NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
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.
As of December 31, 2020, we had cash and
cash equivalents of approximately $16,704,000, up from approximately $3,334,000 as of December 31, 2019. We generated a net loss
of $6,518,000 for the year ended December 31, 2020 compared to a net income of $4,465,000 for the year ended December 31, 2019.
Based on the current forecast for the year 2021, we believe that we will have sufficient cash resources to finance our operations
and expected capital expenditures through March 31, 2022. As of October 24, 2019, our funding available terminated under an unsecured
revolving promissory note to borrow up to $3,700,000 from G. Ward Paxton, the Company’s former Chief Executive Officer (the
“CEO Note”). Our management will be assessing whether to replace this borrowing base and assessing what terms may be
available to the Company, including whether any such terms available are acceptable to the Company, if at all (the “Potential
Replacement Facility”). Any equity or debt financings, if available at all, may be on terms which are not favorable to us
and, in the case of equity financings, may result in dilution to our stockholders. We expect to fund our operations through anticipated
Company profits, possibly additional investments of private equity and debt, which, if we are able to obtain, will have the effect
of diluting our existing common stockholders, perhaps significantly, and a possible Potential Replacement Facility. If our operations
do not generate positive cash flow in the upcoming year, or if we are not able to obtain additional debt or equity financing on
terms and conditions acceptable to us, if at all, we may be unable to implement our business plan, fund our liquidity needs or
even continue our operations.
2. Summary of Significant Accounting Policies
Principles of Consolidation
Our consolidated financial statements include
our accounts and those of our wholly owned subsidiaries, and are prepared in accordance with accounting principles generally accepted
in the United States of America. Intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and all highly liquid investments purchased
with an original maturity of less than three months are considered to be cash and cash equivalents. As of December 31, 2020, the
Company had approximately $16,204,000 of uninsured cash balances in excess of Federal Depository Insurance Company limits.
Risk Concentration
Financial instruments, which potentially
subject us to concentrations of credit risk, are primarily cash and cash equivalents, investments and accounts receivable. Cash
and cash equivalent deposits are at risk to the extent that they exceed Federal Deposit Insurance Corporation insured amounts.
To minimize risk, we place our investments in U.S. government obligations, corporate securities and money market funds. Substantially
all of our cash, cash equivalents and investments are maintained with two major U.S. financial institutions. We do not believe
that we are subject to any unusual financial risk with our banking arrangements. We have not experienced any significant losses
on our cash and cash equivalents.
We sell our products to customers primarily
in the United States. In the future, we may sale our products internationally. Fluctuations in currency exchange rates and adverse
economic developments in foreign countries could adversely affect the Company’s operating results. We perform ongoing credit
evaluations of our customers’ financial condition and generally require no collateral. We maintain reserves for potential
credit losses, and such losses, in the aggregate, have historically been minimal.
Accounts Receivable and
Allowance for Doubtful Accounts
Trade accounts receivable are stated at the amount we
expect to collect. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers
to make required payments. Management considers the following factors when determining the collectability of specific customer
accounts: customer creditworthiness, past transaction history with the customer, current economic industry trends, and changes
in customer payment terms. If the financial condition of our customers were to deteriorate, adversely affecting their ability to
make payments, additional allowances would be required. Based on management’s assessment, we provide for estimated uncollectible
amounts through a charge to earnings and an increase to a valuation allowance. Balances that remain outstanding after we have used
reasonable collection efforts are written off through a charge to the valuation allowance. There was no allowance at December 31,
2020 and 2019.
Property and Equipment
Equipment and furniture and fixtures are
stated at cost less accumulated depreciation and depreciated on a straight-line basis over the estimated useful lives of the assets.
Such lives vary from 1 to 5 years. Leasehold improvements are stated at cost less accumulated amortization and are amortized on
a straight-line basis over the shorter of estimated useful lives of the assets or the remaining terms of the leases. Such lives
vary from 2 to 5 years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment
are capitalized. Repair and maintenance costs are expensed as incurred. Depreciation and amortization expense totaled approximately
$231,000 and $184,000 for the years ended December 31, 2020 and 2019, respectively.
