Intrusion Inc Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the INTRUSION Inc. Second Quarter 2020 Financial Results. At this time, all participants are in a listen-only mode. And after the speakers’ presentation, there will be a question-and-answer session. And please be advised that today’s conference is being recorded. Now Mr. Mike Paxton, you may begin.

Alright. Thank you. Welcome to this afternoon's conference call to review INTRUSION's second quarter 2020 financial results. Participating on the call today is Jack Blount, President and CEO; and Joe Head, Senior Vice President and Co-Founder. I will go over financial results and Joe will give a business update and review current projects. Jack will give a business update, including our current and future market conditions. We will be glad to answer any questions after our prepared remarks. We distributed the earnings release at approximately 3:05 PM today. A replay of today's call will be available at approximately 6:30 PM tonight for a one-week period. The replay conference call number is (855) 859-2056, conference ID 9435598. In addition, a live and archived audio webcast is available at our website, intrusion.com. Please be reminded that during this call, including the question-and-answer session, we may make forward-looking statements which reflect management's expectations regarding future events and operating performance and speak only as of the date hereof. Forward-looking statements involve a number of risks and uncertainties. Such statements include, without limitations, statements regarding expectations of future revenue, product orders from new and existing customers, and profitability, and are qualified by the inherent difficulties in forecasting future sales caused by current economic conditions and spending patterns of U.S. government departments. Forward-looking statements also include the effects of sales and implementation cycles for our products on our quarterly results and difficulties in accurately estimating market growth, the unpredictability of government and corporate spending on information security products, production revisions, and the effects of the coronavirus, as well as other statements. These statements are made under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties which could cause actual results to differ materially from those in forward-looking statements. The factors that could cause actual results to differ materially are detailed in the company's most recent reports on Form 10-K and Form 10-Q, particularly under the heading Risk Factors. Now let's move onto the financial results. We had a net loss of $715,000 in the second quarter of 2020 compared to a net income of $1.8 million for the second quarter of 2019 and a net loss of $465,000 for the first quarter of 2020. Revenue for the second quarter was $1.7 million compared to $4 million for the second quarter of 2019, and $1.8 million for the first quarter of this year. Gross profit margin was 61% in the second quarter of 2020 compared to 60% for the second quarter of 2019 and it was 58% for the first quarter of this year. INTRUSION's second quarter 2020 operating expenses were $1.7 million compared to $0.7 million for the second quarter of 2019 and $1.5 million for the first quarter of 2020. Thank you. And now I'll turn the call over to Senior Vice President and Co-Founder, Joe Head.

In the previous quarter’s call on June 12, we were still in the shutdown. From a government customer standpoint, they are still not very open. Our government customers are in a mixed state still; many are still working from home, some are working partial schedules, and others are back to work. A common missing element is procurement departments are not back to normal. I've talked to a customer who had a $2.4 million contract with us last year. Nothing is moving forward on that as of yet. But we have started up a new business during the play. We have won a new contract for $375,000 ready for award, and there’s a good rumor that a budget has been approved for another contract for about $800,000. Also, we teamed with another company on an Air Force contract called the Advanced Battle Management System; our partner company has awarded spots on the $950 million IDIQ last week. They'll give us a potential new customer for TraceCop, as well as some other AI projects. Again, this is an IDIQ, where there’s no guarantee; it’s been more than ever, but it gives us a contract vehicle. We were on the winning team to do some work that the Air Force liked well enough to pick our team. We expect renewals from existing customers to auto-renew, even with partial staffing. So, I don't have any renewal threats to report, and I think that's pretty good. At some time in the future, we expect the government to return to normal operations. Our pipeline we reported some time back of new DoD opportunities will move forward for new business as things turn back to normal. We have several good ones there, and as usual, we have plenty of bandwidth to keep our own customers happy. We also have new projects defined for new funding as they awaken and return to work. The goals of a defender are to make it harder for an adversary to penetrate, operate, and remain undetected on their network. Historically, our Savant, TraceCop, and STA products only address two of those three items—to operate and remain undetected. There was a reporting service that finds things after the fact, and then you have to go fix them. Our team conceived, developed, tested, and done a ton of innovation for our new Shield product family since February. My patents write-up was over 130 pages two weeks ago, and we expect the provisional filings to be ready to file with the patent office tomorrow. I spent a lot of time on this family of products, which have their roots in both Savant and TraceCop, and that go far beyond anything in the world in scope, coverage, and effectiveness. The great news is that now we're only days away from patent filing. We hope to have the patent coverage, and we’ll be able to start describing more details as we begin Beta testing with customers on September 1st. I've been using Shield for all of my network traffic for more than a month now with over 6 billion rules working and live in real-time, blocking bad stuff and reporting it. I'm pretty excited about the product and how big this innovation will be in the marketplace. The purpose of Shield is to make it harder to penetrate the network in the first place and harder to spread inside an enclave and very hard to operate and remain undetected by changing the approach radically and doing blocking in real-time, using huge data, AI, and this process that gets smarter every day. Unlike a lot of rule-based systems, this thing learns and gets better as it operates. This is what all antivirus and security products are marketed to do. The ongoing number of breaches and huge sums being paid to ransom underscore that the world's current enclave network, desktop, and post-penetration defenses aren't working. This new set of Shield solutions are novel and greatly reduce the number of adversaries and methods that can stay in the compromised game. Shield is a family of products that are built on each other and offer ever-increasing protections for additional environments and threats with each additional release. Best of all, they're not do-overs, but incremental steps that aren’t huge developments from the release of the first Shield to each additional stage. I'm very amazed at what our team has accomplished during the COVID-19 interruption. We have folks that come in every day and a ton of folks that work from home 100%, and their work output has been tremendous. If anybody believes that folks working remotely are less productive, that has been far from the case here. Our team rocks and has amazed us every day. Shield has many moving parts and innovations that are all working together well. Jack and I are very excited about the company's future as we launch the family of Shield products.

