# Intrusion Inc: Form 10-Q for the period ended Sep 30, 2023

- Company: [Intrusion Inc](/companies/intz.md) (CIK 736012)
- Form: 10-Q
- Filed: 2023-11-14
- Accepted by EDGAR: Nov 14, 2023, 16:07 ET
- Period: 2023-09-30
- Accession: 0001683168-23-008126
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/736012/000168316823008126/intrusion_i10q-093023.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/736012/000168316823008126/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $1.5m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $4.2m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $324.0k | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $967.0k | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $1.1m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $3.3m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $1.2m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-01-01 to 2023-09-30 | $4.4m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$2.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$9.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $520.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $1.5m | us-gaap:InterestExpense |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$3.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$11.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.14 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.51 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.14 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.51 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 23,061,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 21,844,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$4.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $28.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-09-30 | $177.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $932.0k | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $4.7m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $15.7m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2023-09-30 | −$11.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 22,261 characters.

#### Forward-Looking Statements

This Quarterly Report on Form 10-Q, including, without limitation, the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our financial position; our ability to continue our business as a going concern; our business, sales, and marketing strategies and plans; our ability to successfully market, sell, and deliver our **INTRUSION** ***Shield*** commercial product and solutions to an expanding customer base; and our ability to secure additional financing; are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, such statements.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and our most recent Annual Report on Form 10-K, as the same may be amended or updated from time to time.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements do not indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.

#### Overview

Intrusion offers businesses of all sizes and industries products and services that leverage the Company’s exclusive threat intelligence database of over 8.5 billion IP addresses and domain names. After many years of gathering intelligence and providing our **INTRUSION** ***TraceCop*** and ***Savant*** solutions exclusively to government entities, we released our first commercial product in 2021, the **INTRUSION** ***Shield.*** **INTRUSION** ***Shield*** was designed to allow businesses to incorporate a Zero Trust, reputation-based security solution into their existing infrastructure to observe traffic flow and instantly block known malicious or unknown connections from both entering or exiting a network, making it an ideal solution for protecting from Zero-Day and ransomware attacks.

Much of 2022 was spent improving the **INTRUSION** ***Shield*** On-Premise performance and developing the Shield Cloud and End-Point solutions, both of which were released in September 2022. During the nine months ended September 30, 2023, our primary focus has been building out our sales reseller and channel platform and working with those partners to 1) increase our sales pipeline and 2) progress customer prospects, leads and opportunities through the sales lifecycle. Gaining traction with our Shield solutions has taken longer than initially anticipated. We feel that the progress made with our reseller and channel community along with refining our product messaging will help to shorten the sales cycle and grow revenues in future periods.

As discussed in more detail below on September 30, 2023, we had $0.2 million in cash. If we are not able to obtain additional debt or equity financing on terms and conditions acceptable to us, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations.

#### Results of Operations

**Revenues**. Revenue for the three and nine month periods ended September 30, 2023, was $1.5 and $4.2 million compared to $2.2 and $6.1 million for the same periods in 2022. Revenue from our consulting business was $1.0 and $3.1 million for the three and nine month periods ended September 30, 2023, compared to $1.9 and $5.2 million for same periods in 2022. **INTRUSION** ***Shield*** revenues were $0.4 and $1.2 million for the three and nine month periods ended September 30, 2023, compared to $0.3 and $0.9 million for the three and nine month periods ended September 30, 2022.

**Concentration of Revenues**. For the three and nine month periods ended and September 30, 2023, revenues from sales to various U.S. government entities totaled $0.6 and $1.9 million, or 43.0% and 45.8% of revenues compared to $1.4 and $4.1 million, or 63.3% and 66.8% of revenues, for the same periods in 2022. Although we expect our concentration of revenues to vary among customers in future periods depending upon the timing of certain sales, we anticipate that sales to government customers will continue to account for a significant portion of our revenues in future periods. Sales to the government present risks in addition to those involved in sales to commercial customers which could adversely affect our revenues, including, without limitation, potential disruption to appropriation and spending patterns and the government’s reservation of the right to cancel contracts and purchase orders for its convenience. Although we do not anticipate that any of our revenues from government customers will be renegotiated, any cancelled or renegotiated government orders could have a material adverse effect on our financial results. We had two commercial customers in the three and nine months ended September 30, 2023, and 2022, that each contributed individually to more than 10% of our total revenue. Our similar product and service offerings are not viewed as individual segments, as its management analyzes the business as a whole and expenses are not allocated to each product offering.

