Intrusion Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; filed March 28, 2019. This annual filing does not provide standalone fourth-quarter results. Intrusion develops cybersecurity and data analytics products, principally TraceCop and Savant, and sells mainly to U.S. government customers.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $10.276 million | $6.862 million |
| Gross profit / margin | $6.429 million / 62.6% | $4.038 million / 58.8% |
| Operating income (loss) | $2.476 million | ($0.749 million) |
| Net income (loss) | $2.287 million | ($0.030 million) |
| Net income (loss) attributable to common stockholders | $2.148 million | ($0.169 million) |
| Net cash provided by operations | $2.578 million | $0.272 million |
- Revenue grew 49.8%, primarily due to TraceCop sales. Gross margin improved, which management attributed to higher-margin projects and economies from increased sales.
- Sales and marketing expense was $1.604 million, research and development $1.237 million, and general and administrative $1.112 million. R&D expense fell from $2.162 million in 2017, partly because labor was charged to direct project costs.
- 2017 included $928,000 of other income—$872,000 from selling unused IP addresses and $56,000 from selling an investment. Neither item recurred in 2018.
- Cash and cash equivalents were $1.652 million at year-end, versus $224,000 in 2017. Working capital was $0.5 million, down from $0.8 million. Operating cash flow benefited from earnings and higher deferred revenue and payables, but was partly offset by a $1.005 million increase in receivables.
- At December 31, 2018, the company owed its CEO $1.815 million under an unsecured revolving note and had $479,000 of accrued related-party interest. The note bore interest at prime plus 1% (6.5% at year-end); its amended terms allowed borrowing up to $2.7 million through March 2021. The company reported $885,000 of remaining availability as of February 28, 2019.
- Current liabilities were $3.252 million, including $594,000 of accrued preferred dividends and $1.004 million of deferred revenue. Operating and capital lease commitments totaled $2.224 million.
Changes, outlook and risks
- U.S. government sales were 83.9% of revenue, up from 81.6% in 2017. Four government customers represented approximately 61.4% of 2018 revenue. Indirect channels also accounted for 83.9% of revenue, increasing exposure to government budgets, contract cancellations, resellers and customer concentration.
- Management expected revenue and R&D and sales-related spending to increase in 2019. Based on projected growth, expected profitability and CEO-note availability, management believed cash resources would fund operations and expected capital expenditures through March 31, 2020. This outlook depends on future performance and financing availability.
- Preferred dividends of $139,000 accrued in 2018; unpaid accrued dividends totaled $594,000 at year-end. The filing says past-due dividends had been paid by the filing date; dividends continue to accrue, and specified Series 2 and 3 unpaid dividends may incur an 18% annual late penalty and redemption rights. Preferred conversion, option exercises or future financing may dilute common shareholders.
- Other key risks include limited product market acceptance, lengthy sales cycles, rapid technological change, intense competition, dependence on a small customer base, and liquidity needs. The company reported an accumulated deficit of $59.242 million and a full valuation allowance against deferred tax assets, including approximately $86 million of federal net operating loss carryforwards.
- The auditor issued an unqualified opinion on the financial statements. Management reported disclosure controls and internal control over financial reporting effective at year-end; the auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Whether revenue growth, particularly from TraceCop, continues and converts into timely cash collections; receivables rose to $1.967 million.
- Actual remaining availability, repayment terms and accrued interest under the CEO-related-party note, and the company’s ability to meet liquidity needs beyond management’s March 2020 estimate.
- Preferred dividend payment status, continuing accruals, potential penalties or redemption rights, and resulting cash demands or dilution.
- Revenue exposure to individual government customers and indirect sales channels, including any budget delays, cancellations or contract changes.
- Whether expected 2019 growth and profitability support the stated outlook, given the company’s modest working capital and accumulated deficit.