Q3 2021 Intrusion Inc Earnings Call

Good afternoon, and welcome to intrusions third quarter 2021 financial results conference call. At this time, all participants are in a listen only mode.

At the conclusion of today's conference call instructions will be given for the question and answer session.

As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the call over to Joel <unk> of Shelton Group Investor Relations Joel. Please go ahead.

Okay.

Good afternoon, and welcome to intrusions third quarter 2021 earnings Conference call I'm Joel at Cromwell, its managing director of Shelton Group Intrusions Investor Relations firm joining me today are intrusion cofounder and CTO Joe ahead.

Yeah, So Franklin Bird and CMO Gerry David also on today's call is intrusions chairman of the board, Tony Lovecchio, who will be available for questions. After management's prepared remarks before we begin I want to remind you that todays conference call may contain forward looking statements regarding future events, including but not limit.

The two expectations for intrusions future business financial performance goals.

Customer and industry adoption of skilled technology successfully bringing to market intrusions design pipeline executing on its business plan anticipated capital needs as well as the engagement of investment professionals to assist the company. These and all forward looking statements are based on estimates judgments current trends and market conditions.

They involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward looking statements. We encourage you to review the company's SEC filings, including the 2020 Form 10-K filed with U S. D. C. On March nine 2021, and other SEC filings made from time to time in which we.

We discuss risk factors associated with investing in intrusion all.

All forward looking statements are made as of the date of this call Thursday November 11th 2021, and except as required by law, we do not intend to update. This information. This conference call will be available for audio replay for at least 90 days in the Investor Relations section.

The web site at Www intrusion dot com with that it's my pleasure to turn the call over to Franklin Franklin. Please go ahead.

Thanks, Joe and thank you to everyone, who has joined US on the call today as mentioned in our last quarterly call. We expected our third quarter would be a period of transition due primarily to the effects of an aggressive hiring in the first half of the year that wasn't aligned with our projected operating model S.

Such early in the third quarter, we announced a reduction of force along with additional cost reduction initiatives and a new shelf registration and an ATM at the market stock sales program, which has been effective in raising capital.

Additionally, in the third quarter, we experienced a partial delay in some of our consulting revenues tied to a number of changes at the company I'm happy to say that for most part. These transition items have concluded and Q4 will show clear benefits from the changes that were made now I'd like to review the company's third quarter results.

Third quarter 2021 revenue was $1 8 million compared to 2.1 million in the second quarter and $1 6 million in the third quarter of last year.

Similar to past quarters, the majority of the third quarter revenue, that's derived from our consulting business, which was slightly lower from the prior quarter due to certain contract delays associated with the recent changes at the company.

Revenues from shield increased sequentially and represented approximately 13% of total revenue as compared to 7% last quarter.

Gross margin in the third quarter was 62% as compared to 63% last quarter and 59% in the third quarter of 2020.

Third quarter operating expenses were $7 2 million compared to $6 9 million last quarter and $2 3 million in the same quarter a year ago.

The 300000 dollar increase in operating expenses from the prior quarter was primarily due to head count payroll prior to the reduction in force higher legal expenses associated with previously announced matters fall season trade show expenses.

All of which were offset by a noncash credit and stock compensation and subsequent lower expenses for partial quarter. Both as a result of the recent reduction in force. We expect next quarter's operating expenses to more materially reflect our cost reduction actions as we continue to focus on optimizing cash.

Net loss for the third quarter of 2021 was $6 1 million or minus 34 cents per share.

Compared to a net loss of $5.1 million or minus 28 cents per share.

In the prior quarter and a net loss of $1 4 million or minus 10 cents per share in the third quarter of 2020.

Turning to the balance sheet as of September 30th 2021, the company had cash and cash equivalents of $7 2 million compared to $9 3 million at the end of the second quarter.

During the third quarter, we raised $4 8 million in net proceeds from the issuance of new stock through our ATM facility that we put in place in August.

As mentioned last quarter. This facility enables the company to periodically raise cash through issuing equity at market prices.

Our intention is to use facility in a measured way that minimizes dilution to our shareholders, while providing capital as required.

In addition to this facility, but the board and the company continue to evaluate all potential options that are consistent with our goals of accelerating intrusions growth achieving improved operating results as well as maximizing shareholder value.