**Gross Profit**. Gross profit was $1.1 and $3.3 million or 77.9% and 77.2% of revenues for the three and nine month periods ended September 30, 2023, compared to $1.2 and $3.3 million or 54.6% and 53.8% of revenues for the three and nine month periods ended September 30, 2022. The increased gross profit is largely due to the loss of the low margin government contract and a shift in product mix with Shield representing a greater percentage of sales.

**Operating Expenses**. Operating expenses for the three and nine months ended September 30, 2023, totaled $3.8 and $12.9 million, a decrease of 23.6% and 14.0% when compared to $5.0 and $15.0 million for the same periods in 2022. The period over period change was most notably due to reduced legal expense associated with the various litigation matters that arose in 2021, and reduced contract labor and employee costs. Employee headcount on September 30, 2023, totaled 48 compared to 64 on September 30, 2022.

In late March 2023, we implemented cost reduction measures that resulted in approximately $1.5 million in savings per quarter on a go-forward basis. There was no impact on operating expenses in the March quarter resulting from these reductions. In the quarters ended June 30, 2023, and September 30, 2023, we realized $1.5 million and $1.6 million in cost savings, respectively, excluding the impact of non-cash stock-based compensation and capitalized software development. The reductions included the voluntary reduction in compensation for certain of our executive officers for a 6-month period, elimination of 16 full-time positions (“RIF”) and decreased use of contractors. As a form of retention incentive for employees not impacted by the RIF and in exchange for the voluntary reduction in compensation, we issued 553 thousand options for the purchase of shares of common stock.

**Sales and Marketing**. Sales and marketing expenses were $1.4 and $4.5 million for the three and nine month periods ended September 30, 2023, compared to $1.7 and $4.5 million for the three and nine month periods in 2022. Certain discretionary marketing spend inclusive of participation in trade shows, utilization of third-party contractors for content and product messaging and travel, are likely to vary over time based on savings initiatives that may be necessary.

**Research and Development**. For the three and nine month periods ended September 30, 2023, research and development expenses were $1.2 and $4.4 million compared to $1.5 and $4.6 million for the three and nine month period ended September 30, 2022. In the second quarter of 2022, we implemented the Agile methodology of software development to manage and track our development costs. As a result, we are able to accurately quantify and capture the cost associated with each stage of the development life cycle and, accordingly, are capitalizing costs incurred during the application development stage. For the three and nine month periods ended September 30, 2023, we recorded $0.3 and $1.1 million of research and development costs to internal use software compared to $0.5 million and $0.9 million for the three and nine month periods ended September 30, 2022, respectively. The net increased spend for the nine month period, including amounts capitalized, of $0.3 million related to costs to harden the design and user interface related to the Shield suite of products. Research and development costs may vary over time as we determine the frequency of new releases, improved functionality and enhancements needed to be competitive with our product offering.

**General and Administrative**. General and administrative expenses were $1.3 and $4.0 million for the three and nine month periods ended September 30, 2023, compared to $1.9 and $6.0 million for the three and nine month periods ended September 30, 2022. The decrease in general and administrative expenses is primarily due to a reduction in legal costs of $0.2 and $1.1 million for the three and nine month periods associated with various litigation matters that arose in 2021. The reduction in legal for the nine month period is net of $0.3 million expense related to a registered direct offering and S-1 filing that were withdrawn. Additional items contributing to the reduction for the three and nine month periods included (i) reduced use of consultants and contractors in 2023 of $0.1 and $0.4 million, respectively (ii) recruiting fees incurred in the September 2022 period of $0.1 million, and (iii) voluntary temporary reductions in director and officer compensation of $0.1 and $0.2 million, respectively for the three and nine month periods.

**Interest Expense**. Our interest expense consists primarily of interest related to the Streeterville notes entered into in March and June of 2022 and related debt issuance cost amortization as well as interest expense from finance leases. Interest expense for the quarter ended September 30, 2023, decreased $0.5 million to $0.5 million. The decrease primarily relates to the reversal of interest recorded to accrete the value of the Streeterville notes to the stock-settled value for potential redemptions paid in stock as no redemption payments in cash or stock were made in the quarter. Interest expense for the nine months ended September 30, 2023, totaled $1.5 million compared to $1.7 million for the nine months ended September 30, 2022. The increase is due to the Streeterville notes not being outstanding for the full nine-months in 2022. Interest expense will vary in the future based on our cash flow and borrowing needs.

