NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1.
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Description of Business
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We develop, sell and support products that protect
any-sized company or government organization by fusing advanced threat intelligence with real-time artificial intelligence to kill cyberattacks
as they occur – including Zero-Days. We market and distribute our solutions through a direct sales force and value-added resellers.
Our end-user customers include U.S. federal government entities, state and local government entities, and companies ranging in size from
mid-market to large enterprises.
References to the “Company”, “we”,
“us”, “our”, “Intrusion” or “Intrusion Inc.” refer to Intrusion Inc. and its subsidiaries.
Savant™ and TraceCop™ are registered trademarks of Intrusion Inc.
We
were organized in Texas in September 1983 and reincorporated in Delaware in October 1995. Our principal executive offices are located
at 101 East Park Boulevard, Suite 1300, Plano, Texas 75074, and our telephone number is (972) 234-6400. Our website URL is www.intrusion.com.
References to the “Company”, “we”, “us”, “our”, “Intrusion” or “Intrusion
Inc.” refer to Intrusion Inc. and its subsidiaries. TraceCop and Savant are trademarks of Intrusion Inc. We have applied for trademark
protection for our new INTRUSION Shield cybersecurity solution.
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Item 10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The December
31, 2020 balance sheet was derived from audited financial statements but does not include all the disclosures required by accounting principles
generally accepted in the United States. However, we believe that the disclosures are adequate to make the information presented not misleading.
In our opinion, all the adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been
included. The results of operations for the three-month period ended March 31, 2021 are not necessarily indicative of the results that
may be achieved for the full fiscal year or for any future period. The unaudited condensed consolidated financial statements included
herein should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form
10-K for the year ended December 31, 2020, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March
9, 2021.
The Company calculates the fair value of its assets and liabilities
which qualify as financial instruments and includes this additional information in the notes to consolidated financial statements when
the fair value is different from the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts
payable and accrued expenses approximate their carrying amounts due to the relatively short maturity of these instruments. Financing leases
and Paycheck Protection Program (“PPP”) loan approximate fair value as they bear market rates of interest. None of these instruments
are held for trading purposes.
3.
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Accounting for Stock-Based Compensation
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During the three-month period ended March 31, 2021,
the Company granted 65,000 stock options to employees. For the three-month period ended March 31, 2020, the Company did not grant any
stock options to employees or directors. The Company recognized $204,000 and $19,000, respectively, in stock-based compensation expense
for the three-month periods ended March 31, 2021 and 2020.
During the three-month period ended March 31, 2021,
197,227 options were exercised under the 2005 Plan compared to 157,600 in the previous year comparative quarter. During the three-month
period ending March 31, 2021, no options were exercised under the 2015 Plan compared to 15,000 in the previous year comparative quarter.
Valuation Assumptions
The fair values of employee and director option
awards were estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:
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For Three
Months Ended
March 31, 2021
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|
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For Three
Months Ended
March 31, 2020
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|
|
|
|
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Weighted average grant date fair value
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$
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13.88
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–
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Weighted average assumptions used:
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Expected dividend yield
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0.0
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%
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–
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Risk-free interest rate
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0.67
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%
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–
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Expected volatility
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73.00
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%
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–
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Expected life (in years)
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5.0
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–
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Expected volatility is based on historical volatility
and in part on implied volatility. The expected term considers the contractual term of the option as well as historical exercise and forfeiture
behavior. The risk-free interest rate is based on the rates in effect on the grant date for U.S. Treasury instruments with maturities
matching the relevant expected term of the award. Options granted to non-employees are valued using the fair market value on each measurement
date of the option.
We generally recognize product revenue upon shipment
or after meeting certain performance obligations. These products can include hardware, perpetual software licenses and data sets. Most
of our sales are data set updates. Warranty costs and sales returns have not been material.
We recognize sales of our data sets in accordance
with FASB ASC Topic 606 whereby revenue from contracts with customers is not recognized until all five of the following have been met:
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i)
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identify the contract with a customer;
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ii)
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identify the performance obligations in the contract;
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iii)
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determine the transaction price;
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iv)
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allocate the transaction price to the separate performance obligations; and
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v)
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recognize revenue upon satisfaction of a performance obligation.
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Data updates are typically done monthly, and revenue
will be matched accordingly. Product sales may include maintenance and customer support allocated revenue in an arrangement using estimated
selling prices of the delivered goods and services based on a selling price hierarchy using the relative selling price method. All product
offering and service offering market values are readily determined based on current and prior stand-alone sales. We may defer and recognize
maintenance, updates and support revenue over the term of the contract period, which is generally one year.
Service revenue, primarily including maintenance,
training and installation are recognized upon delivery of the service and typically are unrelated to product sales. To date, training
and installation revenue has not been material. These revenues are included in net customer support and maintenance revenues in the statement
of operations.
