Intrusion Inc. — Q1 2018 Form 10-Q
Business and period: The company develops and sells cybersecurity and entity-identification products, principally TraceCop and Savant. This unaudited report covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. Financial statement amounts below are in thousands of dollars unless noted otherwise.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $2,263 | $1,559 |
| Gross profit / margin | $1,411 / 62.4% | $976 / 62.6% |
| Operating income (loss) | $399 | ($301) |
| Net income (loss) | $346 | ($351) |
| Net income (loss) attributable to common stockholders | $310 | ($386) |
| Basic and diluted EPS | $0.02 | ($0.03) |
| Cash used in operating activities | $206 | $417 |
Revenue increased approximately 45%. TraceCop revenue was $2.2 million versus $1.5 million; Savant revenue was $0.1 million in both periods. Gross margin was essentially flat. Operating expenses declined to $1.012 million from $1.277 million, principally as research and development expense fell to $303,000 from $585,000; management attributed the decrease to labor costs shifting to direct project costs. Net interest expense was $53,000, compared with $50,000.
Cash and cash equivalents were $133,000 at March 31, 2018, down from $224,000 at December 31, 2017. Net operating cash use was driven mainly by a $330,000 decrease in deferred revenue, a $282,000 increase in accounts receivable and a $92,000 increase in prepaid expenses and other assets, partly offset by net income and other items. Investing activities used $37,000, primarily for property and equipment. Financing provided $152,000, including $100,000 borrowed from the CEO and $70,000 from option exercises, offset by $18,000 of capital-lease principal payments.
Balance sheet, debt and liquidity
At March 31, 2018, current assets were $1.558 million and current liabilities were $1.874 million, a working-capital deficit of approximately $316,000. Total assets were $1.765 million. The company reported a $2.965 million loan payable to its CEO, plus $388,000 of accrued interest, and $84,000 of capital-lease obligations. Stockholders’ deficit was $3.112 million. Accrued and unpaid preferred dividends totaled $483,000.
The CEO’s unsecured revolving note permits borrowing up to $3.7 million through March 2020, at Silicon Valley Bank prime plus 1% (5.75% at quarter-end). The filing reports $735,000 of remaining borrowing availability. Management said it expects operating profits and CEO-note borrowings to provide sufficient resources for operations and expected capital expenditures for the next 12 months, based on projected revenue and net-income growth. This expectation depends on those projections and available financing; the filing warns that failure to generate positive cash flow or obtain financing could impair operations or threaten business continuity.
Material changes, outlook and risks
- Revenue and profitability improved substantially year over year, but operating cash flow remained negative and cash declined during the quarter.
- Sales to U.S. government customers through direct and indirect channels were 79.6% of revenue, up from 77.0%. Four government customers accounted for about 66.3% of revenue. One commercial customer accounted for 19.0%. Management expects government customers to remain a significant revenue source; government contracts may be affected by spending patterns or cancellation rights.
- Management expected sales and marketing costs could rise through year-end if revenue growth materializes; it expected R&D and general and administrative expenses to remain relatively stable, with possible increases alongside growth. The filing provides no specific quantified revenue or earnings guidance.
- Preferred dividends continue to accrue whether or not they can legally be paid. Series 2 and Series 3 holders may have redemption rights after notice and failure to cure a dividend-payment breach; the stated aggregate cash redemption amount for those series was $2.4 million as of April 30, 2018. A late-payment penalty of 18% per year may apply to unpaid dividends, subject to specified waivers.
- Management identified dependence on CEO financing, customer and channel concentration, the need to sustain revenue to achieve ongoing profitability, possible dilution from preferred-stock conversion or new financing, and limited cash as material risks. It also noted that preferred conversions or sales could pressure the stock price, particularly given low trading volume.
- The company reported routine legal proceedings and claims, which it did not expect to have a material adverse effect, while noting it could not assure that future claims would be immaterial. It adopted the new revenue-recognition standard on January 1, 2018, with no material effect. Management concluded disclosure controls were effective as of March 31, 2018 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and management’s profitability projections continue, and whether the quarter’s positive earnings translate into sustained positive operating cash flow.
- Cash runway, CEO-note availability and terms, and the company’s ability to obtain alternative financing if needed.
- Government, individual-customer and indirect-channel concentration, including any contract cancellations, renewals or changes in purchasing patterns.
- Preferred dividend arrears, potential redemption obligations, and dilution from conversion, redemption or future securities issuance.
- The filing’s working-capital figures and the timing and collectability of receivables and deferred-revenue-related cash flows.