SideChannel, Inc. (SDCH) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the SideChannel Fiscal Year 2024 Full Year Financial Results Update. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Brian Haugli. Sir, the floor is yours.

Thank you so much. Good afternoon, everybody. This is Brian Haugli, CEO of SideChannel. I'm joined by our CFO, Ryan Polk. I want to thank everybody for taking the time again. This is December 5. I know we pushed it off a day, but now we're able to get together. So I'll go over a couple of things, some outlooks. I'm going to then kick it over to Ryan for the financial overviews, and then we'll -- I'll take it back and we can go into Q&A. You have a number of questions I have seen online. We've got a number of ones that have been submitted. And then obviously, there's methods to submit questions during this call. 2024 has ended fiscally from a calendar year, and we are all very excited about kind of how this year went. We set out going into this year with a number of internal goals and I feel like we accomplished those and feel really good about those. Ryan will hit those on the financial side, but some specifics. But really kind of like looking at the market as a whole and where cybersecurity is, it's not going away as a problem. And it's definitely not getting any easier for our core target market, which is the small to midsize, mid-market businesses, commercial and smaller enterprise with our services. And then obviously, mid-market commercial and larger enterprises with our Enclave product. We've seen a number of different big global issues happen that have really kind of shaped how people, industry, CIOs, CTOs, business leaders are thinking about cybersecurity. It's branched beyond just -- anybody over here has been in a sales call will hear me hit on the fact that we're not dealing with kids in their mom's basement. These are well orchestrated, well financed, well-structured threats that are out there. But we are now kind of like saddled with issues like availability concerns. We see this within manufacturing and spaces like that. We see this within logistics and distribution, warehousing. We saw this with a major cybersecurity provider CrowdStrike create a massive global impact on the availability of systems because of poor software development and updating. When we look at what cybersecurity is, it is defined by a triad, confidentiality, integrity and availability. And a lot of people, when they think about cybersecurity, they're really just thinking about the first 2, confidentiality and integrity. And they kind of chalk up availability is the thing that IT has to deal with. The reality is that's very squarely in the realm of what the CISO and the cybersecurity professional needs to address as a risk for clients. And we're seeing an increase in that as a risk for clients that is either being ignored, and we are bringing it up as a risk that needs to be addressed or we are bringing it up as a risk and is being embraced as something that can then actually be met and accomplished whether we are building the right type of security program for that client or we're deploying our software to address it. All of these things in the market, the lack of qualified professionals, the expanding threat landscape, the technical debt that keeps things piling up at clients. All of these things are playing to our favor and allowing us to win deals. This is why we have a lot of confidence in what we are doing, where we are, who we're marketing to, who we're gaining traction with and where our growth is going to go over '25, '26 and '27. So just kind of my thoughts on like why this is still a very exciting space, why we're excited to still be within it and supporting organizations that are looking for a good, experienced way to address a risk that is sitting squarely inside of their operational risk table. This is not a horizon risk anymore. Cybersecurity is not the thing that's out there that maybe we'll get to. Start-ups are dealing with it. It is a sales blocker for them to sell their products to other customers. It is a regulatory issue that different entities are bringing like squarely in front of those that need to. The SEC did it in 2023. We saw it start shaping up with all the disclosures that are happening in -- and honestly, go ahead and peel back. Actually, I challenged the investors on this call. I can see all of you. I challenge you to go read some of the 10-Ks of the publicly traded companies that are supposed to be disclosing underneath risk factors and underneath section, I think it's 1C, what their cybersecurity program looks like. I'll be honest, I read a lot of them. You should read a lot of them. Some of them are really poor. And it's very interesting what organizations are doing or not doing what they're embracing. I'm really happy. We just had a couple of clients this week put out their 10-Ks and some of them were allowed to call us out. Some not, but they are saying, "Hey, we use the vCISO, hey, we use these capabilities from an organization that was and is SideChannel and they're disclosing that this is a way for them to address that risk." So we are primed and ready in the right spot to do what we're doing. It's a great market, we believe, for what we are going after. And that's why I'm just continually excited about what we're still building. We've done some really cool things in '24. We've expanded what we're doing around our marketing, our inbound, our presence, our brand is strong. We rank very high on Google searches. We're now ranking high within Perplexity and ChatGPT. I mean go ahead and ask ChatGPT, who's the top vCISO firm in the U.S., who's the best vCISO company? It will spit back, not always because that's the way ChatGPT is. But that, Perplexity, it starts telling people about us. It's been telling people about us. In fact, we've landed in a number of clients because of that. It's not just Google search. The landscape is changing on how people find cybersecurity expertise. And what we have been doing over the last couple of years to build up that type of presence, it's working in our favor. I'm very excited about that. What we're doing on the sales side, we've opened up channel. We've opened up direct sales. We've continued to embrace expansion inside of our current client base. It's the right and the pragmatic way to build the team right? The days of hiring 50, 22-year-olds to smile and dial and cold call people is dead. When you look at the metrics out there and the data around that type of a junior SDR approach doesn't work. Buyers inside for cybersecurity want to talk to people with experience. They want to talk to people who are practitioners who know what they're talking about. They don't want to just talk to somebody who can get them on the call. They want to work and talk to experience. And our approach has been that since day 1, and it's really working to our favor. What we're doing in the channel, I'm super excited about them. The thing that we are seeing now in our partnerships, we are working with MSPs, MSSPs actually other vCISO firms, other service providers large and small, who have all realized that they don't want to compete with us and they'd rather partner. So they have captive audience and they have client base as they are a channel for us. And we are basically saying, "Hey, listen, let us be that delivery." Let us see that software, let us be that capability. You just go be sales to your audience. And in what we are doing with our channel program and our sales around that, it has allowed us to now go work and talk to one person who can get us in front of 10. So there's an exponential factor in having a good solid channel program and developing good partnerships. Now not all partnerships are going to be great. You're going to get