Intrusion Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Intrusion develops and sells security, data-mining, identity-discovery, and compliance software and related support. Financial amounts below are in U.S. dollars; statement amounts are generally in thousands.
Financial results
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $1.805 million | $2.073 million | $3.399 million | $3.850 million |
| Gross profit / margin | $1.189 million / 65.9% | $1.347 million / 65.0% | $2.207 million / 64.9% | $2.489 million / 64.6% |
| Operating income (loss) | $4,000 | $237,000 | $(233,000) | $325,000 |
| Net income (loss) | $(22,000) | $205,000 | $(292,000) | $262,000 |
| Net income (loss) attributable to common stockholders | $(56,000) | $167,000 | $(363,000) | $187,000 |
- Q2 revenue declined about 13% year over year; first-half revenue declined about 12%. Product revenue fell primarily because Savant sales decreased. Q2 TraceCop revenue was about $1.7 million versus $1.4 million; Savant revenue was $40,000 versus $600,000.
- Q2 operating income fell to near breakeven as research and development expense rose to $520,000 from $378,000. First-half R&D expense increased to $999,000 from $777,000.
- Net interest expense was $26,000 in Q2 and $59,000 for the first half, both below the comparable 2013 periods. No income tax provision was recorded.
Cash, liquidity, and debt
- Cash and equivalents were $203,000 at June 30, 2014, down from $1.139 million at year-end 2013. First-half operating cash use was $374,000, investing cash use was $53,000, and financing cash use was $509,000. Cash decreased by $936,000 overall.
- Working capital deficit was $1.3 million. Current assets were $1.319 million and current liabilities were $2.632 million.
- The company reported a $1.53 million loan payable to CEO G. Ward Paxton, classified as current at June 30; accrued interest was $114,000. The note permits borrowing up to $2.2 million, bears interest at prime plus 1% (5% at June 30), and is due March 31, 2015. Management reported $670,000 of remaining availability.
- A renewed SVB receivables-based line has a $625,000 limit, is secured by substantially all company assets, and is personally guaranteed by the CEO. No balance was outstanding at June 30; management reported $475,000 available. The line terminates June 23, 2015. The company stated it was within its debt covenant limits.
- Capital lease obligations totaled $270,000 ($144,000 current and $126,000 noncurrent). The company paid $490,000 of dividends during the first half. Preferred dividends continue to accrue and reduce cash available for operations.
Changes, outlook, and risks
- Revenue mix shifted: U.S. government sales were 36.0% of Q2 revenue versus 44.1% a year earlier; commercial sales were 64.0%. One commercial customer accounted for 60.7% of Q2 revenue, compared with two customers representing 54.8% in Q2 2013. Management also reported that three government customers contributed 31.6% of Q2 revenue.
- Management expected sales and marketing costs to increase through the end of 2014 alongside revenue growth, while R&D costs were expected to remain relatively constant, subject to increases with revenue. It forecast sufficient resources for the next 12 months based on projected revenue and net-income growth and available borrowing. This outlook depends on achieving those projections.
- Liquidity is a significant risk: the company warned that failure to generate positive operating cash flow or obtain acceptable financing could impede its business plan or ability to continue operations. Additional equity financing could materially dilute shareholders. The CEO is both a major lender and guarantor of the bank line.
- Preferred stock dividends accrue even when payment is restricted. If Series 2 and Series 3 dividends are not cured after notice, holders may seek redemption; the filing estimated an aggregate $1.9 million redemption price as of August 1, 2014. Preferred conversions and potential redemptions may also dilute common shareholders.
- Customer and channel concentration, government spending or contract cancellations, and reliance on key products are material risks. The filing noted no known proposed government contract cancellations or renegotiations. Routine legal matters were not expected to materially affect results; no specific material proceeding was identified.
- Management concluded disclosure controls were effective as of June 30, 2014 and reported no material change in internal control over financial reporting during the quarter. The company was evaluating the forthcoming revenue-recognition standard.
Important facts for investors to verify
- Whether revenue and cash generation improve as management projected, particularly given the sharp year-over-year decline in Savant sales.
- How the company will fund operations and repay the $1.53 million CEO loan and capital lease obligations as they come due.
- Actual availability and borrowing conditions under the receivables-based SVB line, including its collateral and covenant requirements.
- Preferred dividend arrears, potential redemption obligations, and resulting dilution from conversions or new financing.
- The effect of dependence on one commercial customer and concentrated government and indirect-channel sales.