Q4 2023 Intrusion Inc Earnings Call
Welcome to intrusion Inc's fourth quarter and full year of 2023 earnings conference call and webcast. At this time all participant lines are in a listen only mode for those of you participating in the conference there will be an opportunity for your questions at the end of today's prepared.
Operator: At this time, all participant lines are in a listen-only mode. For those of you participating in the conference, there will be an opportunity for your questions at the end of today's prepared comment. Please note, this conference is being recorded. An audio replay of the conference call will be available on the company's website within a few hours after the call. We'll now turn the call over to Josh Carroll with Investor Relations. Thank you and welcome.
Comments. Please note this conference is being recorded.
A replay of the conference call will be available on the company's website within a few hours. After this call.
Now I'll turn the call over to Josh Carroll with Investor Relations.
Josh Carroll: Thank you and welcome joining me today are Tony Scott, Chief Executive Officer, and Kimberly pitcher Chief Financial Officer.
Josh Carroll: Joining me today are Tony Scott, Chief Executive Officer, and Kimberly Pinson, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before I turn the call over to Tony, I'd like to remind everyone that the statements made during this conference call related to the company's expected future performance, future business prospects, future events, or plans may include forward-looking statements as defined under the Private Securities Litigations Reform Act of 1995. Please refer to our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's conference call Any forward-looking statements that we make on this call are based on information that we believe is up to date, and we undertake no obligation to update these statements as a result of new information or future events.
Josh Carroll: This call is being webcast and will be archived on the Investor Relations section of our website.
Josh Carroll: Before I turn the call over to Tony I'd like to remind everyone that the statements made during this conference call relate to the company's expected future performance future business prospects future events or plans may include forward looking statements as defined by the private Securities Litigations Reform Act 1995.
Anthony E. Scott: Please refer to our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially.
Anthony E. Scott: <unk> described in todays conference call.
Anthony E. Scott: Any forward looking statements that we make on this call are based upon information that we believe as of today and we undertake no obligation to update these statements as a result of new information or future events.
Josh Carroll: In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles during the call. We may use non-GAAP measures if we believe they are useful to investors or if we believe they will help investors better understand our performance or business trends. With that, let me now turn the call over to Tony for a few opening remarks. Thank you, Josh, and good afternoon, and thank you all for joining us today. To start, I'd like to just take a moment to acknowledge the poor performance of our stock in the marketplace this past year, as an investor and as one who has significantly increased my personal investment in intrusion over the last year. I want you to know that I feel your pain.
Anthony E. Scott: In addition to U S. GAAP reporting we report certain financial measures that do not conform to generally accepted accounting principles.
Anthony E. Scott: Nicole.
Anthony E. Scott: We may use non-GAAP measures. If we believe it is useful to investors or if we believe it will help investors better understand our performance or business trends with that let me now turn the call over to Tony for a few opening remarks.
Anthony E. Scott: Thank you, Josh and good afternoon, and thank you all for joining us today.
Anthony E. Scott: To start I'd like to just take a moment to acknowledge the poor performance of our stock in the marketplace. This past year.
Anthony E. Scott: As an investor and as one who has significantly increased my personal investment in intrusion over the last year.
Speaker Change: Want you to know that I feel your pain.
Anthony E. Scott: Intrusion's performance in 2023 did not live up to anyone's expectations, including mine, and I wanted to address that right up front. But I'd like to share some of the factors which have contributed to that poor performance and also share our plans to overcome those realities, or at least compensate for them. We made no secret that we needed to raise capital in 2023. And as it turned out, 2023 was one of the worst years ever for small and microcap companies to raise equity.
Speaker Change: Intrusions performance in 2023 did not live up to anyone's expectations, including mine.
Speaker Change: And I wanted to address that right upfront.
Speaker Change: But I'd like to share some of the factors, which have contributed to that poor performance and also share our plans to overcome those realities or at least compensate for them.
Speaker Change: We made no secret that we needed to raise capital in 2023.
And as it turned out 2023 was one of the worst years ever for small and micro cap companies to raise equity.
Anthony E. Scott: We made multiple attempts with three different investment banking firms to raise capital. And obviously, our stock was severely discounted as a result of these efforts. Additionally, due to unforeseen delays in shield booking, we were not able to make the kind of public announcement that could have helped either stabilize the stock price or generated a measure of positive inertia. And finally, as you'll hear later, the loss of the large, thin-margin consulting contract in 2022 that we previously talked about, at its full impact on top line revenue in 2023, and the impact of the federal government's continuing resolution At all times, we've reacted to these developments by doing what we could to reduce costs and to conserve cash, and at the same time, preserve and protect our highly talented engineering and consulting teams, whose skills are not easily replaced. In 2023, we did manage to resolve all of the legal issues that were a carryover from 2021 and 2022, including the SEC investigation, the shareholder derivative lawsuit, and the class action lawsuit. Only the derivative action remains technically open, with final court approval scheduled shortly after a self-imposed delay by the court of jurisdiction.
Speaker Change: We made multiple attempts with three different investment banking firms to raise capital.
Speaker Change: And obviously our stock was severely discounted as a result of these efforts.
Speaker Change: Additionally, due to unforeseen delays in shield bookings, we were not able to make the kind of public announcements that could've helped either stabilize the stock price or generate a measure of positive inertia.
Speaker Change: And finally as you'll hear later.
Speaker Change: Loss of the large thin margin consulting contract in 2022 that we previously talked about and.
Speaker Change: At its full impact on top line revenue in 2023.
Speaker Change: And the impact of the federal government's continuing resolution in Q4, 2023, which continued into 2024 has had a significant impact in our consulting revenue during the period.
Speaker Change: At all times, we've reacted to these developments by doing what we could to reduce costs and to conserve cash and at the same time preserve and protect our highly talented engineering and consulting teams, whose skills are not easily replaced.
In 2023, we did manage to resolve all of the legal issues that were a carryover from 'twenty to 'twenty, one and 2022.
Speaker Change: <unk> the FCC investigation, the shareholder derivative lawsuit and the class action law suit.
Speaker Change: Only the derivative action remains technically open with final court approval scheduled shortly after our self imposed delay by the court of jurisdiction.
