Intrusion(INTZ) - 2021 Q2 - Quarterly Report

Part I – Financial Information This section details the company's financial performance, condition, and internal controls for the period Financial Statements For the six months ended June 30, 2021, the company reported a significant net loss increase and weakened financial position Unaudited Condensed Consolidated Balance Sheets As of June 30, 2021, total assets decreased to $13.8 million from $19.9 million, with a significant decline in cash and stockholders' equity Condensed Consolidated Balance Sheet Data (in thousands) | Balance Sheet Item | June 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $9,337 | $16,704 | | Total current assets | $11,466 | $18,307 | | Total Assets | $13,843 | $19,882 | | Liabilities & Equity | | | | Total current liabilities | $4,165 | $2,142 | | Total Liabilities | $5,858 | $4,221 | | Total stockholders' equity | $7,985 | $15,661 | | Total Liabilities & Equity | $13,843 | $19,882 | Unaudited Condensed Consolidated Statements of Operations Despite slight revenue growth, surging operating expenses led to dramatically widened operating and net losses for Q2 and six months 2021 Statement of Operations Highlights (in thousands, except per share data) | Metric | Q2 2021 (in thousands) | Q2 2020 (in thousands) | Six Months 2021 (in thousands) | Six Months 2020 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,960 | $1,655 | $3,812 | $3,450 | | Gross Profit | $1,227 | $1,004 | $2,454 | $2,052 | | Operating Loss | $(5,651) | $(714) | $(9,554) | $(1,185) | | Net Loss | $(4,951) | $(715) | $(8,854) | $(1,180) | | Net Loss Per Share (Basic & Diluted) | $(0.28) | $(0.05) | $(0.50) | $(0.09) | - A gain on the extinguishment of debt of $635,000 was recorded in Q2 2021 due to the forgiveness of the SBA PPP loan[18][69] Unaudited Condensed Consolidated Statements of Cash Flows Net cash used in operating activities significantly increased for the six months ended June 30, 2021, leading to a substantial overall decrease in cash Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | $(6,574) | $(1,026) | | Net cash used in investing activities | $(891) | $(62) | | Net cash provided by financing activities | $98 | $626 | | Net decrease in cash | $(7,367) | $(462) | Notes to Unaudited Condensed Consolidated Financial Statements Notes highlight going concern doubts, a planned stock offering, recent CEO termination and workforce reduction, and high revenue concentration - The company has significant concerns about its ability to meet its cash-flow and liquidity needs, raising doubts about its ability to continue as a going concern It has engaged B. Riley Securities for a potential at-the-market offering of up to $50.0 million[34][92] - Subsequent to the quarter end, the company terminated its President and CEO, appointed an interim replacement, and executed a planned reduction in force, terminating approximately 20% of its employees[71][72] - Sales to the U.S. Government accounted for 69.03% of total revenues for the six months ended June 30, 2021 One individual commercial customer accounted for 21.50% of total revenues during the same period[59] - On April 7, 2021, the company received notice that its $629,000 PPP loan and accrued interest was forgiven in full, resulting in a recorded gain of $635,000[69] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes revenue growth to new products but notes surging operating expenses, leading to significant losses, liquidity concerns, and cost-cutting - Net revenues for the six months ended June 30, 2021, increased to $3.8 million from $3.5 million in 2020, primarily due to revenues from the new Shield product ($0.1 million) and an increase in TraceCop revenues[80] Operating Expense Increase (Six Months Ended June 30, 2021 vs 2020, in thousands) | Expense Category | 2021 (in thousands) | 2020 (in thousands) | Change (in thousands) | Reason for Increase | | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $6,341 | $995 | +$5,346 | Aggressive ramp-up in labor, web marketing, and advertising for Shield product | | Research and development | $2,999 | $1,660 | +$1,339 | Increased labor and development/testing costs for legacy and Shield products | | General and administrative | $2,668 | $582 | +$2,086 | Increased labor, legal costs, and stock compensation | - The company's cash position and decreased revenue expectations for the Shield offering have created significant concerns about its ability to meet short-term liquidity needs The company is considering strategic alternatives, including an at-the-market program to sell up to $50.0 million of common stock[92][119] - In July 2021, the company implemented cost-saving measures, including a reduction in force, to align expenses with revenue trends The company expects net cost savings of $1.2 million for the remainder of the year from this action[72][86] Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of June 30, 2021, due to a failure in memorializing board actions - Management evaluated the effectiveness of disclosure controls and procedures and concluded they were not effective as of June 30, 2021[110] - The specific weakness identified was a failure to maintain appropriate written records to memorialize the formal actions of the board of directors[110] Part II – Other Information This section covers legal proceedings, critical risk factors, and a list of exhibits filed with the report Legal Proceedings The company is engaged in a lawsuit against its former landlord and is defending two class-action lawsuits alleging federal securities law violations - The company is a plaintiff in a lawsuit against its former landlord, Purple Plaza LLC, seeking damages in excess of $1,000,000 for breach of contract and constructive eviction[114] - Two related class-action lawsuits (Celeste v. Intrusion Inc. and Neely v. Intrusion Inc.) have been filed against the company, its CFO, and former CEO, alleging violations of federal securities laws (Section 10(b) and 20(a) of the Exchange Act)[115][116] Risk Factors Key risks include going concern uncertainty, management instability, ongoing litigation, a history of net losses, and high revenue concentration - Going Concern Risk: The company may not have sufficient cash to implement its business plan and may not be able to raise additional funds, raising the possibility it may not be able to continue as a going concern[119][120] - Management and Workforce Risk: The company faces risks related to the search for a new CEO, potential delays in its business plan, and workforce volatility following the termination of approximately 20% of its employees[121][123] - Litigation Risk: The company is defending class-action lawsuits alleging federal securities law violations, which will divert management attention and resources and could result in financial liability[122] - Financial Performance Risk: The company has a history of net losses, with a $8.9 million loss for the first six months of 2021 and an accumulated deficit of $70.1 million It must increase revenue to improve financial performance[126] - Revenue Concentration Risk: Approximately 91% of existing revenues come from the TraceCop family of solutions, and the new INTRUSION Shield offering has been slow to generate material revenue[127][128] Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents and officer certifications - Key exhibits filed include the Intrusion Inc. 2021 Omnibus Incentive Plan and certifications from the CEO and CFO pursuant to the Exchange Act and Sarbanes-Oxley Act[132]