Regarding the company's financial outlook for the fourth quarter, we are maintaining our policy of not providing quarterly financial guidance until such a time that we have greater visibility into our revenue ramp.

With that I'd like to turn the call over to Joe head for a more detailed update on our business and our sales initiatives Joe.

Thank you Franklin, let's start with an update on our legacy and consulting business. Our base government business declined slightly this quarter due to some contract renewal delays, which are now behind us despite quantity of quarter fluctuations in this business. It's been a very solid base of business for us consisting of long standing customers that are expected to.

Continue renewing for years to come and last quarter, we reported that we expected a few new program starts in the second half of the year. We expect that these new programs along with increased spending rates on others will contribute to a gradual upward trend on top of our historical run rate now shifting to our shield business over the past several.

Quarters, we've made substantial progress on shield. Most recently, we included a number of enhancements based on customer and market feedback that includes the following one our new executive dashboard, which shows what security issues Shield has prevented we display four quadrants on the dashboard quarter one is how many.

Jim Scheel is blocked malicious traffic today and yesterday quarter, two is which machines are sending how much data at each foreign country and you can now drill down to see details of each individual instance of communications.

Quadrant three as counts events that made it past your firewall that shield caught in quarter. Four shows you of which machines on your network have transmitted traffic that shield block and other words machines that you should consider cleaning up.

Enhancement a number two is enhanced daily reporting we.

Now offer a three day look back on live views of traffic, where previously it was an hour and a variety of custom drill downs and data export options to give threat analysts much more visibility into all kinds of traffic the good the bad and the suspicious.

And then finally, we've made major engine improvements it greatly refine our DNS protections and increase our speeds, even as we've added more protection methods.

We also have made some key product discoveries as we worked with customers in Q3 that further shows how shield delivers value for one bad guys scan infrastructure.

And launch attacks on devices, which are not behind the firewall and this case shield blocks those incoming scans connection attempts and zero day is simply based on the source ip's.

Reputation showing value as part of a defense in depth security architecture.

Another example is around credential theft, which people bad guys used to gain access to internal systems bad guys don't try this from their homes and businesses instead, they use virtual private host and other related types to protect their editing identity, while logging in and stealing data in one case shield block 23 of 25.

Places bad guys tried to log in from and these failures allowed the customer to isolate the stolen credentials and deactivate them are.

Our lessons learned is that shield is unique strengths and blocking inside out connections, but also deliver surprisingly good resistance to outside in attacks due to its bidirectional zero Trust approach based on reputation. We will continue to make refinements to shield to meet our customers' needs and finally, we established an advisory board.

Ward of cyber security experts and executives, who will collectively serve to help us further refine and optimize our business, they're already opening doors for us in assisting us with new opportunities on our New Advisory Board, we have Vice Admiral T. J, why Greg acres, and Eric Jackson as our inaugural members Greg acre.

<unk> was the senior Vice President and CTO of advanced Security Research and government as well as Chief Technology Officer within the security interest organization at Cisco a major focus of his group was to expand security awareness and launch product resiliency initiatives throughout Cisco's development.

<unk> to deliver high quality and secure products to customers before joining Cisco and 93 acres career included more than 15 years of designing building and running large networks for Fortune 100 companies, Eric Jackson retired FBI special agent in charge of the Dallas Field office had a career in law enforcement spanning almost 20.

Two years, which included experiences fighting terrorism fraud, and cyber crime. Jackson currently servers serves as the Chief Security Officer, and risk mitigation executive for TV Keybank SSB with locations in Dallas.

Iowa, Kansas, Colorado, Illinois, and New Mexico, <unk> T. J Y U S. Navy retired as a 30 year plus national security practitioner strategist and cyber operations expert leading joint military formations and combined intelligence community organizations. He has commanded at all levels within the Navy enjoying service.

Most recently as the commander.

Its fleet Cyber command, United States, 10th Fleet, United States Navy Space Command and previously as the commander United States Cyber National mission for Us of U S. Cyber Com. These prominent individuals' joined our advisory board because they know us and recognize that shield delivers value like no other cyber security solution in the March.

They are motivated to help us get the word out to the market and connectors to potential new customers and partners I can't tell you. How excited we are about these initial appointment's their professional counsel and cyber security expertise will be of great value to us. Our plan is to add additional members to this important group in the future now Gary will.

Date, you on sales and marketing.

