Plurilock Security Inc. (PLUR) Earnings Call Transcript & Summary

Hello, everyone. Welcome to Plurilock's Second Quarter Fiscal 2023 Earnings Call. My name is Prit Singh, and I'll be the moderator for today's call. For those that are unfamiliar, Plurilock is an AI-driven cybersecurity solutions provider for workforces that aims to capitalize on the $1.75 million -- $1.75 trillion cybersecurity industry. Plurilock trades on TSXV under the ticker PLUR and on the OTCQB under the ticker PLCKF. Before we begin, I would like to take -- I'd like to take note of some comments today that will contain forward-looking information and statements. I will pause here for a second so that our viewers can review our disclaimer. Please note that all dollar amounts mentioned in this presentation are in Canadian dollars. On today's call, we will be covering Plurilock's second quarter fiscal 2023 financial and operational highlights as well as its growth outlook for the remainder of 2023. Following Plurilock's management's comments, the call will be open for questions. Questions can be sent in using the Zoom Q&A function at the bottom of your screen or alternatively, if you're calling in to listen to the webinar today, please email your questions directly to [email protected]. Again, that is [email protected]. Our presenters today will be the CEO of Plurilock, Ian L. Paterson and CFO, Plurilock, Scott Meyers. With that out of the way, I will now turn the conference call over to Scott, CFO of Plurilock, to discuss the company's second quarter fiscal 2023 financial results.

Thank you, Prit. First and foremost, I would like to highlight several key business milestones that we've achieved for the 6 months ended June 30, 2023. Our total revenue increased to CAD 28 million for the 6 months ending June 30, 2023, as compared to CAD 16.1 million over the same period in the prior year. Directly attributable to our strategic acquisitions of Integra and Atrion in 2022. Our gross margins increased to 12.5% for the 6 months ending June 30, 2023, as compared to 8.6% over the same period in the prior year driven mainly by Plurilock's 2022 acquisitions, pricing strategy and its focus on securing high-margin software sales. Our high margin software sales for the 6 months ended June 30, 2023, increased approximately 445% year-over-year. A total of 26 sales orders and contract renewals were announced as June 30, 2023, since January 1, 2023, including a cross-sale purchase order with a Fortune 500 company for the company's Plurilock AI platform. Moving on to revenue. Total revenue for the 3 and 6 months ended June 30, 2023, was CAD 12,251,143 and CAD 28,018,471, respectively, as compared to CAD 9,106,547 and CAD 16,059,599 respectively for the 3 and 6 months ended June 30, 2022. Revenue for the 3 and 6 months ended June 30, 2023, is significantly higher than the prior year period ended June 30, 2022, as a result of timing of the acquisitions of Integra as well as the asset acquisitions of Atrion and CloudCodes, along with an increase in organic sales volume and cross selling amongst the Solutions and Technology Division. Hardware and system sales revenue for the 3 and 6 months ended June 30, 2023, totaled CAD 10,368,483 and CAD 22,812,612, respectively, compared to CAD 8,359,715 and CAD 14,855,611, respectively, in the prior period for the same period. Software license and maintenance sales revenue for the 3 and 6 months ended June 30, 2023, was CAD 1,150,767 and CAD 3,864,345 compared to CAD 610,653 -- I'm sorry, CAD 610,523 and CAD 1,039,979, respectively, in the prior year for the same periods. Professional services revenue was CAD 731,893 and CAD 1,341,514, respectively, for the 3 and 6 months ended June 30, 2023, compared