10-K: SideChannel FY25: Flat Revenue, vCISO Decline, Software Growth

SideChannel, Inc. reported flat total revenue for fiscal year 2025, with a decline in vCISO services offset by growth in cybersecurity software and services, alongside continued net losses and material weaknesses in internal controls.

Summary

• Total revenue for fiscal year 2025 was $7.351 million, a slight decrease of 0.7% from $7.400 million in fiscal year 2024.
• vCISO Services revenue decreased by $715 thousand (14.9%) to $4.083 million in FY25, attributed to client churn exceeding new client acquisition and transitions to lower-revenue software/services.
• Cybersecurity Software and Services revenue grew by $666 thousand (25.6%) to $3.268 million in FY25, benefiting from client transitions and expanded offerings, including the proprietary Enclave software.
• The company incurred a net loss of $892 thousand in FY25, a slight improvement from $904 thousand in FY24.
• Operating activities used $130 thousand in cash in FY25, a significant shift from $307 thousand provided by operations in FY24.
• Gross margin remained stable at 47.7% for both fiscal years 2025 and 2024.
• Selling and marketing expenses increased by 25.3% to $966 thousand in FY25, driven by personnel and advertising costs.
• Research and development expenses increased by 2.9% to $562 thousand in FY25, primarily due to personnel and consulting costs for Enclave development.
• General and administrative expenses decreased by 8.3% to $2.894 million in FY25, mainly from lower professional services, stock-based compensation, and insurance costs.
• As of September 30, 2025, the company had an accumulated deficit of $20.7 million and $1.2 million in cash, cash equivalents, and short-term investments.
• Management believes existing cash balances are sufficient to fund operations through at least December 31, 2026.

Sentiment

Score: 3

Explanation: The sentiment is low due to flat overall revenue, a significant decline in the core vCISO services, and a negative shift in cash flow from operations. While net loss slightly improved and software revenue grew, the persistent accumulated deficit and un-remediated material weaknesses in internal controls indicate ongoing operational and financial challenges. The need for potential future capital raises and intense competition further contribute to a cautious outlook.

Positives

• Cybersecurity Software and Services revenue grew by 25.6% ($666 thousand) in fiscal year 2025, indicating success in expanding product and software offerings, including Enclave.
• Net loss slightly decreased from $904 thousand in FY24 to $892 thousand in FY25.
• General and administrative expenses decreased by 8.3% ($261 thousand) in FY25, primarily due to lower professional services, stock-based compensation, and insurance costs.
• The company successfully settled a legal proceeding with Eric Marquez, issuing 356,400 shares of common stock and agreeing to pay $95 thousand in cash, with four payments totaling $63 thousand already made and shares issued as of September 30, 2025.
• The company's proprietary software product, Enclave, is well-positioned to address zero trust environment challenges and aligns with industry standards like NIST and CIS Controls 1, 2, and 3.

Negatives

• Total revenue declined by 0.7% ($49 thousand) in fiscal year 2025, indicating a lack of overall growth.
• vCISO Services revenue decreased significantly by 14.9% ($715 thousand) in FY25, due to client churn exceeding new client acquisition.
• Operating activities used $130 thousand in cash in FY25, a negative shift from $307 thousand provided by operations in FY24, indicating worsening cash flow from core business activities.
• The company continues to incur net losses, with an accumulated deficit of $20.7 million as of September 30, 2025.
• Material weaknesses in disclosure controls and procedures and internal control over financial reporting were identified and not fully remediated as of September 30, 2025, posing risks to financial reporting accuracy.
• The company's common stock is thinly traded on the OTCQB Venture Market, leading to potential volatility and difficulty for investors to sell shares at favorable prices.
• Certain warrants issued in 2021 contain anti-dilution rights and price reset provisions that could result in significant dilution to existing stockholders and inhibit access to equity capital.

