As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

11/13/19  Intrusion Inc                     10-Q        9/30/19   41:2.2M                                   RDG Filings/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    299K 
 2: EX-31.1     Certification -- §302 - SOA'02                      HTML     21K 
 3: EX-31.2     Certification -- §302 - SOA'02                      HTML     21K 
 4: EX-32.1     Certification -- §906 - SOA'02                      HTML     17K 
32: R1          Document And Entity Information                     HTML     42K 
15: R2          Unaudited Condensed Consolidated Balance Sheets     HTML    117K 
20: R3          Unaudited Condensed Consolidated Balance Sheets     HTML     46K 
                (Parentheticals)                                                 
40: R4          Unaudited Condensed Consolidated Statements of      HTML     61K 
                Operations                                                       
31: R5          Unaudited Condensed Consolidated Statements of      HTML     47K 
                Changes In Stockholders' Equity (Deficit)                        
14: R6          Unaudited Condensed Consolidated Statements of      HTML     86K 
                Cash Flows                                                       
19: R7          Note 1 - Description of Business                    HTML     26K 
41: R8          Note 2 - Basis of Presentation                      HTML     27K 
30: R9          Note 3 - Loan Payable to Officer                    HTML     22K 
13: R10         Note 4 - Accounting for Stock-based Compensation    HTML     43K 
24: R11         Note 5 - Contract Assets and Contract Liabilities   HTML     21K 
36: R12         Note 6 - Net Income Per Share                       HTML     19K 
34: R13         Note 7 - Concentrations                             HTML     20K 
12: R14         Note 8 - Commitments and Contingencies              HTML     18K 
23: R15         Note 9 - Dividends Payable                          HTML     22K 
35: R16         Note 10 - Right-of-use Asset and Leasing            HTML     60K 
                Liabilities                                                      
33: R17         Note 4 - Accounting for Stock-based Compensation    HTML     36K 
                (Tables)                                                         
11: R18         Note 10 - Right-of-use Asset and Leasing            HTML     55K 
                Liabilities (Tables)                                             
25: R19         Note 3 - Loan Payable to Officer (Details Textual)  HTML     26K 
38: R20         Note 4 - Accounting for Stock-based Compensation    HTML     23K 
                (Details Textual)                                                
29: R21         Note 4 - Accounting for Stock-based Compensation -  HTML     29K 
                Valuation Assumptions (Details)                                  
18: R22         Note 5 - Contract Assets and Contract Liabilities   HTML     19K 
                (Details Textual)                                                
22: R23         Note 6 - Net Income Per Share (Details Textual)     HTML     16K 
37: R24         Note 7 - Concentrations (Details Textual)           HTML     30K 
28: R25         Note 9 - Dividends Payable (Details Textual)        HTML     31K 
17: R26         Note 10 - Right-of-use Asset and Leasing            HTML     20K 
                Liabilities (Details Textual)                                    
21: R27         Note 10 - Right-of-use Asset and Leasing            HTML     21K 
                Liabilities - Schedule of Items Appearing on the                 
                Statement of Operations (Details)                                
39: R28         Note 10 - Right-of-use Asset and Leasing            HTML     70K 
                Liabilities - Future Minimum Lease Obligations                   
                (Details)                                                        
27: XML         IDEA XML File -- Filing Summary                      XML     69K 
26: EXCEL       IDEA Workbook of Financial Reports                  XLSX     31K 
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to
Commission File Number 0-20191

 

INTRUSION INC.

(Exact name of registrant as specified in its charter)

 

Delaware		75-1911917
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

1101 East Arapaho Road, Suite 200, Richardson, Texas 75081

(Address of principal executive offices)

(Zip Code)

 

(972) 234-6400

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

* * * * * * * * * *

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐			Accelerated filer	☐
Non-accelerated filer	☐			Smaller reporting company	☒
Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

 

The number of shares outstanding of the Registrant’s Common Stock, $0.01 par value, on November 1, 2019 was 13,539,736.

