Intrusion Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Intrusion develops and sells network-security, entity-identification, data-mining, and compliance products, including TraceCop and Savant. All financial amounts below are in thousands of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $2,069 | $1,805 | $3,784 | $3,399 |
| Gross profit / margin | $1,287 / 62.2% | $1,189 / 65.9% | $2,370 / 62.6% | $2,207 / 64.9% |
| Operating income (loss) | $22 | $4 | $(262) | $(233) |
| Net income (loss) | $(4) | $(22) | $(314) | $(292) |
| Net loss attributable to common stockholders | $(39) | $(56) | $(383) | $(363) |
- Q2 revenue increased $264, or about 15%; six-month revenue rose $385, or about 11%. Management attributed product-revenue growth primarily to Savant. Q2 Savant revenue was $0.8 million versus $40,000; TraceCop revenue was $1.3 million versus $1.8 million.
- Gross margin declined year over year, primarily because of product mix and higher labor costs associated with TraceCop sales. Q2 sales and marketing expense rose modestly; six-month research and development was approximately flat, while general and administrative expense declined slightly.
- For the six months, operating cash flow was $82, compared with cash used of $374 in 2014. The 2015 result included a $798 increase in deferred revenue, partly offset by a $773 increase in accounts receivable and a $314 net loss. Investing activities used $71; financing activities used $39.
- Cash was $978 at June 30, down from $1,006 at December 31, 2014. Current assets were $2,615 and current liabilities $4,006; management reported a $1.4 million working-capital deficiency. Stockholders’ deficit was $1,021.
- Debt and obligations included a $1,530 loan from CEO G. Ward Paxton, accruing interest at 5% and due March 31, 2016, plus $386 of capital-lease obligations. No SVB line borrowings were outstanding at quarter-end.
Liquidity, outlook, and risks
- The SVB receivables-based credit line was amended in June 2015 to a maximum of $625,000, replacing the expiring facility; $500,000 was reported available. The company also reported $670,000 available under the CEO’s $2.2 million promissory note. The SVB facility is secured by substantially all company assets, including intellectual property, and has financial and nonfinancial covenants.
- 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 is conditional: the company cautioned that insufficient operating cash flow or unavailable financing could impair its ability to fund operations or continue its business. Additional equity financing could materially dilute existing shareholders.
- Preferred-stock dividends continue to accrue; $89,000 was accrued and unpaid at June 30. Failure to pay specified Series 2 and Series 3 dividends could lead to redemption rights; the filing estimated an aggregate $1.9 million redemption price for those series as of August 1, 2015, if redemption were required.
- Revenue is concentrated: U.S. government sales were 41.9% of Q2 revenue and 52.0% for the six-month period. Indirect channels generated 77.6% of Q2 revenue, versus 36.3% a year earlier. Management cited potential government spending or contract changes, customer concentration, and competition in indirect channels as risks.
- Management expected sales and marketing costs to increase through year-end alongside revenue; it expected research and development and general and administrative expenses to remain relatively constant, subject to revenue-related increases. No specific revenue or earnings guidance was provided.
- The company reported routine legal proceedings and claims but did not expect them to materially affect its financial position, results, or cash flows. Disclosure controls were assessed as effective as of June 30, 2015.
Key facts for investors to verify
- Whether revenue growth and the expected improvement in profitability translate into sustained positive operating cash flow, especially as accounts receivable and deferred revenue change.
- Availability and terms of the CEO loan and SVB facility, including covenant compliance, collateral, and repayment obligations.
- Preferred-dividend arrears, potential redemption exposure, and possible dilution from conversion, redemption, options, or future financing.
- How much revenue remains dependent on government customers, a small number of customers, and indirect sales channels; and whether the shift in product mix continues to pressure margins.