Our normal payment terms offered to customers,
distributors and resellers are net 30 days domestically and net 45 days internationally. We do not offer payment terms that extend beyond
one year and rarely do we extend payment terms beyond our normal terms. If certain customers do not meet our credit standards, we do require
payment in advance to limit our credit exposure.
Shipping and handling costs are billed to the customer
and included in product revenue. Shipping and handling expenses are included in cost of product revenue. We have elected to account for
shipping and handling costs as fulfillment costs after the customer obtains control of the goods.
With our newest product, Shield, Intrusion began
offering software on a subscription basis. Shield is a hosted arrangement subject to software as a service (“SaaS”) guidance
under ASC 606. SaaS arrangements are accounted for as service obligations, not arrangements that transfer a license of IP.
We use the five-step process, mentioned above,
per FASB ASC Topic 606 to recognize sales. We will follow that directive, also, to define revenue items as individual and distinct. Shield
services include:
·
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Intrusion’s proprietary software
and database to detect and prevent unauthorized access to its clients’ information networks.
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·
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All software, associated media,
printed materials, data, files, online documentation, and any equipment that Intrusion provides for customers to access the Intrusion
Shield.
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·
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Tech support, post contract customer
support (PCS) includes daily program releases or corrections provided by Intrusion without additional charge.
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·
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The contract provides for no other
services – no setup fees, consulting, training, or maintenance.
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The contract price is stated at $20 per authorized
user per month. There are no rebates or return rights, nor are any anticipated. The contract does not provide a renewal rate. Intrusion
anticipates that upon renewal the contract rates will remain the same.
Intrusion satisfies its performance obligation
when the Shield solution is available to detect and prevent unauthorized access to its client’s information networks. Revenue should
be recognized monthly over the term of the contract. Shield contracts can range from a 1-month term to 3-years. Initial contract terms
of 1 year or 3 years automatically renew unless notice is given 30 days before renewal, and there is no early termination for convenience.
Upfront payment of fees should be deferred and amortized into income over the period covered by the contract.
Contract assets represent contract billings for
sales per contracts with customers and are classified as current. Our contract assets include our accounts receivables. On March 31, 2021,
the Company had contract assets balance of $1,305,000. At December 31, 2020, the Company had contract assets balance of $1,233,000.
Contract liabilities consist of cash payments in
advance of the Company satisfying performance obligations and recognizing revenue. The Company currently classifies deferred revenue as
a contract liability. At March 31, 2021, the Company had contract liabilities balance of $146,000 At December 31, 2020, the Company had
contract liabilities balance of $177,000.
Basic net loss per share is computed by dividing
net loss attributable to common stockholders for the period by the weighted average number of common shares outstanding for the period.
Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of
common shares and dilutive common stock equivalents outstanding for the period. Our common stock equivalents include all common stock
issuable upon conversion of preferred stock and the exercise of outstanding options and warrants. The aggregate number of common stock
equivalents excluded from the diluted loss per share calculation for the three-month periods ending March 31, 2021 and 2020 are 925,711
and 1,876,352, respectively.
Our operations are concentrated in one area—security
software/entity identification. Sales to the U.S. Government through direct and indirect channels totaled 73.9% of total revenues for
the first quarter of 2021 compared to 71.4% of total revenues for the first quarter of 2020. During the first quarter of 2021, approximately
68.1% of total revenues were attributable to three government customers compared to the first quarter of 2020, approximately 70.0% of
total revenues were attributable to three government customers. There was one individual commercial customer in the first quarter of 2021
attributable for 19.8% of total revenue compared to 22.0% of total revenue to one individual commercial customer for the same period in
2020. Our similar product and service offerings are not viewed as individual segments, as our management analyzes the business as a whole
and expenses are not allocated to each product offering.
7.
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Commitments and Contingencies
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We are subject from time to time to various legal
proceedings and claims that arise during the ordinary course of our business. We do not believe that the outcome of those "routine"
legal matters should have a material adverse effect on our consolidated financial position, operating results, or cash flows; however,
we can provide no assurances that legal claims that may arise in the future will not have such a material impact on the Company.
8.
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Right-of-use Asset and Leasing Liabilities
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Under the new lease accounting standard, we have
determined that we have leases for right-of-use (ROU) assets. We have both finances right-of-use assets and operating right-of-use assets
with a related lease liability. Our finance lease right-of-use assets consist of computer hardware and a copying machine. Our operating
lease right-of-use assets include our rental agreements for our offices in Plano, and San Marcos, CA, and our data service center in Allen,
TX. Both types of lease liabilities are determined by the net present value of total payments and are amortized over the life of the lease.
