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, 2021, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 18,
2022. 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 the condensed 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 notes payable approximate fair value as
they bear market rates of interest. None of these instruments are held for trading purposes.
As of June 30, 2022, we had
cash and cash equivalents of $7.0 million, compared to $4.1 million as of December 31, 2021. We generated a net loss of $8.1 million for
the six-months ended June 30, 2022, compared to a net loss of $8.9 million for the six-months ended June 30, 2021. Under our at-the-market
offering, since January 1, 2022, we have received proceeds of $1.2 million net of fees from the sale of our common stock related to this
program. On March 10, 2022, we entered into a debt securities agreement that provides $10.0 million in funds through two separate fundings
throughout 2022 and have received $9.3 million in net proceeds under this agreement through June 30, 2022. We will continue to streamline
our sales and marketing departments to better align expenses with revenue and build the customer base for our new INTRUSION Shield
product. 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.
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 2021 Omnibus Incentive Plan provides 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, 2022, the Company granted 131,580 new Restricted Stock Awards (RSAs) under the 2021 Omnibus Incentive Plan,
compared to 27,540 similar awards in the same periods in 2021. The Company recognized $0.1 million of compensation expense related to
its RSAs during the three month periods ended June 30, 2022, and 2021, respectively. The Company recognized $0.3 million and $0.1 million
in compensation expense related to its RSAs during the six month periods ended June 30, 2022, and 2021, respectively. As of June 30, 2022,
there was $0.5 million unrecognized compensation cost related to unvested RSAs compared to $0.3 million of unrecognized compensation cost
related to unvested RSAs as of June 30, 2021.
During the three months ended March 31, 2022,
the Company granted 167,500 stock options under its 2015 Stock Incentive Plan (“2015 Plan”). The Company granted no options
under the 2015 Plan during the three months ended June 30, 2022, or the three and six month periods ended June 30, 2021. The Company issued
no options under its 2005 Stock Incentive Plan (the “2005 Plan”) during the three and six month periods ended June 30, 2022,
and 2021, respectively. During the three and six month periods ended June 30, 2022, the Company issued no options under the 2021 Omnibus
Incentive Plan compared to 480,000 options granted under this plan during the three and six month periods ended June 30, 2021.
During the six months
ended June 30, 2022, 96,500
stock options were exercised under the 2005 and 2015 Plans compared to 203,227
stock options were exercised in the six months ended June 30, 2021. During the three months ended June 30, 2022 and 2021, 5,000 and 6,000
stock options were exercised under the 2005 and 2015 Plans, respectively.
The following table summarizes
the activities for the Company’s stock options for the six months ended June 30, 2022:
Schedule of stock option activities | |
| | |
| |
| |
June 30, 2022 | |
| |
Number of Options | | |
Weighted-Average Exercise Price | |
Outstanding at beginning of year | |
| 617,273 | | |
$ | 6.47 | |
Granted | |
| 167,500 | | |
| 3.64 | |
Exercised | |
| (96,000 | ) | |
| 0.68 | |
Forfeited | |
| (123,334 | ) | |
| 7.50 | |
Expired | |
| (4,334 | ) | |
| 9.26 | |
Outstanding at June 30, 2022 | |
| 561,105 | | |
$ | 6.23 | |
Options exercisable at June 30, 2022 | |
| 293,270 | | |
$ | 4.73 | |
The Company recognized compensation
expense related to its stock option awards of $0.4 million and $0.6 million, for the three and six month periods ended June 30, 2022,
compared to $0.8 million and $1.0 million for the three and six month periods ended June 30, 2021. As of June 30, 2022, the total unrecognized
compensation cost related to non-vested options not yet recognized in the condensed consolidated statement of operations totaled $0.8
million compared to a $5.1 million in the same period ending 2021.
Valuation Assumptions
The fair values of employee
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, 2022 | | |
For Three Months Ended June 30, 2021 | | |
For Six Months Ended June 30, 2022 | | |
For Six Months Ended June 30, 2021 | |
| |
| | |
| | |
| | |
| |
Weighted average grant date fair value | |
$ | – | | |
$ | 8.33 | | |
$ | 3.34 | | |
$ | 8.99 | |
Weighted average assumptions used: | |
| | | |
| | | |
| | | |
| | |
Expected dividend yield | |
| 0.0% | | |
| 0.0% | | |
| 0.0% | | |
| 0.0% | |
Risk-free interest rate | |
| 0.0% | | |
| 0.81% | | |
| 0.88% | | |
| 0.80% | |
Expected volatility | |
| 0.0% | | |
| 83.00% | | |
| 133.0% | | |
| 81.81% | |
Expected life (in years) | |
| – | | |
| 5.0 | | |
| 6.6 | | |
| 5.0 | |
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, INTRUSION Shield, Intrusion began offering software on a subscription basis. INTRUSION 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. INTRUSION 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 contracts provide 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 INTRUSION 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 is deferred and amortized into income
over the period covered by the contract.
