Intrusion Inc. (NASDAQ:INTZ) Q3 2023 Earnings Call Transcript
Intrusion Inc. (NASDAQ:INTZ) Q3 2023 Earnings Call Transcript November 14, 2023
Intrusion Inc. misses on earnings expectations. Reported EPS is $-0.13924 EPS, expectations were $-0.12.
Operator: Welcome to Intrusion's Inc Third Quarter 2023 Earnings Confrence Call and Webcast. [Operator Instructions]. Please note, this confrence is being recorded. An audio replay of the conference will be available to 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: Thanks you and welcome. Joining me today are Anthony Scott, Chief Executive Officer; 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 relating to the company's expected future performance, future business prospects and 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.
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 and the results of the new information or future events. In addition to US. 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. With that, I'll now turn the call over to Tony for a few opening remarks
Anthony Scott: Thank you, Josh, and good afternoon, and thank you all for joining us today. In today's call, I'll cover our high-level third-quarter financial results and provide an update on our product offerings, traction in the marketplace. Our pipeline, our recently announced securities purchase agreement through a private offering and other highlights from the third quarter, as well as some visibility into the fourth quarter and beyond. Overall, Q3 was one of the busiest and challenging quarters. We saw a significant increase in orders in the company's history, with increased bookings, including the finalizing of the major $5 million award, as we previously announced, and an increasing number of new customer POCs in our pipeline, and our product development teams delivering exciting new capabilities.
And all of that with the painful backdrop of trying to raise capital in one of the most challenging capital market environments in memory. Let me start with bookings and a view of our pipeline. In early October, we announced that we've been awarded a $5 million deal with a large telecommunications provider to provide Intrusion shield support for its data centers. The implementation plan includes a phased production rollout, beginning now in the fourth quarter of 2023, that builds upon a successful pilot that actually started in the first quarter of 2023. The terms of the award allow for further expansion of the use of shield, with the possibility of generating additional revenue after the completion of the initial set of projects. The customer has already requested an accelerated rollout, which will result in earlier revenue recognition than originally contemplated.
We expect to make a public joint announcement on the scope and nature of the agreement with this customer in Q4 or early 2024. During the quarter, Intrusion also booked four other new shield contracts. In aggregate, these are relatively small initially in terms of ARR. However, two of these new customers have the potential for additional revenue growth during 2024. When we signed two new reseller agreements in Q3, in our previously announced partnerships with SEIC, NetGate, First Advisory Health Services and others, remain strong and are leading to new opportunities to showcase our technology and generate new business. Our pipeline is robust, and we are focused on converting existing POVs and POCs to revenue-generating customers. A bit more on that topic in a few minutes.
Finally, with growing evidence of traction in the marketplace for Intrusion's Shield technology, we'll once again explore more strategic technology partner relationships. We've heard over and over again that intrusion technology is unique, but the big technology players have routinely looked for evidence of customer adoption. We believe that in the next two quarters, we can begin to show those proof points and revenue that the larger technology players have been seeking. Turning to our product development efforts, I'm pleased to report that our product development teams have continued to deliver exciting new capabilities. We have released for general availability version 19.2 of our Shield software, which has many improvements over prior versions, including enhancements to reporting, additional threat monitoring capabilities.
Improvements to our renderer software, and significant changes to Shield's management interface. We've also completed our integration of Shield technology to the PFSense firewall and are beginning to introduce that to customers. And we've introduced a cloud dashboard, which will allow customers to consolidate reporting across multiple instances of our Shield technology. One of the most exciting developments from a product perspective is our beta release of Shield on a small platform. This is a form factor hardware device, which we are testing in a POC with a large Starlink customer. If successful, this could pave the way for a new market opportunity for Shield with this and other Starlink customers, which is a fast-growing service, and it serves customers in previously hard-to-reach and underserved locations around the world.
This small form factor device can also be relevant in many other applications beyond Starlink. Now, onto our financials. As you will hear from Kim later and in more detail, total revenue for the third quarter was $1.5 million, which was relatively flat on a sequential basis. Shield revenues for the third quarter were $0.4 million, in line with the previous quarter, as we did not recognize any revenue in the quarter from new bookings. Going forward, we expect some lumpiness in revenue due to the timing of deployment, activation of our technology, and when we can recognize revenue. Year to date, shield has represented 27% of revenue for the year and will continue to be a bigger percentage of overall revenue over time. Turning now to our consulting business, our third quarter consulting revenues were flat sequentially.
