Intrusion Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 13, 2024

There are 7 speakers on the call.

Operator

Welcome to Intrusion Inc. 2nd Quarter 2024 Earnings Conference Call and Webcast. At this time, all participant lines are in a listen only mode. 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 this call.

Operator

I would now like to turn the call over to Josh Carroll with Investor Relations.

Speaker 1

Thank you, and welcome. 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 statements made during this conference call relating 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 Litigation 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.

Speaker 1

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. 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 it is useful to investors or if we believe it will help investors better understand our performance or business trends.

Speaker 1

With that, let me now turn the call over to Tony for a few opening remarks.

Speaker 2

Thank you, Josh, and good afternoon and thank you all for joining us today. Our Q2 results reflect a positive improvement from a revenue standpoint as both our suite of Shield Technologies and our consulting business regain momentum. And with the previous challenges that we've been facing over the past 2 years behind us, we've now been able to focus solely on positioning Intrusion for growth and we believe that we are beginning to see the early stages of those efforts materialize. Now as many of you know, I've personally invested over 1,500,000 dollars into intrusion and like many of our investors, I invested a significant portion of this when our share price was trading at a higher level and is now at a loss compared to today's share price. And I understand how frustrating this is.

Speaker 2

And while we still have a lot of work ahead of us, I believe that we are on the right path forward toward creating sustainable growth in a share price that's commensurate with improved results. Now transitioning to some of our recent sales activity. Since we last spoke, we signed an additional 5 new logos, bringing our total new logo count year to date to 14. We see positive momentum for our suite of shield technology among a wide range of customers in different industries as our pipeline continues to grow. And over the next few quarters, as we continue to deploy our technology to these new logos, we will begin to see additional improvements in our financial results, which we believe will help drive revenue growth in 2024 and beyond.

Speaker 2

As we mentioned during our Q1 earnings call, we've been awarded 2 new orders for IntrusionShield from our traditional government customer base, which marked an important milestone for Intrusion as these are the 1st large scale adoption of our shield technology with government customers. We began servicing one of these awards during the 2nd quarter that included both shield services and consulting work, which helped improve both our shield and consulting revenue during the quarter. The second contract will begin contributing to revenues for both Shield and Consulting throughout the remainder of the year and beyond. I'd like to give you an update on our recent partnership activity. We've been seeing strong momentum in the Philippines with the signing of multiple contracts in the region, including the iOne Resources contract to help protect the cybersecurity and integrity of national elections in the Philippines.

Speaker 2

And our recent partnership with TIM to provide our advanced threat detection and prevention solutions to Orca Cold Chain Solutions and multiple other agreements with customers spanning across different sectors of the Philippines economy. As a result of this momentum and our strong pipeline in the region, I personally traveled to the Philippines earlier this month to speak with both current and potential customers to discuss our unique technology. These meetings were very positive and the enthusiasm for our shield technology is quite high given the nature of the cyber threats in that region of the world. We plan to announce additional agreements and expansions of current deployments in the region in the near future. And also to help meet this growing demand in the Philippines and to better serve our expanding customer base in the region, we've officially opened a wholly owned subsidiary in the Philippines.

Speaker 2

As for our go to market strategy, we've been selling our products through managed service providers and managed security service providers as well as more traditional reseller channels. I'm pleased to report that in each of these cases, we're beginning to see growth and increased pipeline as these organizations develop confidence in our products and services. And additionally, our renewals remain strong with near zero churn for the quarter. With respect to our product development efforts, we've continued to focus on adding new capabilities to increase the efficacy of our products. The work we do with our government customers often leads to useful insights into some of the most difficult challenges in the cybersecurity space, and we leverage those insights into new and novel approaches to advancing the cause of better cybersecurity in our products.