Advertising Expenses
The cost of advertising is expensed as incurred
or deferred until first use of advertising and expensed ratably over the applicable periods. Advertising expense was $1.3 million
and $10,000 for 2020 and 2019, respectively. The increase in 2020 was primarily due to the Company’s establishing a Marketing
department and allocating a dedicated budget for marketing, advertising, promotion, and public relations.
Long-Lived Assets
We review long-lived assets, including property
and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
future undiscounted cash flows to be generated by the asset. If the carrying value exceeds the future undiscounted cash flows,
the assets are written down to fair value. During the years ended December 31, 2020 and 2019, there was no impairment of long-lived
assets.
Foreign Currency
All assets and liabilities in the balance
sheets of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at year-end exchange rates.
All revenues and expenses in the statement of operations of these foreign subsidiaries are translated at average exchange rates
for the year. Translation gains and losses are not included in determining net income but are shown in accumulated other comprehensive
loss in the stockholders’ deficit section of the consolidated balance sheet. Foreign currency transaction gains and losses
are included in determining net loss and were not significant.
Accounting for Stock Options
We account for stock options using the guidance
in Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 718. FASB ASC Topic 718
requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements
based on their fair values.
Stock-based compensation expense recognized
in the statements of operations for the years ended 2020 and 2019 is based on awards ultimately expected to vest, reduced by estimated
forfeitures. FASB ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.
Valuation Assumptions
The fair values of option awards were estimated
at the date of grant using a Black-Scholes option-pricing model with the following assumptions for fiscal years ended December 31,
2020 and 2019, respectively:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value
|
|
$
|
3.50
|
|
|
$
|
3.69
|
|
Weighted average assumptions used:
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00%
|
|
|
|
0.00%
|
|
Risk-free interest rate
|
|
|
0.41%
|
|
|
|
2.00%
|
|
Expected volatility
|
|
|
75.70%
|
|
|
|
124.58%
|
|
Expected life (in years)
|
|
|
5.93
|
|
|
|
5.00
|
|
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.
Net Income (Loss) Per Share
We report two separate net income (loss)
per share numbers, basic and diluted. Basic net income (loss) attributable to common stockholders per share is computed by dividing
net income (loss) attributable to common stockholders for the year by the weighted average number of common shares outstanding
for the year. Diluted net income (loss) attributable to common stockholders per share is computed by dividing the net income (loss)
attributable to common stockholders for the year by the weighted average number of common shares and dilutive common stock equivalents
outstanding for the year. Our common stock equivalents include all common stock issuable upon conversion of convertible preferred
stock and the exercise of outstanding options. Common stock equivalents are included in the diluted income (loss) per share for
the years ended December 31, 2020 and 2019 except in cases where the issuance would be anti-dilutive. The aggregate number
of common stock equivalents excluded from the diluted income (loss) per share calculation for the years ended December 31,
2020 and 2019 totaled 976,284 and 30,630 respectively.
Revenue Recognition
We generally recognize product revenue upon
shipment or after meeting certain performance obligations. These products can include hardware, perpetual software licenses and
data sets. Data set updates are the majority of our sales. We do not currently offer software on a subscription basis. 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:
|
i)
|
identify the contract with a customer;
|
|
ii)
|
identify the performance obligations in the contract;
|
|
iii)
|
determine the transaction price;
|
|
iv)
|
allocate the transaction price to the separate performance obligations; and
|
|
v)
|
recognize revenue upon satisfaction of a performance obligation.
|
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 of our 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.
Research and Development
Costs
We incur research and development costs
that relate primarily to the development of new security software, appliances and integrated solutions, and major enhancements
to existing services and products. Research and development costs are comprised primarily of salaries and related benefits expenses,
contract labor and prototype and other related expenses.
Software development costs are included
in research and development and are expensed as incurred. FASB ASC Topic 985 Software requires that software development
costs incurred subsequent to reaching technological feasibility be capitalized, if material. If the process of developing a new
product or major enhancement does not include a detailed program design, technological feasibility is determined only after completion
of a working model. To date, the period between achieving technological feasibility and the general availability of such software
has been short, and the software development costs qualifying for capitalization have been insignificant.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Estimates are used for, but not limited to, the accounting for doubtful accounts,
sales discounts, sales returns, revenue recognition, warranty costs, inventory obsolescence, depreciation, income taxes and stock
based compensation. Actual results could differ from these estimates.
