Intrusion Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparisons are with FY 2013. This is an annual filing, not a standalone fourth-quarter report. Intrusion develops network-security software and related products, including TraceCop, Savant and Compliance Commander, and sells primarily in the United States.
Financial performance
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $7.219 million | $7.663 million |
| Gross profit / margin | $4.687 million / 64.9% | $4.912 million / 64.1% |
| Operating income (loss) | $(221,000) | $754,000 |
| Net income (loss) | $(274,000) | $623,000 |
| Net income (loss) attributable to common stockholders | $(415,000) | $472,000 |
| Operating cash flow | $571,000 | $1.440 million |
| Cash and cash equivalents at year-end | $1.006 million | $1.139 million |
| Working capital at year-end | $0.4 million | $0.4 million |
Product revenue fell 5.3%; customer support and maintenance revenue declined from $85,000 to $69,000. No export revenue was reported in either year. The company recorded no income-tax provision; its deferred tax assets were fully offset by a valuation allowance.
Material changes and financial position
- Revenue declined 5.8% overall, which management attributed mainly to slower-than-anticipated Savant sales and the expiration of SecureNet maintenance contracts.
- Gross margin improved to 64.9%, while operating expenses increased: sales and marketing rose to $1.735 million, research and development to $1.941 million, and general and administrative to $1.232 million. The higher sales and marketing spending reflected planned sales-force expansion.
- Cash from operations remained positive but fell from $1.440 million to $571,000. Operating cash flow included a $303,000 increase in deferred revenue and noncash stock compensation of $375,000.
- Investing activities used $55,000; financing activities used $649,000, including $558,000 of preferred-dividend payments. Cash decreased $133,000 over the year.
- At year-end, the company had $1.530 million owed to its CEO under an unsecured revolving note, plus approximately $76,500 of accrued interest. The note bears interest at prime plus 1%; it was renewed in February 2015 through March 2016, with a maximum principal balance of $2.2 million.
- No SVB line borrowings were outstanding at year-end. The receivables-based credit line had a $625,000 limit, with $475,000 available as reported; it is secured by substantially all company assets, including intellectual property, and was scheduled to terminate June 23, 2015. Capital-lease obligations totaled $275,000 on the balance sheet; future operating-lease commitments were $912,000.
- Total assets were $2.312 million and stockholders’ deficit was $817,000. Accumulated deficit was $58.698 million.
Outlook, risks and other notable items
- Management expected revenue and net income growth and stated that available cash and borrowing sources should fund operations and expected capital spending for the next 12 months. This outlook depends on projected growth and continued access to financing; the filing warns that failure to generate positive cash flow or obtain acceptable financing could threaten operations.
- Government sales represented 51.4% of revenue, up from 50.1%. The filing identifies four government customers and also reports that one commercial customer exceeded 30% of revenue in each year. Government funding, contract cancellation and customer concentration create substantial exposure.
- Indirect channels generated 55.7% of revenue in 2014, compared with 32.4% in 2013. The company also cautions that newer products have limited market acceptance and may face lengthy sales cycles and strong competition.
- Preferred shares accrued $141,000 of dividends in 2014. Preferred-stock conversion, redemption provisions, outstanding options and potential future financing could dilute common shareholders. The company reported approximately 3.076 million options outstanding at year-end.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements. The auditor did not provide an internal-control attestation. Ordinary-course legal matters were not believed material, and no significant off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether Savant and TraceCop sales improve enough to restore revenue growth and sustained profitability.
- How much revenue and receivables depend on the largest government and commercial customers, and whether any major contracts or orders change.
- Cash-flow performance, preferred-dividend payments, CEO-note borrowing and repayment, and renewal or replacement of the SVB facility.
- Compliance with SVB liquidity and EBITDA covenants and the impact of the facility’s scheduled June 2015 termination.
- Potential dilution from preferred-stock conversion or redemption, options, and any new equity or debt financing.