 

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		September 30, 2019				December 31, 2018
ASSETS
Current Assets:
Cash and cash equivalents		$	2,111			$	1,652
Accounts receivable			2,704				1,967
Prepaid expenses			136				91
Total current assets			4,951				3,710
Noncurrent Assets:
Property and equipment, net			295				200
Finance leases, right-of-use assets, net			73				121
Operating lease, right-of-use assets, net			1,407				—
Other assets			38				38
Total noncurrent assets			1,813				359
TOTAL ASSETS		$	6,764			$	4,069
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued expenses		$	1,078			$	1,596
Dividends payable			32				594
Finance leases liability, current portion			43				58
Operating lease liability, current portion			277				—
Deferred revenue			643				1,004
Total current liabilities			2,073				3,252
Noncurrent Liabilities:
Loan payable to officer			—				1,815
Finance leases liability, noncurrent portion			32				64
Operating lease liability, noncurrent portion			1,389				—
Total noncurrent liabilities			1,421				1,879
Commitments and contingencies
Stockholders’ equity (deficit):
Preferred stock, $0.01 par value: Authorized shares – 5,000
Series 1 shares issued and outstanding — 200 Liquidation preference of $1,025 in 2019 and $1,213 in 2018			707				707
Series 2 shares issued and outstanding — 460 Liquidation preference of $1,155 in 2019 and $1,385 in 2018			724				724
Series 3 shares issued and outstanding — 289 Liquidation preference of $633 in 2019 and $760 in 2018			412				412
Common stock, $0.01 par value:
Authorized shares — 80,000
Issued shares — 13,550 in 2019 and 13,259 in 2018 Outstanding shares — 13,540 in 2019 and 13,249 in 2018			135				133
Common stock held in treasury, at cost – 10 shares			(362	)			(362	)
Additional paid-in capital			56,770				56,609
Accumulated deficit			(55,073	)			(59,242	)
Accumulated other comprehensive loss			(43	)			(43	)
Total stockholders’ equity (deficit)			3,270				(1,062	)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)		$	6,764			$	4,069

 

		Three Months Ended								Nine Months Ended
		September 30, 2019				September 30, 2018				September 30, 2019				September 30, 2018
Revenue		$	3,860			$	2,665			$	11,071			$	7,296
Cost of revenue			1,465				967				4,339				2,744
Gross profit			2,395				1,698				6,732				4,552
Operating expenses:
Sales and marketing			356				466				813				1,311
Research and development			297				329				775				832
General and administrative			277				243				930				828
Operating income			1,465				660				4,214				1,581
Interest expense, net			(1	)			(43	)			(45	)			(144	)
Net income		$	1,464			$	617			$	4,169			$	1,437
Preferred stock dividends accrued			(35	)			(35	)			(104	)			(104	)
Net income attributable to common stockholders		$	1,429			$	582			$	4,065			$	1,333
Net income per share attributable to common stockholders: Basic		$	0.11			$	0.04			$	0.30			$	0.10
Diluted		$	0.09			$	0.04			$	0.27			$	0.09
Weighted average common shares outstanding: Basic			13,523				13,062				13,466				13,009
Diluted			15,371				14,955				15,314				14,901

 

		Nine Months Ended
		September 30, 2019				September 30, 2018
NUMBER OF PREFERRED SHARES—ISSUED AND OUTSTANDING
Balance, beginning of year and end of nine month period			949				949
PREFERRED STOCK
Balance, beginning of year and end of nine month period		$	1,843			$	1,843
NUMBER OF COMMON SHARES—ISSUED
Balance, beginning of year			13,259				12,808
Exercise of stock options			291				322
Balance, end of nine month period			13,550				13,130
COMMON STOCK
Balance, beginning of year		$	133			$	128
Exercise of stock options			2				3
Balance, end of nine month period		$	135			$	131
TREASURY SHARES
Balance, beginning of year and end of nine month period		$	(362	)		$	(362	)
ADDITIONAL PAID-IN-CAPITAL
Balance, beginning of year		$	56,609			$	56,518
Stock-based compensation			24				16
Exercise of stock options			234				108
Preferred stock dividends declared, net of waived penalties by shareholders			(97	)			(70	)
Balance, end of nine month period		$	56,770			$	56,572
ACCUMULATED DEFICIT
Balance, beginning of year		$	(59,242	)		$	(61,529	)
Net income			4,169				1,437
Balance, end of nine month period		$	(55,073	)		$	(60,092	)
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of year and end of nine month period		$	(43	)		$	(43	)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)		$	3,270			$	(1,950	)

