Intrusion Inc. — FY 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011; comparisons are with FY 2010. This filing reports annual results, not standalone fourth-quarter results. Intrusion develops and sells network security, identity discovery, data-mining, and information-compliance products, including TraceCop, Savant, Compliance Commander, and SecureNet.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $5.348 million | $5.588 million |
| Gross profit / margin | $3.291 million / 61.5% | $3.528 million / 63.1% |
| Operating income (loss) | ($749,000) | $220,000 |
| Net income (loss) | ($933,000) | $226,000 |
| Net income (loss) attributable to common stockholders | ($1.084 million) | $90,000 |
| Net cash from (used in) operating activities | ($1.539 million) | $1.270 million |
| Cash and cash equivalents at year-end | $308,000 | $540,000 |
| Working capital | ($123,000) approximately | ($688,000) approximately |
Revenue declined 4.3%. Product revenue was $5.192 million, down 3.5%; support and maintenance revenue fell 23.9% to $156,000, primarily from expired SecureNet maintenance contracts. Gross margin contracted 1.6 percentage points. Sales and marketing expense rose to $1.383 million from $921,000, R&D to $1.555 million from $1.395 million, and general and administrative expense to $1.102 million from $992,000. Interest expense was $66,000 versus $41,000. The income-tax provision was zero in both years because deferred tax assets were fully valuation-allowed.
Liquidity, debt, and capital
- Operating cash use was driven in part by the $886,000 reduction in deferred revenue and an $258,000 increase in receivables. Financing provided $1.336 million, principally from $1.3 million of officer borrowings.
- At year-end, the company owed its CEO $1.530 million, plus $54,000 accrued interest, and had $80,000 drawn on its SVB line. The officer loan bears interest at SVB prime plus 1% (5% at year-end) and is due March 2013 under the disclosed terms.
- The SVB facility was reduced to a $625,000 receivables-based line; $115,000 was available at year-end. It is secured by substantially all company assets, including intellectual property, and was scheduled to terminate June 25, 2012. Covenants include liquidity and rolling-EBITDA requirements.
- A February 2012 unsecured CEO revolving note permits borrowing up to $2.2 million through March 2013. The filing reports $670,000 available under this note at year-end.
- Accrued preferred dividends were $123,000 at year-end; $151,000 was accrued during 2011. Lease obligations totaled $518,000, including $377,000 of operating leases and $141,000 of capital leases.
- Stockholders’ deficit was $1.459 million. Outstanding preferred stock, options, and possible preferred-stock redemption/conversion create dilution risk.
Outlook, commentary, and material risks
Management said it expected revenue and net income to grow in coming quarters and believed available cash, credit, and CEO financing would fund operations and expected capital spending for the next 12 months. This outlook depends on projections; the company cautioned that absent positive operating cash flow or acceptable additional financing, it might be unable to fund its needs or continue operations. Management aims to offset weaker SecureNet sales with TraceCop and Savant growth, but acknowledged that newer products have limited market acceptance and operate in competitive markets. It expected sales and marketing, R&D, and administrative spending to rise as revenue levels increase.
- U.S. government sales were 38.4% of revenue in 2011, down from 60.3% in 2010. Three government customers represented 34.2% of 2011 revenue. The notes separately state that one commercial customer exceeded 58% of 2011 revenue; this concentration disclosure merits verification.
- Government contracts can be delayed, reduced, canceled, or affected by budget and appropriation changes. A substantial portion of sales also comes through indirect channels, although the channel share fell to 39.3% in 2011 from 61.0% in 2010.
- Liquidity is constrained by operating cash burn, preferred dividends, debt covenants, and dependence on CEO financing. Potential preferred conversions or redemptions and future financing could materially dilute common shareholders.
- Other stated risks include intense competition, long sales cycles, product acceptance and technology risks, customer concentration, intellectual-property protection, and possible product defects. Ordinary-course legal matters were disclosed; management did not believe any pending claim at year-end would materially affect the company.
- The independent auditor gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness.
Key facts investors should verify
- Whether the reported 58%-plus commercial-customer concentration is accurate and how it relates to the government-customer disclosures.
- Actual borrowing availability and terms under the CEO note, and repayment or refinancing of the SVB facility due in June 2012.
- Subsequent cash flows, deferred-revenue trends, and progress toward the stated 12-month funding outlook.
- Whether TraceCop and Savant sales can replace declining SecureNet-related revenue and support a return to profitability.
- Preferred dividend arrears, redemption/conversion rights, and the resulting potential dilution to common shareholders.