SideChannel Sales Fall 4% in Q3

Key Points

• Revenue (GAAP) fell 3.8% year over year to $1.78 million in Q3 FY2025.

• Gross margin narrowed to 47.0%, a 1.9 percentage point decline in gross margin (GAAP) compared to Q3 FY2024.

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SideChannel (OTC:SDCH), a cybersecurity solutions provider focused on software and advisory services for mid-market and regulated enterprises, posted its fiscal third-quarter results on Aug. 13, 2025. GAAP revenue was $1.78 million, a 3.8% decline compared to the prior year. This was below the consensus GAAP estimate of $2.013 million. Gross margin decreased to 47.0% from 48.9% a year earlier, and Net loss (GAAP) widened to $0.26 million. While management pointed to ongoing adoption of its Enclave platform among Department of Defense clients, the quarter was marked by weaker retention metrics, Operating expenses increased 4.5% compared to the prior-year period, and persistent net losses, suggesting SideChannel remains in a transitional phase.

Source: SideChannel. Note: Analysts' consensus estimates provided by FactSet.

Company Background and Strategic Focus

SideChannel helps organizations manage cyber risk by combining its proprietary software and advisory offerings. RealCISO is a software platform that helps companies understand and manage cyber risk. The company also provides services such as vCISO (virtual Chief Information Security Officer), risk assessments, and compliance support, with a focus on regulated sectors like healthcare, energy, and government.

Recently, SideChannel has concentrated on product innovation and federal sector expansion. Its success depends on differentiating its platforms against well-funded industry competitors, adapting services to different industry’s needs, and securing long-term contracts in sectors like defense. The company also continues to evolve its branding and strategic positioning, building on a history that dates back to 1953 but emphasizing its renewed push into cybersecurity solutions.

Quarter in Review: Revenue, Margins, and Operations

Revenue (GAAP) declined to $1.78 million, a 3.8% drop from the year-ago period. The company cited ongoing traction for Enclave, its zero trust platform that helps organizations securely segment and control network access. Despite this, overall sales suffered from client losses in older service contracts and weak revenue retention, which was 61.4% for the trailing twelve months.

Gross margin was 47.0%, down 1.9 percentage points compared to Q3 FY2024. Operating expenses (GAAP) climbed to $1.10 million, a 4.5% rise. That increase did not translate into higher quarterly sales.

Net loss (GAAP) reached $0.26 million, wider than both the prior-year GAAP net loss of $0.15 million. Although Cumulative results for 9M FY2025 still show modest improvement, this quarter saw a step back in profitability. As of June 30, 2025, cash and investments totaled $1,249,000. As of September 30, 2024, cash and investments totaled $1,295,000.

Deferred revenue, representing prepaid contracts yet to be fulfilled, grew to $0.88 million as of quarter-end from $0.52 million as of FY2024 year end, suggesting SideChannel has been successful signing some new contracts, even as overall retention lagged. Capital structure and equity have weakened slightly as ongoing losses accumulated on the balance sheet.

Product and Client Wins: Enclave, Insider Threat, and Service Suite

Enclave, SideChannel’s zero trust network solution, remains the central technology highlight this quarter. Management reports that two Department of Defense agencies are now active Enclave clients and describes the federal space as a core target for future growth—a concept that is gaining ground with government clients demanding stricter security and compliance.

A new Insider Threat program launched during the period seeks to help organizations detect, contain, and respond to risks posed by internal users, employees, or partners. The company built this service atop its Enclave platform and introduced it at DEFCON 33, a major cybersecurity industry conference. While SideChannel noted early client interest, it did not specify any meaningful revenue generated from the program as of quarter end.

The company continues to offer vCISO services, providing outsourced security leadership for organizations lacking full-time in-house expertise. Management noted some client churn in this area in prior calls, which may be contributing to current weakness in revenue retention. Although no segment data was disclosed, the loss of several major contracts in vCISO last year has continued to ripple through results, as evidenced by the lagging retention metric.

SideChannel’s RealCISO software platform, designed for risk management and compliance tracking, was not mentioned by name during the earnings update, suggesting customer acquisition efforts are currently centered on Enclave and related defense opportunities.

Outlook: Guidance and Key Issues Ahead

No quantitative financial guidance was provided for the upcoming quarter or the remainder of fiscal 2025. Management continues to express confidence in Enclave’s public-sector appeal but did not set any explicit financial targets or milestones in its latest release.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.

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