Business context and reporting period
Intrusion Inc. develops and sells cybersecurity and entity-identification products, including TraceCop and Savant. This unaudited Form 10-Q covers the three months ended March 31, 2017; financial statement amounts are in thousands of dollars except per-share data.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $1,559 | $1,511; up 3.2% |
| Gross profit / margin | $976 / 62.6% | $972 / 64.3% |
| Operating loss | $(301) | $(513) |
| Net loss | $(351) | $(544) |
| Net loss attributable to common stockholders / diluted loss per share | $(386) / $(0.03) | $(579) / $(0.05) |
| Cash used in operating activities | $(417) | $(794) |
| Cash and cash equivalents, period-end | $193 | $246 at March 31, 2016 |
Cost of revenue was $583, or 37.4% of revenue, versus $539, or 35.7%, a year earlier. Sales and marketing expense was $361 (prior year $428); research and development was $585 ($730); general and administrative expense was $331 ($327). Net interest expense rose to $50 from $31.
At March 31, 2017, current assets were $879 and current liabilities $1,435, a working-capital deficit of approximately $556. Total assets were $1,180. The company reported a $3,465 principal balance on its unsecured revolving loan from CEO G. Ward Paxton, plus $224 of accrued interest; the loan bears a floating rate of prime plus 1% (5% at quarter-end) and is due March 31, 2019. Capital-lease obligations totaled $164, including $119 current. Stockholders’ deficit was $3,765. Accrued preferred dividends payable were $338.
Operating cash outflow was partly offset by $555 of financing cash inflow, including $580 borrowed from the CEO, $11 from option exercises, and $36 in lease principal payments. Investing cash outflow was $9. Cash increased by $129 during the quarter, from $64 at December 31, 2016.
Material changes versus the prior comparable period
- Revenue rose modestly, while gross profit was nearly unchanged and gross margin declined 1.7 percentage points, which management attributed mainly to product mix.
- Operating loss narrowed by $212 and net loss by $193, primarily alongside lower sales and marketing and research and development spending.
- Operating cash use improved by $377 year over year, but deferred revenue declined by $328 in Q1 2017, reducing cash generated from operations.
- U.S. government sales increased to 77.0% of revenue from 65.2%; indirect-channel sales were 77.0% versus 67.7%.
- CEO loan borrowings funded operations. The filing reports $235 of remaining borrowing availability under the note at quarter-end.
Outlook, risks, contingencies and unusual items
Management expected revenue and net income to grow in coming quarters and stated it believed available cash and CEO-note borrowing would fund operations and expected capital expenditures for the next 12 months. It also said sales and marketing costs could rise if revenue increases; research and development and general and administrative expenses were expected to remain relatively constant, subject to increases if revenue grows. No formal financial guidance was provided.
Management cautioned that continued losses or inability to secure acceptable financing could prevent execution of the business plan or continuation of operations. Liquidity is limited, the company depends in part on financing from its CEO, and additional equity or debt funding may be unavailable or dilutive. Revenue is concentrated in a small number of customers and products: four government customers represented approximately 73.8% of Q1 2017 revenue, and one commercial customer represented 19.9%. Government contracting may be affected by spending patterns or cancellations.
Preferred dividends continue to accrue whether or not legally payable. Series 2 and Series 3 preferred holders may have redemption rights following specified events; redemption of those series would have required approximately $2.2 million as of April 30, 2017. The company also disclosed potential dilution from preferred-stock conversion, redemption, options, and future financing. Routine legal matters were not expected to materially affect results, though the company gave no assurance about future claims. Management concluded disclosure controls and procedures were effective as of March 31, 2017 and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth, profitability, and positive operating cash flow materialize, given the ongoing operating losses and declining deferred revenue.
- How much CEO-note capacity remains available and whether the company can access other financing on acceptable terms.
- The timing and cash impact of preferred dividends, possible late fees, and any redemption demands.
- Whether customer and U.S. government concentration, product mix, or indirect-channel dependence changes materially.
- The potential dilution and market impact from preferred-stock conversion or redemption, option exercises, and new securities issuance.