Forward Looking Statements
This Quarterly Report on Form 10-Q, including, without limitation, the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which statements involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our financial position; our ability to continue our business as a going concern; our business, sales, and marketing strategies and plans; our ability to successfully market, sell, and deliver our INTRUSION Shield commercial product and solutions to an expanding customer base; are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as "anticipate," "believe," "contemplate," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "should," "target," "will," or "would" or the negative of these words or other similar terms or expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, such statements. You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. 17 Results of Operations The following table sets forth, for the condensed consolidated statements of operations in dollar amounts and as a percentage of our total revenue for the periods indicated. The period-to-period comparison of results is not necessarily indicative of results for future periods. Three Months Ended Six Months Ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Revenue 100.0% 100.0% 100.0% 100.0% Cost of revenue 32.4% 37.4% 33.9% 35.6% Gross profit 67.6% 62.6% 66.1% 64.4% Operating expenses: Sales and marketing 88.3% 186.4% 84.0% 166.3% Research and development 72.2% 78.1% 80.6% 78.7%
General and administrative 99.6% 86.4%
105.5% 70.0% Operating loss -192.5% -288.3% -204.1% -250.6%
Interest and other income 0.0% 3.4% 0.1% 1.8% Interest expense -25.5% -0.1% -15.3% -0.1% Gain on the extinguishment of debt - 32.4% - 16.6% Gain on lease termination 20.4% - 10.8% - Net loss -197.5% -252.6% -208.5% -232.3% Three Months Ended Six Months Ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Domestic revenues 100.0% 100.0% 100.0% 100.0% Export revenues - - - - Net revenues 100.0% 100.0% 100.0% 100.0%
Revenues. Revenue for the three and six month periods endedJune 30, 2022 , was$2.1 million and$3.9 million compared to$2.0 million and$3.8 million for the same periods in 2021. Revenue from our consulting business was$1.7 million and$3.3 million for the three and six month periods endedJune 30, 2022 , compared to$1.7 million and$3.5 million for same periods in 2021. INTRUSION Shield revenues were$0.4 million and$0.6 million for the three and six month periods endedJune 30, 2022 , compared to$0.1 million for the three and six month periods endedJune 30, 2021 . 18 Concentration of Revenues. For the three and six month periods ended andJune 30, 2022 , revenues from sales to variousU.S. government entities totaled$1.4 million and$2.7 million , or 65.7% and 68.8% of revenues compared to$1.3 million and$2.6 million , or 64.4% and 69.0% of revenues, for the same periods in 2021. Although we expect our concentration of revenues to vary among customers in future periods depending upon the timing of certain sales, we anticipate that sales to government customers will continue to account for a significant portion of our revenues in future periods. Sales to the government present risks in addition to those involved in sales to commercial customers which could adversely affect our revenues, including, without limitation, potential disruption to appropriation and spending patterns and the government's reservation of the right to cancel contracts and purchase orders for its convenience. Although we do not anticipate that any of our revenues with government customers will be renegotiated, any cancelled or renegotiated government orders could have a material adverse effect on our financial results. Currently, we are not aware of any proposed cancellation or renegotiation of any of our existing arrangements with government entities and, historically, cancellations or renegotiated orders by government entities have not resulted in a material adverse effect on our business. There were two individual commercial customers in the three and six month periods endedJune 30, 2022 , attributable for 30.5% and 26.3% of total revenue compared to 23.1% and 21.5% of total revenue to one individual commercial customer for the same periods in 2021. The Company's similar product and service offerings are not viewed as individual segments, as its management analyzes the business as a whole and expenses are not allocated to each product offering. Gross Profit. Gross profit was$1.4 million and$2.6 million or 67.6% and 66.1% of revenues for the three and six month periods endedJune 30, 2022 , compared to$1.2 million and$2.5 million or 62.6% and 64.4% of revenues three and six month periods endedJune 30, 2021 . Gross profit as a percentage of revenues is impacted by several factors, including shifts in product mix, changes in channel of distributions, revenue volume, pricing strategies, and fluctuations in revenues of integrated third-party products. Sales and Marketing. Sales and marketing expenses were$1.8 million and$3.3 million or 88.3% and 84.0% of revenues for the three and six month periods endedJune 30, 2022 , compared to$3.7 million and$6.3 million or 78.1% and 166.4% of revenues for the three and six month periods in 2021. The anticipated revenues from our INTRUSION Shield product have been slower than originally expected and as a result we have made certain cost reduction measures such as staff reductions and lower attendance at trade events. We continue practicing certain cost saving measures implemented in 2021, such as a reduction in force as well as negotiations with certain contractors and vendors to appropriately align our expenses with our revenue trends. Research and Development. For the three and six month periods endedJune 30, 2022 , research and development expenses were$1.5 million and$3.1 million or 72.2% and 80.6% of revenues compared to$1.5 and$3.0 million or 186.4% and 78.7% of revenues for the three and six month period