INTRUSION INC. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Intrusion develops and sells cybersecurity products, including TraceCop, Savant and its newly introduced subscription-based INTRUSION Shield.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $1.96 | $1.66 | $3.81 | $3.45 |
| Gross profit / margin | $1.23 / 62.6% | $1.00 / 60.7% | $2.45 / 64.4% | $2.05 / 59.5% |
| Operating loss | $5.65 | $0.71 | $9.55 | $1.19 |
| Net loss | $4.95 | $0.72 | $8.85 | $1.18 |
| Net loss per share | $0.28 | $0.05 | $0.50 | $0.09 |
- Revenue increased about 18% year over year in both Q2 and the first half. Shield generated $0.1 million of revenue in each 2021 period (quarter and six months); management also attributed growth to TraceCop.
- Operating expenses rose sharply. For the first half, sales and marketing was $6.34 million, R&D $3.00 million and G&A $2.67 million. Management linked the increases to hiring, marketing and product development undertaken in anticipation of Shield growth.
- Gross margin improved, which management attributed mainly to product mix. The $0.635 million gain from forgiveness of the PPP loan reduced reported net loss; the underlying operating loss remained substantial.
- Cash and cash equivalents were $9.34 million at June 30, down from $16.70 million at December 31, 2020. First-half operating cash use was $6.57 million, investing cash use $0.89 million and financing cash inflow $0.10 million. Working capital was $7.30 million.
- The $0.629 million PPP loan and accrued interest were forgiven in April 2021; no PPP loan remained on the June 30 balance sheet. Finance and operating lease liabilities totaled $2.47 million on the balance sheet. The filing lists $2.66 million of undiscounted future lease payments as of June 30.
Material changes and management commentary
- Shield sales were slower than anticipated. In July, management said increased spending and lower revenue expectations for Shield created significant concerns about meeting near-term cash-flow and liquidity needs.
- The company said it believes additional funding is necessary to finance operations and continue as a going concern. It engaged B. Riley Securities as sales agent for a proposed at-the-market program of up to $50 million, subject to the shelf registration becoming effective and the company’s ability to raise funds. No proceeds or assurance of funding were reported.
- After quarter-end, the company terminated its CEO, appointed Executive Chairman Anthony LeVecchio as Principal Executive Officer while searching for a permanent CEO, and reduced its workforce by approximately 20%. It estimated $135,000 of third-quarter termination costs and $1.2 million of net cost savings for the remainder of 2021.
- On August 1, the company entered equipment leases with $1.5 million of future minimum payments through 2024. Management also reported approximately $0.5 million of remaining-2021 payments related to the former CEO’s departure and workforce reduction.
- There is no quantified revenue or earnings guidance in the filing. Management expected conservative customer budgets to continue amid COVID-19 uncertainty and anticipated government customers would remain a significant revenue source.
Risks, contingencies and unusual items
- Funding and going concern: Management identified significant near-term liquidity concerns and said additional financing may be necessary. The proposed equity program could dilute shareholders, and the company gave no assurance it could raise funds.
- Customer and product concentration: Government sales represented 64.4% of Q2 revenue and 69.0% of first-half revenue. One commercial customer contributed 23.1% of Q2 revenue and 21.5% of first-half revenue. Management reported that TraceCop remained the dominant solution.
- Litigation: Two purported securities class actions were pending; the company said it considered the claims without merit and intended to defend them. The company also sued its former landlord, seeking more than $1 million and lease-related declaratory relief. Outcomes and potential financial effects were uncertain.
- Disclosure controls: Management concluded disclosure controls and procedures were not effective as of June 30, 2021, citing deficiencies in recording, organizing and preserving written records of formal board actions. It described initial mitigating steps and an outside consultant’s review.
- Other risks include the CEO transition, workforce retention after layoffs, market acceptance and performance of Shield, competition, cybersecurity incidents and volatility in the company’s shares.
Important facts for investors to verify
- Whether the shelf registration and proposed ATM became effective, how much capital was raised, and the resulting dilution and cash runway.
- Subsequent revenue, customer adoption, renewals and unit economics for Shield, and whether commercial growth offsets TraceCop and government-customer concentration.
- Actual spending and cash-flow trends after the workforce reduction, including realized savings, severance costs and new equipment lease commitments.
- Progress in appointing a permanent CEO and remediating the disclosure-control deficiencies.
- Developments and potential costs in the securities class actions and landlord litigation.