The accompanying notes are an integral part of these condensed consolidated
financial statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1.
|
Description of Business
|
Intrusion, Inc. (together with its consolidated
subsidiaries, the “Company”, Intrusion”, “Intrusion Inc.”, “we”, “us”, “our”,
or similar terms) was 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 1200, Plano, Texas 75074, and our telephone number is (972) 234-6400. Our website URL is
www.intrusion.com.
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.
TraceCop “(TraceCop™”)
and Savant (“Savant™”) are registered trademarks of Intrusion Inc. We have applied for trademark
protection for our new INTRUSION Shield cybersecurity solution.
The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with Generally Accepted Accounting Principles in the United States
of America (“GAAP”) 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 the information and disclosures required by GAAP for complete financial statements. All adjustments
that, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods have been
made and are of a recurring nature unless otherwise disclosed herein. The results of operations for such interim periods are not necessarily
indicative of results of operations for a full year. These condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and accompanying notes 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. All significant intercompany balances
and transactions have been eliminated in consolidation.
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.
In July 2021, the Company determined that the
combination of increased expenses primarily related with management’s accelerated increase in staffing its sales and administrative
resources together with decreased revenue expectations related to its INTRUSION Shield offering has created significant
concerns about the Company’s ability to meet its current and short-term cash-flow and liquidity needs. In recognition of this determination,
the Company has been actively considering strategic alternatives for the funding and implementation of its long-term business plan. For
example, the Company has engaged B. Riley Securities, Inc. to act as sales agent under its at-the-market program, which allows the Company
to potentially sell up to $50.0 million of its common stock on a delayed or continuous basis through the use of a shelf-registration statement
on Form S-3, which the Company initially filed on August 5, 2021. Management believes that this plan provides an opportunity for the Company
to continue as a going concern; however, the Company can offer no assurances that the shelf registration will be declared effective or
whether the Company will be able to raise any amounts under this at-the-market program or under such shelf-registration statement generally.
The Company is also evaluating other potential funding and longer-term strategic options. However, these evaluations are still in the
early stages.
3.
|
Accounting for Stock-Based Compensation
|
The Company accounts for stock-based compensation
in accordance with ASC 718, Compensation – Stock Compensation, which requires that compensation related to all stock-based
awards be recognized in the condensed consolidated financial statements. Stock-based compensation cost is valued at fair value at the
date of grant, and the grant date fair value is recognized as expense over each award’s requisite service period with a corresponding
increase to equity or liability based on the terms of each award and the appropriate accounting treatment under ASC 718.
During 2021, the Company added a new incentive
plan (the “2021 Omnibus Incentive Plan”). The purpose of the 2021 Omnibus Incentive Plan is to provide a means through which
the Company may attract and retain key personnel and to provide a means whereby directors, officers, employees, consultants and advisors
of the Company can acquire and maintain an equity interest in the Company, or be paid incentive compensation, including incentive compensation
measured by reference to the value of common stock, thereby strengthening their commitment to the welfare of the Company and aligning
their interests with those of the Company’s stockholders.
The aggregate number of shares of Common Stock
that may be issued or used for reference purposes or with respect to which Awards may be granted under the 2021 Omnibus Incentive Plan
shall not exceed 2,500,000 shares and is subject to any increase or decrease, which shares may be either authorized and unissued Common
Stock or Common Stock held in or acquired for the treasury of the Company or both.
During the three- and six-month periods ended
June 30, 2021, the Company issued new Restricted Stock Awards (RSAs) under the 2021 Omnibus Incentive Plan in the amount of $70,000 in
value of restricted stock to each of the Company’s outside directors, with a valuation to be based on the closing price of the Company’s
common stock on the Nasdaq Capital Market (the “Outside Director Awards”). Accordingly, 27,540 shares were granted and are
expected to fully vest in one year, on the anniversary of the grant date.
The following table summarizes
the activities for the Company’s unvested RSAs in Intrusion Inc. stock for the six months ended June 30, 2021:
Schedule of RSA activity
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted Stock Units
|
|
|
|
|
Number of Shares
|
|
|
|
Weighted-Average Grant-Date Fair Value
|
|
Unvested as of December 31, 2020
|
|
|
–
|
|
|
$
|
–
|
|
Granted
|
|
|
27,540
|
|
|
|
12.71
|
|
Vested
|
|
|
–
|
|
|
|
–
|
|
Forfeited/canceled
|
|
|
–
|
|
|
|
–
|
|
Unvested as of June 30, 2021
|
|
|
27,540
|
|
|
$
|
12.71
|
|
The Company recognized
compensation expense related to its RSAs of $41,000
during the three- and six-month periods ended June 30, 2021. As of June 30, 2021, there was $309,000
of unrecognized compensation cost related to unvested RSAs. This amount is expected to be recognized over a weighted-average period
of one year.