Anthony E. Scott: I'll say it's impossible to fully measure the workload and the distraction that these legal issues have landed on our leadership team, and are only surpassed in magnitude by the workload and distraction associated with the constant fundraising activities we also took on in 2020. I'm happy to have at least some of this workload behind us as we get into 2024. From a product development perspective, 2023 was a very productive year and one of significant progress in terms of delivering the features and functions that our customers have told us were important. We delivered a cloud-based reporting and management platform that makes it easy to manage a fleet of SHIELD instances, including cloud and endpoint.
Speaker Change: I'll say, it's impossible to fully measure the workload and the distraction that these legal issues have landed our leadership team and our only surpassed in magnitude by the workload and distraction associated with the constant fundraising activities. We also took on in 2023.
Speaker Change: I'm happy to have at least some of this workload behind us as we get into 2024.
Speaker Change: From a product development perspective, 2023 was a very productive year and one of significant progress in terms of delivering the features and functions that our customers have told us were important.
Speaker Change: We delivered a cloud based reporting and management platform that makes it easy to manage a fleet of shield instances, including cloud and endpoint.
Anthony E. Scott: This is an important development for managed service providers, managed service security providers, and enterprise customers. We've also made significant improvements in overall performance, and we've continued our progress on reliability, quality, and scalability to meet the needs of the most demanding customers. Also, the infrastructure and tooling that support our product development team and our consulting teams have had a much needed and long-delayed upgrade as well. Taken together, these improvements will shorten our product development time, as well as continue to deliver high quality products that are relevant to our customers.
Speaker Change: This is an important development for managed service providers managed service security providers and enterprise customers.
Speaker Change: We've also made significant improvements in overall performance and we've continued our progress in reliability quality and scalability to meet the needs of the most demanding customers.
Speaker Change: Also the infrastructure and tooling that supports our product development team and our consulting teams has had a much needed long delayed upgrade as well.
Speaker Change: Taken together these improvements will shorten our product development time as well as continued to deliver high quality products that are relevant to our customers.
Anthony E. Scott: Let me talk a bit about our sales activity. We added seven new logos in Q4 2023, our best quarter ever. Now revenue for these initial contracts will be small initially as deployments occur in Q1 and Q2.
Speaker Change: Let me talk a bit about our sales activity.
We added seven new logos in Q4, 2023, our best quarter ever.
Speaker Change: Now revenue for these initial contracts will be small initially as deployments occur in Q1 and Q2.
Anthony E. Scott: Two of these new customers have already indicated an intent to significantly increase their shield consumption in 2024, with revenue potential in each case of several hundred thousand dollars ARR. In October of 2023, we announced a $5 million multi-year award with a large telecom provider that we expected to generate revenue beginning in Q4, but due to some unforeseen contracting delays involving our original channel partner and ultimately the need to switch to an alternate channel partner at the request of our customer. We now expect revenue to begin in Q2 and then ramp up throughout the year. We expect to be able to make a more definitive announcement about the details of the award in the next few weeks.
But two of these new customers have already indicated intent to significantly increase their shield consumption in 2020 four with revenue potential in each case of several hundred thousand dollars a R. R.
Speaker Change: In October of 2023, we announced a $5 million multiyear award with a large telecom provider that we had expected to generate revenue beginning in Q4 and.
Speaker Change: And due to some unforeseen contracting delays involving our original channel partner.
And ultimately the need to switch to an alternate channel partner at the request of our customer. We now expect revenue to begin in Q2, and then ramp throughout the year.
Speaker Change: We expect to be able to make a more definitive announcement of the details of the award in the next few weeks.
Anthony E. Scott: Finally, in the last two weeks, we've been notified through our partner, I-1 Resources, in the Philippines, that we're a part of a solution that's been down selected as the number one preference for helping protect the cybersecurity integrity of National Elections in the Philippines. After an upcoming 30 to 45 day technical due diligence period, a final award will be made, with deployments beginning in Q2 and Q3.
Speaker Change: Finally in the last two weeks, we've been notified through our partner I one resources in the Philippines.
Speaker Change: That were part of a solution that's been down selected as the number one preference for helping protect the cyber security integrity.
Speaker Change: National elections in the Philippines.
Speaker Change: After a upcoming 30 to 45 day technical due diligence period, a final award will be made with deployments beginning in Q2 and Q3.
Anthony E. Scott: And if we are successful, along with our I-1 partners, the revenue to intrusion for this will exceed $1 million ARR. Now turning to our financials, total revenues for the fourth quarter were $1.4 million, representing a 7% decline on a sequential basis. Revenues for fiscal 2023 were $5.6 million, a 25% decline compared to fiscal year 2022.
Speaker Change: And if we are successful along with her I want partners. The revenue to intrusion for this will exceed $1 million a R. R.
Speaker Change: Now turning to our financials.
Speaker Change: Revenues for the fourth quarter were 1.4 million, representing a 7% decline on a sequential basis revs.
Speaker Change: Revenues for fiscal 2023 were $5 6, million% to 25% decline compared to fiscal year 2022.
Anthony E. Scott: The decline in revenue in the fourth quarter was driven by the decrease in consulting revenue, mainly associated with the federal government's continuing resolution and the absence of an approved federal budget. The decline year-over-year was largely due to the loss of the large low-margin government contract in Q4 2022 that we previously discussed. Shield revenues for the fourth quarter were flat sequentially, primarily due to a delayed final contracting and implementation schedule, as I just discussed. We've also been informed by a large and early Shield customer that they will not be renewing their Shield contract. The customer was one of the original users of an early version of the Shield product and had implemented a highly customized and non-standard architectural configuration of the product.
Speaker Change: The decline in revenue in the fourth quarter was driven by the decrease in consulting revenue mainly associated with the federal government's continuing resolution and the absence of an approved federal budget.
Speaker Change: The decline year over year was largely due to the loss of the large low margin government contract in Q4 2022 that we previously discussed.
Speaker Change: Shield revenues for the fourth quarter were flat sequentially, primarily due to a delayed final contracting and implementation schedule as I just discussed.
Speaker Change: We've also been informed by a large and early shield customer that they will not be renewing their shield contract the.
Speaker Change: The customer was one of the original users of an early version of the shield product and had implemented a highly customized and nonstandard architectural configuration of the product.
