Intrusion Inc.
Q3 2021 Earnings Call Transcript

Published: 11 Nov 2021

[Operator:]

Good afternoon and welcome to Intrusion’s Third Quarter 2021 Financial Results Conference Call. As a reminder, today’s conference call is being recorded for replay purposes. I would now like to turn the call over to Joel Achramowicz of Shelton Group Investor Relations. Joel, please go ahead.

[Joel Achramowicz:]

Good afternoon and welcome to Intrusion’s third quarter 2021 earnings conference call. I am Joel Achramowicz, Managing Director of Shelton Group, Intrusion’s Investor Relations Firm. Joining me today are Intrusion’s Co-Founder and CTO, Joe Head; CFO, Franklin Byrd; and CMO, Gary Davis. Also on today’s call is Intrusion’s Chairman of the Board, Tony LeVecchio, who will be available for questions after management’s prepared remarks. Before we begin, I want to remind you that today’s conference called may contain forward-looking statements regarding future events, including, but not limited to expectations for Intrusion’s future business, financial performance and goals, customer-industry adoption of Shield technology, successfully bringing to market Intrusion’s 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 and 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 the SEC on March 9, 2021 and other SEC filings made from time-to-time in which we may discuss risk factors associated with investing in Intrusion. All forward-looking statements are made as of the date of this call, Thursday, November 11, 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 of Intrusion’s website at www.intrusion.com. With that, it’s my pleasure to turn the call over to Franklin. Franklin, please go ahead.

[Franklin Byrd:]

Thanks, Joel and thank you to everyone who has joined us on our 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 was aligned with our projected operating model. As 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 the number of changes at the company. I’m happy to say that for the 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 2.0 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 less 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 increase 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 $300,000 increase in operating expenses from the prior quarter was primarily due to headcount payroll prior to the reduction in force, higher legal expenses associated with previously announced matters, fall season tradeshow expenses, all of which were offset by a non cash credit and stock compensation and subsequent lower expenses partial quarter, both as a result of the recent reduction of 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 $0.34 per share, compared to a net loss of 5.8 million, or minus $0.28 per share in the prior quarter, and a net loss of 1.4 million or minus $0.10 per share in the third quarter of 2020. Turning to the balance sheet as of September 30, 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 to 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, both the board and the company continue to evaluate all potential options that are consistent with our goals of accelerating Intrusion’s 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?

[Joe Head:]

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 quarter-to-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 programs starts in the second half of the year. We expect that these new programs, along with increased spending rates on others will contribute to 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, a new executive dashboard, which shows what security issue Shield has presented, we display four quadrants on the dashboard. Quadrant one is how many times Shield has blocked malicious traffic today and yesterday. Quadrant 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 is counts events that made it past your firewall that Shield caught and quadrant four shows you which machines on your network have transmitted traffic that Shield block and in other words, machines that you should consider cleaning up. Number two is enhanced daily reporting. We now offer a three day look back on live use 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 that greatly refine our DNS protections and increase our speeds even as we have added more protection methods. We also have made some key product discoveries as we worked with customers in Q3. This further shows how Shield delivers value. For one bad guys scan infrastructure and launch attacks on devices which are not behind the firewall. In this case, Shield blocks those incoming scans, connection attempts, and zero days simply based on the source IPs, reputation, showing value as part of a defense in depth security architecture. Another example is around credentials theft, which bad guys use 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 relay types to protect their identity while logging in and stealing data. In one case, Shield block 23 of 25 places bad guys tried to login from and these failures allowed the customer to isolate the stolen credentials and deactivate them. Our lessons learned is that Shield has unique strengths and blocking inside out connections, but also delivers surprisingly good resistance outside and attacks. Due to its bi-directional zero trust approach based on reputation. We will continue to make refinements to Shield and meet our customers’ needs. And finally, we established an advisory board 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 and assisting us with new opportunities. On our new advisory board we have Vice Admiral T.J. White, Greg Akers, and Eric Jackson as our inaugural members. Greg Akers 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 organization to deliver high quality and secure products to customers. Before joining Cisco in 93 Akers 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 22 years, which included experiences fighting terrorism, fraud and cybercrime. Jackson currently serves as the chief security officer and risk mitigation executive for TBK bank, SSB with locations in Dallas, Iowa, Kansas, Colorado, Illinois and New Mexico. Vice Admiral T.J. White, US Navy retired is a 30 year plus national security practitioner strategist and cyber operations expert leading joint military formations and combined intelligence community organizations. He’s commanded at all levels within the Navy and joint service. Most recently as the commander, United States Fleet Cyber Command, United States 10th Fleet, United States Navy Space Command and previously as the commander, United States Cyber National Mission Force of U.S. Cybercom. 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 market. They’re motivated to help us get the word out to the market and connect us to potential new customers and partners. I can’t tell you how excited we are about these initial appointments, their professional counsel and cyber security expertise will be a great value to us. Our plan is to add additional members to this important group in the future. Now Gary will update you on sales and marketing.