to CAD 136,309 and CAD 164,009, respectively, in the prior year for the same period. Hardware and system sales revenue for the 3 and 6 months ended June 30, 2023, accounted for 84.6% and 81.4%, respectively, of total revenues compared to 91.8% and 92.5%, respectively, for 3 and 6 months ended June 30, 2022. Software, licenses and maintenance sales revenues for the 3 and 6 months ended June 30, 2023, accounted for 9.4% and 13.8%, respectively to 6.7% and 6.5%, respectively, for the 3 and 6 months ended June 30, 2022. Professional services revenues for the 3 and 6 months ended June 30, 2023, accounted for 6% and 4.8% of total revenues compared to 1.5% and 1%, respectively, for the 3 and 6 months ended June 30, 2022. Now moving on to gross profit and gross margin. Gross profit as a percent of revenue for the 3 and 6 months ended June 30, 2023, increased to 11.2% and 12.5%, respectively, compared to 10% and 8.6%, respectively, in the prior year for the same period. The change in gross profit and percentage primarily related to the company's continuation of the price architecture and following the growth of high project, high-margin product sales. Expenses. For the 3 and 6 months ended June 30, 2023, the Plurilock's R&D expenses totaled CAD 494,774, and CAD 1,005 654 respectively, compared to CAD 742,002 and CAD 1,289,415, respectively, in the prior year for the same periods. R&D expenses primarily include salaries and benefits, contractors, fees, communication and IT services. The net decrease in R&D expenses is due to the decreased use of contractors and the reduction in employee head count and salaries and benefits. The company received government assistance from the IRAP program, which also contributes to the reduction of R&D expenses. For the 3 and 6 months period ended June 30, 2023, the company's sales and marketing expenses totaled CAD 694,750 and CAD 1,472,342, respectively, compared to CAD 826,318 and CAD 1,613,660, respectively, in the prior year for the same period. Sales and marketing expenses primarily include salaries and benefits, marketing, contractor fees and web hosting fees. The increase of sales and marketing salaries and benefits is due to the additional sales, staff from the acquisitions from prior year and the direct correlation with increased revenue during the year. The decrease in contractors' expenses due to the termination of certain sales contractors and decreased spending in the office and general. For 3 and 6 months ended June 30, 2023, G&A expenses totaled CAD 2,224,210 and CAD 4,151,846, respectively, compared to CAD 1,203,576 and CAD 2,257,315, respectively, during the prior year or the same periods. G&A expenses primarily included salaries and benefits, professional fees, such as auditing and accounting, legal, corporate finance as well as Investor Relations, regulatory filing fees, communication and IT services as well as office and general expenses. These increases in G&A expenses compared to the prior year relates to increased investor relations and regulatory filing related expenses, amortization of capital assets acquired through the acquisition, web hosting, office in general and business insurance covering multiple entities as well as increased salaries and benefits as a result of increased head count following the Atrion, CloudCodes and Integra acquisitions. Finally, moving on to cash position. As at June 30, 2023 and December 31, 2022, the company had CAD 3,034,374 and CAD 2,712,684 cash and cash equivalents, respectively. As at June 30, 2023 and December 31, 2022, the company had CAD 140,423 to CAD 140,423 of restricted cash. That is all for the financial update on Plurilock. I will now turn the call over to Ian L. Paterson, CEO of Plurilock.

