Company Quick10K Filing
Intrusion
Price4.51 EPS0
Shares15 P/E17
MCap69 P/FCF24
Net Debt-2 EBIT4
TEV67 TEV/EBIT16
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-15
10-K 2019-12-31 Filed 2020-03-27
10-Q 2019-09-30 Filed 2019-11-13
10-Q 2019-06-30 Filed 2019-08-13
10-Q 2019-03-31 Filed 2019-05-14
10-K 2018-12-31 Filed 2019-03-28
10-Q 2018-09-30 Filed 2018-11-13
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-11
10-K 2017-12-31 Filed 2018-03-29
10-Q 2017-09-30 Filed 2017-11-14
10-Q 2017-06-30 Filed 2017-08-14
10-Q 2017-03-31 Filed 2017-05-15
10-K 2016-12-31 Filed 2017-03-29
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-12
10-Q 2016-03-31 Filed 2016-05-13
10-K 2015-12-31 Filed 2016-03-29
10-Q 2015-09-30 Filed 2015-11-16
10-Q 2015-06-30 Filed 2015-08-10
10-Q 2015-03-31 Filed 2015-05-13
10-K 2014-12-31 Filed 2015-03-27
10-Q 2014-09-30 Filed 2014-11-13
10-Q 2014-06-30 Filed 2014-08-13
10-Q 2014-03-31 Filed 2014-05-13
10-K 2013-12-31 Filed 2014-03-28
10-Q 2013-09-30 Filed 2013-11-13
10-Q 2013-06-30 Filed 2013-08-13
10-Q 2013-03-31 Filed 2013-05-14
10-K 2012-12-31 Filed 2013-03-28
10-Q 2012-06-30 Filed 2012-08-13
10-Q 2012-03-31 Filed 2012-05-14
10-K 2011-12-31 Filed 2012-03-30
10-Q 2011-09-30 Filed 2011-11-10
10-Q 2011-06-30 Filed 2011-08-12
10-Q 2011-03-31 Filed 2011-05-12
10-K 2010-12-31 Filed 2011-03-29
10-Q 2010-09-30 Filed 2010-11-10
10-Q 2010-06-30 Filed 2010-08-12
10-Q 2010-03-31 Filed 2010-05-13
10-K 2009-12-31 Filed 2010-03-29
8-K 2020-05-22
8-K 2020-05-22
8-K 2020-05-14
8-K 2020-02-24
8-K 2019-11-11
8-K 2019-11-01
8-K 2019-10-24
8-K 2019-08-12
8-K 2019-05-16
8-K 2019-05-13
8-K 2019-02-11
8-K 2018-11-12
8-K 2018-05-17
8-K 2018-05-07
8-K 2018-02-12

INTZ 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 ex_186562.htm
EX-31.2 ex_186564.htm
EX-32.1 ex_186565.htm

Intrusion Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
10.07.14.31.4-1.4-4.32012201420172020
Assets, Equity
4.13.22.21.30.3-0.62012201420172020
Rev, G Profit, Net Income
1.50.90.3-0.2-0.8-1.42012201420172020
Ops, Inv, Fin

10-Q 1 intz20200331_10q.htm FORM 10-Q intz20200331_10q.htm
 
 

 



 

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 March 31, 2020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                        

 

Commission File Number 0-20191

 

INTRUSION INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

75-1911917

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

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

(Address of principal executive offices)

(Zip Code)

 

(972) 234-6400

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

* * * * * * * * * *

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

Yes ☒ No ☐

 

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

Yes ☒ No ☐

 

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

☐ 

 

Smaller reporting company

     

Emerging growth company

 

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

 

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

 

The number of shares outstanding of the Registrant’s Common Stock, $0.01 par value, on May 1, 2020 was 13,778,030.

 



 

1

 

INTRUSION INC.