[Gary Davis:]

Thank you Joe. Notable achievements in Q3 include the addition of five new customers. We also met with great success JSX in Orlando this September. We onboard new partners for quest to extend our reach across in Brazil, and liquid PC as a conduit, the top tier distributor CW. We also continue to make progress on the thought leadership but with media coverage across TV, radio and online outlets. As part of our recent efforts, we recognize the need to improve our sales production while also implementing incentive programs that drive improved performance. As part of this process, we’re 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 or worked with our partners working closely 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.

[Joe Head:]

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. We are 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 accelerate adoption by new customers. With that we’ll open the call to your questions. Operator?

[Operator:]

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

[Zach Cummins:]

Hey, good afternoon, Franklin, Joe, and Gary, thanks for taking my questions. And Franklin just starting off, in terms of the OpEx run rate, I know a lot of the changes you made to really optimize that occurred in this quarter. But what sort of runway run rates are you assuming for Q4 of this year for OpEx?

[Franklin Byrd:]

Appreciate that Zach and I think what I 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 the exact number but it’ll be a little bit higher than Q1, but close closer in line to Q1.

[Zach Cummins:]

And, Joe, can you talk about some of the traction that you’re seeing with Shield now? I mean, nice to see it ramp up to 13% of total revenue during the quarter and secure five more customers. I mean, can you give us a sense of kind of the industry that those customers are in and kind of what are the areas where Shield is really standing out and driving a lot of interest?

[Joe Head:]

Well, we’re still Gary reported, we had four new customers. We’ve had some subsequent demos that have gone pretty well, since that. The numbers are so small, they get zero in on an industry. We’ve got banking, education, DOD, we got all kinds of, yes manufacturing as well.

[Zach Cummins:]

Got it in terms of, sorry, yes didn’t mean to cut you off there. Sorry about that.

[Joe Head:]

That’s right. You first then I’ll continue. I won’t forget my thought.

[Zach Cummins:]

Okay, perfect. Yes. I’ll let you finish talking about Shield I mean and maybe I’ll just pile one more on in there that both you and Gary can address in terms of changes to the sales force. I mean, why was this kind of considered to be a necessary change to really kind of revamp that entire team and really refine the process there?

[Gary Davis:]

I’ll take that one. Joe?

[Joe Head:]

Yes, sure Gary.

[Gary Davis:]

Well, 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 their participation at the company. So certainly we’re also looking for, I think, a different mindset going forward. We’re really looking hard for salespeople have a strong closing mentality, they love to hunt, they have to go out and close deals. And I think it’s just we’re looking for different DNA in the people we’re interviewing to bring them into the company.

[Zach Cummins:]

And guess just final question for me would be around career 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 you’re making, but it sounds like you have at least a pretty solid momentum there that that should drive at least historical rates, or maybe slightly above that, as we think about it going forward?

[Franklin Byrd:]

Yes. This is Franklin. I’ll start and I’ll turn it over to Joe, who knows a lot more about it. I’m measuring it, and he’s driving it sometimes. But no, you’re 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 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’ll be next year and we’re excited to see it moving up. Joe?

[Joe Head:]

I further said your comment about that we’ve made changes in the legacy area, I would say that probably isn’t true. So none of the staffing changes. So there was no cuts in that area. Like I said in my comments we made, we had a little blip in the quarter just do a slow renewal and that is behind us now. And so I’d say that we’re going to see a tick up, slight tick up from the historical run rates that have been reasonably flat. And for a long time, but we had one new program start that’s already entered. And we’re expecting another one that’s been in the queue for a while. And like I said, it’s, unfortunately at the whim of the is there a CR or real budget? We expect this. Will it go forward if there’s a CR? That’s an open question. We thinking yes.

[Zach Cummins:]

No, go ahead. Go ahead and finish your thought.

[Joe Head:]

So yes I’d say there’s a there’s a tick up, and then also the gap we had will end up making back that missed revenue as well over some period of time. So it’s a pause that got made up.

[Zach Cummins:]

Understood. Well, thanks again, guys for taking my questions. And best of luck as you go forward from here.

[Operator:]

Your next question comes from Ross Taylor with ARS Investment Corporation. Your line is open.

[Ross Taylor:]

Thank you, gentlemen, I’m kind of getting 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 if roughly 10 months into the process, we are gaining and should be gaining more meaningful traction with the major customers and potential new business that we’ve been looking for earlier this year.

[Joe Head:]

It’s a reset. It’s all one was let go and that I think that, the thing of note is that, even with those departures, we’re still making meaningful progress on the sales front where it feels like we’re getting a better pipeline, we’re getting more commitments, we’re getting more proofs of concepts, and we’re getting more engagement than we had before. Another thing that we’ve done is we’ve changed the incentive plan to make it be very digital focus, by the one hand before really didn’t get them in the money until they pretty much hit the quarter. So we changed that to let them have permission on everything that they bring in. So I think that was important distinction as well. And then finally, I think another important thing that we set out early in the years is 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 thing than a quality things. What we aspire to do is to really lean into those partners that really want to work with us instead of just getting a logo on the website and not hearing from them again, we really want to make sure that we’re being mindful of those partners who are committed to Shield and committed to our success, and make sure that we’re seeing them. So there’s a lot of things that are have been changed or will continue to change. But I believe the change that we made are having great impact already.