Risks

• Market price for common stock has been volatile, and substantial sales or perception of sales could depress the market price.
• Future issuances of common stock or exercise/conversion of options, warrants, or convertible securities could dilute existing stockholders' ownership percentage.
• Anti-dilution rights of certain warrants could result in significant dilution and/or require the issuance of a substantially greater number of shares.
• Covenants in the 2021 private placement purchase agreement, if not complied with, could lead to monetary and other penalties.
• Thinly traded common shares on OTCQB may make it difficult for investors to sell shares at or near ask prices or at all.
• Common stock is subject to restrictions on sales by broker-dealers and penny stock rules, which may be detrimental to investors.
• The company's charter allows for the issuance of blank check preferred stock without stockholder approval, which could cause substantial dilution or provide voting control to preferred stockholders.
• Economic uncertainty, including inflation, recession, and global financial conditions, may pressure customers to reduce IT and cybersecurity spending, negatively impacting demand and financial results.
• Inflation and geopolitical events (e.g., Ukraine conflict) increase operating costs, disrupt operations, and add uncertainty to technology investment decisions.
• The company has incurred net losses and may never achieve profitability, with an accumulated deficit of $20.7 million as of September 30, 2025.
• Ability to continue as a going concern may depend on raising additional capital, which may not be available on acceptable terms or at all, leading to potential dilution.
• Increased costs as a reporting company (estimated $700-$800 thousand per year) may adversely impact profitability given limited capital resources.
• Management has broad discretion over the use of working capital and future funding, which may not always improve operating results or increase share price.
• Dependence on continued involvement of present management and ability to attract/retain talented employees, especially in engineering, sales, and marketing.
• Reliance on third-party software for essential financial and operational services, with potential for failure, outages, or disruption.
• Previously identified material weaknesses in disclosure controls and procedures and internal control over financial reporting, which, if not remediated, could lead to material misstatements.
• Inaccurate estimates, assumptions, or judgments relating to critical accounting policies or changes in financial reporting standards could adversely affect results.
• Failure to effectively manage growth could strain business resources and systems, leading to inefficiencies and diminished performance.
• Long and unpredictable sales cycles require considerable time and expense, and investments in sales and marketing may not always result in increased revenue.
• Inability to effectively expand and train the direct sales force could hinder new customer acquisition and sales to existing customers.
• Future revenue and operating results depend significantly on the ability to retain and add new clients and customers.
• Growth depends on the success of strategic relationships with third parties (technology providers, resellers, service partners), and disruptions could hinder product delivery and market expansion.
• Decline in billing, delays, and/or defaults in payments could lead to unrecovered expenditures and declining operating margins.
• Intense competition from larger, well-established companies with greater resources, potentially leading to loss of market share and price reductions.
• Limited experience with some pricing models for newer/bundled products, potentially leading to inaccurate predictions of adoption/renewal rates and impact on revenue.
• Competitive pricing pressure may reduce gross profits and adversely affect financial results.
• Reliance on consulting services as the largest revenue stream, requiring attraction and retention of qualified personnel in a competitive talent market.
• Failure to accurately predict, prepare for, and respond promptly to rapidly evolving technological and market developments in cybersecurity could harm competitive position.
• Delays in product development or failure to introduce new/improved offerings could harm revenues and competitive position.
• Failures, defects, or vulnerabilities in complex products and services could harm reputation, reduce sales, and expose to legal/financial liability, especially as a cybersecurity provider.
• Claims, litigation, government investigations, and other proceedings may adversely affect business and results of operations.
• Inability to protect and enforce intellectual property rights could adversely affect results of operations.
• Claims of infringement of proprietary technology or other rights by others could result in significant costs and harm the business.
• Subject to changing laws and regulations (e.g., privacy, export control), and failure to comply could lead to fines and penalties.
• Governmental restrictions on the sale of products/services in non-U.S. markets could negatively affect business, financial condition, and results.
• Cyberattacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims, or harm to reputation/competitive position.

Future Outlook

SideChannel plans to increase the adoption of its proprietary Enclave software and other cybersecurity solutions among existing vCISO clients, secure new vCISO Services clients by addressing budget constraints and rapid security posture needs, and add new Cybersecurity Software and Services offerings, including AI-based security operations, data security posture management (DSPM), polymorphic encryption, cyber-physical system (CPS) security, and application security posture management (ASPM). The company anticipates needing to increase staffing in the foreseeable future and expects to fund operations with existing cash and cash flow generated from operations, aiming to sustain positive cash flow by managing expenses.

Management Comments

• Our mission is to make cybersecurity simple and accessible for mid-market and emerging companies, a market that we believe is currently underserved.
• We anticipate that our target customers will continue to need cost-effective security solutions.
• We continue to expand our catalogue of services and solutions to address the cybersecurity needs of our customers.
• The year-over-year decline in vCISO Services revenue reflects new vCISO client acquisition not exceeding vCISO client churn and the transitioning of vCISO Services clients into lower revenue generating Cybersecurity Software & Services.
• Cybersecurity Software & Services revenue benefited from these transitions along with the expansion of the software and services offered.
• We believe that our existing cash balances are sufficient to fund our operations through at least December 31, 2026.
• We intend to manage our business such that our expenses will allow us to sustain positive cash flow from our operations, but we cannot assure this will occur.

Industry Context

The cybersecurity market is highly competitive and dynamic, driven by rapid technological advancements, evolving threats (like ransomware), and increasing demand for remote worker technologies and zero trust strategies. SideChannel aims to serve the underserved mid-market and emerging companies with cost-effective solutions. The industry is seeing increased investment in security due to breaches and complex threats, with a growing focus on AI-based security operations, data security posture management, and application security. The company's Enclave product aligns with critical industry standards like NIST and CIS Controls for asset inventory and access control. However, the market also faces intense competition from larger, well-established players with greater resources and lower barriers to entry for new competitors.