With the absence of an approved federal budget and the conditions that surround the current continuing resolution, many new spend decisions have been delayed. The potential government shutdown could further impact our ability to get timely renewals of some longstanding contracts. But absent the uncertainty of when a federal budget will get approved, I remain optimistic about the demand for our products and services. And expect growth in the future from our government customers. Apart from our government customers, we do believe that we will see some positive future growth in our consulting business as well, which is evident by the addition of a well-known customer in the travel and leisure industry that we signed in the second quarter. Finally, as we renew many of these consulting contracts in 2024, we do see opportunities for rate increases and other revenue-generating enhancements to existing contracts.
As I've 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. Among other things, these conversations help me understand the general sentiment and the consensus opinion of these important individuals. As it relates to trends, spending concerns related to cyber security. During the last quarter, I heard that as a result of the current economic environment that will be earning. A large majority of companies have been going through some form of flattening or reductions in growth when it comes to their cyber security teams and their budgets. Meanwhile, the bad guys continued to proliferate and launch all kinds of new and leave for a cash.
This has put a significant amount of pressure on CIOs and CISOs to keep up with both technology and staffing needs with more limited availability of new resources. We believe that this provides intrusion with a significant opportunity to step in, help fill the gaps these companies currently have in their technology stack and in their cybersecurity teams. And we can help provide them with the needed capability to identify, deflect, and eliminate any cyber threats that they may encounter. When I joined Intrusion in late 2021, we were faced with a daunting array of legal issues, and we've provided regular updates on our progress in terms of resolving these issues. I'm pleased to announce that during the third quarter, we were able to successfully conclude the last of these.
And with the SEC investigation now behind us, this resolves all of the outstanding legal issues that we've been dealing with for the past two years, and our team can now fully focus on growing our business. Finally, let me spend a few minutes on our fundraising efforts. As you may have seen in our filings, after careful consideration, we decided to pull our S-1 registration with the SEC to sell up to $8.5 million in stock and warrants in a public offer. It became evident that market conditions were very unfriendly, and were being severely and negatively impacted by short sellers, among other factors. However, in place of the S-1 registration and offering, we announced on November 8, 2023, that we entered into a securities purchase agreement.
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In which we sold to purchasers in a private offering, an aggregate of $4.4 million shares of our common stock. Each of which is coupled with a warrant to purchase two shares of common stock and an aggregate offering price of $0.60 per share, both market price at the time. The offering resulted in net proceeds to Intrusion of approximately $2.4 million. The company intends to use the net proceeds from the offering for working capital, general corporate purposes, and the potential partial repayment of outstanding indebtedness to Streeterville Capital, LLC. The private offering was participated in by myself, members of our executive team, board of directors, and existing shareholders, which we believe demonstrates the confidence that both our organization and loyal shareholders have in our unique technology.
The offering also marks an important step for Intrusion as we continue to focus on ensuring we have the funds we need to propel our growth and focus on satisfying our customers' needs with cost-effective cybersecurity solutions for their enterprise. Now, I'd like to turn the call over to Kim for a more detailed review of our third quarter financials. Kim?
Kimberly Pinson: Thanks, Tony. Revenues for the third quarter of 2023 were $1.5 million, with both shield and consulting revenues flat compared to the previous quarter. Third quarter shield revenue totaled $400,000. We do expect to see shield revenues begin to ramp with some of the recent wins that have been announced. New bookings in much of our pipeline consist predominantly of shield appliance product sales, or revenues recognition is dependent on an implementation and customer acceptance timeline. Consulting revenue in the third quarter totaled $1 million. As Tony mentioned earlier, the current continuing resolution and threat of a government shutdown has hindered the timing of new contract awards. We have a relatively strong consulting pipeline that once the budget uncertainty is resolved will result in growth.