Our accounts receivable represents
unconditional contract billings for sales per contracts with customers and are classified as current. As of June 30, 2022, and December
31, 2021, we had accounts receivable balances of $1.3 million and $1.0 million, respectively. We did not recognize an allowance for doubtful
accounts at June 30, 2022 or December 31, 2021.
We classify our contract
assets as receivables because we generally have an unconditional right to payment for our sales or services performed at the end of the
reporting period. As a result, we had no material contract assets as of June 30, 2022, and December 31, 2021.
Contract liabilities consist
of cash payments in advance of the Company satisfying performance obligations and recognizing revenue. The Company currently classifies
contract liabilities as deferred revenue.
The following table presents
changes in the Company’s contract liability during the six months ended June 30, 2022, and the year ended December 31, 2021 (in
thousands):
Schedule of contract liability | |
| | |
| |
| |
June 30, 2022 | | |
December 31, 2021 | |
Balance at beginning of period | |
$ | 560 | | |
$ | 177 | |
Additions | |
| 1,559 | | |
| 1,953 | |
Revenue recognized | |
| (805 | ) | |
| (1,570 | ) |
Balance at end of period | |
$ | 1,314 | | |
$ | 560 | |
5. |
Capitalized Software Development |
Certain development costs
related to the Company’s products during the application development stage are capitalized. Costs incurred in the preliminary stages
of development are analogous to research and development activities and are expensed as incurred. The preliminary stage includes such
activities as conceptual formulation of alternatives, evaluation of alternatives, determination of existence of needed technology, and
final selection of alternatives. Once the application development stage is reached, internal and external costs are capitalized until
the software is substantially complete and ready for its intended use. Capitalized costs are recorded as part of property and equipment,
net. Capitalized internal use software is amortized on a straight line basis over its estimated useful life, which is generally three
years, and is recorded as cost of revenue in the Condensed Consolidated Statement of Operations.
We report two separate net
loss per share numbers, basic and diluted. Basic net loss attributable to common stockholders 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 attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders for the
period 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 exercise of outstanding options and vesting of restricted stock awards. The aggregate
number of common stock equivalents excluded from the diluted loss per share calculation for the three months ended June 30, 2022, and
2021 totaled 611,473 and 1,091,927, respectively. The aggregate number of common stock equivalents excluded from the diluted loss per
share calculation for the six months ended June 30, 2022, and 2021 totaled 628,550 and 1,009,278, respectively. Since the Company is in
a net loss position for the three and six month periods ended June 30, 2022, and 2021, basic and dilutive net loss per share is the same.
Our operations are concentrated
in one area—security software/entity identification. Sales to the U.S. Government through direct and indirect channels for the three
and six month periods ended June 30, 2022, totaled $1.4 million and $2.7 million, or 65.7% and 68.8% of revenues compared to $1.3 million
and $2.6 million, or 64.4% and 69.0% of revenues, for the same periods in 2021. During the three and six month periods ended June 30,
2022, 61.6% and 65.2% of total revenues were attributable to three government customers when compared to 64.4% and 66.2% of total revenue
in the same periods of 2021. There were two individual commercial customers in the three and six month periods ended June 30, 2022, attributable
for 30.5% and 26.3% of total revenue compared to 23.1% and 21.5% of total revenue to one individual commercial customer for the same periods
in 2021. 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.
8. |
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 now-former chief financial
officer, and now-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 now-former chief financial
officer, and now-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.
On November 23, 2021,
the Court consolidated the Celeste and Neely actions, and appointed a lead plaintiff and lead plaintiff’s counsel. The lead plaintiff
filed his amended complaint on February 7, 2022. The amended complaint named the following additional parties as named defendants: Mr.
Michael Paxton, a former director and executive officer; Mr. Gary Davis, a former officer; Mr. Joe Head, our current chief technology
officer and a former director; and Mr. James Gero, a current director and chair of our compensation committee.
The parties to the
consolidated action held a mediation on April 5, 2022, at the conclusion of which the parties executed a settlement term sheet setting
forth the material terms associated with the resolution of the action. A motion for preliminary approval of the settlement and accompanying
documents were submitted to the Court on June 24, 2022. That motion remains pending with the Court. The finality of the settlement is
subject to certain terms and conditions and is also subject to preliminary and final Court approval.
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.