Anthony E. Scott: While the loss of one of our original Intrusion Shield customers is both regrettable and will have a short-term impact on our financial results, we believe that the SHIELD transactions that we booked in the fourth quarter of 2023 and during the first quarter of 2024 and the several transactions that we anticipate will close in the second quarter of this year. As well as the promising opportunity from the I-1 Resources Award will help drive intrusion shield revenue growth in 2024. Turning now to our consulting business, our fourth quarter consulting revenues were down sequentially, driven by the continuing resolution in the absence of an approved federal budget that I mentioned earlier in the call. And while the budget was finally passed over this past weekend, it will take a few days to sort out the total impact on intrusion and planned renewals, as well as prospective new work.
Speaker Change: While the loss of one of our original intrusion shield customers as both regrettable and will have a short term impact on our financial results. We believe that the shield transactions that we booked in the fourth quarter of 2023 and during the first quarter of 2024.
Speaker Change: And the several transactions that we anticipate will close in the second quarter of this year as well as the promising opportunity from the I. One resources Award will help drive intrusion shield revenue rose in 2024.
Speaker Change: Turning now to our consulting business, our fourth quarter consulting revenues were down sequentially driven by the continuing resolution and the absence of an approved federal budget that I mentioned earlier in the call.
Speaker Change: And while the budget was finally passed over this past weekend. It will take a few days to sort out the total impact on intrusion and planned renewals as well as prospective new work.
Anthony E. Scott: Still, we continue to remain optimistic about the demand for our products and services and expect growth in the future from both our government and non-government customers. And finally, through some of our recent consulting contract renewals for 2024, we were able to implement rate increases and also make other revenue-generating enhancements to existing contracts. As I previously indicated in various Q&A sessions, I informally stay in touch with many former colleagues and notable CIOs and CISOs across a wide spectrum of industries.
Speaker Change: Still we continue to remain optimistic about the demand for our products and services and expect growth in the future from both our government and nongovernment customers.
Speaker Change: Finally through some of our recent consulting contract renewals for 2024, we were able to implement rate increases and also make other revenue generating enhancements to existing contracts.
Speaker Change: As I've previously indicated in various Q&A sessions.
Speaker Change: Informally stay in touch with many former colleagues and notable C I OS and <unk> across a wide spectrum of industries.
Anthony E. Scott: Among other things, these conversations helped me understand the general sentiment and consensus opinion of these important individuals as it relates to trends, spending, and concerns related to cybersecurity. During the last quarter, I heard that as a result of the current economic environment that we're in, a large majority of companies have been going through some form of flattening or reduction in growth when it comes to their cyber security teams and their cyber security budgets. Meanwhile, the bad guys continued to launch all kinds of new and lethal attacks.
Among other things. These conversations helped me understand the general sentiment and consensus opinion of these important individuals as it relates to trends spending and concerns related to cyber security.
Speaker Change: During the last quarter I heard that as a result of the current economic environment that we're in a large majority of companies have been going through some form of flattening or a reduction in growth when it comes to their cyber security teams and their cyber security budgets.
Speaker Change: Meanwhile, the bad guys continuing to pour freight all kinds of new and lethal attacks.
Anthony E. Scott: This has put a significant amount of pressure on CIOs and CISOs to keep up with both technology and staffing needs with more limited new resources. We continue to believe that this provides intrusion with a significant opportunity to step in and help fill the gaps these companies currently have in their technology stack and in their cybersecurity team and to provide them with the needed capability to identify, deflect, and eliminate any cyber threats that they might encounter. In November 2023, we closed a private offering pursuant to which we sold an aggregate of 4.4 million shares of our common stock, each of which was coupled with a warrant to purchase two shares of common stock at an aggregate offering price of 60 cents per share, above the market price at the time. The private offering resulted in net proceeds to intrusion of approximately $2.3 million, which are being used for working capital and general corporate purposes.
Speaker Change: This has put a significant amount of pressure on C. I OS and see so as to keep up with both technology and staffing needs with more limited new resources.
Speaker Change: We continue to believe that this provides intrusion with a significant opportunity to step in and help fill the gaps. These companies currently have in their technology stack.
Speaker Change: And in cyber security teams.
Speaker Change: And to provide them with the need and capability to identify deflect and eliminate any cyber threats that they might encounter.
Speaker Change: In November 2023, we closed a private offering pursuant to which we sold an aggregate of $4 4 million shares of our common stock each of which was coupled with a warrant to purchase two shares of common stock at an aggregate offering price of <unk> 60 per share above the market price.
Speaker Change: At the time.
Speaker Change: The private offering resulted in net proceeds to intrusion of approximately $2 $3 million, which are being used for working capital and general corporate purposes.
Anthony E. Scott: Members of our executive team, our board of directors, and several existing shareholders participated in the private office, which we believe demonstrates the confidence that both our organization and our loyal shareholders have in our unique technology. In addition to our private offering, on January 2nd, 2024, I personally entered into an accounts receivable invoice financing arrangement via a note purchase agreement in which I purchased from Intrusion a promissory note in the amount of $1.1 million in exchange for delivery of $1.0 million in cash to Intrusion. Not only does this purchase agreement provide favorable terms for intrusion, but this also demonstrates the confidence I have in Intrusion's future. Finally, before I turn the call over to Kim to cover our financial results in greater detail, I would first like to spend a few minutes discussing the recent steps that we've taken to regain compliance with NASDAQ for continued listing on the NASDAQ Capital Mark as it relates to the minimum bid price of $1 and the equity standard. On March 18th, we announced our intentions to effectuate a 1 for 20 reverse stock split of our issued and outstanding shares of common stock, par value of one cent per share. The reverse split became effective on March 22nd, and Intrusion shares began trading on a reverse stock split adjusted basis on March 25th.
Speaker Change: Members of our executive team, our board of directors and several existing shareholders participated in the private offering which we believe demonstrates the confidence that both our organization and our loyal shareholders have and our unique technology.
Speaker Change: In addition to our private offering on January <unk> of 2024, I personally entered into an accounts receivable invoice financing arrangement via note purchase agreement in which I purchased from intrusion, a promissory note and the amount of $1 1 million in exchange for delivery of <unk>.
Speaker Change: $1.0 million in cash to intrusion.
