INTRUSION INC

Previous wording

As discussed in more detail below on March 31, 2024, we had $0.1 million in cash. Subsequent to March 31, 2024, we raised $5.7 million in net proceeds through the issuance of common stock using our ATM program, a private placement offering and the exercise of warrants resulting from a warrant inducement offering. As of May 10, 2024, we had $2.4 million in cash. If we are not able to raise adequate funds under the Company’s ATM program or obtain additional equity financing, the Company may be unable to implement the Company’s business plan, fund its liquidity needs or even continue its operations.

Current wording

As discussed in more detail below on June 30, 2024, we had $1.5 million in cash. If we are not able to raise adequate funds under the Company’s ATM program or obtain additional equity financing, the Company may be unable to implement the Company’s business plan, fund its liquidity needs or even continue its operations.

Previous wording

Revenues. Revenue for the three-month period ended March 31, 2024, was $1.1 million compared to $1.3 million for the same period in 2023. Revenue from consulting totaled $0.7 million for the three-month period ended March 31, 2024, compared to $1.0 million for the three-month period ended March 31, 2023. The continuing resolution and delay in the approval of a federal budget for the 2024 year which did not occur until March 22, 2024, impacted renewals and task orders received for long-standing contracts which resulted in a decline in consulting revenues. We will continue to pursue new consulting opportunities and expect to see an increase in consulting revenues beginning in the second quarter of 2024.INTRUSIONShield revenues were $0.4 million for the three-month period ended March 31, 2024, compared to $0.3 million for the three-month period ended March 31, 2023. We have begun to see some traction inINTRUSIONShield sales with the recent addition of seven new logos and the award of a large contract for the Philippine national elections. These new customers will begin to contribute to revenues more meaningfully in the second half of 2024. We have also been informed by a large earlyINTRUSIONShield customer that they will not be renewing theirINTRUSIONShield contract. The customer was one of the original users of an early version of theINTRUSIONShield product and had implemented a highly customized and non-standard configuration of the product. We believe that theINTRUSIONShield transactions booked in the fourth quarter of 2023 and during the first quarter of 2024 and the several transactions that we anticipate will close in the second quarter of this year will offset this loss and help driveINTRUSIONShield revenue growth in 2024.

Current wording

Revenues. Revenue for the three and six month periods ended June 30, 2024, was $1.5 and $2.6 million compared to $1.5 and $2.8 million for the same periods in 2023. Revenue from consulting totaled $1.2 and $1.9 million for the three and six month periods ended June 30, 2024, compared to $1.1 and $2.1 million for the three and six month periods ended June 30, 2023. The continuing resolution and delay in the approval of a federal budget for the 2024 year which did not occur until March 22, 2024, impacted the timing of renewals and task orders received for long-standing contracts which resulted in a decline in consulting revenues for the six month period ended June 30, 2024.INTRUSIONShield revenues were $0.3 and $0.7 million for the three and six month periods ended June 30, 2024, compared to $0.4 million and $0.7 million for the three and six month periods ended June 30, 2023. The decline in Shield revenues for the three month period resulted from the loss of a large earlyINTRUSIONShield customer that had implemented a highly customized and non-standard configuration of the product. The loss of revenues from this customer was partially offset by revenues from new customers signed in recent quarters. We believe the revenues from these new customers and several transactions that we anticipate will close in the second half of this year will fully offset this loss and driveINTRUSIONShield revenue growth in 2024.

Previous wording

Concentration of Revenues. Revenues from sales to various U.S. government entities totaled $0.7 million, or 58.6% of revenues, for the quarter ended March 31, 2024, compared to $0.6 million, or 48.4% of revenues, for the same period in 2023. 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 from government customers will be renegotiated, cancelled or renegotiated government orders could have a material adverse effect on our financial results. The Company has one commercial customer in the first quarter of 2024 that accounted for 30.0% of total revenue. This customer has chosen not to renew theirINTRUSIONShield contract. There were two customers accounting for 46.6% of total revenue for the same three-month period in 2023. 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.

Current wording

Concentration of Revenues. For the three and six month periods ended and June 30, 2024, revenues from sales to various U.S. government entities totaled $1.3 and $2.0 million, or 89.0% and 75.7% of revenues compared to $0.7 and $1.3 million, or 46.7% and 47.5% of revenues, for the same periods in 2023. 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 from government customers will be renegotiated, any cancelled or renegotiated government orders could have a material adverse effect on our financial results. We had one commercial customer in the six months ended June 30, 2024, and two commercial customers in the 2023 period, that each contributed individually to more than 10% of our total revenue. Our 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.

Previous wording

Operating Expenses. Operating expenses for the quarter ended March 31, 2024, totaled $3.4 million, a 33.0% decrease when compared to $5.0 million for the same period in 2023. The decrease was most notably due to a reduction in staffing and contract labor expenses which totaled $1.1 million in addition to reduced spend on sales and marketing of $0.2 million and reduced litigation defense costs of $0.1 million.

