Business Context and Reporting Period
Company: Intrusion Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: Intrusion Inc. develops and markets security software solutions, including entity identification (TraceCop), data mining (Savant), compliance (Compliance Commander), and intrusion prevention (SecureNet). The company sells directly to end-users (government and commercial) and through indirect channels (resellers, distributors). As of September 30, 2010, the company reported a working capital deficit of approximately $0.6 million.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Revenue | $1,577,000 | $4,650,000 |
| Gross Profit | $983,000 (62.3% margin) | $2,954,000 (63.5% margin) |
| Operating Income | $163,000 | $513,000 |
| Net Income | $203,000 | $528,000 |
| Net Income Attributable to Common Stockholders | $165,000 | $415,000 |
| Cash and Cash Equivalents | $298,000 | $298,000 (Ending Balance) |
| Net Cash Provided by Operating Activities | N/A | $534,000 |
| Total Debt (Loan Payable to Officer) | $670,000 | $670,000 |
| Accumulated Deficit | $(57,566,000) | $(57,566,000) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 25.9% for the quarter and 36.7% for the nine-month period compared to 2009. This was driven primarily by a $328,000 increase in product revenue for the quarter, specifically from the TraceCop product line.
- Profitability Turnaround: The company reported net income of $528,000 for the nine months ended September 30, 2010, compared to a net loss of $193,000 for the same period in 2009. Operating income improved from a loss of $149,000 in the prior year to income of $513,000.
- Customer Concentration Shift: Revenue from U.S. government entities decreased as a percentage of total revenue from 66.3% in Q3 2009 to 31.5% in Q3 2010. Conversely, reliance on a single commercial customer increased to 65.1% of total revenue in Q3 2010, up from 28.8% in Q3 2009.
- Liquidity: Cash and cash equivalents decreased from $519,000 at year-end 2009 to $298,000 at September 30, 2010, despite positive operating cash flow, due to financing activities including dividend payments and loan repayments.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management believes it has sufficient cash resources to finance operations for the next twelve months based on projected revenue growth, available credit lines, and commitments from the CEO. The company expects to fund operations through profits, borrowings from the CEO, and potentially additional private equity or debt, which may result in significant dilution to common stockholders.
Key Risks and Contingencies:
- Liquidity Risk: The company has a working capital deficit and relies heavily on the CEO for funding. Failure to generate positive cash flow or secure additional financing could threaten operations.
- Customer Concentration: A significant portion of revenue comes from U.S. government entities and one major commercial customer. Loss of these relationships could materially harm the business.
- Product Concentration: A large percentage of revenue is derived from the TraceCop product line.
- Dilution: Conversion of preferred stock and exercise of warrants could increase the number of common shares outstanding by approximately 11.5% to 30.0%, potentially depressing the stock price.
- Debt Covenants: The company has a $0.625 million line of credit with Silicon Valley Bank secured by substantially all assets, including intellectual property. It must maintain specific liquidity coverage ratios and EBITDA computations.
Investor Verification Checklist
- CEO Dependence: Verify the status and terms of the $700,000 revolving note and the $1.5 million investment commitment from CEO G. Ward Paxton, which are critical to liquidity.
- Customer Concentration: Assess the stability of the single commercial customer representing 65.1% of Q3 revenue and the risks associated with government contract renewals.
- Preferred Stock Obligations: Review the liquidation preferences and dividend accruals ($35,000 accrued unpaid) for Series 1, 2, and 3 preferred stock, and the potential dilution upon conversion.
- Working Capital: Monitor the working capital deficit of $0.6 million and the company's ability to meet the covenants of its Silicon Valley Bank line of credit.
- Product Mix: Confirm continued demand for the TraceCop product line, which drives the majority of revenue growth.