in, you're going to kiss a lot of frogs, right? It's unfortunate, but that's the nature of the business. But once you start landing these good partnerships and you've got good solid agreements and contracts and a process for onboarding and training your partners on how to work with you the deals start flowing in, and we're starting to see that, right? We just hired our guy in charge of in leading our channel in like June of this year. I mean the pipeline is robust. I'm very, very, very excited about what it's going to unlock going into 2025. On the Enclave front, we've had some really good adoption. We've had a growing pipeline. We're getting a good amount of at bats. Everybody internally knows I like baseball analogies. We do a whole internal discussion yearly kind of things centered around the Moneyball movie, it's just a lot of fun. But we get a good amount of at bats. We're getting in front of the right types of folks. And because Enclave is so versatile, it's so -- it's not complex, but it's so multidimensional in what it can do with asset intelligence, vulnerability discovery, microsegmentation, machine identity management now, host-based firewall management, secure web gateway, like these are all multiple different functions that generally organizations, whether they're service providers for clients or they're just direct organizations and enterprises that need for themselves, they're going to have to use 4 or 5 different products and we're able to position a product with one single pane of glass to be able to manage all of this. And this is what we are hearing from the industry they want. They don't want to have 6 different products to do all these things. And our approach with Enclave has always been, well, these things are so closely related and they feed off each other, why aren't they in one product, and that's what we're able to do. I think we're also blessed because each of those modules and each of those functionality in Enclave can actually stand on their own. So where you've got somebody who is already embedded with other commodity type of applications like vulnerability discovery or asset intelligence or things like that. We don't have to try to sell that as part of the package. We can just sell everything else. And the positioning works very much in our favor. I know there's been a number of questions. I'll go into Q&A later on this, but there a lot of questions about the DoD contract and the nature of that. Due to the nature of the contract that we have with them, we just can't really disclose much more than we had in the PR. Trust me. I tried to put as much as I could in the PR, and we did, and we got out of what we did. I will share that our approach with that initial and our first DoD customer is good. Nick is on site today working a deployment with them. And our approach with Enclave with that initial customer is the foothold. Our goal and the feedback is that this will expand and it can expand. There's a need across other aspects of what this DoD customer needs to do. Right now, we're in a component of it. Our goal is to replace the legacy means -- the old school ways of how they do things with Enclave. And it's a pathway to expanded revenue, expanded adoption inside of the DoD. Inside the DoD, they have this whole concept about past performance. Everyone is very big on that. Where has your product or your service worked. What other agency or service can we talk to that has seen this in action. We now have that. It's worth gold. The agency itself, what they're solving for is they've replaced multimillion-dollar legacy hardware that they usually have to buy through -- Ryan, you're going to correct me if I get this wrong because I always mess up on the finance piece here. As a CapEx but they're buying it every year or 2 years and nothing to replace it as hardware. They're going -- and not only are they -- are we removing that cost from them and introducing software-defined networking as a means to do the same thing, we're also introducing new capabilities that they didn't have before. So they are lowering their costs and becoming more secure. The problem within the DoD and the federal government a lot, and I think we're going to see this actually work in our favor going into the next administration. If anybody is following what Elon and Ramaswamy you're going to do, hopefully, they hold through their word. They're going to cut down on areas that are wasteful spend and poor thinking and poor architecture. What we can do with Enclave solves for that, remove the old way of doing things, remove legacy approaches, remove crazy costs and apply better, more modern solutions, more cost-effective solutions. So we're solving a lot of problems in here. And this is -- I mean, we're not done. I mean what we're doing with the Enclave product in this space and what we're probably going to be able to announce over the next quarter is where else we are making an impact, where else we're making inroads into the DoD. I'm pretty excited about it. I'll speak on behalf of Nick, our CTO and fellow board member, he's very excited about it. We're very bullish on what we can do with this product. We're also very bullish on partnerships we can have with this product and the ability to white label it and OEM it into other solutions because other people are looking for ways to solve these problems that we are doing with Enclave and now we can provide that to them. And just like channel works for sales on services, so does this approach with products, right? If we can find other solutions out there that don't do what we do, they want to partner, we can bring our capabilities into their solution and now they're selling our solution on our behalf. So overall, again, just still a good solid investment in what we're doing with Enclave, the right market. We're getting after the right opportunities. I think you might have seen maybe an announcement recently, and I'll wrap up here. We're very fortunate to be able to bring on Dutch Schwartz. Dutch left AWS as one of their principal security architects, really top-notch cloud guy, well respected in the industry. He's actually at AWS reinvent this week. Our ability to now bring -- and I hate the term thought leadership, but real experience in that type of -- that level of leadership and sales around cloud, into a very captive audience is a tremendous asset for us. When you read the recent surveys from YO Ventures and IONS and other major industry reports and surveys, you'll see that cloud security is still top because the movement over the last 10 years for cloud adoption, unfortunately kind of put to the side cloud security. And now people are realizing, "Oh, no, all my stuff is outside my walls. It's in the cloud now and it's not secure. I thought AWS is doing that. Oh, I thought Azure was doing that, guess what, they're not. You're still responsible. People are realizing that, clients are realizing that. Multi-cloud environments, people are realizing that, "Oh, I'm in Azure, AWS and Google, good God. Why? But you are. Well, how do you now secure that? Our ability to bring these types of services, which will pull along our products and other capabilities into those markets through this type of delivery, just I feel super confident about what we're doing with it. I mean we got one of the best in the business. We're looking to really build a team, really build up a delivery. So a number of different facets that we have with inside channel to be able to deliver to our current clients and expand and retain, deliver to new clients and then obviously be able to deliver into new aspects with Enclave as one of our products. All right. So with that, I want to turn it over to Ryan, who will touch on all the other good things that I missed, hopefully, and then we'll come back for Q&A.