Lease Abandonment
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 claimed 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 sought damages in excess of
$1.0
million together with a declaratory judgment that any of Intrusion’s remaining obligations under the lease had been terminated.
Purple Plaza, LLC answered by filing a general denial, and added a counterclaim seeking alleged past due rent in the amount of
$0.2 million and
future rent allegedly exceeding $2.0
million. On May 31, 2022, all claims and counterclaims were dismissed pursuant to a confidential settlement agreement reached
between the parties.
Stockholder Derivative Claim
On June 3, 2022, a verified
stockholder derivative complaint was filed in U.S. District Court, District of Delaware by plaintiff Nathan Prawitt (the “Plaintiff
Stockholder”) on behalf of Intrusion against certain of the Company’s current and former officers and directors, including
Jack B. Blount, Michael L. Paxton, B. Franklin Byrd, P. Joe Head, Gary Davis, James F. Gero, Anthony Scott, Anthony J. LeVecchio, Katrinka
B. McCallum, Jamie M. Schnur, and Gregory K. Wilson (the “Defendants”). Plaintiff alleges that Defendants through various
actions breached their fiduciary duties, wasted corporate assets, and unjustly enriched Defendants by (a) incurring costs and expenses
in connection with the ongoing SEC investigation, (b) incurring costs and expenses to defend the Company with respect to the consolidated
class action, (c) settling class-wide liability with respect to the consolidated class action, as well as ancillary claims regarding sales
of our common stock by certain of the Defendants. The Plaintiff is seeking unspecified damages from the Defendants on behalf of the Company,
remedial actions and improvements in the Company’s corporate governance and internal control policies, restitution from certain
Defendants for proceeds from sales of the Company’s common stock, and costs and expenses for various legal and investigative costs
related to the SEC investigation and the consolidation class action settlement. While the Company is not a named defendant but a nominal
plaintiff in the stockholder derivative claim, the Company will be providing the financial and other assistance for each of the Defendants
that we are obligated to provide under our Articles of Incorporation, our Bylaws, as well as individual indemnifications agreements that
are in effect between, the Company and each of the Defendants.
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 our future
results.
9. |
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 a data service center in Allen, TX. The Plano offices operating lease liability was modified in 2021, to add an additional floor of office space and terminate the prior lease. The modified lease has a life of one year and three months as of June 30, 2022. The data service center operating lease liability has a life of three years and four months as of June 30, 2022. |
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 combine 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 agreements, 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 and six month periods ended June 30, 2022, the
Company had $0.1
million and $0.2
million respectively, in lease payments related to operating leases. For the three and six month periods ended June 30, 2021, the
Company had $0.1
million and $0.1
million respectively, in lease payments related to operating leases.
On June 30, 2022, and December
31, 2021, the weighted average remaining lease term for the Company's operating leases was 2.56 and 3.61 years, respectively. On June
30, 2022, and December 31, 2021, the weighted average remaining lease term for the Company's finance leases was 1.21 and 1.71 years, respectively.
Schedule of Items Appearing on the Condensed Consolidated Statement
of Operations (in thousands):
Lease cost table | |
| | |
| | |
| | |
| |
| |
Three Months Ended | | |
Six Months Ended | |
| |
June 30, 2022 | | |
June 30, 2021 | | |
June 30, 2022 | | |
June 30, 2021 | |
Operating expense: | |
| | | |
| | | |
| | | |
| | |
Amortization expense – Finance ROU | |
$ | 166 | | |
$ | 23 | | |
$ | 332 | | |
$ | 33 | |
Lease expense – Operating ROU | |
$ | 91 | | |
$ | 92 | | |
$ | 186 | | |
$ | 181 | |
Other expense: | |
| | | |
| | | |
| | | |
| | |
Interest expense – Finance ROU | |
$ | 15 | | |
$ | 1 | | |
$ | 22 | | |
$ | 1 | |
Future minimum lease obligations consisted of the following as
of June 30, 2022 (in thousands):
Future minimum lease obligations | |
| | |
| | |
| |
| |
Operating | | |
Finance | | |
| |
Period ending December 31, | |
ROU Leases | | |
ROU Leases | | |
Total | |
2022 | |
$ | 175 | | |
$ | 631 | | |
$ | 806 | |
2023 | |
| 308 | | |
| 663 | | |
| 971 | |
2024 | |
| 147 | | |
| 6 | | |
| 153 | |
2025 | |
| 80 | | |
| 1 | | |
| 81 | |
| |
$ | 710 | | |
$ | 1,301 | | |
$ | 2,011 | |
Less Interest* | |
| (27 | ) | |
| (25 | ) | |
| | |
| |
$ | 683 | | |
$ | 1,276 | | |
| | |
* |
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. |
On March 10, 2022, Intrusion
Inc. entered into an unsecured loan agreement with Streeterville Capital, LLC whereby the Company can draw up to $10,000,000 in two separate
tranches of $5.0 million through our issuance of two separate promissory notes of $5.4 million each, with an initial interest rate of
7%, subject to some increases in the case of, among other things, an event of default. On March 10, 2022, we received $4.6 million in
net funds from the first tranche (First Note) pursuant to a promissory note executed contemporaneously with the execution of the loan
agreement. On June 29, 2022, we received an additional $4.7 million in net funds from the second tranche (Second Note) pursuant to a promissory
note executed contemporaneously with the execution of the loan agreement. Each note has an 18-month maturity, may be prepaid subject to
varying prepayment premiums, and may be redeemed at any time after six months into the term of such note in amounts up to $0.5 million
per calendar month upon the noteholder’s election. The Company has the option, in its sole discretion, to satisfy any redemption
demands in cash or shares of its common stock that will be issued in an amount equal to the dollar amount of the redemption demand divided
by the number that represents 85% of the average of the two lowest daily volume weighted average prices of common stock over a fifteen-day
trailing period. This option to settle in shares at an 15% discount is deemed a beneficial conversion feature (“BCF”).
