INTRUSION INC. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Financial statements are unaudited and amounts below are in millions unless otherwise stated. Intrusion develops cybersecurity, data-mining and entity-identification products, including TraceCop, Savant and its newer INTRUSION Shield offering.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1.588 | $3.860 | $5.039 | $11.071 |
| Gross profit / margin | $0.936 / 58.9% | $2.395 / 62.0% | $2.989 / 59.3% | $6.732 / 60.8% |
| Operating income (loss) | $(1.407) | $1.465 | $(2.594) | $4.214 |
| Net income (loss) | $(1.409) | $1.464 | $(2.590) | $4.169 |
| Net income (loss) per common share, diluted | $(0.10) | $0.09 | $(0.19) | $0.27 |
- Revenue and margins: Management attributed the revenue decline principally to lower TraceCop sales, which were $1.5 million in Q3 2020 versus $3.9 million a year earlier. Savant sales increased to $106,000 from $29,000. Gross margin contracted, mainly due to product mix.
- Operating expenses: Q3 sales and marketing expense rose to $885,000 from $356,000, and research and development to $1.081 million from $297,000. The increases largely reflected planned marketing and development investment in INTRUSION Shield. General and administrative expense was $377,000 versus $277,000.
- Cash flow: Operating activities used $2.367 million in the first nine months of 2020, versus providing $2.935 million in 2019. Investing activities used $153,000 for equipment purchases. Financing activities provided $691,000, including $629,000 of PPP proceeds and $193,000 from option exercises, offset partly by dividend and finance-lease payments.
- Cash and liquidity: Cash and equivalents were $1.505 million at September 30, 2020, down from $3.334 million at December 31, 2019. Current assets were $3.182 million and current liabilities $2.196 million, implying positive working capital of about $986,000. However, MD&A calls the position a “working capital deficiency” of $1.0 million; the filing does not reconcile this apparent discrepancy.
- Debt and leases: The PPP loan had a reported balance of $631,000, including accrued interest, with $392,000 classified as current and $239,000 noncurrent. It bears 1% interest and matures April 2022. The company had submitted a forgiveness application and expected full forgiveness, but forgiveness was not reported as completed. Operating-lease liabilities totaled $1.390 million; finance-lease liabilities totaled $32,000.
- Equity: Stockholders’ equity was $1.254 million, down from $3.556 million at year-end 2019, and accumulated deficit was $57.367 million. All outstanding preferred shares converted in August into common stock; the filing says 1,004,249 shares were issued and describes 7.28% dilution, while eliminating preferred dividend obligations and certain restrictions.
Material changes versus the prior comparable periods
- Revenue fell by about 59% in Q3 and 54% for the first nine months compared with 2019; the company moved from profit to loss in both comparisons.
- For the first nine months, sales and marketing expense increased to $1.880 million from $813,000, and research and development to $2.741 million from $775,000. Gross margin declined by 3.1 percentage points in Q3 and 1.5 points for the nine-month period.
- Cash from operations shifted from a $2.935 million inflow to a $2.367 million outflow for the nine-month period. Cash declined by $1.829 million from the start of 2020.
- The former CEO’s revolving note was repaid in May 2019; the company says the funding availability terminated after the former CEO’s death in October 2019. In 2020, the PPP loan provided financing instead.
Outlook, risks and unusual items
- Management did not anticipate significant Q4 2020 revenue change compared with Q3, which it described as lower than prior quarters. It expected Shield to begin contributing positively to revenue in fiscal 2021, but provided no quantified forecast.
- Management expected sales and marketing, research and development, and general and administrative expenses to increase through the remainder of 2020, reflecting Shield marketing, development and implementation.
- After quarter-end, the company completed a public offering and reported approximately $18.053 million of net proceeds to Intrusion, intended to fund growth initiatives, including Shield commercialization and follow-on products. The filing also reports Nasdaq Capital Market listing under “INTZ” on October 9, 2020. These proceeds were not reflected in September 30 results or balances.
- Customer concentration is material: U.S. government sales represented 92.3% of Q3 revenue and 84.4% of nine-month revenue. Four government customers accounted for approximately 92.3% of Q3 revenue. Management cited government spending patterns, possible contract cancellations, COVID-19 disruption and dependence on TraceCop as risks.
- Other highlighted risks include Shield’s ability to gain market acceptance and perform as expected, competition and rapid technology change, cybersecurity breaches, and volatility or dilution from share sales and outstanding options. The company reported routine legal matters and did not expect them to materially affect results, while noting future claims could have a material impact.
- Management concluded disclosure controls and procedures were effective as of September 30, 2020, and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the PPP loan was forgiven, and the final amount and timing of any repayment.
- The working-capital figure: MD&A’s stated $1.0 million deficiency conflicts with the balance-sheet figures, which imply a $986,000 surplus.
- Whether Shield gains customers and revenue as planned, while marketing and development spending remains elevated.
- Revenue trends and customer concentration, particularly TraceCop sales and reliance on government customers.
- The offering’s final share counts, net proceeds and use of funds; the filing reports 3.565 million offering shares and approximately $18.053 million in net proceeds to the company.
- The preferred-stock conversion share count and dilution, given the filing’s stated 1,004,249 shares issued and its separate equity-statement presentation.