INTRUSION INC. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; filed November 12, 2021. Intrusion develops and sells cybersecurity products and services to U.S. government and commercial customers, including TraceCop, Savant and the subscription-based INTRUSION Shield.
Financial performance
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2020 periods.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1.82 | $1.59 | $5.63 | $5.04 |
| Gross profit | $1.13 | $0.94 | $3.58 | $2.99 |
| Gross margin | 62.1% | 58.9% | 63.6% | 59.3% |
| Operating expenses | $7.24 | $2.34 | $19.25 | $5.58 |
| Operating loss | $(6.11) | $(1.41) | $(15.66) | $(2.59) |
| Net loss | $(6.10) | $(1.41) | $(14.95) | $(2.59) |
| Net loss per share, basic and diluted | $(0.34) | $(0.10) | $(0.85) | $(0.19) |
- Revenue rose about 15% in Q3 and 12% year to date. TraceCop revenue was $1.5 million in Q3 and $4.9 million year to date; Shield contributed $0.2 million and $0.3 million, respectively. Shield generated no revenue in the comparable 2020 periods.
- Operating expenses increased sharply, especially sales and marketing, reflecting expanded staffing, promotion and business-development spending ahead of expected Shield sales. Management said those sales had been slower than expected.
- Gross margin improved year over year; management attributed changes mainly to product mix. Operating and net losses widened substantially as expense growth far outpaced revenue growth.
- For the first nine months, cash used in operations was $12.8 million, versus $2.4 million in 2020. Investing used $1.1 million, and financing provided $4.4 million. Cash decreased $9.6 million to $7.2 million.
Liquidity, balance sheet and financing
- At September 30, cash was $7.2 million, current assets $8.8 million and current liabilities $4.0 million; working capital was $4.9 million, down from $16.2 million at December 31, 2020.
- Total assets were $12.8 million and stockholders’ equity was $6.8 million. The company reported no PPP loan balance: the $629,000 loan and accrued interest were forgiven in April 2021, producing a $635,000 gain during the nine-month period.
- Lease liabilities were $3.5 million at September 30, comprising $1.4 million current and $2.0 million noncurrent; future lease payments before imputed interest totaled $3.7 million. The company also entered finance leases for equipment, including server systems.
- The at-the-market stock program permits potential sales of up to $50 million under an effective shelf registration. Through September 30, it had generated $4.8 million net proceeds. Common shares outstanding increased to 18.8 million from 17.4 million at year-end.
Outlook, risks and notable items
- Going concern and funding: Management cited significant concerns about meeting cash-flow and liquidity needs over the next 12 months. It said additional financing is necessary to fund operations and continue as a going concern, but gave no assurance that financing will be available or on acceptable terms. Further equity issuance could dilute shareholders. No quantified revenue or earnings guidance is provided.
- Cost actions and product outlook: Shield sales were slower than anticipated. The company began expense reductions, including a July 29 reduction in force affecting approximately 20% of employees and negotiations with vendors and contractors. Management anticipated continued conservative customer budgets amid COVID-19 uncertainty.
- Customer and product concentration: Government customers accounted for 69.1% of nine-month 2021 revenue, versus 84.4% in the MD&A comparison for 2020. TraceCop remained the dominant product, representing approximately 88% of existing revenue. Government spending patterns, contract cancellations and dependence on a limited customer and product base are risks.
- Legal and regulatory matters: Two purported securities class actions allege federal securities-law violations; the company disputes the claims and says it cannot estimate any potential loss. The SEC notified the company of an investigation in August and served a subpoena on November 9, 2021; the company said it was cooperating. A separate landlord dispute includes the company’s claim for more than $1 million and a landlord counterclaim for about $229,000 in past rent and more than $2 million in future rent; trial was scheduled for February 2022.
- Leadership and controls: Tony Scott was announced as president and CEO effective November 15, 2021. Following management’s determination that disclosure controls were ineffective at June 30, the company implemented a disclosure committee and policy; management concluded controls were effective as of September 30.
Most important facts for investors to verify
- Cash burn, remaining ATM capacity and the timing, availability and dilution impact of any further financing; assess the company’s stated 12-month liquidity concerns.
- Whether Shield revenue and customer adoption improve, and whether expense reductions bring operating costs in line with revenue.
- Revenue concentration and trends in TraceCop, government customers and commercial customers. The filing presents different government-customer concentration figures in its notes and MD&A, so the basis of comparison merits checking.
- Developments in the SEC investigation, securities class actions and landlord litigation, including any material financial or operational consequences.
- Execution of the CEO transition and the sustainability of the reported improvement in gross margin amid continued operating losses.