INTRUSION INC. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report; the filing does not provide standalone fourth-quarter results. Financial statements are audited and prepared under U.S. GAAP.
Business context
Intrusion sells cybersecurity products and services built on threat intelligence covering more than 8.5 billion IP addresses. Its offerings include INTRUSION Shield, a reputation-based security service expanded in September 2022 with Cloud and End-Point products; TraceCop, an IP intelligence and forensics tool; and Savant, a network monitoring solution. The company shifted toward indirect sales channels and continued developing Shield after addressing performance issues in its On-Premise product.
Financial results
| Metric (USD millions, except per-share data) | 2022 | 2021 |
|---|---|---|
| Revenue | $7.529 | $7.277 |
| Gross profit / gross margin | $4.175 / 55.5% | $3.656 / 50.2% |
| Operating loss | ($16.283) | ($19.503) |
| Net loss | ($16.229) | ($18.802) |
| Net loss per share, basic and diluted | ($0.82) | ($1.05) |
| Net cash used in operating activities | ($13.190) | ($16.557) |
| Net cash used in investing activities | ($1.479) | ($1.148) |
| Net cash provided by financing activities | $13.584 | $5.101 |
Revenue grew 3.5%. Shield revenue rose $0.7 million, partly offset by a $0.4 million decline in consulting revenue after a customer did not renew a contract that had contributed $2.6 million in annual revenue. Management said it expected consulting revenue to increase in 2023. TraceCop generated $6.1 million, approximately 80.9% of 2022 revenue. Shield represented 16% of revenue, versus 7% in 2021.
Gross margin improved as Shield became a larger share of sales. Sales and marketing expense fell to $6.510 million from $10.935 million, reflecting cost reductions and a shift to indirect selling. Research and development expense was $6.465 million; the company also capitalized $1.4 million of software development costs. General and administrative expense rose to $7.483 million, primarily due to legal, insurance, recruiting, and finance-related costs.
Other income included a $2.0 million Employee Retention Credit (ERC) benefit. The company also recorded a $0.385 million gain on lease termination. Interest expense increased to $2.359 million, principally due to Streeterville notes and related costs. The effective income tax rate was 0% because deferred tax assets were fully offset by a valuation allowance.
Liquidity, debt, and capital
Cash and cash equivalents were $3.015 million at year-end, down from $4.100 million. Working capital shifted from a $2.1 million surplus in 2021 to a $7.8 million deficit in 2022. Current liabilities included $10.114 million of notes payable; total lease liabilities were $1.202 million. Operating cash burn remained substantial.
The company raised approximately $15.6 million in 2022 through Streeterville notes and equity offerings. The two Streeterville notes had stated principal amounts of $5.4 million each, initial interest of 7%, and maturities in September and December 2023. Their effective interest rate, including discounts and accretion, was reported as 35.19%. The agreements include financing restrictions and potential share settlement at a market discount, creating possible dilution. As of March 24, 2023, reported Streeterville indebtedness, including principal, accrued interest, and fees, was $10.2 million.
In February 2023, the company borrowed $1.3 million net under a short-term secured note backed by ERC receivables. It received the ERC payment on March 13 and repaid that note on March 14, 2023. Management stated it needed additional funding to continue operations. The auditor’s report and management’s disclosures both identify substantial doubt about the company’s ability to continue as a going concern, dependent on obtaining further financing.
Changes, outlook, and risks
- Government customers contributed 65.8% of revenue in 2022, compared with 71.3% in 2021; three government customers individually represented more than 10% of revenue. Commercial revenue increased to $2.6 million, or 34.2% of the total.
- Management expects government sales to remain significant but anticipates a lower government share if Shield gains commercial traction. Shield opportunities made up a large portion of the year-end sales pipeline; this is not a revenue guarantee.
- Key risks include continued losses and cash burn, dependence on new financing, note maturities and restrictive covenants, potential dilution, concentrated product and customer exposure, cancellable government contracts, channel-partner execution, competition, and product performance and cybersecurity risks.
- The $3.3 million securities class-action settlement was paid by the company’s insurer; the court approved the settlement and allocation plan in March 2023. The SEC investigation remained ongoing, and a stockholder derivative action was pending. The filing gives no clear quantified estimate of potential future costs from these matters.
- The company corrected immaterial 2021 presentation errors by moving $0.996 million from sales and marketing expense to cost of revenue. The correction did not change operating loss, net loss, or cash flows. Management reported disclosure controls and internal control over financial reporting effective; the auditor did not attest to internal control effectiveness.
Most important facts for investors to verify
- Whether the company can secure sufficient financing to fund operations and meet the Streeterville note maturities, and the resulting cost or shareholder dilution.
- Whether Shield sales and the commercial pipeline convert into recurring revenue and improve margins enough to offset consulting and TraceCop concentration risks.
- Current cash, working capital, operating cash burn, and status of any subsequent financing or debt amendments.
- Whether the SEC investigation or derivative litigation has changed, and whether any additional company-funded legal or indemnification costs arise.
- Receipt and accounting treatment of the ERC proceeds, along with the immaterial 2021 expense reclassification described in the filing.