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 | |
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 | (I.R.S. Employer |
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, 2019July 31, 2020 was 13,539,736.13,792,030.
INTRUSION INC.
INDEX
PART I – FINANCIAL INFORMATION | |
Item 1. Financial Statements | |
Unaudited Condensed Consolidated Balance Sheets as of | 3 |
Unaudited Condensed Consolidated Statements of Operations for the three and | 4 |
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity | 5 |
Unaudited Condensed Consolidated Statements of Cash Flows for the | 6 |
Notes to Unaudited Condensed Consolidated Financial Statements | 7 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 4. Controls and Procedures | |
PART II – OTHER INFORMATION | 16 |
Item 1. Legal Proceedings | |
Item 1A. Risk Factors | |
Item 6. Exhibits | |
Signature Page |
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTRUSION INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
September 30, 2019 | December 31, | June 30, 2020 | December 31, | |||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 2,111 | $ | 1,652 | $ | 2,872 | $ | 3,334 | ||||||||
Accounts receivable | 2,704 | 1,967 | 1,067 | 1,566 | ||||||||||||
Prepaid expenses | 136 | 91 | 388 | 152 | ||||||||||||
Total current assets | 4,951 | 3,710 | 4,327 | 5,052 | ||||||||||||
Noncurrent Assets: | ||||||||||||||||
Property and equipment, net | 295 | 200 | 311 | 335 | ||||||||||||
Finance leases, right-of-use assets, net | 73 | 121 | 41 | 62 | ||||||||||||
Operating lease, right-of-use assets, net | 1,407 | — | ||||||||||||||
Operating leases, right-of-use asset, net | 1,223 | 1,348 | ||||||||||||||
Other assets | 38 | 38 | 36 | 38 | ||||||||||||
Total noncurrent assets | 1,813 | 359 | 1,611 | 1,783 | ||||||||||||
TOTAL ASSETS | $ | 6,764 | $ | 4,069 | $ | 5,938 | $ | 6,835 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Accounts payable and accrued expenses | $ | 1,078 | $ | 1,596 | $ | 1,152 | $ | 1,080 | ||||||||
Dividends payable | 32 | 594 | 19 | 20 | ||||||||||||
Finance leases liability, current portion | 43 | 58 | 38 | 43 | ||||||||||||
Operating lease liability, current portion | 277 | — | ||||||||||||||
Operating leases liability, current portion | 291 | 284 | ||||||||||||||
PPP loan payable, current portion | 285 | — | ||||||||||||||
Deferred revenue | 643 | 1,004 | 164 | 516 | ||||||||||||
Total current liabilities | 2,073 | 3,252 | 1,949 | 1,943 | ||||||||||||
Noncurrent Liabilities: | ||||||||||||||||
Loan payable to officer | — | 1,815 | ||||||||||||||
Finance leases liability, noncurrent portion | 32 | 64 | 5 | 21 | ||||||||||||
Operating lease liability, noncurrent portion | 1,389 | — | ||||||||||||||
Operating leases liability, noncurrent portion | 1,170 | 1,315 | ||||||||||||||
PPP loan payable, noncurrent portion | 345 | — | ||||||||||||||
Total noncurrent liabilities | 1,421 | 1,879 | 1,520 | 1,336 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders’ equity (deficit): | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
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 | ||||||||||||||
Series 1 shares issued and outstanding — 200 Liquidation preference of $1,012 in 2020 and $1,013 in 2019 | 707 | 707 | ||||||||||||||
Series 2 shares issued and outstanding — 420 in 2020 and 460 in 2019 Liquidation preference of $1,054 in 2020 and $1,155 in 2019 | 661 | 724 | ||||||||||||||
Series 3 shares issued and outstanding — 266 in 2020 and 289 in 2019 Liquidation preference of $583 in 2020 and $634 in 2019 | 379 | 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 | ||||||||||||||
Issued shares — 13,802 in 2020 and 13,552 in 2019 Outstanding shares — 13,792 in 2020 and 13,542 in 2019 | 138 | 136 | ||||||||||||||
Common stock held in treasury, at cost – 10 shares | (362 | ) | (362 | ) | (362 | ) | (362 | ) | ||||||||
Additional paid-in capital | 56,770 | 56,609 | 56,946 | 56,759 | ||||||||||||
Accumulated deficit | (55,073 | ) | (59,242 | ) | (55,957 | ) | (54,777 | ) | ||||||||
Accumulated other comprehensive loss | (43 | ) | (43 | ) | (43 | ) | (43 | ) | ||||||||
Total stockholders’ equity (deficit) | 3,270 | (1,062 | ) | |||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 6,764 | $ | 4,069 | ||||||||||||
Total stockholders’ equity | 2,469 | 3,556 | ||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 5,938 | $ | 6,835 |
See accompanying notes.
INTRUSION INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | |||||||||||||||||||||||||
Revenue | $ | 3,860 | $ | 2,665 | $ | 11,071 | $ | 7,296 | $ | 1,655 | $ | 4,020 | $ | 3,450 | $ | 7,211 | ||||||||||||||||
Cost of revenue | 1,465 | 967 | 4,339 | 2,744 | 651 | 1,590 | 1,398 | 2,874 | ||||||||||||||||||||||||
Gross profit | 2,395 | 1,698 | 6,732 | 4,552 | 1,004 | 2,430 | 2,052 | 4,337 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Sales and marketing | 356 | 466 | 813 | 1,311 | 485 | 46 | 995 | 458 | ||||||||||||||||||||||||
Research and development | 297 | 329 | 775 | 832 | 907 | 296 | 1,660 | 477 | ||||||||||||||||||||||||
General and administrative | 277 | 243 | 930 | 828 | 326 | 321 | 582 | 652 | ||||||||||||||||||||||||
Operating income | 1,465 | 660 | 4,214 | 1,581 | ||||||||||||||||||||||||||||
Operating income (loss) | (714 | ) | 1,767 | (1,185 | ) | 2,750 | ||||||||||||||||||||||||||
Interest expense, net | (1 | ) | (43 | ) | (45 | ) | (144 | ) | ||||||||||||||||||||||||
Interest income | 1 | — | 7 | — | ||||||||||||||||||||||||||||
Interest expense | (2 | ) | (9 | ) | (2 | ) | (44 | ) | ||||||||||||||||||||||||
Net income | $ | 1,464 | $ | 617 | $ | 4,169 | $ | 1,437 | ||||||||||||||||||||||||
Net income (loss) | $ | (715 | ) | $ | 1,758 | $ | (1,180 | ) | $ | 2,706 | ||||||||||||||||||||||
Preferred stock dividends accrued | (35 | ) | (35 | ) | (104 | ) | (104 | ) | (33 | ) | (35 | ) | (66 | ) | (69 | ) | ||||||||||||||||
Net income attributable to common stockholders | $ | 1,429 | $ | 582 | $ | 4,065 | $ | 1,333 | ||||||||||||||||||||||||
Net income (loss) attributable to common stockholders | $ | (748 | ) | $ | 1,723 | $ | (1,246 | ) | $ | 2,637 | ||||||||||||||||||||||
Net income per share attributable to common stockholders: Basic | $ | 0.11 | $ | 0.04 | $ | 0.30 | $ | 0.10 | ||||||||||||||||||||||||
Net income (loss) per share attributable to common stockholders: | ||||||||||||||||||||||||||||||||
Basic | $ | (0.05 | ) | $ | 0.13 | $ | (0.09 | ) | $ | 0.20 | ||||||||||||||||||||||
Diluted | $ | 0.09 | $ | 0.04 | $ | 0.27 | $ | 0.09 | $ | (0.05 | ) | $ | 0.11 | $ | (0.09 | ) | $ | 0.17 | ||||||||||||||
Weighted average common shares outstanding: Basic | 13,523 | 13,062 | 13,466 | 13,009 | ||||||||||||||||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 13,784 | 13,523 | 13,743 | 13,466 | ||||||||||||||||||||||||||||
Diluted | 15,371 | 14,955 | 15,314 | 14,901 | 13,784 | 15,371 | 13,743 | 15,314 |
See accompanying notes.
