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.

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.

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…

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…

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.

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

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?

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.

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?

We do. It’s August 27, I believe.

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?

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.

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

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

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?

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.

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

Thank you.

Thanks, Scott.

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

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

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.

Yes. It's [indiscernible].

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?

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.

Okay. But the election starts generating revenues already or…

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

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.

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.

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

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.

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?

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

Thanks and good luck, Tony.

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

Okay. Again thank you and good luck.

Thank you.

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

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.

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.

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

Thank you.

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.

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.

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