Okay. Thanks, Brian. If you've been on these calls in the past, you've heard me say this. I'm just repeating in case we've got some folks that are new to this conversation. We set a goal for ourselves in April, May of 2023 to become cash flow positive during our next fiscal year. At that point, we made that declaration. In fiscal year 2023, we said we wanted to accomplish being cash flow positive in 2024 which we have done, as you've read in our -- in the press release that came out this morning. The formula we used to do that was to -- we had a lot of confidence in our ability to grow revenue. We felt like we understood our margin profile pretty well. And so we focused on taking out some costs that we felt like were unnecessary in the short term. Unfortunately, for us, a lot of those costs that came out were in the area of sales and marketing. And so we sacrificed some growth in order to achieve positive cash flow from operations. The question that maybe you haven't heard us answer as to why we did that was because we don't really have access to capital. And so for a couple of different reasons. One, we think our stock price is severely underpriced, undervalued. Issuing new stock at this price would be excessively dilutive to the folks that are currently in the cap table. Number two, we've got a tranche of some warrants that are really -- they're really prohibitive from us even engaging the capital markets. Those warrants fall off our cap table in 2026. And so April 2026. And so -- that means our only real source of cash is going to be cash that we can provide through our operations. And so we leaned into our growth formula, depended upon our ability to manage margin, cut some operating expenses. And that's allowed us to create the cash flow that you see in the results we announced this morning. We don't see that slowing down. Our growth isn't going to stop. We had some pullback in our margin this year that was a little unexpected. The explanation for that is that we had some underutilized employees that deliver to our clients. And so we had some excess costs that flowed through to our cost of goods sold and therefore decreased our margins. Last half of '24, we started to change our approach to scheduling and allocating our employees that we think will reverse that trend and show up as a year-over-year benefit in our '25 gross margin line. So growth continues, margin improves, OpEx stays controlled, we think that cash flow engine still works for us in '25, which gives Brian the confidence to do what he's just announced in hiring salespeople. New sales person joins in May '24, new salesperson joins in August. We've got one new salesperson coming up here in the next few weeks, and there's a fourth position that we're looking at as well. So a lot of that investment is oriented toward Enclave. We would say maybe overweighted toward Enclave. And so why are we doing that? Well, Enclave is really a -- represents a tremendous opportunity for us to develop a SaaS platform. And I think everyone that's on the call who understands the value that can be created off of a very successful SaaS platform would support why we're making investments in that area. We're a couple of months into this next fiscal year in our fiscal year 2025. We are tracking with our plan on the cash flow line. We've got a couple of working capital items that hit us in Q1, Q2, our Q1, our Q2, so that's December 31 quarter and the March 31 quarter. That will offset some of the cash flow we generate from operations. But -- so we -- what I'm saying is we're likely to be from one quarter to the next, looking like we're cash flow neutral, maybe slightly higher, maybe slightly lower. But in terms of our internal tracking, we're where we would expect to be in terms of cash. And so we've got the confidence to continue doing the investments that we've talked about. I monitor the effectiveness of our leads. There's some marketing metrics that we look at internally. Our lead generation at this time, in our fiscal year 2025 is ahead of where it was in fiscal year 2024. The pipeline is deeper. It's got a much better mix of clients in it. And so we have confidence in that growth line as well, at least at this point in the fiscal year. So I think you can read some of the details in the press release around our balance sheet. And our income statement. And so Brian, I'm going to turn the floor back to you, and I'll take any questions the group may have when we get to Q&A.