Speaker 2

We're always mindful that the cybersecurity space is very fluid and yet many of the breaches and incidents that occur are the result of the failure of basic principles and practices. The recent CrowdStrike incident, which crippled systems all over the world, is a testimony to the degree to which we become dependent on widely used software to run our businesses, government and critical infrastructure and that the fragility of these ecosystems when a key component fails is paramount. Since our products are often the last line of defense against the most sophisticated acts and actors in the cyber world, we take our responsibility seriously and invest in our product development efforts to ensure that we can live up to our customers' expectations. On the leadership front, we recently announced that we appointed Dion Hinchcliffe to our Board of Directors. I'd like to add a little more color to that announcement.

Speaker 2

Dion brings extensive experience in information technology, business strategy, next generation enterprises and AI and having consulted Fortune 1,000 Companies, the Federal Government and the Internet Startup Community, His expertise will help us further our go to market strategy, our partnerships with strategic players in the industry and aid in our mission to provide our customers with highly effective cybersecurity solutions for their enterprise. Dione is widely known in the technology community for his insights into emerging trends in the technology space and we look forward to his contributions to our mission. Now briefly on to our financials. As you will hear from Kim later in greater detail, total revenue for the Q2 was 1,500,000 dollars representing an increase of 29% sequentially. This increase in revenue during the Q2 was driven largely by the addition of a government contract for our shield and consulting services as well as the several new logos that we've signed over the past few quarters.

Speaker 2

As I mentioned earlier, our churn for the quarter was near 0. And these new contracts have for all practical purposes fill the gaps that were created by Churn in prior quarters. We believe that these government contracts are recently added new logos and the deals we currently have in our pipeline will continue to drive growth and further diversify our customer base. Now before I turn the call over to Kim, I'd like to discuss our efforts to improve our balance sheet and ensure that we have the funds needed to propel our growth and support our customers' needs. As we previously discussed in our last earnings call, we successfully closed on a private offering in April, which resulted in net proceeds to intrusion of 2,600,000 dollars This private offering was a key final step towards helping us achieve compliance with NASDAQ's minimum equity standard.

Speaker 2

In addition to the private offering, we also secured $600,000 during the Q2 through a warrant inducement program. The funds from both of these financing efforts are being used for working capital and general corporate purposes. And finally, on July 3, we entered into a Standby Equity Purchase Agreement or SEPA with Streeterville Capital to sell the firm $10,000,000 of our common stock. In order to have full access to the $10,000,000 facility pursuant to applicable NASDAQ rules, we are seeking shareholder approval at our annual meeting on August 27 to allow for the sale, issuance or potential issuance of common stock in excess of 20% of the common shares outstanding. We believe that Decipo will allow us to be more strategic with how we access and deploy capital to support our future growth as our solutions continue to gain traction.

Speaker 2

With that, I would now like to turn the call over to Kim for a more detailed review of our Q2 financials. Kim?

Speaker 3

Thanks, Tony. In the Q2 of 2024, revenues were $1,500,000 a $300,000 increased sequentially and in line with our results for the Q2 of last year. Consulting revenue in the 2nd quarter totaled $1,200,000 an increase of $500,000 sequentially and $100,000 on a year over year basis. This increase in consulting revenue was driven by the approval of federal budget in late March, allowing for the issuance of new contract awards and for current task awards on existing contracts with government customers to move forward. Jield revenue for the 2nd quarter was $300,000 which was down $100,000 on a sequential and year over year basis as a result of the loss of a large early intrusion shield customer that had implemented a highly customized and non standard configuration of the product.

Speaker 3

The loss of revenues from this customer was partially offset by revenues from we will see our shield revenues continue to grow driven by the recent government order, the iOne Resources Award, other new logos and the expansion of current deployments. Gross profit margin was 76% for the Q2 of 2024 compared to 80% in the March quarter and 78% in the Q2 of 2023. Our gross profit decreased slightly during the quarter as a result of product mix with lower margin consulting revenue representing a greater percentage of total revenue in the Q2. With that said, Shield revenues represented 20% of our revenues in the Q2 of 2024. Operating expenses in the Q2 of 2024 totaled 3,100,000 dollars a decrease of $200,000 sequentially and $900,000 when compared to the Q2 of 2023.

