Intrusion Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparative periods ended September 30, 2014. Intrusion develops and sells security, entity-identification, data-mining, threat-detection and compliance products, including TraceCop and Savant. Amounts below are in thousands of dollars unless noted.
Financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $1,552 | $2,030 | $5,336 | $5,429 |
| Gross profit | $982 | $1,323 | $3,352 | $3,530 |
| Gross margin | 63.3% | 65.2% | 62.8% | 65.0% |
| Operating income (loss) | $(405) | $117 | $(667) | $(116) |
| Net income (loss) | $(432) | $147 | $(746) | $(145) |
| Net loss attributable to common stockholders | $(467) | $112 income | $(850) | $(251) |
| Basic and diluted EPS attributable to common stockholders | $(0.04) | $0.01 | $(0.07) | $(0.02) |
| Operating cash flow | Not separately reported for the quarter | $282 | $861 |
At September 30, 2015, cash and cash equivalents were $1,081, versus $1,006 at December 31, 2014. Total assets were $2,286 and stockholders’ deficit was $1,437. Current liabilities of $3,569 exceeded current assets of $1,743; management reported a $1.8 million working-capital deficiency.
Current liabilities included $1,530 owed to CEO G. Ward Paxton, $784 deferred revenue, $945 accounts payable and accrued expenses, $185 current capital-lease obligations and $125 dividends payable. The CEO loan also had $134 of accrued interest; the note bears interest at prime plus 1% (5% at quarter-end) and is due March 31, 2016. Capital-lease obligations totaled $339, including $154 noncurrent. The $625,000 SVB line of credit had no balance outstanding; the company reported $374,000 available and compliance with its covenants. It is secured by substantially all assets, including intellectual property, and guaranteed by the CEO.
Nine-month investing cash use was $112, primarily property and equipment purchases. Financing cash use was $95, including $161 of capital-lease principal payments, partly offset by $66 from option exercises. Cash increased by $75 over the nine-month period.
Changes versus prior periods
- Q3 revenue declined $478, or about 24%; nine-month revenue declined $93, or about 2%. Product revenue fell $467 in Q3 and $66 for the nine-month period. Management attributed the decline mainly to lower Savant and TraceCop sales. Q3 TraceCop revenue was $1.3 million versus $1.5 million; Savant was $0.2 million versus $0.5 million.
- Q3 gross margin fell 1.9 percentage points, and nine-month gross margin fell 2.2 points. Management cited product-mix changes and slightly higher labor costs associated with TraceCop sales.
- Q3 operating results shifted from $117 income to a $405 loss; nine-month operating loss widened to $667 from $116. Q3 research and development expense increased to $592 from $443, while sales and marketing was $490 versus $470. Nine-month sales and marketing and R&D also increased; general and administrative expense was broadly flat.
- Nine-month operating cash flow declined to $282 from $861. The 2015 figure included a $342 increase in deferred revenue, while net loss was $746; deferred revenue increased $827 in the comparable 2014 period.
- Government sales represented 55.4% of Q3 revenue versus 52.8% a year earlier, and 53.0% of nine-month revenue versus 45.6%. Three government customers accounted for approximately 50.7% of Q3 revenue, compared with 38.6%. Indirect channels generated 67.4% of Q3 revenue, versus 57.4%.
Outlook, risks and other disclosures
- Management expected sales and marketing costs to increase through year-end 2015 with revenue; R&D and general and administrative costs were expected to remain relatively constant, subject to possible increases alongside revenue. No specific revenue or earnings guidance was provided.
- Management believed cash, available borrowing and projected revenue and net-income growth would fund operations and expected capital expenditures for the next 12 months. It cautioned that failure to generate positive cash flow or obtain acceptable financing could impair the business plan, liquidity, or ability to continue operating. Potential additional equity financing could significantly dilute existing holders.
- Preferred dividends continue to accrue and reduce available cash. Accrued and unpaid dividends were $125 at September 30, 2015. If Series 2 and Series 3 dividends are not cured after notice, holders may have redemption rights; the filing estimated an aggregate cash redemption price of $2.0 million as of November 1, 2015. The filing also describes possible share dilution from preferred conversion or redemption and option exercises.
- Revenue and sales channels are concentrated: government entities/resellers, a limited number of customers, and key product lines are material dependencies. Government contracts may be affected by appropriations or cancelled for convenience; the company said it knew of no proposed cancellation or renegotiation of existing government arrangements.
- Routine legal proceedings were not expected by management to materially affect results, financial position or cash flows, though no assurance was given regarding future claims. Disclosure controls were deemed effective as of September 30, 2015; management reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue and operating cash flow improve enough to reduce the working-capital deficit and support operations without additional financing.
- Availability and terms of CEO and SVB borrowing, including the CEO note’s March 2016 maturity, SVB collateral and covenant requirements.
- Preferred-dividend arrears, any redemption notices or obligations, and the resulting cash burden or dilution.
- Customer, government and indirect-channel concentration, and whether Savant and TraceCop sales stabilize or recover.
- Whether actual results support management’s stated 12-month liquidity expectation; the filing’s projections are forward-looking and subject to risks.