Intrusion Inc. — Q1 2013 Form 10-Q
Business and period: Intrusion develops and sells security, data-mining, identity-discovery, privacy and network-intrusion products. This unaudited report covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Financial amounts below are in thousands of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $1,777 | $1,398 |
| Gross profit / margin | $1,142 / 64.3% | $783 / 56.0% |
| Operating income (loss) | $88 | ($325) |
| Net income (loss) | $57 | ($352) |
| Net income (loss) attributable to common shareholders | $20 | ($390) |
| Operating cash flow | $113 provided | $55 provided in cash-flow statement* |
- Revenue increased 27%, primarily from TraceCop sales, which were approximately $1.8 million versus $1.4 million. Customer support and maintenance revenue declined to $22 from $35.
- Improved gross margin reflected a more favorable TraceCop product mix. Sales and marketing expense fell to $312 from $399; research and development was $399 versus $398; general and administrative expense was $343 versus $311.
- Cash and cash equivalents were $301 at March 31, 2013, compared with $52 at December 31, 2012. Cash increased $249 during the quarter. Investing activities used $17; financing activities provided $153.
- Current assets were $1,965 and current liabilities $3,608, a working-capital deficit of approximately $1.6 million. Stockholders’ deficit was $1,454; accumulated deficit was $59.0 million.
- Debt and obligations included $311 drawn on the $625 SVB line of credit, a $1,530 loan from CEO G. Ward Paxton, and $179 in capital-lease obligations. The company reported $314 of remaining SVB availability and approximately $670 available under the CEO note. The line was secured by substantially all company assets, including intellectual property.
Outlook, risks and unusual items
- Management expected available cash, operating profits and borrowing availability to fund operations and expected capital expenditures for the next 12 months. This expectation depends on projected revenue and income growth; the filing warns that inadequate operating cash flow or unavailable financing could impair the business plan, liquidity or continued operations. No specific revenue or earnings guidance was provided.
- The SVB facility was due to terminate June 24, 2013. Management anticipated renewal on similar terms but gave no assurance that it could renew. The company was subject to financial and nonfinancial covenants.
- U.S. government sales represented 67.7% of revenue, up from 42.7%; three government customers accounted for approximately 57.9% of revenue. TraceCop generated substantially all revenue. Government budget delays, cancellations, customer concentration and reliance on indirect channels (41.9% of Q1 revenue) were key risks.
- Accrued and unpaid preferred dividends were $317,000 and continue to accrue. If Series 2 and Series 3 preferred dividends remain unpaid, holders may have redemption rights; the stated cash redemption amount for those series was $2.2 million as of April 30, 2013. Preferred-stock conversion or redemption and future financing could substantially dilute common shareholders.
- The company reported one quarter of net income but still had a substantial accumulated deficit and working-capital shortfall. Management also noted potential dependence on CEO financing and the possibility that future debt or equity financing may be unavailable or unfavorable.
- Routine legal proceedings were not expected by management to have a material adverse effect; future claims could have a material impact. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Most important facts to verify
- Whether SVB renewed the credit facility before its June 24, 2013 maturity, and whether the company remained in compliance with its covenants.
- Whether subsequent results supported management’s 12-month liquidity assessment, given the $1.6 million working-capital deficit and reliance on borrowing.
- Whether the concentrated government and TraceCop revenue base persisted or diversified.
- The status and cash consequences of accrued preferred dividends, potential redemption rights and any preferred-stock conversions or new financing.
- *The cash-flow statement reports $55 of operating cash provided in Q1 2012, while the MD&A describes $55 as cash used; the filing is inconsistent on this comparator.