 

		Nine Months Ended
		September 30, 2019				September 30, 2018
Operating Activities:
Net income		$	4,169			$	1,437
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			136				96
Stock-based compensation			24				16
Penalties on dividends			6				34
Extinguishment of U.K. cumulative translation adjustment			—				65
Changes in operating assets and liabilities:
Accounts receivable			(737	)			(155	)
Inventories			—				15
Prepaid expenses and other assets			(45	)			(120	)
Operating lease, right-of-use asset			364				—
Accounts payable and accrued expenses			(621	)			191
Deferred revenue			(361	)			213
Net cash provided by operating activities			2,935				1,792
Investing Activities:
Purchases of property and equipment			(183	)			(173	)
Financing Activities:
Borrowings on loan from officer			—				150
Payments on loan from officer			(1,815	)			(1,200	)
Proceeds from stock options exercised			236				111
Payments of dividends			(667	)			—
Reduction of finance lease liability			(47	)			(51	)
Net cash used in financing activities			(2,293	)			(990	)
Net increase in cash and cash equivalents			459				629
Cash and cash equivalents at beginning of period			1,652				224
Cash and cash equivalents at end of period		$	2,111			$	853
SUPPLEMENTAL DISCLOSURE OF NON CASH OPERATING AND FINANCING ACTIVITIES:
Preferred stock dividends accrued		$	103			$	104
Purchase of leased equipment per right-of-use finance lease		$	—			$	89
Initial recognition of operating lease, right-of-use asset		$	1,771			$	—

 

1.	Description of Business

 

We develop, market and support a family of entity identification, high speed data mining and cybersecurity solutions. Our products help detect, report and mitigate cybercrimes and advanced persistent threats.

 

Our product families include:

 

●

TraceCop for entity identification, cybercrime detection and disclosure, and;

●

Savant for high speed data mining. analytics, detection, reporting and mitigation of cybersecurity threats.

 

Intrusion’s products help protect critical information assets by quickly detecting, protecting, analyzing and reporting attacks or misuse of classified, private and regulated information for government and enterprise networks.

 

We market and distribute our products through a direct sales force to:

 

●

end-users, and

●

value-added resellers.

 

Our end-user customers include:

 

●

U.S. federal government entities,

●

state and local government entities,

●

large and diverse conglomerates,

●

manufacturing entities, and

●

other customers.

 

We were organized in Texas in September 1983 and reincorporated in Delaware in October 1995. Our principal executive offices are located at 1101 East Arapaho Road, Suite 200, Richardson, Texas 75081, and our telephone number is (972) 234-6400. Our website URL is www.intrusion.com. References to the “Company”, “we”, “us”, “our”, “Intrusion” or “Intrusion Inc.” refer to Intrusion Inc. and its subsidiaries. TraceCop and Savant are trademarks of Intrusion Inc.

 

2.	Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Item 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The December 31, 2018 balance sheet was derived from audited financial statements, but does not include all the disclosures required by accounting principles generally accepted in the United States. However, we believe that the disclosures are adequate to make the information presented not misleading. In our opinion, all the adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. The results of operations for the three and nine month periods ended September 30, 2019 are not necessarily indicative of the results that may be achieved for the full fiscal year or for any future period. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2018, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 28, 2019.

 

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, and dividends payable approximate their carrying amounts due to the relatively short maturity of these instruments. Loans payable to officer are with a related party and as a result do not bear market rates of interest.  Management believes based on its current financial position that it could not obtain comparable amounts of third party financing, and as such cannot estimate the fair value of the loans payable to officer. None of these instruments are held for trading purposes.

