Good afternoon, and welcome to Intrusion's Fourth Quarter 2020 Financial Results Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. As a reminder, today's conference call is being recorded for replay purposes. I would now like to turn the call over to Joel Achramowicz of Shelton Group Investor Relations. Joel, please go ahead.

Thank you, Rob. Good afternoon, everyone, and welcome to the Intrusion's Fourth Quarter and Full Year 2020 Earnings Conference Call. I'm Joel Achramowicz, Managing Director of Shelton Group, Intrusion's Investor Relations firm. Joining me today are Jack Blount, Intrusion's President and CEO; and Franklin Byrd, Intrusion's new CFO. Before we begin the call, 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 and executing on its business plan. Now these 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 2019 Form 10-K we filed with the SEC on March 27, 2020, and other SEC filings made from time of time in which we may discuss risk factors associated with investing in Intrusion. All forward-looking statements are made as of the date of this call, Thursday, February 25, 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. I will start the call off with a review of the financial results by Franklin, and then Jack will review Intrusion's recent operating developments progress with Shield and the company's key objectives going forward. Then we'll take your questions. And with that, I'd like to turn the call over to Franklin. Franklin, please go ahead.

Well, thank you, Joel, and thank you to everyone who joined us today. As you know, this is my first call as the CFO, and I'm excited to be on board. I look forward to meeting with you in the coming weeks and working closely with Jack and the team during this exciting time at Intrusion. So turning to the fourth quarter 2020 results. Revenue was $1.6 million compared to $1.6 million in the prior quarter and $2.6 million in the fourth quarter of 2019. Revenue for the full year 2020 was $6.6 million compared to $13.6 million in the prior year. 2020 revenue for the fourth quarter and the full year were impacted by extended government shutdowns related to the pandemic, which delayed subscription renewals and contract starts for our government business. However, as we indicated in the recent press release, we've begun to see signs of recovery on our government business, and we see those continuing to levels that we've seen historically. Additionally, 2019 revenue for the fourth quarter and the full year benefited from 2 onetime contracts that were unique to 2019 only. Gross margins in the fourth quarter were 58.2% as compared to 58.9% last quarter, and 61% in the fourth quarter of 2019. For the full year 2020, gross margin was 59.1% compared to 60.8% in 2019. Operating expenses in the fourth quarter were $4.8 million, which included a $1.1 million noncash write-off related to a prior office lease agreement. This compares to $2.3 million last quarter and $1.3 million in the same quarter a year ago. Full year 2020 operating expenses were $10.4 million, which includes the same $1.1 million noncash write-off just mentioned and compares to $3.8 million in the prior year. In addition to the $1.1 million noncash write-off in 2020, we…

Thank you, Franklin. I appreciate you giving that cover for us, and thank you all for being on the call today. We are extremely excited about the reception that Shield has gotten in the marketplace since we launched it and the progress that we're seeing in the field. I can tell you that the product continues to perform near perfect. As one of my prospects, as I was quoting in some of our data actually quoted back to me in a call earlier today, our numbers show that we are 99.999% accurate every time we make a decision about whether we kill a connection or not. There is no product on the planet that can get close to 3 9s, much less 5 9s. Most firewalls, most cyber security products actually tell you they have a 30% error ratio. So we are orders of magnitude on the other side of this equation compared to any other technology. Again, I draw you back to what makes Shield so unique and so valuable, and I'm not sure that people, even though we've talked about this many times, have fully picked up on it, so I'm going to restate it this morning - excuse me, this afternoon. Shield is really all 3 of Intrusion's technologies married together in a single product solution. The TraceCop database that we have created, managed, grown, used for 25 years, is the core of what makes Shield work today. Everyone asks me all the time, how can our AI be so much more accurate than any other company's AI in the world. The answer to that is understanding AI. AI is two things. It's mathematical algorithms that teach computers how to learn. But that's actually a very small piece of the equation. What AI is really about, as…

Please queue up for questions.

[Operator Instructions] And your first question comes from the line of Zach Cummins from B. Riley Securities. Your line is open.

Yes. Hi, good afternoon, and thanks for taking my questions. I appreciate the commentary around the opportunities for Shield ahead. Jack, I know after your beta tests have completed at the start of this year, it sounds like a majority of those customers have went on and became actually paying customers for Shield. Is there any way you can kind of quantify the opportunity there, just within the beta participants, just to give us a sense of the potential seed opportunity?

