Intrusion Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; filed May 13, 2016. Intrusion develops and sells cybersecurity, network data-mining, and entity-identification products, primarily TraceCop and Savant.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $1.511 million | $1.714 million; down 11.8% |
| Gross profit / margin | $972,000 / 64.3% | $1.082 million / 63.1% |
| Operating loss | $513,000 | $285,000 |
| Net loss | $544,000 | $310,000 |
| Net loss attributable to common stockholders | $579,000; $0.05 per share | $344,000; $0.03 per share |
| Operating cash flow | $(794,000) | $(415,000) |
| Cash at period end | $246,000 | $560,000 at March 31, 2015; $102,000 at December 31, 2015 |
- Research and development expense rose to $730,000 from $538,000; sales and marketing fell to $428,000 from $498,000. Net interest expense was $31,000 versus $25,000.
- At March 31, 2016, current assets were $1.135 million and current liabilities $1.787 million, a working-capital deficit of approximately $652,000. Total assets were $1.589 million; stockholders’ deficit was $2.361 million.
- Debt included $364,000 outstanding on the SVB line of credit and $2.055 million payable to the CEO, plus $286,000 of capital-lease obligations. The officer loan accrued interest at 5%; accrued interest was $99,000.
- Cash increased during the quarter mainly because of $938,000 net financing inflows: $525,000 borrowed from the CEO, $364,000 from the credit line, and $99,000 from option exercises. Operating activities used $794,000; there were no investing cash flows.
Material changes and business trends
- Revenue decline reflected lower Savant sales: $100,000 versus $200,000. TraceCop revenue was approximately $1.5 million in both periods. Maintenance revenue was zero, versus $10,000, after contracts expired at 2015 year-end.
- Gross margin improved by 1.2 percentage points, which management attributed mainly to product mix. Operating loss widened as higher R&D expense outweighed lower selling and marketing costs.
- U.S. government sales were 65.2% of revenue, versus 64.0% a year earlier. Four government customers represented about 65.2% of revenue; one commercial customer represented 25.6%.
- Indirect channels accounted for 67.7% of revenue, down from 87.6% in Q1 2015.
Outlook, liquidity, and risks
- Management expected to renew the $625,000 SVB facility, which was due to terminate June 21, 2016, but gave no assurance renewal would occur. At quarter-end, $78,000 remained available; the facility was secured by substantially all company assets, including intellectual property, and personally guaranteed by the CEO.
- The CEO revolving note was renewed through March 2018, with a $2.2 million borrowing limit. The company reported $145,000 of remaining availability at March 31, 2016.
- 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 warned that failure to generate positive cash flow or obtain acceptable financing could impair operations or threaten the company’s ability to continue operating. No numerical revenue or earnings guidance was provided.
- Preferred dividends continued to accrue; $195,000 was payable at quarter-end. The company said it lacked the surplus or profits needed to pay past-due dividends. Holders of Series 2 and Series 3 preferred stock could, after notice and an uncured breach, demand redemption; the filing estimated a $2.0 million aggregate redemption amount as of February 29, 2016.
- Key risks include limited liquidity, ongoing losses and accumulated deficit, reliance on CEO financing, customer and government-sales concentration, and potential dilution from preferred-stock conversion or redemption and future financing. Routine legal matters were not expected to be material; no specific material proceeding was described.
- Disclosure controls and procedures were reported effective as of March 31, 2016; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the SVB credit line was renewed before its June 21, 2016 termination date, and the resulting borrowing availability and covenant status.
- Actual subsequent cash burn, revenue performance, and progress toward the company’s liquidity and profitability assumptions.
- Status and terms of past-due preferred dividends, any redemption demands, and potential cash obligations or share dilution.
- Whether government and major commercial customer concentration, as well as the mix of TraceCop and Savant sales, changed after quarter-end.