Intrusion Inc.

Good afternoon and welcome to Intrusion's second quarter 2021 financial results conference call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question and answer session. As a reminder, today's conference call is being recorded for replay purposes. I would now like to turn it over to Joel Akramowitz of Shelton Group Investor Relations. Joel, please go ahead.

Good afternoon and welcome to Intrusion's second quarter 2021 earnings conference call. I'm Joel LaCromowitz, managing director of Shelton Group, Intrusion's investor relations firm. Joining me today are Intrusion's co-founder and CTO, Joe Head, the company's CFO, Franklin Byrd, and also the chief marketing officer, Gary Davis. Also on today's call is Intrusion's chairman of the board, Tony Lavecchio, who will be available for questions after management's prepared remarks. Before we begin, I want to remind you that today's conference call may contain forward-looking statements regarding future events, including but not limited to expectations for Intrusion's future business, financial performance and goals, customer and industry adoption of Shield technology, successfully bringing to market Intrusion's design pipeline, executing on its business plan, anticipated capital needs, as well as the engagement of investment professionals to assist the company. These and all forward-looking statements are based on estimates, judgments, current trends and market conditions and involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. We encourage you to review the company's SEC filings, including the 2020 Form 10-K filed with the SEC on March 9, 2021, and other SEC filings made from time to time in which we may discuss risk factors associated with investing in intrusion. All forward-looking statements are made as of the day of this call, Thursday, August 12, 2021, and except as required by law, we do not intend to update this information. This conference call will be available for audio replay for at least 90 days in the Investor Relations section of Intrusion's website at www.intrusion.com. With that, it's my pleasure to turn the call over to Franklin. Franklin, please go ahead.

Well, thanks, Joel, and thank you to everyone who's joined us on our call today. Clearly, there have been a number of significant developments at the company since our first quarter conference call. On July 20th, we published a press release in which we provided preliminary revenue results for the second quarter. As part of this press release, we also announced certain organizational changes and new strategic activities, including the engagement of an investment banking firm to evaluate various funding sources, as well as potentially constructive longer-term strategic options. Additionally, we announced that Intrusion's CEO, Jack Blunt, had left the company. In conjunction with these developments, the Board asked Joe Head and me to assume operating responsibilities until a new CEO could be appointed. It is our aim to address each of these developments during the course of today's call. Let me start with a review of the company's second quarter financial results. Second quarter 2021 revenue was $2.0 million, which was in line with the preliminary revenue results we reported in our July 20th release. This compares to $1.9 million in the first quarter of this year and $1.7 million in the second quarter of last year. The majority of the second quarter revenue consisted of our government business. Even though our Shield revenue was much higher in the second quarter than in the first, it only represented approximately 7% of our total second quarter revenue, as it was still in the early stages of deployment. As indicated in the recent announcement, the ramping up Shield solution has been slower than anticipated due to longer customer evaluation cycles. While we had hoped our appliance model would allow customers to simply plug the platform in, and use Shield immediately, we found that customers actually wished to evaluate additional metrics, and this renders the actual time to close more in line with the procurement processes for normal enterprise security software sales. Activity in our government sector remained stable as reopenings occurred, and we expect this recovery to continue in the coming quarters. Gross margin in the second quarter was 63% as compared to 66% last quarter and 61% in the second quarter of 2020. Second quarter operating expenses were $6.9 million compared to $5.1 million last quarter and $1.7 million in the same quarter a year ago. Included in these operating expenses were increases in non-cash stock compensation expense of 0.6 million resulting from the rollout of our 2021 stock option plan and 0.2 million in legal expense attributable to our annual shareholder meeting and ongoing legal matters. As indicated last quarter, major increase in our operating expenses was primarily due to the additional hiring we had done to expand our sales and leadership team, combined with increased marketing spend around the development and launch of Shield. At the quarter end, our total headcount was 112, compared to 80 in the prior quarter. In conjunction with the previous mentioned developments, on July 30th, we took decisive action to significantly reduce expense and our cash burn by implementing a reduction of force. After the reduction in force and additional recent terminations, our headcount has been reduced to 76. Reductions were made across the entire company with some of the largest reductions coming from the sales and marketing and general administrative areas. Net loss for the second quarter of 2021 was 5.0 million or minus 28 cents per share on 17.6 million weighted average shares compared to a net loss of 3.9 million or minus 22 cents per share in the prior quarter. And the net loss of 0.7 million or minus 5 cents per share in the second quarter of 2020. Turning to the balance sheet, at quarter end, June 30th, 2021, the company had cash and cash equivalents of 9.3 million, which is down from 13.1 million at the end of the first quarter. Working capital was 7.3 million and we had no outstanding debt at the end of the quarter. As previously indicated, we believe the company's current cash position, combined with a slower ramp of revenue from SHIELD, are likely to result in a need for additional capital in order to fund near-term operating losses and execute on our strategic growth initiatives before we reach profitability. Given these expectations, on August 5th, the company completed a multi-purpose shelf registration, which provides the flexibility to take in additional capital through various types of security transactions. I would like to emphasize that the primary intended purpose of the SHELP is to satisfy the potential requirements for additional capital in the near term at the discretion of the Board. As of today, the registration has not yet become effective. Separately, the company is evaluating other potential funding and long-term strategic options. However, these evaluations are still in the early stages. Both the company and its board are firmly committed to considering all potential options that are consistent with our goals of accelerating intrusions growth, achieving improved operating results, as well as maximizing shareholder value. Regarding the company's outlook for the third quarter, together with recent developments, our near-term visibility remains very limited with respect to both the timing of recovery of the government business and the ramp of our SHIELD revenues. Given the difficulties in forecasting this respective timing, some of which is outside the control of the company, we are maintaining our policy of not providing quarterly guidance. We will, however, continue to reevaluate our approach on an ongoing basis as the business and the visibility evolve in future quarters. With that, I'd like to turn the call over to Joe Head for an update on current market dynamics and our product initiatives. Joe?