Business Context and Reporting Period
Company: Intrusion Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Intrusion Inc. develops and markets security software for entity identification, regulated information compliance, data privacy, and network intrusion prevention. Key product families include TraceCop, Compliance Commander, and Intrusion SecureNet. The company sells primarily to U.S. federal government entities, financial institutions, and healthcare providers.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|---|
| Total Revenue | $1,292,000 | $2,148,000 | $1,746,000 |
| Gross Profit | $859,000 (66.5%) | $1,438,000 (67.0%) | $1,126,000 (64.5%) |
| Operating Income (Loss) | $65,000 | $(245,000) | $(812,000) |
| Net Income (Loss) | $50,000 | $(271,000) | $(834,000) |
| Net Income (Loss) Attributable to Common | $11,000 | $(349,000) | $(939,000) |
| Cash and Cash Equivalents (End of Period) | $136,000 (as of June 30, 2009) | ||
| Net Cash Used in Operating Activities | $(774,000) (Six months 2009) | ||
| Working Capital Deficit | $(1.58 million) (Current Assets $489k vs. Current Liabilities $2.074m) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 23% for the six months ended June 30, 2009, compared to the same period in 2008 ($2.15M vs. $1.75M). Product revenue drove this growth, while customer support revenue declined due to a sales mix shift toward government contracts that do not require maintenance.
- Profitability Improvement: The company reported a net income of $50,000 for the quarter ended June 30, 2009, compared to a net income of $41,000 in the prior year quarter. However, the six-month period resulted in a net loss of $271,000, a significant improvement from the $834,000 loss in the prior year.
- Expense Management: Sales and marketing expenses decreased significantly (25% for the quarter, 27% for the six months) due to planned reductions. Research and development expenses increased slightly for the quarter but decreased for the six-month period.
- Liquidity Deterioration: Cash and cash equivalents dropped from $554,000 at year-end 2008 to $136,000 at June 30, 2009. The working capital deficit widened from $1.3 million to $1.58 million.
Guidance, Outlook, Risks, and Contingencies
Liquidity and Capital Resources: Management believes it has sufficient cash resources to finance operations for the next twelve months based on projected revenue growth and available borrowing. Funding sources include:
- Cash on hand: $136,000.
- Line of Credit: $177,000 available under a $1.25 million facility with Silicon Valley Bank (secured by substantially all assets).
- CEO Commitment: $1.4 million available from a written commitment by CEO G. Ward Paxton to invest up to $1.5 million.
Risks and Contingencies:
- Customer Concentration: 94.2% of Q2 2009 revenue came from U.S. government entities. Approximately 94% of revenue was attributable to just three government customers. Loss of these contracts would materially harm the business.
- Preferred Stock Dividends: The company has accrued $276,000 in unpaid preferred stock dividends. Delaware law currently prevents payment due to a lack of capital surplus or net profits. Failure to pay may trigger late fees (18% per annum) and redemption rights. If Series 2 and Series 3 preferred stock were redeemed, the company would owe approximately $2.2 million.
- Dilution Risk: Future financing or conversion of preferred stock/warrants could significantly dilute common stockholders. Conversion of all preferred stock and exercise of warrants would increase common shares outstanding by approximately 17.7%.
- Continuity of Operations: If the company cannot generate positive cash flow or secure additional financing, it may be unable to continue operations.
Investor Verification Checklist
- Cash Runway: Verify the sufficiency of the $136,000 cash balance plus $1.577 million in committed/available credit against the $774,000 operating cash burn over six months.
- Government Contract Stability: Assess the risk of revenue concentration, as 94% of Q2 revenue relied on three government customers.
- Preferred Stock Redemption: Confirm the status of the $276,000 accrued dividends and the potential $2.2 million redemption liability for Series 2 and 3 preferred stock.
- CEO Financing Dependence: Evaluate the reliance on CEO G. Ward Paxton for $1.4 million of available funding and the terms of the revolving promissory note.
- Line of Credit Covenants: Review the financial covenants (liquidity coverage ratio, rolling EBITDA) of the Silicon Valley Bank line of credit to ensure compliance.