Thank you, Joe. I think Joe has done a great job of trying to give you an overview. Just a couple of things I'd like to add and then I'd really like to be able to answer your questions. First of all, I'd like to tell you, I went out and spent a week in Washington D.C. about three weeks ago. I went up there to meet with our sales reps. I met with some of our customers who were willing to come in and meet with me. I was shocked to find out Washington D.C. is much more shut down than I ever imagined. I stayed in the Marriott Hotel Downtown that I've stayed in almost every time I go to D.C. for the last eight years. It has 1,500 rooms and it's normally sold out unless you book three weeks in advance. I booked three days in advance. I got there and found out there were only six rooms occupied in the entire hotel. I rarely saw a person on the street. I rarely passed a moving car on the street. I did have very successful meetings. I met, for example, with executives in USDA, that I used to work with and know personally. We were in a one million square foot, six-story facility in downtown Washington D.C., normally occupied by thousands of USDA federal employees, and I found out there were four people in the building. There was a security guard that led us in through one door out of 12 doors to the building. I found this reflects what we're dealing with, with our customers. Now, I did meet with a couple of our customers. Again, we don't talk about them personally, but they're all DoD side of the house customers. They were very gracious to meet with me. I spent an entire half a day with one of the customers with a roomful of very senior people in the agency. They love our company. They love the reports we get them. They were devastated by the shutdown that they're dealing with. They assured me that the build-up of demand for reports has not diminished and that they expect to give us in later third and fourth quarter the quantity of reports they have planned in their original budget for all of 2020. We will be extremely overworked the rest of the year if that business comes through, as they assured me it would. That was generally the report I’ve got from every customer I met with. It was great to meet them in person. It was great to see their long-term admiration for this company and the work that we've done for them over the years, and their strong interest in our long-term relationship continuing. So, I feel really good about that side of the business. Even though Q1 and Q2 have been extremely painful, they have actually been a lot more painful for other businesses in this industry, as you're aware. The number of business bankruptcies is way up. The number of business suicides is way up. We are living through a time that America has never envisioned before. I remain extremely optimistic. I remain extremely positive about everything we see. One of the reasons I'm so positive is, while I hate to say it this way, cybercrime has also grown 28% according to the statistics in the last six months—growth attributed to COVID. Almost every newspaper out there has run an article on their front page about how cybercrime has gone up in the last six months. They are capitalizing on the fact that America is disorganized, off balance and working remotely. The fact that cybercrime continues to grow ensures me that the market for our products and demand grows as well. Shield will be the first product I'm aware of that is introduced to the market as a plug and play product. I've been selling IT technology for 40 years and can tell you there are two major complaints about every IT product I've ever been associated with, including the ones I bought while I was the CIO in the federal government. Problem number one, they're way too expensive. Problem number two, they're way too complicated to install and operate. If you talk to any IT professional, they'll tell you whatever IT products you're buying that cost you X, let’s say it's $1 million, because a lot of the products I’ve bought as a CIO were $1 million, they say, you'll spend $4 million over the next two years installing, configuring, and maintaining that product. So your $1 million purchase is actually a $5 million commitment. That's typical of IT products and why the market is so frustrated. Shield will not fall into that category. We have designed and implemented Shield to be low-cost so that every business, large or small, can afford Shield without having to think twice about it—$2,000 up to 100 users and $20 a seat beyond 100 users. Very, very affordable for a product that can literally save you bankruptcy and millions of dollars, et cetera. So, I think it's revolutionary in that regard. I also think it’s revolutionary in the fact that it's plug and play. It's the only IT product I'm aware of that you can take out of the box, plug it into your network without reconfiguring your network, without talking to your CIO, without getting 17 other IT professionals to come in and work on it; you simply turn it on, and it starts protecting you one minute later. So I think we've overcome the two major obstacles of all IT products. It's now affordable and it's now installable. I am increasingly excited by how well the product works, by the magic it performs, and about how safe it's going to make