During the three- and six-month periods ended June 30, 2021, the Company also granted new option awards under the 2021 Omnibus Incentive Plan to its employees with the option price for each option set at the closing price for the Company’s Common Stock on the Nasdaq Capital Market on the grant date (the “May 2021 Option Awards”). Accordingly, 480,000 options were granted under this plan during the three and six months ended June 30, 2021.
The Company did not grantf any options under its
2005 Stock Incentive Plan (the “2005 Plan”) or 2015 Stock Incentive Plan (the “2015 Plan”) during the three-month
period ended June 30, 2021 but granted 323,000 stock options under these plans during the three-month period ended June 30, 2020 to employees
or directors.
During the three-month periods ended June 30,
2021, and 2020, 5,000 and 14,000 options were exercised under the 2005 Plan, respectively, and 202,227 and 186,600 options, were exercised
under the same plan during the six-month periods ended June 30, 2021, and 2020, respectively.
During the three- and six-month periods ended
June 30, 2021, 1,000 options were exercised under the 2015 Plan and no options were exercised under this same Plan during the three- and
six-month periods ended June 30, 2020.
During the six months ended June 30, 2021, the
Board of Directors (“Board”) approved a new clause to the 2015 Plan, to accelerate the vesting of any unvested equity grants
held by members of the Board upon their retirement from the Board. Pursuant to the approval of the acceleration clause, during the second
quarter of 2021, the equity awards held by two outside board members who retired from the Board in May 2021 became fully vested. The Company
accounts for the acceleration of the related stock options as a modification of the option award under ASC 718. Accordingly, the Company
recognized incremental stock compensation expense of approximately $237,000 during the three- and six-month periods ended June 30, 2021.
The Company recognized compensation expense related
to its stock option awards of $765,000 and $55,000, for the three months ended June 30, 2021, and 2020, respectively, and $969,000 and
$74,000, for the six months ended June 30, 2021, and 2020, respectively.
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:
Valuation assumptions for stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Three Months Ended
June 30, 2021
|
|
|
For Three Months Ended
June 30, 2020
|
|
|
For Six Months
Ended
June 30, 2021
|
|
|
For Six Months
Ended
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value
|
|
$
|
8.33
|
|
|
$
|
2.80
|
|
|
$
|
8.99
|
|
|
$
|
2.80
|
|
Weighted average assumptions used:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.0%
|
|
|
|
0.0%
|
|
|
|
0.0%
|
|
|
|
0.0%
|
|
Risk-free interest rate
|
|
|
0.81%
|
|
|
|
0.43%
|
|
|
|
0.80%
|
|
|
|
0.43%
|
|
Expected volatility
|
|
|
83.00%
|
|
|
|
76.00%
|
|
|
|
81.81%
|
|
|
|
76.00%
|
|
Expected life (in years)
|
|
|
5.0
|
|
|
|
6.2
|
|
|
|
5.0
|
|
|
|
6.2
|
|
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.
The Company generally recognizes product revenue
upon shipment or after meeting certain performance obligations. These products can include hardware, perpetual software licenses and data
sets. Most of the Company’s sales are data set updates. Warranty costs and sales returns have not been material.
The Company recognizes sales of its data sets
in accordance with FASB ASC Topic 606 whereby revenue from contracts with customers are recognized once the criteria under the five steps
below have been met:
|
i)
|
identification of the contract with a customer;
|
|
ii)
|
identification of the performance obligations in the contract;
|
|
iii)
|
determination of the transaction price;
|
|
iv)
|
allocation of the transaction price to each separate performance obligations; and
|
|
v)
|
recognition of revenue upon satisfaction of a performance obligation.
|
Data updates are typically done monthly, and revenue
is 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. The Company may defer
and recognize maintenance, updates and support revenue over the term of the contract period, which is generally one year.
Normal payment terms offered to customers, distributors
and resellers are net 30 days domestically and net 45 days internationally. The Company does not offer payment terms that extend beyond
one year and rarely does it extend payment terms beyond its normal terms. If certain customers do not meet the Company’s credit
standards, the Company requires payment in advance to limit its credit exposure.
Shipping and handling costs are billed to the
customer and included in revenue. Shipping and handling expenses are included in cost of revenue. The Company has elected to account for
shipping and handling costs as fulfillment costs after the customer obtains control of the goods.