Thanks, Scott. I will now cover Plurilock's operational highlights for the 3 and 6 months ending June 30, 2023. And then from there, we can move on to the Q&A section. Significant sales and gross margin growth. As Scott alluded, our total revenues have increased significantly to approximately CAD 28 million for the 6-month period as of June 30, 2023 which is primarily driven by the increase in organic sales and cross selling through our Technology and Solutions division. We also saw a significant increase in software sales, which led to our gross margins increasing 12.5% for the 6-month period as of June 30, 2023, as compared to 8.6% over the same period in the prior year. As a result, we intend to continue securing more contracts for our high-margin software solutions and services to improve our bottom line with the goal of reaching cash flow breakeven. Furthermore, we secured our first cross-sale purchase order for the Plurilock AI platform with a Fortune 500 company in May 2023 through Aurora. As we continue to strengthen our relationship with existing customers, we plan to cross sale more high-margin proprietary technology offerings to our existing customer pipeline and client network of over 400 active organizations. Focus on maximizing cost efficiencies. As part of our strategy to achieve substantial cost savings, we've appointed Jord Tanner as Chief Information Officer to implement best practices across our all business units and realize operational efficiencies by deploying automation. With four acquisitions completed since going public, we need to streamline our operations and integrate our business units to unlock cost synergies. On August 28, 2023, we enacted a plan that will reduce our head count and other costs as part of our ongoing strategy to realize acquisition synergies. We expect to realize roughly CAD 2 million in cost savings on an annualized basis as a result of these actions. As part of the plan, we intend to reduce 18% of our head count costs. To date, we have reduced certain overhead in our General and Administrative expenses. Moving forward, we will continue to evaluate our operations and implement new initiatives to reduce our overall business expenses in order to improve our bottom line. Expansion of Plurilock's AI-driven technology portfolio. In Q2 2023, we decided to shift our focus towards addressing cybersecurity threats revolving around AI solutions. Due to the rapid adoption of generative AI tools within the workforce as well as the growing market for generative AI, which is expected to reach $1.3 trillion by 2032. As a cybersecurity provider that is founded on AI, with a world-class AI and data science team, including the numerous in-house PhDs, intend to leverage our state-of-the-art cybersecurity products and services to provide organizations with tools to make employee AI use safe without disrupting their productivity. We filed a provisional patent application with United States Patent and Trademark Office, the USPTO for an omnibus system of AI-driven cloud access security broker, CASB technology features that protect against the inadvertent or the intentional release of sensitive data while generative AI tools are being used. Our goal was to develop this technology in an enterprise solution that provides a way for businesses and other organizations to manage and govern the data to reveal to AI platforms without having to block AI either access in general or certain kinds of AI prompts in particular. This led to the development and launch of our first generative AI Guardrails product called PromptGuard. PromptGuard is a new AI-driven and cloud access security broker that supports employee AI use while ensuring that sensitive data is not released to AI systems. It provides strong AI guardrails without obstructing AI use and relies on a combination of mature data loss prevention technology and new, patent-pending, Plurilock AI platform technology to enable users to interact with generative AI, such that the AI platform does not receive sensitive data through user-generated AI prompts. And the user need not be aware of any anonymization or redaction having taken place. PromptGuard is currently available under the Plurilock's Early Access Program, EAP, as the closed, by invitation beta experience. And today, the first 10 channel partners across the world have signed up to distribute PromptGuard. Overall, we will continue to develop new AI-based technology to not only expand our product suite, but also strengthen our intellectual property. Moving forward, Plurilock will continue to employ a multipronged strategy to ensure continued rapid growth with the goal of reaching profitability. First, we aim to continue streamlining our operations and realize operational and financial efficiencies to achieve significant cost savings. As I highlighted earlier, we will reduce our head count as well as integrate various business functions across all departments to maximize cost efficiencies without disrupting our productivity. Furthermore, we intend to organically acquire new customers for our high-margin product offerings through leveraging our extensive distribution channels and employee channel partners. Following four successful acquisitions, we have secured over 400 active customers and clients worldwide, and we aim to continue capitalizing on cross-selling opportunities. Additionally, in regions without a direct Plurilock presence, Plurilock will work with a certified channel partner -- with certified channel partners to drive awareness of our Plurilock AI platform. Lastly, we also intend to expand our technology portfolio and release more advanced AI-driven cybersecurity products that are designed to protect the company's workforce in today, the tech savvy landscape where organizations and their employees are becoming more susceptible to cyberattacks due to the rapid adoption of new AI tools and solutions. Before we move to Q&A, I would like to conclude this review by emphasizing that we will continue ongoing efforts to secure more high-margin product sales while also streamlining our operations in order to drive significant revenue and gross margin growth as well as maximize cost efficiencies. As noted earlier, our goal is to reach cash flow breakeven. I will now turn the call over to Prit, who will be moderating our Q&A section.