INTRUSION INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands)
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 | ) |
Six Months Ended | ||||||||
June 30, 2020 | June 30, 2019 | |||||||
NUMBER OF PREFERRED SHARES—ISSUED AND OUTSTANDING | ||||||||
Balance, beginning of quarter | 949 | 949 | ||||||
Conversion of preferred stock to common | (63 | ) | — | |||||
Balance, end of quarter | 886 | 949 | ||||||
PREFERRED STOCK | ||||||||
Balance, beginning of quarter | $ | 1,843 | $ | 1,843 | ||||
Conversion of preferred stock to common | (96 | ) | — | |||||
Balance, end of quarter | 1,747 | 1,843 | ||||||
NUMBER OF COMMON SHARES—ISSUED | ||||||||
Balance, beginning of quarter | 13,552 | 13,259 | ||||||
Conversion of preferred stock to common | 63 | — | ||||||
Exercise of stock options | 187 | 280 | ||||||
Balance, end of quarter | 13,802 | 13,539 | ||||||
COMMON STOCK | ||||||||
Balance, beginning of quarter | $ | 136 | $ | 133 | ||||
Conversion of preferred stock to common | 1 | — | ||||||
Exercise of stock options | 1 | 2 | ||||||
Balance, end of quarter | $ | 138 | $ | 135 | ||||
TREASURY SHARES | ||||||||
Balance, beginning of quarter and end of quarter | $ | (362 | ) | $ | (362 | ) | ||
ADDITIONAL PAID-IN-CAPITAL | ||||||||
Balance, beginning of quarter | $ | 56,759 | $ | 56,609 | ||||
Conversion of preferred stock to common | 95 | — | ||||||
Stock-based compensation | 74 | 14 | ||||||
Exercise of stock options | 84 | 224 | ||||||
Preferred stock dividends declared, net of waived penalties by shareholders | (66 | ) | (62 | ) | ||||
Balance, end of quarter | $ | 56,946 | $ | 56,785 | ||||
ACCUMULATED DEFICIT | ||||||||
Balance, beginning of quarter | $ | (54,777 | ) | $ | (59,242 | ) | ||
Net income (loss) | (1,180 | ) | 2,706 | |||||
Balance, end of quarter | $ | (55,957 | ) | $ | (56,536 | ) | ||
ACCUMULATED OTHER COMPREHENSIVE LOSS | ||||||||
Balance, beginning of quarter and end of quarter | $ | (43 | ) | $ | (43 | ) | ||
TOTAL STOCKHOLDERS’ EQUITY | $ | 2,469 | $ | 1,822 |
See accompanying notes.
INTRUSION INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended | Six Months Ended | |||||||||||||||
September 30, 2019 | September 30, 2018 | June 30, 2020 | June 30, | |||||||||||||
Operating Activities: | ||||||||||||||||
Net income | $ | 4,169 | $ | 1,437 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Net income (loss) | $ | (1,180 | ) | $ | 2,706 | |||||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||
Depreciation and amortization | 136 | 96 | 107 | 86 | ||||||||||||
Stock-based compensation | 24 | 16 | 74 | 14 | ||||||||||||
Penalties on dividends | 6 | 34 | — | 6 | ||||||||||||
Extinguishment of U.K. cumulative translation adjustment | — | 65 | ||||||||||||||
Noncash lease costs | 124 | 304 | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (737 | ) | (155 | ) | 499 | (738 | ) | |||||||||
Inventories | — | 15 | ||||||||||||||
Prepaid expenses and other assets | (45 | ) | (120 | ) | (234 | ) | (234 | ) | ||||||||
Operating lease, right-of-use asset | 364 | — | ||||||||||||||
Accounts payable and accrued expenses | (621 | ) | 191 | (64 | ) | (66 | ) | |||||||||
Deferred revenue | (361 | ) | 213 | (352 | ) | 179 | ||||||||||
Net cash provided by operating activities | 2,935 | 1,792 | ||||||||||||||
Net cash provided by (used in) operating activities | (1,026 | ) | 2,257 | |||||||||||||
Investing Activities: | ||||||||||||||||
Purchases of property and equipment | (183 | ) | (173 | ) | �� | (62 | ) | (168 | ) | |||||||
Financing Activities: | ||||||||||||||||
Borrowings on loan from officer | — | 150 | ||||||||||||||
Proceeds from PPP loan payable | 629 | — | ||||||||||||||
Payments on loan from officer | (1,815 | ) | (1,200 | ) | — | (1,815 | ) | |||||||||
Proceeds from stock options exercised | 236 | 111 | 85 | 226 | ||||||||||||
Payments of dividends | (667 | ) | — | (67 | ) | (644 | ) | |||||||||
Reduction of finance lease liability | (47 | ) | (51 | ) | (21 | ) | (31 | ) | ||||||||
Net cash used in financing activities | (2,293 | ) | (990 | ) | ||||||||||||
Net cash provided by (used in) financing activities | 626 | (2,264 | ) | |||||||||||||
Net increase in cash and cash equivalents | 459 | 629 | ||||||||||||||
Net decrease in cash and cash equivalents | (462 | ) | (175 | ) | ||||||||||||
Cash and cash equivalents at beginning of period | 1,652 | 224 | 3,334 | 1,652 | ||||||||||||
Cash and cash equivalents at end of period | $ | 2,111 | $ | 853 | $ | 2,872 | $ | 1,477 | ||||||||
SUPPLEMENTAL DISCLOSURE OF NON CASH OPERATING AND FINANCING ACTIVITIES: | ||||||||||||||||
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES: | ||||||||||||||||
Preferred stock dividends accrued | $ | 103 | $ | 104 | $ | 66 | $ | 68 | ||||||||
Purchase of leased equipment per right-of-use finance lease | $ | — | $ | 89 | ||||||||||||
Initial recognition of operating lease, right-of-use asset | $ | 1,771 | $ | — | ||||||||||||
Conversion of preferred stock to common | $ | 96 | $ | — |
See accompanying notes.
INTRUSION INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 |
Our products in development include:
● | Intrusion Shield |
We are in the process of developing a new product offering, Intrusion Shield, that is designed to be a next generation intrusion detection and protection solution. After 20 years of providing research, analysis, and tools to the federal government and enterprise corporations, Intrusion possesses a comprehensive and proprietary database of Internet activity, including information about the activities of malicious online actors. Intrusion’s Shield product will combine that comprehensive database with artificial intelligence (AI) and real-time process flow technology to provide businesses and government agencies with a unique and affordable tool to detect, identify, and prevent cyber-crimes.
Shield is a combination of plug-and-play hardware, software, global data, and AI services providing organizations with aggressive protection against unaddressed information security threats and the most robust defense possible against cybercrime. Unlike traditional industry approaches that rely heavily on human resources, which malicious actors have learned to bypass, Intrusion Shield uses our extensive database together with real-time AI technology to prevent illicit behavior. Shield's proprietary architecture isolates and neutralizes malicious traffic and network flows that existing solutions cannot identify or even characterize. Most breaches today are caused by malware free compromises that trigger no alarms in a firewall or endpoint solution. The common denominator is network communications, and Shield monitors and analyses all network traffic and communications allowing it to identify and stop malware-free attacks. Shield's capabilities will continuously evolve based on real-time updates originating from our worldwide installations and growing TraceCop database identifying new dangers.
Shield does not seek to displace existing solutions, instead providing a new, and additional layer of cybersecurity for enterprises. According to SBA 2019, the U.S. enterprise market consists of 30.7 million businesses, of which 70% are characterized as small and medium sized businesses. While the company believes that many large enterprises will recognize the need this product addresses and will be incentivized to purchase Shield, the enterprise market has many decision makers for new security product purchases; therefore, the sale cycle may be longer for this product than our current product offerings. We have identified businesses with from 100 to 1,000 users as our initial target market, as we believe this market segment has the most pressing need for the enhanced protection that the Intrusion Shield will offer. We intend to leverage existing and new channel partners, such as value added resellers and systems integrators, to market Shield to this target market.
