Intrusion Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Financial amounts are in U.S. dollars; financial statement amounts below are in thousands unless stated otherwise. Intrusion develops and sells security, data-mining, identity-discovery, and information-compliance products. Most reported revenue came from its TraceCop product line.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $1,949 | $1,068 | $3,347 | $2,110 |
| Gross profit / margin | $1,161 / 59.6% | $662 / 62.0% | $1,944 / 58.1% | $1,305 / 61.8% |
| Operating income (loss) | $238 | $(461) | $(87) | $(859) |
| Net income (loss) | $212 | $(473) | $(140) | $(875) |
| Net income (loss) attributable to common stockholders | $174 | $(511) | $(215) | $(950) |
| Basic and diluted EPS attributable to common stockholders | $0.01 | $(0.04) | $(0.02) | $(0.08) |
- Q2 revenue rose 82% year over year, primarily on higher TraceCop sales tied to new project orders. TraceCop revenue was $1.9 million, versus $1.0 million in Q2 2011; substantially all revenue in both quarters came from TraceCop.
- Six-month revenue rose 59%. Product revenue increased, while support and maintenance revenue declined to $68,000 from $87,000 for the half year.
- Gross margin declined year over year: management cited product mix and somewhat higher labor costs on TraceCop sales.
- Q2 operating expenses were $923,000, compared with $1.123 million a year earlier. For the half year, sales and marketing was $699,000, R&D $711,000, and G&A $621,000.
Cash flow, liquidity and debt
- Cash and equivalents were $149,000 at June 30, 2012, down from $308,000 at December 31, 2011. Six-month operating cash use was $148,000; investing cash use was $12,000; financing provided $1,000. Ending cash was $149,000.
- Working capital deficiency was $1.7 million. Current assets were $1.271 million and current liabilities were $2.960 million. The company reported total assets of $1.530 million and a stockholders’ deficit of $1.499 million.
- Debt included $1.530 million owed under a revolving note from CEO G. Ward Paxton, plus $66,000 outstanding on the SVB line of credit and $156,000 in capital-lease obligations. The officer note bears interest at SVB prime plus 1% (5% at June 30, 2012) and is due March 31, 2013.
- SVB amended the credit facility in June 2012, replacing the expiring facility with a $625,000 line. The company reported $336,000 of available capacity. The line is secured by substantially all company assets, including intellectual property, and guaranteed by the CEO; it has financial and nonfinancial covenants and terminates June 24, 2013.
- Management said an additional $670,000 was available under the CEO note, which permits borrowing up to $2.2 million. The company accrued $199,000 in unpaid preferred dividends.
Changes, outlook and key risks
- Management believed available cash, borrowing capacity, and projected revenue and net-income growth would fund operations and expected capital expenditures for the next 12 months. It also warned that failure to generate positive cash flow or obtain acceptable financing could impair its ability to fund operations or continue operating. No specific numerical revenue or earnings guidance was provided.
- Management expected sales and marketing costs to increase through year-end with revenue; R&D and G&A were expected to remain relatively stable, potentially rising with revenue.
- Customer and product concentration are substantial. U.S. government sales were 30.6% of Q2 revenue and 35.6% for the first half. One commercial customer accounted for 67.7% of Q2 revenue. The filing also says approximately 27.9% of Q2 revenue was attributable to two government customers; customer categories and concentration figures should be checked against the underlying filing.
- Unpaid preferred dividends continue to accrue. If holders of Series 2 and Series 3 preferred shares exercised cash redemption rights, the filing estimated an aggregate redemption price of $2.0 million as of July 31, 2012. The filing also describes potential dilution: conversion of all outstanding preferred stock would increase common shares by about 9.6%; a specified redemption scenario could require issuance of about 6.68 million shares.
- Other stated risks include government budget delays or contract cancellations, reliance on indirect sales channels, dependence on TraceCop, limited liquidity and possible financing dilution. Routine legal matters were not expected by management to have a material adverse effect, though no assurance was given.
- Disclosure controls and procedures were deemed effective as of June 30, 2012. Management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether TraceCop growth and the Q2 profit are repeatable, given the first-half operating loss and the heavy dependence on one product and one commercial customer.
- Current liquidity, SVB covenant compliance, eligible receivables supporting line availability, and the CEO note’s remaining capacity and repayment terms.
- The status and potential cash or share-settlement consequences of overdue preferred dividends and redemption rights.
- The customer concentration disclosures, including the reported commercial-customer and government-customer percentages.
- Whether projected positive cash flow and financing sources are sufficient to support operations beyond the stated 12-month outlook.