Intrusion Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless otherwise noted. Intrusion develops and sells security and entity-identification software, principally TraceCop and Savant. Financial statements are unaudited.
Financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $3.191 million | $2.263 million |
| Gross profit / margin | $1.907 million / 59.8% | $1.411 million / 62.4% |
| Operating income | $982,000 | $399,000 |
| Net income | $947,000 | $346,000 |
| Net income attributable to common stockholders | $913,000; $0.07 basic and $0.06 diluted per share | $310,000; $0.02 basic and diluted per share |
| Net cash from (used in) operating activities | $787,000 | $(206,000) |
Revenue increased about 41% and net income about 174% year over year. TraceCop revenue was $3.1 million versus $2.2 million; Savant revenue was $0.1 million in both periods. Gross margin declined, which management attributed mainly to product mix. Operating expenses totaled $925,000, compared with $1.012 million: research and development declined to $182,000, sales and marketing was approximately $412,000, and general and administrative expense was $331,000. Net interest expense declined to $35,000 from $53,000, partly reflecting debt repayment.
Balance sheet, cash flow and liquidity
- At March 31, 2019, cash and cash equivalents were $951,000, down from $1.652 million at December 31, 2018. Working capital was approximately $553,000, versus a $0.3 million deficiency at March 31, 2018.
- Operating cash flow was $787,000. Cash used in investing was $96,000, primarily for property and equipment. Financing used $1.392 million, including $1.0 million repaid on the CEO note and $597,000 of preferred dividends paid; $220,000 was received from option exercises. Cash declined by $701,000 during the quarter.
- The CEO’s unsecured revolving note had $815,000 outstanding at quarter-end, with $506,000 accrued interest. The amended facility permits borrowing up to $2.7 million through March 2021; the company reported $1.9 million of remaining availability. The stated interest rate was 6.5% at quarter-end.
- Preferred dividends of $32,000 remained accrued and unpaid. The filing states that a required cash redemption of Series 2 and Series 3 preferred stock, if triggered, would total approximately $1.8 million at March 31, 2019.
- Adoption of lease accounting resulted in recognition of a $1.498 million operating lease right-of-use asset and current and noncurrent operating lease liabilities totaling $1.767 million. Total future lease payments, before imputed interest, were $2.172 million.
Outlook, risks and other notable matters
- Management expects sufficient resources for operations and expected capital expenditures over the next 12 months, based on projected revenue and income growth and access to CEO-note borrowings. This outlook is conditional: weaker cash generation or unavailable financing could impair operations or the company’s ability to continue its business plan. No specific revenue or earnings guidance was provided.
- Revenue concentration is significant: U.S. government sales through direct and indirect channels were 86.4% of revenue, versus 79.6% a year earlier. Three government customers represented about 64.2% of revenue. The company also depends heavily on TraceCop and reseller channels; loss of a major customer, contract disruption, or reduced product demand could materially affect results.
- The company cited dependence on CEO-provided financing, potential dilution from additional financing or preferred-stock conversion, preferred-dividend obligations, and limited cash as risks. Management also noted government customers may cancel contracts or orders for convenience; it was not aware of proposed cancellations or renegotiations.
- Routine legal proceedings were not expected by management to have a material adverse effect, though no assurance was given about future claims. Disclosure controls were assessed as effective at March 31, 2019; management reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether revenue growth and positive operating cash flow continue, particularly given government and TraceCop concentration.
- Cash usage, working-capital needs, and actual availability and terms of further borrowing under the CEO note.
- Preferred-dividend arrears, potential redemption obligations, and the dilution impact of preferred conversions, option exercises, or future financing.
- Gross-margin trends and the effect of product mix, reseller channels, and customer concentration on profitability.
- The filing describes $1.9 million of CEO-note availability and forecasts adequate liquidity for 12 months, but stresses that these conclusions depend on projected growth and financing access.