 

INDEX

 

PART I – FINANCIAL INFORMATION

 
   

Item 1. Financial Statements

3
   

Unaudited Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

3
   

Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019

4
   
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2020 and 2019 5
   

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

6
   

Notes to Unaudited Condensed Consolidated Financial Statements

7
   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

11
   

Item 4. Controls and Procedures

15
   

PART II – OTHER INFORMATION

 
   

Item 1. Legal Proceedings

16
   

Item 1A. Risk Factors

16
   

Item 6. Exhibits

19
   

Signature Page

20

 

2

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

INTRUSION INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

 

   

March 31,

2020

   

December 31,
2019

 

ASSETS

               

Current Assets:

               

Cash and cash equivalents

  $ 3,217     $ 3,334  

Accounts receivable

    1,032       1,566  

Prepaid expenses

    169       152  

Total current assets

    4,418       5,052  

Noncurrent Assets:

               

Property and equipment, net

    333       335  

Finance leases, right-of-use assets, net

    52       62  

Operating leases, right-of-use assets, net

    1,285       1,348  

Other assets

    38       38  

Total noncurrent assets

    1,708       1,783  

TOTAL ASSETS

  $ 6,126     $ 6,835  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

Current Liabilities:

               

Accounts payable and accrued expenses

  $ 1,051     $ 1,080  

Dividends payable

    53       20  

Finance leases liability, current portion

    43       43  

Operating leases liability, current portion

    288       284  

Deferred revenue

    284       516  

Total current liabilities

    1,719       1,943  

Noncurrent Liabilities:

               

Operating leases liability, noncurrent portion

    1,244       1,315  

Finance leases liability, noncurrent portion

    11       21  

Total noncurrent liabilities

    1,255       1,336  
                 

Commitments and contingencies

               
                 

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 2020 and $1,013 in 2019

    707       707  

Series 2 shares issued and outstanding — 420 in 2020 and 460 in 2019 Liquidation preference of $1,068 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 $590 in 2020 and $634 in 2019

    379       412  

Common stock, $0.01 par value:

               

Authorized shares — 80,000

               

Issued shares — 13,788 in 2020 and 13,552 in 2019 Outstanding shares — 13,778 in 2020 and 13,542 in 2019

    138       136  

Common stock held in treasury, at cost – 10 shares

    (362

)

    (362

)

Additional paid-in capital

    56,914       56,759  

Accumulated deficit

    (55,242

)

    (54,777

)

Accumulated other comprehensive loss

    (43

)

    (43

)

Total stockholders’ equity

    3,152       3,556  

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

  $ 6,126     $ 6,835  

 

See accompanying notes.

 

3

 

 

INTRUSION INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

 

   

Three Months Ended

 
   

March 31,

2020

   

March 31,

2019

 

Revenue

  $ 1,795     $ 3,191  

Cost of revenue

    747       1,284  
                 

Gross profit

    1,048       1,907  
                 

Operating expenses:

               

Sales and marketing

    510       412  

Research and development

    753       182  

General and administrative

    256       331  
                 

Operating income (loss)

    (471

)

    982  
                 

Interest expense

    (1

)

    (35

)

Interest income

    7        
                 

Net Income (loss)

  $ (465

)

  $ 947  
                 

Preferred stock dividend accrued

    (33

)

    (34

)

Net income (loss) attributable to common stockholders

  $ (498

)

  $ 913  
                 
                 
Net income (loss) per share attributable to common stockholders:                

Basic

  $ (0.04 )   $ 0.07  

Diluted

  $ (0.04

)

  $ 0.06  
                 
Weighted average common shares outstanding:                

Basic

    13,703       13,408  

Diluted

    13,703       15,323  

 

See accompanying notes.

 

4

 

 

INTRUSION INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

 

   

Three Months Ended

 
   

March 31, 2020

   

March 31, 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

    173       266  

Balance, end of quarter

    13,788       13,525  

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

    19       4  

Exercise of stock options

    74       218  

Preferred stock dividends declared, net of waived penalties by shareholders

    (33

)

    (28

)

Balance, end of quarter

  $ 56,914     $ 56,803  

ACCUMULATED DEFICIT

               

Balance, beginning of quarter

  $ (54,777

)

  $ (59,242

)

Net income (loss)

    (465

)

    947  

Balance, end of quarter

  $ (55,242

)

  $ (58,295

)

ACCUMULATED OTHER COMPREHENSIVE LOSS

               

Balance, beginning of quarter and end of quarter

  $ (43

)

  $ (43

)

TOTAL STOCKHOLDERS’ EQUITY

  $ 3,152     $ 81  

 

See accompanying notes.