Revenues for the nine months ended September 30, 2023, totaled $4.2 million, a decline of $1.8 million, or 30%, when compared to the same 2022 period. The decline is a result of decreased consulting revenues of $2.1 million related primarily to the loss of a contract in the fourth quarter of 2022, in which Intrusion's prime sponsor chose not to renew the final option year of a contract. This loss was partially offset by increased shield revenues of $0.3 million. 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. Gross profit margin was 78% for the third quarter of 2023, compared to 54% in the third quarter of 2022.
The increase in gross profit margin in the current quarter is the result of our product mixed with shield revenues representing a higher percentage of revenue, and the loss of the low margin consulting contract, as previously mentioned. shield revenues currently represent 29% of our revenues. As you may recall from our first quarter earnings call, in late March of this year, we implemented cost reduction measures we estimated would result in cash savings of approximately $1.5 million per quarter on a go-forward basis. As a reminder, these measures included the voluntary reduction in the salaries of certain of our executive officers for a six-month period, reduction of some full-time positions, and a reduction in the use of contractors. Many of the reductions were in research and development, which impacted the number and frequency of product releases.
I am pleased to report that combined cost reduction savings for Q2 and Q3 totals $3.1 million, operating expenses in the third quarter of 2023 total $3.8 million, a decrease of $0.2 million sequentially from the second quarter of 2023. As a reminder, 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 spending decision while also making prudent investments in our long-term profitable growth. Net loss for the third quarter of 2023 was 3.2 million, or $0.14 per share in line with our loss of 3.1 million or $0.15 per share for the second quarter of 2023. When compared to the same periods in 2022 earnings per share showed marginal improvement of $0.01 per share from a loss of $0.15 per share for the 2022 quarter.
Q3 2022 was benefited by the recording of the employee retention tax credit refund of $2 million, which reduced the net loss per share by $0.10 in each of the three and nine month periods. And net loss per share for the nine months period 2023 was $0.51 per share compared to $0.57 per share for the same period in the prior year. Turning to the balance sheet, on September 30, we had cash and cash equivalents of $0.2 million, down from $3 million at year end. We've taken steps to improve our liquidity and strengthen our cash position. In August, we filed an S-1 registration statement, which was subsequently amended to raise up to $8.5 million. As Tony mentioned, earlier, we withdrew the S-1 on October 2, primarily due to the deal terms not being advantageous to the Company.
Alternatively, we completed a private offering on November 8, that resulted in net proceeds of approximately $2.4 million. Also in October, we entered into two separate exchange agreements with Streeterville Capital. Our debt lender, where we agreed to exchange in aggregate $350,000 of principal for approximately one-million shares of our common stock. The number of shares in the exchange was determined using at market pricing. While this exchange did not result in bringing in additional capital. It is a positive step forward in deleveraging the company. We believe that these combined efforts will provide us with the liquidity needed for operations as we execute our plan to grow the business. Before I conclude, I'd like to address our Nasdaq listing compliance.
In April, we received a letter from Nasdaq, indicating that we had failed to meet Nasdaq market value of listed securities or MVLS, standard of $35 million minimum required for continued listing on the Nasdaq capital market. We were provided an initial period of 180 calendar days to regain compliance. On October 26, we received a letter from Nasdaq informing us that our shares had failed to comply with the MVLS required for continued listing on the Nasdaq capital market, and as a result, our shares are subject to delisting. We have filed an appeal with Nasdaq, which has stayed the delisting of our common stock from the Nasdaq Capital Market pending a Nasdaq Listing Qualifications Hearing Panel's decision. There can be no assurance that the panel will grant our request for continued listing.
However, we intend to present a plan to regain compliance to the panel that includes a discussion of the events that we believe will enable us to regain compliance. The panel hearing is scheduled for February 1. Until that hearing, Intrusion stock will remain listed on Nasdaq. I'd like to now turn the call back over to Tony for a few closing comments. Tony?
Anthony Scott: Thanks, Kim. To conclude, I think we're continuing to see encouraging signs of growing interest in our shield family of products, and that gives us confidence that we are heading in the right direction as we continue to focus on satisfying our customers' needs with cost-effective cybersecurity solutions for their enterprise. I look forward to sharing the next steps in our journey with all of you, and I want to personally thank our investors and financial partners for their continued patience and support as we execute our strategy. This concludes our prepared remarks, and I'll now turn the call over to the operator for Q&A.
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