Shield has experienced positive progress during Alpha testing and the Company has identified twelve companies for the Beta release anticipated to begin in September. The configuration of hardware is a single Dell network appliance installed inline inside of the customer's firewall. The size of the network appliance will vary depending on the number of workstations and the size of the customer's internet connection be that 1Gb, 10Gb, or 100 Gb.
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 trademarksTrademarks of Intrusion Inc.include:
● | INTRUSION SHIELD |
● | PROCESS FLOW TECHNOLOGY |
● | INTRUSION SAVANT |
● | BRINGING SCIENCE INTO DECISION MAKING |
● | TRACECOP |
● | INTRUSION PROTECT EVERYTHING. TRUST NOTHING |
● | PROTECT EVERYTHING. TRUST NOTHING. |
| 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, 20182019 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 ninesix month periods ended SeptemberJune 30, 20192020 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, 2018,2019, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 28, 2019.27, 2020.
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 ninesix month periods ended SeptemberJune 30, 2020 and 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”).Paxton. Under the terms of the CEO Note, the Company had the ability to borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $3,700,000 at any given time through March 2020.
On February 7, 2019, the Company amended the unsecured revolving promissory note to borrow up to $2,700,000 from G. Ward Paxton, the Company’s former Chief Executive Officer. Amounts borrowed under the CEO Note accrued interest at a floating rate per annum equal to Silicon Valley Bank’s (“SVB”) prime rate plus 1%. Under the terms of the note, the Company had the ability to borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $2,700,000 at any given time through March 2021.
Amounts borrowed We reduced our borrowing under the CEO Note officer accrued interest at a floating rate per annum equalthis note to Silicon Valley Bank’s (“SVB”) prime rate plus 1%. Any outstanding borrowings and accrued but unpaid interest is due on March 31, 2021. Aszero as of September 30, 2019, there were no borrowings or accrued interest outstandingMay 2019.
As of October 24, 2019.2019, 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 basecapacity 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 SeptemberJune 30, 20192020 and 2018,2019, the Company did not grant anygranted 323,000 and 24,000, respectively, of stock options to employees or directors. The Company recognized $10,000$55,000 and $5,000,$10,000, respectively, of stock-based compensation expense for the three month periods ended SeptemberJune 30, 20192020 and 2018.2019. During the ninesix month periods ended SeptemberJune 30, 20192020 and 2018,2019, the Company granted 24,000323,000 and 24,000, respectively, of stock options to employees and directors. The Company recognized $24,000$74,000 and $16,000,$14,000, respectively, of stock-based compensation expense for the ninesix month periods ended SeptemberJune 30, 20192020 and 2018.2019.
During the three month periods ended SeptemberJune 30, 2020 and 2019, 14,000 and 2018, 10,500 and 103,500 options14,000 were exercised under the 2005 Plan, respectively. During the ninesix month periods ended SeptemberJune 30, 2020 and 2019, 186,600 and 2018, 291,000 and 322,500280,500 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:
For Three Months Ended September 30, 2019 | For Three Months Ended September 30, 2018 | For Nine Months Ended September 30, 2019 | For Nine Months Ended September 30, 2018 | For Three Months Ended June 30, 2020 | For Three Months Ended June 30, 2019 | For Six Months Ended June 30, 2020 | For Six Months Ended | |||||||||||||||||||||||||
Weighted average grant date fair value | — | — | $ | 3.61 | $ | 0.99 | $ | 2.80 | $ | 3.61 | $ | 2.80 | $ | 3.61 | ||||||||||||||||||
Weighted average assumptions used: | ||||||||||||||||||||||||||||||||
Expected dividend yield | — | — | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||
Risk-free interest rate | — | — | 2.19 | % | 2.93 | % | 0.43 | % | 2.19 | % | 0.43 | % | 2.19 | % | ||||||||||||||||||
Expected volatility | — | — | 127.52 | % | 131.0 | % | 76.00 | % | 127.52 | % | 76.00 | % | 127.52 | % | ||||||||||||||||||
Expected life (in years) | — | — | 5.0 | 5.0 | 6.2 | 5.0 | 6.2 | 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.
5. Revenue Recognition
We generally recognize product revenue upon shipment or after meeting certain performance obligations. These products can include hardware, perpetual software licenses and data sets. Data set updates are the majority of our sales. We do not currently offer software on a subscription basis. Warranty costs and sales returns have not been material.
We recognize sales of our data sets in accordance with FASB ASC Topic 606 whereby revenue from contracts with
customers is not recognized until all five of the following have been met:
i) | identify the contract with a customer; |
ii) | identify the performance obligations in the contract; |
iii) | determine the transaction price; |
iv) | allocate the transaction price to the separate performance obligations; and | |
v) | recognize revenue upon satisfaction of a performance obligation. |
Data updates are typically done monthly and revenue will be matched accordingly. Product sales may include maintenance and customer support allocated revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy using the relative selling price method. All of our product offering and service offering market values are readily determined based on current and prior stand-alone sales. We may defer and recognize maintenance, updates and support revenue over the term of the contract period, which is generally one year.
Service revenue, primarily including maintenance, training and installation are recognized upon delivery of the service and typically are unrelated to product sales. To date, training and installation revenue has not been material. These revenues are included in net customer support and maintenance revenues in the statement of operations.
Our normal payment terms offered to customers, distributors and resellers are net 30 days domestically and net 45 days internationally. We do not offer payment terms that extend beyond one year and rarely do we extend payment terms beyond our normal terms. If certain customers do not meet our credit standards, we do require payment in advance to limit our credit exposure. Shipping and handling costs are billed to the customer and included in product revenue. Shipping and handling expenses are included in cost of product revenue. We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods. |
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Contract assets represent contract billings for sales per contracts with customers and are classified as current. Our contract assets include our accounts receivables. At SeptemberJune 30, 2020, the Company had contract assets balance of $1,067,000. At December 31, 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.$1,566,000.
Contract liabilities consist of cash payments in advance of the Company satisfying performance obligations and recognizing revenue. The Company currently classifies deferred revenue as a contract liability. At SeptemberJune 30, 2020, the Company had contract liabilities balance of $164,000. At December 31, 2019, the Company had contract liabilities balance of $643,000. At September 30, 2018, the Company had contract liabilities balance of $619,000.$516,000.
| 6. Net Income (Loss) Per Share |
Basic net income (loss) 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 (loss) per share is computed by dividing the net income (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. The aggregate number of common stock equivalents excluded from the diluted income (loss) per share calculation for the three month periods ended SeptemberJune 30, 2020 and 2019 are 1,942,990 and 2018 are 0 and 149,000,12,132, respectively. The aggregate number of common stock equivalents excluded from the diluted income (loss) per share calculation for the ninesix month periods ended SeptemberJune 30, 2020 and 2019 are 1,909,289 and 20186,066, respectively. Since the Company is in a net loss position for the three and six month periods ending June 30, 2020, basic and dilutive net loss per share are 4,044 and 292,044, respectively.the same.
| 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%91.0% of total revenues for the thirdsecond quarter of 20192020 compared to 84.5%91.3% of total revenues for the thirdsecond quarter of 2018.2019. During the thirdsecond quarter of 2019,2020, approximately 75.8%91.0% of total revenues were attributable to threefour government customers compared to approximately 66.4%73.2% of total revenues attributable to fourthree government customers in the thirdsecond quarter of 2018.2019. In the thirdsecond quarter of 2019,2020, no individual commercial customer had revenues over 10.0% of total revenue compared to oneno individual commercial customer attributable for 14.5% of total revenue for the same period in 2018.2019. 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 SeptemberJune 30, 2019,2020, we accrued $13,000 in dividends payable to the holders of our 5% Preferred Stock, $14,000$13,000 in dividends payable to the holders of our Series 2 5% Preferred Stock and $8,000$7,000 in dividends payable to the holders of our Series 3 5% Preferred Stock. As of SeptemberJune 30, 2019,2020, we have $32,000had $19,000 in accrued and unpaid dividends.