Perfect. Thank you, Ryan. Yes, a couple just kind of clarifying things from my end on what Ryan said. We've known about these warrants. We've tried to work with these warrants through. We came out to the warrant holders last year, this year with a sizable, not sizable reasonable conversion to RSUs with a new warrant that would allow us to get kind of away from these toxic warrants. Pretty pleased that I think we had close to 80% conversion, but the 20% hold out, I'll be honest with everyone like I'm at a loss for like why they wouldn't have taken the deal that we offered is pretty good, would have allowed us to kind of move forward. But they're holding out for whatever reason, whether that's with and through the brokers that they're using or just who they are as investors, I'm not sure, but their warrants are out of the money. And honestly, I'm not -- off in April 2026. So it will be their loss. They had the opportunity, but we're going to move on. The aspects of what we're going to do with Capital Markets is kind of hinges around that. So really, again, we don't want to be dilutive to the shareholders today at the stock price that we're at. We think we are undervalued, like Ryan said, and again, the warrants just, I think, are just another blocker. So that is what it is. We are looking forward to reengaging hiring on sales, like Ryan said, we've been very, very diligent about becoming cash flow positive. And we are -- I think we're taking the right track, and I'm really glad I have Ryan as our CFO to be able to help us think through and work through what do we need to go do, where do we need to be on what we can spend and what we can't spend. So -- but the goal is now, let's be able to take the capital that we've built up and then looking at our forecast and growth and let's start using that towards building out a sales or rebuilding or not really rebuilding just expanding the current sales and marketing team so that we can start getting the products out there and our services out there. I think it was kind of the only clarifying pieces that we had on this. But yes, on behalf of the Board of Directors and executive leadership team for SideChannel, obviously, I want to thank everybody as an investor and everybody on the call. So with that, I can go over to Q&A that we got online and everybody knows that I read the Investor Hub Board, the SideChannel Board for that. Anybody does run that board and manages that board if somebody could figure out how to get us out from underneath the electronics and components category, I still don't know why we are underneath that category on that website, but that seems to be where most people are talking about us. And I appreciate that. I think it's great. I definitely connected with a number of folks online privately. I've met with some investors in person for coffee, which is great. I think it's a nice dialogue. I love that as a CEO, I can directly talk to investors and hear their feedback, good, bad and in different. But I will say on that board and on these types of things, like these seems to -- I don't know, there needs to be -- I think there's some care and feeding needs to happen to, if that's going to be our presence for investors, we need to -- somebody needs whoever needs to like make that a little bit better. I can't do it because I am not -- I'm just a by standard. So with that, let's go to a couple of questions.

We do have a question about revenue attached to a major contract with the DoD? I think I answered that earlier. We're allowed to say as much as we did. Hopefully, I hit that. When can we expect a reverse split and an uplisting? Ryan, feel free to chime in here. But essentially, our view is we want to grow more. We want to have a number of consistent Enclave revenue-generating quarters behind us. We want to see the stock price up more. And we're not going to just reverse split and uplift for the sake of it. In our discussions with advisers, with NYSE themselves, it doesn't make sense to just do it for the sake of doing it. We understand the OTC has its drawbacks, but there's actually an interesting downside to just like doing it to just get up to another board. So there's a lot more that goes into it than just like, let's just uplift. That doesn't, not one of the things you can snap your fingers on. So I hope investors kind of understand that a little bit more because I've definitely heard it today, and I've heard it otherwise. The business model -- Ryan, do you want to touch on the reverse split uplifting question that seems to keep coming?

No, no. I think you answered. Yes, nothing to add.

