INTRUSION INC. — Q1 2012 10-Q
Reporting period: Three months ended March 31, 2012; comparative period is Q1 2011. Intrusion develops and sells security, data-mining, identity-discovery, and information-compliance products. Nearly all Q1 revenue came from TraceCop.
Financial results
Amounts are in thousands of dollars, except per-share data and percentages.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $1,398 | $1,042 |
| Gross profit / margin | $783 / 56.0% | $643 / 61.7% |
| Operating loss | $(325) | $(398) |
| Net loss | $(352) | $(402) |
| Net loss attributable to common stockholders | $(390); $(0.03) per share | $(439); $(0.04) per share |
| Operating cash flow | $55 provided | $737 used |
| Investing cash flow | $6 used | $1 used |
| Financing cash flow | $88 used | $301 provided |
Revenue increased 34%, primarily from higher TraceCop sales, while customer-support and maintenance revenue declined to $35 from $46. Product gross margin fell to 55.3% from 60.5%, mainly because of product mix and higher labor costs. Operating expenses were $1,108, compared with $1,041: sales and marketing rose to $399 from $345, while R&D and G&A were broadly unchanged. Interest expense increased to $27 from $4, primarily due to officer borrowings and capital leases.
Balance sheet and liquidity
At March 31, 2012, cash was $269, total assets $1,222, and current liabilities $2,908, producing a working-capital deficit of approximately $2.0 million. Stockholders’ deficit was $1,769. The company had $1,530 outstanding under an unsecured revolving note from CEO G. Ward Paxton; principal and accrued interest are due March 31, 2013. The note bears interest at SVB prime plus 1% (5% at quarter-end).
No SVB line borrowings were outstanding at quarter-end. The company reported $158 of available borrowing under its $625 line and $670 remaining availability under the CEO note. The SVB line is secured by substantially all company assets, including intellectual property, and was scheduled to terminate June 25, 2012; management anticipated renewal on similar terms. The filing reports $161 of accrued and unpaid preferred dividends. Cash declined $39 during the quarter to $269.
Changes, outlook, and risks
U.S. government sales rose to 42.7% of revenue from 28.9%; two government customers accounted for 38.9% of revenue. One commercial customer represented 54.7% of revenue, compared with 66.8% in Q1 2011. Indirect channels generated 43.4% of revenue, up from 30.3%. This customer, product, channel, and government exposure leaves revenue vulnerable to the loss or delay of major orders.
Management expected sales and marketing spending to increase through 2012, while R&D and G&A were expected to remain relatively stable. Management projected sufficient resources for the next 12 months, assuming revenue and net-income growth and access to available borrowing. The company cautioned that failure to generate positive cash flow or secure acceptable financing could impair operations or threaten its ability to continue. Additional financing could be unavailable or unfavorable and could significantly dilute shareholders.
Preferred dividends continue accruing and reduce available cash. If unpaid dividends are not cured after notice, Series 2 and Series 3 holders may have redemption rights; the stated aggregate cash redemption price was approximately $2.0 million as of April 30, 2012. The filing also describes potential substantial dilution from preferred-stock conversion or redemption, options, and future financing. Routine legal claims were not expected by management to have a material adverse effect, though no assurance was given. Management concluded disclosure controls were effective as of March 31, 2012.
Important facts for investors to verify
- Whether the SVB facility was renewed before its June 25, 2012 termination date, and whether its covenants or collateral terms changed.
- Actual cash generation and results against management’s assumptions of revenue and net-income growth.
- Collection, renewal, or cancellation status of major customer orders, especially government and concentrated commercial business.
- Preferred-dividend arrears, any cure notices or redemption demands, and the potential cash or share impact.
- Availability and terms of CEO or other financing, including related-party terms and potential shareholder dilution.
- The filing’s cash-flow statement reports $55 of cash provided by operations; the MD&A narrative calls the same amount “net cash used.”