Intrusion Inc. (NASDAQ:INTZ) Q2 2024 Earnings Call Transcript

Intrusion Inc. (NASDAQ:INTZ) Q2 2024 Earnings Call Transcript August 13, 2024

Intrusion Inc. beats earnings expectations. Reported EPS is $-0.53, expectations were $-0.72.

Operator: Welcome to Intrusion Inc.’s Second Quarter 2024 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 call, there will be an opportunity for your questions at the end of today’s prepared comments. 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. I would now like to 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 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 on 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.

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 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.

Tony Scott: Thank you, Josh, and good afternoon, and thank you all for joining us today. Our second quarter results reflect a positive improvement from a revenue standpoint as both our suite of Shield technologies and our consulting business regained momentum and with the previous challenges that we’ve been facing over the past two years behind us, we have 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 $1.5 million 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. 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 and 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 five 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.

As we mentioned during our first quarter earnings call, we’ve been awarded two new orders for Intrusion Shield from our traditional government customer base, which marked an important milestone for Intrusion, as these are the first large-scale adoption of our Shield technology with government customers. We began servicing one of these awards during the second 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.

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.

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 remained 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.

We are 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’ve 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. And I’d like to add a little more color to that announcement. Dion brings extensive experience in information technology, business strategy, next-generation enterprises and AI and having consulted Fortune 1000 companies, the federal government and the Internet start-up 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. Dion 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 second quarter was $1.5 million, representing an increase of 29% sequentially. This increase in revenue during the second quarter 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. As I mentioned earlier, our churn for the quarter was near zero, and these new contracts have for all practical purposes filled 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 $2.6 million. This private offering is a key final step towards helping us achieve compliance with NASDAQ’s minimum equity standard. In addition to the private offering, we also secured $0.6 million during the second quarter 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 million of our common stock.

In order to have full access to the $10 million 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 the SEPA 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. With that, I would now like to turn the call over to Kim for a more detailed review of our second quarter financials. Kim?

Kimberly Pinson: Thanks, Tony. In the second quarter of 2024, revenues were $1.5 million, a $0.3 million increase sequentially and in line with our results for the second quarter of last year. Consulting revenue in the second quarter totaled $1.2 million, an increase of $0.5 million sequentially, and $0.1 million on a year-over-year basis. This increase in consulting revenue was driven by the approval of the 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. Shield revenue for the second quarter was $0.3 million, which was down $0.1 million 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.

The loss of revenues from this customer was partially offset by revenues from new customers signed in recent quarters. However, as Tony mentioned earlier on the call, we do anticipate that 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 deployment. Gross profit margin was 76% for the second quarter of 2024 compared to 80% in the March quarter and 78% in the second quarter 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 second quarter. With that said, Shield revenues represented 20% of our revenues in the second quarter of 2024.

Operating expenses in the second quarter of 2024 totaled $3.1 million, a decrease of $0.2 million sequentially and $0.9 million when compared to the second quarter of 2023. 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 or 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 second quarter of 2024 was $2 million, representing a $0.4 million or 18% improvement over the first quarter and a $0.9 million or 30% improvement on a year-over-year basis.

The improvement over the first quarter was driven by both gross profit on higher revenues and a decrease in operating expenses. The net loss for the second quarter of 2024 was $2.1 million compared to a net loss of $1.7 million in the first quarter of this year. The increase in net loss on a sequential basis was principally a result of a $1 million credit to interest expense recorded in the first quarter 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 stop settled principal redemptions. On a year-over-year basis, net loss improved by $1.1 million from $3.1 million in the 2023 quarter. Turning to the balance sheet. On June 30, we had cash and cash equivalents of $1.5 million.