Thank you. For those unfamiliar, if you are calling in today, you can email us at [email protected] -- [email protected]. If you're on the Zoom call today, you can submit your questions to the Q&A function at the bottom of your screen. What -- the first question, what is the company's strategy to reach profitability?

So I'll take that one. We have a few levers here. So first and foremost is to grow our revenue, especially in the software as well as professional services. So what we're calling higher-margin offers. And then the second one is defined cost synergies and efficiencies, which we have been doing again, been here less than 90 days. We've already found CAD 2 million of cost synergies and really want to highlight that we have a secret weapon somewhat in our India offshore as well. So we'll be moving functions there at a lower cost basis.

Next question. Can you expand on the company's recent significant software sales growth?

Yes. [indiscernible]. So there's really three ways that we're growing in software sales. I think the first is that there's new customers acquired either direct or cross selling through our solutions division where we've ended up as a company is that the majority of our sales and marketing operations is through the Solutions division. They're actively talking to customers on a daily basis. And so that creates opportunities to introduce and then sell our technology division products. Second is that we are seeing renewals, upsells and expansion revenue from existing software clients. And so that creates an opportunity to take an existing client either increase the price that they're paying because they're on a legacy pricing plan, for instance, or if they've -- if there's opportunity to increase the number of seats that client has or potentially upsell to some additional functionality or to take -- as an example, to take a Plurilock AI customer and then offer PromptGuard to them as well. And then the third is that we did see a bump up in software sales as a result of the acquisition of CloudCodes last year, which also includes some software revenue as well.

How has the company garnered a lot of interest in PromptGuard?

Yes, I'll take that one. So I think the thing that I found surprising is the amount of interest, but also how it's generalized across both all industries as well as all company sizes. So in comparison with cybersecurity software, there are some pieces of cybersecurity software that are really only specific to larger enterprises. So if you look at a category like data loss prevention, typically, you're not going to have them on top of 10 employees, you're probably not going to have data loss prevention software deployed in that environment. It's more going to be once you're in the hundreds of thousands of employees in size. Similarly, just depending on what industry you're in, you might face stronger regulatory controls. So if you're in health care or financial services, you might have a mandate by a regulator or a third party that say, you must have certain types of cybersecurity software deployed. And so what that means is that for most cybersecurity offerings, they're verticalized where there's at least a vertical go-to-market as well as segmentation based on company size. The surprising thing that I found with PromptGuard, but also just the interest of our customers using generative AI is that the interest we're seeing is across the board, companies of all sizes, but also companies across all verticals are asking the same types of questions around AI usage and how to do so safely. And so I've been speaking extensively both with our current clients as well as prospective new clients who are all struggling with how to adopt applications like ChatGPT or DALL-E or [ similar ] in a way that is safe for their business. What's interesting too is that there's concern both from a PII perspective. So companies who deal with Personally Identifiable Information or Personal Health Information, they're concerned about what that means to interact with public AI model with those types of data, but also just from a general privacy standpoint, disclosing what the company is doing to these public AI models and then there's a lot of fear and uncertainty about what happens to that data inside those public AI models. So I would say that just from a broad statement, there's just a lot of attention right now on this new type of technology and what that means for businesses.

Yes, you can even jump in there. Like from the financial world, I'm certainly concerned about customer data, just in general and especially depending on where you are, the fines that could happen if that data gets out, also just confidential data being released. So I think from a public market standpoint, you want to keep your confidential data type and you have a regimented release date. So I think that's, again, something that are solving for. And then finally, just if anything else gets out, it could be misconstrued. You want to keep your data for -- of your finance teams in-house so there's a broad range of applications here, not just in finance, but also along.

Next question here. Q3 is traditionally the strongest revenue quarter but margins will be pressured? What level of margins can be achieved in Q3?

I'll maybe take the first part of that. So I think it's worth reminding that the -- we have a very large portion of our business, which is to the U.S. federal government. We've always seen that as a strength because going into potentially uncertain economic climates. We've been quite reassured that we have good, strong customers that we are interacting with. Now what that has meant for us historically is that a lot of -- we see a lot of activity towards the end of Q3. That's typically when we see a lot of our U.S. government buyers procuring solutions because that's -- there's a change in where their budgets run out, and that's typically right at the end of Q3. And so as a result, we see a lot of demand. Certainly, the team is usually very, very busy right at the end of Q3. I think that the second component of that, though, is that in a lot of cases, the products and services that those buyers procure can run the gamut. And so it could be hardware, it could be software. And so those are just some of the dynamics that we have seen in years past. So it is definitely worth remembering that we do tend to see some seasonal fluctuations in the business. That's been the case for a number of years. And that's just one of the things that's a little bit different about Plurilock. Scott, would welcome if you want to chime in as well on that.

Yes. I mean, for sure, the mix impact of the margin is going to be in terms of margin rate, again, this is the busy season, and we're going to see a lot of resale activity. So it's more a margin dollar play than margin rate on that side during Q3. The mixing in and what we've been doing with software and professional services has given us that elevation in past quarters of margin rate, and we expect to continue doing that as part of our growth strategy as well as just performance objectives.

Next question, long-term goal on gross margin on the VAR side of the business.