With the Company’s
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.
The Company utilizes the
five-step process, mentioned above, per FASB ASC Topic 606 to recognize sales and will follow that directive, also, to define revenue
items as individual and distinct. Shield services include:
·
|
|
Intrusion’s proprietary software and database to detect and prevent unauthorized access to its clients’ information networks.
|
·
|
|
All software, associated media, printed materials, data, files, online documentation, and any equipment that Intrusion provides for customers to access the INTRUSION Shield.
|
·
|
|
Tech support, post contract customer support (PCS) includes daily program releases or corrections provided by Intrusion without additional charge.
|
·
|
|
The contract provides for no other services – no setup fees, consulting, training, or maintenance.
|
The contract price is a stated fee per month.
There are no rebates or return rights, nor are any anticipated.
The Company 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. Initial contract terms automatically renew
unless notice is given 30 days before renewal. Upfront payment of fees are deferred and amortized into income over the period covered
by the contract.
The Company’s accounts receivable represents
unconditional contract billings for sales per contracts with customers and are classified as current. As of June 30, 2021, and December
30, 2020, the Company had accounts receivable balance of $1,668,000 and $1,233,000, respectively. Accounts receivable is net of $26,000
of allowance of doubtful accounts as of June 30, 2021. The Company did not recognize an allowance for doubtful accounts as of December
31, 2020.
The Company had no material contract assets as
of June 30, 2021 and December 31, 2020.
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.
The following table presents
changes in the Company’s contract liability during the six months ended June 30, 2021 and the year ended December 31, 2020 (in
thousands):
Schedule of contract liability
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Balance at beginning of period
|
|
$
|
177
|
|
|
$
|
516
|
|
Additions
|
|
|
1,658
|
|
|
|
353
|
|
Revenue recognized
|
|
|
(665
|
)
|
|
|
(692
|
)
|
Balance at end of period
|
|
$
|
1,170
|
|
|
$
|
177
|
|
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 June 31, 2021, and 2020 are 1,091,927
and 1,942,990, respectively. The aggregate number of common stock equivalents excluded from the diluted loss per share calculation for
the six-month periods ended June 30, 2021, and 2020 are 1,009,278 and 1,909,289, respectively. Since the Company is in a net loss position
for the three- and six-month periods ended June 30, 2021, and 2020, basic and dilutive net loss per share are the same.
The Company’s operations are concentrated
in one area—security software/entity identification. Sales to the U.S. Government through direct and indirect channels totaled 69.03%
of total revenues attributable to five government customers and 91.0% of total revenues attributable to four government customers for
the six-month periods ended June 30, 2021, and 2020, respectively. One individual commercial customer during the six months ended June
30, 2021, accounted for 21.50% of total revenues. During the six months ended June 30, 2020, no individual commercial customer accounted
for revenues that were over 10.0% of total revenues. The Company’s similar product and service offerings are not viewed as individual
segments, as its management analyzes the business as a whole and expenses are not allocated to each product offering.
7.
|
Commitments and Contingencies
|
The Company is periodically involved in claims
asserted in the normal course of its business. We believe these actions are routine and incidental to the business. While the outcome
of these actions cannot be predicted with certainty, we do not believe that any will have a material adverse impact on our business.
8.
|
Right-of-use Asset and Leasing Liabilities
|
The Company has operating and finance leases where
it records the right-of-use assets and a related lease liability as required under ASC 842. The lease liabilities are determined by the
net present value of total lease payments and amortized over the life of the lease. All obligations under the Company’s lease agreements
are designed to terminate with the last scheduled payment. The Company’s leases are for the following types of assets:
|
·
|
Computer hardware and copy machines- The Company’s finance
lease right-of-use assets consist of computer hardware and a copying machine. These leases have a three-year life and are in various stages
of completion.
|
|
·
|
Office space - The Company’s operating lease right-of-use
assets include its rental agreements for its offices in Plano, TX, and San Marcos, CA, and a data service center in Allen, TX. The Plano
offices operating lease liability has a life of two years and three months as of June 30, 2021. 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 four months as of June 30,
2021. The Company also has an operating lease liability for its former corporate office in Richardson. The Richardson operating lease
liability has a life of three years and five months as of June 30, 2021; however, the related right-of-use asset was fully impaired due
to the Company’s abandonment of the lease as of 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 Silicon Valley Bank's prime rate.