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 $3.3 million from ATM sales, $2.6 million from a private placement and $0.6 million from the warrant inducement program. Our cash burn during the second quarter was higher than what we have experienced in recent quarters, principally resulting from changes in working capital with working capital consuming $1.4 million in the second quarter compared to working capital providing $0.7 million in the first quarter. The timing of customer prepayments can and does have a significant impact on our cash flows and contributed $0.5 million to our cash burn in the second quarter. Also during the second quarter, our customer accounts receivable increased $0.5 million, primarily resulting from payment processing and regularities on one of our long-standing government contracts.

As Tony mentioned earlier, we did enter into a SEPA agreement with Streeterville Capital to sell $10 million of our common stock. However, in order to have full access to the $10 million 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. 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?

Tony Scott: Thanks, Kim. The second 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. This concludes our prepared remarks. And I’ll now turn the call over to the operator for Q&A.

Q&A Session

Operator: [Operator Instructions] And the first question today is coming from Scott Buck from H.C. Wainwright. Scott, your line is live. Please go ahead.

Scott Buck: 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?

Tony Scott: 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, 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. 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 one or two 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 one customer, and they started with two or three appliances and the team got well trained on the products and they saw 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.

So I’m encouraged by all of those signs.

Scott Buck: 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?

Tony Scott: We do. It’s August 27, I believe.

Scott Buck: Okay, a 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?

Tony Scott: 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 until 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 could 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.

Scott Buck: Okay. So it sounds like you don’t have funds earmarked for something in particular?

Tony Scott: No, no. And we’ll use it for general corporate purposes, product development, the traditional things that we’ve been investing in.

Scott Buck: 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&D. In terms of fixed costs or just kind of 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?

Kimberly Pinson: 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.

Scott Buck: Perfect. Thank you for that. I appreciate the time, guys.

Kimberly Pinson: Thank you.

Tony Scott: Thanks, Scott.

Operator: Thank you. [Operator Instructions]. Our next question today is coming from Walter Schenker from MAZ Partners. Walter, your line is live. Please go ahead.

Walter Schenker: Hi, Tony, Kim, you announced or said you have 14 logos now. How many of them are in the Philippines the new logos, approximately?

Tony Scott: 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.

Kimberly Pinson: Yes. It’s [indiscernible].

Walter Schenker: And you’ve announced three 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?

Tony Scott: We – on the commission, on elections and in Orca and some of the others, we’re 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.

Walter Schenker: Okay. But the election starts generating revenues already or…

Tony Scott: It will in Q3. Yes, it will in Q3.

Walter Schenker: Okay. It will in Q3. Okay. And when you talked about your – the government contracts and use of Shield, is there some metric, I mean, once we talk 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 six figures? Is it seven figures? Because you’ve had seven-figure government contract. Just you’re identifying who it is. So I’m just trying to get some idea of how big the bread box is.

Tony Scott: Well, remember that for Shield, we – our metric is recurring revenue because it’s a subscription model. And so that’s our measure. It’s just increases in recurring revenue. Our consulting contracts tend to be task orders on a yearly or on a monthly basis, contracts are typically three 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. So – but for Shield, it’s clear 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.

Walter Schenker: And for Shield, which is a recurring revenue, you get paid monthly, quarterly, it varies by contract? Just trying to understand – the cash…

Tony Scott: It depends on the customer – it depends on the customer. Yes, it depends on the customer. So, we prefer to get paid quarterly or annually upfront. 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.

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

Tony Scott: I would hope so, yes. That’s our goal.

Walter Schenker: Thanks and good luck, Tony.

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

Walter Schenker: Okay. Again thank you and good luck.

Tony Scott: Thank you.

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

Ed Woo: Yes, thanks 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.

Tony Scott: 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 in 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. 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. And I think that’s a pattern that we’ve seen on a fairly regular basis.

Ed Woo: Great. Thanks for answering my questions. And I wish you guys good luck. Thank you.

Tony Scott: Thank you.

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.

Tony Scott: 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 third quarter and the fourth quarter of this year. I know that you’ll be 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.

Operator: Thank you. This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.