Thank you Joe notable achievements in Q3 include. The addition of five new customers. We also met with great success at <unk> in Orlando. This September.

We onboard a new partners for quest to extend our reach across EMEA, and Brazil, and liquid PC as a condo and top tier distributors CDW. We also continue to make progress on the thought leadership fraught with media coverage across TV radio and online outlets as part of our recent efforts we recognized the need to improve our sales structure, while also implementing.

Incentive programs to drive improved performance as part of this process. We are actively hiring a new sales team with a strong deal closing mindset and cyber security experience. Our hope is that we will have the new sales team on board and delivering close deals by early in Q1 as part of this reassessment. We've also stepped up our work with our partners working closer.

With them to better understand what we can do together to help them succeed selling shield in summary, we have a strong pipeline of opportunities and have already closed four new deals since the start of the fourth quarter back to you Joe.

Thanks, Gary we're glad to report traction in sales as we've made necessary changes to the sales organization and connected new potential customers at trade shows via our marketing activities and advisory Board connections. We received some great feedback on the new release of shield based on first impressions. We expect this latest version will act.

<unk> adoption by new customers with that we'll open the call to your questions operator.

At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.

Pause for just a moment to compile our Q&A roster.

Yeah.

Again, if you would like to ask a question press star one on your telephone keypad.

First question comes from the line of Zach Cummins with B Riley Securities. Your line is open.

Hey, good afternoon, Franklin, Joe and Gary Thanks for taking my questions.

And frankly, just starting off in terms of the Opex run rate I know a lot of the changes you made.

Really optimize that occurred in this quarter, but what sort of runway run rate excuse me are you assuming for Q4 of this year for Opex.

I appreciate that back and I think.

What I've tried to convey last year last quarter is still true and we kind of expected Q4 to be closer to our Q1 run rate with a couple exceptions.

So it will be a little bit higher than Q1, but.

We do have.

A bit more noncash stock compensation now with the ramp up of employees and we are experienced some heavy legal costs right now too so.

Try not to give you exact number but it'll be a little bit higher than Q1, but.

Close to closer in line to Q1.

Understood.

And Joe can you talk about I guess some of the traction that youre seeing with shield now nice to see it ramp up to 13% of total revenue during the quarter and secured five more customers.

Can you give us a sense of kind of the industry is that those customers are and and kind of what are the areas, where shield is really standing out and driving a lot of interest.

Well, we're still Gerry reported we had.

For new customers. We've had some subsequent demos have gone pretty well since that the numbers are so small I don't think <unk> zero in on a on an industry we've got.

Right.

Banking.

Education.

We've got all kinds of us with that yes.

Yes, and manufacturing as well.

Not for profit.

Okay.

Yeah.

Got it and in terms of.

Okay.

Oh, I'm, sorry, I didn't mean to cut you off there sorry about that.

Thanks, Archie first then I'll continue I'll forget my thought.

Yeah.

I'll, let you finish that I've talked about on.

Don Shield, I mean, and maybe I'll just pile on more on in there that that both you and Gary can address in terms of.

Changes to the sales force.

Why are those that are considered to be a necessary change there to really kind of revamped that entire team and.

Really refine the process there.

Well I think I'll take that one Joe yes sure Gary.

Well it's for me it was a very straightforward thing we had to do it's easy to assess the effectiveness of your sales team and when they are closing deals and making quota then it's time to rethink.

They are.

Participation at the company.

Certainly we're also looking for I think a different mindset going forward, we're really looking hard for.

Sales people have a strong closing mentality.

They love to have to wait to get out in co deals and I think it's just we're looking for different DNA and the people were interviewing audit to bring them into the company.

Yeah.

Understood.

I guess just final question for me would be around kind of your.

Legacy consulting business. It sounds like you also made some changes there I mean can you just talk about maybe some of the changes that youre, making but it sounds like you have.

At least some pretty solid momentum there that that should drive at least historical rates or maybe slightly above that as we think about it going forward.

Yes. This is Franklin I'll start and I'll turn it over to Joe who knows a lot more about it.

Measuring it and he is driving that sometimes but.

No you are right, we had a little dip in our quarter here, we kind of took a pause on some of the activity there.

Based on just some change of activity, but we.

We do see momentum we've already had new orders in Q4, and we do see it returning to some of the historical levels.

And we've already taken a snapshot of what we think it will be next year and.