Speaker Change: Not only does this purchase agreement provides favorable terms for intrusion, but this also demonstrates the confidence I have in intrusions future.
Speaker Change: Finally, before I turn the call over to Kim to cover our financial results in greater detail I would first like to spend a few minutes discussing the recent steps that we've taken to regain compliance with NASDAQ for continued listing on the NASDAQ capital markets as it relates to the minimum bid price of $1.
Kim: And the equity standard.
Kim: On March 18th we announced our intentions to effectuate a one for 20 reverse stock split of our issued and outstanding shares of common stock par value of one seven per share.
The reverse split became effective on March 22nd and intrusion shares began trading on a reverse stock split adjusted basis on March 25th.
Anthony E. Scott: We also announced last week that we'd entered into an exchange agreement with Streeterville Capital to exchange an aggregate of $9.3 million of senior debt pursuant to notes issued in March and June of 2022 for newly designated Series A preferred stock. We'd like to thank Streeter Real Capital for their continued support of Intrusion. The firm has been a key partner in providing Intrusion with additional flexibility to support our capital needs. As an additional measure, we have offered a warrant exercise inducement to warrant holders from our 2022 Registered Direct and 2023 Pipe Offering, whereby we've reduced the exercise price through March 29th, after which time the inducement period will be over, and the exercise price reverts back to the original exercise price. And while there can be no assurance that intrusion will be able to regain and therefore sustain compliance with NASDAQ's listing requirements, we believe that the measures taken provide intrusion with the best option.
Kim: We also announced last week that we had entered into an exchange agreement with St are real capital to exchange, an aggregate of $9 $3 million of senior debt pursuant to notes issued in March and June of 2022 for a newly designated series a preferred stock.
Kim: We'd like to thank street, a real capital for their continued support of intrusion as the firm has been a key partner in providing intrusion with additional flexibility to support our capital needs.
Kim: As an additional measure we have offered a warrant exercise inducement to warrant holders from our 2022 registered direct in 2023 pipe offerings, whereby we have reduced the exercise price through March 29, after which time, the inducement period will be over and the exercise price of <unk>.
Kim: <unk> back to the original exercise price.
Kim: And while there can be no assurance that intrusion will be able to regain and therefore sustained compliance with nasdaq's listing requirements. We believe that the measures taken provide intrusion with the best option to successfully regained compliance with nasdaq's listing requirements.
Anthony E. Scott: Successfully Regain Compliance with NASDAQ's Listing Requirements. Now I'd like to turn the call over to Kim for a more detailed review of our fourth quarter financial results for fiscal year 2023. Kim.
Kim: Now I'd like to turn the call over to Kim for a more detailed review of our fourth quarter and fiscal year 2023 financials Jim.
Kim: Kim.
Kimberly Pinson: Thanks, Tony. Revenues for the fourth quarter of 2023 were $1.4 million, a decrease of $0.1 million on both a sequential and year-over-year basis. Revenues for the full year ended December 31, 2023, were $5.6 million, a decrease of $1.9 million compared to 2022. Consulting revenue in the fourth quarter totaled $0.9 million, a decrease of $0.1 million sequentially and $0.2 million year-over-year. Consulting revenue for the full year of 2023 was $4.0 million, a decrease of $2.3 million compared to 2022.
Thanks, Tony.
Kim: Revenues for the fourth quarter of 2023 were $1 4 million a decrease of <unk> 1 million on both a sequential and year over year basis.
Kim: Revenues for the full year ended December 31 2023.
Kim: $5 6 million, a decrease of $1 9 million compared to 2022.
Kim: Consulting revenue in the fourth quarter totaled $9 million, a decrease of <unk> 1 million sequentially and <unk> 2 million year over year.
Kim: Consulting revenue for the full year of 2023 was four point out $1 million, a decrease of $2 3 million compared to 2022.
Kimberly Pinson: The decline in our consulting revenues is due to the loss of a consulting contract in the fourth quarter of 2022, in which Intrusion's prime sponsor chose not to renew the final option year of a contract. As disclosed in prior quarters, while the loss of this one consulting contract significantly impacted Intrusion's top-line revenue, the gross margin on this contract was 14%, and as a result, had a marginal impact on profitability. Additionally, as Tony mentioned earlier in the call, our consulting business has also been impacted by the continuing resolution of the federal budget that continues to hinder the clarity of timing for new contract awards. However, we continue to have a relatively strong consulting pipeline that, once the budget uncertainty is officially resolved, should result in growth. Shield revenue for the fourth quarter was $0.4 million, which was relatively flat sequentially and up 37% on a year-over-year basis.
Kim: The decline in our consulting revenues is due to the loss of a consulting contract in the fourth quarter of 2022, and which intrusions prime sponsor chose not to renew the final option you are on the contract.
Kim: As disclosed in prior quarters, while the loss of this one consulting contract significantly impacted and choosing topline radical.
Kim: Gross margin on this contract was 14%.
Kim: And as a result had a marginal impact on profitability.
Kim: Additionally, as Tony mentioned earlier in the call.
Kim: Consulting business has also been impacted by the continuing resolution of the federal budget that continues to hinder the clarity of timing for new contract Awards.
We continue to have a relatively strong consulting pipeline that once the budget uncertainties officially resolved should result in growth.
Kim: Shield revenue for the fourth quarter was <unk> $4 million, which was relatively flat sequentially and up 37% on a year over year basis.
Kimberly Pinson: For the full year of 2023, SHIELD revenue was $1.6 million, an increase of 36% compared to 2022. However, as Tony previously mentioned, we were informed by a large Shield customer that they will not be renewing their contract. As a result, the loss of this SHIELD customer has the potential to impact our financial results beginning in the second quarter, and to a greater extent, if the deals that we anticipate closing during the second quarter slip into the second half of the year. As a reminder, many of our new bookings and much of our pipeline consists predominantly of Shield Appliance product sales, where revenue recognition is dependent on an implementation and customer acceptance timeline. Gross profit margin was 79% for the fourth quarter of 2023 compared to 63% in the fourth quarter of 2022.
Kim: The full year of 2023 shield revenue was $1 $6 million, an increase of 36% compared to 2022.
Kim: However, as Tony previously mentioned, we were informed by a large scale customer that they will not be renewing that contract.
