Intrusion Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Intrusion develops and sells cybersecurity products and services, including INTRUSION Shield, TraceCop and Savant. All dollar amounts below are in millions unless otherwise noted.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $1.309 | $1.835 |
| Gross profit / margin | $0.996 / 76.1% | $0.932 / 50.8% |
| Operating expenses | $5.040 | $4.916 |
| Operating loss | $(4.044) | $(3.984) |
| Interest expense | $0.731 | $0.071 |
| Net loss | $(4.734) | $(4.054) |
| Basic and diluted loss per share | $(0.22) | $(0.21) |
| Cash used in operating activities | $(2.312) | $(3.471) |
Cash and cash equivalents were $0.411 million at March 31, down from $3.015 million at December 31, 2022. Cash used in investing activities was $0.301 million, principally for capitalized software development; financing activities provided $0.009 million. Working capital deficit was $12.6 million, versus $7.8 million at year-end. The company reported $10.737 million of current notes payable on its balance sheet; MD&A separately reported $10.2 million payable to Streeterville, including principal, accrued interest and fees. The filing does not clearly reconcile these amounts.
Changes versus prior-year quarter
- Revenue fell 28.7%, mainly after a government-sponsored consulting contract was not renewed. That contract contributed $0.7 million, or 35.8% of Q1 2022 revenue, and had a 14% gross margin.
- Consulting revenue declined to $1.0 million from $1.6 million. INTRUSION Shield revenue increased to $0.3 million from $0.2 million.
- Gross margin improved to 76.1% from 50.8%, primarily because the lost contract had low margins and Shield represented a greater share of sales.
- Operating expenses were broadly flat overall, but sales and marketing rose to $1.738 million from $1.206 million; R&D rose to $1.796 million from $1.650 million; and G&A declined to $1.506 million from $2.060 million. Higher interest expense contributed to the larger net loss.
- Government customers accounted for 48.4% of revenue, down from 72.2%. Two commercial customers together accounted for 46.6% of revenue, versus 21.6% for those customers in Q1 2022.
Outlook, risks and unusual items
- Going concern: Management said the low cash balance, $12.6 million working capital deficit and recurring operating losses raise substantial doubt about the company’s ability to continue as a going concern. The 2022 audit opinion also expressed substantial doubt. Management plans to seek additional debt or equity financing, with no assurance it can obtain financing on acceptable terms or at all.
- Cash was $0.2 million as of May 11, 2023, which the company said was insufficient for monthly operating needs. In April, it received $1.3 million in advance under a customer contract renewal, creating an obligation to provide services for the remaining 11 months of the contract term.
- Streeterville notes mature in September and December 2023. The notes permit monthly redemptions and may be settled in shares at a 15% discount to market, creating potential dilution. The effective interest rate, including issuance-cost amortization and accretion, was 23.9%. The company was negotiating amendments with Streeterville but gave no assurance of agreement.
- A separate $1.4 million secured Streeterville note issued in February 2023 was repaid in full on March 14 after the company received employee retention credit funds. The January amendment to the other notes waived redemptions through March 31 for a fee added to the maturity obligation.
- Late-March cost reductions included eliminating 16 positions, reducing contractor use and temporary executive compensation reductions. Management estimated savings of about $1.5 million per quarter for the next two quarters and $1.4 million per quarter thereafter. R&D reductions are expected to affect the number and frequency of product releases.
- Management said Shield sales traction had taken longer than anticipated. Q1 efforts focused on reseller and channel development; management expects consulting revenue to increase in 2023 but provided no quantified revenue or earnings guidance.
- The $3.3 million securities class-action settlement was paid by the insurer, and the court approved the settlement allocation in March 2023. The SEC investigation remained ongoing, and a stockholder derivative claim was pending; the company could not assure the outcome or potential impact of the SEC investigation.
- The ATM offering limit was reduced to aggregate proceeds of up to $15 million under Form S-3 restrictions; Q1 net proceeds were $21,000. New equity financing could dilute shareholders.
Key facts for investors to verify
- Near-term financing availability and the company’s ability to fund operations, meet obligations and continue as a going concern.
- Streeterville note balances, maturity payments, any amendment, and potential cash-redemption or discounted-share dilution exposure.
- Whether Shield and channel sales grow enough to offset lost consulting revenue and customer concentration risk.
- Realized cost savings and the effects of R&D reductions on product releases and competitiveness.
- Developments in the SEC investigation and derivative claim, as well as any material obligations arising from them.