Intrusion Files For $10 Million IPO (OTCMKTS:INTZ)


Quick Take

Intrusion (OTCQB:INTZ) has filed to raise $10 million in a Nasdaq IPO of its common stock, according to an S-1 registration statement.

The firm provides cybersecurity products and services to U.S. government agencies and enterprises.

INTZ is a tiny firm that appears to have been has been negatively impacted by the Covid-19 pandemic but seeks to broaden its customer base with a new intrusion detection product.

I’ll provide an update when we learn more about the IPO from management.

Company & Technology

Richardson, Texas-based Intrusion was founded to develop a database of global IP addresses and related information for monitoring cyber threat sources.

Management is headed by president and Chief Executive Officer Mr. Jack Blount, who has been with the firm since May 2020 and was previously CIO in the U.S. federal government and founder of a strategic consultancy for various organizations.

The company’s primary offerings include:

Intrusion has received at least $58 million from investors including ARS Investment Partners, Patsy Paxton, Michael Paxton, Julie Paxton Puckett and Mark Paxton. The Paxton’s collectively own 50.2% of company stock pre-IPO.

Customer Acquisition

The firm markets its products through an in-house direct sales force and through value-added reseller organizations.

Intrusion counts as customers a variety of ‘U.S. Federal government entities, state and local government entities, large and diverse conglomerates, manufacturing entities, and other customers.’

Sales & Marketing expenses as a percentage of total revenue have fluctuated as revenues have varied, as the figures below indicate:

Sales & Marketing

Expenses vs. Revenue

Period

Percentage

Six Mos. Ended June 30, 2020

28.8%

2019

9.5%

2018

15.6%

Source: Company registration statement

The Sales & Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales & Marketing spend, dropped to a negative (3.8x) in the most recent reporting period, as shown in the table below:

Sales & Marketing

Efficiency Rate

Period

Multiple

Six Mos. Ended June 30, 2020

-3.8

2019

2.6

Source: Company registration statement

Market & Competition

According to a 2020 market research report by ResearchAndMarkets, the market for U.S. government cyber security is expected to grow by $11.5 billion from 2020 to 2024.

This represents a forecast CAGR of 11.0% during the period.

The main drivers for this expected growth are increasing cyber security budgets at all levels of government due to greater cyber threat activity domestically and from abroad.

Major competitive or other industry participants include:

  • Niksun

  • NetScout (NTCT)

  • Fireeye (FEYE)

  • Darktrace

Management says its TraceCop product has ‘limited competitors,’ although it expects competition to emerge in the future, albeit with ‘only a portion of the functions that we are able to perform with TraceCop.’

Financial Performance

Intrusion’s recent financial results can be summarized as follows:

  • Sharp drop in topline revenue

  • Reduced gross profit and gross margin

  • A swing to operating loss and negative operating margin

  • A swing to cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Six Mos. Ended June 30, 2020

$ 3,450,000

-52.2%

2019

$ 13,643,000

32.8%

2018

$ 10,276,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Six Mos. Ended June 30, 2020

$ 2,052,000

-52.7%

2019

$ 8,301,000

29.1%

2018

$ 6,429,000

Gross Margin

Period

Gross Margin

Six Mos. Ended June 30, 2020

59.48%

2019

60.84%

2018

62.56%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Six Mos. Ended June 30, 2020

$ (1,185,000)

-34.3%

2019

$ 4,507,000

33.0%

2018

$ 2,476,000

24.1%

Net Income (Loss)

Period

Net Income (Loss)

Six Mos. Ended June 30, 2020

$ (1,180,000)

2019

$ 4,465,000

2018

$ 2,287,000

Cash Flow From Operations

Period

Cash Flow From Operations

Six Mos. Ended June 30, 2020

$ (1,026,000)

2019

$ 4,290,000

2018

$ 2,578,000

(Glossary Of Terms)

Source: Company registration statement

As of June 30, 2020, Intrusion had $2.9 million in cash and $3.5 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2020, was $853,000.

IPO Details

Intrusion intends to raise $10 million in gross proceeds from an IPO of its common stock, although the final amount may differ.

Management says it will use the net proceeds from the IPO as follows:

We intend to use the net proceeds from this offering, together with our existing cash, to complete the development of our Intrusion Shield product offering, to promote and market the Intrusion Shield product, to develop sales and distribution channels to sell our products to a customer base comprised of commercial customers who are distinct from and our historical customer base of governmental and regulatory customers, and for general and administration expenses.

Management’s presentation of the company roadshow is not available.

The sole listed bookrunner of the IPO is B. Riley FBR.

Commentary

Intrusion is seeking public market financing to continue product development for its Shield product.

The firm’s financials indicate a sharp drop in topline revenue for the first six months of 2020, likely due to the negative effects of the Covid-19 pandemic on its sales and operations.

Sales & Marketing expenses have fluctuated as revenue has varied; its Sales & Marketing efficiency rate turned sharply negative in the most recent reporting period, mirroring the sharp drop in topline revenue.

The market opportunity for providing cybersecurity solutions to all levels of U.S. government agencies is large and expected to grow substantially in the years ahead, as cyber threats proliferate.

Intrusion is a tiny firm in a big market with large players. It provides a few niche products and seeks to broaden its offerings with its Shield product under development.

Management hopes to also broaden its customer base in the process.

When we learn more IPO details, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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