**Interest and Other Income.** Interest and other income were negligible for the three and nine month periods ended September 30, 2023. The September 2022 period included $2.0 million related to the Cares Act Employee Retention Credit.

#### Liquidity and Capital Resources

As of November 10, 2023, we had $2.4 million of cash which includes $2.4 million in net proceeds received from the sale of common stock through a private placement which closed on November 8, 2023.

On August 11, 2023, we filed an S-1 Registration Statement for a public offering of our common stock and warrants to purchase common stock. The filing was subsequently amended on August 25th and September 18th. On October 10, 2023, we withdrew the S-1 filing prior to going effective. We currently do not have plans to pursue an S-1 public offering in the near future.

However, we will need to raise additional funds to continue operations and comply with our financial obligations. We intend to obtain these funds through one or more offerings of debt or equity securities, including through private placements, and the use of our ATM program. We can provide no assurances that we will be able to obtain such financing on acceptable terms or at all and, in the case of equity or equity-linked financings, such financings will result in additional dilution to our stockholders.

As of September 30, 2023, we had cash and cash equivalents of $0.2 million, down from $3.0 million as of December 31, 2022, and a working capital deficit of ($14.8) million compared to ($7.8) million as of December 31, 2022.

#### Sources of Liquidity

Our principal sources of cash for funding operations in 2023 has been net proceeds received from sales of common stock using our ATM program of $3.0 million and net funds through changes in working capital which includes receipt of the remaining ERC refund in the March quarter of $1.4 million. Our principal source of cash for funding operations and growth in 2022 was issuance of the two Streeterville notes which contributed $9.3 million, net of issuance costs, and $6.4 million from the sale and issuance of common stock and warrants.

#### Notes Payable

We entered into a SPA with Streeterville on March 10, 2022, pursuant to which Streeterville purchased two promissory notes with substantively identical terms. Streeterville purchased the first note on March 10, 2022, and the second note on June 29, 2022, each note with an aggregate principal amount of $5.4 million in exchange for $5.0 million less certain expenses. We received an aggregate of approximately $9.3 million, net of transaction expenses, in connection with these issuances.

The notes had original maturity dates in September and December 2023. In August 2023, we entered into a Forbearance Agreement with Streeterville whereby the maturity date for each note was extended by 12 months to September 2024 and December 2024, respectively.

Streeterville has the right to redeem up to $0.5 million of the outstanding balance of each note per month. Payments may be made by the Company, generally at the Company’s option, (a) in cash, (b) by paying the redemption amount in the form of shares of common stock or (c) a combination of cash and shares of common stock. If paid in common stock, the number of redemption shares to be issued is based on a 15% discount to market, as further defined in the note agreements. Through December 2022, Streeterville made three separate redemption requests totaling $1.5 million, which we satisfied in cash. In January 2023, the note agreements were amended whereby Streeterville waived their right to redemptions through March 31, 2023, in exchange for a fee equal to 3.75% of the outstanding note balance. This fee was added to the outstanding principal balance to be paid at maturity. No redemptions have been made in 2023. As of September 30, 2023, the total outstanding amount payable to Streeterville under the notes payable which includes principal, accrued interest and fees associated with agreement modifications was $10.6 million.

On October 11, and October 17, 2023, we agreed to exchange $0.4 million in aggregate principal on Note 1 for 1.0 million shares of our common stock. The issuance of the shares was made pursuant to the exemption from the registration requirements afforded by Section 3(a)(9) of the Securities Act of 1933, as amended.

There can be no assurance that we will improve our liquidity position or our ability to make redemption or principal payments.

#### ATM Program

In August of 2021, we engaged B. Riley Securities, Inc. to act as sales agent under our at-the-market program, which allows us to potentially sell up to $50.0 million of our common stock using the shelf-registration statement on Form S-3 filed on August 5, 2021. On April 11, 2023, as a result of limitations under General Instruction I.B.6 of Form S-3, and in agreement with the terms of the sales agreement, the Company revised the aggregate offering price of shares of common stock that we can sell pursuant to the ATM program to $15.0 million. For the nine months ended September 30, 2023, we received $3.0 million, net of fees for sales of common stock pursuant to the program.