We're excited to see it moving up Joe and I would further say that your comment about that we've made changes in the legacy area I would say that probably isn't true. So none of the none of the staffing change. So there was no no cuts in that area.

We are like I said in my comments, we made we had a little blip in the quarter just do a slow renewal.

And that that is behind us now and so I'd say that we're going to see it tick up a slight tick up from the historical run rates that have been reasonably flat.

For a long time, but we had one new program start that has already entered and we're expecting another one.

Thats been in the queue for a while and like I said it's.

This unfortunately at the whim of the is there a real.

A real budget, we expect this slowdown will it go forward if there's a CR. That's an open question when we're thinking yes.

You never know.

Got it anyway.

Without it we still have a slight tick up.

And then.

Yes go ahead.

Go ahead no go ahead finish your thought.

So.

Yes, I'd say there is a tick up and then also the gap we had wil will end up making back that missed revenue as well.

For some period of time.

Yes.

A pause that got laid out.

Understood well, thanks again, guys for taking my questions and bus and best of luck as you go forward from here.

Thanks, <unk> I appreciate the comment.

Again, if you would like to ask a question press Star one on your telephone Keypad. Your next question comes from Ross Taylor with <unk> Investment Corporation. Your line is open.

Thank you gentlemen, I'm trying to get a handle on whether the moves you've made with the sales force are basically a complete reset of what you had been doing or is it.

Roughly 10 months into the process we are.

<unk> are gaining in should be gaining more meaningful traction with.

Major customers and potential new business that we had been looking for earlier this year.

It's a reset.

All but one was let go.

And I think that thing of note is that even with those departures were still making meaningful progress on the sales front were fuels.

Feels like we're getting a better pipeline, we're getting well commitments, we're getting more proof of concepts in the we're getting more engagement than we had before.

The other thing that we have.

Done is we've changed the incentive plan to make it be very.

Do you focus.

One had before really gives them the money until they pretty much at your quota so reaching that too because that can have a commission on everything that they bring and so I think that was an important distinction as well and then.

Finally, I think another important thing that we.

We set out early in the year as we said we wanted to sign I think 100 partners before the end of the year and then it became apparent that.

It was more of a quantity things in a quality things what we aspired to do is to to really lean into those partners that really want to work with US right. Instead of just getting a logo on the website and not hearing from them again, we really wanted to make sure that we're being mindful of those partners, who are committed to shield and committed towards success and make sure that ward.

So there's a lot of things that are.

Ben change will continue to change, but I believe the changes we made are having great impact already.

Okay.

And how long do you think it would take.

To get this new sales force we have in place.

With meaningful traction I mean, I think that everyone.

Obviously.

Previously there had been pretty high expectations that they haven't been met.

They werent necessarily amenable, but now you're kind of looking at this going are we six months away from something do you think the sales force can start to show us something in the next three to four months, what kind of time horizon are we looking at.

I feel strongly that we will see some meaningful traction from the new sales team starting in Q1.

There is.

Hey, there.

Jumping into a pipeline that's all figured how to come in and build their own pipelines will have pipeline to share with them because we've been building pipeline all along and nurturing and then it's just a matter of.

Partner distribution at Walmart has been making sure.

We have the right.

Business development.

Ill focus on the right partners to make them successful as well so I generally believe that.

Everybody, we're bringing on I was going to have some level of success starting in Q1 for sure.

Okay.

We received some.

Fairly favorable feedback from third party reviewers and yet that hasn't yet translated into new business why do you win when people don't buy what are they telling telling you as to why they are not buying.

Well the biggest thing that we see now is that you know.

Sheila has a very different cyber security products a lot of what we're having to do is is really inform and educate them on a different way of thinking about how to fix the problem.

Good news is there's been a lot of discussion around this notion of zero trust with we've been talking about a lot of our our media mentions in and on our homepage and we really think there is an intersection at the category of Zero Trust network access.

The category itself has an explicit way of how that's done but the outcome is what she does so it's really the thing that we think will have a lot of success in going forward as is it those companies, especially bringing the company to do category buying.

That are looking at that type of park will help a lot of success. There. We also think we're going to have lots of success in the IEPS displacement area, because theres not a lot of innovation around <unk> like companies are thinking about replacing either their mcafee or.

Cisco product.

There's a lot of opportunities there for us to get some business as well so.

We.

