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Please note that Information Arbitrage discussion begins at the 19:57 mark

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Outline: Conference Call Information Arbitrage (InfoArb)

1. Why Invest Long-Term

2. What Intrusion does – Cyber Security

  • In simple terms, Intrusion Inc (OOTC:INTZ) “develops, markets and supports a family of entity identification, data mining and advanced persistent threat detection products. Our customers use our products as an integral part of protecting their critical infrastructure and data information assets. By quickly detecting, protecting, analyzing and reporting attacks, along with the potential misuse of classified information, we have become a key component to the daily challenges of cyber security for both state and federal governments and large private commercial enterprises.”
  • Tracecop – Includes a number of our proprietary supporting tools, allows our customers and in-house cyber analysts to accurately discover and help identify ‘bad actors’ associated with cybercrime.
    • Our TraceCop product family includes a database of worldwide IP addresses, registrant information and their associations, along with a plurality of related IP information, some dating back nearly two decades. assist the analysts in locating cybercriminals and other potential ‘bad actors’ or network anomalies. We offer our customers a daily, weekly or monthly enrichment service to assist them in the culling of ‘good’ data traffic from potential threats.Continuously collects, processes and stores vast amounts of historical Internet usage and traffic data into the TraceCop™ Databases.The power of this tool resides in the patented algorithms used to make complex associations based current and historical public information including IP addresses, domain names, host names and personal information extracted from Whois information including email addresses, names, phone numbers, fax numbers and physical addresses. These associations provide the potential to uncover identities of unlawful companies and individuals who have attempted to deceive others.This tool greatly reduces the time required to track down Internet perpetrators, thereby making it easier for law enforcement or company officials to prosecute Internet related offences.Some companies can provide similar tools and services around small amounts of the existing data but only Intrusion can offer access and views into deep historical data.
      • Fees – Intrusion licenses TraceCop to our customers for a yearly fee and offers scheduled updates. Intrusion will either install and update the database at the Intrusion facility or install TraceCop on a customer server onsite. Updates are delivered via secure Internet feed or removable storage devices.
  • Savant – A ‘purpose-built’, very high-speed network data mining and analytics software package that is easily installed on commercial off the shelf platforms.
    • Savant is a purpose-built appliance that performs a unique, real-time, transparent data capture and analysis of all content across a company’s network, including the “who, what, when and where” of the data from any application. The Savant solution provides real-time access and insight into a company’s own indisputable and quantifiable network data for more effective, unbiased examination of their flows. Uses of the Savant product include data mining, data loss prevention, advanced persistent threat detection and identification of Internet habits of network users.
    • Fees – Savant is a software product which we license to our customers for which we sell data updates. We also offer the option to fully implement a server and re-sell to the customer as a turn-key solution.
  • Call scheduled with the company after they report Q1 2020 (Quiet Period)
  • What it does not do
    • Block threats

3. Coverage History

  • Began in coverage in May 2018 at $1.35
    • See Research note the Premium Member Portal https://portal.geoinvesting.com/companies/intz_intrusion_inc/research**Call to Action – Initiating Swing Trade In INTZ On Possible Contract Win and Information ArbitrageIntrusion Inc (OOTC:INTZ) ($1.35; $17.5M market cap), a provider of entity identification, high speed data mining, cybercrime and advanced persistent threat detection products, is seeing shares hit new highs on the heels of strong Q1 2018 results highlighted in our May 8, 2018 email.  In November 2017, after reporting Q3 2017 results, we tweeted that shares inched up ~220% as the Q3 conference call offered some InfoArb that a new level of revenue will solidly move the company into profit.Similar to Q3, the recent conference call had some more InfoArb nuggets
  • Information Arbitrage – Several earning conference call transcripts divulge bullish information that was not in related earnings press releases
    • Contract outlook for Tracecop
    • Building Savant pipeline
    • Seeking Sales Hire
  • Disclose Long Position in May 2018
  • Eight straight quarters of YoY and sequential revenue growth
    • Began to achieve strong profitability
  • Stock rose to attain a high of $6.50 on January 14, 2020
  • Stock has pulled back due to a softer Q4 2019. Sales and earnings were lower on a YoY basis, as well as down sequentially from Q3 2019.
    • Weak results were due to delays in contract awards.
    • The company anticipates that these delays will also impact Q1 2020.“Revenue in the fourth quarter was lower compared to last year primarily due to delays in orders expected but not received. Order delays were primarily due to customer funding not aligned with anticipated renewals, a trend we anticipate will continue through the first quarter 2020. Orders booked in the fourth quarter 2019 totaled $4.4 million consisting primarily from renewals of existing projects,” stated Michael L. Paxton, Interim President of Intrusion.
  • Valuation
    • Stats
      • Current Price $3.35
      • 4 million fully diluted shares
      • Fully Diluted market cap of $50.25 million
      • $3.3 Million in cash and no long-term debt
      • Currently selling at a P/E of 12
      • P/S of 3.7x
      • EV/S of 3.5x
      • P/E of 25 = $7.00 (P/S of 7.7x)
    • Comps (all are billion dollar companies, so comparisons are not that useful)

