Intrusion Inc. — Q3 2011 Form 10-Q
Business and period: The company develops and sells security, data-mining, identity-discovery, and information-compliance products. This unaudited report covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Financial amounts below are in thousands of dollars unless noted.
Financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1,792 | $1,577 | $3,902 | $4,650 |
| Gross profit / margin | $1,091 / 60.9% | $983 / 62.3% | $2,396 / 61.4% | $2,954 / 63.5% |
| Operating income (loss) | $145 | $163 | $(714) | $513 |
| Net income (loss) | $121 | $203 | $(755) | $528 |
| Net income (loss) attributable to common stockholders | $83 | $165 | $(868) | $415 |
| Basic earnings (loss) per common share | $0.01 | $0.01 | $(0.07) | $0.04 |
Q3 revenue was almost entirely product revenue; TraceCop generated $1.7 million, compared with $1.5 million a year earlier. U.S. government sales were 38.0% of Q3 revenue and 32.9% of nine-month revenue. Two government customers together represented approximately 33.5% of Q3 revenue.
For the first nine months, operating cash flow was $(1,464), versus $534 provided in 2010. The 2011 outflow included a $921 decrease in deferred revenue and a $261 increase in receivables. Investing activities used $29, primarily for property and equipment; financing activities provided $1,275, mainly from CEO borrowing. Cash declined to $322 at September 30, from $540 at December 31, 2010.
At September 30, current assets were $873 and current liabilities $2,479; the company reported a $1.6 million working-capital deficiency. Total assets were $1,102 and stockholders’ deficit was $1,415. Current liabilities included a $1,530 loan payable to the CEO, $747 in accounts payable and accrued expenses, $84 in preferred dividends payable, and $62 in deferred revenue. The CEO loan bears interest at prime plus 1% (5% at quarter-end) and is due March 31, 2012. The company had no borrowings outstanding under its SVB credit line.
Material changes and management commentary
- Q3 revenue rose 14% year over year, reflecting higher TraceCop sales after a period of federal budget delays. Nine-month revenue fell 16%, primarily because of lower TraceCop sales associated with those delays.
- Nine-month operating results swung from $513 income to a $714 loss. Sales and marketing expense increased to $1,092 from $639, while gross margin declined to 61.4% from 63.5%, partly due to product mix.
- Q3 sales and marketing expense increased to $365 from $179, primarily due to added personnel. Management expected sales and marketing, R&D, and G&A costs to remain relatively constant through year-end, subject to increases with revenue.
- Preferred dividends continued to accrue; $113 accrued in the first nine months, and $84 was payable at quarter-end. Preferred stock liquidation preferences totaled $3.106 million at September 30.
Outlook, liquidity, and risks
Management stated it expected available cash, operating profits, the SVB line, and CEO funding to be sufficient for operations and expected capital expenditures over the next 12 months, based on projected revenue and net-income growth. The filing provides no quantified revenue or earnings guidance. At quarter-end, the company reported $64,000 available under its $625,000 SVB line and $670,000 available under the CEO’s written commitment for loans up to $2.2 million. The CEO loan commitment and SVB facility are significant financing dependencies; the SVB facility is secured by substantially all company assets, including intellectual property, and terminates June 25, 2012.
The company cautioned that failure to generate positive cash flow or obtain acceptable financing could impair its business plan, liquidity, or ability to continue operations. Other material risks include reliance on TraceCop, government customers and indirect sales channels; government budget delays or contract cancellations; preferred-dividend arrears; and potential dilution. If holders of Series 2 and Series 3 preferred stock exercised redemption rights, the filing estimated a $2.0 million cash redemption obligation as of October 31, 2011. Routine legal claims were not believed likely to have a material adverse effect, though future outcomes cannot be assured. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Key investor verification points
- Confirm whether revenue growth and profitability assumptions underpinning management’s 12-month liquidity outlook were achieved.
- Assess operating cash burn, deferred-revenue changes, receivable collection, and access to the remaining CEO and SVB financing.
- Review preferred-dividend arrears, redemption triggers, and potential dilution; check whether any redemption rights or late fees were invoked.
- Monitor TraceCop and U.S. government customer concentration, federal budget timing, and sales through indirect channels.
- Evaluate SVB covenant compliance, collateral exposure, and repayment or refinancing needs ahead of the facility’s June 2012 termination and the CEO loan’s March 2012 maturity.