Current wording

Operating Expenses. Operating expenses for the three and six months ended June 30, 2024, totaled $3.1 and $6.5 million, representing a decrease of 23% and 28% when compared to $4.1 and $9.1 million for the same periods in 2023. The decrease was most notably due to a reduction in staffing and contract labor expenses in addition to reduced spend on sales and marketing and reduced litigation defense costs.

Previous wording

In late March 2023 we implemented cost reduction measures that resulted in the reduction of sixteen permanent positions, the reduced use of contractors and renegotiating or replacing spend on certain sales support and marketing services with less costly programs. Headcount on March 31, 2024, was forty-nine compared to sixty-six for the 2023 period when adjusted for the reductions that took place in late March 2023. Many of the reductions were in Research and Development, which will impact the number and frequency of product releases. As we grow our customer base and increase our revenues, we may choose to accelerate our product development in future periods, which would result in increased spending.

Current wording

In late March 2023 we implemented cost reduction measures that resulted in the reduction of sixteen permanent positions, the reduced use of contractors and renegotiating or replacing spend on certain sales support and marketing services with less costly programs. Headcount at June 30, 2024, and 2023 was fifty and forty-nine, respectively. Many of the reductions were in Research and Development, which will impact the number and frequency of product releases. As we grow our customer base and increase our revenues, we may choose to accelerate our product development in future periods, which would result in increased spending.

Previous wording

Sales and Marketing. Sales and marketing expenses decreased to $1.1 million for the quarter ended March 31, 2024, compared to $1.7 million for the quarter ended March 31, 2023. The 2024 period includes approximately $0.2 million in one-time negotiated contract savings. When adjusted for these one-time savings, the first quarter 2024 expense is more representative of the anticipated spend going forward although, certain discretionary spend, inclusive of participation in trade shows, utilization of third-party contractors for content and product messaging and travel, are likely to vary over time based on savings initiatives that may be necessary.

Current wording

Sales and Marketing. Sales and marketing expenses decreased to $1.2 and $2.3 million for the three and six months ended June 30, 2024, compared to $1.4 and $3.2 million for the three and six month periods ended June 30, 2023. The 2024 six month period includes approximately $0.2 million in one-time negotiated contract savings. Certain discretionary spend, inclusive of participation in trade shows, utilization of third-party contractors for content and product messaging and travel, are likely to vary over time based on savings initiatives that may be necessary.

Previous wording

Research and Development. Research and development expenses totaled $1.0 million for the quarter ended March 31, 2024, an $0.8 million decrease compared to the same period in 2023. The savings are a result of cost reduction measures implemented in late March 2023 which included the reduction of 13 FTEs and the reduced use of contractors. Research and development costs may vary over time as we determine the frequency of new releases, improved functionality and enhancements needed to be competitive with our product offering.

Current wording

Research and Development. Research and development expenses totaled $1.0 and $2.1 million for the three and six months ended June 30, 2024, a $0.4 and $1.2 million decrease compared to the same periods in 2023. The savings are a result of cost reduction measures implemented in late March 2023 which included the reduction of 13 FTEs and the reduced use of contractors. Research and development costs may vary over time as we determine the frequency of new releases, improved functionality and enhancements needed to be competitive with our product offering.

Previous wording

General and Administrative. General and administrative expenses totaled $1.2 million for the quarter ended March 31, 2024, compared to $1.5 million for the quarter ended March 31, 2023. The reduction is primarily due to one-time negotiated cost savings of $0.1 million and legal defense costs incurred in the 2023 period of $0.1 million for matters that have since been settled.

Current wording

General and Administrative. General and administrative expenses totaled $1.0 and $2.1 million for the three and six months ended June 30, 2024, compared to $1.2 and $2.7 million for the three and six months ended June 30, 2023. The $0.6 million reduction in the six month period relates to the elimination of two positions, reduced share-based compensation and one-time negotiated cost savings of $0.1 million.

Previous wording

Interest Expense. Interest expense for the period March 31, 2024 was $0.2 million consisting principally of the stated interest related to the Streeterville notes, interest associated with the note’s payable issued to Scott, our CEO and finance leases. Interest expense for the period March 31, 2023 was $0.3 million. Interest expense will vary in the future based on our cash flow and borrowing needs.

Current wording

Interest Expense. Interest expense for the three and six months ended June 30, 2024, was $34 thousand and $262 thousand consisting principally of the stated interest related to the Streeterville notes, interest associated with the note’s payable issued to Scott, our CEO and finance leases. Interest expense for the three and six months ended June 30, 2023, was $233 thousand and $530 thousand. The decreased interest expense resulted principally from the aggregate exchange of the Streeterville debt to both common and preferred stock. At June 30, 2024, only $511 thousand of Streeterville debt remains outstanding. Interest expense will vary in the future based on our cash flow and borrowing needs.

