Intrusion Inc. — Q1 2014 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2014. Intrusion develops and sells cybersecurity and data-identification products, primarily through direct and indirect channels. Revenue was substantially from TraceCop and Savant products; all reported revenue was domestic.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $1.594 million | $1.777 million; down 10.3% |
| Gross profit / margin | $1.018 million / 63.8% | $1.142 million / 64.3% |
| Operating income (loss) | $(237,000) | $88,000 |
| Net income (loss) | $(270,000) | $57,000 |
| Net loss attributable to common stockholders | $(307,000), or $(0.02) per share | $20,000, or $0.00 per share |
| Cash from operating activities | $(497,000) | $120,000 |
| Cash and cash equivalents at quarter-end | $198,000 | $1.139 million at Dec. 31, 2013 |
At March 31, current assets were $1.301 million and current liabilities were $2.647 million, a working-capital deficit of approximately $1.346 million. Total assets were $1.788 million; stockholders’ deficit was $1.016 million. The company had $1.530 million outstanding under an unsecured revolving note from CEO G. Ward Paxton, with accrued interest of $95,000; principal and accrued interest are due March 31, 2015. It had no SVB line borrowings, and reported $500,000 available under the line and $670,000 available under the CEO note. Capital-lease obligations totaled $310,000. Q1 investing cash use was $12,000; financing cash use was $432,000, including $439,000 of dividend payments, partly offset by $47,000 from option exercises.
Material changes versus the prior comparable period
- Product revenue fell by about $179,000. TraceCop revenue decreased to $1.3 million from $1.8 million, while Savant revenue rose to $300,000 from none, reflecting new-project orders and delayed expected commercial Savant growth.
- U.S. government sales declined to 47.2% of revenue from 67.7%. However, two commercial customers represented 51.7% of Q1 revenue, versus one customer at 31.1% in Q1 2013.
- Operating expenses increased overall: sales and marketing was $423,000 versus $312,000; research and development was $479,000 versus $399,000; and general and administrative was $353,000 versus $343,000. The company moved certain personnel costs into direct labor.
- Operating results moved from income to loss, while operating cash flow shifted from a $120,000 source to a $497,000 use. The Q1 2014 operating cash use included increased receivables and decreases in accounts payable and deferred revenue.
Outlook, risks, and unusual items
Management projected revenue and net-income growth in coming quarters and stated that available cash and borrowing capacity should fund operations and expected capital expenditures for the next 12 months. This outlook is dependent on achieving those projections and access to financing; the filing gives no specific revenue or earnings guidance. The SVB facility, secured by substantially all company assets including intellectual property, was scheduled to terminate June 24, 2014; management anticipated renewal on similar terms. Failure to generate positive cash flow or obtain acceptable financing could impair operations or threaten continuity.
Preferred dividends continue to accrue and reduce cash available. At March 31, $35,000 was accrued and unpaid. If Series 2 and Series 3 dividends are not paid, holders may provide notice and, if the breach is not cured within 45 days, may have redemption rights; the filing estimated an aggregate cash redemption price of $1.8 million as of April 30, 2014. The filing also notes possible dilution from preferred-stock conversion or redemption, option exercises, and future financing. Sales concentration, government budget and cancellation risks, indirect-channel dependence, and limited product/customer concentration are material risks. Routine legal proceedings were not expected to have a material adverse effect. Management concluded disclosure controls were effective as of March 31, 2014 and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the SVB facility was renewed before its June 24, 2014 termination and whether covenant requirements were met.
- Cash burn, collections of receivables, and the company’s ability to fund operations without relying on additional CEO or external financing.
- Whether revenue and profitability improved as management projected, particularly TraceCop performance and commercial Savant adoption.
- Preferred dividend obligations, any redemption notices, and the potential cash impact or dilution from preferred securities and options.
- The sustainability of revenue given customer concentration, government exposure, and reliance on indirect sales channels.