Sentieo Revenue Table (Began coverage in May 2018)

INTZ Revnue

5. Risks

  • Ris
    • Customer Concentration
      • 4% = U.S. government
      • 3 exceed 10% of sales, individually
    • Budget delays
      • Trump border wall
      • Uncertainties surrounding the effects of the coronavirus, particularly potential diversion of time and resources of the federal, state, and local governmental entities which make up a significant concentration of our customer base, could cause a material adverse effect on our results of operations and financial results.
    • Only 4 sales associates
  • As of October 24, 2019, we have lost the ability to borrow, up to $2.7 million under an unsecured revolving promissory note (the “CEO Note”) from our former CEO, the loss of which may have a material adverse effect on our business, our results of operation, or even our ability to continue as a going concern. We will continue to seek financing alternatives.

6. InfoArb

  • Earnings Conference Call via Seekingalpha.com https://seekingalpha.com/article/4326750-intrusion-inc-intz-ceo-michael-paxton-on-q4-2019-results-earnings-call-transcript?part=single
    • New sales guy with cybersecurity experience hired in Q3 2018 is coming through with having current and new government customers adopt Savant“As we’ve grown into this new area, I’ve been excited about what we’ve started up and new customer projects and portions of DOD who I’ve never worked with. To that end, we compiled a list of DOD entities that we should call on and we’ve also brought the list of program where he has connections; previous connections too and he began interacting with them for sales opportunities. So today, I’m happy to report that via his efforts, we’ve developed relationships with four new customers who are in the process of putting new contracts in place for us.”
      • 19 new Savant government prospects, and expect that pipeline to grow throughout the year.
        • The ratio of larger projects continues to improve
      • Four new Savant government customers represent $6 million to $8 million of potential orders this year
      • Wallet Share (more revenue from current customers)
    • Value Of Potential New Contract pipeline
      • Current pipeline = ~ $18 million
      • Potential to double sales in two to three years
    • Actively seeking new sales partners to go after an enormous commercial market
      • Built infrastructure to handle surge in commercial customer growth“As we’ve done, relatively a few amount of customers, and we’re looking at suddenly doing reports for upto 7,000 or so customers. You can’t do that by hand because there are just not that many wizards. So we’ve spent a good part of the last two years doing machine-generated auto reports so that when the gusher occurs and we hit that elbow, we won’t be out trying to hire people that don’t exist.”
    • New product gives the company a complete product offering
      • Prevents threats from entering network
        • Very big deal!
    • Up for sale (CEO’s father and ex-CEO recently passed away)

Conference Call Notes

New Sales Guy Commentary:

But if we reflect back to where we were in October, November; up until last week, when we got the good news on one of the big two, we were told this whole year might not — might just be skipped over and that the prospects for underfunded requests were not good. So starting back in October, me and our new sales guy had been focused on all three items; investing market energy to get new business to grow our base in case to fall out funds, for the two big ones just didn’t come through this year, but also staying in front of the two prospects to increase our chances of renewing them as well. Now, both threats looks like they’ll be successful, but not without a dry spell while we wait.

As you know, I hired a new salesman to push Savant and Savant Threat Analysis into the Department of Defense space, into groups that we didn’t know previously. And he got on board in Q3 last year. Far from being just a salesman, our new hire has a bachelor’s, master’s and doctorate in electrical engineering, and is one of the best cyber security folks around.

These four represent $6 million to $8 million of potential orders this year, that’s a potential orders we actually haven’t forecasted, so not Pie in the Sky [ph] potential. And the first two are proceeding to contracts on their first few items to put under contract as we speak.

By my count, we took the 16 we were working on in Q4 and turn four into the forecasted orders in 2020. In addition to those four, we’re now working on 19 new prospects, and expect that pipeline to grow throughout the year. The ratio of larger projects continues to improve. Also, we’ve pushed hard to develop new relationships, we’ve built some good ones, and to our surprise, I found a number of teams that already knew us and we’re looking at solutions right in our sweet spot.