Speaker 3

The decrease in operating expenses during the quarter was driven by lower share based compensation and the timing of professional services. As we have noted on our past few earnings calls, there is the possibility that we could see an increase in our operating expense if we choose to accelerate our product development in future periods for marketing spend to increase our brand awareness. As we move forward, we will continue to remain diligent with not only our spending decisions, but also our investments that will ensure future growth. The net loss from operating activities for the Q2 of 2024 was $2,000,000 representing a $400,000 or 18 percent improvement over the Q1 and a $900,000 or 30% improvement on a year over year basis. The improvement over the Q1 was driven by both gross profit on higher revenues and a decrease in operating expenses.

Speaker 3

The net loss for the Q2 of 2024 was $2,100,000 compared to a net loss of $1,700,000 in the Q1 of this year. The increase in net loss on a sequential basis was principally a result of a $1,000,000 credit to interest expense recorded in the Q1, resulting from the exchange of the Streeterville debt to preferred stock and the reversal of the interest accretion and debt amortization costs associated with the ability to stock settle principal redemptions. Basis, net loss improved by $1,100,000 from $3,100,000 in the 2023 quarter. Turning to the balance sheet. On June 30, we had cash and cash equivalents of 1,500,000 dollars Our principal sources of cash for funding operations in 2024 have been proceeds received from the issuance of common stock in a series of transactions, which include $3,300,000 from ATM sales, dollars 2,600,000 from a private placement and $600,000 from the warrant inducement program.

Speaker 3

Our cash burn during the Q2 was higher than what we have experienced in recent quarters, principally resulting from changes in working capital with working capital consuming $1,400,000 in the second quarter compared to working capital providing $700,000 in the Q1. The timing of customer prepayments can and does have a significant impact on our cash flows and contributed $500,000 to our cash burn in the 2nd quarter. Also during the Q2, our customer accounts receivable increased $500,000 primarily resulting from payment processing irregularities on one of our long standing government contracts. As Tony mentioned earlier, we did enter into a CEPA agreement with Streeterville Capital to sell $10,000,000 of our common stock. However, in order to have full access to the $10,000,000 facility, pursuant to applicable NASDAQ rules, we are seeking stockholder approval at our annual meeting to allow for the sale issuance or potential issuance of common stock in excess of 20% of the common shares outstanding.

Speaker 3

We believe this transaction will provide Intrusion with the future flexibility it needs in order to enhance its liquidity in an opportunistic and efficient manner. I'd like to now turn the call back over to Tony for a few closing comments. Tony?

Speaker 2

Thanks, Kim. The 2nd quarter was an important step in the right direction for Intrusion and included tangible signs that our strategy to drive growth through our compelling products and innovative strategies are coming to fruition through improved revenue results. Our pipeline for both new logos and current contract expansions remain strong and we're confident that we are on the right path forward to grow our business and improve our share price. As always, I'd like to thank our investors and financial partners for their continued support as we execute our strategy and our employees for all their hard work during this past transition period. This is an exciting time for Intrusion and we look forward to providing additional updates on our progress during the second half of the year.

Speaker 2

This concludes our prepared remarks. And I'll now turn the call over to the operator for Q and A.

Operator

Thank you. At this time, we will be conducting a question and answer session. And the first question today is coming from Scott Buck from H. C. Wainwright.

Operator

Scott, your line is live. Please go ahead.

Speaker 4

Hi, good afternoon, guys. Thanks for taking my questions. Tony, I was hoping you might be able to give us a little more color on where you're seeing strength in the pipeline. And then on the government side, is there any additional low hanging fruit there for Shield?

Speaker 2

Great question, Scott. Yes, we think there is. As I kind of hit it on the call, we've been continually investing in new capabilities based on emerging trends and those kinds of things and baking them into Shield. And so even just this last week, we've identified some new opportunities and new customers that can take advantage of some of these new capabilities that we've just developed. So the excitement level remains pretty high for those new capabilities.