Comparison to Industry Standards

• SideChannel's Enclave product is built to primarily address Critical Control 1 (asset inventory), Critical Control 2 (software management), and Critical Control 3 (data access control) of CIS version 8, aligning with industry-standard cybersecurity and risk management frameworks like NIST and Center for Internet Security Controls.
• The company's vCISO services address the increasing demand for flexible, expert security leadership, particularly among small and cloud-enabled companies facing budget constraints, a trend observed across the cybersecurity industry where fractional CISO roles are gaining traction.
• SideChannel faces competition from large, established cybersecurity service providers such as Optiv, NCC, Coalfire, PwC, EY, Deloitte, and GuidePoint, which often have greater financial, technical, and marketing resources.
• In the software segment, SideChannel competes with major players like Check Point, Cisco, CrowdStrike, F5 Networks, HPE, Huawei, Illumio, Juniper, Microsoft, Netskope, Palo Alto Networks, SonicWALL, Sophos, and Zscaler, many of whom offer broader product lines and cloud-based security services.

Management Changes

Corporate Governance

Legal Proceedings

• A lawsuit filed in April 2021 by Eric Marquez and other plaintiffs against Cipherloc Corporation and Michael De La Garza was settled on December 13, 2024. The lawsuit was dismissed with prejudice on January 2, 2025.
• The settlement required the company to issue 356,400 shares of common stock and pay $95 thousand in cash in six equal quarterly installments, beginning January 1, 2025, and ending April 1, 2026. Four payments totaling approximately $63 thousand and all shares have been issued as of September 30, 2025.

Related Party Transactions

• Brian Haugli, CEO and stockholder, is also a principal shareholder of RealCISO Inc. SideChannel resells RealCISO software and paid $75 thousand in licensing fees to RealCISO in FY25 (compared to $30 thousand in FY24).
• SideChannel invoiced RealCISO $34 thousand for software development services provided in FY25 (compared to $122 thousand in FY24).
• The Association of the US Army (AUSA) signed an agreement for a cybersecurity risk assessment for approximately $24 thousand on October 13, 2023. Robert Brown, President of AUSA, joined SideChannel's Board on February 15, 2024.
• AUSA signed an agreement for recurring vCISO Services on July 8, 2024, generating $9 thousand in FY24 and $54 thousand in FY25 before terminating in March 2025.
• SideChannel paid $8 thousand to AUSA for booth space at the AUSA Global Force Symposium in March 2025.

Stakeholder Impact

• **Shareholders**: Face potential dilution from future equity issuances and anti-dilution rights of existing warrants. The thinly traded nature of the stock and penny stock rules may limit liquidity and price realization. Continued net losses and negative operating cash flow could depress share value. The Board's control through significant share ownership by ELT and Directors may limit minority shareholder influence.
• **Employees**: The company anticipates needing to increase staffing, particularly in engineering, sales, and marketing, which could create new opportunities. However, competition for skilled personnel is intense. Stock-based compensation is a component of remuneration, but the value is tied to the volatile stock price.
• **Customers**: Benefit from expanded cybersecurity software and services offerings, including the proprietary Enclave product and vCISO services. The company's focus on mid-market and emerging companies aims to provide cost-effective solutions. However, a decline in vCISO client retention could indicate service satisfaction issues or competitive pressures.
• **Suppliers/Partners**: The company relies on third-party software licensors and a network of third-party service providers and VARs. Disruptions or changes in these relationships could impact service delivery. The company also engages external experts for risk management.
• **Creditors**: The company has no credit facilities currently but is exploring options. Continued net losses and negative operating cash flow could impact the company's ability to secure favorable debt financing in the future.

Next Steps

• Increase adoption of Enclave and other cybersecurity solutions among existing vCISO clients.
• Secure new vCISO Services clients to expand the client base.
• Add new Cybersecurity Software and Services offerings, including transformational technologies like AI-based security operations, DSPM, polymorphic encryption, CPS security, and ASPM.
• Continue efforts to remediate material weaknesses in accounting policies, procedures, and controls during fiscal year 2026.
• Potentially hire additional qualified accounting staff and engage external consultants to strengthen financial reporting controls.
• Monitor the effectiveness of remediation measures for internal controls.
• File a Definitive Proxy Statement for the 2025 Annual Meeting of Stockholders within 120 days after September 30, 2025.

Key Dates

Recommendation

The filing reveals several concerning factors that warrant a 'sell' recommendation for a seasoned investor. Despite a slight reduction in net loss, the company experienced flat total revenue and a significant decline in its core vCISO services, indicating fundamental business challenges. Critically, cash flow from operating activities turned negative, shifting from providing $307 thousand in FY24 to using $130 thousand in FY25, which is a major red flag for an unprofitable company. The persistent material weaknesses in internal controls over financial reporting raise serious questions about the reliability of financial statements and operational integrity. Furthermore, the stock's thin trading on the OTCQB, coupled with potential dilution from existing warrants and the stated need for future capital raises, presents substantial liquidity and valuation risks. While growth in cybersecurity software is positive, it's not enough to offset the broader operational and financial deterioration, making the stock a high-risk, low-conviction investment.

Keywords

Cybersecurity, vCISO, Enclave, Zero Trust, Microsegmentation, Cybersecurity Software, Cybersecurity Services, Risk Management, SEC Filing, 10-K, SDCH, OTCQB