Intrusion Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 28, 2013. This is an annual report, and the provided filing text does not give standalone fourth-quarter results. Intrusion develops and sells cybersecurity and data products, including TraceCop, Savant, Compliance Commander and SecureNet.
Financial performance
| Metric | 2012 | 2011 | Change / context |
|---|---|---|---|
| Revenue | $6.697 million | $5.348 million | Up 25.2%, chiefly from TraceCop sales |
| Gross profit / margin | $3.990 million / 59.6% | $3.291 million / 61.5% | Gross profit rose; margin fell on product mix and higher TraceCop labor costs |
| Operating loss | $130,000 | $749,000 | Improved as expenses grew more slowly than revenue |
| Net loss | $246,000 | $933,000 | Improved; 2011 included $118,000 of other expense |
| Net loss attributable to common stockholders | $398,000 | $1.084 million | Includes accrued preferred dividends of $152,000 in 2012 |
| Cash used in operating activities | $276,000 | $1.539 million | Improved, though receivables increased $466,000 in 2012 |
| Cash and cash equivalents at year-end | $52,000 | $308,000 | Declined $256,000 |
Product revenue rose 26.5% to $6.569 million, while support and maintenance revenue fell 17.9% to $128,000, largely because SecureNet maintenance contracts expired. Sales and marketing expense was $1.317 million; research and development was $1.660 million; general and administrative was $1.143 million. Interest expense increased to $116,000 from $66,000. The effective income tax rate was 0% in both years because deferred tax assets were fully reserved.
Liquidity, debt and obligations
At year-end, current assets were $1.051 million and current liabilities were $1.264 million, resulting in a $213,000 working-capital deficit. Total assets were $1.359 million, against stockholders’ deficit of $1.551 million. Debt included a $130,000 SVB line-of-credit balance, a $1.530 million unsecured loan from CEO G. Ward Paxton, and $212,000 of capital lease obligations. Accrued interest on the officer loan was $130,000; accrued and unpaid preferred dividends were $279,000.
The company reported $456,000 available under its $625,000 SVB receivables-based line and $670,000 available under the CEO’s $2.2 million revolving note at December 31. The SVB facility was scheduled to terminate June 24, 2013, with outstanding amounts then due; it is secured by substantially all company assets, including intellectual property. A new CEO revolving note was entered into in February 2013, extending availability through March 2014. The filing says management expected sufficient resources for the next 12 months, assuming projected revenue and net-income growth and access to available borrowings, while warning that failure to generate cash or obtain financing could threaten operations.
Operating lease commitments were $1.709 million and capital lease commitments $229,000, totaling $1.938 million. Operating cash outflow was partly offset by $41,000 of financing cash inflow; investing activities used $21,000.
Material changes and outlook
- Revenue growth was driven by TraceCop. Management said it expected TraceCop and Savant market acceptance to support future product revenue growth, but provided no quantified guidance.
- Gross margin declined 1.9 percentage points. Management expected sales and marketing, research and development, and general and administrative expenses to rise as revenue increased in 2013.
- Management said SecureNet sales had declined and that growth in entity-identification and data-mining products was needed to offset this and sustain profitability. Newer products had limited market acceptance and may have longer sales cycles.
- U.S. government sales were 40.5% of revenue, versus 38.4% in 2011. Export revenue was approximately 0.1%. The filing cites government budget delays and cancellation rights, customer and channel concentration, intense competition, technology change, and financing availability as significant risks.
- Preferred dividends continue to accrue. Certain Series 2 and Series 3 preferred holders may have redemption rights; the filing estimates redemption of those shares could require about $2.0 million. Conversion or redemption, additional financing, and outstanding options may materially dilute common stockholders.
- The company reported an accumulated deficit of $59.047 million. Legal proceedings were described as arising in the ordinary course, with no known material claims outstanding at year-end.
Key investor verification points
- Verify the sustainability and customer-level makeup of 2012’s TraceCop-led revenue growth, and whether newer products are gaining market acceptance.
- Review receivables collection and cash conversion: accounts receivable rose to $946,000 from $480,000 while operating cash flow remained negative.
- Confirm renewal or repayment of the SVB facility before its June 2013 termination and the availability and terms of CEO-provided financing.
- Assess preferred dividend arrears, possible redemption demands, and dilution under conversion, redemption, option exercise or future financing scenarios.
- Reconcile the customer-concentration disclosure: the filing reports four U.S. government customers represented 38.2% of revenue, but also states that one individual commercial customer exceeded 57% of revenue. These statements appear inconsistent; the filing text does not provide a clear reconciliation.
- Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an attestation opinion on internal control over financial reporting.