Intrusion Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Intrusion develops and sells entity-identification, data-mining and cybersecurity products, principally TraceCop and Savant. Financial amounts below are in U.S. dollars; financial statement figures are in thousands unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $4.020 million | $2.369 million | $7.211 million | $4.632 million |
| Gross profit / margin | $2.430 million / 60.4% | $1.443 million / 60.9% | $4.337 million / 60.1% | $2.854 million / 61.6% |
| Operating income | $1.767 million | $522,000 | $2.750 million | $921,000 |
| Net income | $1.758 million | $474,000 | $2.706 million | $820,000 |
| Net income attributable to common stockholders | $1.723 million | $439,000 | $2.637 million | $751,000 |
| Basic / diluted EPS | $0.13 / $0.11 | $0.03 / $0.03 | $0.20 / $0.17 | $0.06 / $0.05 |
| Net cash provided by operating activities | Six-month period: $2.257 million | Prior-year six-month period: $1.240 million |
Q2 revenue rose approximately 70% year over year; first-half revenue rose approximately 56%. Management attributed the increase primarily to TraceCop. Gross margin declined modestly, which management attributed mainly to product mix. No income tax provision was reported.
Cash, liquidity and obligations
- Cash and cash equivalents were $1.477 million at June 30, 2019, versus $1.652 million at December 31, 2018. Working capital was approximately $1.4 million; the filing cites a $1.0 million working-capital deficiency at June 30, 2018.
- First-half operating cash flow of $2.257 million was partly offset by $168,000 of property and equipment purchases and $2.264 million of financing outflows. Financing included $1.815 million repaid on the CEO loan and $644,000 of preferred dividends paid. Cash decreased by $175,000 over the six months.
- No CEO loan principal was outstanding at June 30. The amended revolving note permits borrowing up to $2.7 million through March 2021; the company reported that amount as available funding. The note bears interest at SVB prime plus 1%. Accrued interest was $513,000, and past-due interest was paid July 16, 2019.
- Balance-sheet operating and finance lease liabilities totaled approximately $1.822 million. The filing lists $2.096 million of undiscounted future minimum lease payments, before $274,000 of imputed interest.
- Preferred dividends continue to accrue. The company reported $20,000 accrued and unpaid at quarter-end; holders of Series 2 and Series 3 preferred stock could have redemption rights, with an aggregate cash redemption price of $1.8 million if all those shares were redeemed under the stated circumstances.
Material changes and management commentary
- TraceCop quarterly sales were approximately $4.0 million, compared with $2.4 million a year earlier; Savant sales were $29,000 in each quarter. Management noted that Q2 benefited from a customer order delayed from the two preceding quarters and said new orders would be needed to sustain revenue levels.
- Sales and marketing expense fell to $46,000 from $431,000 in Q2 2018. Management attributed this to shifting project costs to cost of sales, collecting $200,000 related to a 2018 customer expense, and delayed customer sales; it expected the expense to return to more traditional levels in Q3 2019.
- First-half net income improved to $2.706 million from $820,000. Interest expense also declined, primarily because the company paid down the CEO loan.
- Management believed cash, anticipated profits and available CEO-note borrowings would fund operations and expected capital expenditures for the next 12 months. This assessment depends on projected growth and positive cash generation; the company warned that failure to generate positive cash flow or obtain acceptable financing could impair its ability to fund operations or continue them.
Risks, contingencies and unusual items
- Revenue is highly concentrated: U.S. government customers and resellers represented 91.3% of Q2 revenue and 89.2% of first-half revenue. Three government customers represented approximately 73.2% of Q2 revenue. Government orders may be affected by appropriations, spending patterns, or cancellation rights.
- The company depends heavily on TraceCop, government-related customers and indirect sales channels. A decline in product demand, loss of major customers or channel disruption could materially affect results; sales timing also contributed to Q2 performance.
- Liquidity and financing risks include dependence on the CEO note, possible need for additional debt or equity, potential dilution, preferred dividend obligations and preferred-stock redemption provisions. The company reported an accumulated deficit of $56.536 million.
- Routine legal proceedings and claims arise in the ordinary course; management did not expect them to materially affect financial position, results or cash flows, while noting future claims could have a material impact.
- The company adopted lease-accounting standard ASC 842 in 2019, recording operating right-of-use assets and lease liabilities; it reported no material effect on results or cash flows. Disclosure controls and procedures were assessed as effective as of June 30, 2019.
Important facts for investors to verify
- Whether the Q2 revenue increase—especially TraceCop and delayed customer orders—continues in subsequent periods.
- Customer and channel concentration, including dependence on U.S. government spending and a small number of government customers.
- Cash conversion and working-capital needs, including the impact of receivables growth, preferred dividend payments and lease obligations.
- Availability and terms of the CEO revolving note, and any subsequent borrowing, repayment or interest developments.
- Preferred-stock dividend, redemption and conversion terms, and potential dilution from preferred shares, options or future financing.