America. $3 trillion— that the world lost last year alone to cybercrime. That's six times more than all the bank robberies in the world combined in one year. And it's forecasted to be $6 trillion two years from now. It's a growing massive problem that we're addressing head-on using artificial intelligence. Fortunately, what I found here, which is the reason I'm the CEO today is when I got here and looked at this company and met with Mike and Joe, I saw TraceCop for the first time in my life. As an IT professional who has worked in it for 40 years and who ran one of the largest data centers in the federal government for four years, I told them, I'd never seen such a rich, robust database. I immediately thought of the endless ways to monetize it. The first way we're monetizing it is with the Shield product. The Shield product could not be launched if it wasn't using the TraceCop database, which is 25 years of research that we're leveraging in one product. The other thing I found two weeks later that blew my mind was Savant. Savant is the most sophisticated network appliance I've ever come across that real-time analyzes every packet of data coming on and off your network and stores it in the database. I saw that as an asset the company spent 10 years developing, perfecting, and enriching that could be coupled with TraceCop, that would be used not as a log but as a real-time defense mechanism. We developed a layer of artificial intelligence that works in real-time—not later on logs, not weeks later finding decisions, but on the fly to make a decision about what it sees about packets of information, determining that they're bad and blocking them. The number one problem with all IT cybersecurity products today is all they produce is alerts. When I was in the government, we received from 50,000 to 500,000 alerts a day. Human beings cannot process 50,000 to 500,000 alerts a day. It's impossible. Most of them—almost all of them—get completely ignored, and with every layer you add, you know there's another product in the market today that's growing very well because it advertises that it's all AI. But it costs you a whole lot of money, you have to sign a three-year contract, and it's only a logging product, effectively creating massively more alerts. I talked to a Gartner expert about it last night who is very involved with this product, and I said, yes, but does it protect you from anything? He said, well, if you act on all the alerts, you can make yourself safe. I asked, so how many new alerts does it produce a day? He said, well, I was at one company and they got 10,000 a day. I just looked at him in silence and said, who can manage 10,000 alerts a day? Shield, on the other hand, would take those 10,000 alerts and block all 10,000 of them, leaving you nothing to do in IT while leaving your network safe. We're not just another log or another alert; we're not going to create more confusion and chaos. We will block everything bad that's going on and make your network safe. And we do it in real-time and at a low cost. I believe the market for this product is every business that uses the Internet. I believe it will grow rapidly because of the fact that you buy it, try it, like it, and you'll never take it out. I am more excited about this product than any technology I've worked on. I believe this is a game-changer technology in this market. As Joe mentioned, we can't talk too much about futures. Please understand, Shield is not a one-off product; Shield is the beginning of a family of technology that will also use TraceCop, that will also use Savant, and that will also have a layer of its own specific AI. We will have another half dozen products in the family by 12 months from now. They're all fairly small, they're all fairly powerful, and they're all additive. One of the things that every analyst asks me when I try to explain Shield is, what about the cloud? Everybody is going to the cloud. This is an enterprise product, and I ask, how many businesses in the world have a local area network that they need to secure today? The answer ranges from 30 million to 10 million depending on who you're asking. But it's a huge number of businesses. LANs haven't gone away; people still have them. They still have equipment; they still need it secured. That's why we're addressing that market first because it's the largest, lowest hanging fruit in the most pain. The FBI again reports 60% of businesses in America hit by ransomware in 2019 went bankrupt. They didn't just lose money; they went bankrupt. I feel a moral obligation as well as a business opportunity to attack this low-end market first. But the cloud is growing and is very important. Our very next product in the family that we will be launching will be a cloud solution. It will be priced differently, it's still going to be affordable, and it will be a service; it will still be plug and play. This is a very, very important market that we're just breaking open, and we're going to continue to leverage Savant and TraceCop long into the future. I know I covered a lot and certainly want to answer your questions. I hope that gives you a better understanding of why Shield is so significant and how desperately needed it is by the market today. Thank you for your time. Let me answer your questions.