Previous wording

Interest Accretion and Amortization of Debt Issuance Costs. During the March 2024 quarter, the Company entered into exchange agreements to convert $9.5 million in Streeterville debt to $9.3 million of Series A preferred stock and $0.2 million to common stock and, as a result, the Company reversed the interest accretion associated with the ability to stock-settle principal redemptions and wrote-off the remaining deferred debt issue costs resulting in a net credit to interest expense of $1.0 million. For the March 2023 quarter, the interest accretion and amortization of debt issuance costs was $0.4 million.

Current wording

Interest Accretion and Amortization of Debt Issuance Costs. During the March 2024 quarter, the Company entered into exchange agreements to convert $9.5 million in Streeterville debt to $9.3 million of Series A preferred stock and $0.2 million to common stock and, as a result, the Company reversed the interest accretion associated with the ability to stock-settle principal redemptions and wrote-off the remaining deferred debt issue costs resulting in a net credit to interest expense of $1.0 million. For the six months ended June 30, 2023, the interest accretion and amortization of debt issuance costs totaled $0.4 million.

Previous wording

Other (Expense) Income, Net. Other income and expense were nominal amounts for both the periods ended March 31, 2024, and 2023.

Current wording

Other (Expense) Income, Net. Other income and expense were nominal amounts for the three and six months ended June 30, 2024, and 2023.

Previous wording

As of March 31, 2024, we had cash and cash equivalents of $0.1 million and a working capital deficit of $(4.7) million. Subsequent to March 31, 2024, we raised $5.7 million in net proceeds through the issuance of common stock using our ATM program, a private placement and a warrant inducement offering. As of May 10, 2024, we had $2.4 million in cash. Management plans to fund the operations of the Company through the continued use of the ATM and or additional equity financings. If the Company is not able to raise adequate funds, the Company may be unable to implement the Company’s business plan, fund its liquidity needs or even continue its operations.

Current wording

As of June 30, 2024, we had cash and cash equivalents of $1.5 million and a working capital deficit of $(0.5) million. Management plans to fund the operations of the Company through the continued use of the ATM and or additional equity financings. If the Company is not able to raise adequate funds, the Company may be unable to implement the Company’s business plan, fund its liquidity needs or even continue its operations.

Previous wording

Our principal sources of cash for funding operations in the March 2024 quarter was through the issuance of notes payable to Scott of $1.3 million and the issuance of common stock using the Company’s ATM program which provided $0.5 million. Our principal source of cash for funding operations in 2023 was through changes in working capital which consisted principally of $1.4 million in Employee Retention Tax Credit refunds recorded in 2022.

Current wording

Our principal sources of cash for funding operations for the six months ended June 30, 2024, has been proceeds received from the issuance of common stock in a series of transactions which include $3.3 million from ATM sales, $2.6 million from a private placement, and $0.6 million from the exercise of warrants. Our principal source of cash for funding operations in 2023 was $1.3 million from sales of common stock utilizing the ATM program and changes in working capital which includes the receipt of $1.2 million in Employee Retention Tax Credit refunds recorded in 2022.

Previous wording

B. Riley Securities, Inc. acts as sales agent under the Company’s at-the-market program, which allowed us to potentially sell up to $50.0 million of its common stock using the shelf registration statement on Form S-3 filed on August 5, 2021. On April 11, 2023, Instruction I.B.6 of Form S-3 and in agreement with the terms of the sales agreement, the company revised the aggregate offering price of shares of common stock that we can sell pursuant to the ATM program to $15 million. For the quarter ended March 31, 2024, we received $0.5 million, net of fees for sales of common stock were made pursuant to the program. As of March 31, 2024, the remaining aggregate offering price of shares of common stock that we can sell pursuant to the ATM program based on gross proceeds was $9.6 million.

Current wording

B. Riley Securities, Inc. acts as sales agent under the Company’s at-the-market program, which allowed us to potentially sell up to $50.0 million of its common stock using the shelf registration statement on Form S-3 filed on August 5, 2021. On April 11, 2023, Instruction I.B.6 of Form S-3 and in agreement with the terms of the sales agreement, the company revised the aggregate offering price of shares of common stock that we can sell pursuant to the ATM program to $15 million. For the six months ended June 30, 2024, we received $3.3 million, net of fees for sales of common stock were made pursuant to the program. As of June 30, 2024, the remaining aggregate offering price of shares of common stock that we can sell pursuant to the ATM program based on gross proceeds was $6.7 million.