endedJune 30, 2021 . During the quarter endedJune 30, 2022 , the Company began capitalization of internally developed software development and enhancements. Research and development costs associated with preliminary stages of development are expensed in the period in which they are incurred. Research and development expenses may vary in the future, mainly dependent on levels of research and development labor expense charged to direct labor. General and Administrative. General and administrative expenses were$2.0 million and$4.1 million or 99.6% and 105.5% of revenues for the three and six month periods endedJune 30, 2022 , compared to$1.7 million and$2.7 million or 86.4% and 70.0% of revenues for the three and six month periods endedJune 30, 2021 . The increase in general and administrative expenses is primarily due to legal costs increased by$0.8 million related to ongoing lawsuits and consulting fees increased by$0.4 million during for the six months endedJune 30, 2022 , when compared to the same periods in 2021. Both the increases in legal costs and consulting fees are considered non-recurring costs. Interest Expense. For the three and six month periods endedJune 30, 2022 , interest expense increased to$0.5 million and$0.6 million or 25.5% and 15.3% of revenues compared to negligible amounts for the same periods in 2021. Our interest expense consists primarily of interest related to the Streeterville notes payable entered into in March of 2022 and related debt issuance cost amortization as well as interest expense from finance leases. Interest expense will vary in the future based on our cash flow and borrowing needs. 19
Interest and other Income.Interest and other income were negligible for the three and six month periods endedJune 30, 2022 compared to$0.1 million and$0.1 million interest and other income for the three and six month periods
endedJune 30, 2021 . Gain on Extinguishment of Lease and Debt. Gain on extinguishment of lease was$0.4 million and$0.4 million for the three and six month periods endedJune 30, 2022 , relating to the settlement of our lease abandonment lawsuit, compared to$0.6 and$0.6 million gain on extinguishment of debt for the three and six month periods endedJune 30, 2021 . The gain on extinguishment of debt in 2021 was due to the forgiveness of our SBA PPP loan principal and accrued interest inApril 2021 .
Liquidity and Capital Resources
Sources of Liquidity As ofJune 30, 2022 , we had cash and cash equivalents of$7.0 million , up from$4.1 million as ofDecember 31, 2021 , and working capital of($1.4) million compared to$2.1 million as ofDecember 31, 2021 . Our primary source of cash for funding operations and growth has been through cash flows from$9.3 million in net proceeds received from the issuance of notes payable and$1.2 million in net proceeds received from our at-the-market program in 2022. If our operations do not generate positive cash flows in the upcoming year, or if we are not able to obtain additional debt or equity financings on terms and conditions acceptable to us, if at all, we may be unable to implement our business plan, fund our liquidity needs, or even continue our operations.
Current At-The Market Offering.
In August of 2021, we engagedB. Riley Securities, Inc. to act as sales agent under our at-the-market program, which allows us to potentially sell up to$50.0 million of our common stock on a delayed or continuous basis through the use of a shelf-registration statement on Form S-3, which we initially filed onAugust 5, 2021 . The shelf registration became effective onAugust 16, 2021 . OnMarch 28, 2022 , as a result of limitations under General Instruction I.B.6 of Form S-3, and in agreement in the terms of the sales agreement, the Company revised the aggregate offering price of shares of common stock to$10.0 million , which does not include issued shares having aggregate sales price of$6.9 million , through the Prospectus Supplement filing with theSEC . OnJuly 12, 2022 , Intrusion's stock traded at$4.33 per share, which caused the Company's public float to exceed$75 million . As a result, the limitations under General Instruction I.B.6 of Form S-3 were no longer applicable and the Company revised the aggregate offering price of shares of common stock to the original$50.0 million through a Prospectus Supplement filing with theSEC . As ofJune 30, 2022 , the Company had received proceeds of$1.2 million net of fees from the sale of common stock related to this program. 2022 Notes Issuance. We entered into a securities purchase agreement (the "SPA") withStreeterville Capital, LLC (the "Investor") onMarch 10, 2022 , pursuant to which, among other things, the Investor (i) purchased an unsecured promissory note ("First Note") in the aggregate principal amount totaling$5.4 million in exchange for$5.0 million less certain expenses and (ii) agreed to purchase another unsecured promissory note at the Company's election ("Second Note" and, together with First Note, the "Notes") in aggregate principal amount totaling$5.4 million in exchange for$5.0 million , with the Company's election being subject to the Company satisfying, among others, the following conditions within six months of the issuance of the First Note: (A) obtaining stockholder approval for the issuance of shares of the Company's common stock ("Common Stock") in excess of 19.99% of the outstanding shares of Common Stock in connection with the potential redemption of the Notes (as described below) and (B) there being no Trigger Event (as defined in the Notes) under the First Note. The Company received stockholder approval of this matter at the annual meeting held onMay 24, 2022 . OnJune 29, 2022 , we received the funding from the Second Note. In total, the Company received$9.3 million in net proceeds in connection with the issuance of the two Notes and intends to use the proceeds from such issuance for general corporate purposes. 20
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