Fair Value of Financial Instruments
We calculate the fair value of our assets
and liabilities which qualify as financial instruments and include additional information in the notes to consolidated financial
statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of
accounts receivable, accounts payable and accrued expenses, and dividends payable approximate their carrying amounts due to the
relatively short maturity of these instruments. Financing leases and PPP loan approximate fair value as they bear market rates
of interest. None of these instruments are held for trading purposes.
Income Taxes
Deferred income taxes are determined using
the liability method in accordance with FASB ASC 740, Accounting for Income Taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined
that it is more likely than not that some portion of the deferred tax asset will not be realized.
FASB ASC 740 creates a single model to address
accounting for uncertainty in tax positions by prescribing a minimum recognition threshold that a tax position is required to meet
before being recognized in the financial statements. FASB ASC 740 also provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure and transition. There are no unrecognized tax benefits to disclose
in the notes to the consolidated financial statements.
We file income tax returns in the United
States federal jurisdiction. At December 31, 2020, tax returns related to fiscal years ended December 31, 2017 through
December 31, 2019 remain open to possible examination by the tax authorities. No tax returns are currently under examination
by any tax authorities.
Recent Accounting Pronouncements
On January 1, 2019 we adopted ASU No. 2016-02,
Leases (topic 842). At the date of adoption there was no impact on the statement of operations, while the balance sheet
reflects recording both assets and liabilities applicable to the operating right-of-use asset lease identified. ASU No. 2016-02
did not have a material effect on the Company’s results of operations or cash flows for the year ended December 31, 2019.
3. Accrued Expenses (in thousands)
Accrued expenses are made up of the following
as of December 31:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Accrued payroll
|
|
$
|
228
|
|
|
$
|
193
|
|
Accrued vacation
|
|
|
278
|
|
|
|
311
|
|
Accrued bonus
|
|
|
–
|
|
|
|
245
|
|
Employee benefits payable
|
|
|
31
|
|
|
|
–
|
|
Other
|
|
|
91
|
|
|
|
79
|
|
|
|
$
|
628
|
|
|
$
|
828
|
|
4. Commitments and Contingencies
Right-of-use Asset and Leasing Liabilities
Under the new lease accounting standard,
we have determined that we have leases for right-of-use (ROU) assets. We have both finance 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, TX, Allen, TX and San Marcos, CA.
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 of the 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 eleven months as of December 31, 2020. The San Marcos operating lease liability has a life of three months as of December
31, 2020. The adoption of the lease accounting standard resulted in the recognition of an operating ROU asset of $1,580 thousand
and a related lease liability of $1,771 thousand on January 1, 2019. The Plano operating lease liability has a life of two years
and nine months as of December 31, 2020 and had an initial recognition of an operating ROU asset and related lease liability of
$225 thousand during the year ended December 31, 2020. The Allen operating lease liability has a life of four years and ten months
as of December 31, 2020 and had an initial recognition of an operating ROU asset and related lease liability of $824 thousand during
the year ended December 31, 2020.
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 SVB's prime rate.
Supplemental cash flow information includes
operating cash flows related to operating leases. For the years ended December 31, 2020 and 2019, the Company had approximately
$380,000 and $294,000, respectively, in operating cash flows related to operating leases.
Lease Abandonment
Because of the breach of contract mentioned
in the following Legal Proceedings section, management decided to abandon our offices subject to the Richardson ROU operating lease.
The final move out of employees, applicable furnishings and server datacenter was in early December 2020. We have applied the abandonment
guidance in ASC 360-10-35. We believe “abandonment” means ceasing to use the underlying asset and lacking either the
intent or the ability to sublease the underlying asset. Accordingly, lease abandonment charges incurred for this ROU asset for
the year ended December 31, 2020 totaled $1.1 million.