 

5

 

 

INTRUSION INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 

   

Three Months Ended

 
   

March 31,

2020

   

March 31,
201
9

 

Operating Activities:

               

Net income (loss)

  $ (465

)

  $ 947  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    52       39  

Stock-based compensation

    19       4  

Penalties on dividends

          6  

Noncash lease costs

    63       246  

Changes in operating assets and liabilities:

               

Accounts receivable

    534       475  

Prepaid expenses and other assets

    (17

)

    (94

)

Accounts payable and accrued expenses

    (96

)

    (307

)

Deferred revenue

    (232

)

    (529

)

Net cash provided by (used in) operating activities

    (142

)

    787  
                 

Investing Activities:

               

Purchases of property and equipment

    (40

)

    (96

)

                 

Financing Activities:

               

Payments on loan from officer

          (1,000

)

Proceeds from stock options exercised

    75       220  

Payments of dividends

          (597

)

Reduction of finance lease liability

    (10

)

    (15

)

Net cash provided by (used in) financing activities

    65       (1,392

)

                 

Net decrease in cash and cash equivalents

    (117

)

    (701

)

Cash and cash equivalents at beginning of period

    3,334       1,652  

Cash and cash equivalents at end of period

  $ 3,217     $ 951  
                 
                 

SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES:

               
                 

Preferred stock dividends accrued

  $ 33     $ 34  

Conversion of preferred stock to common

  $ 96     $  

 

See accompanying notes.

 

6

 

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 detect, report and mitigate cybercrimes and advanced persistent threats.

 

Our product families include:

 

 

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

 

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

 

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

 

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

 

  end-users, and
 

value-added resellers.

 

Our end-user customers include:

 

 

U.S. federal government entities,

 

state and local government entities,

 

large and diverse conglomerates,

 

manufacturing entities, and

 

other customers.

 

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

 

 

2.

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Item 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The December 31, 2019 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 month period ended March 31, 2020 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, 2019, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 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.

 

7

 

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 month periods ended March 31, 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. 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. We reduced our borrowing under this note to zero as of May 2019.

 

As of October 24, 2019, G. Ward Paxton passed away, terminating the CEO Note with the result that future borrowings thereunder will no longer be available to the Company. Our management will be assessing whether to replace this borrowing capacity 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 March 31, 2020 and 2019, the Company did not grant any stock options to employees or directors. The Company recognized $19,000 and $4,000, respectively, in stock-based compensation expense for the three month periods ended March 31, 2020 and 2019.

 

During the three month period ended March 31, 2020, 172,600 options were exercised under the 2005 Plan compared to 266,000 in the previous year comparative quarter.

 

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.

 

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.

 

8

 

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.

 

Contract assets represent contract billings for sales per contracts with customers and are classified as current. Our contract assets include our accounts receivables. At March 31, 2020, the Company had contract assets balance of $1,032,000. At December 31, 2019, the Company had contract assets balance of $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 March 31, 2020, the Company had contract liabilities balance of $284,000. At December 31, 2019, the Company had contract liabilities balance of $516,000.

 

 

6.

Net Income (Loss) Per Share

 

Basic net income (loss) per share is computed by dividing net income (loss) 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 and warrants. The aggregate number of common stock equivalents excluded from the diluted income (loss) per share calculation for the three month periods ending March 31, 2020 and 2019 are 1,876,352 and 0, respectively.

 

 

7.

Concentrations

 

Our operations are concentrated in one area—security software/entity identification. Sales to the U.S. Government through direct and indirect channels totaled 71.4% of total revenues for the first quarter of 2020 compared to 86.4% of total revenues for the first quarter of 2019. During the first quarter of 2020, approximately 70.0% of total revenues were attributable to three government customers compared to approximately 64.2% of total revenues attributable to three government customers in the first quarter of 2019. There was one individual commercial customer in the first quarter of 2020 attributable for 22.0% of total revenue compared to 11.1% of total revenue to one individual commercial customer for the same period in 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 March 31, 2020, we accrued $13,000 in dividends payable to the holders of our 5% Preferred Stock, $13,000 in dividends payable to the holders of our Series 2 5% Preferred Stock and $7,000 in dividends payable to the holders of our Series 3 5% Preferred Stock. As of March 31, 2020, we have $33,000 in accrued and unpaid dividends.