Kim: As a result, the loss of the show customer has the potential to impact our financial results beginning in the second quarter and to a greater extent the deals that we anticipate closing during the second quarter slipped into the second half of the year.
Kim: As a reminder, many of our new bookings and much of our pipeline consists predominantly of shield appliance product sales, where revenue recognition is dependent on implementation and customer acceptance timeline.
Kim: Gross profit margin was 79% for the fourth quarter of 2023 compared to 63% in the fourth quarter of 2022.
Kim: The increase in gross profit margin in the current quarter as a result of our product mix with shield revenues, representing a higher percentage of revenues and the loss of the low margin consulting contract as previously mentioned.
Kim: Shield sales currently represents 32% of our vessels.
Kimberly Pinson: The increase in gross profit margin in the current quarter is a result of our product mix, with shield revenues representing a higher percentage of revenue, and the loss of the low margin consulting contract, as previously mentioned. Shield sales currently represent 32% of our revenues. Operating expenses in the fourth quarter of 2023 totaled $3.5 million, a decrease of $0.4 million sequentially from the third quarter of 2023. We implemented cost reduction measures in late March 2023, which was predominantly in staffing as we eliminated 16 positions and reduced our use of contractors. These measures, along with continued reductions in discretionary spending, resulted in $5.2 million in cost savings from April through December.
Kim: Operating expenses in the fourth quarter of 2023 total $3 $5 million a decrease of <unk> 4 million sequentially from the third quarter of 2023.
Kim: Implementing cost reduction measures in late March 2023, which was predominantly non staffing as we eliminated 16 conditions and reduced our use of contractors.
These measures along with continued reductions in discretionary spend resulted in $5 $2 million in cost savings April three to sunburn.
Kim: As we have noted on previous calls as we grow our customer base and increase revenues, we may choose to accelerate our product development and future periods, which will result in increased spending we were.
Kim: Well and are continuing to evaluate each been deflation, while also making prudent investments in our long term profitable growth.
Kim: The net loss for the fourth quarter of 2023 with $2 $8 million or nine cents per share a marked improvement from our loss of $3 $2 million or 14 cents per share for the third quarter of 2023.
Kimberly Pinson: As we have noted on previous calls, as we grow our customer base and increase revenues, we may choose to accelerate our product development in future periods, which will result in increased spending. We will and are continuing to evaluate each spend decision while also making investments in our long-term profitable growth. The net loss for the fourth quarter of 2023 was $2.8 million, or $0.09 per share, a marked improvement from our loss of $3.2 million, or $0.14 per share, for the third quarter of 2023. When compared to the same periods in 2022, earnings per share improved by $0.16 per share from a loss of $0.25 per share for the 2022 quarter. The net loss per share for the 12-month period 2023 was $0.57 per share, compared to $0.82 per share for the same period in the prior year.
Kim: When compared to the same periods in 2022 earnings per share of <unk> 16 per share from a loss of 25 cents per share for the 2022 quarter.
Kim: The net loss per share for the 12 months period 2023 was 57 cents per share compared to 82 cents per share for the same period in the prior year.
Kim: Yeah.
Kim: Turning to the balance sheet on December 31, we had cash and cash equivalents of <unk> 1 million.
Kim: $3 million.
Kim: At the end of 2022.
Kim: Since December 31, we have funded our operations through the continued use of our ATM facility and changes in working capital, which consists principally of customer advance payments and the AAR financing arrangement, Tony mentioned earlier and the amount of $1 1 million.
More information relating to this arrangement is available on current reports on form 8-K.
Kim: We continue to take active steps towards improving our liquidity and strengthen our balance sheet, which also align with steps we are taking to regain compliance with the NASDAQ listing requirements.
Kimberly Pinson: Turning to the balance sheet, on December 31st, we had cash and cash equivalents of $0.1 million, down $3 million at the end of 2022. Since December 31st, we have funded our operations through the continued use of our ATM facility and changes in working capital, which consists principally of customer advance payments and the ARM financing arrangement Tony mentioned earlier in the amount of $1.1 million. More information relating to this arrangement is available in current reports on Form 8K. We continue to take active steps towards improving our liquidity and strengthening our balance sheet, which also align with steps we are taking to regain compliance with the NASDAQ listing requirements. On February 1st, we had a NASDAQ hearings panel meeting where we presented our plan to regain and sustain compliance. Following this meeting, we were granted an extension until April 23rd in which to meet the NASDAQ capital markets listing criteria.
Kim: On February 1st we had a NASDAQ hearing panel meeting, where we presented our plan to regain and testing compliance.
Kim: Following this meeting we were granted an extension until April 23rd in which to meet the NASDAQ capital market listing criteria.
Kim: We are executing our plan to gain compliance with the NASDAQ listing rule 50, 551, which requires a minimum of $2 5 million in net equity.
Kim: Pursuant to this plan in order to increase our equity we are continuing to utilize our ATM.
Kim: We closed on a private offering in November 2023.
And are anticipating to close on an additional private offering in the near term.
Kim: We have sent warrant and decent letters that temporarily reduce the exercise price to warrant holders for 2022 registered direct and our November 2023 type offerings.
Kim: And through a series of three transactions in the fourth quarter 2023, and two transactions.
Kimberly Pinson: We are executing a plan to gain compliance with NASDAQ Listing Rule 5550B1, which requires a minimum of $2.5 million in net equity. Pursuant to this plan, in order to increase our equity, we are continuing to utilize our ATM. We closed on a private offering in November 2023 and are anticipating to close on an additional private offering in the near term. We have sent warrant inducement letters that temporarily reduce the exercise price to warrant holders for our 2022 Registered Direct and our November 2023 pipe offerings.
Kim: This March 2024 quarter, we exchanged $10 million in senior debt.
Kim: Four eight.
8 million in common stock and $9 3 million series a preferred stock.
Kim: These exchange agreements with street, a real capital are a significant step towards deleveraging our business.
Kim: Following the exchanges the remaining outstanding principal on our senior notes.
Kim: Yes.
Kim: $19.
Kim: I'd like to now turn the call back over to Tony for a few closing comments Tony.
Anthony E. Scott: Thanks Kim.
Anthony E. Scott: Despite the challenges that we faced throughout the year. We've continued to move forward with a clear vision for the future and we're focused on transforming that vision into action through compelling products and innovative strategies that position us to capitalize on the robust opportunities in our evolving marketplace.