Schedule of Items Appearing on the Statement of Operations:
|
|
Year Ended
|
|
|
|
December 30, 2020
|
|
|
December 31, 2019
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
Amortization expense – Finance ROU
|
|
|
43
|
|
|
|
59
|
|
Lease expense – Operating ROU
|
|
|
380
|
|
|
|
433
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Interest expense – Finance ROU
|
|
|
2
|
|
|
|
4
|
|
Future minimum lease obligations consisted of the following
at December 31, 2020 (in thousands):
|
|
Operating
|
|
|
Finance
|
|
|
|
|
Period ending December 31,
|
|
ROU Leases
|
|
|
ROU Leases
|
|
|
Total
|
|
2021
|
|
$
|
584
|
|
|
$
|
21
|
|
|
$
|
605
|
|
2022
|
|
|
644
|
|
|
|
–
|
|
|
|
644
|
|
2023
|
|
|
640
|
|
|
|
–
|
|
|
|
640
|
|
2024
|
|
|
549
|
|
|
|
–
|
|
|
|
549
|
|
2025
|
|
|
167
|
|
|
|
–
|
|
|
|
167
|
|
|
|
$
|
2,584
|
|
|
$
|
21
|
|
|
$
|
2,605
|
|
Less Interest*
|
|
|
(230
|
)
|
|
|
–
|
|
|
|
|
|
|
|
$
|
2,354
|
|
|
$
|
21
|
|
|
|
|
|
*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.
Legal Proceedings
On February 16, 2021, Intrusion Inc.
instituted legal proceedings in the District Court of Dallas County, Texas, 14th Judicial District against Purple Plaza
LLC, the landlord for the facilities we previously occupied in Richardson, Texas. This lawsuit claims damages for breach of contract
for, among other things, failure to maintain and repair the leased facilities and to provide adequate heating, air conditioning,
and ventilation on the premises, resulting in a constructive eviction. Intrusion is seeking damages in excess of $1,000,000 together
with a declaratory judgment that any of Intrusion’s remaining obligations under the lease have terminated. The landlord filed
a general denial on March 5, 2021.
In addition to this pending litigation,
we are subject to various other legal proceedings and claims that may arise in the ordinary course of business. We do not believe
that any claims exist where the outcome of such matters would have a material adverse effect on our consolidated financial position,
operating results or cash flows. However, there can be no assurance such legal proceedings will not have a material impact on future
results.
We are not aware of any material claims
outstanding or pending against Intrusion Inc. at December 31, 2020.
5. Employee Benefit Plan
Employee 401(k) Plan
We have a plan known as the Intrusion Inc.
401(k) Savings Plan (the “Plan”) to provide retirement and incidental benefits for our employees. The Plan covers
substantially all employees who meet minimum age and service requirements. As allowed under Section 401(k) of the Internal
Revenue Code, the Plan provides tax deferred salary deductions for eligible employees.
Employees may contribute from 1% to 25%
of their annual compensation to the Plan, limited to a maximum amount as set by the Internal Revenue Service. Participants who
are over the age of 50 may contribute an additional amount of their salary per year, as defined annually by the Internal Revenue
Service. We match employee contributions at the rate of $0.25 per each $1.00 of contribution on the first 4% of compensation. Matching
contributions to the Plan were approximately $36,000 and $32,000, respectively, for the years ended December 31, 2020 and
2019.
6. PPP 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 December 31, 2020,
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 December 31, 2020, the balance of the PPP Loan was $629,000,
along with $4,000 in accrued interest. We have submitted the PPP Loan Forgiveness Application and expect full forgiveness as we
have met all stated requirements.
7. Borrowings from Officer
On February 8, 2018, the Company entered
into an unsecured revolving promissory note to borrow up to $3,700,000 from G. Ward Paxton, the Company’s former Chief Executive
Officer (the “CEO Note”). Under the terms of the CEO Note, the Company had the ability to borrow, repay and reborrow
on the loan as needed up to an outstanding principal balance due of $3,700,000 at any given time through March 2020.
On February 7, 2019, the Company amended
the unsecured revolving promissory note to borrow up to $2,700,000 from G. Ward Paxton, the Company’s former Chief Executive
Officer. Amounts borrowed under the CEO Note accrued interest at a floating rate per annum equal to Silicon Valley Bank’s
(“SVB”) prime rate plus 1%. Under the terms of the note, the Company had the ability to borrow, repay and reborrow
on the loan as needed up to an outstanding principal balance due of $2,700,000 at any given time through March 2021. We reduced
our borrowing under this note to zero as of May 2019.
As of October 24, 2019, G. Ward Paxton passed
away, terminating the CEO Note with the result that future borrowings thereunder will no longer be available to the Company. Our
management will be assessing whether to replace this borrowing base and assessing what terms may be available to the Company, including
whether any such terms are acceptable to the Company, if at all.
