Intrusion Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited; amounts below are in U.S. dollars, with financial statement figures generally in thousands. Intrusion develops cybersecurity and data-mining products, including TraceCop and Savant, and was developing its Intrusion Shield offering.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1.655 million | $4.020 million | $3.450 million | $7.211 million |
| Gross profit / margin | $1.004 million / 60.7% | $2.430 million / 60.4% | $2.052 million / 59.5% | $4.337 million / 60.1% |
| Operating income (loss) | $(714,000) | $1.767 million | $(1.185) million | $2.750 million |
| Net income (loss) | $(715,000) | $1.758 million | $(1.180) million | $2.706 million |
| Net income (loss) attributable to common stockholders | $(748,000) | $1.723 million | $(1.246) million | $2.637 million |
| Basic and diluted EPS | $(0.05) | $0.13 basic; $0.11 diluted | $(0.09) | $0.20 basic; $0.17 diluted |
- Revenue fell approximately 59% in Q2 and 52% in the first half year over year, primarily due to lower TraceCop sales. Q2 TraceCop revenue was $1.6 million versus $4.0 million; Savant revenue was $106,000 versus $29,000.
- Gross margin was broadly stable year over year in Q2, while the first-half margin declined 0.6 percentage points. Management attributed margin variation mainly to product mix.
- Q2 sales and marketing expense rose to $485,000 from $46,000; research and development rose to $907,000 from $296,000. First-half amounts were $995,000 and $1.660 million, respectively, reflecting higher labor, Shield development and launch-related spending. Management expected marketing costs to increase through year-end 2020.
Cash, liquidity and obligations
- Cash and cash equivalents were $2.872 million at June 30, 2020, down from $3.334 million at December 31, 2019. Current assets were $4.327 million and current liabilities $1.949 million, implying working capital of approximately $2.378 million.
- For the first six months, operating cash flow was a use of $1.026 million, compared with a source of $2.257 million in 2019. Investing activities used $62,000; financing activities provided $626,000, including a $629,000 PPP loan and $85,000 from stock-option exercises.
- The PPP loan bears 1% interest and matures April 30, 2022. The company reported a June 30 balance of $630,000, including accrued interest, and said it was in covenant compliance. Forgiveness eligibility and amount had not yet been determined.
- Lease liabilities totaled approximately $1.504 million at June 30: $1.461 million operating and $43,000 finance. No material capital expenditure commitments were reported.
- The former CEO’s borrowing facility had terminated; the company had no outstanding balance under that note. Management was considering replacement funding but had no committed facility disclosed.
Changes, outlook and risks
- Sales to U.S. government entities accounted for 91.0% of Q2 revenue, versus 91.3% a year earlier; four government customers represented approximately 91.0% of Q2 revenue. For the first half, government revenue was 80.8% of total revenue, versus 89.2% in 2019. Management noted that government budget delays, reallocations or contract cancellations could affect sales.
- Management said it expected available cash to fund operations and expected capital expenditures for the next 12 months, based on projected revenue growth. The company also warned that continued losses or inability to secure acceptable debt or equity financing could impair liquidity and operations.
- Intrusion Shield had made progress in alpha testing; beta testing with 12 identified companies was anticipated to begin in September 2020. Management identified small and midsize businesses as an initial target market and anticipated longer sales cycles than for existing products. Product acceptance, execution, costs and potential financing needs remain uncertain.
- COVID-19 could disrupt government customer spending and company operations. Other highlighted risks include dependence on TraceCop, customer and indirect-channel concentration, the need to restore profitability, and possible dilution from future financing or option exercises.
- After quarter-end, all then-outstanding preferred shares were voluntarily converted into 1,004,249 common shares, which the filing says diluted existing common shares by 7.28%. The conversion eliminated preferred dividend obligations and certain restrictions, but the filing cautioned that increased selling volume could pressure the stock price.
- Routine legal matters were not expected to have a material adverse effect, though the company gave no assurance regarding future claims. Management concluded disclosure controls were effective as of June 30, 2020 and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue stabilizes and the company can reduce its reliance on TraceCop and a small group of government customers.
- Shield beta timing, customer adoption, commercialization costs and contribution to revenue.
- Operating cash burn, cash runway and the availability and terms of any replacement or other financing.
- PPP loan forgiveness outcome and repayment obligations.
- The effects of preferred-stock conversion, option exercises and any future securities issuance on ownership and trading liquidity.