INTRUSION INC. "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995
This Annual Report on Form 10-K, including the sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Description of Business," contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or to our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as "may," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "predict," "potential," "continue," or the negative of these terms or other comparable terminology. You should not place undue reliance on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, levels of activity, performance or achievements. Factors that may cause actual results to differ materially from current expectations, which we describe in more detail elsewhere in this Annual Report on Form 10-K under the heading "Risk Factors," include, but are not limited to:
? our ability to maintain sufficient cash to operate our business and to meet
future liquidity requirements;
? our ability to successfully transition responsibilities from our president,
chairman, and co-founder G. Ward Paxton to Michael Paxton ;
? our ability to secure new financing to replace our prior borrowing ability
under the note with our former CEO and our facility with Silicon Valley Bank ,
neither of which is available to us moving forward;
? anticipated fluctuations in quarterly revenues;
? a concentration in governmental customers with unique risks attached;
? competition from companies with greater financial resources;
? our response to rapid technological shifts in the network security industry
and consistently changing laws and regulations concerning consumer privacy and
personally identifiable information; and
? risks related to our common stock as well as the effect of the superior rights
and privileges of our various classes of preferred stock over the rights of
the holders of our common stock.
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If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what we projected. Any forward-looking statement you read in this filing reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. We assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Overview
We develop, market and support a family of entity identification products, data mining and advanced persistent threat detection products. Our product families include:
? The TraceCop™ product line, including many of our proprietary supporting
tools, allows our customers and in-house cyber analysts to accurately discover
and help identify 'bad actors' associated with cybercrime. The TraceCop
product family is built upon an extensive database based on over 20 years of
Internet data, Internet understanding and cyber security analytical
experience. Along with a multitude of cyber security 'global threat feeds',
this vast and ever expanding database is used in conjunction with our
customer's data to help identify areas of vulnerability and potential cyber
security threats. We offer our customers a daily, weekly or monthly enrichment
service to assist them in the culling of 'good' data traffic from potential
threats.
? The Savant™ product is a 'purpose-built', very high-speed network data mining
and analytics software package that is easily installed on COTS (commercial
off the shelf) platforms. Its patented design exceeds performance expectations
and ensures 'deep dives' into data-in-motion in order to quickly and
accurately detect advanced persistent threats.
Our customers' use our products and services as an integral part of protecting their critical infrastructure and data information assets. By quickly detecting, protecting, analyzing and reporting attacks, along with the potential misuse of classified information, we have become a key component to the daily challenges of cybercrime for both state and federal governments and large private commercial enterprises.
Our revenues have been fairly consistent over the past few years due primarily
to our focus on our TraceCop and Savant product lines. To date, we have not
encountered significant competition in the TraceCop and Savant markets that has
caused us to decrease our sales prices when compared to sales prices in previous
years. To help keep our operation expenses under control, we held our employee
headcount at a reasonable level in 2019 compared to 2018. At
In order for us to operate and grow our business, we must generate and sustain sufficient operating profits and cash flow in future periods. This will require us to continue to generate revenues from sales of our entity identification software, data mining and advanced persistent threat products. In order to obtain these sales, our products must gain acceptance in a competitive industry. We believe our ability to market and sell our TraceCop and Savant products into the marketplace in a timely manner and our efforts to effectively control spending levels will help us achieve these results.
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in
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We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We generally recognize product revenue upon shipment. These products can include hardware, perpetual software licenses and data sets. Data set updates are the majority of our sales. We do not currently offer software on a subscription basis. Warranty costs and sales returns have not been material.
We recognize sales of our data sets in accordance with FASB ASC Topic 606 whereby revenue from contracts with customers is not recognized until all five of the following have been met:
i) identify the contract with a customer; ii) identify the performance obligations in the contract; iii) determine the transaction price; iv) allocate the transaction price to the separate performance obligations; and v) recognize revenue upon satisfaction of a performance obligation.
Data updates are typically done monthly and revenue will be matched accordingly. Product sales may include maintenance and customer support allocated revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy using the relative selling price method. All of our product offering and service offering market values are readily determined based on current and prior stand-alone sales. We may defer and recognize maintenance, updates and support revenue over the term of the contract period, which is generally one year.
Service revenue, primarily including maintenance, training and installation, are recognized upon delivery of the service and typically are unrelated to product sales. To date, maintenance, training and installation revenue has not been material. Our normal payment terms offered to customers, distributors and resellers are net 30 days domestically and net 45 days internationally. We do not offer payment terms that extend beyond one year and rarely do we extend payment terms beyond our normal terms. If certain customers do not meet our credit standards, we do require payment in advance to limit our credit exposure.
