Intrusion Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The company develops and sells cybersecurity and entity-identification products, principally TraceCop and Savant.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1.678 million | $1.595 million | $4.780 million | $4.693 million |
| Gross profit / margin | $942,000 / 56.1% | $985,000 / 61.8% | $2.829 million / 59.2% | $3.016 million / 64.3% |
| Operating loss | $(311,000) | $(244,000) | $(992,000) | $(1.109) million |
| Net income (loss) | $568,000 | $(280,000) | $(221,000) | $(1.211) million |
| Net income (loss) attributable to common stockholders | $533,000 | $(315,000) | $(325,000) | $(1.315) million |
Q3 basic and diluted earnings per share were $0.04; nine-month loss per share was $0.03. Q3 operating expenses were $1.253 million, including $617,000 for research and development. Net interest expense was $49,000 in Q3 and $157,000 for the nine months.
For the nine months, operating cash flow was $274,000, investing cash flow was $43,000, and financing cash flow was $(118,000); cash increased $199,000 to $263,000. At September 30, current assets were $1.209 million and current liabilities $2.199 million, a working-capital deficit of approximately $990,000. Total assets were $1.409 million and stockholders’ deficit was $3.677 million.
Debt included $2.865 million outstanding under the unsecured CEO note, plus $308,000 accrued interest. The note’s $3.7 million limit left $835,000 available to borrow. Accrued and unpaid preferred dividends were $411,000. Cash and short-term obligations remained tight despite the reported quarterly profit.
Changes versus prior comparable periods
- Revenue increased 5% in Q3 and 2% for the nine months, while gross margin declined 5.7 and 5.1 percentage points, respectively. The company attributed lower margins mainly to product mix and somewhat higher labor costs associated with TraceCop.
- Operating loss widened in Q3 but narrowed for the nine-month period. Nine-month net loss improved substantially year over year.
- Q3 net income included $928,000 of other income: $872,000 from selling unused IP addresses and $56,000 from selling an investment. The IP sale was a one-time transaction, not recurring product revenue.
- U.S. government customers accounted for 90.6% of Q3 revenue, up from 78.4%; for the nine months, they accounted for 80.2%, up from 70.0%. Indirect channels generated 92.1% of Q3 revenue.
Outlook, risks, and other matters
Management believed available cash, anticipated profits, and borrowing capacity under the CEO note would be sufficient for operations and expected capital expenditures for the next 12 months. It expected sales and marketing costs to increase through year-end, while research and development and general and administrative costs were expected to remain relatively constant. These expectations depend on projected revenue and profitability; the filing provides no quantified revenue or earnings guidance.
Liquidity and continued operations are significant risks: the company has a working-capital deficit, relies on CEO financing, and may need additional debt or equity financing, which could be unavailable, unfavorable, or dilutive. Preferred dividends continue to accrue; if Series 2 and Series 3 dividends are not cured after notice, holders may have redemption rights. The filing estimates a $2.2 million cash redemption amount for those series as of November 1, 2017. Government and reseller concentration, dependence on TraceCop, competition, and possible customer cancellations also pose risks. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. Routine legal claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether recurring operations can improve margins and reach sustained profitability without one-time asset-sale proceeds.
- Current cash needs, access to the remaining CEO-note capacity, and the terms and collectability of that related-party financing.
- Preferred dividend arrears, any notices or redemption demands, and potential cash or share dilution from preferred securities and options.
- Ongoing customer and channel concentration, including exposure to U.S. government spending and indirect resellers.