8. Income Taxes
Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of our deferred tax assets (liabilities) as of December 31, 2020
and 2019 are as follows (in thousands):
|
|
December 31
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
19,965
|
|
|
$
|
18,771
|
|
Net operating loss carryforwards of foreign subsidiaries
|
|
|
374
|
|
|
|
374
|
|
Depreciation expense
|
|
|
(99
|
)
|
|
|
(77
|
)
|
Stock-based compensation expense
|
|
|
53
|
|
|
|
36
|
|
Other
|
|
|
304
|
|
|
|
68
|
|
Net deferred tax assets
|
|
|
20,597
|
|
|
|
19,172
|
|
Valuation allowance for net deferred tax assets
|
|
|
(20,597
|
)
|
|
|
(19,172
|
)
|
Net deferred tax assets, net of allowance
|
|
$
|
–
|
|
|
$
|
–
|
|
Deferred tax assets are required to be reduced
by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Realization of the future benefits related to the deferred tax assets is dependent on many factors, including the Company’s
ability to generate taxable income within the near to medium term. Management has considered these factors in determining the valuation
allowance for 2020 and 2019.
The differences between the provision for
income taxes and income taxes computed using the federal statutory rate for the years ended December 31, 2020 and 2019 are
as follows (in thousands):
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Reconciliation of income tax benefit to statutory rate:
|
|
|
|
|
|
|
|
|
Income benefit at statutory rate
|
|
$
|
(1,369
|
)
|
|
$
|
938
|
|
State income taxes (benefit), net of federal income tax benefit
|
|
|
(121
|
)
|
|
|
1,066
|
|
Permanent differences
|
|
|
60
|
|
|
|
10
|
|
Change in valuation allowance
|
|
|
1,425
|
|
|
|
(2,030
|
)
|
Other
|
|
|
5
|
|
|
|
16
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
At December 31, 2020, we had federal
net operating loss carryforwards of approximately $86.9 million for income tax purposes that begin to expire in 2022 and are subject
to the ownership change limitations under Internal Revenue Code Section 382.
9. Stock Options
At December 31, 2020, we had two stock-based
compensation plans, which are described below. These plans were developed to retain and attract key employees and directors.
On March 17, 2005, the Board approved
the 2005 Stock Incentive Plan (the “2005 Plan”), which was approved by the stockholders on June 14, 2005. The
2005 Plan provided for the issuance of up to 750,000 shares of common stock upon exercise of options granted pursuant to the 2005
Plan. On May 30, 2007, the stockholders approved an Amendment to the 2005 Plan that increased this amount by 750,000 for a
total of 1,500,000 shares of common stock that may be issued upon the exercise of options granted pursuant to the 2005 Plan. On
May 29, 2008 and May 21, 2009, the stockholders approved an increase of 500,000 shares, respectively, of common stock
that may be issued pursuant to the 2005 Plan for a total of 2,500,000 shares. On May 20, 2010, the stockholders approved an
additional increase of 500,000 shares of common stock that may be issued pursuant to the 2005 Plan for a total of 3,000,000 shares.
On May 19, 2011, the stockholders approved an additional increase of 400,000 shares of common stock that may be issued pursuant
to the 2005 Plan for a total of 3,400,000 shares. Finally, on May 17, 2012, the stockholders approved an additional increase
of 300,000 shares of common stock that may be issued pursuant to the 2005 Plan for a total of 3,700,000 shares. At December 31,
2020, 1,861,335 had been exercised and options to purchase a total of 526,000 shares of common stock were outstanding. A total
of 3,892,000 options had been granted under the 2005 Plan, of which 1,504,665 have been cancelled. The 2005 Plan expired on June
14, 2015, and no options remain for grant.
On March 19, 2015, the Board approved
the 2015 Stock Incentive Plan (the “2015 Plan”), which was approved by the stockholders on May 14, 2015. The 2015
Plan serves as a replacement for the 2005 Plan which expired by its terms on June 14, 2015. The approval of the 2015 Plan
had no effect on the 2005 Plan or any options granted pursuant to the plan. All options will continue with their existing terms
and will be subject to the 2005 Plan. Further, the Company will not be able to re-issue any option which is cancelled or terminated
under the 2005 Plan. The 2015 Plan provided for the issuance of up to 600,000 shares of common stock upon exercise of options granted
pursuant to the 2015 Plan.
