Intrusion Inc. — Q3 2022 Form 10-Q
Business and period: Intrusion develops and sells cybersecurity products and services, including its INTRUSION Shield subscription offering, through channel partners and resellers. This unaudited filing covers the quarter and nine months ended September 30, 2022; amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $2.19 million | $1.82 million | $6.09 million | $5.63 million |
| Gross profit / margin | $1.20 million / 54.6% | $0.88 million / 48.4% | $3.27 million / 53.8% | $2.84 million / 50.4% |
| Operating loss | $(3.82) million | $(6.11) million | $(11.77) million | $(15.66) million |
| Net loss | $(2.92) million | $(6.10) million | $(11.04) million | $(14.95) million |
| Net loss per share, basic and diluted | $(0.15) | $(0.34) | $(0.57) | $(0.85) |
- Revenue grew about 21% in Q3 and 8% for the nine-month period. INTRUSION Shield revenue was $0.3 million in Q3 and $0.9 million year to date, versus $0.2 million and $0.3 million in the comparable 2021 periods. Consulting revenue was $1.9 million and $5.2 million, respectively.
- Gross margin improved in both comparisons. Operating losses narrowed, with lower sales and marketing and R&D expenses; nine-month G&A rose to $6.0 million from $4.3 million, mainly due to legal costs and consulting fees.
- Interest and other income included a $2.0 million Employee Retention Credit claim. Interest expense was $1.1 million in Q3 and $1.7 million for nine months, primarily related to the Streeterville notes.
- Nine-month operating cash use was $9.6 million, compared with $12.8 million in 2021; investing cash use was $1.1 million. Financing provided $13.5 million, and cash increased $2.8 million to $6.9 million.
Liquidity, debt and capital
- At September 30, cash was $6.9 million, versus $4.1 million at year-end 2021. Working capital was negative $3.0 million, compared with positive $2.1 million at year-end; stockholders’ equity was negative $0.5 million.
- Notes payable totaled $10.4 million on the balance sheet, including current and noncurrent portions. The two Streeterville notes have an 18-month maturity and a stated initial interest rate of 7%; the reported effective rate, including fees and accretion, was 38.7%. The company may meet certain redemptions in cash or shares, with share settlement potentially dilutive.
- Funding during the first nine months included $9.3 million net from the notes, $1.9 million net from the at-the-market program and $3.3 million net from the registered direct offering. After quarter-end, the offering generated additional proceeds; the filing reports final aggregate proceeds of $5.2 million for shares and warrants.
Changes, outlook and risks
- Management said INTRUSION Shield adoption and anticipated revenue were slower than originally expected. Cost reductions included staff reductions and lower trade-event attendance; the company continued expense-alignment measures.
- The filing gives no specific revenue, earnings or cash-flow guidance. Management cautioned that without acceptable additional financing or positive operating cash flow, the company may be unable to fund its liquidity needs, implement its business plan or continue operations.
- Revenue remains concentrated: U.S. government customers accounted for 63.3% of Q3 revenue and 66.8% year to date. Three government customers represented 57.9% and 62.5% of revenue, respectively. Government contract cancellations or spending changes and customer concentration pose risks.
- Legal matters include a securities class action with preliminary settlement approval and a final hearing scheduled for November 30, 2022; an ongoing SEC investigation; and a stockholder derivative claim. The company stated it could not assure the SEC investigation’s outcome. A separate lease-abandonment dispute was settled in May 2022; the company recorded a $0.4 million gain related to the settlement.
- The company recognized $2.0 million, net of fees, from Employee Retention Credits in Q3. It also corrected immaterial historical classification errors between cost of revenue and sales and marketing expense; the corrections did not affect operating loss, net loss, EPS, cash flows or balance sheets.
- Management reported disclosure controls were effective as of September 30, 2022, and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Track cash burn, working capital and access to further financing, including the timing and terms of Streeterville note redemptions and any share settlement.
- Verify whether INTRUSION Shield growth accelerates and whether improved gross margins persist as revenue mix and volume change.
- Assess continued dependence on government and a small number of customers, and monitor any contract changes or cancellations.
- Follow the final status and financial consequences of the class-action settlement, SEC investigation and derivative litigation.
- Confirm the final registered-offering proceeds, securities issued and resulting dilution, including warrants outstanding.