Intrusion Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; balance sheet compared with December 31, 2010. Unless noted otherwise, financial amounts are in thousands of dollars. Intrusion develops and sells security, identity-discovery, data-mining, compliance, and intrusion-detection products, primarily through direct and indirect sales channels.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $1,068 | $1,538 | $2,110 | $3,073 |
| Gross profit (margin) | $662 (62.0%) | $990 (64.3%) | $1,305 (61.8%) | $1,971 (64.1%) |
| Operating income (loss) | $(461) | $133 | $(859) | $350 |
| Net income (loss) | $(473) | $121 | $(875) | $325 |
| Net income (loss) per common share | $(0.04) | $0.01 | $(0.08) | $0.02 |
| Operating cash flow | Not separately stated | Not separately stated | $(1,181) | $804 |
Revenue was overwhelmingly product revenue: $1,027 in Q2 and $2,023 for the first half. Sales of TraceCop, the principal revenue-generating product line, were $1.0 million in Q2 2011 versus $1.5 million in Q2 2010. Product gross margin declined to 61.0% for Q2 and 60.7% for the first half, primarily due to product mix.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $233 at June 30, 2011, down from $540 at year-end 2010. Cash declined by $307 in the first half.
- Current assets were $617 and current liabilities were $2,317, a working-capital deficit of approximately $1.7 million. Total assets were $739; stockholders’ deficit was $1,578.
- Current liabilities included $1,130 payable to CEO G. Ward Paxton, $774 of accounts payable and accrued expenses, $367 of deferred revenue, and $46 of accrued preferred dividends. The officer loan bears interest at 5% at June 30 and is due March 31, 2012.
- The company reported no borrowings under its amended $625 line of credit at June 30, but also said no funding was available under the facility. The line is secured by substantially all company assets, including intellectual property, and terminates June 25, 2012.
- Paxton had committed to lend up to $1.5 million through March 2012; the company reported approximately $1.1 million of remaining funding availability. First-half financing cash flow was $875, including $900 borrowed from the CEO, $26 from warrant exercises, and $51 of preferred dividends paid.
- Preferred stock dividends continue to accrue. Series 2 and Series 3 holders may have redemption rights if dividend defaults are not cured; the filing estimated a $2.5 million aggregate cash redemption price for those series as of July 31, 2011.
Material changes and management commentary
- Revenue fell 31% in Q2 and 31% for the first half versus 2010. Management attributed the product-revenue decline chiefly to delayed U.S. government orders amid federal budget delays; support and maintenance revenue also declined slightly.
- Operating expenses increased: first-half sales and marketing rose to $726 from $460, research and development to $836 from $645, and general and administrative to $602 from $516. Sales and marketing growth reflected added personnel; R&D changes also reflected engineering contract work.
- First-half operating cash use was driven by the net loss and a $615 decrease in deferred revenue, partly offset by a $244 increase in accounts payable and accrued expenses and noncash expenses. Investing cash use was $1 for property and equipment.
- U.S. government sales were 28.2% of Q2 revenue, versus 79.9% a year earlier; for the first half they were 28.5%, versus 83.0%. Despite the lower concentration in this period, management expected government customers to remain a significant revenue source.
Outlook, risks, and other matters
Management believed cash, anticipated business growth, the credit facility, and CEO borrowing availability would be sufficient for operations and expected capital expenditures for the next 12 months. This outlook depends on projected revenue and net-income growth. The company warned that failure to generate positive cash flow or obtain acceptable financing could impair its ability to fund operations or continue operating. Additional equity financing could materially dilute existing shareholders.
- Key risks include dependence on TraceCop and government orders, federal budget and purchasing delays, customer and indirect-channel concentration, and the need to increase revenue to regain profitability.
- Preferred dividends reduce available cash; unpaid Series 2 and Series 3 dividends may trigger penalties and redemption rights. Conversion or redemption of preferred stock, warrants, options, or future financing could dilute common shareholders. The filing described potential dilution of approximately 61% from a specified preferred-stock redemption scenario.
- Routine legal proceedings were not expected by management to materially affect results, though future claims could. The filing reported no material capital-expenditure commitments.
- Management concluded disclosure controls were effective as of June 30, 2011 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether government-order timing improves and TraceCop revenue stabilizes or continues to decline.
- Actual cash burn, deferred-revenue trends, and the company’s ability to meet near-term obligations given its working-capital deficit and low cash balance.
- Whether CEO loan commitments remain available and whether the company can satisfy credit-facility covenants and access the facility when needed.
- Preferred dividend arrears, potential redemption demands, and the effect of conversions, redemptions, options, warrants, or new financing on common-share dilution.
- Whether management’s projected growth and 12-month liquidity assumptions are achieved; the filing provides no specific revenue or earnings guidance targets.