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.

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

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…

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…

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.

[Operator Instructions]. Our first question is from Scott Buck with H.C. Wainwright. Your line is now open.

Hi, good afternoon, guys. Thanks for taking my questions. Tony, I'm curious on the $5 million shield agreements with the large-scale telecommunications company. Can you give us a little more color around that contract? I mean, what is the duration and really what is the cadence and how that should ramp over time?

Yeah, great question. So the award contemplates a full rollout in three years, but the revenue will come over a period of five years. So what you'll see is over the next ensuing quarters as we deploy into their data centers, revenue that we recognize as we fully ramp up to the full order. And then as I indicated, they've already indicated to us two things that they want to accelerate the rollout, which we're in the process of working out with them, which will result in revenue recognition sooner than our original contemplated plan. And then there's also an opportunity for expanded use of shield and beyond the initial data centers. So we think it's a very positive development. As I said on the call, we expect to have a more public visibility of this, more than likely right after the first of the year, a more sort of public announcement and so on.

That's helpful. And would that public announcement provide the actual customer name?

Yes.

Essentially?

Yes.

Okay, super. That's great. And then I want to ask about the $2.5 million or so that you guys just raised. Is that purely to, you know, kind of keep the lights on right now? Or is there actually some projects that you can put that capital towards that, could potentially accelerate shield sales? I mean, there are more special marketing programs, et cetera. that you're looking at?

So we'll spend the money for general corporate purposes. As we've said, that will include marketing and continued engineering development because I think I've mentioned on prior calls, we've got at least a three-year road map of things that we want to do with the shield family of products. And so we'll continue on that road map as well. But Kim and I are both focused on not letting our spend get out of our revenue. So as we get revenue in from some of these deals, we'll make the best decisions we can in terms of how that money I could best be used.

Great. That's helpful. And then just the last question for me quickly. If you could give us a little more color on the macro environment and whether or not, and we talked about the government side, but on the commercial side, whether or not the level of economic uncertainty is causing a hesitation in people to pull the trigger on really any new software.

Yeah, the sentiment I'm getting from my colleagues and friends in the industry is they've enjoyed many years in a row of increased budgets and increased staffing and so on. And while you're getting some increases, two things are happening. The rate of those increases is leveled off sharply. And then just the availability of people has meant that they're not able to staff to the level that they had hoped or even planned in many cases. And so that, those two factors mean that, A, you've got to be more efficient with the resources that you have, the dollars and the people. And generally, that means more automation, more leverage of technology. In some cases, it also means a focus on reducing the number of different solutions that you have in favor of solutions that are highly effective. And I think it's a truism in the industry that, you know, there are some solutions that people think are valuable, but it's hard to prove. And in the case of Intrusion technology, we can show proof every single day of the things that we're blocking or alerting CISO staffs to. So I think that's a high value proposition for our success.

Great. I appreciate the time, guys. Thank you very much.

Thanks, Scott.

[Operator Instructions]. Our next question is from Michael Ruben felt with mid-Atlantic builders. Your line is now open.

Hi there, Tony, and hi there, team. I wanted to say a couple quick things. Congratulations on your cost controls. They're certainly admirable and obviously excited about some of the great news on the Shield technology. Tony, you just made a comment about being able to show the value of the product every single day. Can you talk a little bit about sort of the adoption rates once you get to showcase the product? You know, what percentage of those people who are trying it or adopting it? I guess that's question number one. And question number two is sort of, you know, as we look at this cost reductions and obviously the higher margin Shield product becoming a bigger and bigger piece of the sort of the revenue mix, can you speak a little bit about what point do you think maybe you look at the future and you start to look at when you're going to be cash flow positive? Is there any sense of what that looks like and feels like yet?