Delaware law provides that we may only pay dividends, outall 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 Stockwhich 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 Stockbeen paid as of September 30, 2019, the aggregate redemption price we would owe would be $1.8 million.date of this Quarterly Report.
| 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 fivefour years and twofive months as of SeptemberJune 30, 2019.2020. The San Marcos operating lease liability has a life of eighteennine months as of SeptemberJune 30, 2020. The adoption of the lease accounting standard resulted in the recognition of an operating ROU asset of $1,553 thousand and a related lease liability of $1,744 thousand during the first quarter of 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.
Supplemental cash flow information includes operating cash flows related to operating leases. For the six months ended June 30, 2020 and 2019, the Company had $179 thousand and $88 thousand, respectively, in operating cash flows related to operating leases.
Schedule of Items Appearing on the Statement of Operations:
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | |||||||||||||||||||||||||
Operating expense: | ||||||||||||||||||||||||||||||||
Amortization expense – Finance ROU | 16 | 17 | 48 | 50 | $ | 11 | $ | 16 | $ | 21 | $ | 32 | ||||||||||||||||||||
Lease expense – Operating ROU | 82 | 65 | 244 | 197 | 82 | 83 | 165 | 162 | ||||||||||||||||||||||||
Other expense: | ||||||||||||||||||||||||||||||||
Interest expense – Finance ROU | 1 | 1 | 3 | 2 | $ | — | $ | 1 | $ | 1 | $ | 2 |
Future minimum lease obligations consisted of the following at SeptemberJune 30, 20192020 (in thousands):
Operating | Finance | Operating | Finance | |||||||||||||||||||||
Period ending September 30, | ROU Leases | ROU Leases | Total | |||||||||||||||||||||
2020 | $ | 359 | $ | 46 | $ | 405 | ||||||||||||||||||
Period ending June 30, | ROU Leases | ROU Leases | Total | |||||||||||||||||||||
2021 | 362 | 31 | 393 | $ | 363 | $ | 39 | $ | 402 | |||||||||||||||
2022 | 366 | 1 | 367 | 363 | 5 | 368 | ||||||||||||||||||
2023 | 378 | — | 378 | 375 | — | 375 | ||||||||||||||||||
2024 | 384 | — | 384 | 384 | — | 384 | ||||||||||||||||||
2025 | 159 | — | 159 | |||||||||||||||||||||
Thereafter | 64 | — | 64 | — | — | — | ||||||||||||||||||
$ | 1,913 | $ | 78 | $ | 1,991 | $ | 1,644 | $ | 44 | $ | 1,688 | |||||||||||||
Less Interest* | (247 | ) | (3 | ) | (183 | ) | (1 | ) | ||||||||||||||||
$ | 1,666 | $ | 75 | $ | 1,461 | $ | 43 |
*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.
| 11. PPP Loan On March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which includes provision for a Paycheck Protection Program (“PPP”) administered by the U.S. Small Business Administration (“SBA”). The PPP allows qualifying businesses to borrow up to $10 million calculated based on qualifying payroll costs. The loan is guaranteed by the federal government, and does not require collateral. On April 30, 2020 we entered into a PPP Loan with Silicon Valley Bank effective April 30, 2020, pursuant to the PPP under CARES for $629,000. The PPP Loan matures on April 30, 2022 and bears interest at a rate of 1.0% per annum. Monthly amortized principal and interest payments are deferred for six months after the date of disbursement. The PPP Loan funds were received on April 30, 2020. The PPP Loan contains events of default and other provisions customary for a loan of this type. The PPP provides that (1) the use of PPP Loan amount shall be limited to certain qualifying expenses, (2) 100 percent of the principal amount of the loan is guaranteed by the SBA and (3) an amount up to the full principal amount may qualify for loan forgiveness in accordance with the terms of CARES. We are not yet able to determine the amount that might be forgiven. As of June 30, 2020, the Company was in full compliance with all covenants with respect to the PPP Loan. The Company expects to use the full proceeds of the PPP loan in accordance with the provisions of CARES. As of June 30, 2020, the balance of the PPP Loan was $630,000, which includes $1.0 thousand in accrued interest. Future minimum loan obligations consisted of the following at June 30, 2020 (in thousands):
12. Coronavirus Outbreak in the United States Uncertainties surrounding the effects of the coronavirus, particularly potential diversion of time and resources of federal government entities which make up a significant concentration of our customer base, could cause a material adverse effect on our results of operations and financial results. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers, employees and vendors all of which are uncertain and cannot be predicted. A material disruption in our workplace as a result of the coronavirus could affect our ability to carry on our business operations in the ordinary course and may require additional cost and effort should our employees not be able to be physically on-premises. 13. Subsequent Events. As of the date of this Quarterly Report, all current shares of issued and outstanding preferred stock have been voluntarily converted, resulting in the issuance of a total of 1,004,249 newly issued shares of the Company’s common stock. The addition of these newly issued shares has resulted in the dilution of each share of issued and outstanding common stock by a factor of 7.28%. While the elimination of these three classes of preferred stock removes a number of the Company’s obligations to the holders of preferred stock (such as the obligation to pay continuing dividends) as well as a number of restrictions on the Company’s activities (such as restrictions on certain capital raising and funding transactions), the addition of these newly issued shares combined with the fact that the Company’s common stock is thinly traded on the OTCQB Marketplace could cause an increase in selling volume, and result in a decline in the market price of the Company’s common stock. On August 6, 2020, Anthony J. LeVecchio was appointed to the board of directors and to serve on the Company’s audit and compensation committees. 12 Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward Looking Statements
This Quarterly Report on Form 10-Q, including, without limitation, the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements are generally accompanied by words such as “estimate,” “expect,” “believe,” “should,” “would,” “could,” “anticipate,” “may” or other words that convey uncertainty of future events or outcomes. These statements relate to future events or to our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations, which we describe in more detail elsewhere in this Quarterly Report on Form 10-Q, as well as in our 20182019 Annual Report on Form 10-K, filed March 28, 2019,27, 2020, in Item 1A “Risk Factors” include, but are not limited to:
● | the |
● | our ability to successfully create, market, sell and distribute our new Shield product to a new and distinct customer base |
● | our ability to produce and promote our new commercial product, Intrusion Shield, and market it through new sales channels to a new set of |
● | insufficient cash to operate our business and inability to meet our liquidity requirements; |
● | loss of revenues due to the failure of our newer products, Shield in particular, to achieve market acceptance; |
● | our need to increase current revenue levels in order to achieve sustainable profitability; |
● | our unavailability to make future borrowings under the CEO Note; |
● | our ability to replace all or a portion of the borrowing |
● | our ability to raise funds through debt or equity offerings related to launching a commercial product; |
● | concentration of our revenues from U.S. government entities or commercial customers and the possibility of loss of one of these customers and the unique risks associated with government customers; |
● | our dependence on sales made through indirect channels; |
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● | the influence that our management and larger stockholders have over actions taken by the Company. |
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what we projected. These forward-looking statements and other statements made elsewhere in this report are made in reliance on the Private Securities Litigation Reform Act of 1995. Any forward-looking statement you read in this Quarterly Report on Form 10-Q or our Annual Report on Form 10-K reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. We assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. The section below entitled “Factors That May Affect Future Results of Operations” sets forth and incorporates by reference certain factors that could cause actual future results of the Company to differ materially from these statements.
Results of Operations
The following table sets forth, for the periods indicated, certain financial data as a percentage of net revenues. The period-to-period comparison of financial results is not necessarily indicative of future results.
