, reflecting growth in both vCISO Services and Cybersecurity Software and Services.

Gross Profit: $3.532 million, up from $3.332 million in the prior year, despite a decrease in gross margin to 47.7% from 50.7% due to lower utilization of service delivery team employees and increased revenue from third-party software and services.

Operating Loss: $(940) thousand, a significant improvement from $(7,414) thousand in the prior year, attributed to reductions in operating expenses and increased gross profit.

Net Loss: $(904) thousand, compared to $(7,006) thousand in the prior year, with the improvement driven by cost reductions and increased revenue.

Net Loss Per Common Share – Basic and Diluted: $(0.00), compared to $(0.04) in the prior year, reflecting the reduced net loss and increased weighted average common shares outstanding.

Business Highlights

Business Overview: SideChannel is a cybersecurity advisory services and software company focused on simplifying cybersecurity for mid-market and emerging companies. The company offers comprehensive cybersecurity and privacy risk management solutions, including virtual Chief Information Security Officer (vCISO) services, zero trust solutions, and managed end-point security solutions.

Market Opportunity: The cybersecurity market is experiencing significant growth, with security spending forecasted to reach $190 billion in 2024. This growth is driven by remote and hybrid work environments, increased data breaches, and a focus on information security by CIOs.

Product Offering - Enclave: Enclave is SideChannel's proprietary SaaS platform that streamlines critical cybersecurity tasks such as asset inventory and microsegmentation. It integrates access control, encryption, and secure networking concepts into a unified solution, aligning with the industry's shift towards zero trust frameworks.

vCISO Services: SideChannel provides vCISO services on a virtual or outsourced basis, which include assessing cybersecurity risk profiles, implementing policies, and managing day-to-day compliance tasks. These services are particularly popular among small and cloud-enabled companies.

Revenue Segments: The company reports revenue in two categories: vCISO Services and Cybersecurity Software and Services. vCISO Services include a fixed monthly subscription fee, while Cybersecurity Software and Services encompass a range of cybersecurity products and services, including third-party software and services.

Growth Strategy: SideChannel's growth strategy focuses on securing new vCISO clients, adding new cybersecurity software and services offerings, and increasing the adoption of cybersecurity software, including Enclave, among vCISO clients.

Industry Standards and Compliance: SideChannel aligns its offerings with industry-standard cybersecurity frameworks such as the NIST Cybersecurity Framework and CIS Controls, emphasizing asset inventory and access control.

Research and Development: The company classifies all software development activities as research and development, focusing on providing reliable and innovative features for its Enclave platform.

Sales and Marketing: SideChannel uses digital marketing, industry events, direct outreach, and referral partners to identify prospective clients. The company has enhanced its digital marketing tactics and expanded its online presence.

Competition: The cybersecurity market is highly competitive, with major competitors including Optiv, NCC, Coalfire, PwC, EY, Deloitte, GuidePoint, Perimeter 81, Zscaler, Palo Alto, and Illumio.

Future Outlook: SideChannel aims to capitalize on the expanding cybersecurity market by providing cost-effective, tech-enabled services to mid-market and emerging companies. The company plans to drive growth through its vCISO services, Enclave platform, and comprehensive suite of cybersecurity offerings.

Strategic Initiatives

Strategic Initiatives: The company aims to make cybersecurity simple and accessible for mid-market and emerging companies by securing new vCISO clients, adding new Cybersecurity Software and Services offerings, and increasing adoption of Cybersecurity Software, including Enclave, at vCISO clients. The company also focuses on expanding its tech-enabled services to address customer needs, such as virtual Chief Information Security Officer (vCISO), zero trust, third-party risk management, due diligence, privacy, threat intelligence, and managed end-point security solutions.

Capital Management: The company reported a net loss of $904 thousand for the fiscal year ended September 30, 2024, but generated $307 thousand in cash from operations. It reduced operating expenses by eliminating non-essential third-party supplier relationships and reducing staff. The company had $1.3 million in cash, cash equivalents, and short-term investments as of September 30, 2024, and believes these are sufficient to fund operations through at least December 31, 2025. The company issued 7.3 million shares of common stock and 17.4 million new warrants in exchange for tendering 43.5 million 2021 warrants. No dividends are planned as the company intends to use available funds for business development and expansion.

Future Outlook: The company expects to continue generating cash flow from operations during fiscal year 2025. It plans to manage expenses to sustain positive cash flow and is exploring establishing a line of credit secured by accounts receivable. The company is focused on maintaining liquidity and capital resources to support its strategic initiatives and growth plans.

Challenges and Risks

Market Risks: The company is exposed to market volatility due to inflation, geopolitical events, and global financial conditions. These factors could lead to economic uncertainty, affecting customer spending and potentially causing delays or defaults in payments.

Operational Risks: The company depends heavily on its current management and the ability to attract and retain skilled employees. Failure to develop new products or improve existing ones could weaken its competitive position. Additionally, the company faces intense competition from larger, well-established companies, which may have more resources.

Cybersecurity Risks: The company is vulnerable to network or data security incidents, which could harm its reputation and financial results. The complexity of its products and the potential for intentional disruption pose significant risks.

Regulatory Risks: The company is subject to changing laws and regulations, including those related to data privacy and export controls. Non-compliance could result in fines, penalties, and loss of business opportunities.

Financial Risks: The company has incurred net losses and may need to raise additional capital, which may not be available on acceptable terms. This could impact its ability to continue operations.

Stock-Related Risks: The market price of the company's common stock has been volatile, and substantial sales or the perception of such sales could depress the stock price. Additionally, the issuance of new shares could dilute existing stockholders' ownership.

Management Strategies: Management acknowledges the challenges posed by market volatility and competition. Strategies to address these include focusing on innovation and strategic partnerships to enhance product offerings and market reach. The company is also working on improving its internal controls to address previously identified material weaknesses.

Market Risk Disclosures: The company is exposed to risks related to foreign currency exchange rate fluctuations, which could adversely affect its financial results. It is also subject to interest rate risks that could impact its borrowing costs and overall financial condition.

SEC Filing: SideChannel, Inc. [ SDCH ] - 10-K - Dec. 12, 2024