Yes. Operator, can you remind the participants how to queue up for questions?

Thank you, operator. We have our first question from Howard Brous at Wellington Shields. You can go ahead, Howard.

Thank you. Jack, once again, congratulations on joining the firm and becoming CEO. I have a couple of—and I'm excited about this business as you are. So, I would like to get back to the base business. If I can get a sense of what you're referring to in terms of either the third and fourth quarter of this year or some sense of, assuming the government is open, what we could be looking for in the base business in 2021? Your choice of either one.

Yes. In looking at the third and fourth quarters, I said what I was told by our customers that I was able to talk to in person is they have a built-up demand for reports that they're not able to push through procurement in the past five months, and they plan to be able to execute in the third quarter and fourth quarter that will consume the amount of money they have budgeted for this company in 2020. So, we anticipate we have staffed and are ready to be extremely busy in our consulting services in the third and fourth quarters meeting that pent-up demand. Again, cybersecurity has not stopped because of COVID; it's gotten worse. Therefore, the government's need for our resources is greater than it’s ever been. They simply can't get anything out of procurement right now. I was assured by a senator and several other government officials that I met in D.C. that procurement is going to be open in the third quarter and that they will be issuing things. I'm continuing to be very optimistic that the third and fourth quarters will come in very positive, and our numbers will be very close to what we forecasted originally for 2020. Now, when you ask about 2021, I am even more bullish about 2021. Again, cybercrime we know is growing rapidly. Therefore, the demand for our traditional work out of the government will grow as well for 2021. One of our largest contracts that we've had for many years, I got a handshake agreement that will be signed in the next 30 days and will be renewed for another year. That's a multi-million dollar contract that we depended on, which was certainly in question, but I was given complete confidence that it will be signed, and we will have that revenue. I'm very bullish that the government business is going to kick back in and be very aggressive because demand is going to be even higher. In parallel to that, we will have launched and have in the market a successful commercial product that could be sold from anyone, from a small company up to an enterprise. We anticipate having a Fortune 100 company as part of our Beta process right now. We are signing the final deals on getting that closed. Again, whether you're small—which is where most of our customers are fitting in—because we’re focused on the SMB market for Shield initially, as it's the quickest market to sell an immediate return on investment. If you talk to a Gartner expert or a Forrester expert, they will tell you selling an enterprise IT solution into a Fortune 500 or Fortune 100 company is an 18-month to 24-month process. You have to meet with and get approval from 18 different people. I've lived in that world and know that's true. We’ll win a lot of that business longer-term, but that's not going to turn the first quarter. That's why we're focused on SMB because SMB is decided by the CEO or the CFO, and those people are in pain, they're in need, and we have an affordable solution. Unlike the Gillette Razor is cybersecurity, try it, you’ll like it. Put it in, run it for a month. Just to tell you how significant this is, I brought Mike into Joe's office last night to give him an update on Shield desk. I wanted to show him one of the new interfaces we've developed that end users can look at to see what the product is doing for them. We looked at it and we saw a lot of blocks happening. In fact, 52 things popped up on the screen while we were standing there talking. Mike said, that's pretty impressive. How long has this been running? I looked at the timer and said, Joe reset it 8 minutes ago. In 8 minutes on our secured network here in Richardson, Texas, we have 52 breaches that Shield blocked. We were all three in the room; it’s amazing. That's how the product works. This product is going to sell like crazy. I am very, very bullish that we will see phenomenal growth in new sales in the commercial market. Does that answer your question, Howard?

Fortune 100 company is public?

Yes, it is.

Okay. In the 10-Q, you referred to a couple of items. Value-added resellers and system integrators, the market share for the target market. You're talking about Ingram and people like that?

Yes, we are.

Have you spoken with Ingram?