New Product Commentary

Recall, last time I reported over the past year, we’ve built new capabilities in three areas, one, improvement to Savant, and Savant Threat Analysis, which is our Hadoop-based analysis system, we can talk about later if you want it in the question-answer. We’ve built the TraceCop machine learning capabilities into a new platform along with adding some new TraceCop datasets, and started work on novel new kind of security solution in the zero trust space which complements Savant and STA without competing with it. We also built cash, paid off our debt, and hired some new staff to help our push into the new areas

This project has several elements in the trace comp in Savant space, which are ongoing, and we’ve discussed before. But one of the prime movers is a new technology been working on for about six months. If we going to go through the goals of a defender, his job is to make it harder for an adversary to penetrate, to operate, and remain undetected in his infrastructure. So far our Savant, STA and Savant products and TraceCop as well, primarily address just two of those three. They help you prevent an adversary from operating and remaining undetected in your network, unless you trace some and attribute them, and it doesn’t stop them from initially penetrating.

So last year, we participate in the conception of a novel way to make it harder for an adversary to penetrate to. This is the area which is proven most elusive because a large number of unaddressed threats and realities, which I won’t bore you with on this call, but we can talk about that separately if you want. This new thrust will make it much harder to penetrate a network in the first place, and harder to spread through an enclave by changing the approach radically. For sure this is what all antivirus and security products are marketed to do. But the ongoing number of breaches and huge sums of money being paid as ransom where criminals underscore that the world’s current enclave network, desktop and post penetration defenses, just aren’t working. This new set of solutions will be novel and greatly reduce the number of advertories [ph] and methods that can stay in the compromise game. We’ve worked out that there’ll be a free version available to DOD and perhaps others in the federal government, but Intrusion will offer paid subscriptions and services to layer on top of the solution.

Commercial Opportunities and Sales Partners

So we’ve had one of our Savant STA customers refer us to two companies in their industry that have suffered breaches while our customers stayed safe. We see that as a great opportunity, but one where we don’t have enough staff to go engage the wider commercial marketplace. Even though we have a few good customers purely in the commercial space, ready to offer good referrals; further, over the last quarter, we’ve been pondering how best to expand our marketing and sales. To that end, I’ve been talking to a few potential partners or those who can introduce us to potential partners as a way to expand the sales of our products outside our normal DOD, customer base.

As we’ve done, relatively a few amount of customers, and we’re looking at suddenly doing reports for up to 7,000 or so customers. You can’t do that by hand because there are just not that many wizards. So we’ve spent a good part of the last two years doing machine-generated auto reports so that when the gusher occurs and we hit that elbow, we won’t be out trying to hire people that don’t exist.

Selling The Company; Sales Partners

Question From Attendee:

Have you guys retained anyone that help you advice on strategic alternatives, whether it would be the sale of the company or the buying back of stock or things of that nature? And as answer that could be a yes or no, and no comment which means yes, by the way.

Company’s Answer:

So as I’ve said a couple times the shape of which I’m lobbying for is, I see a huge commercial opportunity and growing that inside is just not an option. And so you can view that as partnering by various methods, and obviously, we’re looking at those; and that’s also kind of an interesting time-related challenge as you don’t always want to wait for the next horizon but in this particular case, dang, going from government DOD to commercial is a huge swing in addressable market and potential sales and market cap that you don’t want to give up on or you see that elbow, but that is essentially our — our largest challenge is how do we find.

And so we’re working that for a while with trying to see who would be a suitable partner from a trust and a scale perspective and certainly, we’re talking to other people. That’s my comment in the last paragraph of efforts to stir up as well as seeking sales partner to further add to our channel and optimize shareholder value.

Revenue Outlook

Question from Howard Brous

So were you looking at notwithstanding the issue of timing which obviously, isn’t hitting the first quarter. But basically, if I add up all of these contracts that you’d expect the ones — for all of these, you’re talking about $18 million in contracts. Does that sound about right for this year?

Answer from co-founder, Joe Head:

I don’t have a reason to doubt your numbers there, Howard.

Question From Unidentified Analyst:

So when you look at this, so yes — to me, it would make sense a couple things. One is that if you choose to stay independent, I believe you should list on a significant exchange; you should probably be retiring shares because you’re going to generate free cash flow. And the other side is it looks to me that you’re probably sitting in a situation where it’s not unrealistic to see you potentially doubling your top line over the next two to three years, would that — I mean, it just seems that’s probably fairly achievable.

Answer from CEO, Michael Paxton:

Yes.

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