Shipping and handling costs are billed to the customer and included in product revenue. Shipping and handling expenses are included in cost of product revenue.
Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our receivables are uncollaterized, and we expect to continue this policy in the future. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, increased allowances may be required. Historically, our estimates for sales returns and doubtful accounts have not differed materially from actual results.
Fair Value of Financial Instruments
We calculate the fair value of our assets and liabilities which qualify as financial instruments and include additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued expenses, and dividends payable approximate their carrying amounts due to the relatively short maturity of these instruments. Loan payable to officer is with a related party and as a result does not bear market rates of interest. Capital leases approximate fair value as they bear market rates of interest. Management believes based on its current financial position that it could not obtain comparable amounts of third party financing, and as such cannot estimate the fair value of the loans payable to officer. None of these instruments are held for trading purposes.
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Results of Operations
The following tables set forth, for the periods indicated, certain financial data as a percentage of net revenue.
Year Ended December 31,
2019 2018
Net product revenue 100.0 % 100.0 %
Total cost of revenue 39.2 37.4
Gross profit 60.8 62.6
Operating expenses:
Sales and marketing 9.5 15.6
Research and development 9.6 12.1
General and administrative 8.7 10.8
Operating income 33.0 24.1
Interest expense (0.3 ) (1.8 )
Interest income - -
Income from operations before income taxes 32.7 22.3
Income tax provision - -
Net income 32.7 22.3
Preferred stock dividends accrued (1.0 ) (1.4 )
Net income attributable to common stockholders 31.7 % 20.9 %
2019 compared with 2018
Net Revenue
Total revenue increased 32.8% to
There were no export sales in 2019 and 2018 primarily due to our focus on domestic revenue sales. Sales of our products internationally may be subject to currency exchange risk, which may cause our products to effectively increase in price, if the exchange rate moves significantly and the dollar gains value over the foreign currency.
Historically, due to the timing of our sales cycle, a significant portion of our monthly sales occurs in the second half of the month. Accordingly, our receivables increase at the end of each month, which causes a higher accounts receivable balance at month end. This monthly trend also causes an inflated comparative relationship between revenue and accounts receivable. We believe that this monthly trend will continue because monthly sales forecast and planning meetings are held in the first week of every month, the middle of the month is focused on sales calls to customers and the latter half of the month on closing sales.
Gross Profit
Gross profit increased 29.1% to
Gross profit as a percentage of net revenue is impacted by several factors, including shifts in product mix, changes in channels of distribution, sales volume, fluctuations in manufacturing costs, labor costs, pricing strategies, and fluctuations in sales of integrated third-party products.
Sales and Marketing
Sales and marketing expenses decreased to
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Research and Development
Research and development expenses increased to
General and Administrative
General and administrative expenses remained fairly constant at
Interest Expense
Interest expense decreased to
Interest Income
Interest income earned on bank deposits was
Income Taxes
Our effective income tax rate was 0% in 2019 and 2018 as valuation allowances
have been recorded for the entire amount of the net deferred tax assets due to
uncertainty of realization. On
Liquidity and Capital Resources
Our principal source of liquidity at
Net cash provided by operations for the twelve months ended
Net cash used in investing activities in 2019 was
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Net cash used in financing activities in 2019 was
At
As of
On
On
As of
As of
We may explore the possible acquisitions of businesses, products and technologies that are complementary to our existing business. We are continuing to identify and prioritize additional security technologies, which we may wish to develop, either internally or through the licensing, or acquisition of products from third parties. While we may engage from time to time in discussions with respect to potential acquisitions, there can be no assurances that any such acquisitions will be made or that we will be able to successfully integrate any acquired business. In order to finance such acquisitions and working capital it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms, which are not favorable to us and, in the case of equity financings, may result in dilution to our stockholders.
Contractual Obligations
The following table sets forth certain information concerning the future
contractual obligations under our leases at
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Future minimum lease obligations consisted of the following atDecember 31, 2019 (in thousands): Operating Finance Period ending December 31, ROU Leases ROU Leases Total 2020$ 362 $ 45$ 407 2021 361 21 382 2022 369 - 369 2023 380 - 380 2024 352 - 352$ 1,824 $ 66$ 1,890 Less Interest* (225 ) (2 )$ 1,599 $ 64
*Interest is imputed for operating ROU leases and classified as lease expense and is included in operating expenses in the accompanying condensed consolidated statement of operations.
Off-Balance Sheet Arrangements
As of
Recent Accounting Pronouncements
See Note 2 Consolidated Financial Statements
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