Intrusion Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; balance sheet compared with December 31, 2013. The company develops and sells cybersecurity, data-mining, and network-protection products, primarily through direct and indirect channels. Amounts below are in thousands of dollars except per-share data.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $2,030 | $1,975 | $5,429 | $5,825 |
| Gross profit / margin | $1,323 / 65.2% | $1,185 / 60.0% | $3,530 / 65.0% | $3,674 / 63.1% |
| Operating income (loss) | $117 | $207 | $(116) | $532 |
| Net income (loss) | $147 | $173 | $(145) | $435 |
| Net income (loss) attributable to common stockholders | $112 | $135 | $(251) | $322 |
| Basic EPS attributable to common stockholders | $0.01 | $0.01 | $(0.02) | $0.03 |
Q3 revenue rose 2.8% year over year, while nine-month revenue declined 6.8%. Product revenue was $2,011 in Q3 and $5,375 for the nine months; support and maintenance revenue was $19 and $54, respectively. Nine-month operating results shifted to a loss as expenses increased despite higher gross margin.
Cash flow, liquidity, and debt
- Cash and cash equivalents were $1,376 at September 30, 2014, up from $1,139 at year-end 2013. Working capital remained negative at approximately $1.1 million.
- For the first nine months, operating activities provided $861 cash (versus $678 in 2013), investing activities used $49, and financing activities used $575. The operating cash inflow included an $827 increase in deferred revenue; net loss and a $199 increase in accounts receivable were offsets.
- The company reported no SVB line borrowings at quarter-end and was in compliance with its covenants. The amended line has a $625 limit, with $500 reported available; it is secured by substantially all company assets, including intellectual property, and matures June 23, 2015.
- Borrowings from CEO G. Ward Paxton were $1,530, with $57 accrued interest; outstanding principal and interest were due March 31, 2015. The company reported $670 of remaining availability under the CEO’s $2,200 promissory note.
- Capital-lease obligations totaled $271, including $145 current. Stockholders’ deficit was $761, and accumulated deficit was $58,569.
Changes, outlook, and risks
- Management attributed lower year-to-date product revenue mainly to weaker-than-expected growth in Savant sales. Q3 TraceCop sales were $1,500 versus $1,600 a year earlier; Savant sales were $500 versus $400.
- Q3 gross margin improved, which management attributed mainly to product-mix changes. Nine-month sales and marketing expense increased to $1,245 from $1,083, and research and development expense rose to $1,442 from $1,138. Management expected sales and marketing costs to increase through year-end alongside revenue and R&D costs to remain relatively constant, subject to revenue growth.
- Management believed available cash and borrowing capacity, together with projected revenue and net-income growth, would fund operations and expected capital expenditures for the next 12 months. This outlook depends on projections and financing availability; the filing warns that insufficient cash flow or unavailable financing could impair operations or threaten continuity.
- Customer and channel concentration is significant: U.S. government sales were 52.8% of Q3 revenue, versus 45.8% a year earlier; indirect channels generated 57.4%, versus 25.4%. Two commercial customers represented 42.0% of Q3 revenue. Government spending, contract cancellations, customer loss, and channel competition could affect results.
- Preferred dividends continue to accrue and reduce cash available. Unpaid dividends were $32 at quarter-end; the company paid $512 of dividends during the nine months. Holders of Series 2 and Series 3 preferred shares could seek redemption after specified nonpayment procedures; the filing estimated an aggregate $1,900 redemption price if all such shares were redeemed as of November 1, 2014. Preferred conversions or new financing could dilute common shareholders.
- Q3 and nine-month results included $54 of other income; its nature is not clearly explained in the filing text. Routine legal matters were not expected by management to have a material adverse effect, though future claims could. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether revenue growth and profitability materialize, particularly given the year-to-date revenue decline and operating loss.
- Cash conversion and sustainability of operating cash flow, including the effect of deferred revenue and receivables.
- Availability and terms of CEO financing, SVB borrowing capacity, and repayment dates for related-party debt.
- Preferred dividend obligations, potential redemption demands, and dilution from conversions or additional financing.
- Exposure to government customers, individual customers, and indirect sales channels, and progress in growing newer products.