Both types of lease obligations are designed to terminate with the last scheduled payment. All finance lease right-of-use assets have
a three-year life and are in various stages of completion. The Richardson operating lease liability has a life of three years and eight
months as of March 31, 2021, however, the corresponding right-of-use asset was impaired to $0 due to our abandonment of the lease as of December
31, 2020. The San Marcos operating lease liability terminated on March 31, 2021. The data service center operating lease liability has
a life of four years and seven months as of March 31, 2021. The Plano executive offices operating lease liability has a life of two years
and six months as of March 31, 2021. The Plano two additional offices operating lease liability had an initial recognition of an operating
ROU asset and related lease liability of $31 thousand during the three months ended March 31, 2021. The Plano two additional offices lease
liability has a life of two years and six months as of March 31, 2021,
Additional qualitative and quantitative disclosures
regarding the Company's leasing arrangements are also required. The Company adopted ASC 842 prospectively and elected the package of transition
practical expedients that does not require reassessment of: (1) whether any existing or expired contracts are or contain leases, (2) lease
classification and (3) initial direct costs. In addition, the Company has elected other available practical expedients to not separate
lease and non-lease components, which consist principally of common area maintenance charges, for all classes of underlying assets and
to exclude leases with an initial term of 12 months or less.
As the implicit rate is not readily determinable
for the Company's lease agreement, the Company uses an estimated incremental borrowing rate to determine the initial present value of
lease payments. This discount rate for the lease approximates Silicon Valley Bank's prime rate.
Supplemental cash flow information includes operating
cash flows related to operating leases. For the three months ended March 31, 2021 and 2020, the Company had $69,000 and $88,000 respectively,
in lease payments related to operating leases.
Schedule of Items Appearing on the Statement of Operations:
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Three Months Ended
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March 31, 2021
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March 31, 2020
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Operating expense:
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Amortization Expense – Finance ROU
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$
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10
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$
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10
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Lease expense – Operating ROU
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88
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83
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Other expense:
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Interest Expense – Finance ROU
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1
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1
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Future minimum lease obligations consisted of the following
at March 31, 2021 (in thousands):
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Operating
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Finance
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Period ending March 31,
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ROU Leases
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ROU Leases
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Total
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2022
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$
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688
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|
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$
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11
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|
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$
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699
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2023
|
|
|
662
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|
|
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–
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|
|
662
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2024
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|
|
628
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|
|
|
–
|
|
|
|
628
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2024
|
|
|
454
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|
|
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–
|
|
|
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454
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Thereafter
|
|
|
117
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|
|
|
–
|
|
|
|
117
|
|
|
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$
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2,549
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|
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$
|
11
|
|
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$
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2,560
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Less Interest*
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(205
|
)
|
|
|
–
|
|
|
|
|
|
|
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$
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2,344
|
|
|
$
|
11
|
|
|
|
|
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*Interest is imputed for operating ROU
leases and classified as lease expense and is included in operating expenses in the accompanying condensed consolidated statement of operations.
10. Coronavirus Outbreak in the United States
A significant concentration of our federal, state,
and local governmental customers were forced to allocate scarce and competing resources and balance budgetary demands placed upon them
as a result of the effects of the coronavirus, mandatory quarantines, decreased travel, interruptions in workforce populations, scarcity
of commodities, and similar economic and operational effects of the virus upon their own constituencies. These adverse effects resulted
in decreased demand by many of our customers for our product offerings and cybersecurity solutions, negatively affecting historic revenue
levels for the Company.
11. SBA Paycheck Protection Program Loan
On March 27, 2020, the U.S. federal government
enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which includes provision for a Paycheck Protection
Program (“PPP”) administered by the U.S. Small Business Administration (“SBA”). The PPP allows qualifying businesses
to borrow up to $10 million calculated based on qualifying payroll costs. The loan is guaranteed by the federal government and does not
require collateral. On April 30, 2020 we entered into a PPP Loan with Silicon Valley Bank, pursuant to the PPP under CARES for $629,000.
The PPP Loan matures on April 30, 2022 and bears interest at a rate of 1.0% per annum. The PPP Loan funds were received on April
30, 2020. The PPP Loan contains events of default and other provisions customary for a loan of this type. The PPP provides that (1) the
use of PPP Loan amount shall be limited to certain qualifying expenses, (2) 100 percent of the principal amount of the loan is guaranteed
by the SBA and (3) an amount up to the full principal amount plus accrued interest may qualify for loan forgiveness in accordance with
the terms of CARES. As of March 31, 2021, the Company was in full compliance with all covenants with respect to the PPP Loan. The
Company expects to use the full proceeds of the PPP loan in accordance with the provisions of CARES. As of March 31, 2021, the balance
of the PPP Loan was $635,000, which includes $5.8 thousand in accrued interest. We submitted the PPP Loan Forgiveness Application, and
on April 7, 2021, the Company received notice from the SBA that the PPP loan and accrued interest was forgiven in full.