Yes. Look, guys, we would love to go do it like tomorrow, if we were set up and mechanically set up to do it and it made sense for everyone, but it doesn't make sense right now, right? Like -- great to see the uptick in the stock price today from, I assume, the news, there's obviously been a significant amount -- a much more significant amount of trading over the last 30 to 60 days and the stock price is up 20% alone today. But like we're at $0.04, $0.045. I mean I think the ask -- the last ask on the day was $0.05. It just doesn't make sense for us to do that to the shareholders at this time. So just let's keep building the business, let's keep growing as we're growing. And we will do it when the time is right. Trust me, it will be socialized and it will definitely be announced. It's not going to be -- yes. Business model has been very solid, but growth has only been moderate. I think Ryan touched on it, why did we pull back. And now why are we in a position to be able to expand our marketing and sales programs. So you're going to see that in 2025. Another question here, slowing the aggressive push towards conserved cash? Yes, margins dropped slightly, revenue dropped slightly. They don't -- you don't think this is significant. I mean it's not. I don't think our margin changes or anything have been significant. Where do you see the company in 5 years? That's which -- I'll tell you this, as a CISO and a security practitioner, I've never set a security growth plan like building a security program for a company or even clients. We generally don't go out 18 months because the landscape just shifts so much. Where do I see us in 5 years? I think Ryan is probably diligently talking to me on the back end here to try to bring up the models that we've built out. But obvious growth. I would like to see -- and Ryan's heard me say this, I've held to the belief that as -- on the services side, you really need to be growing at like 30% to 40% growth. Otherwise, you're kind of standing still as a services group. On the product side, I don't know what the growth trajectory is. But ideally, we're seeing a significant amount of adoption of Enclave, I don't know if you remember a couple of years back when we kind of -- after the merger, we'd start talking about how much of our business was the vCISO business, how much is it was other cybersecurity services. And at the time, it was like from like every dollar of vCISO we're doing like $0.40 to $0.50 of other services. And if you'll recall, we wanted to flip that where other services for $1.50, for every dollar of other services we're doing $0.50 vCISO. So we still want to go hit that. We still want to inverse what we're doing there. And I think what we want to then also go do is see an expansion and maybe a carve-out of where is Enclave in that. So for every dollar of Enclave, it's $0.50 of other services and $0.25 of vCISO, that is our -- I think our ultimate goal is to invert into that type of a revenue structure where you're looking at the different capabilities that we have out there and the product is leading the way. So yes, in 5 years, we are no longer just talking about SideChannel as a leading services company and with an amazing product, SideChannel is a product company with an amazing services line. Other question here? Is it reasonable to assume Q4 revenue growth year-over-year will pick up? So that this will be the lowest sales growth for the foreseeable future. Ryan, do you want to touch that? I think you kind of mentioned based on lead and what we're seeing this quarter versus last quarter that might answer it but...

Sure, there's definitely seasonality to our business. It really -- I think what we've -- but what concluded is that the seasonality is just driven around purchasing cycles. We seem to have a bit of an uptick in the pipeline late our Q1, calendar year Q4. And then a strong calendar year Q1, calendar year Q2 for new clients. I think that just aligns without everyone on this call normally sees businesses work. And so that's been our -- that's been our history. We don't see that changing, at least at this point. We don't have any data that's telling us that our new client acquisition is going to be any different than it was last year. Of course, Enclave is a new animal for us in terms of what that sales pipeline looks like. We don't -- we don't have enough history to understand if there's going to be a seasonal spike. It would make sense that there would be that there would be a second half of the year discussions around exploring it, putting cues into everyone's budgets, which get activated at the beginning of the year, which would turn on some spend. But we'll -- I think that's kind of what you normally see in the software world. But we'll see -- we'll wait till we get a little more data under us before we can predict how things are going to be with Enclave. But we don't, at this point, have any evidence saying that our quarter-over-quarter change in revenue in fiscal year '25 is going to be any different than it was in '24. We do have, though, a couple of sales initiatives that are relatively new, Brian mentioned, emphasized the channel. Channel partner work that we think does have the ability to put some incremental revenue into our quarterly results and how that plays out on our seasonality is yet to be seen. But in terms of quarter-over-quarter, let's call it a curve, we think it's going to be the same.

Yes. Thanks, Ryan. Yes. I mean, commercially, we see budgets start. Everybody has always got their budget starts Jan 1, right? We see that all the time. So you're trying to get in during Q2, Q3 of the calendar year to set up for -- you always see kind of Q4 calendar year tuned down on services? Or you actually see some late minute spikes where people are like, hey, we've got some additional cash. We got to spend it on some like short-term projects stuff. That's pretty standard in corporate, like we -- I've seen that. I lived through that when I was a CISO at a Fortune 500. Government is a little different. They're an October 1 start, at least the federal government is. Some states are a little different on that, but for the most part, our focus is on federal space. They're an October 1 start, which means that generally calendar year 1, calendar year 2, you're trying to get those meetings, get those things set up going into when money can then be released for use starting after October 1. So there is a lot of seasonality around buying. It's always lined up against budgets, and we are just trying to play inside of those constraints. All right. Those are all the online questions I can find. Sorry if I missed anything, please, if you are on the line from any of those, please drop a note. Let's get into Q&A from anybody on the call and live.

