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, over the next
12 months. 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. The shelf registration
became effective on August 16, 2021. As of September 30, 2021, the Company received net proceeds in the amount of $4.8 million net of
fees from the sale of its common stock related to this program.
Management believes that
this plan may continue to provide the Company with the financing required to continue as a going concern; however, the Company can offer
no assurances that this at-the-market program will continue to generate the proceeds necessary to finance future operating needs. Accordingly,
the Company is currently evaluating a variety of other potential funding and longer-term strategic options.
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 nine-month period ended September 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 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 nine months ended September
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 September 30, 2021
|
|
|
27,540
|
|
|
$
|
12.71
|
|
The
Company recognized compensation expense related to its RSAs of $88,000
and $130,000,
respectively, during the three- and nine-month periods ended September 30, 2021. As of September 30, 2021, there was $220,000
of unrecognized compensation cost related to
unvested RSAs. This amount is expected to be recognized over a weighted-average period of eight months.
During
the nine-month period ended September 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
nine-month period ended September 30, 2021.
During
the nine months ended September 30, 2021, the Company granted 65,000 stock options under its 2015 Stock Incentive Plan (the “2015
Plan”). The Company did not grant any options under the 2015 Plan during the three months ended September 30, 2021. The Company
did not grant any options under its 2005 Stock Incentive Plan (the “2005 Plan”) during the three- and nine-month periods
ended September 30, 2021. During the three- and nine-month periods ended September 30, 2020, the Company granted 10,000
and 333,000,
respectively, of stock options under these plans to employees or directors.
During
the three-month periods ended September 30, 2021 and 2020, 53,500
(24,000
under the 2015 Plan and 29,500
under the 2005 Plan) and 133,000
(30,000
under the 2015 Plan and 103,000
under the 2005 Plan) options were exercised,
respectively. During the nine-month periods ended September 30, 2021, and 2020, 256,727
(25,000
under the 2015 Plan and 231,727
under the 2005 Plan) and 319,600
(45,000
under the 2015 Plan and 274,600
under the 2005 Plan) options were exercised,
respectively. With recent employee resignations, terminations, and departures, a number of unexercised and unvested options were forfeited
resulting in an addition of 420,333
(270,333 under the 2015 Plan and 150,000 under
the 2021 Omnibus Incentive Plan) and 505,333
(305,333 under the 2015 Plan and 200,000 under the 2021 Omnibus Incentive Plan) option
shares during the three and nine months ended September 30, 2021, respectively, that are now available for re-granting under each respective
plan.
During
the nine months ended September 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 outside directors 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 nine-month period ended September
30, 2021.
The
following table summarizes the activities for the Company’s stock options for the nine months ended September 30, 2021:
Schedule of stock option
activities
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2021
|
|
|
|
|
Number
of
Options
|
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding at beginning of year
|
|
|
1,035,000
|
|
|
$
|
2.87
|
|
Granted
|
|
|
545,000
|
|
|
|
14.00
|
|
Exercised
|
|
|
(256,727)
|
|
|
|
0.97
|
|
Forfeited
|
|
|
(505,333)
|
|
|
|
9.29
|
|
Cancelled
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
(90,000)
|
|
|
|
2.12
|
|
Outstanding at September 30, 2021
|
|
|
727,940
|
|
|
$
|
7.49
|
|
Options exercisable at September 30, 2021
|
|
|
349,610
|
|
|
|
1.64
|
|
The
Company recognized compensation (benefit) expense related to its stock option awards of ($26,000)
and $100,000,
for the three months ended September 30, 2021, and 2020, respectively, and $943,000 and
$174,000,
for the nine months ended September 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
September
30,
2021
|
|
For
Three
Months Ended
September
30, 2020
|
|
For
Nine
Months Ended
September
30, 2021
|
|
For
Nine
Months Ended
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Weighted average
grant date fair value
|
$
|
–
|
|
$
|
4.98
|
|
$
|
8.99
|
|
$
|
2.86
|
|
Weighted average assumptions
used:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
dividend yield
|
|
–
|
|
|
0.0%
|
|
|
0.0%
|
|
|
0.0%
|
|
Risk-free
interest rate
|
|
–
|
|
|
0.23%
|
|
|
0.80%
|
|
|
0.42%
|
|
Expected
volatility
|
|
–
|
|
|
70.85%
|
|
|
81.81%
|
|
|
76.85%
|
|
Expected
life (in years)
|
|
–
|
|
|
5.0
|
|
|
5.0
|
|
|
6.1
|
|
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 typically requires payment in advance on some of its smaller
sized customers 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 provided to the Company’s customers for a fixed
monthly subscription fee include:
|
·
|
Access to Intrusion’s proprietary software and database to detect and
prevent unauthorized access to its clients’ information networks;
|
|
·
|
Use of all software, associated media, printed materials, data, files, online
documentation, and any equipment that Intrusion provides for customers to access the INTRUSION Shield; and
|
|
·
|
Tech support, post contract customer support (PCS) includes daily program
releases or corrections provided by Intrusion without additional charge.
|
The
contract provided for no other services, and our customers have no rebates or return rights, nor are any such rights anticipated to be
offered as part of this service.