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | |||||||||||||||||||||||||
Total revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
Total cost of revenue | 38.0 | 36.3 | 39.2 | 37.6 | 39.3 | 39.6 | 40.5 | 39.9 | ||||||||||||||||||||||||
Gross profit | 62.0 | 63.7 | 60.8 | 62.4 | 60.7 | 60.4 | 59.5 | 60.1 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Sales and marketing | 9.2 | 17.5 | 7.4 | 18.0 | 29.3 | 1.0 | 28.8 | 6.3 | ||||||||||||||||||||||||
Research and development | 7.7 | 12.3 | 7.0 | 11.4 | 54.8 | 7.4 | 48.1 | 6.7 | ||||||||||||||||||||||||
General and administrative | 7.1 | 9.1 | 8.4 | 11.3 | 19.7 | 8.0 | 16.9 | 9.0 | ||||||||||||||||||||||||
Operating income (loss) | (43.1 | ) | 43.9 | (34.3 | ) | 38.1 | ||||||||||||||||||||||||||
Operating income | 38.0 | 24.8 | 38.0 | 21.7 | ||||||||||||||||||||||||||||
Interest income | 0.1 | — | 0.2 | — | ||||||||||||||||||||||||||||
Interest expense | (0.2 | ) | (0.2 | ) | (0.1 | ) | (0.6 | ) | ||||||||||||||||||||||||
Interest expense, net | (0.1 | ) | (1.6 | ) | (0.4 | ) | (2.0 | ) | ||||||||||||||||||||||||
Income before income tax provision | 37.9 | 23.2 | 37.6 | 19.7 | ||||||||||||||||||||||||||||
Income (loss) before income tax provision | (43.2 | ) | 43.7 | (34.2 | ) | 37.5 | ||||||||||||||||||||||||||
Income tax provision | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Net income | 37.9 | % | 23.2 | % | 37.6 | % | 19.7 | % | ||||||||||||||||||||||||
Net income (loss) | (43.2 | )% | 43.7 | % | (34.2 | )% | 37.5 | % | ||||||||||||||||||||||||
Preferred stock dividends accrued | (0.9 | ) | (1.4 | ) | (0.9 | ) | (1.4 | ) | (2.0 | ) | (0.8 | ) | (1.9 | ) | (0.9 | ) | ||||||||||||||||
Net income attributable to common stockholders | 37.0 | % | 21.8 | % | 36.7 | % | 18.3 | % | ||||||||||||||||||||||||
Net income (loss) attributable to common stockholders | (45.2 | )% | 42.9 | % | (36.1 | )% | 36.6 | % |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | |||||||||||||
Domestic revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Export revenues | — | — | — | — | ||||||||||||
Net revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | |||||||||||||
Domestic revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Export revenues | — | — | — | — | ||||||||||||
Net revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Net Revenues. Net revenues for the quarter and ninesix months ended SeptemberJune 30, 20192020 were $3.9$1.7 million and $11.1$3.5 million, respectively, compared to $2.7$4.0 million and $7.3$7.2 million for the same periods in 2018.2019. Product revenues increased $1.2decreased $2.3 million for the quarter ended SeptemberJune 30, 2019,2020, and $3.8$3.7 million for the ninesix months ended SeptemberJune 30, 20192020 compared to the same periods in 2018. Increased2019. Decreased product revenues were primarily due to an increasea decrease in sales of our TraceCop product line. TraceCop sales for the quarters ended SeptemberJune 30, 2020 and 2019 and 2018 were $3.9$1.6 million and $2.7$4.0 million, respectively. Savant sales remainedwere $106 thousand for the same atquarter ended June 30, 2020 and were $29 thousand for the quartersquarter ended SeptemberJune 30, 2019 and 2018.2019.
Concentration of Revenues. Revenues from sales to various U.S. government entities totaled $3.5$1.5 million, or 90.9%91.0% of revenues, for the quarter ended SeptemberJune 30, 20192020 compared to $2.3$3.9 million, or 84.5%91.3% of revenues, for the same period in 2018.2019. Revenues from sales to various U.S. government entities totaled $9.9$2.8 million, or 89.8%80.8% of revenues, for the ninesix months ended SeptemberJune 30, 2019,2020 compared to $6.1$6.4 million, or 84.2%89.2% of revenues, for the same period in 2018.2019. Sales to commercial customers totaled 9.1%9.0% of total revenue for the thirdsecond quarter of 20192020 compared to 15.5%8.7% of total revenue for the thirdsecond quarter of 2018.2019. During the thirdsecond quarter of 2020 and 2019, no individual commercial customer had revenues over 10.0% of total revenue approximately compared to approximately 14.5% to one commercial customer in the third quarter of 2018.revenue. Although we expect our concentration of revenues to vary among customers in future periods depending upon the timing of certain sales, we anticipate that sales to government customers will continue to account for a significant portion of our revenues in future periods. Sales to the government present risks in addition to those involved in sales to commercial customers which could adversely affect our revenues, including, without limitation, potential disruption to appropriation and spending patterns and the government’s reservation of the right to cancel contracts and purchase orders for its convenience. Although we do not anticipate that any of our revenues with government customers will be renegotiated, a large number of cancelled or renegotiated government orders could have a material adverse effect on our financial results. Currently, we are not aware of any proposed cancellation or renegotiation of any of our existing arrangements with government entities and, historically, government entities have not cancelled or renegotiated orders which had a material adverse effect on our business.
Gross Profit. Gross profit was $2.4$1.0 million or 62.0%60.7% of net revenues for the quarter ended SeptemberJune 30, 2019,2020, compared to $1.7$2.4 million or 63.7%60.4% of net revenues for the quarter ended SeptemberJune 30, 2018.2019. Gross profit was $6.7$2.1 million or 60.8%59.5% of net revenues for the ninesix months ended SeptemberJune 30, 20192020 compared to $4.6$4.3 million or 62.4%60.1% of net revenues for the ninesix months ended SeptemberJune 30, 2018.2019. Gross profit on product revenues trended from 59.5% of net revenues for the quarter and ninesix months ended SeptemberJune 30, trended from 63.7% and 62.4%, respectively, in 20182020 to 62.0% and 60.8%, respectively, in60.1% of net revenues for the six months ended June 30, 2019, mainly due to a change inTraceCop/Savant product mix. Gross profit increases can be attributed to such variables as labor hour rates and department overhead. Gross profit as a percentage of net revenues is impacted by several factors, including shifts in product mix, changes in channels of distribution, revenue volume, pricing strategies, and fluctuations in revenues of integrated third-party products.
Sales and Marketing. Sales and marketing expenses decreasedincreased to $0.4$0.5 million for the quarter ended SeptemberJune 30, 2019,2020 compared to $0.5 million$46 thousand for the same period in 2018.2019. Sales and marketing expenses decreasedincreased to $0.8$1.0 million for the ninesix months ended SeptemberJune 30, 2019,2020 compared to $1.3$0.5 million for the same period in 2018. For the nine months ended September 30, 2019, sales2019. Sales and marketing expenses decreasedmay vary in the future. Sales and marketing expenses increased compared to the comparable periods last year due to shifting expense to cost of sales for various projects during the second quarter 2019increases in labor and expenses and the Company was able to collect payment of $200 thousand from a customer related expense in 2018 that occurred during the year 2018. Sales and marketing expenses may varyreduced expense in the future.2019. We believe that these costs maywill increase through the end of 2019.2020 due to increased marketing expense related to the Shield launch.
Research and Development. Research and development expenses remained constant at $0.3increased to $0.9 million for the quarter ended SeptemberJune 30, 2019,2020 compared to $0.3 million for the same period in 2018.2019. Research and development remained constant at $0.8expenses increased to $1.7 million for the ninesix months ended SeptemberJune 30, 2019,2020 compared to $0.5 million for the same period in 2018. Research2019. The increase in research and development expense was due partly to increased costs remained constantrelated to the development of our Intrusion Shield product as well as an increase in labor expense due to increasedless direct labor expense being allocated to cost of sales.required on existing projects. Research and development costs are expensed in the period in which they are incurred. Research and development expenses may vary in the future; however, we believe that these costs will mainly be dependent on the amountlevels of research and development labor expense allocatedcharged to cost of sales.projects.
General and Administrative. General and administrative expenses increased toremained constant at $0.3 million for the quarterquarters ended SeptemberJune 30, 2019,2020 and 2019. General and administrative expenses decreased to $0.6 million for the six months ended June 30, 2020 compared to $0.2$0.7 million for the same period in 2018. General and administrative expenses increased to $0.9 million for the nine months ended September 30, 2019, compared to $0.8 million for the same period in 2018.2019. It is expected that general and administrative expenses will remain relatively constant throughout the remainder of 2019.2020, although expenses may be increased due to increased expenses related to a new product launch.