 

9

 

Delaware law provides that we may only pay dividends out of our capital surplus or, if no surplus is available, out of our net profits for the fiscal year the dividend is declared and/or the preceding fiscal year. These dividends continue to accrue on all our outstanding shares of preferred stock, regardless of whether we are legally able to pay them. If we are unable to pay dividends on our preferred stock, we will be required to accrue an additional late fee penalty of 18% per annum on the unpaid dividends for the Series 2 Preferred Stock and Series 3 Preferred Stock. Our late CEO, our Interim CEO and current CFO, and one outside board member who are holders of our Series 2 and Series 3 Preferred Stock have waived any possible late fee penalties. In addition to this late penalty, the holders of our Series 2 Preferred Stock and Series 3 Preferred Stock could elect to present us with written notice of our failure to pay dividends as scheduled, in which case we would have 45 days to cure such a breach. In the event that we failed to cure the breach, the holders of these shares of preferred stock would then have the right to require us to redeem their shares of preferred stock for a cash amount calculated in accordance with their respective certificates of designation. If we were required to redeem all shares of Series 2 Preferred Stock and Series 3 Preferred Stock as of March 31, 2020, the aggregate redemption price we would owe would be $1.7 million.

 

 

10.

Right-of-use Asset and Leasing Liabilities

 

Under the new lease accounting standard, we have determined that we have leases for right-of-use (ROU) assets. We have both finance right-of-use assets and operating right-of-use assets with a related lease liability. Our finance lease right-of-use assets consist of computer hardware and a copying machine. Our operating lease right-of-use assets include our rental agreements for our offices in Richardson and San Marcos, CA. Both types of lease liabilities are determined by the net present value of total payments and are amortized over the life of the lease. Both types of lease obligations are designed to terminate with the last scheduled payment. All of the finance lease right-of-use assets have a three year life and are in various stages of completion. The Richardson operating lease liability has a life of four years and eight months as of March 31, 2020. The San Marcos operating lease liability has a life of twelve months as of March 31, 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.

 

Supplemental cash flow information includes operating cash flows related to operating leases. For the three months ended March 31, 2020 and 2019, the Company had $88 thousand and $0, respectively, in operating cash flows related to operating leases.

 

Schedule of Items Appearing on the Statement of Operations:

 

   

Three Months Ended

 
   

March 31, 2020

   

March 31, 2019

 

Operating expense:

               

Amortization Expense – Finance ROU

    10       16  

Lease expense – Operating ROU

    83       79  

Other expense:

               

Interest Expense – Finance ROU

    1       1  

 

 

Future minimum lease obligations consisted of the following at March 31, 2020 (in thousands):

 

   

Operating

   

Finance

         

Period ending March 31,

 

ROU Leases

   

ROU Leases

   

Total

 

2020

  $ 365     $ 45     $ 410  

2021

    360       11       371  

2022

    372             372  

2023

    383             383  

2024

    256             256  

Thereafter

                 
    $ 1,736     $ 56     $ 1,792  

Less Interest*

    (204

)

    (2

)

       
    $ 1,532     $ 54          

 

*Interest is imputed for operating ROU leases and classified as lease expense and is included in operating expenses in the accompanying condensed consolidated statement of operations.

 

10

 

 

11. 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.

 

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. PPP loans bear a fixed interest rate of 1% over a two-year term, are guaranteed by the federal government, and do not require collateral. The loans may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company has applied for a PPP loan in the amount of $629 thousand, which was approved by the SBA on April 30, 2020. The Company expects to use the full proceeds of the PPP loan in accordance with the provisions of the CARES Act.

 

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 2018 Annual Report on Form 10-K, filed March 28, 2019, in Item 1A “Risk Factors” include, but are not limited to:

 

 

the transition of responsibilities from our co-founder, G. Ward Paxton, and the appointment of our current CFO, Michael L. Paxton, as a Director, Chairman of the Board, as well as Interim President and Interim CEO, may cause disruptions in the Company’s operations, take a significant portion of our management’s time and attention, and may cause our suppliers, vendors, and customers to be concerned about this transition;

 

 

the uncertain ramifications related to the coronavirus outbreak;

 

 

insufficient cash to operate our business and inability to meet our liquidity requirements;

 

 

loss of revenues due to the failure of our newer products 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 capacity available to the Company under the CEO Note and whether any such terms would be available on terms acceptable to the Company, if at all;

