INTRUSION INC. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated financial statements; amounts below are USD unless noted. Intrusion develops and sells cybersecurity and entity-identification products, principally TraceCop and Savant.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $3.86m | $2.67m | $11.07m | $7.30m |
| Gross profit / margin | $2.40m / 62.0% | $1.70m / 63.7% | $6.73m / 60.8% | $4.55m / 62.4% |
| Operating income / margin | $1.47m / 38.0% | $0.66m / 24.8% | $4.21m / 38.0% | $1.58m / 21.7% |
| Net income | $1.46m | $0.62m | $4.17m | $1.44m |
| Net income attributable to common stockholders | $1.43m | $0.58m | $4.07m | $1.33m |
| Diluted earnings per share | $0.09 | $0.04 | $0.27 | $0.09 |
- Revenue grew approximately 45% year over year in Q3 and 52% for the nine-month period, primarily from TraceCop. Q3 TraceCop revenue was $3.9m; Savant revenue was $29,000.
- Gross margin declined 1.7 percentage points in Q3 and 1.6 points year to date, which management attributed mainly to product mix.
- Q3 operating expenses were $930,000, down from $1.04m. For nine months, sales and marketing fell to $813,000 from $1.31m; R&D was broadly flat, while G&A increased to $930,000 from $828,000.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $2.94m, versus $1.79m in 2018. Investing cash outflow for equipment purchases was $183,000.
- Cash was $2.11m at September 30, 2019, up from $1.65m at December 31, 2018. Working capital was $2.88m; the filing compares this with a $0.4m deficiency at September 30, 2018.
- Financing cash outflow was $2.29m, including $1.82m repaid on the CEO loan and $667,000 of preferred dividends paid. The officer loan balance was zero at quarter end. No material capital expenditure commitments were reported.
- Total assets were $6.76m and stockholders’ equity was $3.27m, compared with a $1.06m stockholders’ deficit at year-end 2018. Operating lease liabilities totaled $1.67m and finance lease liabilities $75,000.
- Preferred dividends continued to accrue: $32,000 was accrued and unpaid at quarter end. The filing states Series 2 and Series 3 preferred holders could seek redemption following an uncured dividend-payment breach; the stated aggregate cash redemption amount at September 30 was $1.8m.
Outlook, material events and risks
- Management believed projected revenue and net income would provide sufficient resources for operations and expected capital expenditures over the next 12 months. This outlook depended in part on continuing profits and was qualified by financing and liquidity risks; no specific revenue or earnings guidance was provided.
- On October 24, 2019, after quarter end, CEO and co-founder G. Ward Paxton died. His death terminated the CEO Note, eliminating access to up to $2.7m of borrowing. CFO Michael L. Paxton became Chairman, Interim President and Interim CEO. Management said it would assess replacement financing, with no assurance of availability or acceptable terms.
- Revenue concentration is substantial: U.S. government customers and resellers accounted for 90.9% of Q3 revenue and 89.8% for the nine months. Three government customers represented approximately 75.8% of Q3 revenue. Nearly all revenue was from TraceCop, and indirect channels were important.
- Management cited risks including the leadership transition, loss of the lending backstop, reliance on a small number of government customers and one principal product line, potential preferred-dividend obligations, and the possibility that additional financing may be unavailable or dilutive. Government contracts may be subject to spending changes or cancellation. Routine legal matters were not expected to have a material adverse effect, but future claims could.
- Management reported disclosure controls and procedures were effective as of September 30, 2019, and no material change to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the company replaced the terminated CEO Note, and the resulting financing terms and liquidity runway.
- Whether revenue growth and profitability continued after Q3, particularly given TraceCop and government-customer concentration.
- Preferred dividend accruals, payment status, and any redemption rights or related cash requirements.
- Leadership-transition developments and any effects on customer, reseller or supplier relationships.
- Cash conversion and working-capital trends, including receivables growth and deferred-revenue changes.