I have spoken with Ingram. I have spoken with two VPs in Ingram. I've met with Tech Data; I've talked with one SVP at Tech Data. They are very excited to get their hands on the product. They say it's going to be very easy for them to push this through their channel. Again, I got myself in the back a second, but you can look in the history books: I helped create the channel back in 1985 at Novell. Novell is really the first company that identified, grew, and matured the channel. We grew from originally three resellers into 2,000 resellers and 19 distributors in six years. I've used that channel in every company I've gone to since I left Novell. I know it well, I know how effective it is. The reason it's so effective is there are 34,000 resellers around the world, all who have existing relationships with 90 million businesses around the world. You're not cold calling; you have an experienced rep with an existing relationship with the customer walking in and saying, I have a virtually no-cost product that will solve your cybersecurity problems. Let me show it to you. I think the channel will be extremely effective at moving this product forward. In addition to that, we have telesales people who are making calls today, signing up customers, and Shield is not even shipping yet. I talked to five customers that came out of that telesales this week in person. They are diverse businesses across America. One of them is Gartner, one of them is a manufacturer. Again, I think we fit every company's need. Early signs are that the customer understands the problem and understands our solution.

So my last question, Jack, is basically Beta testing starts on or about the first week of September, when you're finished; second, third week in September. Can we expect to hear from you publicly, as to the results?

Absolutely. You will hear from me. Officially the Beta in the contract that they're signing is a 30-day Beta, so it will run through the end of September. I will get feedback before the end of that. I plan to publicly talk about the Beta program, probably midway in the third week of Beta once we have enough data to give you something meaningful, and then again in the fifth week after we close out the data and have all the formal results.

We have our next question. Please state your first and last name and the company name. Your line is open.

Aaron Warwick from Diaz Capital. Can you tell me how many companies participated in the Alpha testing?

We really don't talk about Alpha testing. We have a non-disclosure with those customers, so we really can't disclose that. I can tell you that Alpha testing has been a very successful process. Again, I can't tell you how many bugs we closed, but I know it well over a hundred. That's not alarming, as most products I've worked on close 200 bugs during the Alpha process. A large number of bugs is very normal in Alpha. This is an extremely complex product. We're working at millisecond speed, making analysis and decisions on whether to pass or block a packet of information. The AI involved in those decisions is extremely complex, and there are a lot of ways that can go wrong, so you have to conduct extensive testing to find all of those. That’s what Alpha is about.

If anything else, going through the competitive analysis team here, we found one of the competitors that wrote their evaluation of their competitors. They said we have more than 30,000 signatures in hours and had less than 30,000. As of today, we have 6.3 billion. The one that's running in the closet over here that I'm using when you start looking at lists of that size, it's interesting. Just pruning the list and formatting it properly and loading it all the way has been...we're dealing with immense lists that are running in real-time, and it's been amazing that it's been as smooth as it has.

I appreciate that clarity. I think that’s what interests me; you mentioned the 200 bugs versus 100. I mean, from what I’ve heard from speaking to people in the industry, it sounds like—just from looking at the timeline from when you guys introduced Shield to the public to now, it's been pretty quick. It must have been a pretty successful Alpha test to get the Beta rolling this fast.

Absolutely. It has been extremely successful. And again, that's because it's built on a database that's been around for 25 years that we can depend on. It's built on a Savant network appliance product that has been around for 10 years, which has been updated numerous times. It’s a very mature product. If those two things didn't exist and weren't that mature, we would not have been able to move this fast; the Beta would not have gone this fast. Another way to look at results, for example, is I told you Mike and the eight minutes; that’s a telling story. One of our Beta customers is a Fortune 2000 business and in the one-month period that they were in an Alpha test, we managed to block 1.2 million attacks for them. This is on a network that they thought was completely clean. They told us they didn't need our appliance and we weren’t going to find anything. 1.2 million. Think about that. No customer that has installed and looked at the Shield product has not found that it was blocking things within minutes. The attacks are real-time; they’re non-stop, and they’re getting worse. Cybersecurity gets worse every day.

So when you look at the Beta testing now coming up, you've mentioned a Fortune 2000 company and the Fortune 100 company. What are you talking about in terms of the number of seats that will fit that Beta testing?

Yes, I’d like to know, then tell you. That’s the reason we don’t have a signed deal yet; they’re trying to decide how much of their network they’re going to expose. The bigger the companies are, the more resistant they are, the more afraid of new things they are. Just because they're a Fortune 100 company, they’re not going to open up their whole company to us on day one. They’ll come back and tell us what part of their company they’re going to expose it to. I’m anticipating that most of these customers will be in the 200 to 500 workstation range during their initial Beta phase. But they have the potential to scale skyward once they see it work and are convinced.

I appreciate that insight. That’s good to know that 200 to 500 per company. So when you—I'm assuming based on how successful Alpha was and how successful Savant and TraceCop have been, the Beta testing is going to go very well. So my question about that is building up the sales channel. How do you plan to fund that? Is that something that you can fund on your own now? Do you have to look to raise equity raise or take on some debt? What are your thoughts with respect to that?