Previous wording

In March 2024, we entered into an agreement with Streeterville to exchange $0.2 million in principal for 52.2 thousand shares of common stock. Also in March 2024, we exchanged $9.3 million in Streeterville debt for 9,275 shares of our newly created Series A Preferred. The issuance of both common and preferred shares was made pursuant to the exemption from the registration requirements afforded by the Securities Act, as amended. The designations for the Series A Preferred preclude the Company from repaying any indebtedness for so long as any Series A Preferred shares are outstanding. The Series A Preferred have a stated value of $1,100 per share and are subject to preferences and designations as more fully described in our Amended and Restated Articles of Incorporation filed on March 15, 2024. Following the exchanges noted herein, the remaining balance on Note One was $0.5 million. The maturity date for Note One is September 2024 which conflicts with the Series A Preferred designation prohibiting repayment of any indebtedness. We are in discussions with Streeterville to modify the terms of the Note One agreement.

Current wording

In March 2024, we entered into an agreement with Streeterville to exchange $0.2 million in principal for 52.2 thousand shares of common stock. Also in March 2024, we exchanged $9.3 million in Streeterville debt for 9,275 shares of our newly created Series A Preferred. The issuance of both common and preferred shares was made pursuant to the exemption from the registration requirements afforded by the Securities Act, as amended. The designations for the Series A Preferred preclude the Company from repaying any indebtedness for so long as any Series A Preferred shares are outstanding. The Series A Preferred shares have a stated value of $1,100 per share and are subject to preferences and designations as more fully described in our Amended and Restated Articles of Incorporation filed on March 15, 2024. Following the exchanges noted herein, the remaining balance on Note One was $0.5 million at June 30, 2024. The maturity date for Note One is September 2024 which conflicts with the Series A Preferred designation prohibiting repayment of any indebtedness. We are in discussions with Streeterville to modify the terms of the Note One agreement.

Previous wording

During the March 2024 quarter we entered into two separate note purchase agreements with our Chief Executive Officer, Anthony Scott. On January 2, 2024, Scott purchased a note payable in the principal amount of $1.1 million in exchange for $1.0 million in cash. The note called for weekly payments of $40,000 until maturity on June 15, 2024. Interest accrued on the balance of the note at 7% per annum compounding daily. During the quarter we made $200 thousand in principal payments, on March 31, 2024, the balance outstanding under this note was $0.9 million.

Current wording

During the March 2024 quarter we entered into two separate note purchase agreements with our Chief Executive Officer, Anthony Scott. On January 2, 2024, Scott purchased a note payable in the principal amount of $1.1 million in exchange for $1.0 million in cash. The note called for weekly payments of $40,000 until maturity on June 15, 2024. Interest accrued on the balance of the note at 7% per annum compounding daily. During the March quarter we made $200 thousand in principal payments. On March 20, 2024, Scott purchased a second note payable in the principal amount of $343 thousand in exchange for $340 thousand in cash. The note was non-interest bearing and matured on April 19, 2024. On April 2 nd, we reduced the principal balance due under the note by $101 thousand which reflected the amount due from Scott for the exercise of common stock purchase warrants. On April 19, 2024, Scott entered into a private placement subscription agreement to convert the aggregate remaining outstanding balance of $1.1 million for both notes in exchange for common stock and common stock purchase warrants.

Previous wording

Our cash flows for the three months ended March 31, 2024, and 2023 were:

Current wording

Our cash flows for the six months ended June 30, 2024, and 2023 were:

Previous wording

Net cash used in operations for the quarter ended March 31, 2023, was ($2.3) million due primarily to a net loss of ($4.7) million partially offset by 1) adjustments for non-cash items of $1.2 million which are mostly comprised of depreciation, stock-based compensation and changes in working capital of interest related to Streeterville notes, and 2) changes in working capital of $1.2 million consisting principally of the cash receipt of amounts due relating to Employee Retention Credit.

Current wording

Net cash used in operations for the six months ended June 30, 2023, was ($3.3) million due primarily to a net loss of ($7.9) million partially offset by 1) adjustments for non-cash items of $2.2 million which are mostly comprised of depreciation, stock-based compensation and interest related to Streeterville notes, and 2) changes in working capital of $2.4 million consisting principally of the cash receipt of amounts due relating to Employee Retention Credit and amounts received as prepayment for a one year customer contract.

Previous wording

For the three months ended March 31, 2024, net cash used in investing activities was $0.4 million, which was comprised of capitalization of internally developed software and hardware purchases. Net cash used by investing activities, for the three months ended March 31, 2023, was $0.3 million principally for capitalization of internally developed software.

Current wording

For the six months ended June 30, 2024, net cash used in investing activities was $0.7 million, which was comprised of capitalization of internally developed software and hardware purchases. Net cash used by investing activities, for the six months ended June 30, 2023, was $0.7 million principally for capitalization of internally developed software.