Business context and reporting period
Intrusion Inc. develops and sells security, network data-mining, identity-discovery, compliance and privacy-protection products, primarily through direct sales and intermediaries. This unaudited Form 10-Q covers the three and six months ended June 30, 2013, with comparisons to the same 2012 periods. Amounts below are in thousands of dollars except per-share data.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $2,073 | $1,949 | $3,850 | $3,347 |
| Gross profit (margin) | $1,347 (65.0%) | $1,161 (59.6%) | $2,489 (64.6%) | $1,944 (58.1%) |
| Operating income (loss) | $237 | $238 | $325 | $(87) |
| Net income (loss) | $205 | $212 | $262 | $(140) |
| Net income (loss) attributable to common stockholders | $167 | $174 | $187 | $(215) |
| Net income (loss) per diluted share | $0.01 | $0.01 | $0.01 | $(0.02) |
- Revenue and margins: Revenue rose about 6% in Q2 and 15% in the first half year over year. The company attributed product-revenue growth mainly to Savant-TraceCop, which generated $670 in Q2 2013 versus none in Q2 2012. Product mix drove higher product gross margins; support and maintenance revenue declined.
- Expenses and interest: Q2 sales and marketing expense increased to $435 from $299, while R&D rose to $378 from $314. First-half sales and marketing was $747 in both years; R&D increased to $777 from $711. Net interest expense was $32 in Q2 and $63 for the first half, up from $26 and $53, respectively.
- Cash flow: First-half operating cash flow was $708, versus cash used of $148 in 2012. Investing used $36, primarily for equipment; financing used $179. Cash increased $493 from year-end to $545 at June 30.
- Balance sheet and obligations: Current assets were $1,782 and current liabilities $3,235, a working-capital deficit of approximately $1,453. Total assets were $2,087 and stockholders’ deficit was $1,243. The balance sheet reported a $1,530 current loan payable to CEO G. Ward Paxton, $187 in capital-lease obligations, and $357 in accrued preferred dividends. No SVB line borrowings were outstanding at quarter-end.
- Available funding: Management reported $500 of availability under a $625 SVB line and $670 remaining availability under the CEO’s $2,200 revolving note. The CEO note bore 5% interest at June 30, with outstanding principal and accrued interest due March 31, 2014. The SVB facility is secured by substantially all company assets, including intellectual property, and expires June 24, 2014.
Material changes versus the prior comparable period
- First-half operating results moved from an $87 operating loss and $140 net loss in 2012 to operating income of $325 and net income of $262 in 2013. Q2 net income was slightly lower year over year despite higher revenue and gross margin.
- U.S. government sales increased to 44.1% of Q2 revenue from 30.6%; for the first half they were 55.0% versus 35.6%. Q2 commercial sales fell to 55.9% of revenue from 69.3%.
- The company replaced its expiring SVB facility with a smaller $625 line, down from the previous $2.5 million facility. The officer loan was reclassified as current at June 30.
Outlook, risks and contingencies
- Management expected sales and marketing expense to rise through the end of 2013 alongside revenue; it expected R&D and general and administrative expenses to remain relatively stable, subject to revenue-related increases. No quantified revenue or earnings guidance was provided.
- Management believed available cash, projected revenue and income, the SVB line and CEO borrowing capacity would fund operations and expected capital expenditures for the next 12 months. It cautioned that insufficient operating cash flow or unavailable/unfavorable financing could prevent execution of its plans or threaten continued operations. Future financing could significantly dilute common shareholders.
- Customer and product concentration are significant: three government customers accounted for about 40.4% of Q2 revenue, and two commercial customers for about 54.8%. TraceCop and Savant-TraceCop are key products; government purchasing, appropriations, payment timing and cancellation risks could affect results. Indirect channels accounted for 24.2% of Q2 revenue.
- Preferred dividends continue to accrue; unpaid Series 2 and Series 3 dividends may trigger an 18% annual late fee (waived by certain insider holders), a 45-day cure period, and potential redemption. The filing estimated a $2.2 million cash redemption obligation for those series as of July 31, 2013. It also described potential substantial dilution from preferred conversion or redemption.
- Routine legal claims were not expected by management to materially affect the company, though future claims could. The company reported effective disclosure controls as of June 30, 2013 and no material change in internal control over financial reporting during the quarter. No material capital-expenditure commitments were reported.
Important facts for investors to verify
- Whether revenue growth and profitability persist, particularly given dependence on a few customers and products and the increased government-sales share.
- Actual liquidity, SVB borrowing availability and covenant compliance, and the company’s ability to repay the CEO loan and lease obligations.
- Preferred-dividend arrears, redemption rights and potential common-share dilution; confirm the applicable share counts and redemption terms.
- Cash-flow quality: first-half operating cash generation included increases in accounts payable and deferred revenue, while accounts receivable also rose.
- Reported figures and period comparisons: the filing gives rounded MD&A amounts alongside financial-statement amounts, so use the statements for exact reported values.