Intrusion Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Intrusion develops and sells network security, data-mining, threat-detection and compliance products, primarily through direct and indirect channels. Financial amounts below are in U.S. dollars; reported statements are in thousands.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $1.714 million | $1.594 million |
| Gross profit | $1.082 million | $1.018 million |
| Gross margin | 63.1% | 63.8% as shown in the percentage table |
| Operating loss | $285,000 | $237,000 |
| Net loss | $310,000 | $270,000 |
| Net loss attributable to common stockholders | $344,000 | $307,000 |
| Basic and diluted loss per share | $0.03 | $0.02 |
| Net cash used in operating activities | $415,000 | $497,000 |
Revenue grew about 8%. Product revenue was $1.704 million; support and maintenance revenue was $10,000. TraceCop revenue rose to $1.5 million from $1.3 million, while Savant revenue declined to $0.2 million from $0.3 million. Sales and marketing expense increased to $498,000 from $423,000; R&D was $538,000 versus $479,000; and general and administrative expense fell to $331,000 from $353,000. Net interest expense declined to $25,000 from $33,000. The filing’s narrative gives the prior-year gross margin as 63.9%, while its percentage table reports 63.8%.
Balance sheet, liquidity and financing
- Cash and cash equivalents were $560,000 at March 31, 2015, down from $1.006 million at December 31, 2014. Total assets were $1.943 million; current liabilities were $2.775 million; and stockholders’ deficit was $1.027 million. Management reported a $1.4 million working-capital deficiency, compared with $1.3 million at March 31, 2014.
- Operating cash use was $415,000; investing cash use was $44,000, mainly equipment purchases; financing provided $13,000, including $66,000 from option exercises offset by $53,000 of capital-lease principal payments. Cash decreased by $446,000 during the quarter.
- The company had $1.530 million outstanding under a revolving CEO promissory note, with $95,000 accrued interest; $670,000 of the $2.2 million borrowing capacity remained available. The note was renewed through March 2016 and bears interest at SVB prime plus 1% (5% at quarter-end).
- No borrowings were outstanding under SVB’s $625,000 receivables-based credit line at March 31; the company reported $500,000 available. The facility is secured by substantially all company assets, including intellectual property, and was scheduled to terminate June 23, 2015. Management anticipated renewal on similar terms.
- Current and noncurrent capital-lease obligations totaled $376,000. Accrued and unpaid preferred dividends were $55,000 at quarter-end.
Changes, outlook and key risks
- Sales to U.S. government entities reached 64.0% of revenue, up from 47.2%; three government customers accounted for about 48.0% of revenue. Two commercial customers represented 23.5%, down from 51.7% in Q1 2014. Indirect channels accounted for 87.6% of revenue, versus 47.5% a year earlier.
- Gross profit dollars increased, but operating and net losses widened as operating expenses rose overall. Cash use from operations improved year over year, though the company continued to consume cash.
- Management projected revenue and net-income growth in coming quarters and believed available cash, borrowing capacity and anticipated financing would cover operations and expected capital expenditures for the next 12 months. This outlook depends on projections and is not a quantified formal earnings guidance.
- Management cautioned that failure to generate positive operating cash flow or secure acceptable financing could impair the business plan, liquidity or ability to continue operations. Additional equity financing could materially dilute shareholders; debt may not be available on favorable terms.
- Preferred dividends continue to accrue. If unpaid dividends on Series 2 and Series 3 preferred stock are not cured after required notice, holders may have redemption rights; the filing states the aggregate cash redemption price would be $1.8 million as of March 31, 2015. Preferred conversion or redemption and option exercises could also dilute common shareholders.
- Revenue depends heavily on a limited product range, government customers and resellers. Government appropriations, spending delays, contract cancellation rights, customer concentration, channel competition and product acceptance are identified risks. Routine legal matters were not believed likely to have a material adverse effect; no specific material proceeding is described.
- Management assessed disclosure controls and procedures as effective as of March 31, 2015 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether SVB renewed the credit facility before its June 23, 2015 termination and whether borrowing availability or covenant compliance changed.
- Actual subsequent cash flow, revenue and profitability against management’s growth assumptions, given the cash decline and working-capital deficit.
- CEO-note balances, terms and related-party dependence, as well as the company’s ability to meet preferred dividend obligations and any resulting redemption exposure.
- Customer and channel concentration, including the sustainability of TraceCop sales and government/reseller demand.
- Potential dilution from preferred conversions or redemptions, stock options, and any additional financing.