SideChannel, Inc. ($SDCH)

Greetings, and welcome to the SideChannel Fiscal Year 2026 Second Financial -- or Second Quarter Financial Results Update Call. [Operator Instructions]. And please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Brian Haugli, Chief Executive Officer with SideChannel. Sir, the floor is yours.

Thank you for joining us. I'll be brief on the quarter and then spend most of our time on what's actually mattering right now, the transition from services to platform. Q2 FY 2026 was a down quarter. Total revenue was $1.58 million, down from $1.89 million in Q2 FY 2025, 11.9% decline. More specifically, vCISO services revenue fell 28.4% year-over-year. That's the real number. It reflects a contracted vCISO pipeline and the fact that we're deliberately shifting client mix from hourly vCISO engagements towards fixed retainer platform models. Here's what matters. Our gross margin expanded 380 basis points from 49.7% to 53.5%. That's real operational leverage. It means the underlying product margin, Enclave, and our software bundle is working. 6 months into the fiscal year, we've lost $840,000 on revenue of $3.35 million cash burn from operations is negative $854,000. But these are the facts and they reflect exactly what we said we do, trade short-term service revenue for durable platform economics. So what's our strategy, 3-phase delivery model on services. So we're not pivoting. We're deliberately executing a known 3-phase transition from services to platform. Phase 1, where we started. vCISO or principal consultant-led time and materials vCISO work, 1 consultant for client, margins roughly 46% growth requires hiring consultants. Phase 2, what we're moving into right now, targeting August 2026, in the AI augmented delivery, 1 Principal Consultant or PC owns the client relationship when senior consultant handles day-to-day execution, augmented by our AI-powered skills which generates first draft assessment, policies, compliance tracking. Fixed retainer replaces hourly billing. The margin scale to 65%, 1 pod covers 15 to 20 clients instead of 8 to 12. Phase 3, our strategic target is Enclave First. Enclave itself becomes the operating security program layer. We layer advisory services on top as the retainer. Margin potential is 64% to 75%. Clients for senior consultants scale of 30 to 50. Revenue can be classified as product ARR, which is why Phase 3 matters for valuation. vCISO decline in Q2 isn't a problem. It's Phase 2 pulling clients out of Phase 1 pricing and into Phase 2 fixed retainer models. Gross margin expansion proves it's working. Enclave as our growth engine. So our software and services category, which includes Enclave, engineering services and third-party partnerships, grew 12.5% year-over-year from $1.54 million to $1.73 million in Q2 FY 2026. Enclave is our core product, but this line also captures delivery leverage and ecosystem commissions. Enclave is a network microsegmentation Zero Trust SaaS platform that gives organizations 3 operational outcomes: one, real-time asset visibility without spreadsheet management; two, microsegmentation without tearing apart the network. And three, certificate life cycle management, which is increasingly critical as the CA/Browser forum compresses the TLS certificate lifetimes to 47 days by 2029. The ideal customer is 50 to 2,500 employees, multisite or hybrid cloud, compliance burden and no in-house networking expertise. That's essentially every mid-market customer we already have. In Phase 3, Enclave pricing tier is twofold. Enclave Advisory, roughly $30,000 to $90,000 per year, AI-powered risk assessment, policy generation, compliance tracking all through the platform. Enclave enterprise, $60,000 to $80,000 per year. Advisory plus dedicated hours from our consultants. That's recurring leverage based revenue. Gross margin on platform approaches 70%, and that's the business we are building. So what's ahead? Q3 and Q4 FY 2026 are critical. We need to prove Phase 2 works operationally in the Phase 3, Enclave First is where real growth lives. We also need to get the sales motion right. We've got a number of bad sales hires in the past year. People didn't understand our model or couldn't execute on it. It's partly why vCISO revenue contracted. We've corrected for that, and our remaining sales team is solid, but we're not giving ourselves credit for sales execution yet because we're still rebuilding confidence in that function. On marketing, Jamie, our CMO, is only 6 months into the role, and she's already expanded her team, Paige and Melizza. Marketing takes time to produce results, but we're seeing it now. We're seeing direct opportunities, and more importantly, we're seeing channel growth. Our MSP and MSSP partners are moving from passive to active. They're embedding Enclave, their co-selling vCISO, they're asking for marketing materials. That's the signal we need, and we're seeing it. We're in the middle of a delivered transition. The down services revenue is not a failure, it's a mechanism of the transition. We're pulling high-touch clients into product leverage delivery models. We're building Enclave into the operating model and the operating system for mid-market security. We are correcting for bad sales hires and seeing real momentum in channel expansion. Q3 FY 2026 is an inflection point. We execute Phase 2 delivery operationally, if Enclave adoption accelerates, our MSP and MSSP partners continue to embed us in their go-to-market then we have visibility into Phase 3, and Phase 3 is where the valuation multiple lives. We know what we're doing. We have the products, we have the team, we have the client base to prove it. We just need to show it quarter-over-quarter. Thank you.

[Operator Instructions]. As we have no questions on the line at this time. This will conclude today's conference, and you may disconnect your lines at this time, and we thank you for your participation.