Intrusion Inc. — Q2 2017 Form 10-Q
Business and period: Intrusion develops and sells security and entity-identification software, including TraceCop and Savant. This filing covers the quarter and six months ended June 30, 2017; financial amounts below are in thousands of dollars unless noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Revenue | $1,543 | $1,587 | $3,102 | $3,098 |
| Gross profit | $911 | $1,059 | $1,887 | $2,031 |
| Gross margin | 59.0% | 66.7% | 60.8% | 65.6% |
| Operating loss | $(380) | $(352) | $(681) | $(865) |
| Net loss | $(438) | $(387) | $(789) | $(931) |
| Net loss attributable to common stockholders | $(473) | $(422) | $(858) | $(1,000) |
| Basic and diluted loss per share | $(0.04) | $(0.03) | $(0.07) | $(0.08) |
| Operating cash flow | Not presented quarterly | $265 | $(34) |
- Quarterly revenue fell about 3%; six-month revenue was essentially flat. Q2 TraceCop sales were $1.5 million versus $1.6 million; Savant sales were $29,000 versus $32,000. Management attributed lower product revenue primarily to Savant.
- Gross margin declined, which management attributed mainly to product mix and also identified labor hours, overhead, distribution channels, revenue volume, pricing, and third-party product fluctuations as factors.
- Operating expenses declined year over year in H1: sales and marketing $776, R&D $1,179, and G&A $613. Net interest expense rose to $108 in H1 from $66, primarily because of increased officer borrowing.
- H1 operating cash flow was positive despite the net loss, principally reflecting increases in deferred revenue ($543), lower receivables ($256), and higher payables/accruals ($135). Cash at June 30 was $397, compared with $64 at December 31, 2016.
Balance sheet, debt and liquidity
- At June 30, 2017, total assets were $1,268; current assets were $1,022 and current liabilities $2,435. The company reported a $1.4 million working-capital deficiency, compared with $1.0 million at June 30, 2016. Stockholders’ deficit was $4,224; accumulated deficit was $62.3 million.
- Officer loan payable was $3,025, plus $271 of accrued interest. The unsecured revolving CEO note permits borrowing up to $3.7 million through March 2019, bears interest at prime plus 1% (5.25% at June 30), and had $675 of stated availability at quarter-end. H1 included $1.33 million of advances and $1.19 million of repayments.
- Management said it expected available cash, anticipated profits and CEO-note borrowings to fund operations and expected capital spending for the next 12 months. It cautioned that failure to generate positive cash flow or obtain acceptable financing could impair operations or threaten the ability to continue. The filing also notes possible future equity or debt financing could be unavailable or dilutive.
- Capital-lease obligations totaled $126, including $94 current. The company reported no material capital-expenditure commitments.
Changes, outlook and key risks
- Government entities accounted for 72.2% of Q2 revenue, up from 66.2%; for H1 the share was 74.6%, versus 65.7%. Three government customers represented about 54.2% of Q2 revenue. One commercial customer represented 25.9%, compared with 30.3% a year earlier. Management expects government sales to remain significant and identifies customer and channel concentration as risks.
- All current maintenance contracts had expired at year-end 2015. The filing provides no specific revenue or earnings guidance; management expected sales and marketing costs to increase through year-end 2017, while R&D and G&A were expected to remain relatively constant, subject to revenue-related increases.
- Preferred dividends continued to accrue; unpaid dividends were $374 at June 30. The filing describes possible late penalties and redemption rights if scheduled dividends are not paid and a breach is not cured. Redemption of Series 2 and Series 3 preferred shares at August 1 terms could require $2.2 million in cash. Preferred conversion or redemption, options, or future financing could dilute common shareholders.
- Subsequent event: the company sold unused IP addresses on July 7 and received net proceeds of $871,629 on August 9; it stated the cash receipt immediately improved liquidity.
- Routine legal proceedings were not expected by management to have a material adverse effect, though no assurance was given. Management concluded disclosure controls were effective as of June 30, 2017 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue and operating cash flow can improve without relying on working-capital timing, and whether the company can reach sustainable profitability.
- Cash needs, CEO-note availability and terms, repayment obligations, accrued interest, and dependence on financing from the CEO.
- Preferred-dividend arrears, potential redemption or penalties, and the resulting cash requirements or dilution.
- Exposure to government contracts, indirect sales channels, the dominant TraceCop product, and significant individual customers.
- Use of the $871,629 IP-sale proceeds and the company’s liquidity after the quarter-end transaction.