Well, again, we have very solid plans right now. We said before to fund the sales of Shield organically. We have money in the bank and we have a plan of how we're going to get there. It does cost money; we are spending money, but we're doing it cost-effectively. I'm not going out to hire 100 salespeople tomorrow and see if they can be successful. For example, I've hired a firm that does telesales, that has an amazing track record, that works for Dell and Cisco. They’re two of their customers that they allow me to name, very, very successfully. They're very successful company and they know what they're doing—they're already producing consumers for us. Their feedback to us after their first week was pure joy. They said it was the easiest product they had ever started selling. Again, that's just one week, but we did turn it on and stick it. We can turn it up as fast as we want to. Obviously, we pay based on the number of telesales people we have. You want to start out small with a half dozen people so you can really manage the data, get feedback, and analyze what's working and what's not working. That’s the process we can grow. It's a very affordable process. You’re not staffing people, you’re not doing facilities. Telesales is a huge market that everybody uses today. It's a very, very cost-effective channel. We will grow that quickly, and we will grow it based on results. Any additional costs we add will basically be paid for by the new sales.

Good. What are your thoughts—this is obviously geared right now towards the commercial space. But is this applicable also in the government space where you're currently operating? I know you have a lot of contacts. Is that something that they're going to be interested in?

Absolutely. One of the meetings I had when I—one of the main reasons I went to Washington D.C. is, again, I have, unfortunately, a customer that I can't name; they're in the DoD side of the government. They spent two hours just talking about Shield, and they expanded from the start of the meeting, over a 1,000 seat installation that they want to discuss with me to talking about a nationwide rollout that could potentially include 20,000 seats. Now, that's an opportunity; it’s not a contract, right? That's what the customer told me in a meeting. So, again, I think it speaks to the fact that yes, the federal government is going to be very excited. No other product—I’ll say this, I’ll challenge anybody to prove me wrong—no other product stops the problem from happening. All other cybersecurity products that are used this way create endless alerts that you then have to staff and manage. You get the alerts so fast, you can’t manage them, and everybody knows that. We’re the only people that say, what good are alerts? If it means you have to work, it should mean you must block.

Yes, that's – and like obviously I'm not a company insider. I can't say how the product actually works, but taking your word for it right now, I can tell you that of all the cybersecurity people I've spoken with, they have said what you said—that this is a product that’s needed. It’s something that is currently not being done. Anyway, I appreciate you guys’ transparency. I know sometimes you're not able to say things, but I respect that 100%. But I do appreciate all the commentary you've given and how you try to be transparent with us. So, thank you very much.

One thing I’ll add just for fun is we haven't said on this call lately, but firewalls and all the other products stop stuff from coming in. One of the things we've been amazed with is we’re watching what leaves—stuff initiated within the enterprise—it’s throwing out to the Internet. If there isn't another product that actually does that, looking at what's going out, and that’s the thing that matters.

Yes, again, the myth is that all attacks come from the outside in; the reality from working in the federal government for four years in cybersecurity is 80% to 90% of all intrusions are caused by something inside going out. The outbound traffic is where almost all harm happens. It starts with simple call homes to pop-ups, but we stop all of those.

More than half of the detected now are actually not malware. They're malware-free, which means they're already on your system. It was on there when you bought the system, or they have a password backdoor. Our product does both, but primarily we're addressing the—it's calling out. We kill it in real time. It’s going to be amazing. It's not us against the firewall or us against the IDS; they do that, we do this. We found something they didn't. Would you like to renew?

We have a number of questions both covering the core business and also Shield. On the core business earlier this year, I think the call you had back late February, you talked about the ability to add $12 million to $16 million in revenues through the efforts of your new salesman and others inside the government. When you’re talking about the numbers, do you think you can see those are the numbers you're talking about being able to exit this year with the run rate at?

Yes. To update you on those numbers, we had about $6 million to $8 million related to the new salesperson we hired and the customers they brought in. One of those accounts is the $100,000 I just mentioned; that was actually a secondary one. There's another worth about $2.4 million. His entire team has been checking for security breaches, but they have paused their travel. Most of that activity is on hold, waiting for things to get back to normal. However, none of the clients have expressed any dissatisfaction. They’re all close to making a decision. In fact, two of those accounts; one we've already received the order for and are billing—the $800,000 will be the next one. I would suggest taking the numbers we reported previously and considering them as still pending, waiting for the government to resume work. We've also reported on other accounts, including DRK, which is one of them.

