Intrusion Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing compares full-year results with 2018 and does not provide standalone fourth-quarter results. Intrusion develops cybersecurity and data-analysis products, principally TraceCop and Savant, and sells through direct and indirect channels.
Financial performance and liquidity
- Revenue: $13.643 million, up 32.8% from $10.276 million in 2018. Management attributed the increase primarily to TraceCop growth.
- Profitability: Gross profit was $8.301 million, up 29.1%; gross margin declined to 60.8% from 62.6%, reflecting higher labor costs on certain projects. Operating income rose to $4.507 million from $2.476 million. Net income was $4.465 million versus $2.287 million; net income attributable to common stockholders was $4.326 million, or $0.32 per basic share and $0.28 diluted, compared with $2.148 million, or $0.16 basic and $0.14 diluted, in 2018.
- Costs and taxes: Sales and marketing expense fell to $1.298 million from $1.604 million; research and development expense increased to $1.314 million from $1.237 million; general and administrative expense was $1.182 million versus $1.112 million. The effective income tax rate was 0% in both years because deferred tax assets were fully offset by a valuation allowance.
- Cash flow: Operating cash flow was $4.290 million, compared with $2.578 million in 2018. Investing activities used $260,000, primarily for property and equipment. Financing activities used $2.348 million, including $1.815 million of officer-loan repayments and $714,000 of preferred-dividend payments. Cash increased to $3.334 million from $1.652 million.
- Liquidity and obligations: Working capital was $3.1 million, up from $0.5 million. There was no officer loan outstanding at year-end; the CEO Note was repaid to zero in May 2019 and terminated following the former CEO’s death in October. Lease commitments totaled $1.890 million, including $1.824 million operating and $66,000 finance lease payments. Management forecast sufficient cash for operations and expected capital expenditures through March 31, 2021, subject to its assumptions.
Material changes versus 2018
- Revenue, net income, operating income, operating cash flow, cash and working capital increased. The accumulated deficit narrowed to $54.8 million from $59.2 million.
- Gross margin decreased by 1.8 percentage points, while operating margin increased to 33.0% from 24.1%. Interest expense fell to $46,000 from $189,000, primarily due to repayment of the officer loan.
- U.S. government customers accounted for 87.4% of revenue, compared with 83.9% in 2018. Three government customers represented approximately 68.1% of 2019 revenue.
- Adoption of lease accounting standards resulted in recognition of operating lease right-of-use assets and liabilities; management said the adoption did not materially affect 2019 results or cash flows.
Outlook, risks and notable items
- Management anticipated lower net revenue for the first quarter of 2020, while noting it was too early to determine whether this reflected a trend or customer ordering patterns. No quantified full-year revenue or earnings guidance was provided.
- The loss of the CEO Note removed a prior borrowing backstop of up to $2.7 million. Management said it would assess replacement financing; any new debt or equity might be unavailable or on unfavorable terms, and equity financing could dilute shareholders. The filing also identifies the former SVB facility as unavailable going forward.
- Founder and former CEO G. Ward Paxton died on October 24, 2019. Michael L. Paxton became chairman, interim president and interim CEO while continuing as CFO; the filing cautions that leadership transition could disrupt operations.
- COVID-19 was identified as an emerging uncertainty that could delay government customer spending, disrupt employees’ work and adversely affect operations and financial results.
- Other key risks include government-budget and contract-cancellation exposure; dependence on indirect sales channels; quarterly revenue volatility; competition and technology changes; product or cybersecurity failures; preferred-stock dividend and redemption obligations; and potential dilution. Preferred dividends accrued in 2019 totaled $139,000, while $20,000 remained accrued and unpaid at year-end. The Series 2 and Series 3 preferred terms provide an 18% annual late penalty on unpaid dividends and potential redemption rights in specified circumstances.
- The company reported no material pending legal claims known at year-end. The auditor issued an unqualified opinion on the financial statements. 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 the forecasted cash runway through March 31, 2021 remains achievable given the expected Q1 2020 revenue decline and loss of the CEO Note.
- Subsequent revenue trends, customer renewals and order concentration, especially among the three government customers driving a large share of sales.
- Availability and terms of replacement financing, and any resulting debt burden or shareholder dilution.
- Preferred-stock dividend arrears, future cash payments, and any redemption triggers or other senior security rights.
- Whether leadership responsibilities have transitioned successfully and whether COVID-19 or government budget changes affected customer spending and company operations.