For as long as our public float is less than $75 million, we will be subject to the limitations set forth in General Instruction I.B.6 of Form S-3, which limit our ability to conduct primary offerings. Under such limitations, we may not sell, during any 12-month period, securities on Form S-3 having an aggregate market value of more than one-third of our public float. As of November 13, 2023, our public float calculated in accordance with General Instruction I.B.6 of Form S-3 was $13.2 million.

#### Condensed Consolidated Statements of Cash Flows

Our cash flows for the nine months ended September 30, 2023, and 2022 (in thousands) were:

|  | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(4,779) | $(9,557) |
| Net cash used in investing activities | (1,041) | (1,113) |
| Net cash provided by financing activities | 2,982 | 13,476 |
| Change in cash and cash equivalents | $(2,838) | $2,806 |

#### Operating Activities

Net cash used in operations for the nine months ended September 30, 2023, was ($4.8) million due to a net loss of ($11.1) million, offset by 1) adjustments for non-cash items of $3.5 million which are mostly comprised of depreciation, stock-based compensation, and interest related to Streeterville notes and 2) $2.8 million provided from working capital principally relating to the cash receipt of amounts due relating to Employee Retention Credit, and increased accounts payable of $1.0 million.

Net cash used in operations for the nine months ended September 30, 2022, was ($9.6) million due primarily to a net loss of ($11.0) million partially offset by the following sources of cash and non-cash items: $1.5 million add back of non-cash expense comprised mostly of depreciation and stock-based compensation and ($0.1) million changes in working capital.

#### Investing Activities

For the nine months ended September 30, 2023, net cash used in investing activities was ($1.0) million, which was principally the capitalization of internally developed software. Net cash used by investing activities, for the nine months ended September 30, 2022, was ($1.1) million consisting of ($0.9) million of capitalized internally developed software and ($0.2) million for purchases of property and equipment.

#### Financing Activities

For nine months ended September 30, 2023, net cash provided by financing activities was $3.0 million which consisted principally of proceeds from sales of common stock using our ATM program. Cash provided by financing activities for the 2022 period totaled $13.5 million which was primarily the result of proceeds from issuance of the Streeterville notes, net of issuance costs and principal repayment of $8.8 million, $3.3 million in net proceeds from the sale of shares and warrants pursuant to our registered direct offering and sales of stock using our ATM program of $1.9 million, partially offset by finance lease payments of ($0.6) million.

### Critical Accounting Policies and Use of Estimates

Our condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

We believe the critical accounting policies and estimates discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 31, 2023, reflect our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements. There have been no other significant changes to our critical accounting policies and estimates as filed in such report.

## Controls and procedures

As filed, 1,540 characters.

We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we must apply our reasonable judgment in evaluating the cost-benefit relationship of potential disclosure controls and procedures.

As of September 30, 2023, our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures and concluded that the disclosure controls and procedures were effective as of September 30, 2023.

There have not been any changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 2,270 characters.

In addition to the information set forth elsewhere in this Quarterly Report on Form 10-Q and the risk factor set forth below, you should carefully consider the risk factors we previously disclosed in our Annual Report on Form 10-K, filed with the SEC on March 31, 2023, as of and for the year ended December 31, 2022 (the “Annual Report”). These risks could materially and adversely affect our business, financial condition, results of operations, and cash flows. However, these risks are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business, financial condition, results of operations, and cash flows.

### Risks Related to Our Financial Position and Liquidity

***We may not be able to implement our current business plan or continue operations unless we are able to raise additional funds through public or private financings.***

As of November 10, 2023, we had $2.4 million in cash. We need to raise additional funds in the near term to continue operations and comply with our financial obligations. We intend to obtain these funds through one or more offerings of debt or equity securities, including through private placements, and the use of our ATM program. We can provide no assurances that we will be able to obtain such financing on acceptable terms or at all and, in the case of equity or equity-linked financings, such financings will result in additional dilution to our stockholders.

If we are unable to obtain additional debt or equity financing on acceptable terms, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations. Specifically, we may have to further reduce our workforce, sell our assets, and reduce or cease activities to grow our business. Such actions may impact our ability to comply with the obligations under our commercial contracts, including those under the government contract for which we received prepayment of the full one-year term in April 2023. Failure to comply with such contracts may result in the termination of such contracts and us being obligated to return some or any prepayments we received. We may also fail to satisfy our obligations under the Streeterville notes.

Filed Nov 14, 2023.
Source: SEC EDGAR, the filing index for accession 0001683168-23-008126. Last ingested by Listed: Nov 2, 2026, 07:54 ET. No prices; not investment advice.