Kimberly Pinson: And through a series of three transactions in the fourth quarter 2023 and two transactions in this March 2024 quarter, we exchanged $10 million in senior debt for $0.8 million in common stock and $9.3 million in Series A preferred stock. These exchange agreements with Streeter Real Capital are a significant step toward deleveraging our business. Following the exchanges, the remaining outstanding principal on the senior notes is $0.5 million. I'd like to now turn the call back over to Tony for a few closing comments. Tony said:
Speaker Change: I look forward to sharing the next steps in our journey with all of you and I want to personally. Thank all of our employees for all their art work over the past year, and our investors and financial partners for their continued patience and support as we execute our strategy.
Speaker Change: This concludes our prepared remarks, and I'll now turn the call over to the operator for Q&A.
Speaker Change: At this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up your hands.
Anthony E. Scott: Thanks, Kim. You know, despite the challenges that we faced throughout the year, we've continued to move forward with a clear vision for the future. And we're focused on transforming that vision into action through compelling products and innovative strategies that position us to capitalize on the robust opportunities in our evolving marketplace. I look forward to sharing the next steps in our journey with all of you. I want to personally thank all of our employees for all their hard work over the past year and our investors and financial partners for their continued patience and support as we execute our strategy.
Speaker Change: <unk> said before pressing the star keys, one moment. Please while we poll for questions. Once again. Please press star one if you have a question or comment.
Speaker Change: First question comes from Scott Buck with H C. Wainwright. Please proceed.
Scott Christian Buck: Hi, Good afternoon, guys. Thanks for taking my questions. Tony I'm curious are you seeing any patterns in the success that you're having selling shield enough during the fourth quarter and now the first quarter.
Scott Christian Buck: Just curious if maybe you guys have had stumbled onto our CEO secret sauce or what are the recent success can be attributed to.
Operator: This concludes our prepared remarks, and I'll now turn the call over to the operator for Q&A. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Anthony E. Scott: Well I think Theres, a couple of things, but first I would tell you that.
All of the new work that we talked about the new logos were.
Anthony E. Scott:
Anthony E. Scott: The result of months of work of.
Anthony E. Scott: Doing a proof of concept and then.
Anthony E. Scott: Getting the customer comfortable with the product and what it could do and so on so.
Operator: You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 2. One moment, please, while we poll for questions. Once again, please press star one if you have a question or a comment. The first question comes from Scott Buck with H.C. Wainwright.
Anthony E. Scott: And a lot of ways, we've been setting the stage for these.
Anthony E. Scott: For for quite a long time, but I think theres a couple of macro things in the environment that also are helping us one is and you've probably seen in the newspaper or a lot of concern around ACA.
Anthony E. Scott: Activities from foreign governments are China, and Russia in particular.
Anthony E. Scott: And our solution is particularly well suited to do.
Scott Christian Buck: Hi, good afternoon, guys. Thanks for taking my questions. Tony, I'm curious, are you seeing any patterns in the success that you have had selling S.H.I.E.L.D. during the fourth quarter and now the first quarter?
Anthony E. Scott: Detect those kinds of threats in a in a network environment and I think as.
Anthony E. Scott: People's concerns have continued to rise.
Anthony E. Scott: I'm just curious if maybe you guys have stumbled onto a secret sauce or to what the recent success can be attributed. I think there are a couple of things, but first I would tell you that all of the new work that we talked about, the new logos, were the result of months of work of doing a proof of concept and then, you know, getting the customer comfortable with the product and what it could do, and so on. So, in a lot of ways, we've been setting the stage for these, you know, for quite a long time. But I think there are a couple of macro things in the environment that are also helping us. One is, and you've probably seen in the newspaper, a lot of concern around activities from foreign governments, China and Russia in particular. And our solution is particularly well-suited to detect those kinds of threats in a network environment.
Anthony E. Scott: And that particular dimension it argues for a solution like ours.
Maybe more than it would have before so we do see that pattern.
Anthony E. Scott: And then I mentioned it in my remarks, but one of the things we were missing.
Anthony E. Scott: Was the ability to manage a fleet of.
Anthony E. Scott: Shield instances.
Anthony E. Scott: Prior to our introduction of the cloud dashboard, you would've had to log in to each instance separately.
Anthony E. Scott: And and manage it individually and with the cloud.
Anthony E. Scott: Platform now you can manage a fleet of shiel.
Anthony E. Scott: She'll devices across all the different ways it gets deployed.
Anthony E. Scott: And have consolidated reporting as well as management and that was one of the most asked for features from our.
Anthony E. Scott: And I think as people's concerns have continued to rise in that particular dimension, it argues for a solution like ours, perhaps more than it would have before. So we do see that pattern. And then I mentioned it in my remarks, but one of the things we were missing was the ability to manage a fleet of Shield instances.
From our bigger clients and so I think that's helped and will continue to help us.
In terms of addressing the needs of some of these larger customers.
Great I appreciate that.
Anthony E. Scott: Prior to our introduction of the cloud dashboard, you would have had to log into each instance separately and manage it individually, and with the cloud platform, now you can manage a fleet of shield devices across all the different ways they get deployed and have consolidated reporting as well as management. And that was one of the most asked-for features from our bigger clients. And so I think that's helped and will continue to help us in terms of addressing the needs of some of these larger customers. Great, I appreciate that. Kim, can you tell us what the dollar amount contributed by the large non-reoccurring Shield customer was during 2023? Um, I don't have that number in front of me.
Speaker Change: Kim can you tell us what the dollar amount contributed from the large nonrecurring shield customer was during 2023.
And I.
Kim: I don't have that number in front of me I know that I mean, it is a significant number.
Kim: And I would need to pull that for you, but it does represent.
Kim: 2020.
Kim: Represented.
Kim: Thanks.
Kim: Roughly 80% of <unk>.
Speaker Change: Okay I appreciate that and then the last one for me guys. What do you have remaining on the ATM.
Speaker Change: We have roughly $9 million remaining on the ATM.
The ATM is is.
Speaker Change: All of our S. Three registration, which expires in August of this next year.
Kimberly Pinson: I know that I mean, it is a significant number, and I would need to pull that for you. But it does represent the number in 2020.