[Operator Instructions] Your first question is coming from [ Jacqueline ].

Yes. Brian, I just noticed that it seems like the stock isn't being -- it's like we're the little guy on the block. We're not being noticed by investors or -- I mean, just recently, we've actually traded some stock. But I was wondering if there's any plans to like attract additional investors into the company?

Yes. Thanks, [ Jacqueline ]. Good to hear from you. I hope you're doing well. Glad to hear you on this. Yes. I mean we've done a number of different kind of retail investor outreach initiatives. I think we're going to continue to do that. You got to remember the thing with the OTC is certain -- I think not just certain most institutional investors cannot invest in OTC listed stocks. We did a series of meetings in New York City. I believe it was cold. So it was definitely 2024 is January, February, March where we were down -- Ryan came down with me at least once. He's lucky. He was able to go back to California where it was warm. I had to go back to Boston, where it was still cold. But we did a number of dinners with some high net worth, ultra-high net worth individuals, folks with family offices. And we heard some more about how they were constrained from being able to invest in OTC listed companies. They like the mechanics that we have, right? We're 0 debt, revenue generating, growth, good company, strong leadership, good inside ownership of the company, all the right things, but just the fact that we were listed on the OTC was something that was holding them back from investing. So we definitely learned and we kind of ran into quite a bit of that, which was disheartening, but still good to learn. And we're exploring other means to kind of get within the retail space. So there's a -- I will say on the conference front, I did go to the -- a microcap conference where I was invited to speak at about cybersecurity with [ Andrea Cataneo ], She's one of the leading OTC lawyers. She moderated the discussion that she had me on talking about cybersecurity around -- specifically around what the SEC was looking to do. And we had meetings there with folks who were -- yes, it's a micro-cap conference, right? So it was in Atlantic City, good couple of hundred folks. And it's an interesting mix. Like these types of conferences, I feel are very -- I don't know. I'm not sure if the value is there because on one side, when you show up and go to those, people expect that you're going to raise money in like just massively like dilute. Like I'm watching other folks that are very similar cybersecurity OTC listed companies. And the backlash to the CEO and CFO showing up on these things is, oh, they're just going to raise money, we're going to get diluted. And I mean I'm not trying to go to a conference to do that. I'm going to invite, hey, who are interested parties, who are investors who can start building a position, do some open market buying. I'm not trying to raise funds. Again, back to -- we don't believe right now is the right time to raise fund based on the Warrant's and based on the timing of the stock. So for us to go to these things, that's -- I mean that's what's happening. So it's like almost kind of a bad idea for us to show up to a conference like that, both from an optic standpoint, and no one is there to really talk about that. So for us, I think it's to continue to find high net worth, ultra-high net worth individuals, family offices that can buy in OTC listed companies and the like for us to just continue to build in the retail space and continue just building our brand. Ryan and I strongly believe that the fact that our financials are strong and getting stronger, will show themselves. What we need to do is just continually kind of build that. Will we engage an IR firm again at some point? Probably, I will say I wasn't very pleased with the last two that we had, both outside contracted, pretty standard kind of groups in the industry. I didn't see a tremendous amount of value out of that approach to build investor relations. I feel like Ryan and I and Nick getting out there the company leadership as major stockholders in the company and as honestly, experts in this field that we're representing with the company are a much better way to go do it. So if we can get in front and do more talks, discussions, the conferences where we are speaking and building brand awareness that way, I think that's going to go a long way, coupled with our strong financials. Ryan, do you have any other ideas that you want to maybe chalk in? Or did I exhaust that?

Yes. Yes. Thanks, Brian. [ Jacqueline ] I think -- we also want to do what you're suggesting. We want to get -- we want to create awareness of this opportunity and activate on that awareness to get new investors in the stock. What we've chosen to do is to prioritize, one, getting cash flow positive; two, then selling and marketing. Both of those things, we think, create the story that people can understand and get behind. So rather than just being present and talking, we want to make sure that we're present and talking about something of substance. And I think that a company that has a strong balance sheet doesn't have the risk of running out of cash and needing to dilute all those kinds of things. So we've turned a corner. We can be further around that corner than we are, and we intend to do that. The second thing we think is having some sustainable quarters announced of Enclave growth. And I think when people see those 2 things, that's a story that's going to attract not just attract, I think it's probably going to attract and retain some new investments in the stock. So I know you've been with us for a bit. You've been patient, and we appreciate that. But we think we've got that, that we got one more thing to get done. And that's a few sustain -- a few quarters of Enclave growth reported in our public filings before we think we're going to have that substantive story that people are going to understand.