 

On January 1, 2018 we adopted ASU No. 2014-09, Revenue from Contracts with Customers, as amended, using the modified retrospective approach. At the date of adoption there was no impact on the balance sheet or statement of operations. ASU No. 2014-09 did not have a material effect on the Company’s financial position, results of operations or cash flows for the three and nine month periods ended September 30, 2019 and 2018.

 

 

On January 1, 2019 we adopted ASU No. 2016-02, Leases (topic 842). At the date of adoption there was no impact on the statement of operations, while the balance sheet reflects recording both assets and liabilities applicable to the operating right-of-use asset lease identified. ASU No. 2016-02 did not have a material effect on the Company’s results of operations or cash flows for the three and nine month periods ended September 30, 2019.

 

3.	Loan Payable to Officer

 

On February 8, 2018, the Company entered into an unsecured revolving promissory note to borrow up to $3,700,000 from G. Ward Paxton, the Company’s Chief Executive Officer (the “CEO Note”). Under the terms of the CEO Note, the Company had the ability to borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $3,700,000 at any given time through March 2020.

 

On February 7, 2019, the Company amended the unsecured revolving promissory note to borrow up to $2,700,000 from G. Ward Paxton, the Company’s Chief Executive Officer. Under the terms of the note, the Company had the ability to borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $2,700,000 at any given time through March 2021.

 

Amounts borrowed under the CEO Note officer accrued interest at a floating rate per annum equal to Silicon Valley Bank’s (“SVB”) prime rate plus 1%. Any outstanding borrowings and accrued but unpaid interest is due on March 31, 2021. As of September 30, 2019, there were no borrowings or accrued interest outstanding

 

As of October 24, 2019. G. Ward Paxton passed away, terminating the CEO Note with the result that future borrowings thereunder will no longer be available to the Company. Our management will be assessing whether to replace this borrowing base and assessing what terms may be available to the Company, including whether any such terms are acceptable to the Company, if at all.

 

4.	Accounting for Stock-Based Compensation

 

During the three month periods ended September 30, 2019 and 2018, the Company did not grant any stock options to employees or directors. The Company recognized $10,000 and $5,000, respectively, of stock-based compensation expense for the three month periods ended September 30, 2019 and 2018. During the nine month periods ended September 30, 2019 and 2018, the Company granted 24,000 and 24,000, respectively, of stock options to employees and directors. The Company recognized $24,000 and $16,000, respectively, of stock-based compensation expense for the nine month periods ended September 30, 2019 and 2018.

 

During the three month periods ended September 30, 2019 and 2018, 10,500 and 103,500 options were exercised under the 2005 Plan, respectively. During the nine month periods ended September 30, 2019 and 2018, 291,000 and 322,500 were exercised under the 2005 Plan, 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:

 

 

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.

 

 

 

5.	Contract Assets and Contract Liabilities

 

Contract assets represent contract billings for sales per contracts with customers and are classified as current. Our contract assets include our accounts receivables. At September 30, 2019, the Company had contract assets balance of $2,704,000. At September 30, 2018, the Company had contract assets balance of $1,117,000.

 

Contract liabilities consist of cash payments in advance of the Company satisfying performance obligations and recognizing revenue. The Company currently classifies deferred revenue as a contract liability. At September 30, 2019, the Company had contract liabilities balance of $643,000. At September 30, 2018, the Company had contract liabilities balance of $619,000.

 

6.	Net Income Per Share

 

Basic net income per share is computed by dividing net income attributable to common stockholders for the period by the weighted average number of common shares outstanding for the period. Diluted net income per share is computed by dividing the net income 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. The aggregate number of common stock equivalents excluded from the diluted income per share calculation for the three month periods ended September 30, 2019 and 2018 are 0 and 149,000, respectively. The aggregate number of common stock equivalents excluded from the diluted income per share calculation for the nine month periods ended September 30, 2019 and 2018 are 4,044 and 292,044, respectively.

