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spk03: Welcome everybody to SIREN's third quarter 2021 financial results conference call. This call is being broadcast live and can be accessed on the investor relations section of the SIREN website. Before we begin, please let me remind you that during the course of this conference call, SIREN's management may make forward-looking statements. These forward-looking statements are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These risks are outlined in the risk factor section of our SEC filing, including our annual report on Form 10-K that was filed March 30, 2021. Any forward-looking statements should be considered in light of these risk factors. Please also note, as a safe harbor, any outlook we present is as of today, and management does not undertake any obligation to revise any forward-looking statements in the future. Also, during the course of this conference call, we may discuss non-GAAP measures. when talking about the company's performance. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables in the earnings press release we issued today and available on the investor relations section of our website. These financial measures are included for the benefit of investors and should be considered in addition to, and not instead of, GAAP measures. Joining me on the call today, we have Brett Jackson, our Chief Executive Officer, and Ken Tarpey, our Chief Financial Officer. With that, I will now hand the call over to Brett.
spk02: Thanks, Joe. I'd like to welcome everyone to today's call. SIREN continues to focus on establishing revenue growth by executing our strategy to build an exciting new recurring revenue stream in the enterprise anti-phishing market. We are pleased to report that SIREN inbox security market momentum continued to accelerate in Q3 with a 36% increase in customer transactions over Q2, and Q3 quarter-ending annual recurring revenue growth of 92% year-over-year. We remain very bullish on the market opportunity and our product market fit. Phishing, business email compromise, and ransomware threats continue to be significant problems for most enterprises, are top of mind for CIOs and CISOs, and customer feedback consistently reinforces our view that SIREN has a highly differentiated solution to help mitigate these threats. While Siren's Q3 overall revenues declined year over year, this was due to churn and downsell in our legacy business that occurred in prior quarters, as previously reported. We continue to believe that Siren Inbox security will be the key driver of future revenue growth for Siren. Our team remains focused on building momentum in the market each quarter with the goal of developing a high-growth enterprise revenue stream that will materially contribute to Siren's results. As we have previously discussed, this is a journey that will span multiple quarters, and we are encouraged with the revenue trajectory to date. As I mentioned earlier in my comments, SIREN's approach to addressing phishing is highly different. We are offering customers a completely different and unique solution. Our approach leverages SIREN's core strength in automated, real-time phishing and business email compromise detection, but more importantly, we also provide automated incident response. SIREN inbox security continuously monitors users' inboxes, automatically detects phishing and business email compromise attacks, and automatically responds to remove threats without the need for human intervention. So our solution doesn't just simply identify phishing and BEC attacks. We automatically remove the threats, saving IT and security staff valuable time and effort as they no longer have to manually investigate and remove suspicious emails on a daily basis. This translates into a real return on investment. The final component of our unique approach is to involve users. As mentioned, we provide automated detection of phishing and BEC, as well as automated incident response, but we also leverage users and human intelligence to help identify and analyze suspicious emails. Our unique approach continues to resonate with customers and we believe our view is supported by our win rate. In the third quarter, we won 83% of the customer product evaluations we participated in, and our win rate year to date is 76%. As we mentioned in last quarter's earnings call, we are confident in our product market fit and the value we provide customers. Given this, our top priority is to expand our go-to-market, and growing our channel is an essential component to achieving this. Consistent with our Q2 results, More than 50% of our Siren Inbox security business came through the channel in the third quarter. We continue to expand our channel partner network and, in the quarter, added a number of new partners, including leading solution providers like PD Cinex in North America and Softcat in the United Kingdom. We believe that another component to expanding our go-to-market will be developing partnerships with other solution providers who are involved in addressing the phishing problem. We announced earlier today our first of such partnerships with KnowBe4, the leading security awareness training provider with more than 40,000 customers worldwide. Cybersecurity is all about multiple layers of defense, and security awareness training for users is an important component of an enterprise's cybersecurity strategy. With that said, phishing, business email compromise, and ransomware are difficult problems to solve, and Siren Inbox Security offers customers additional and complementary capabilities to security awareness training solutions. As we engaged customers in the market, we learned that many of them had deployed KnowBe4's platform, but also saw value in our automated anti-phishing solution, and we're requesting integration