Interest. Net interestInterest expense decreased to $2 thousand for the quarter ended June 30, 2020 compared to $9 thousand for the same period in 2019. Interest expense decreased to $2 thousand for the six months ended June 30, 2020 compared to $44 thousand for the same period in 2019. Interest expense decreased due to decreased amount of Loan Payable to Officer culminating in our repayment of the balance in May 2019. Interest expense will vary in the future based on our cash flow and borrowing needs. Interest income increased to $1 thousand for the quarter ended SeptemberJune 30, 2019,2020 compared to $43 thousandnone for the same period in 2018. Net interest expense decreased2019. Interest income increased to $45$7 thousand for the ninesix months ended SeptemberJune 30, 20192020 compared to $144 thousandnone for the same period in 2018. The decrease2019. This is attributable to investing extra cash in money market accounts and getting better interest expense was due to elimination of the loan payable to an officer. Net interest expense may vary in the future based on our level of borrowing, which will be affected by our cash flow, operating income and capital expenditures.
rates.
Liquidity and Capital Resources
Our principal source of liquidity at SeptemberJune 30, 2019,2020 was approximately $2.1$2.9 million of cash and cash equivalents. At SeptemberJune 30, 2019,2020, we had working capital of $2.9$2.4 million compared to a $0.4$1.4 million working capital deficiency at SeptemberJune 30, 2018.2019.
Net cash used in operations for the six months ended June 30, 2020 was $1.0 million due primarily to a net loss of $1.2 million and the following uses of cash: a $352 thousand decrease in deferred revenue, a $234 thousand increase in prepaid expenses and other assets, and a $64 thousand decrease in accounts payable and accrued expenses. This was partially offset by the following provisions of cash and non-cash items: a $499 thousand decrease in accounts receivable, $124 thousand in noncash lease costs, $107 thousand in depreciation and amortization expense, and $74 thousand in stock-based compensation. Net cash provided by operations for the ninesix months ended SeptemberJune 30, 2019 was $2.9$2.3 million due primarily to a net income of $4.2$2.7 million and the following sourcesprovisions of cash and non-cash items: $304 thousand in noncash lease costs, a $364$179 thousand decreaseincrease in operating lease right-of-use assets, $136deferred revenue, $86 thousand in depreciation and amortization expense, $24$14 thousand in stock-based compensation, and $6 thousand in penalties and waived penalties on dividends. This was partially offset by a $737$738 thousand increase in accounts receivable, a $621 thousand decrease in accounts payable and accrued expenses, a $361 thousand decrease in deferred revenue, and a $45 thousand increase in prepaid expenses and other assets. Net cash provided by operations for the nine months ended September 30, 2018 was $1.8 million due primarily to a net income of $1.437 million and to the following sources of cash and non-cash items: $213 thousand increase in deferred revenue, $191 thousand increase in accounts payable and accrued expenses, $15 thousand decrease in Inventories, $34 thousand in penalties and waived penalties on dividends, $50 thousand in amortization expense of capital leases, $46 thousand in depreciation expense, $16 thousand in stock-based compensation, and a $65 thousand write-off of the United Kingdom’s cumulative translation adjustment. This was partially offset by a $120$234 thousand increase in prepaid expenses and other assets, and a $155$66 thousand increasedecrease in accounts receivable.payable and accrued expenses. Future fluctuations in inventory balances, accounts receivable and accounts payable will be dependent upon several factors, including, but not limited to, quarterly sales volumes and timing of invoicing, and the accuracy of our forecasts of product demand and component requirements.
Net cash used in investing activities for the ninesix months ended SeptemberJune 30, 2019,2020, was $183$62 thousand for net purchases of property and equipment, compared to $168 thousand net cash used byin investing activities for the ninesix months ended SeptemberJune 30, 2018, was $173 thousand2019 for net purchases of property and equipment.
Net cash provided by financing activities in 2020 was $0.6 million generated primarily by proceeds from a PPP loan of $0.6 million and proceeds from exercise of stock options of $85 thousand. This was directly offset by the following uses of cash: payments for preferred stock dividends of $67 thousand, and payment on principal of finance right-of-use leases of $21 thousand. Net cash used byin financing activities in 2019 was $2.3 million with payments on the loan from an officer of $1.8 million, payments for preferred stock dividends of $667$644 thousand, and payment on principal of finance right-of-use leases of $47$31 thousand. This was directly offset by the following provisions of cash: proceeds from exercise of stock options of $236$226 thousand. Net cash used by financing activities in 2018 was $1.0 million due to payments to the CEO Note of $1.2 million and $51 thousand payment on principal on capital leases. This was directly offset by the following provisions of cash: proceeds from a loan by an officer of $150 thousand and $111 thousand from the exercise of stock options.
At SeptemberJune 30, 2019,2020, the Company did not have any material commitments for capital expenditures.
During the ninesix months ended SeptemberJune 30, 2019,2020, the Company funded its operations through the use of cash and cash equivalents.
As of SeptemberJune 30, 2019,2020, we had cash and cash equivalents of approximately $2,111,000,$2,872,000, down from approximately $1,652,000$3,334,000 as of December 31, 2018.2019. We generatedhad a net incomeloss of $1,464,000$715,000 for the quarter ended SeptemberJune 30, 20192020 compared to a net income of $617,000$1,758,000 for the quarter ended SeptemberJune 30, 2018. As of September 30, 2019, in addition to cash and cash equivalents of $2,111,000, we had $2.7 million of funding available from a promissory note to borrow up to $2.7 million from G. Ward Paxton, the Company’s Chief Executive Officer (the “CEO Note”). We are obligated to make payments of accrued dividends on all our outstanding shares of preferred stock that will reduce our available cash resources.
2019. Based on projections of growth in revenue and net income in the coming quarters, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures for the next twelve months. However, as
As of October 24, 2019, our funding available from the CEO Note terminated. Our management will be assessing whether to replace this borrowing basecapacity and assessing what terms may be available to the Company, including whether any such terms are available on terms acceptable to the Company, if at all (the “Potential Replacement Funding Facility”).
We expect to fund our operations through anticipated Company profits, the Potential Replacement Funding Facility, and possible additional investments of private equity and debt, , and the Potential Replacement Facility.debt. Any equity or debt financings,options, if available at all, may be on terms which are not favorable to us and, in the case of any potential equity financings, may result in dilution to our stockholders. If our operations do not generate positive cash flow in the upcoming year,future, 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.
We may explore the possible acquisitions of businesses, products and technologies that are complementary to our existing business. We are continuing to identify and prioritize additional security technologies, which we may wish to develop, either internally or through the licensing, or acquisition of products from third parties. While we may engage from time to time in discussions with respect to potential acquisitions, there can be no assurances that any such acquisitions will be made or that we will be able to successfully integrate any acquired business. In order to finance such acquisitions and working capital it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms, which are not favorable to us and, in the case of equity financings, may result in dilution to our stockholders.
Item 4. | CONTROLS AND PROCEDURES |
We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of SeptemberJune 30, 2019,2020, and concluded that the disclosure controls and procedures were effective.
Our management, with the participation of our principal executive officer and principal financial officer, evaluated our “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) as of December 31, 2018,2019, and concluded that there have not been any changes in our internal control over financial reporting that occurred during the quarter ended SeptemberJune 30, 2019,2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. | LEGAL PROCEEDINGS |
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 will not have such a material impact in the future.
| 16 Item 1A. RISK FACTORS |
Factors That May Affect Future Results of Operations
We are providing the following information regarding changes that have occurred to previously disclosed risk factors from our Annual Report on Form 10-K for the year ended December 31, 2018.2019. In addition to the other information set forth below and elsewhere in this report, you should consider the factors discussed under the heading “Risk Factors” in our Form 10-K for the year ended December 31, 20182019 filed on March 28, 2019.27, 2020 and in our Form 10-Q for the quarter ended March 31, 2020 filed on May 15, 2020. The risks described in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Uncertainties surrounding the effects of the coronavirus, particularly potential diversion of time and resources of the federal, state, and local governmental entities which make up a significant concentration of our customer base, could cause a material adverse effect on our results of operations and financial results.