So when we look at the VAR side itself, again, we have -- I think I would break out the business in a few separate chunks. One is the federal government business. One is what I call traditional VAR and then we also have professional services, we're selling through just on that side. So the goal is to layer in more and more professional services to increase the margin rates. In terms of long-term goals, I mean we're staying a bit away from forward looking, but again, our -- we do have goals to continually layer in professional services. I think we have a lot of room for fair growth and opportunity there.

I just jumped in. I think one of the areas that we're actually seeing a lot of demand on the customer side is help with professional services. Last year, I believe the statistic was that there's 3 million jobs unfilled in cybersecurity, and that's really facing -- that's having customers face the inability to hire the qualified people to do all of the work they need to do. Now if you pair that with the increase in compliance obligations that are occurring, so some of you may have seen us already, but the SEC, for instance, just published a new rule that there's now a 4 day reporting time line. So if a public company in the U.S. suffers a cyber incident. They have 4 days to report upon that. That's new obligation coming into U.S. public companies, which is going to -- which we believe will drive more focus for cybersecurity products and solutions inside publicly traded companies. At the same time, we're also seeing just a tremendous amount of cyberattacks coming in the other direction in the form of ransomware; Canada in particular, has been hit. Suncor, Sun Life just a number of industries. And so we're seeing a lot of threat activity occurring. And so what that's causing now is our customers have these increased regulatory obligations. They're also seeing increased risk. They need to do more. They can't hire enough people. And so it's a perfect storm for them to turn to trusted partners like Plurilock to say, "Hey, can you help us? So that's just a little bit of the nuance behind what we're seeing in the market and the need for additional assistance to actually do the things that they need to do, which could be as simple as hey, you sold us some products or some capabilities, we need help to not necessarily deploy, but we might need help to integrate. So getting PromptGuard, for instance, deployed and integrated and then connected into their log management system like a Splunk or a Security Incident and Event Management system, which is a shortened to SIEM. So those are some of the dynamics that we're seeing in the industry today.

Next question. How many large cybersecurity companies showing interest in integrating your product into their solutions?

Yes, I'd say at a high level, cybersecurity is a team sport. And so even the example that I just gave, where we have our system and we might be deploying it into a customer environment, and that customer says, "Oh, well, I want to consume the logs from one system in another system. And so Splunk is an example. Plurilock actually has -- on the Plurilock AI side, we actually have a public integration with Splunk to make that easy to do. And so for customers who want to consume that log information inside Splunk we provide an easy way of making that happen. So you don't have to really do work for every deployment. You can just -- it's a more automated way of doing that. So any time you have those types of integrations, there's usually interest from larger incumbents and so we publicized a number of them over the years. I certainly expect that we'll continue to want to collaborate and work with other cybersecurity companies. So I don't think that's going to change. I would also say that from an industry perspective, we are seeing a focus from -- a focus change from individual best-of-breed point solutions to more of a platformification. And so customers -- again, because of all of the drivers that we just talked about, compliance, regulatory, increased threats and the inability to do all the work that they need to do what we're seeing is that customers are looking for an easy button where they can just buy a whole platform to do as much of the work as possible. That platform could be like a technology platform, but the platform could also be trying to standardize on a couple of key vendors, which could be Plurilock and then looking to funnel all of their demand and needs through a couple of key vendors just to manage from a procurement standpoint. So rather than saying, hey, we need 200 cyber products, we're going to get that from 100 Cyber vendors working with maybe 5 or 6 to have more of an integrated, consolidated capability. So that's a bit of a shift compared to where it was 2 years ago, 3 years ago, where what we saw more of, where customers who were wanting to say, hey, we want to get the best, the best of the best and what's integrated now they bought too many things they can't integrate it and so they're looking for some assistance.

Okay. Great. Next question. You have a great product. The many Fortune customers are reluctant to take a chance on not a very well-known company, how do you plan to overcome that issue?