between Siren Inbox Security and the KnowBe4 platform. Additionally, Siren and KnowBe4 have many mutual channel partners who also saw the value in a combined integrated solution. So customers and partners believe that an integrated solution would provide much greater value and given this market input, Cyren collaborated with Novi4 to provide integration between our respective products. This integration is available today and we are working with Novi4 to develop a shared roadmap for the future. It is particularly exciting when customers are the impetus for a partnership and vendors collaborate to provide more value to their mutual customers. We believe there are other partnership and product integration opportunities that may make sense for Siren Inbox Security and our customers, including the potential to integrate and collaborate with security orchestration, automation, and response platforms, commonly referred to as SOAR platforms, as well as endpoint security solutions. We will continue to explore partnership opportunities that can provide value to our customers and or accelerate our market traction. As 2022 approaches, We are also evaluating our strategic direction with Siren Inbox Security. Today we are focused on addressing phishing and business email compromise threats among enterprises using Microsoft 365 as their corporate email platform. This is a very large market opportunity with Microsoft 365 being used by more than one million companies worldwide and more than 200 million users. Our goal is to achieve a leading position in the anti-phishing market among enterprises using Microsoft 365. With that said, we believe the phishing problem will continue to expand beyond email to other messaging systems within collaboration platforms like Teams, Slack, and Zoom, as well as to mobile phone messaging systems including SMS and WhatsApp. Our vision for SIREN is to be a leading security provider, not just for email, but other messaging systems as well. And over the coming months, we will be developing our future platform expansion strategy. Let me move to our legacy threat intelligence business. In this segment of our business, we provide embedded threat detection and threat intelligence solutions to the world's largest email providers, leading cybersecurity vendors, as well as managed service providers. Our teams are focused on maximizing customer satisfaction and retention among our OEM customers, many of whom we have longstanding relationships with. We are pleased to report gross retention of 97% in the third quarter with minimal churn and downsell. Additionally, we added several new customers in the quarter. Of course, Q3 is behind us, and our go-to-market teams are now focused on closing out Q4 and calendar year 2021 and continuing to build momentum in the enterprise anti-fishing market. I will now turn the call over to Ken, who will go through the third quarter financials.
spk01: Thank you, Brett, and good afternoon, everyone. I will now present our third quarter 2021 financial results. For more details on these results, please refer to the earnings press release that was issued earlier today and is posted on the investor relations section of our website and our quarterly filings on form 10-2. Please note that we present our financials under U.S. GAAP accounting standards including non-operating expenses and that I will discuss certain financial metrics on a non-GAAP or adjusted basis which excludes those non-operating items. Please refer to the table in today's earnings release for reconciliation of our GAAP to non-GAAP results. GAAP revenue for the third quarter 2021 was 7.5 million compared to 9.1 million reported during third quarter 2020. The decrease in revenue year over year is primarily a result of a contract reduction by our largest customer. We had previously disclosed this change, which took effect in Q2 2021. The impact of this customer contract reduction was $700,000 and $1.7 million for the three and nine months ended September 30, 2021, respectively. Other items which reduced our Q3 2021 revenue were customer renewals at lower values and churn within our legacy business, End of life of several legacy enterprise products during 2020 also contributed to the decline in revenue during 2021. Gap gross margins for the third quarter 2021 were 50% compared to 58% for Q3 2020. On a non-gap basis, gross margins were 60% compared to 66% during the third quarter of 20. Gap and non-gap costs of goods sold during the quarter were roughly in line with the same period as a year ago. So the reduction in gross margin is a function of lower revenue. Third quarter 2021 gap net loss was 5.8 million compared to 4.9 million during Q3 2020. On a per share basis gap net loss was 7 cents per basic and diluted share for Q3 2021. compared to $0.08 per basic and diluted share for Q3 2020. On a non-GAAP basis, SIREN's third quarter 2021 net loss was $4.3 million compared to $2.9 million during the third quarter of 2020. This translates to a loss of $0.06 per basic and fully diluted share for Q3 2021 and a loss of 5 cents per basic and diluted share for Q3 2020. As a reminder, SIREN's non-GAAP results exclude a number of non-cash items, including the effect of stock-based compensation, amortization of intangible assets, and capitalization of technology costs. Please refer to the table in our press release for reconciliation of selected GAAP to non-GAAP measures. GAAP operating expenses for Q3 2021 totaled 9 million, down from 10 million during Q3 2020, a decrease of 7%. On a non-GAAP basis, total operating expenses for the quarter totaled 8.5 million, down from 8.7 million in Q3 of 2020. During the recent quarter, GAAP R&D expense was 4.1 million, compared to 4.8 million in the third quarter of 2020. The main reason for the decrease of GAAP R&D expense during the third