We have a concentration of customers that are federal, state, and local governmental entities. Such entities will be required to allocate resources and adjust budgets to accommodate potential contingencies related to the effects of the coronavirus and measures required to be put in place to prevent and contain contamination of the virus. These uncertainties have resulted in certain of our customers delaying budgeted expenditures or re-allocating resources that would result in a decrease in orders from these customers, and the possibility that other customers may follow suit in the weeks and months to come. Any such decrease in orders from these customers could cause a material adverse effect on our operations and financial results.
A material disruption in our workplace as a result of the coronavirus could affect our ability to carry on our business operations in the ordinary course and may require additional cost and effort should our employees not be able to be physically on-premises.
Should we experience periods where it is not prudent for some or all of our employees to be physically present on-site, we may not have the benefit of the time and skills of such employees or we may be required to adjust our current business operations and processes to permit some or all of our employees at any one of our locations to work remotely in order to avoid the potential spread of the virus. We can offer no assurances that these adjustments would not cause material disruptions to our daily operations, require us to expend our time, energy and resources to make necessary adjustments, and may result in a material adverse effect on our sales, research and development and other critical areas of our business model.
Our common stock may experience volatility in trading or loss in value as a result of the effects of the coronavirus on the US and global economies.
Uncertainties surrounding the effects of the coronavirus on the US and global economies has resulted in an increase in volatility and violent drops in the value of publicly traded securities, including the trading in our common stock. We can offer no assurances that these effects are temporary or that any losses that are incurred as a result of these uncertainties will be regained if and when this crisis has passed. As a result, the value of our stock remains subject to such volatility and potential loss of market value.
We may be unsuccessfulunable to successfully produce and promote our new commercial product, Intrusion Shield, and market it through new sales channels to a new set of prospective customers.
We anticipate significant resources will be required in order to complete product development of Intrusion Shield, including the time, attention, and focus of our senior management and our research and development team, coordination of new marketing strategies highlighting this new product offering and promoting it through new and expanded sales channels to a wider audience of prospective customers than we have historically marketed and sold our products and services. In addition, significant financial resources will be required to successfully manage and implementation this new product rollout. This could result in diversion of those resources from critical areas of our company operations and a potential strain on our liquidity and ability to meet our current and these anticipated increases in our cash-flow needs. We may need to explore possible funding sources in order to successfully complete this project, including, without limitation, exploring options for meeting those needs through equity investment and/or debt financing which may not be on terms favorable to the Company and its stockholders (if available at all), and in the instance where additional equity securities may be issued, result in significant dilution to our existing stockholders.
We could experience damage to our reputation in the transition of responsibilities ofcyber-security industry in the event that our co-founder, G. Ward PaxtonIntrusion Shield product fails to perform as upon his unexpected passing on October 24, 2019expected, to meet our customers’ needs, or to achieve market acceptance.
Our reputation in the industry as a leading provider of entity identification, data mining, and advanced persistent threat detection products may be harmed, perhaps significantly, in the event that our new Intrusion Shield fails to perform as we expect it to. If Shield does not perform as we expect, if we experience product delivery delays, or if our customers do not perceive the benefits of purchasing and using Shield as part of their comprehensive cyber-security solution, our position as a leader in this technology space may be damaged and could affect customers, as well as potential customers, willingness to purchase our other products that function separately from our Intrusion Shield. Any reputational damage could result in a decrease in orders for all of our products, the loss of current customers, and a decrease in our overall revenues which maycould in turn have a material adverse effect on our results of operations.operation.
Mr. G. Ward Paxton co-founded the Company in 1983, and he served as President, Chief Executive Officer, Director, and Chairman of the Board for most of his 36 year tenure. He demonstrated dedication and leadership, and provided a unique insight and understanding of the Company’s operations and business strategy for decades. The loss of that leadership and experience may cause the expenditure of Company’s and its managementsWe must expend time and attention as it works through this transition with the Company’s management, staff, vendors, suppliersresources addressing potential cyber-security risk, and customers, any or all of whom may be apprehensive regarding the loss of Ward’s leadership. We can provide no assurance of the smoothness, the diversion of the Company’s resources, or the successfulness of this transition.
The appointmentbreach of our current CFO, Mr. Michael L. Paxton, to the positions of Director and Chairman of the Board, as well as his service as Interim President and Interim CEO, may take significant time, attention, and focus from our day to day operations and the Company’s goals and objectives, perhaps in a material way.
Mr. Michael Paxton has been an integral part of our management team for many years, and our Board has expressed confidence that he will provide a smooth transition going forward. However, Mr. Paxton will be tasked with continuing his current obligations of our Chief Financial Officer as well as taking on these additional roles and responsibilities. While we believe that Mike’s long tenure with and understanding of the Company’s operations will be an asset to his ability to quickly adapt to these additional duties, we can provide no assurances of such.
As of October 24, 2019, we have lost the ability to borrow, up to $2.7 million under the CEO Note, the loss of which mayinformation security safeguards could have a material adverse effect on our business, our results of operation, or even out ability to continue as a going concern.the Company.
With the passing The threat of cyber-attacks requires additional time and money to be expended in efforts to prevent any breaches of our former CEO, Mr. G. Ward Paxton,information security protocols. However, we can provide no assurances that we can prevent any and all such attempts from being successful, which could result in expenses to address and remediate such breaches as well as potentially losing the CEO Note terminated, with the result that future borrowings thereunder will no longer be availableconfidence of our customers who depend upon our services to the Company. Our ability to draw funds under the CEO Note has beenprevent and mitigate such attacks on their respective business. Should a major strength behind the Company’s liquidity for a numbermaterial breach of years, the loss of which is unable to be measured at this time. However, the lack of this financial backstop could, in the future,our information security systems occur, it would likely have a material adverse effectimpact on our business our results of our operations, our ability to continue ascustomer relations, and our current and future sales prospects, resulting in a going concern, or to continue operations at all. 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; however we can make no such assurances as to the replacementsignificant loss of this borrowing facility.revenue.
We may not have sufficient cash to operate our business and may not be able to maintain future liquidity requirements. Additional debt and equity offerings to fund future operations may not be available and, if available, may significantly dilute the value of our currently outstanding common stock.
As of SeptemberJune 30, 2019,2020, we had cash and cash equivalents of approximately $2,111,000,$2,872,000, down from approximately $1,652,000$3,334,000 as of December 31, 2018.2019. We generatedhad a net incomeloss of $1,464,000$715,000 for the quarter ended SeptemberJune 30, 20192020 compared to a net income of $617,000$1,758,000 for the quarter ended SeptemberJune 30, 2018.2019. Based on projections of growth in revenue in the coming quarters, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures for the next twelve months. As of September 30, 2019, in addition to cash and cash equivalents of $2,111,000, we had $2.7 million of funding available from a promissory note to borrow up to $2.7 million from G. Ward Paxton, the Company’s Chief Executive Officer (the "CEO Note). We are obligated to make payments of accrued dividends on all our outstanding shares of preferred stock that will reduce our available cash resources. However, as of October 24, 2019, our funding available from the CEO Note terminated. Our management will be assessing whether to replace this borrowing basecapacity and assessing what terms may be available to the Company, including whether any such terms are available on terms acceptable to the Company, if at all (the “Potential Replacement Funding Facility”).
We expect to fund our operations through anticipated Company profits, possiblythe Potential Replacement Funding Facility, and possible additional investments of private equity and debt, which, if we are able to obtain, will have the effect of diluting our existing common stockholders, perhaps significantly, and a possible Potential Replacement Facility.debt. Any equity or debt financings,options, if available at all, may be on terms which are not favorable to us and, in the case of any potential equity financings, may result in dilution to our stockholders. If our operations do not generate positive cash flow in the upcoming year,future, 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.
We had a net incomeloss of $1.0.57 milliomillion n for the quarter ended SeptemberJune 30, 2019,2020, and we have an accumulated deficit of $55.16.0 million as of SeptemberJune 30, 2019.2020. To continueimprove our current financial performance,, we must sustain orincrease revenue levels increasof our existing product offerings and/or increase our revenue through the introduction and sale of our new Shield producte revenue levels..