But again, not to mislead you, as we said in the press release, where we're seeing the biggest slowdown in delays is in new business in the government; the renewals are good, but the new business is dead. The new sales guy I met with him when I was in D.C., and I visited with three of his customers personally. They like him, and they're anxious to work with us, but they're virtually shut down. Again, these were companies, agencies, whatever you want to call them, that there was nobody present—basically just me with the sales guy and the customer. The government in D.C. is shut down. It is depressing, but it is killing new business. It's not killing the demand for the new business. I think that demand will fire up when it opens up, and it will be faster than it would have been before, so we're going to continue to pursue it.

Yes. Do you see the end of the federal year driving new business? I mean historically, if you're running an agency, you don't want to leave money unspent. Is that going to be something you think that drives it? So, we would see something in—pick up in late September, or is it something that because they're literally just not there, this is going to be a unique year and people might not be able to spend their budgets?

It won’t be really dead to me.

Yes, no, it's a unique year. There's no doubt about it. I said at the start of this call, the world has never seen anything like COVID and the impact on the world. This is a one-of-a-kind disaster in any aspect, with 52 million Americans unemployed. Come on, we have to realize how bad things truly are. My other experience from being in the government is that they will not be able to spend their budgets in the third or fourth quarters the way they have in past years. For one thing, Trump is not our past President; he has reallocated money and continues to reallocate money. It doesn't make sense to try and race through spending two quarters’ worth of money in one quarter and not expect people to misuse it. I think he's being what we'd want him to be as a good President; don’t get me wrong, but I think it will have an impact on new business.

Okay. Now you guys developed the product along with an individual or a team inside the DoD, and that product seemed exceptionally sophisticated and unique. How does that product parallel what you're doing with Shield? How does it differ?

Sure. The one that I jointly thought up with one of my DoD buddies was basically a software implementation of a Shield-like thing that runs on every workstation in a virtual machine. What Shield does is basically collapses that to an appliance; it’s in every way I can think of easier to support and easier to deploy. My deal with them is, if they want to deploy that one throughout the DoD, they can in the base; their part can be done for free, but they can buy subscriptions to us. I’ve stayed in contact with my buddy there. I don’t know how the Shield will launch and do well. That one will probably come to deployment as well, but they won’t be able to do their work until they get back to work.

If it were rolled out to other branches of the government, would you then be compensated for it being rolled out? It's only the DoD that gets to roll it out for free?

So their basic function doesn't do a whole lot, but some—all of the enrichment that uses TraceCop, they would subscribe to including DoD.

So basically, it becomes a force multiplier for new business for you as well.

That is correct.

And it also becomes a data gatherer additionally, correct?

And you know it could be a mandated federal thing if it's a mandatory rollout for free, with an optional upsell, which is positive, but I don't know what the timeline for them doing their half is since they're shut down. I suspect that it will come back to be helpful.

Okay. With regard to Shield, how much capital do you see needing to deploy to bring that through the Beta test to where you can bring it into the marketplace?

Very little. The development is done; the money spent is spent; the development is done; the product is ready to ship. We have a partnership with Dell—a company I've worked with since 1985 when I met Michael Dell in his dorm room in Austin, Texas. I've used it at multiple companies to ensure that Dell will provide us products to customers at no direct cost to us initially, and therefore the cost is amortized through the service fee. We don’t have to spend a lot of capital to put hardware in customers’ locations. Dell will bill those customers for products without requiring any upfront spending from us. It’s the absolute best possible solution we could have if we were in the inventory business, building and stacking and shipping hardware. Our CFO just turned pale.

Okay. So when you look at your product and you look at a Fortune 500 company that might have 40,000-50,000 employees or more, how many seats do you think they potentially have that would make use of this product? Do you see this as the type of thing that a company with like—or a federal agency that has 100,000 employees who log into computers? Do you see this type of thing as necessary?

Yes. Again, at the price point we have, it’s not a barrier for anybody implementing. The fact that it's plug and play is not a barrier for anybody implementing. I don't believe any of those organizations will start out with 100,000 people on it. But I think they'll all end up with 100,000 people on it. I don't know how a CFO, CEO, or CIO can sit back after they've had this product for a few months watching what it does, allowing any of their workstations anywhere in their network to operate without it. It will become a requirement, a new layer that you add to what you're already doing that makes you safe.

