Business context and reporting period
Intrusion Inc. develops cybersecurity products and services, including INTRUSION Shield, and sells through resellers, managed service providers, and direct sales. This Form 10-Q covers the quarter and nine months ended September 30, 2023. Financial amounts below are in millions of dollars unless otherwise stated.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1.468 | $2.192 | $4.245 | $6.085 |
| Gross profit / margin | $1.144 / 77.9% | $1.197 / 54.6% | $3.278 / 77.2% | $3.271 / 53.8% |
| Operating expenses | $3.837 | $5.019 | $12.936 | $15.038 |
| Operating loss | $(2.693) | $(3.822) | $(9.658) | $(11.767) |
| Net loss | $(3.211) | $(2.916) | $(11.074) | $(11.035) |
| Basic and diluted loss per share | $(0.14) | $(0.15) | $(0.51) | $(0.57) |
- Q3 revenue comprised $1.0 million from consulting and $0.4 million from Shield; nine-month revenue was $3.1 million and $1.2 million, respectively. Government customers represented 43.0% of Q3 revenue and 45.8% of nine-month revenue, down from 63.3% and 66.8% in 2022.
- Cash and cash equivalents were $0.177 million at September 30, versus $3.015 million at December 31, 2022. Working capital deficit was $14.8 million, compared with $7.8 million at year-end.
- Nine-month operating cash use was $4.779 million, investing cash use $1.041 million, and financing cash provided $2.982 million. Cash declined by $2.838 million over the period.
- At September 30, total assets were $4.721 million and stockholders’ deficit was $11.533 million. Balance-sheet notes payable totaled approximately $11.4 million, including current and noncurrent portions. The notes carry a disclosed effective rate of 26.9% and mature in September and December 2024.
Material changes versus prior period
- Revenue fell 33% in Q3 and 30% for the first nine months year over year, primarily reflecting lower consulting revenue; Shield revenue grew but remained smaller.
- Gross margin improved substantially, which management attributed largely to the loss of a low-margin government contract and a more favorable mix with Shield contributing a greater share.
- Operating expenses declined 23.6% in Q3 and 14.0% year to date, reflecting lower legal costs, contract labor, and employee costs. Headcount was 48 at September 30, versus 64 a year earlier. Management reported cost savings of $1.5 million in Q2 and $1.6 million in Q3 from reductions implemented in March.
- Q3 net loss increased year over year despite lower operating loss, in part because Q3 2022 included $2.0 million of Employee Retention Credit income. Nine-month net loss was broadly unchanged.
- The company raised $3.036 million net through its ATM program during the first nine months. The Streeterville notes’ maturities were extended by 12 months in August; the lender received a first-priority security interest in company assets. No note redemptions occurred in 2023 through September.
Outlook, risks, and unusual items
- Going concern and funding: Management stated that additional debt or equity financing is needed to fund operations and obligations, and that failure to obtain financing could prevent execution of its business plan or continuation of operations. The 2022 audit opinion expressed substantial doubt about the company’s ability to continue as a going concern.
- After quarter-end, the company reported $1.5 million of net ATM proceeds and completed a November 8 private offering expected to provide $2.4 million net. It sold 4.4 million shares, each coupled with warrants to buy two shares, at $0.60 per share-and-warrant package. The company also exchanged $0.4 million of Streeterville Note 1 principal for 1.0 million shares in October.
- As of November 10, cash was reported at $2.4 million, including proceeds from the private offering. Management said it intends to seek further financing; equity or equity-linked financing would dilute shareholders. No formal revenue or earnings guidance is provided.
- Nasdaq notified the company on October 26 that it did not meet the $35 million market-value-of-listed-securities requirement. The company requested a hearing, which stays delisting action pending the panel’s decision; continued listing is not assured.
- Government sales are exposed to appropriation and cancellation risks. The company warned that liquidity constraints could impair performance of contracts, including a government contract prepaid for a one-year term, potentially requiring return of some or all prepayments.
- The SEC-related matter concluded with a court-approved final judgment on October 5, 2023, with no penalties assessed. A stockholder derivative settlement includes governance changes and $0.3 million in attorneys’ fees expected to be paid by insurance; court approval was scheduled for January 17, 2024. The filing says controls and procedures were effective as of September 30, 2023.
Most important facts for investors to verify
- Current cash, cash burn, financing availability, and whether further capital can be raised on acceptable terms.
- The Streeterville notes’ precise outstanding payoff amount: the balance sheet reports about $11.4 million of notes payable, while MD&A describes $10.6 million payable at September 30; reconcile the disclosed figures and confirm maturity, security, and payment terms.
- Outcome of the Nasdaq hearing and the company’s ability to maintain listing compliance.
- Whether Shield sales and reseller-channel development can offset falling consulting revenue and customer concentration exposure.
- Actual proceeds, dilution, warrant terms, and use of funds from the November offering and subsequent equity issuances.