For the quarter ended SeptemberJune 30, 2019,2020, we generatedhad a net incomeloss of $1.5$0.7 million and had an accumulated deficit of approximately $55.1$56.0 million as of SeptemberJune 30, 2019,2020, compared to a net income of $617 thousand$1.8 million for the quarter ended SeptemberJune 30, 20182019 and an accumulated deficit of approximately $60.1$54.8 million at September 30, 2018.December 31, 2019. We need to maintainincrease current revenue levels from the sales of our currently existing products or through the addition of sales of our new Shield product if we are to continueregain profitability. If we are unable to achieve these revenue levels, losses could happencontinue for the near term and possibly longer, and we may not maintainregain profitability or generate positive cash flow from operations in the future.
A large percentage of our revenues are received from U.S. government entities/resellers, and the loss of any one of these customers could reduce our revenues and materially harm our business and prospects.
A large percentage of our revenues result from sales to U.S. government entities/resellers. If we were to lose one or more of these key relationships, our revenues could decline and our business and prospects may be materially harmed. We expect that even if we are successful in developing relationships with non-governmental customers, our revenues will continue to be concentrated among government entities. For the quarter ended SeptemberJune 30, 2019,2020, sales to U.S. government entities/resellers collectively accounted for 90.9%91.0% of our revenues, compared to 84.5%91.3% for the comparable period in 2018.2019. The loss of any of these key relationships may send a negative message to other U.S. government entities or non-governmental customers concerning our product offering. We cannot assure you that U.S. government entities will be customers of ours in future periods or that we will be able to diversify our customer portfolio to adequately mitigate the risk of loss of any of these customers.
AlmostAlmost all of our revenues are from one product line with a limited number of customers, and the decrease of revenue from sales of this product line could materially harm our business and prospects. Timeliness of orders from customers may cause disruptionvolatility in growth.
Almost all of our revenues result from sales of one security product line. TraceCop revenues were $3.9$1.6 million for the quarter ended SeptemberJune 30, 2019,2020, compared to $2.7$4.0 million for the thirdsecond quarter 2018.2019. Savant revenues remained constant atincreased to $106 thousand for the quarter ended June 30, 2020, compared to $29 thousand for the quarters ended September 30, 2019 and 2018. No individual commercial customer in the thirdsecond quarter of 2019 had over 10.0% of total revenue compared to one individual customer with 14.5% of total revenue for the same period in 2018.2019. If sales of this key product line and individual customer were to decrease, our revenues could decline and our business and prospects may be materially harmed. No individual commercial customer in the second quarter of 2020 and 2019 had over 10.0% of total revenue.
We are highly dependent on sales made through indirect channels, the loss of which would materially adversely affect our operations.
We derived 90.9%54.0% of revenue in the thirdsecond quarter of 20192020 through indirect channels of mainly government resellers, compared to 84.5%91.3% of our revenues in the quarter ended SeptemberJune 30, 2018.2019. We must continue to expand our sales through these indirect channels in order to increase our revenues. We cannot assure you that our products will gain market acceptance in these indirect sales channels or that sales through these indirect sales channels will increase our revenues. Further, many of our competitors are also trying to sell their products through these indirect sales channels, which could result in lower prices and reduced profit margins for sales of our products.
You will experience substantial dilution upon the conversion or redemption of the shares of preferred stock that we issued in our private placements or in the event we raise additional funds through the issuance of new shares of our common stock or securities convertible or exercisable into shares of common stock.
On November 1, 2019, we had 13,539,736 shares of common stock outstanding. Upon conversion of all outstanding shares of preferred stock, we would have 14,607,178 shares of common stock outstanding, approximately a 7.9% increase in the number of shares of our common stock outstanding.
In addition, management may issue additional shares of common stock or securities exercisable or convertible into shares of common stock in order to finance our continuing operations. Any future issuances of such securities would have additional dilutive effects on the existing holders of our Common Stock.
Further, the occurrence of certain events could entitle holders of our Series 2 Preferred Stock and Series 3 Preferred Stock to require us to redeem their shares for a certain number of shares of our common stock. Assuming (i) we have paid all liquidated damages and other amounts to the holders, (ii) paid all outstanding dividends, (iii) a volume weighted average price of $4.50, which was the ten-day volume weighted average closing price of our common stock on November 1, 2019, and (iv) our 13,529,236 shares of common stock outstanding on November 1, 2019, upon exercise of their redemption right by the holders of the Series 3 Preferred Stock and the Series 2 Preferred Stock, we would be obligated to issue approximately 97,600 shares of our common stock. This would represent an increase of approximately 0.7% in the number of shares of our common stock as of November 1, 2019.
The conversion of preferred stock we issued in the private placements may cause the price of our common stock to decline.
The holders of the shares of our 5% Preferred Stock may freely convert their shares of preferred stock and sell the underlying shares of common stock pursuant to Rule 144 of the Securities and Exchange Commission. As of November 1, 2019, 800,000 shares of our 5% Preferred Stock had converted into 1,272,263 shares of common stock and 200,000 shares of our 5% preferred stock, convertible into 318,065 shares of common stock, remain outstanding.
The holders of the shares of Series 2 5% Preferred Stock may freely convert their shares of preferred stock and sell the underlying shares of common stock pursuant to Rule 144 of the Securities and Exchange Commission. As of November 1, 2019, 605,200 shares of Series 2 Preferred Stock had converted into 605,200 shares of common stock and 460,000 shares of Series 2 5% preferred stock remain outstanding.
The holders of the shares of Series 3 5% Preferred Stock may freely convert their shares of Series 3 Preferred Stock and sell the underlying shares of common stock pursuant to Rule 144 of the Securities and Exchange Commission. As of November 1, 2019, 275,230 shares of Series 3 Preferred Stock had converted into 275,230 shares of common stock and 289,377 shares of Series 3 5% preferred stock remain outstanding.
For the four weeks ended on November 1, 2019, the average daily trading volume of our common stock on the OTCQB was 8,350 shares. Consequently, if holders of preferred stock elect to convert their remaining shares and sell a material amount of their underlying shares of common stock on the open market, the increase in selling activity could cause a decline in the market price of our common stock. Furthermore, these sales, or the potential for these sales, could encourage short sales, causing additional downward pressure on the market price of our common stock.
You will experience substantial dilution upon the exercise of stock options currently outstanding.
On November 1, 2019,July 31, 2020, we had 13,539,73613,792,030 shares of common stock outstanding. Upon the exercising of current options exercisable at or below the exercise price of $2.73,$4.75, we would have approximately 14,400,00014,546,533 shares of common stock outstanding, a 6.4%5.5% increase in the number of shares of our common stock outstanding.
Our management and larger stockholders exercise significant control over our company and have the ability to approve or take actions that may be adverse to your interests.
As of November 1, 2019,the date of this Quarterly Report, our executive officers directors and preferred stockholdersdirectors beneficially own approximately 36%28% of our voting power. In addition, other related non-affiliate parties control approximately 26%35% of voting power. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could delay or prevent someone from acquiring or merging with us. These stockholders may use their influence to approve or take actions that may be adverse to the interests of holders of our Common Stock. Further, we contemplate the possible issuance of shares of our Common Stock or of securities exercisable or convertible into shares of our Common Stock in the future to our Chief Executive Officer, and Chief Financial Officer.Officer and Senior Vice President. Any such issuance will increase the percentage of stock our Chief Executive Officer, Chief Financial Officer, Senior Vice President and our management group beneficially holds.
Item 6. | Exhibits |
The following Exhibits are filed with this report form 10-Q:
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act. | |
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act. | |
32.1 | ||
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INTRUSION INC. | ||||
Date: | /s/ | |||
| ||||
Director, | ||||
(Principal Executive Officer) | ||||
Date: | /s/ Michael L. Paxton | |||
Michael L. Paxton | ||||
Chairman, Vice President, Chief Financial Officer, | ||||
(Principal Financial & Accounting Officer) |