Okay. I do have one other question. So you keep talking about the Warrants and how they're toxic, and could you explain as to why they are toxic, I couldn't quite -- I wasn't quite understanding why they were so?

Yes. They have what's called a full ratchet provision, which means that any stock that's sold at a price less than $0.36 causes the quantity of warrants to increase and the price of the warrants to decrease. So it becomes a very dilutive event for the existing stockholders. And people who understand the warrants, when they look at those terms, they say, well, there's no way I would invest in your company because those warrants are a problem. If you need cash and you go get cash, these warrants are going to end up taking a pretty strong position in the cap table and that's not going to be good for me. So we're -- that full ratchet clause pushes -- that full ratchet clause scares away anyone that fully understands what that Warrant looks like. No, we're not going to be able to approach the market about getting growth capital for Enclave or services. That's off the table. And of course, it's off the table because these warrants scare people away. We're not even -- this wouldn't be the right thing to do anyway because of how undervalued the stock price is right now. But -- does that help you?

Yes it does.

Your next question is coming from [ Luke ]. Your line is live.

I just had a question regarding the insider trading report filings that came out about a month ago. So the options that were given to the Board, they had an original strike price of $0.06, but they were repriced to $0.18. So I was just wondering what went into that repricing? And then obviously, that is adverse to the interest of the Board because they want a lower strike price. So just what went into that, if you could talk about that a little bit?

Yes. Ryan, I'm going to ask Ryan to cover that. Ryan, you don't mind just because you're probably -- you're going to be able to take this a lot better than I can. I don't want to say the wrong thing.

Yes, yes. No problem. Yes. Well, a couple of different things. First, our Board has been extremely helpful to us in supporting our push to be cash flow positive. Our Board used to receive quarterly cash payments as well as some quarterly stock. And they chose to forego receiving quarterly cash because of how much we -- because of the sacrifices that we were making as a company, as a management team to achieve being cash flow positive. So we really appreciate our Board being supportive in that way. And when we got into that conversation, we had a lot of debates of around how do we how do we incentivize the Board, how do we compensate them for the work that we're doing. And we ended up arriving at options. We just made a mistake. We had a miscommunication about what the exercise price should have been in those options. I think you've heard us say a few times on this call, we think we're undervalued. And so honestly we just made a mistake in the way we administer the warrant agreement. We had to correct that mistake, and that's what you saw in the most recent filing. So -- does that -- did I get to the heart of your question?

Yes. That was great. I really appreciate it. And I just want to say thanks for the call. This has been great today. I'm a new shareholder, and I'm really excited about what's to come in the future.

Oh good. Thanks Luke.

Thanks Luke. Yes. I appreciate that. Always awesome to see new people kind of seeing what we're doing with the vision. It kind of tie offs because I know that Ryan said the part that I was afraid I was going to mess out. Obviously, we are compensating our Board. We just had our Board meeting this week to approve, obviously, what we released today and looking at the 10-K that we're looking to file in its entirety next week, we are compensating our Board. We are just taking a different structure with stock RSUs much like the rest of the company is granted. So they'll be in the same program. We just made an error, we were able to catch it, thankfully to our regular process, and we're able to correct it. So the Board is very much incentivized with the growth of the company because they are incentivized predominantly through stock. So they want to see it grow -- and we've got a great Board. Nick and I being inside directors, obviously, working here, but with Debbie as our Chair, Hugh as our audit lead and retired General Brown as our other Board member. Our ability to go to them and get them to get introductions into their networks, their guidance, their feedback on what we're doing. And then obviously, their governance and holding us accountable as management. I couldn't ask for a better and stronger Board. I'm really glad we have the team that we have now. It's both nimble but also experienced enough to be able to guide us on what we're doing. Remember again, this is the first time I've been the CEO of a publicly traded company. So I'm glad I have the Board that we do to be able to guide us on what we need to do -- basically what we're trying to accomplish and also help us grow. So...

Your next question is coming from Will?

Yes. It seems like in one of the previous maybe the last conference, you mentioned something about the legacy polymorphic software that you inherited. And it seemed like it was positive. I didn't quite understand that maybe it seemed like there was some update on that. Maybe I'm wrong. Could you clarify that?