Yeah, let me talk about our process to adoption. So typically, the challenge that we've had is getting a foot in the door to try to get somebody to try our product. It's often confused with other firewall technology and so on. So historically, we've had to spend a fair amount of time explaining, how our technology is different from traditional firewalls and how we actually work really, really well with whatever firewall technology is out there. And once we get past that and can get to a proof of concept or a proof of value situation where the customer can actually see in real life what our product does, it usually goes really well from there. You know, in a typical POV or POC, we let our product run for a week or sometimes 10 days and we show the customer all of the things that Shield either blocked in the case of it being active or if it's in passive or observed mode, what we would have blocked had we been in enforced mode. And as our CTO likes to say, when shown that data, the typical customer, you know, their muscles tighten up and they get their eyes wide open and they're shocked by the things that are either leaking in through the firewall or, in many cases, call homes that are taking place from infected devices or infected technology inside their firewall that are calling out to command and control servers somewhere on the Internet. And once we show that data, then it's just a conversation about, generally speaking how many of these do I need and where do I place them in my network and so on. So we have a pretty high conversion rate once we get to that point. So I'm not worried…

Thank you very much.

Our next question is from Ed Woo with Ascendant Capital. Your line is now open.

Yeah, thank you for taking my question. I was saying the best advertisement you could get is, you know, massive data breach or massive hacking going on. There was a couple of big high profile ones out on the West Coast. You hear some of these big Las Vegas casinos and there's rumors that they actually paid a significant amount of money. Have you seen a noticeable rash in high profile hacking type events? And how does that impact your business when, companies are getting these high-profile hacks that are very public?

Yeah, I think it's, I think it's a case, Ed, where whenever there's a big fire, people start to pay a lot more attention to whether their, you know, smoke alarm is working effectively or not. And so we certainly get a lot more calls when there's publicity around a big event. And I can speak from experience, you know, in all the businesses I've worked in, when one of your competitors is hacked, the first thing that your own board asks is, hey, how are we different than those guys and are we better protected? And everybody wants some reassurance that they're not going to be the next victim. The reality today is that the bad guys are inventing and reinventing their technology. All the time and they're very nimble and they're very quick. And so I can't foresee the day when there won't be hacks in the future. Our mission is to stay as best we can, one step ahead and protect as best we can. But I think you're going to continue to see these, for the foreseeable future, at least. And I think that bodes well for, intrusion because some of our work with our government customers lets us see the most advanced threats and the newest things that are being tried by the bad guys. And then we can build that into our commercial product, into shield and protect against those, you know, very quickly. So I think it all bodes well for us for the future.

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

Thank you.

Thank you, Ed. Our next question is from James Green. Your line is now open for.

Hi, Tony. I had a question about the mobile app and its development and when we'll see it leave beta.

So right now we have iOS, Windows, and Android. The Android and Windows are in development. The Android and Windows are feature complete. And we're demoing with customers. We'll be doing constant upgrades to those products over time. So we'll have to see how that goes with customers. But it's part of our broader vision for-- for a much broader set of coverage, you know, in terms of covering all of the places that matter, whether it's in the data center, whether it's in the cloud, or whether it's in the endpoint. And so, I think you'll see, further developments from us in all of those spaces over the next several engineering cycles.

Will the Shield family of products eventually be rolling out where ordinary consumers will have access to it? I believe previously you had mentioned that you were focused on, you know, commercial interests. And I was wondering if the technology will reach regular consumer base eventually.

Well, right now the Android is available for consumers, but it's not the full featured product we have in our, well, we have available today. It's not, what's available in the Android store is not the same product. But I think our target market is still enterprise small, medium business even, and it's probably not the consumer market at the end of the day. That's just a different demand, it's a different selling model. It's a different cost model, and really aimed at different needs at the end of the day. So I currently don't see us getting into that space at the moment.

Okay. And previously you had been talking about a plug-in for integration with PFSense and NetGate. And I was wondering whether you guys stood with that plug-in development.

Plug-in work is done, and we're piloting with customers right now.

All right. Thank you so much for your time.

There are no further questions at this time, so I'll pass the conference back to the management team for any closing remarks.

Well, thank you, everyone. I want to say especially thank you to our investors who participated with us on the management team and our board in investing in this latest round. As I mentioned, it's a not a very pretty environment out there, and so I really appreciate everyone stepping up and helping get us the runway we need to deliver in this exciting set of products that we've been developing. And I look forward to our next call with all of you. Appreciate the support and the time. And if we don't talk, have a happy holiday season, and we'll see you in the new year.

That concludes today's conference call. Thank you for your participation. You may now disconnect your line.