[Ross Taylor:]

And how long do you think it takes to get this new sales force you have in place with meaningful traction? And I think that everyone, obviously, previously, there had been pretty high expectations that they haven’t been met. They probably weren’t necessarily meetable. But now you 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?

[Joe Head:]

I feel strongly that we’ll see some meaningful traction from the new sales team starting in Q1. There’s A, they are stepping into a pipeline is going to have to come in and build on pipelines. We will have pipeline to share with them because we’ve been building pipeline and all along and nurturing. And then it’s just a matter of regular distributions while making sure that we have the right business development, sales should focus on the right partners to make them successful as well. So I genuinely believe that everybody we’re bringing on was going to have some level of success starting in Q1 for sure.

[Ross Taylor:]

You’ve received some fairly favorable feedback from third party reviewers and yet that hasn’t yet translated into new business. What do you when people don’t buy what are they telling you as to why they’re not buying it?

[Joe Head:]

Well, the biggest thing that we see now is that Shield is a very different cyber security product. So a lot of what we’re having to do is really inform and educate them on a different way of thinking about how to fix a problem. The good news is, there’s been a lot of discussion around this notion of zero trust, which we’ve been talking about a lot of our media mentions and in our homepage and we really think there is an intersection at the category of zero trust, network access, where the category itself has an explicit way of how that’s done. But the outcome is what Shield does. So it’s really the thing that we think we’ll have a lot of success in going forward is those companies, especially bigger companies that do category buying, that are looking at that type of product we’ll have a lot of success there. We also think we’re going to have lots access in the IDPS displacement area, because there’s not a lot of innovation around IDPS there’s like companies are thinking about replacing either their McAfee or Cisco product. And we think there is a lot of opportunity there for us to get some business as well. So we were getting the urge to say good things is always what you want. But it doesn’t necessarily have to people signing a purchase order any faster than they would have anyways.

[Franklin Byrd:]

When you look at changing 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 weren’t being closed. So the lead guys are now me and Gary and who have been here all along. And to some degree, me and Gary have upped our interaction with the major partners that we expect to perform well. And we’ve mentioned some of those in the narratives and releases. So I think part of the thing you see is zero, going to four and then larger number since then. That’s the effect of Gary and I lean into those. And so it’s not a matter of waiting on the new guys. Let’s work with the partners we already have and keep it going.

[Ross Taylor:]

And do you see things like the issue with the federal government and the continuing resolution being a roadblock to getting something like perhaps a win with the DoD or someplace where you actually have a lot of experience?

[Joe Head:]

Yes. We do. We just got one order from DOD. So that’s positive.

[Ross Taylor:]

You got a field order from DOD?

[Joe Head:]

Correct.

[Ross Taylor:]

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 that field to divining rods. And you have DOD, you just secured a DOD piece of business. That would to me be the DOD doesn’t mess around with things like this, I would actually think that would be something that you would consider I mean did you dance when you got that?

[Joe Head:]

Yes. That’s a, yes we did. We have a bell and all that we rang really loud. And then we took it off the wall and walked around. Some of the other guys did, I just sat in the office and made calls. So it is a bellwether event, and it won’t be the last in that direction than others in the queue.

[Ross Taylor:]

I know you’re 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 in the world. And so next time, you don’t have to be humble and like to be to ask you.

[Joe Head:]

Right, yes. And I think it’s a big deal. I mean, if you ask around, like, if you look at T.J. White Akers and crew, all three of those guys have connections that we, they call people at home that we barely know or don’t know. And so I’d say that we expect good things in our former space as well.

[Ross Taylor:]

Yes, no, and thank you, as I said, I think that, as I said, it looks like you’re starting to get someplace where you can meaningful traction that will actually show people that you got a product that’s real and that been endorsed by people who are serious. And that would be, I think, a major positive. Congratulation.

[Operator:]

There are no further questions at this time. I’d now like to turn the cloud back over to Mr. Joe Head.

[Joe Head:]

Thanks, operator and for you guys on the call this isn’t not just a quick wrap up. So don’t hang out. So before closing out the call, I want to quickly highlight that we are participating in a virtual road show with Alliance Global Partners this coming Monday. We’ll also be attending benchmarks Discovery conference on December 2. Feel free to reach out to your respective sales reps at these firms, or contact the Shelton group if you’re interested in meeting with us. Now our chairman Anthony LeVecchio has a few comments he likes to make.

[Anthony LeVecchio:]

Thanks Joe. One final update I’m very pleased to announce to you today that we’ve appointed a new president and CEO, Tony Scott, who will start on Monday, November 15. A press release will be issued within the next 30 minutes announcing his appointment and giving a substantial detail on his background. Tony brings to Intrusion many years of cyber security experience, including serving as the Federal CIO for the U.S. government, CIO 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 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 unless there’s I can take another question if there are any other questions that people want to ask after that comment.

[Operator:]

There are no further questions at this time. Ladies and gentlemen this concludes today’s conference calls. You may now disconnect.