Intrusion Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The unaudited filing covers a cybersecurity and data-mining software business whose products include TraceCop and Savant. Nearly all revenue came from these product lines, primarily TraceCop.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $1.795 million | $3.191 million |
| Gross profit / margin | $1.048 million / 58.4% | $1.907 million / 59.8% |
| Operating expenses | $1.519 million | $0.925 million |
| Operating income (loss) | $(0.471) million | $0.982 million |
| Net income (loss) | $(0.465) million | $0.947 million |
| Net income (loss) attributable to common stockholders | $(0.498) million; $(0.04) per share | $0.913 million; $0.07 basic per share |
| Cash from (used in) operations | $(0.142) million | $0.787 million |
Revenue fell about 44% year over year. TraceCop revenue declined to $1.7 million from $3.1 million; Savant revenue was approximately $0.1 million in both periods. Gross margin decreased 1.4 percentage points. Research and development expense increased to $753,000 from $182,000, while sales and marketing rose to $510,000 from $412,000. Management attributed the R&D increase mainly to labor costs and described the margin change as primarily related to product mix.
Cash, liquidity and obligations
- Cash and cash equivalents were $3.217 million at March 31, 2020, versus $3.334 million at December 31, 2019; cash declined $117,000 during the quarter. Working capital was reported as $2.7 million, compared with $0.6 million at March 31, 2019.
- Operating cash use reflected the quarterly loss and reductions in deferred revenue and accounts payable, partly offset by collections of receivables. Capital expenditures were $40,000. Financing activities provided $65,000, principally from option exercises, net of finance-lease payments.
- The balance sheet reported no officer loan outstanding. The former CEO’s borrowing facility terminated after his death in October 2019, and the company said replacement funding was under assessment. Lease liabilities totaled approximately $1.586 million, including $1.532 million of operating-lease liabilities and $54,000 of finance-lease liabilities.
- Preferred dividends accrued were $33,000 for the quarter; the balance sheet showed $53,000 of dividends payable. Series 2 and Series 3 preferred holders may have redemption rights if dividend defaults are not cured; the company estimated the aggregate cash redemption price for those series at $1.7 million as of March 31, 2020.
Outlook, risks and other developments
- Management said it expected revenue growth in coming quarters and believed cash would be sufficient for operations and expected capital expenditures for the next 12 months. This assessment depends on projected growth; the filing provides no quantified revenue or earnings guidance.
- The company applied for a $629,000 Paycheck Protection Program loan, approved by the SBA on April 30, 2020, after quarter-end. It expected to use the proceeds for qualifying purposes; potential forgiveness was subject to program requirements.
- COVID-19 could delay or redirect government customer spending and disrupt employees’ ability to work on-site. The filing said the impact was uncertain and could materially affect operations and results.
- Revenue concentration remained significant: U.S. government sales were 71.4% of revenue, three government customers accounted for about 70%, and one commercial customer accounted for 22%. The company also cited dependence on a single principal product line and indirect sales channels.
- Risks include continued losses and negative operating cash flow, limited access to replacement borrowing or other financing, potential dilution from preferred conversions or new securities, and the leadership transition following co-founder G. Ward Paxton’s death. Management reported disclosure controls were effective as of March 31, 2020. Routine legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether revenue and cash flow recover, given the sharp year-over-year revenue decline and Q1 operating cash use.
- How the company’s cash runway compares with its 12-month liquidity assessment, especially if projected growth does not materialize or replacement financing is unavailable.
- The final terms, use, and any forgiveness of the $629,000 PPP loan approved after quarter-end.
- The status and potential cash or dilution effects of preferred dividends, conversion, and redemption rights.
- Whether government and major-customer concentration, product dependence, and the leadership transition materially affect future orders and operations.