Speaker Change: Okay perfect I appreciate the added color guys. Thank you.
Speaker Change: The next question comes from Edward Woo with <unk> Capital. Please proceed yes. Thank you for taking my question.
Kimberly Pinson: It represented, I think, roughly 80% of the shield revenues. Okay, I appreciate that. And then, last one for me guys, what do you have remaining on the ATM? We have roughly nine million dollars remaining on the ATM. The ATM is off of our S3 registration, which expires in August of this next year. Okay, perfect. I appreciate the added color, guys.
Edward Moon Woo: You mentioned that some of the.
Edward Moon Woo: Cyber security budgets are getting cut.
Edward Moon Woo: Does your sales pipeline look right now versus three months ago on a year ago.
Edward Moon Woo: Yes, I didn't want to misrepresent, they're not so much getting cut but there.
Edward Moon Woo: Tapering.
Down in terms of the amount of increases that they've been getting.
Scott Christian Buck: Thank you. This question comes from Edward Woo with Ascendiant Capital. Please proceed.
Edward Moon Woo: As you can probably imagine over the last couple of years.
Edward Moon Woo: Thank you for taking my question. You mentioned that some cybersecurity budgets are getting cut. How does your sales pipeline look right now versus three months ago and a year ago? Yeah, I didn't want to misrepresent it; they're not so much getting cut, but they're tapering down in terms of the amount of increases that they've been getting. As you can probably imagine, over the last couple of years, one of the biggest increases in IT budgets was for cybersecurity, which could have been 20, 30, 40% a year in some cases. And that's been trimmed down pretty significantly in most organizations.
Edward Moon Woo: One of the biggest increases in budgets.
Budgets was for cyber security.
Edward Moon Woo: Could have been 2030, 40% a year in some cases and thats been driven down.
Edward Moon Woo: Pretty significantly and most organization so what we're seeing is more like.
No single digit increases not double digit increases and so on.
Edward Moon Woo: And so that's I think the factor that I was referring to there.
Edward Moon Woo: And what what the CIO is in <unk>.
Edward Moon Woo: Starting the demand is.
Edward Moon Woo: A couple of things that I think are relevant to our platform. One is prove to me that there's value in.
Edward Moon Woo: In the technology that it's actually preventing something and we can actually show that.
Anthony E. Scott: So what we're seeing is more like, you know, single-digit increases, not double-digit increases, and so on. And so that's, I think, the factor that I was referring to there. And what CIOs and CISOs are starting to demand is a couple of things that I think are relevant to our platform. One is, prove to me that there's value in the technology, that it's actually preventing something. And we can actually show that, you know, what the value for the money is. And that's not true, necessarily, of all the cyber tools that an organization may have in its stack. So I think CIOs are looking at what's nice to have, and critical to have, and I think in some cases, they're narrowing their choices based on that. And then they also complain about the number of suppliers they have to deal with.
Edward Moon Woo: You know what the value for the for the money is.
Edward Moon Woo: Not true necessarily have all the cyber tools that are organization may have in its stack.
Edward Moon Woo: So I think see I always are looking at what's nice to have and what's critical to have them.
Edward Moon Woo: I think in some cases, they're narrowing their choices based on that and then they also complain about the number of suppliers they have to deal with.
Edward Moon Woo: And that's a trend that's been going on for now a couple of quarters.
Edward Moon Woo: And so I expect there to be some industry consolidation.
Edward Moon Woo: As a result of that.
Edward Moon Woo: <unk>.
Edward Moon Woo: And it's it's becoming a pretty vocal.
Anthony E. Scott: And that's a trend that's been going on for now for a couple of quarters, and so I expect there to be some industry consolidation as a result of that concern, and it's becoming a pretty vocal concern at this particular point. OK. Great. Thank you, and good luck. Thank you. The next question comes from Walter Schenker with MAZ Partners. Thank you. The ability to raise capital from the ATM is somewhat limited, given the liquidity in the stock, especially, although I realize it's just math, but there are only about a million and a half shares left, or maybe a little more. Shrederville
Edward Moon Woo: Concern at this particular point.
Okay. The next question great. Thank you and good luck.
Thank you.
Edward Moon Woo: Thank you Ed. The next question comes from Walter Schenker with M. A Z partners. Please proceed.
Walter Schenker: Thank you.
Walter Schenker: Okay.
<unk> ability to raise capital from the ATM is somewhat limited.
Walter Schenker: Given the liquidity in the stock, especially although I realize it's just math, but there are only about a million and a half shares left or maybe a little more after the streator Bill.
Walter Schenker: What thoughts do you have, Tony, about raising capital beyond that? The ATM. Well, I think, as Kim mentioned, we're looking at a pipe-type transaction similar to what we did in Q4. And I want to note that I'm personally going to participate in that again and continue my investment in intrusion. And it's likely, you know, a small number of investors, think of it as friends and family, a mix of tech people, cyber people, retired business people, wealthy individuals, and myself who, you know, believe in what we're doing and think there's a great future ahead of us. So that's our plan at the moment. And just a second quick question.
Walter Schenker: What thoughts do you have Tony about raising capital beyond that.
Anthony E. Scott: The ATM.
Anthony E. Scott: Well I think as Kim mentioned, we're looking at.
Anthony E. Scott: Pipe.
Anthony E. Scott: Type transactions similar to what we did in <unk>.
Anthony E. Scott: In Q4.
Anthony E. Scott: And I want to note that I'm personally going to participate in that again.
Anthony E. Scott: And continue my investment in intrusion.
Anthony E. Scott: And it's likely you know.
Anthony E. Scott: Small number of investors think of it as friends and family.
Anthony E. Scott: Our mix of tech people cyber people.
Anthony E. Scott: Retired business people.
Wealthy individuals and myself, who believe in what we're doing and think there's.
A great future ahead of us so that's our.
Anthony E. Scott: That's our plan at the moment.
Anthony E. Scott: And just a second quick question, you don't know, but you've been in negotiations.