The 2015 Plan consists of three separate
equity incentive programs: the Discretionary Option Grant Program; the Stock Issuance Program; and the Automatic Option Grant Program
for non-employee Board members. Officers and employees, non-employee Board members and independent contractors are eligible to
participate in the Discretionary Option Grant and Stock Issuance Programs. Participation in the Automatic Option Grant Program
is limited to non-employee members of the Board. Each non-employee Board member will receive an option grant for 10,000 shares
of common stock upon initial election or appointment to the Board, provided that such individual has not previously been employed
by the Company in the preceding three (3) months. In addition, on the date of each annual stockholders meeting, each Board
member will automatically be granted an option to purchase 10,000 shares of common stock, provided he or she has served as a non-employee
Board member for at least three months. At December 31, 2020, 45,000 options had been exercised and options to purchase a
total of 509,000 shares of common stock were outstanding. A total of 557,000 options had been granted under the 2015 Plan, 3,000
options have been cancelled, and options for 46,000 shares remained available for future grant. No shares have been issued
pursuant to the Stock Issuance Program.
Common shares reserved for future issuance,
including outstanding options and options available for future grant under all of the stock option plans totaled 1,081,000 shares
at December 31, 2020 as follows, in thousands:
(In thousands)
|
|
Common Shares
Reserved for Future
Issuance
|
|
|
|
|
|
2015 Plan
|
|
|
555
|
|
2005 Plan
|
|
|
526
|
|
Total
|
|
|
1,081
|
|
The Compensation Committee of our Board
of Directors determines for all employee options, the term of each option, option exercise price within limits set forth in the
plans, number of shares for which each option is granted and the rate at which each option is exercisable (generally ratably over
one, three or five years from grant date). However, the exercise price of any incentive stock option may not be less than the fair
market value of the shares on the date granted (or less than 110% of the fair market value in the case of optionees holding more
than 10% of our voting stock of the Company), and the term cannot exceed ten years (five years for incentive stock options granted
to holders of more than 10% of our voting stock).
Stock Incentive Plan Summary
A summary of our stock option activity and
related information for the years ended December 31, 2020 and 2019 is as follows:
|
|
2020
|
|
|
2019
|
|
|
|
Number of
Options (in
thousands)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Options (in
thousands)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
975
|
|
|
$
|
0.96
|
|
|
|
1,235
|
|
|
$
|
0.83
|
|
Granted at price = market value
|
|
|
403
|
|
|
|
5.56
|
|
|
|
34
|
|
|
|
4.40
|
|
Granted at price > market value
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
(343
|
)
|
|
|
0.61
|
|
|
|
(294
|
)
|
|
|
0.81
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,035
|
|
|
$
|
2.87
|
|
|
|
975
|
|
|
$
|
0.96
|
|
Options exercisable at end of year
|
|
|
601
|
|
|
$
|
1.03
|
|
|
|
917
|
|
|
$
|
0.84
|
|
Stock Options Outstanding and Exercisable
Information related to stock options outstanding
at December 31, 2020, is summarized below:
|
|
|
Options Outstanding
|
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
|
Outstanding at
12/31/20 (in
thousands)
|
|
|
|
Weighted
Average
Remaining
Contractual Life (years)
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
Exercisable at
12/31/20 (in
thousands)
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.40 - $1.00
|
|
|
411
|
|
|
|
1.66
|
|
|
$
|
0.58
|
|
|
|
411
|
|
|
$
|
0.58
|
|
$1.01 - 2.00
|
|
|
140
|
|
|
|
3.83
|
|
|
|
1.69
|
|
|
|
132
|
|
|
|
1.72
|
|
$2.01 - 4.25
|
|
|
71
|
|
|
|
5.54
|
|
|
|
2.89
|
|
|
|
55
|
|
|
|
2.50
|
|
$4.26 - $8.72
|
|
|
413
|
|
|
|
9.46
|
|
|
|
5.54
|
|
|
|
3
|
|
|
|
4.75
|
|
|
|
|
1,035
|
|
|
|
5.33
|
|
|
$
|
2.87
|
|
|
|
601
|
|
|
$
|
1.03
|
|
Summarized information about outstanding
stock options as of December 31, 2020, that are fully vested and those that are expected to vest in the future as well as
stock options that are fully vested and currently exercisable, are as follows:
|
Outstanding Stock
Options (Fully Vested
and Expected to Vest)*
|
|
|
Options that are
Exercisable
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
Number of outstanding options (in thousands)
|
|
|
987
|
|
|
|
601
|
|
Weighted average remaining contractual life
|
|
|
5.14
|
|
|
|
2.41
|
|
Weighted average exercise price per share
|
|
$
|
2.76
|
|
|
|
$1.03
|
|
Intrinsic value (in thousands)
|
|
$
|
14,670
|
|
|
|
$9,976
|
|
* Includes effects of expected forfeitures
|
As of December 31, 2020, the total
unrecognized compensation cost related to non-vested options not yet recognized in the statement of operations totaled approximately
$1,023 thousand (including expected forfeitures) and the weighted average period over which these awards are expected to vest was
2.30 years.