Well, we have not given public numbers. As I've said many times, cybersecurity customers are very, very, reserved about disclosing who they are, what they'll tell you about them, because they believe any information, they give the cybercriminals, they give them more opportunity to effectively attack them. Now we have done 3 - 2 studies on 3 of those customers. So there is public information by names of those customers and three of those companies that are using the technology. We are working with other beta customers - former beta customers, to also get them to release case studies. We think we're going to get most of them to release in the next 30 to 60 days. So we are trying to get more data out there. I can tell you, as we said before, 90% of our beta customers became paying subscribers on the Shield product. I would have liked to have had 100%. I've never before, in my history, seen a company accomplish 100% of beta customers. In fact, I can't really find a company that had 90% of beta customers convert. So I think that's a very, very impressive number, that we were able to do that. I can tell you that one of our former beta customers, which is now a purchasing beta customer, is using the product at multiple locations here in the United States and is rolling - planning to roll out, as soon as we get approval, in six foreign countries. They are a worldwide business and they want to be protected worldwide. They want Shield running in every one of their offices around the world. So they are simply waiting on us to get federal approval to be able to export the product, which I think we will have by the end…

Understood. And then speaking on the distributor and retailer front, I know you can't do it internationally, but I mean, can you speak to the progress you've seen with signing up distributors and resellers here domestically?

We have 16 under contract as of this phone call. We have 42, in total, that are in process that I think will have signed up by the end of Q1. So that is going as fast as the other pipeline. Again, it's close to opening floodgates. People are learning about the company. They're learning about the technology and they're wanting to sign up. So I think that's going extremely well. We should have, I think, starting next week - we are doing a lot of rework on our website right now to make it dramatic better, and one of the things we're going to be adding is who those resellers are, how to get ahold of them. They will be on our website very shortly. So we will be adding nationally. You'll see that list as they come there. And as we add them, you'll see the list continually grow. So that should be dynamic on a week-to-week basis. As they sign up, once we get that launched here, I hope - I think, in the next week.

Understood. And I appreciate the commentary kind of you outlining the pipeline. I mean, I know you can't give kind of specific seat quantities, but I mean, can you outline or even kind of quantify what some of these potential opportunities could look like at either some of these major enterprise customers? Or some of these federal government agencies? And I guess the second part of that question is, do you get paid as some of these companies are testing out the solution? It sounds like you're already in the door with many entities on that front.

We are not charging for evaluations. We might do that at some point. That's something I never liked doing at any company I've been at. I just feel like it's kind of a requirement of the complexity of the technology we deal with today to give customers that ability to get their hands on it, especially a product as unique as ours. I mean, you listened to what I had to say about the product. It's very, very easy for anybody to say, "Sounds too good to be true, Jack. I've heard that before. So I understand that. It does sound too good to be true. I've been in cybersecurity technology for 42 years. I designed and invented this product, and I think it's too good to be true. So I give them a free evaluation. They have to go through a qualification to show the size of the opportunity, the level of executive commitment in their organization, their ability in their budget to fund it, before I'm going to send them hardware. But we are doing that without charging them today. I should have - and again, I'm sure it's hard for you all to understand how busy one CEO can stay, but I'm extremely, extremely busy. If I'm not visiting with customers, or resellers, or distributors, and I'm not recruiting somebody, it's just unbelievable. One of the things I planned to prepare for today and I just ran out of hours and the fact that it just didn't stay in the front of my mind, is that I wanted to develop a list with some more information for you on that, so I'll get that out to you shortly. But again, I think the pipeline - again, I can tell you I have a Fortune 100 - more…

Yes. Understood. I appreciate the additional color on that. And as far as the development side, I mean, you've mentioned some of the other products that we could be expecting for Shield here in the upcoming months, including either cloud or even kind of a remote worker capability. Can you give us an update on the development progress there? And when we could be expecting some new releases?