Yes, good question. So I think it was like Fortune 1000 customers like larger enterprises. So we definitely see that dynamic. So typically, it's -- what happens is there's a large company, whether it's a Fortune 1000 company or a Russell 2000 sized company and their -- they're looking for trust. They're looking for how do we -- how do we get trust and confidence in potentially taking on a new capability. What we have found with our model through the acquisition of solutions providers and then having that channel that actually creates, in a lot of cases, inherent trust. So they're already used to working with Aurora. They've been working with them for potentially 2 years, potentially 5 years, potentially 10 years. There's a good and trusted relationship. And so then when that sales rep that they're already used to working with presents a new option or says, hey, you've got a problem over here, we have a product that can solve that. There's more trust built up as compared to, if you're somebody that they've never heard of, it's difficult even to take them -- for them to get a meeting scheduled and then you have a higher level of suspicion or similar to present the product. And so that's been a key for us of our strategy, and that's why we're different in that we're trying to make it easier to present those new capabilities. And I think that we already have some evidence that is successful. I mean, we talked about the Fortune 500 client that procured some Plurilock AI licenses earlier in the presentation, and that was as a result of -- that was a cross-sale. That was a result of a long-standing trusted relationship that the company had with that client over many years. And so as a result, we were able to make a recommendation, hey, there's a new capability, you may not have heard of it, ultimately led to a sale.

Okay. Great. Should you have any more questions, you can submit them to the Q&A function at the bottom of your screen. Alternatively, you can e-mail us at [email protected]. Again, that's [email protected]. Last question, Ian and Scott, can you provide us with some catalysts investors can expect from the company over the next 6 to 12 months?

Yes. I'll take the first part of that. So I think the first -- and we've covered some of these already, but I think the first one is that historically, Plurilock has been very, very busy in Q3. So again because U.S. federal government is a very large customer of ours, there is that end of budget timing. And so historically, we've seen a lot of orders in that Q3 time frame. So we're just coming into that. So that's -- I think that's the first one. I think the second is that the end of the year for 2023 will be the first year that we've had all the acquisitions fully on the books. And like we've shown, we've already started to realize some synergies and some integrations. So operationally, those are two key items. I think the third one that I would just speak to is with regards to PromptGuard, the thing we keep in mind is that, when we've announced PromptGuard, we've actually announced it under our beta program, so what we call our Early Access Program. So we actually haven't -- we have not fully released it yet. The reason being is that we've very intentionally launched the capability under our EAP program, very, very early because we wanted to get it out there in front of customers -- potential customers as it really is possible to collect that feedback. So again, one of the key themes that you've heard through this call was that cybersecurity is a team sport. There's oftentimes integrations that need to happen or there might be areas of process that you have to work through with any new capabilities. This is not unique to us. This is true of any cybersecurity or even IT software capability that comes to market. So the next thing that happens after our beta program or after our EAP is a full, what we call a 1.0 launch or what's also called General Availability, GA in the industry. So you first have the beta program, then you have a 1.0 launch and a General Availability. At that time, that's actually when sales start because so you have a fully featured product out there in the market. And then you can go out and [ land ] sales. And then from there, you continue to iterate on that as a result of customer demands. So to -- just to remind where we are in that process, we've already filed the intellectual property. We've launched under EAP. We are actively working with both current clients as well as channel resellers because we want to refine the capabilities and we want to make sure that what we have is relevant to that channel. And then after that, typically, you would have a 1.0 launch and then from there things kind of get into more of a steady state. So those are the 3 items, Scott, maybe turn it over to you with any additional...

Yes. Thanks Ian. It's, I think, a great summary there. The only thing I'd add to that is we're still going to go through continued cost reduction. So we're looking at our expenses and our contracts that are coming up. So keep in mind, some of them are our term contracts. So when those terms are over, we'll be switching those out for more cost-effective options as well as the continued use of our [indiscernible] shared services team and continued to look at our -- that's our just expenses overall and reducing everywhere we can.

Okay Great. I think that's it for the Q&A session of the webinar. So thank you, both Scott and Ian, for the presentation today and overview of Q2. For attendees, if we did not get to your questions, please e-mail us at [email protected] -- [email protected] and we will address them immediately. I would like to thank everyone for attending the webinar today. Just as a quick reminder, again, for those who are unfamiliar with Plurilock, the company trades on the TSXV under the ticker PLUR and on the OTCQB under the ticker PLCKF. We will have a recording of this webinar shortly after. Thank you, everyone, for attending today.

Thanks, everybody.

Thank you.