Speaker 2

And I think will lead to additional customers in both the government sector and elsewhere as well. So pretty jazzed about all of that. And we'll continue to invest in our product. As I said on the call, the cyber criminals and actors don't sleep and neither are we. We're doing our best to keep up with all the new developments.

Speaker 2

In terms of the contracts, we'll selectively announce them. I think the nature of what we're seeing on a lot of these is quite a few started small, maybe with 1 or 2 shields and their teams get some experience with it, begin to really fully realize the efficacy of the product and then want to go big. So as an example, I was in the Philippines with 1 customer and they started with 2 or 3 appliances and the team got well trained on the products and they saw what these what Shield could do. And I talked to the CEO and he said, I want to go big and put these everywhere in our organization. And similarly with some of our managed service providers, a couple of which have been with us for quite a while, based on their customer feedback, they're now saying, hey, we want to go bigger and put this in more customers' environment.

Speaker 2

So I'm encouraged by all of those signs.

Speaker 4

Great. That's helpful. And then on the potential Streeterville capital raise, I'm sorry, do you guys have a date for your annual meeting?

Speaker 2

We do. It's August 27, I believe.

Speaker 4

Okay. Couple of weeks out. And then if this should pass, how do you think about the capital coming in and where will those proceeds be utilized within the business?

Speaker 2

Well, it's the beauty of the SEPA is, it kind of acts like a credit line versus the ATM or us having to go out and do a capital raise. And so we can control the timing of that a lot more on the one hand. So it's kind of there as an insurance policy, but we're not going to use any of it if we don't need to. But because it's kind of an on demand facility, we can use it when we need to versus being at the whim of market conditions on any given day or any given week and so on. So it's I think it affords us more flexibility.

Speaker 5

Okay. So

Speaker 4

it sounds like you don't have funds earmarked for something in particular?

Speaker 2

No, no. And we'll use it for general corporate purposes, product development, the traditional things that we've been investing in. Yes.

Speaker 4

Okay. That's helpful. And then last one, Kim, on operating expenses, I mean, you mentioned you may want to ramp marketing a little bit and maybe some R and D. In terms of fixed costs or just general cost infrastructure outside of those items, are you pretty comfortable with where you are? And as Shield starts to scale here beginning in the second half, we'll start to see some better operating leverage in the business?

Speaker 3

I believe that I am comfortable with where things are. I think that we've scaled things back in the right places. And as we begin to grow the top line, we may make those choices to accelerate some product development or greater marketing efforts to get our brand name out there. But I'm very comfortable with where our operating expenses are now and I think we can really leverage them and not have to increase expenses as we see growth in the top line.

Speaker 4

Perfect. Thank you for that. I appreciate the time guys.

Speaker 3

Thank you.

Speaker 2

Thanks, Scott.

Operator

Thank you. Our next question today is coming from Walter Fehenker from MAZ Partners. Walter, your line is live. Please go ahead.

Speaker 5

Hi, Tony, Kim. You announced or said you have 14 logos now. How many of them are in the Philippines, the new logos

Speaker 6

approximately?

Speaker 2

Maybe Kim can answer that. I don't have the data right in front of me, but I would suspect that it's slightly more than half, I would guess, off the top of my head.

Speaker 5

And you've announced 3 contracts specifically in the Philippines, the original, which I think was a telecom company, the election and the cold storage, if I have it right. When or how are we beginning to see a ramp in revenues from those contracts?

Speaker 2

We on the Commission on Elections in Orca and some of the others, we are in a different situation when it comes with the telecom company. And I don't have any announcement to make on that at the moment, but I'll only say it's been a little more disappointing than we originally projected.

Speaker 5

Okay. But the election starts generating revenues already or

Speaker 2

just It will in Q3. Yes, it will in Q3.

Speaker 5

Okay. So we're in Q3. Okay. And when you talked about your the government contracts and use of shield, is there some metric, I mean, once we talked about seats or appliances or something, how you look at a significant or big or whatever, I forget the adjective you used on the new contract. Is it 6 figures?