Well, we are - the two products we are really focused on working on is the remote worker. Now again, we handle the remote worker much better than people understood we did before. So if a remote worker uses a VPN to connect into their corporate network, then they are automatically protected by Shield today. And what we are finding is, we - to be honest, we haven't found a customer yet that comes to us that is not using a VPN. So the need for a specific remote worker products may be a lot less than we thought it was, so we've actually - I've actually pulled some resources off of that project until we learn more about the market opportunity and whether it's justified or not because we're just not finding companies calling in and saying the remote workers are not using VPNs. Much more than I expected, every company that went remote with COVID was apparently smart enough to force those employees to use a VPN, which makes them automatically part of the network and protected by Shield. So that product seems to have a less importance to us than we thought it was going to have. As a result, again, we're a limited size company, we have limited resources. I have pulled some of those resources on to some other things and while we track that opportunity. The cloud, again, I think, was a huge misunderstanding, and I'll take the blame for that myself. Initially when we launched the product, there's three different cloud segments that have to be looked at. It's not just cloud or no cloud. According to Gartner and Forrester, 70% of cloud customers today operate in either a private or a hybrid cloud environment. Again, like the VPN client, Shield today works…

Understood. That's helpful. And then just final question for me. I know not really your focus, but on your legacy government business, it sounds like you've started to see a recovery on that side. I mean, how should we be thinking about that business in the upcoming year, just given the challenges that you faced in 2020?

Well, I mean as I've always said, the legacy business is a flat business. It's been a flat business for 20 years. So I've never said there's going to be growth in the legacy business. I sustain and support and continue the legacy business primarily because I view it as my R&D center. And I know I've said this before so I mean I - that is where Intrusion gets access to the newest, hardest, most complex cyber breaches that the government has experienced that they want outside help with, and therefore, we get to be involved in those and learn from those and be cutting-edge of the latest and greatest thing that's going on. So we continue that, not because I think it's a growth business, because I don't think it is a growth business. It's a stick - it's a stand-alone self-profitable business, but I view it as my R&D center. That gives me the cutting-edge cybercrime attacks out of China and Russia that I don't have to wait to see at a customer site. So we're going to continue that. We are seeing those that revenue dollars come back. We think we will see about the same status that we've had at about that $10 million annual revenue number that the company's basically operated at for 20 years. It's just a niche market. So it's not - it's just not likely to grow significantly. But at the same time, it is valuable. So I am going to maintain it. I have the same people working on it, the same skills. I haven't pulled anybody off of it. I'm not - in fact, I promoted Mike McClure to be the VP, to focus on that because the CEO, Ward Paxton, used to focus on that business, when he was here. He's not here, and I'm focused on the Shield business, so I promoted Mike to a VP so that he can full-time, focus on maintaining that business for me.

Understood. Well, thank you again, for taking my questions. And best of luck for quarters ahead.

Thank you for following our stock, we're appreciated.

Your next question comes from the line of Ross Taylor from ARS Investments. Your line is open.

Jack, can you walk us through a little bit there, the testing adoption process you expect from the large corporations and government agencies? You've commented that you thought they tended to be slow and kind of process-oriented in their adoption cycle. But yet, they're the ones knocking down your door, it seems, at this moment. So can you walk us through how long does it take? Should we think about it as being each of those like being a beta test? And what kind of resources do you need to commit to help get those over the line?

Well, sure. I'll be glad to comment on that. One, certainly, I am extremely pleased and excited by the demand that we're getting out of that segment early on. That's not normal. I think that is a direct result of the SolarWinds breach and the fact that it took out 16 federal agencies. I think they're all burning, right now, bad from this breach. They're all in panic mode, and therefore, they're willing to be a little less - a little more aggressive in looking at new technology. So I think it's going much faster than I thought it would, both by the level of interest and by the work they're doing. They are taking the product. They have put it into use in their environments. And the feedback there giving us is that their mouths are still open, they haven't closed yet. They are shocked every day. Every day, they're telling whoever the account person is that's working with them, that they're shocked that they can't find anything wrong with the product, that it does everything we claim it does. And that there's the volume of traffic of malware that they were never seeing before that was existing on their network anyway that they didn't know was there, that we're now identifying for them. So I think the adoption will be much faster than anticipated. I think we will see that sales cycle happen certainly this year. Normally, if you've ever been in IT, that historically, since my days at IBM in the '70s, the sell cycle for IT technology was 12 to 18 months. I mean that hasn't changed literally in 40 years. And I think that's still what Gartner and Forrester will tell you the answer is today. I believe we're going to see organizations in the…

Okay. Now would you anticipate - you've worked with the government before, as I, and the government is not always the most efficient place to operate between cycles, between budget cycles. We're in the middle of a fiscal year. Do you anticipate any type of pushback from those people who write the checks to implementing this? Or because of SolarWinds and the like, do you think this is the type of thing that if they want it, they will get it?