Anthony E. Scott: You don't know, but you've been in negotiations on the consulting side, and we've discussed this, given your relationships, going back a long way. The budget has now been passed. I realize it takes a little while to work things out, but you would look for the consulting area to be meaningfully higher than it's been running recently. I.E., you're picking up new contracts, not just renewals, plus prices. Yeah, we had, yeah, so there's a couple of things to think about in this space. One was. If you remember our business, we have a series of contracts that just renew generally year after year after year as a budget gets passed, and then we get task orders against those renewals. Because of the length of this CR, some of those renewals didn't happen when the new budget didn't get passed, and agencies can't spend money if it's not appropriated and authorized by Congress.
Anthony E. Scott: On the consulting side I know we've discussed this given your relationships going back a long way. The budget has now been passed I realize it takes a little while to work things out, but you would look to the consulting area to be meaningfully higher.
Anthony E. Scott: And then it's been running recently.
Anthony E. Scott: I E are picking up new contracts, not just renewals plus price, yes, we had yes. So.
Speaker Change: So theres a couple of things to think about in this space one was.
If you remember our business, we have a series of contracts that just renewed generally year after year after year.
Speaker Change: As a budget gets passed and and then we get task orders against those renewals because of the length of this C. R.
Speaker Change: Some of those renewals didn't happen when.
Speaker Change: When the new budget didn't get passed in.
Speaker Change: And Congress can for agencies cant spend money, if it's not appropriated and authorized by.
Speaker Change: Congress.
Anthony E. Scott: And then on top of that, we had some new opportunities, some of which we thought could get funded by sort of, I'll call it, emergency funding or funding that generally isn't subject to the annual process, but it turned out in the end that that was not possible. So we've got a pipeline of prospective deals that when the dust settles, we think we've got a good opportunity for the remaining six months of the year. And as I said, it'll take a little while for that to sort through, but we feel like we're in pretty good shape there. So I'm optimistic. Okay, thanks a lot, Tony. At this time, there are no other questions in queue.
Speaker Change: And so we were impacted by.
Speaker Change: Those and then on top of it we had some new opportunities.
Speaker Change: Some of which we thought could get funded by sort of I'll call. It emergency funding or funding that generally isn't subject to the.
Speaker Change: Annual process, but it turned out in the end that.
Speaker Change: That was not possible. So we've got a pipeline of prospective deals that when the dust settles. We think we've got a good opportunity.
Speaker Change: For the remaining six months of the year.
Speaker Change: And you know.
Speaker Change: As I said, it'll take a little while for that to sort through but we feel like we're in pretty good shape there. So.
Speaker Change: I'm optimistic.
Speaker Change: Okay. Thanks, a lot Tony.
Speaker Change: Okay.
Speaker Change: At this time there are no other questions in queue I'll turn the call back over to your host Mr. Tony Scott.
Operator: I'll turn the call back over to your host, Mr. Tony Scott. Well, thanks. I appreciate the questions.
Anthony E. Scott: Well thanks.
Anthony E. Scott: I appreciate the questions.
Anthony E. Scott: You know, as we find ourselves at the end of, almost at the end of Q1, I think there are a couple of things to be excited about. As I mentioned on the call, some of the wins that we had in Q4 are likely to turn into significantly bigger opportunities in the remaining part of the year. And we look forward to that. We're also excited about this one opportunity I mentioned with our I-1 resources partner, the Bureau of Elections in the Philippines. And I think that's a real positive if we can win that solution. Part of that solution is a new variation of the product that we created to provide an additional layer of security when you have a Starlink terminal, and that was one of the winning elements that helped this solution get downselected for the Bureau of Elections.
Speaker Change: We find ourselves at the end of <unk>.
Anthony E. Scott: Almost at the end of Q1, I think Theres a couple of things.
Anthony E. Scott: To be excited about as I mentioned on.
Anthony E. Scott: On the call.
Anthony E. Scott: Some of the wins that we had in Q4.
I think are likely to turn into a significantly bigger opportunities.
Anthony E. Scott: In the remaining part of the year.
Anthony E. Scott: And we look forward to that.
Anthony E. Scott: We're also excited about this one opportunity I mentioned with our eye one resources partner.
Anthony E. Scott: For the.
Anthony E. Scott: Bureau of elections in the Philippines.
Anthony E. Scott: And I think that's a.
Anthony E. Scott: Real positive if we can win that solution.
Anthony E. Scott: Part of that solution is a new variation of the product that we created to provide additional.
Anthony E. Scott: It's a layer of security when you have a sterling terminal.
Anthony E. Scott: That was one of the winning elements.
Anthony E. Scott: That helped this solution get down selected for the.
Anthony E. Scott: For the Bureau of elections, and we're seeing a great level of interest in that and other applications.
Anthony E. Scott: And we're seeing a great level of interest in that in other applications. As I think many of you know, Starlink terminals are popping up everywhere, but a lot of customers are looking for additional cybersecurity. So we're hoping to take advantage of that growth and make sure that intrusion is a part of that solution whenever anybody buys a Starlink terminal for their business.
Anthony E. Scott: As I think many of you know sterling terminals are popping up everywhere.
Anthony E. Scott: But a lot of customers are looking for additional cyber security. So we're hoping to.
Anthony E. Scott:
Anthony E. Scott: Take advantage of that growth and make sure that intrusion as a part of that solution.
Anthony E. Scott: Ever anybody.
But as the Sterling terminal for their business.
Anthony E. Scott: So, taken together, I'm still optimistic about our future. As I mentioned, I'm going to invest more over the course of the year, and I hope to have some very positive news for you in the next several months. I appreciate everybody's patience. This has obviously taken a lot longer and been a lot harder than any of us imagined a year ago or two years ago, but we're committed, we're working hard, the team is ready and anxious, and we're looking forward to showing what we can do. So I want to thank everybody, and I appreciate your participation. Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Anthony E. Scott: So taken together I'm.
Anthony E. Scott: Still optimistic about our future. So I've mentioned I'm going to invest Additionally over the course of the year and.
Anthony E. Scott: I hope to have some very positive news.
Anthony E. Scott: Over the next several months for you.
Speaker Change: Appreciate everybody's patience.
Speaker Change: This has obviously taken a lot longer and been a lot harder than.
Speaker Change: Any of us imagined a year ago or two years ago, but we're committed we're working hard the team is ready and anxious and.
Speaker Change: We're looking forward to showing what we can do so I want to thank everybody.
Speaker Change: And I appreciate your participation.
Speaker Change: Thank you. This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.