10. Secondary Public
Offering of Common Stock
In October of 2020, the Company completed
a secondary public offering of 3,565,000 shares of common stock at a price to the public of $8.00 per share, including 2,000,000
shares of common stock to be issued and sold by Intrusion and 1,100,000 shares of common stock to be offered by the group of selling
shareholders, together with 465,000 shares purchased when the underwriter exercised its option to purchase all of the available
shares under the underwriter’s overallotment option (the “Secondary Public Offering”). Gross proceeds of the
offering to the company, before deducting underwriting discounts, commissions and estimated offering expenses, were approximately
$19,720,000. Net proceeds to Intrusion of approximately $18,171,000 are intended to fund several growth initiatives, including
the commercialization of its new Intrusion Shield solutions designed for the enterprise market.
On October 9, 2020 and in connection with
the closing of our Secondary Public Offering, our stock began trading on the Nasdaq Capital Market (“Nasdaq”) under
the symbol “INTZ”.
11. Preferred Stock
In August 2020, all current shares of issued
and outstanding preferred stock were voluntarily converted, resulting in the issuance of a total of 1,004,249 newly issued shares
of the Company’s common stock. The addition of these newly issued shares has resulted in the dilution of each share of issued
and outstanding common stock by a factor of 7.28% at that date.
Dividends Payable
During the year ended December 31,
2020, we accrued $30,000 in dividends to the holders of our 5% Preferred Stock, $32,000 in dividends to the holders of our Series 2
5% Preferred Stock and $17,000 in dividends to the holders of our Series 3 5% Preferred Stock. We paid these in full in August
2020, at the same time as the voluntary conversion of all preferred stocks.
As of December 31, 2019, we had $20,000
in accrued and unpaid dividends included in other current liabilities. We paid these in full during the year ended December 31,
2020.
12. Concentrations
Our operations are concentrated in one area—security
software/entity identification. Sales to the U.S. Government through direct and indirect channels totaled 86.3% of total revenues
for 2020 and 87.4% of total revenues for 2019. During 2020 approximately 76.5% of total revenues were attributable to three government
customers. During 2019 approximately 68.1% of total revenues are attributable to three government customers. One individual government
customer at December 31, 2020 and three at December 31, 2019 exceeded 10% of total accounts receivable balance at respective year
ends, comprising 52.8% and 78.8% of the respective total accounts receivable balance. During 2020 no commercial customer exceeded
10.0% of total revenues, and during 2019, 10.4% of total revenues were attributable to one commercial customer. Only one individual
commercial customer at December 31, 2020 and 2019 exceeded 10% of total accounts receivable balance. 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.
13. Contract Assets and Contract Liabilities
Contract assets represent contract billings
for sales per contracts with customers and are classified as current. Our contract assets include our accounts receivables. For
the year ended December 31, 2020, the Company had contract assets balance of $1,233,000, a decrease of $333,000 from the prior
year due to cash receipts exceeding new contract assets. For the year ended December 31, 2019, the Company had contract assets
balance of $1,566,000.
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. For the year ended December 31, 2020, the Company had contract liabilities balance of $177,000.
For the year ended December 31, 2019, the Company had contract liabilities balance of $516,000.
14. 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.