Intrusion Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Intrusion develops and sells security and data-mining products, including TraceCop and Savant. Financial amounts below are in thousands of dollars unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $2,369 | $1,543 | $4,632 | $3,102 |
| Gross profit / margin | $1,443 / 60.9% | $911 / 59.0% | $2,854 / 61.6% | $1,887 / 60.8% |
| Operating income (loss) | $522 | $(380) | $921 | $(681) |
| Net income (loss) | $474 | $(438) | $820 | $(789) |
| Net income (loss) attributable to common stockholders | $439 | $(473) | $751 | $(858) |
| Basic earnings (loss) per share | $0.03 | $(0.04) | $0.06 | $(0.07) |
Q2 revenue rose about 54% year over year; first-half revenue rose about 49%. Growth was primarily from TraceCop: Q2 sales were $2.4 million, versus $1.5 million a year earlier. Savant sales were $29,000 in both quarters. Gross margin improved, which management attributed mainly to product mix. First-half research and development expense fell to $503,000 from $1.179 million, primarily because payroll shifted to cost of sales. Q2 research and development expense was $200,000 versus $594,000.
For the first six months, operating cash flow was $1.240 million, compared with $265,000 in 2017. Cash increased to $376,000 from $224,000 at year-end; investing cash use was $75,000 and financing cash use was $1.013 million. The financing outflow chiefly reflected $1.2 million of repayments on the CEO loan. The company reported a $1.0 million working-capital deficit at June 30, 2018.
At June 30, the CEO loan balance was $1.815 million, with $423,000 of accrued interest. The revolving note permits borrowing up to $3.7 million through March 2020, bears interest at prime plus 1% (6.00% at quarter-end), and had approximately $1.9 million of availability. Current and noncurrent capital-lease obligations totaled $116,000. Accrued and unpaid preferred dividends were $520,000. Total assets were $2.123 million and stockholders’ deficit was $2.654 million.
Outlook, risks and other matters
Management expected sales and marketing expense to increase with revenue through the remainder of 2018; it expected research and development and general and administrative costs to remain relatively constant, subject to changes with revenue. Management believed cash, anticipated profits and available CEO-note borrowings would fund operations and expected capital expenditures for the next 12 months. This outlook depends on revenue growth and continued access to financing; the filing warns that failure to generate positive cash flow or secure acceptable financing could jeopardize operations.
Revenue concentration is significant: U.S. government entities and resellers accounted for 88.4% of Q2 revenue, up from 72.2% a year earlier, and 84.1% of first-half revenue. Four government customers represented approximately 73.7% of Q2 revenue. Management expects government sales to remain significant and notes risks from spending changes or order cancellations. Sales also rely heavily on indirect channels and the TraceCop product line.
Preferred dividends continue to accrue whether or not legally payable. If Series 2 and Series 3 dividend defaults are not cured after notice, holders may have redemption rights; the filing estimated a $2.4 million cash redemption obligation as of August 1, 2018 if all applicable shares were redeemed. Unpaid dividends on those series may also incur an 18% annual late fee, subject to stated waivers. Preferred conversion, redemption, or new financing could dilute common stockholders. The filing reports routine legal matters that management does not expect to have a material adverse effect, while noting no assurance about future claims. Disclosure controls were concluded effective as of June 30, 2018.
Important facts for investors to verify
- Whether revenue and operating cash flow remain positive, and whether the company reduces its working-capital deficit.
- How durable TraceCop growth is, given product and customer concentration and limited Savant sales.
- Availability and terms of CEO-related financing, including the related-party loan balance, interest and repayment terms.
- Preferred-dividend arrears, potential penalties or redemption demands, and resulting cash needs or dilution.
- Whether the stated 12-month liquidity outlook is achieved without unfavorable or dilutive additional financing.