The loan agreement and accompanying
notes are subject to standard and customary events of default, including, without limitation, the Company’s continued listing on
the Nasdaq or New York Stock Exchange. While the notes remain outstanding, we will be subject to certain conditions and restrictions,
including, without limitation the following: the noteholder’s right to consent to any future variable rate transactions (excluding
ATMs, equity offerings, or private placements without market adjustable features) and any debt (excluding bank loans, lines of credit,
mortgagees, leases, or asset backed loans); the noteholder’s right to participate in any debt or equity financings, excluding (ATMs,
loans, lines of credit, mortgagees, leases, or asset backed loans); a prohibition on the Company’s ability to extend or enter into
any agreement restricting our ability to issue common stock under the notes; as well as a prohibition on our ability to permit any other
lender to participate alongside the noteholder via any debt financing structures.
The Company evaluated both
the First and Second Note in accordance with ASC 480 “Distinguishing Liabilities from Equity” because the promissory
note (1) embodies an unconditional obligation, (2) may require the Company to settle the unconditional obligation by issuing a variable
number of its common shares, and (3) is based solely on a fixed monetary amount known at inception.
The lender does not benefit
if the fair value of the Company’s Common Stock increases and does not bear the risk that the fair value of the Company’s
Common Stock might decrease. In accordance with ASC 480, the promissory notes will be recorded as stock settled debt on the note issue
date and the company will record interest expense over the term of the promissory note, using the interest method from ASC 835-30, to
accrete the carrying amount of the promissory note up to the redemption common stock settlement amount.
On March 10, 2022, the
Company recorded debt issue costs of $0.7
million as an offset to the promissory note to be amortized over the 18-month term associated with the First Note. On June 29, 2022,
the Company recorded debt issue costs of $0.7
million as an offset to the promissory note to be amortized over the 18-month term associated with the Second Note. As of June 30,
2022, the balance of unamortized debt issuance costs was $1.3
million. For the six month period ended June 30, 2022, the Company recorded $0.1
million for amortization of the debt discounts, related to both notes, to interest expense in the accompanying Condensed
Consolidated Statement of Operations. The effective interest rate of the notes payable including amortization of the debt issuance
costs and accretion of BCF is 38.7%.
For the three and six month
periods ended June 30, 2022, the Company recorded $0.5 and $0.6 million respectively, of interest expense in the accompanying Condensed
Consolidated Statement of Operations. The interest recorded associated with the unsecured promissory note increases the associated note
payable on the accompanying Condensed Consolidated Balance Sheet.
Under our at-the market
offering, since July 1, 2022, we have received proceeds of $0.7 million net of fees from the sale of our common stock related to the program.
On March 28, 2022, as a result of limitations under General Instruction I.B.6 of Form S-3, and in agreement in terms of the sales agreement,
the Company revised the aggregate offering price of shares of common stock to $10.0 million, which does not include issued shares having
aggregate sales price of $6.9 million, through Prospectus Supplement filing with the SEC. On July 12, 2022, Intrusion’s stock traded
at $4.33 per share, which caused the Company’s public float to exceed $75 million. As a result, the limitations under General Instruction
I.B.6 of Form S-3 were no longer applicable and the Company revised the aggregate offering price of shares of common stock to the original
$50.0 million through a Prospectus Supplement filing with the SEC. As of June 30, 2022, the Company received proceeds of $1.2 million
net of fees from the sale of common stock related to this program.