Getting with you all just say good things as voice that you want.

But it does initially.

You know people, signing a purchase or any faster than they would've anyways.

Thank you Andrea.

Yeah, Ross I'd also add.

When you look at change in the sales force I don't want to overlook. The fact that we had other people working on the partner relationships and other people working on deals that we had in process and they werent being closed so the.

Lead guys are now me and Gary and Trent, who have been here, all along and to some degree and Gary have upped our interaction with the major partners that we expect to perform well and we've mentioned some of those.

The narratives and releases so I think part of the thing you see is zero closes go under four and then larger numbers since then.

That's that's the effective Gary and Eileen and into those and so it's not a matter of waiting on the new guidance, let's work with the partners we already have in.

Keep it going.

And do you see.

In fact, the issue with the federal government under continuing resolution.

Being a roadblock to getting something like perhaps.

A win with the.

The Dod or someplace, where you actually have a lot of experience.

Yes.

We just got one order from Vod So yes.

That's a positive sign.

Alright.

You got a shield order from D O D.

Correct.

That's actually I would think.

Fairly significant because I would tend to think I mean, there is a school of thought around the company advanced by some debt.

The divining Rod.

And yet you have you just secured a Dod.

Piece of business that may be.

The Dod doesn't mess around with things like that so I would actually think that would be something that you would consider.

Did you dance when you got that.

Well again Dan.

Yes.

Yes, we did we are we have a bell and all are we rang really loud and then we took it off the wall and walked around and some of the other guys did I just certainly also might call. So.

Yes.

It is a it is a bellwether event and it won't be the last in that in that direction that others in the queue.

Okay, I know you and Doug.

You were kind of trying to go the opposite direction of the prior administration.

But.

To be honest with you to me if so much of what the story is getting proof of concept.

And getting the Pentagon getting a Dod contract tells me is a major proof of concept approach because.

I know how.

Seriously. They take this issue they are the greatest they are attacked more than anyone else.

And so.

Next time, you don't have to be humble and wait for me to ask you.

Right, Yeah, and M&A I think it's a big deal I mean, if you ask around like if you look at DJ widen acres and crew all three of those guys have connections that we.

They call people at home that we barely know or don't know.

So I'd say that we.

We expect good things in and our former space as well.

Okay, well I apologize.

Yes.

Now for some reason my call dropped so I apologize he came back and so if I Miss something.

Apologize.

Gary.

And thank you Matt.

I think that.

As I said it looks like you're starting to get some place where you can get that meaningful traction that will actually show people that you buy the product that's real and that's been endorsed by people who are serious and.

That would be I think a major possible congratulation.

Thanks, Ross appreciate the question.

Thank you Sir.

Again, if you would like to ask a question press star followed by the number one on your telephone keypad.

There are no further questions at this time I would now like to turn the call back over to Mr. Joe hedge.

Thanks, operator.

For you guys on the call. This isn't not just a quick wrap up wrap ups. So don't hang up so before closing the call I want to quickly highlight that we'll be participating in a virtual roadshow with alliance Global partners. This coming Monday, we will also be attending benchmarks discovery conference on December 2nd feel free to reach out to your respective sales reps that these firms are.

Contact the Shelton group, if you're interested in meeting with US now our chairman Tony Lovecchio has a few comments he'd like to make.

Thanks, Joe one final update I am very pleased to announce to you today that we've appointed a new president and CEO, Tony Scott, who will start on Monday November 15th.

Our press release will be issued within the next 30 minutes announcing his appointment and giving a substantial detail as background Tony brings to intrusion. Many years of cyber security experience, including serving as the federal CIO for the U S government.

Oh for multibillion dollar corporations, such as Vmware, Microsoft and the Walt Disney Company as well as having served as a cyber security private consultant as.

As I mentioned, you can read more about his background and his qualifications in the release that will be sent out in the next 30 minutes.

Both the board and management team are very very pleased to have Tony Scott joined the company and we're excited about the future of intrusion under his leadership.

We thank you again for your support and interest in intrusion. We look forward to speaking with you during our fourth quarter call and introducing you in the coming weeks and months to Tony Scott Our new CEO.

Operator, Thank you and you may now disconnect the call and lessors I can take another question if theres any other questions that people wanted to ask after that comment.

There are no further questions at this time.

Ladies and gentlemen. This concludes today's conference call you may now disconnect.

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