Speaker 5

Is it 7 figures? And because you've had 7 figure government contract, just you're not identifying who it is, but I'm just trying to get some idea of how big the bread box is?

Speaker 2

Well, remember that for Shield, we our metric is recurring revenue because it's a subscription model. And so that's our measure is just increases in recurring revenue. Our consulting contracts tend to be task orders on a yearly or on a monthly basis. Contracts are typically 3 years with some option years behind that. So the weird thing is it kind of acts like recurring revenue, but nobody actually measures it that way.

Speaker 2

So but for Shield, it's clearly subscription revenue. And we will I hope in the next quarter to start reporting that on an annualized basis. We're still working through some of the metrics and measures to make sure we report it correctly and accurately.

Speaker 5

And for Shield on which is a recurring revenue, you get paid monthly, quarterly, it varies by contract? Just trying to understand

Speaker 2

It depends on the customer. The cash flow. Yes, it depends on the customer. Yes, it depends on the customer. So, we prefer to get paid quarterly or annually upfront.

Speaker 2

But we have some customers that are monthly and some that pay in different increments. So that's all part of the mechanics of measuring recurring revenue accurately and reporting it regularly. We also are working on just standardizing that so that we have fewer variations from a contracting basis. I'm not turning down any business because the customer wants to pay us in a different increment, but we do hope to standardize in a more consistent fashion.

Speaker 5

And finally, if we look at the quarter just ended, you were operating at $6,000,000 annual rate, all of which is not recurring revenue. You have a number of contracts kicking in, in the second half, government contract, the election, some of the others logos. You would expect to be at a multiple on an annualized basis of your current run rate by the end of the year?

Speaker 2

I would hope so, yes. That's our goal.

Speaker 5

Okay. Thanks and good luck, Tom.

Speaker 2

Yes, we see a ramp in the second half of the year as some of these contracts and so on begin to get implemented.

Speaker 5

Okay. Again, thank you and good luck.

Speaker 2

Thank you.

Operator

Your next question is coming from Ed Woo from Ascendiant Capital. Ed, your line is live. Please go ahead.

Speaker 6

Yes. Thank you for taking my question. My question is on the sales cycle. Have you noticed any lengthening of the sales cycles either because of competition or the economy? Thank you.

Speaker 2

We have seen sales cycles take a lot longer than we expected. But I, in this case, wouldn't blame it on either competition or the economy. I would chalk it up really to the complexity of the cybersecurity space. And I think as I've mentioned on prior calls, initially, our customers want to confuse us with a firewall or some other technology that they're more familiar with. And it just takes a little while and a few more conversations to help them understand what the differences are and the role that intrusion technology can play in that in a more modern environment.

Speaker 2

And that just takes some time. The good news is that when we convince them to do a POC or a trial and they see what we can actually do, then typically they want to hurry up and get the implementation stage. And that's what we were seeing with the CEO I was talking about earlier in the call. Once they really understood what it was and the efficacy of the product in their current environment, the efficacy of Shield, then it was hurry up, let's get this going. But the lead up to that took a lot longer than I would have liked.

Speaker 2

And I think that's a pattern that we've seen on a fairly regular basis.

Speaker 6

Great. Well, thanks for answering my questions and I wish you guys good luck. Thank you.

Speaker 2

Thanks, Doug.

Operator

Thank you. At this time, there are no other questions in queue. I'll turn the call back over to our host, Mr. Tony Scott.

Speaker 2

Well, thanks everybody for joining the call. I really appreciate your support, continue to appreciate your support as we work on executing our strategy. I'm convinced that we have all of the tools that we need in place. We have the right team. We've got momentum now and I'm really looking forward to the second half of this year and I look forward to updating everyone on our progress during the Q3 and the Q4 of this year.

Speaker 2

I know that you'll be as interested in the results as I am and as excited about it as I am as well. So thanks everybody and I appreciate your support.

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