Intrusion Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial amounts below are in millions of dollars unless noted. Intrusion sells cybersecurity products and services, including its INTRUSION Shield subscription offering, to government and commercial customers.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $1.47 | $2.06 | $2.78 | $3.89 |
| Gross profit / margin | $1.14 / 77.5% | $1.14 / 55.5% | $2.13 / 76.8% | $2.07 / 53.3% |
| Operating expenses | $4.06 | $5.10 | $9.10 | $10.02 |
| Operating loss | $(2.92) | $(3.96) | $(6.97) | $(7.95) |
| Net loss | $(3.13) | $(4.07) | $(7.86) | $(8.12) |
| Net loss per share, basic and diluted | $(0.15) | $(0.21) | $(0.37) | $(0.42) |
Q2 revenue declined about 29% year over year; first-half revenue also declined about 29%. Management attributed the higher gross margin chiefly to the loss of a low-margin government contract and a more favorable sales mix, including a greater share of Shield revenue. Consulting revenue was $1.1 million in Q2 and $2.1 million for the first half, down from $1.7 million and $3.3 million, respectively. Shield revenue was $0.4 million in Q2 and $0.7 million in the first half, versus $0.4 million and $0.6 million a year earlier.
Cash, debt and liquidity
- Cash and cash equivalents were $0.3 million at June 30, down from $3.0 million at December 31, 2022. Working capital deficit widened to $13.9 million from $7.8 million.
- For the first half, operating cash use was $3.3 million, investing cash use was $0.7 million, and financing provided $1.3 million. Cash decreased by $2.7 million. Operating cash use was lower than the $7.1 million used in the first half of 2022.
- Streeterville notes payable totaled $10.9 million at June 30, including principal, accrued interest and modification fees; the balance was classified as current. The notes carry a stated initial rate of 7%, with a reported effective rate of 14.8%, including debt-cost amortization and accretion. The company also had finance and operating lease liabilities.
- After quarter-end, Streeterville extended each note’s maturity by 12 months, to September and December 2024, and received a first-position security interest in all company assets. A 180-day redemption standstill is conditional on a qualifying public offering of at least $5.0 million net by October 1, 2023. If that condition is not met, the standstill does not take effect; after any applicable standstill, redemption obligations resume along with aggregate weekly cash payments of $50,000.
- On August 11, the company filed a preliminary S-1 for a proposed offering targeting up to $8.5 million gross, or $7.5 million net, through common stock or warrants and related securities. The filing does not establish that the offering closed or that proceeds were received.
Changes, outlook and risks
- Operating expenses fell 20% in Q2 and 9% in the first half year over year, with lower legal and consulting costs and lower stock-based compensation among the factors. Cost reductions introduced in late March were expected to save about $1.5 million per quarter; management reported $1.2 million of Q2 savings excluding noncash stock compensation. Measures included eliminating 16 positions, reduced executive compensation for six months, and reduced contractor use.
- Management said Shield sales traction was slower than initially anticipated. Its focus was building reseller and channel capacity and advancing prospects through the sales process; management believes improved partner engagement and product messaging may shorten sales cycles and support future revenue growth. No numerical revenue or earnings guidance was provided.
- The filing states that the company’s $0.3 million cash balance was insufficient for monthly operating needs and that additional financing was needed in the near term. Management plans to seek debt or equity financing but gave no assurance it can obtain financing on acceptable terms or at all. The company disclosed substantial doubt about its ability to continue as a going concern; failure to secure funding could impair operations or threaten continuation. Equity financing may dilute shareholders.
- U.S. government customers generated 46.7% of Q2 revenue and 47.5% of first-half revenue, down from 65.7% and 68.8% in the comparable 2022 periods. The company warned that government spending changes, cancellations or renegotiations could materially affect results. Two commercial customers each exceeded 10% of revenue in the periods described.
- The consolidated securities class action was settled for $3.3 million, paid by the insurer, and the court approved the settlement allocation in March 2023. An SEC investigation remains ongoing, and a stockholder derivative action is pending; the company cannot assure the SEC investigation’s outcome or its potential effect.
- Management concluded disclosure controls and procedures were effective as of June 30, 2023, and reported no material change in internal control over financial reporting during the quarter.
Key investor verification points
- Whether the proposed securities offering closed, how much net cash it raised, and the resulting dilution and capitalization.
- Whether the company can meet near-term obligations with limited cash, and whether Streeterville’s offering condition, redemption rights, weekly payments and collateral terms are triggered or changed.
- Whether Shield and channel-partner sales grow enough to offset declining consulting revenue and the loss of government-contract revenue.
- Revenue concentration, customer renewals and prepayment obligations, including the government contract referenced in the risk disclosures.
- Developments in the SEC investigation and derivative litigation, and any related financial or operational consequences.