Intrusion Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The unaudited statements compare with the corresponding 2012 periods. Intrusion develops and sells network security, threat-detection, data-mining, and information-compliance products.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1.975 million | $1.855 million | $5.825 million | $5.202 million |
| Gross profit (margin) | $1.185 million (60.0%) | $1.081 million (58.3%) | $3.674 million (63.1%) | $3.025 million (58.1%) |
| Operating income (loss) | $207,000 | $80,000 | $532,000 | ($7,000) |
| Net income (loss) | $173,000 | $48,000 | $435,000 | ($92,000) |
| Net income (loss) attributable to common stockholders | $135,000 | $9,000 | $322,000 | ($208,000) |
For the nine months, operating cash flow was $656,000, investing cash outflow was $60,000, and financing cash outflow was $190,000. Cash increased $406,000 to $458,000. Accounts receivable rose $819,000 and deferred revenue rose $382,000 during the period.
At September 30, cash was $458,000 and the working-capital deficit was approximately $1.3 million. Current liabilities were $3.566 million against current assets of $2.278 million. Debt included a $1.530 million CEO loan and $164,000 of capital-lease obligations; the $625,000 SVB line had no outstanding borrowings, with approximately $500,000 available. The company also reported approximately $670,000 available under the CEO loan facility. Accrued, unpaid preferred dividends were $397,000. Accumulated deficit was $58.612 million.
Changes and management commentary
- Revenue increased about 6% in Q3 and 12% for the nine-month period. Management attributed product-revenue growth primarily to Savant, which contributed $0.4 million in Q3 and $1.0 million for the nine months, versus none in 2012. Maintenance revenue declined.
- Gross margin improved, particularly for the nine-month period. Management cited product mix as the main factor; product gross margin rose while maintenance gross margin fell.
- Management said it expected sales and marketing, research and development, and general and administrative costs to remain relatively stable through the remainder of 2013, subject to increases associated with revenue growth. It projected sufficient cash for operations and expected capital expenditures over the next 12 months, based on revenue and income growth and available borrowing.
- The CEO revolving note permits borrowing up to $2.2 million through March 2014, at a floating rate reported as 5% at quarter-end; outstanding principal and accrued interest are due March 31, 2014. The SVB facility is secured by substantially all company assets, including intellectual property, and has financial and nonfinancial covenants.
Risks, contingencies, and notable items
- Liquidity remains constrained: management cautioned that failure to generate positive cash flow or obtain acceptable financing could impair operations or the ability to continue. Additional financing may be unavailable or dilutive.
- Revenue is concentrated. U.S. government sales were 45.8% of Q3 revenue and 51.9% of nine-month revenue. Two commercial customers together represented 53.2% of Q3 revenue. Government budget, spending, and contract-cancellation risks are noted.
- Preferred dividends continue to accrue. Holders of Series 2 and Series 3 preferred stock may have redemption rights following an uncured dividend breach; the filing estimates a $2.0 million aggregate cash redemption price for those series as of October 31, 2013. Conversion or redemption could also materially dilute common shareholders.
- The company reported routine legal proceedings and claims, which it did not believe would materially affect its financial position, results, or cash flows; it gave no assurance about future claims. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether recent revenue and profitability growth, particularly Savant sales, is sustainable and converts to cash given the increase in receivables.
- Available liquidity, covenant compliance, and the company’s ability to repay the CEO loan when due and meet preferred-dividend obligations.
- The potential cash redemption and share dilution from preferred stock, including the terms and likelihood of any holder action.
- Customer concentration and dependence on U.S. government budgets, contracts, and reseller channels.
- Common-share counts differ within the filing: the cover reports 12,172,017 shares outstanding on October 31, 2013, while portions of the risk-factor text cite 12,072,017. Verify the applicable share count and related dilution calculations.