quarter is that in Q3 2020, we decided to write off some older technology development that was on the books from R&D projects dating back to 2017 that never materialized into release products. GAAP R&D expense during the third quarter of 2020 includes a one-time non-recurring adjustment of approximately $700,000 for those terminated projects. During the third quarter of 2021, we capitalized a lower amount of R&D expense than prior quarters since certain products launched in 2020 are fully launched. As a result, GAAP R&D expense during the period was higher than in prior quarters. The capitalization of these R&D costs reduces expenses. Hence, as capitalization decreases, expenses will increase. Another consideration is the lower headcount in Q3 2021 as compared to Q3 2020 R&D headcount, resulting in lower salaries and related costs. On a non-GAAP basis, which excludes the effects of R&D capitalization, R&D expense for the period decreased from 4.2 million in 2020 to 4.0 million in 2021. Gap sales and marketing expense for the Q3 2021 was 2.8 million compared to 2.9 million during Q3 2020. Non-gap sales and marketing expense was 2.6 million compared to 2.8 million during the third quarter of 2020. G&A expense for Q3 2021 was $2.3 million compared to $2.3 million during the third quarter of 2020. On a non-GAAP basis, G&A expense was $1.8 million compared to $1.7 million a year ago. Employee count at the end of Q3 was 203 full-time and part-time employees, down from 226 full-time and part-time employees at the end of Q3 2020. The overall decrease in operating expenses is consistent with the reduction in headcount year over year. During the quarter, we had negative operating cash flow of 4.9 million compared to negative operating cash flow of 3.6 million during the third quarter of 2020. The decrease was largely driven by an increase in net loss. a decline in deferred revenue driven by the receipt of a multi-year, multi-million dollar prepayment from one of our largest customers in the first quarter of 2019, and a decline in deferred revenue due to downsells on various customer renewals. There was an increase in trade accounts receivable at September 30, 2021, due to a large customer payment of $2.1 million, which was originally due for late Q3 Q3 2021, but was not received until early October 2021. Overall net cash flow for the Q3 2021 was positive, 4.1 million, and the cash balance was 17.9 million at September 30, 2021. On September 15, 2021, we entered into securities purchase agreements with certain institutional investors to which we agreed to sell an issue in a private placement offering 14,152,779 of our ordinary shares at a purchase price of 72 cents per share and warrants to purchase up to 14,152,779 ordinary shares at an exercise price of 60 cents per share. The ordinary warrants will be exercisable immediately and terminate on March 17th, 2025. We also agreed to issue to the placement agent or its designatees warrants to purchase up to 849,167 ordinary shares representing 6% of the aggregate number of ordinary shares sold in the offering. Placement agent warrants will have an exercise price equal to 90 cents or 125% of the offering price per share and will be exercisable immediately and will terminate on March 17th, 2025. The closing of the offering occurred on September 17th, 2021. We received gross proceeds of 10.2 million in connection with the offering. We intend to use the net proceeds received by us from the offering for working capital purposes and repayment of indebtedness. During the second quarter of 2020, we released SIREN inbox security. We continue to increase the number of contracts signed each quarter, but due to the ratable nature of our revenues, the revenue contributed during the quarter was not material. We continue to believe it will take a number of quarters before the revenues of this new product offering will begin to have a meaningful impact on our revenue. As previously disclosed, the company received written notice from NASDAQ of noncompliance as the share price was below $1 for 30 consecutive days. The share price continues to be below $1. On October 6, 2021, we announced that the company received written notification from the Listing Qualification Department of NASDAQ Capital Market granting the company's request for an additional 180-day extension to regain compliance with NASDAQ's minimum bid price requirement. The company now has until April 4, 2022 to meet the requirement. NASDAQ's extension notice has no immediate effect on the continued listing status of the company's ordinary shares on NASDAQ Capital Market. Therefore, the ordinary shares remain listed on NASDAQ Capital Market. If at any time until April 4th, 2022, the bid price of the company's ordinary shares closes at or above $1 per share for a minimum of 10 consecutive trading days, the company will regain compliance with the rule and the matter will be closed. The company will continue to monitor the bid price of its ordinary shares and consider various options available to it if its ordinary shares do not trade at the level that is likely to regain compliance. These options include effecting a reverse stock split. There can be no assurance that the company will regain compliance with the rule or maintain compliance with any of the other NASDAQ continued listing requirements. I will now ask the operator to open the lines for question and answer.
spk04: Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. It appears we have no questions at this time. I'd like to turn the floor back over to Mr. Jackson for closing comments.
spk02: We'd like to thank everyone for joining us on the call today and your interest in SIREN. We look forward to the fourth quarter of 2021 and keeping you updated on our progress. Thank you.
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