I absolutely believe - again, I was there for four years as a CIO, I watched what happened to budgets during breaches. I know what happened when I got brought in. I believe that the federal government has already made offers of money to every department for cybersecurity enhancements. In fact, they are mandating cybersecurity enhancements. I know I've been told that by multiple people. So I believe the money is available today, regardless of the time of year, the budget cycle for them to fund a new purchase of cyber - of the Shield solution to protect their agencies. So I don't believe that's going to be an issue at all. I don't think the transformation from Trump to Biden is going to have anything to do with it. I think any President of this country is aware and concern about the threat cybersecurity, cyber warfare brings. And I think the SolarWinds, again, this was both Russia and China involved in this. And I think it's got everybody scared that things are worse than they thought it was.

I'll leave you with that. I wish you good luck in getting that first major customer. I think that there's still a lot of people who feel that this is too good to be true. I think the market reflects that, and if we're able to get the validation of a major government contract or a major Fortune 100 or Fortune 500-type company that has a broad international reach, I think it will put the naysayers to rest.

It's a very quick one. I totally agree to you, Ross. I appreciate your comments. I'm going to be in D.C. in three weeks, again. So again, I am putting a high priority on this because of the impact it will have on businesses as well as just the overall marketplace. So it's very, very exciting. Thank you.

Thank you, sir.

[Operator Instructions] Your next question comes from the line of Howard Brous from Wellington Shield. Your line is open.

Thank you. Jack, when you discuss Fortune 100 to Fortune 500 companies, can you give us a sense of the potential size of how big or how small a client could possibly be here in terms of number of seats?

Yes. I mean they're all big. When you talk Fortune 100 and Fortune 500, Howard, they're all big. They are, every one, big. Again, I don't want to be misleading, I don't want to, certainly - but again, I've dealt - most of my career, I've sold to the Fortune 500/100. I know those companies well. I know how big they are. One of the things that's unique, I think, in the cybersecurity space is you're not likely to make a cybersecurity purchase for a segment of your business as you do in most other technologies. You're going to either believe that this is a show - this is a game changer or it's not. And if it's a game changer, you're going to want every seat in your company on it. So - I mean, certainly, most of the defense contractor, Fortune 500, 100 companies that we are talking to right now are in the 100,000 seat range day one. Any one of them makes us a rock star, and there's multiple ones that I'm in discussions with right now, all of the names you would recognize in one second. Same with Fortune 100, 500 businesses. Again, one of our beta customers which became a purchaser is much bigger than I thought. I actually did not know about their international components, to tell you the truth, during the entire beta process. I thought of them as a U.S. company. They're a manufacturer here in the U.S. I only learned when I met with the CEO, I guess it was about six weeks ago, seven weeks ago, that he had subsidiaries in eight other countries around the world and that he's already told his Board he's rolling it out internationally as soon as I can get clearance. So again, that was a complete surprise to me. They went from what I thought was 1,000 seats to potentially now 8,000 seats, and that's just a midsized U.S. business.

Jack, that's all I had. Thank you.

Howard, thank you very much for following us and I appreciate your question and I look forward when we can announce some of these customers and give you real details. It's an exciting time to be out there in the market with what we have.

And there are no further questions at this time. I'll turn the call back over to Jack Blount for some closing remarks.

Again, I want to thank you all very much for following the company, your involvement with the company, your advice that you've given me during individual phone calls. I do appreciate interacting with you. This is, I think, the most exciting market right now in the world to be in. Cybercrime is growing at an exponential curve, all of it bad. And we are really the first solution to come to market with patented technology. We filed 19 different patents. We don't know how many of those we'll get, but we know that we'll get many of them so we can defend this technology. We know that our TraceCop database is a one-of-a-kind database. There's nobody else sitting around with another database that they can point their AI at and have it get as smart as our AI. There simply isn't a second database in existence, and that's why our database results are 5 9s of accuracy as compared to 30% error rate of everybody else's product. So thank you very much for working with us. Thank you for your patience. I appreciate your excitement. I know you all want to hear me announce new customers, but it does take a few weeks and a few months to sign up big companies and move the needle like this. It is going to be a very, very exciting year. Trust me. Thank you again. Have a great evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.