 

7.	Concentrations

 

Our operations are concentrated in one area—security software/entity identification. Sales to the U.S. Government through direct and indirect channels totaled 90.9% of total revenues for the third quarter of 2019 compared to 84.5% of total revenues for the third quarter of 2018. During the third quarter of 2019, approximately 75.8% of total revenues were attributable to three government customers compared to approximately 66.4% of total revenues attributable to four government customers in the third quarter of 2018. In the third quarter of 2019, no individual commercial customer had revenues over 10.0% of total revenue compared to one individual commercial customer attributable for 14.5% of total revenue for the same period in 2018. 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

 

We are subject from time to time to various legal proceedings and claims that arise during the ordinary course of our business. We do not believe that the outcome of those "routine" legal matters should have a material adverse effect on our consolidated financial position, operating results or cash flows; however, we can provide no assurances that legal claims that may arise in the future will not have such a material impact on the Company.

 

 

9.	Dividends Payable

 

During the quarter ended September 30, 2019, we accrued $13,000 in dividends payable to the holders of our 5% Preferred Stock, $14,000 in dividends payable to the holders of our Series 2 5% Preferred Stock and $8,000 in dividends payable to the holders of our Series 3 5% Preferred Stock. As of September 30, 2019, we have $32,000 in accrued and unpaid dividends.

 

Delaware law provides that we may only pay dividends out of our capital surplus or, if no surplus is available, out of our net profits for the fiscal year the dividend is declared and/or the preceding fiscal year. These dividends continue to accrue on all our outstanding shares of preferred stock, regardless of whether we are legally able to pay them. If we are unable to pay dividends on our preferred stock, we will be required to accrue an additional late fee penalty of 18% per annum on the unpaid dividends for the Series 2 Preferred Stock and Series 3 Preferred Stock. Our late CEO, our Interim CEO and current CFO, and one outside board member who are holders of our Series 2 and Series 3 Preferred Stock have waived any possible late fee penalties. In addition to this late penalty, the holders of our Series 2 Preferred Stock and Series 3 Preferred Stock could elect to present us with written notice of our failure to pay dividends as scheduled, in which case we would have 45 days to cure such a breach. In the event that we failed to cure the breach, the holders of these shares of preferred stock would then have the right to require us to redeem their shares of preferred stock for a cash amount calculated in accordance with their respective certificates of designation. If we were required to redeem all shares of Series 2 Preferred Stock and Series 3 Preferred Stock as of September 30, 2019, the aggregate redemption price we would owe would be $1.8 million.

 

 

 

10.	Right-of-use Asset and Leasing Liabilities

 

Under the new lease accounting standard, we have determined that we have leases for right-of-use (ROU) assets. We have both finance right-of-use assets and operating right-of-use assets with a related lease liability. Our finance lease right-of-use assets consist of computer hardware and a copying machine. Our operating lease right-of-use assets include our rental agreements for our offices in Richardson and San Marcos, CA. Both types of lease liabilities are determined by the net present value of total payments and are amortized over the life of the lease. Both types of lease obligations are designed to terminate with the last scheduled payment. All of the finance lease right-of-use assets have a three year life and are in various stages of completion. The Richardson operating lease liability has a life of five years and two months as of September 30, 2019. The San Marcos operating lease liability has a life of eighteen months as of September 30, 2019.

 

Additional qualitative and quantitative disclosures regarding the Company's leasing arrangements are also required. The Company adopted ASC 842 prospectively and elected the package of transition practical expedients that does not require reassessment of: (1) whether any existing or expired contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition, the Company has elected other available practical expedients to not separate lease and non-lease components, which consist principally of common area maintenance charges, for all classes of underlying assets and to exclude leases with an initial term of 12 months or less.

 

As the implicit rate is not readily determinable for the Company's lease agreement, the Company uses an estimated incremental borrowing rate to determine the initial present value of lease payments. This discount rate for the lease approximates SVB's prime rate. See the following tables for more information.

 

Schedule of Items Appearing on the Statement of Operations:

 

 

 

Future minimum lease obligations consisted of the following at September 30, 2019 (in thousands):

 

 

*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.