Yes, sure. I can do that. So we still retain the patents and the trademarks around the Polymorphic Encryption Core or the PEC. If you go to the SideChannel website sidechannel.com under products, you can see the listing on that. With the -- I'm going to say this one, it's NIST, not NSA. With NIST adopting a number of other different models. In fact, just in the last 6 months, they had adopted 5 initially and greenlit 5 to be used for post-quantum encryption. They've since actually struck down, I think one of them. So they're only down to 4. But that whole process came and went back in 2021. So we have an engine that can essentially just kind of streamline encryption. We can make it smaller. It's great for low communication, no communication environment. It's good for IoT, it's good for satellite, like these types of use cases. But it's something that we're making available within Enclave as an option, should that be something people want to explore. It's still very early in the post-quantum and encryption and changing encryption space. So it's something that we inherited out of the old Cipherloc entity. When we did the reverse merger with SideChannel that I was leading, we will maintain it. It doesn't cost us really anything to maintain, and we'll retain the patents and what we're doing with it. But we're seeing more of a focus on the needs really around what we're doing with Enclave. So folks aren't out there searching for the solution that was the polymorphic encryption. You got to remember, too, Cipherloc had a number of different innovations and inventions and when we looked at things after the merger, we made decisions to not maintain and keep and try to push all of them. In my view, not all of them were good. So some things we've let lapse, some things we've just mothballed, but we are keeping the PEC alive, but we are focusing more of our activities and our growth and our investment on Enclave. Hopefully, that helps clarify a little bit more for you, Will?

Yes, it does. Just a quick question of thought. You make satellites. I knew that the Polymorphic was good for communications of that nature. What about Starlink...

I don't -- I mean maybe I'll be honest, like I am not the biggest like Elon Musk fan boy, I do not track everything that's going on with that type of hardware. But communications -- I mean, communications are communications, right? You've got satellites in space or in low earth orbit and you've got some type of ground communication system that needs to communicate back up to it. The thing about satellites is you want to have them run in low power consumption modes, right? So what PEC is actually pretty cool. What it can do is it allows you to maintain the same level of encryption, but a lower power consumption. So it's a deal for those types of environments where that needs to happen, right? Think about IoT devices, small form factor devices, they're not plugged into the electric grid. Sometimes they're running on batteries. So that means that they -- if they're going to do anything, it's going to cost power, and then that power is not infinite. So where you need encryption, that's where that plays out really well. And I think that's why we're -- we really like what Enclave can do. And if we can use the PEC, then that's a good case. But yes -- heck if I got a chance to sit in front of the Starlink team and tell them how they could reduce their power consumption, still maintain their encryption capabilities with the PEC and Enclave, I would take that meeting in a heartbeat. Do you know anybody there? Is that what you're saying?

No. I had met him, but I lost him. So it's just too bad.

No, that's okay. I was kind of joking, but I mean those are opportunities that we are entertaining. I think we're going to see this next year change some things for like where stuff is and how accessible people are. But yes, I mean that's -- I mean there's a lot of other satellite operating there's a ton of satellite start-ups. One of our clients manages a ton of stuff around low earth orbit. There's a lot of different groups out there doing things around satellites and stuff that are in the LEO space or the lower earth orbit space.

Thank you. That concludes our Q&A session. I'll now hand the conference back to our host for closing remarks. Please go ahead.

Okay. Well, I don't know what else to add. I just thank you, everybody, for joining the call. Thanks for reaching out online. Obviously, staying in touch with what we're doing. We're definitely putting out more of a monthly investor newsletter. You're going to see more consistent communication from Ryan and I to shareholders. So do sign up on sidechannel.com. There's a newsletter sign-up make sure you get us that information, your e-mail, and we'll get you on that list, so you get that on a monthly basis. I do monitor the Boards from time to time, when I can. So definitely drop some notes on there. I make sure you say my name on this, so I know you're kind of asking me a question. I'll try to chime in, as I can. But then yes, just continue to follow us on LinkedIn and on Twitter. We are still pushing kind of all our messaging out there as well as through our press releases, so just stay close to the -- stay close to the message. And then obviously, look, I asked the Board the same thing. As shareholders, you all want to see us grow. I want to see us grow. If you're in a business or if you have in your network where you're looking at your friends and the folks you're talking to and they don't seem to have any clue on what they're doing around cybersecurity, which let me tell you, they're a good company. There's a lot of people like that, tell them about us. I mean we'll happily help anybody. That's why we started the company in the first place because experience matters in addressing this stuff. But happy to help with whatever, whoever, private equity firms and their portcos, investment banks, CPA firms, lawyers and their clients. It's a great pathway for us and then just meeting good people. So, on behalf of Ryan Polk, Nick Hnatiw, the rest of the leadership team and the Board of Directors of SideChannel I'm Brian Haugli, the CEO. I want to thank you all again for your time today. And with that, we'll close out. And hope everybody has a Merry Christmas and good holidays and the rest of the New Year. Thank you.

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.