Intrusion Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; comparisons are with FY2016. This is an annual report, not a standalone fourth-quarter report. Intrusion develops and sells cybersecurity and data products, principally TraceCop and Savant, to government and commercial customers.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $6.862 million | $6.102 million |
| Gross profit / margin | $4.038 million / 58.8% | $3.919 million / 64.2% |
| Operating loss | $749,000 | $1.407 million |
| Net loss | $30,000 | $1.552 million |
| Net loss attributable to common stockholders | $169,000; $0.01 per share | $1.691 million; $0.13 per share |
| Cash from (used in) operating activities | $272,000 | $1.244 million used |
| Cash and cash equivalents at year-end | $224,000 | $64,000 |
FY2017 other income was $928,000, including $872,000 from selling unused IP addresses and $56,000 from selling an investment. The company remained loss-making from operations; the asset and investment sales materially reduced the reported net loss. Operating cash flow also benefited from a $291,000 increase in accounts payable and accrued expenses, partly offset by a $217,000 increase in receivables.
At year-end, working capital was deficient by $800,000. The balance sheet reported a $2.865 million loan payable to CEO G. Ward Paxton, plus $348,000 accrued interest; capital lease obligations were $61,000. Current liabilities were $2.079 million versus current assets of $1.290 million. Stockholders’ deficit was $3.509 million, and accumulated deficit was $61.529 million.
Changes versus FY2016
- Revenue rose 12.5%, primarily due to TraceCop growth.
- Gross margin declined 5.4 percentage points, which management attributed to higher average labor costs on new projects.
- Operating loss narrowed as sales and marketing, R&D, and general and administrative expenses fell; interest expense increased to $209,000 from $145,000.
- Net loss narrowed substantially, but the improvement included $928,000 of non-recurring other income from asset sales.
- U.S. government sales increased to 81.6% of revenue from 69.3%. Three government customers accounted for approximately 58.8% of FY2017 revenue.
Outlook, risks, and unusual items
- Management expected revenue to grow as TraceCop and Savant gain market acceptance, and said operating resources were projected to be sufficient through March 31, 2019. This outlook depends on revenue and net-income growth and access to CEO borrowings; it is not a guarantee.
- As of February 28, 2018, the company said $835,000 remained available under the CEO’s revolving note, with a borrowing limit of $3.7 million. The note was amended to run through March 2020; year-end borrowings were $2.865 million.
- Liquidity is constrained by low cash, a working-capital deficit, accumulated losses, and unpaid preferred dividends. Preferred dividends payable were $447,000 at year-end; $139,000 was accrued during FY2017. Certain Series 2 and Series 3 holders may have redemption rights; the filing estimated a $2.0 million aggregate redemption price for those shares as of February 28, 2018, subject to the applicable terms.
- Additional financing may be needed and could be unavailable or dilutive. Management warned that failure to generate positive cash flow or obtain acceptable financing could impair execution of its plan or threaten continued operations.
- Other key risks include dependence on government customers and indirect sales channels, cancellable government orders, lengthy sales cycles, intense competition, rapid technology change, and limited product market acceptance.
- The company reported no material pending legal claims known at December 31, 2017. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Whether revenue growth continues and the company can narrow its operating loss without further asset sales.
- Cash conversion and collection of receivables, given the FY2017 operating cash-flow contribution from increased payables and accrued expenses.
- CEO-note availability, outstanding principal and interest, repayment terms, and the company’s reliance on this related-party financing.
- Preferred-dividend arrears, potential penalties or redemption demands, and the resulting cash or dilution impact.
- Customer concentration and whether government and channel sales remain stable.
- The assumptions supporting management’s stated liquidity runway through March 31, 2019.