Supplemental cash flow information includes operating
cash flows related to operating leases. For the three months ended June 30, 2021, and 2020, the Company had $52,000 and $91,000, respectively,
in lease payments related to operating leases. For the six months ended June 30, 2021, and 2020, the Company had $121,000 and $179,000,
respectively, in lease payments related to operating leases.
Schedule of Items Appearing on the Statement of Operations (in
thousands):
Lease cost table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense – Finance ROU
|
|
$
|
23
|
|
|
$
|
11
|
|
|
$
|
33
|
|
|
$
|
21
|
|
Lease expense – Operating ROU
|
|
$
|
92
|
|
|
$
|
82
|
|
|
$
|
181
|
|
|
$
|
165
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense – Finance ROU
|
|
$
|
1
|
|
|
$
|
–
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Future minimum lease obligations consisted of the following as
of June 30, 2021 (in thousands):
Future minimum lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Finance
|
|
|
|
|
Period ending June 30,
|
|
ROU Leases
|
|
|
ROU Leases
|
|
|
Total
|
|
2022
|
|
$
|
794
|
|
|
$
|
76
|
|
|
$
|
870
|
|
2023
|
|
|
666
|
|
|
|
74
|
|
|
|
740
|
|
2024
|
|
|
604
|
|
|
|
22
|
|
|
|
626
|
|
2025
|
|
|
359
|
|
|
|
–
|
|
|
|
359
|
|
2026
|
|
|
66
|
|
|
|
–
|
|
|
|
66
|
|
Thereafter
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
2,489
|
|
|
$
|
172
|
|
|
$
|
2,661
|
|
Less Interest*
|
|
|
(180
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
$
|
2,309
|
|
|
$
|
164
|
|
|
|
|
|
*
|
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
Our 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 revenue levels for the Company. We anticipate that our customers, will continue to budget
conservatively in the coming months, particularly as uncertainty remains about new strains and variants of the COVID-19 virus and potential
future restrictions, slow-downs, or lock-downs.
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 included provision for a Paycheck Protection
Program (“PPP”) administered by the U.S. Small Business Administration (“SBA”). The PPP allowed qualifying businesses
to borrow up to $10 million calculated based on qualifying payroll costs. The loan was guaranteed by the federal government and did not
require collateral. On April 30, 2020, the Company entered a PPP Loan with Silicon Valley Bank, pursuant to the PPP under CARES Act
for a principal amount of $629,000. The PPP Loan was to mature on April 30, 2022, and bear interest at a rate of 1.0% per annum.
The Company received the PPP Loan funds on April 30, 2020. The PPP Loan contained events of default and other provisions customary for
a loan of this type. The PPP provided that (1) the use of PPP Loan amount shall be limited to certain qualifying expenses, (2) 100% 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 Act.
The Company utilized the full proceeds of the
PPP loan in accordance with the provisions of CARES Act and submitted the PPP Loan Forgiveness Application. On April 7, 2021, the Company
received notice from the SBA that the PPP loan and accrued interest was forgiven in full. As a result, the Company recorded gain in the
extinguishment of debt of $635,000 on its condensed statement of operations as of the three and six months ended June 30,2021.
12. Subsequent Events.
On
July 19, 2021, the Company terminated the services of Jack B. Blount as the Company’s President and Chief Executive Officer. On
August 3, 2021, Mr. Blount resigned his position as member of the board of directors and executed a separation agreement. On August 5,
2021, the Board appointed Anthony J. LeVecchio, the Company’s current Executive Chairman of the Board of Directors to serve as Principal
Executive Officer as the Company conducts a search for a permanent Chief Executive Officer.
On July 29, 2021, the Company executed a planned
reduction in force resulting in the termination of approximately 20% of its employees across the organization. The reduction in force
was part of a larger effort on the Company’s part to reduce expenses and overhead as a result of the challenges the Company anticipates
in meeting its liquidity and cash-flow needs in the near term, as a result of lower than expected 2021 revenues from its newly introduced
INTRUSION Shield service offering. In connection with the reduction in force, the
Company will incur approximately $135,000 during the third quarter of 2021 related to employee-termination benefits, including expenses
for cash severance costs. The Company expects to see net costs savings of $1,200,000 during the remainder of the year related to this
reduction in force.
On August
1, 2021, the Company entered new equipment leasing agreements where it has the contractual obligation to make future minimum lease payments
of an aggregate of $1.5 million that expire at various dates through 2024.
Management
has evaluated subsequent events through August 13, 2021, the date these condensed consolidated financial statements are issued. No events
or transactions other than those already described in these condensed consolidated financial statements have occurred subsequent to the
balance sheet date that might require recognition or disclosure in the condensed consolidated financial statements.