So literally, you're looking at this market. When you talk about your addressable market, you're thinking not just hundreds of thousands of seats or 100,000 seats—I mean, by my math, 100,000 seats at a 75% margin retaining makes you about $0.50 a share—but you're really thinking about millions of seats, aren't you?

Absolutely.

And at millions of seats, will this be a 75% gross, a 37% net margin product for you? Would you do better than that? It sounds like you have the potential to do better given the nature of what you’re doing.

Yes, I think it scales. I think we’ll do even better than that.

I used to be the CFO; I wanted to make sure you guide low.

Again, as I said, I've never been more excited about a product from this. This is the largest addressable market I've ever worked at. When I went to Novell back in the early 80s, I think they had 50,000 users of NetWare on their network. When I left six years later, they had 12 million users on NetWare and the network was still growing. Yes, I think this is millions of users, and I think it's a lot more valuable than NetWare.

We only talked about the first two Shield rollouts. Shield for the home workers comes in at 1.5.

Again, if you want to talk about markets, you’ve talked about the family of products—one of the new markets that has developed out of COVID that McKinsey is reporting as the new norm, that Gartner just sent out a report about is the mobile home worker. The teleworker is the new norm; they are here to stay. There will be millions of them. Every one of them needs a new Shield product that will support them in their home environment. Shield 1.0 does not support the home worker, but that is part of our family of products. What we'll be announcing is a product for every user in their home, both business-wise and personally. Technically, every user with a computer in America is a customer, and really every computer in the world is a potential customer.

So, we don't need to ban TikTok; we just need to buy Shield.

If that goes out over cellular, that would be a little bit hard.

Let me answer that a different way: Shield isn't going to block TikTok if the business allows it. TikTok is not an issue; it is the virus—visually, it’s a virus that people trust. That’s the problem. Yes, TikTok should be banned regardless of whether you have Shield or not. You could ban it with Shield, but that would be a company decision. Companies are the ones currently using TikTok.

So, definitely, there's a difference between a company that's naïve enough to allow something that has a vulnerability and a company that purposely designs part of its private data into their infrastructure.

You've got this market opportunity. I'm going to leave you with this question: How rapidly should we? I mean, it sounds literally like you're bringing something to market that almost sells itself—like selling lifeboats to people on the Titanic. It seems like it's a home run, and it's going to be a straightforward process that can lead to wild expectations. Are you going to fulfill those expectations? Do you see those wild expectations being reasonable to be fulfilled? How long does it take you to have 1 million people using this product?

Again, I don't know—none of us have a crystal ball. If you're asking for my opinion, without any facts behind it, because there's no way to give you factual insights in this case, 1 million people in 2021, I think is easy to assume.

I have to say this is one of the most exciting products that pretty much any of us have run across, and it really has a chance to reshape the cyber industry, because when you do talk to the big players—and we have investments in some of the big players—this is not a thing that they really have even thought about being possible.

I agree. Again, I am more passionate and excited about this product than anything I've worked on in 40 years. I recognized that because I spent four years in the government and saw the intense, extreme nature of cybercrime, cyber warfare, and where it was going. I started working on finding the solution, and when I stumbled into TraceCop and Savant, I stopped looking. I simply added the AI to it. This was meant to be. I think it's needed by America desperately, and that’s part of the reason we want to make it affordable. You don't have to sell for a lot of money to make a lot of money; you can make a lot of money, making less on a product that gives you a larger market. I'm much more about winning a large market than making a few customers happy.

When you have 1 million shares outstanding, you have leverage, right?

Right.

We’ve seen this in America a couple of times where there's nothing about the product that doesn't ask to make the rest of the world's life better.

Yes, I talk about America, who we're going after first. We filed for international patents, so we've used Wilson Sonsini Goodrich & Rosati, one of the best law firms in the country, for trademarks. They are filing our trademark patents for us. They are filing internationally. If you look back at my history, I started out selling products at Novell in the U.S. When I started there 100% of their sales were in the U.S. Four years later, 50% of their sales came from international countries. I have 8 million frequent flyer miles. I've been around the world; I have connections all over the world. I believe this is a worldwide product.

And we have no further questions at this time. Presenters?

Okay, then we'll wrap up the call. Operator, we appreciate it. There are no more calls, no more questions?

No further questions at this time, sir.

Okay. We'll wrap up the call. Thank you for participating in today's call. If you didn't receive a copy of the press release or if you have further questions, you can reach me at 972-301-3658 or e-mail mpaxton@intrusion.com. What's your e-mail, Jack?

jblount@intrusion.com.

Alright. Thanks, guys. I appreciate it.

Have a good day, you all.