The
Company satisfies its performance obligation when the Shield solution is available to detect and prevent unauthorized access
to a client’s information networks. Revenue should be recognized monthly over the term of the contract. The Company’s standard
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 September 30, 2021, and December 30, 2020, the Company had accounts receivable balance of $1,048,000
and $1,233,000,
respectively. Accounts receivable is net of $26,000
of allowance of doubtful accounts as of September
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 September 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 nine months ended September 30, 2021, and the year
ended December 31, 2020 (in thousands):
Schedule of contract liability
|
|
|
|
|
|
|
|
|
|
|
September
30, 2021
|
|
|
December
31, 2020
|
|
Balance at beginning of period
|
|
$
|
177
|
|
|
$
|
516
|
|
Additions
|
|
|
1,750
|
|
|
|
353
|
|
Revenue recognized
|
|
|
(1,105
|
)
|
|
|
(692
|
)
|
Balance at end of period
|
|
$
|
822
|
|
|
$
|
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
September 30, 2021, and 2020 are 917,472
and 1,071,952,
respectively. The aggregate number of common stock equivalents excluded from the diluted loss per share calculation for the nine-month
periods ended September 30, 2021, and 2020 are 978,977
and 960,933,
respectively. Since the Company is in a net loss position for the three- and nine-month periods ended September 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 69.14%
of total revenues attributable to five government customers and 92.3%
of total revenues attributable to four government customers for the nine-month periods ended September 30, 2021, and 2020, respectively.
One individual commercial customer during the nine months ended September 30, 2021, individually accounted for over 10.0% of total revenues and during the three months ended September 30, 2021, two individual commercial
customers accounted for revenues that were individually over 10.0% of total revenues. During the three and nine months ended September 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.
Class Action Litigation
On April 16, 2021, a purported
class action lawsuit was filed in the United States District Court, Eastern District of Texas, Sherman Division, captioned Celeste v.
Intrusion Inc. et al., Case No. 4:21-cv-00307 (E.D.Tex) against the Company, the Company’s chief financial officer, and former chief
executive officer alleging, among other things, that the defendants made false and/or misleading statements or omissions about the Company’s
business, operations, and prospects in violation of Section 10(b) of The Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and Rule 10b-5 promulgated thereunder, as well as Section 20(a) of the Exchange Act. The Celeste lawsuit claims compensatory
damages and legal fees.
On May 14, 2021, a related
purported class action lawsuit was filed in the United States District Court, Eastern District of Texas, Sherman Division, captioned Neely
v. Intrusion Inc., et al., Case No. 4:12-cv-00374 (E.D. Tex.) against the Company, the Company’s chief financial officer, and former
chief executive officer. The Neely lawsuit alleges the same violations under the federal securities laws as those alleged in the Celeste
lawsuit. The Neely lawsuit also seeks compensatory damages and legal fees. A motion to consolidate the two lawsuits and appoint a lead
plaintiff is pending before the court. The Company believes the claims in the lawsuits are without merit and intends to defend itself
vigorously.
The Company is unable to predict
the ultimate outcome and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from any unfavorable
outcome of the Class Action Litigation.
Securities Investigation
On August 8, 2021, the Company
received a notification from the Securities and Exchange Commission, Division of Enforcement, that it was conducting an investigation
captioned In the Matter of Intrusion Inc. and requesting the Company produce certain documents and information. On November 9, 2021, the
Securities and Exchange Commission served a subpoena on the Company in connection with this investigation which formally requested substantially
similar information as in the prior request. The Company is continuing to comply with the requests and is cooperating in the investigation.
The Company can offer no assurances as to the outcome of this investigation or its potential effect on the Company or its results of operations.
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 copy machines. 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 was modified during the three months ended September 30, 2021, to
add an additional floor of office space and terminate the prior lease. The modified lease has a life of two years and one month as
of September 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 one month as of September 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 two months as of
September 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 September 30, 2021, and 2020,
the Company had $79,000 and
$92,000,
respectively, in lease payments related to operating leases. For the nine months ended September 30, 2021, and 2020, the Company had
$200,000 and
$271,000,
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
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
2021
|
|
|
September
30,
2020
|
|
|
September
30,
2021
|
|
|
September
30,
2020
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense – Finance ROU
|
|
$
|
111
|
|
|
$
|
11
|
|
|
$
|
144
|
|
|
$
|
32
|
|
Lease expense – Operating
ROU
|
|
$
|
66
|
|
|
$
|
82
|
|
|
$
|
252
|
|
|
$
|
248
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense –
Finance ROU
|
|
$
|
8
|
|
|
$
|
–
|
|
|
$
|
9
|
|
|
$
|
2
|
|
Future
minimum lease obligations consisted of the following as of September 30, 2021 (in thousands):
Future minimum lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Finance
|
|
|
|
|
|
|
ROU
Leases
|
|
|
ROU
Leases
|
|
|
Total
|
|
Remaining 2021
|
|
$
|
410
|
|
|
$
|
8
|
|
|
$
|
418
|
|
2022
|
|
|
704
|
|
|
|
618
|
|
|
|
1,322
|
|
2023
|
|
|
705
|
|
|
|
618
|
|
|
|
1,323
|
|
2024
|
|
|
486
|
|
|
|
9
|
|
|
|
495
|
|
2025
|
|
|
115
|
|
|
|
1
|
|
|
|
116
|
|
Thereafter
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
2,420
|
|
|
$
|
1,254
|
|
|
$
|
3,674
|
|
Less Interest*
|
|
|
(148
|
)
|
|
|
(52
|
)
|
|
|
|
|
|
|
$
|
2,272
|
|
|
$
|
1,202
|
|
|
|
|
|
*
|
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 during the nine months ended September
30, 2021.
On November 9, 2021, the Securities
and Exchange Commission served a subpoena on the Company in connection with its August 8, 2021, investigation notification, formally requesting
substantially similar information as in its prior request on August 8, 2021.
On November 11, 2021, the
Company announced the appointment of Mr. Tony Scott as the Company’s President and Chief Executive Officer, effective November 15,
2021. The Company will be providing additional details regarding this appointment in a current report on Form 8-K on or before November
17, 2021.
Management
has evaluated subsequent events through November 12, 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.