 

 

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;

 

11

 

 

the adverse effect that payment of accrued dividends on our preferred stock would have on our cash resources and the substantial dilution upon the conversion or redemption of our preferred stock;

 

 

the consequences of our inability to pay scheduled dividends on shares of our preferred stock;

 

 

the potentially detrimental impact that the conversion of preferred stock would have on the price of our common stock;

 

 

the ability of our preferred stockholders to hinder additional financing; and

 

 

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

 
   

March 31, 2020

   

March 31, 2019

 

Total revenue

    100.0

%

    100.0

%

                 

Total cost of revenue

    41.6       40.2  
                 

Gross profit

    58.4       59.8  
                 

Operating expenses:

               

Sales and marketing

    28.4       12.9  

Research and development

    41.9       5.7  

General and administrative

    14.3       10.4  
                 

Operating income (loss)

    (26.2

)

    30.8  
                 

Interest income

    0.4        

Interest expense

    (0.1

)

    (1.1

)

                 

Income (loss) before income tax provision

    (25.9

)

    29.7  
                 

Income tax provision

           
                 

Net income (loss)

    (25.9

)%

    29.7

%

Preferred stock dividends accrued

    (1.8

)

    (1.1

)

                 

Net income (loss) attributable to common stockholders

    (27.7

)%

    28.6

%

 

 

 

   

Three Months Ended

 
   

March 31, 2020

   

March 31, 2019

 

Domestic revenues

    100.0

%

    100.0

%

Export revenues

           
                 

Net revenues

    100.0

%

    100.0

%

 

12

 

Net Revenues. Product revenues decreased for the quarter ended March 31, 2020 to $1.8 million, compared to $3.2 million for the quarter ended March 31, 2019. TraceCop revenues decreased to $1.7 million for the quarter ended March 31, 2020, compared to $3.1 million for the quarter ended March 31, 2019. Savant revenues remained constant at $0.1 million for the quarter ended March 31, 2020 and 2019. Substantially all of our revenue for the quarters ended March 31, 2020 and 2019 were derived from TraceCop/Savant sales.

 

Concentration of Revenues. Revenues from sales to various U.S. government entities totaled $1.3 million, or 71.4% of revenues, for the quarter ended March 31, 2020, compared to $2.8 million, or 86.4% of revenues, for the same period in 2019. 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. There was one individual commercial customer in the first quarter of 2020 attributable for 22.0% of total revenue compared to 11.1% of total revenue to one individual commercial customer for the same period in 2019.

 

Gross Profit. Gross profit was $1.0 million or 58.4% of net revenues for the quarter ended March 31, 2020, compared to $1.9 million or 59.8% of net revenues for the quarter ended March 31, 2019. Gross profit on product revenues for the quarter ended March 31, 2020 was 58.4% compared to 59.8% for the quarter ended March 31, 2019, mainly due to TraceCop/Savant product mix. 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 increased to $0.5 million for the quarter ended March 31, 2020, compared to $0.4 million for the quarter ended March 31, 2019. Sales and marketing expenses may vary in the future. Sales and marketing expenses increased compared to the comparable quarter due to increases in labor and expenses. We believe that these costs may increase through the end of 2020 if we achieve anticipated increases in revenue.

 

Research and Development. Research and development expenses increased to $0.8 million for the quarter ended March 31, 2020, compared to $0.2 million for the quarter ended March 31, 2019. The increase in research and development expense was due to an increase in labor expense due to less direct labor 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; mainly dependent on levels of research and development labor expense charged to direct labor.

 

General and Administrative. General and administrative expenses remained constant at $0.3 million for the quarters ended March 31, 2020 and 2019. It is expected that general and administrative expenses will remain relatively constant throughout the remainder of 2020, although expenses may be increased if we achieve anticipated increases in revenue.

 

Interest Expense. Interest expense decreased to $1 thousand for the quarter ended March 31, 2020, compared to $35 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. Interest income earned on bank deposits was $7 thousand for the quarter ended March 31, 2020 compared to none for the same period in 2019.

 

Liquidity and Capital Resources

 

Our principal source of liquidity at March 31, 2020, was approximately $3.2 million of cash and cash equivalents. At March 31, 2020, we had working capital of $2.7 million compared to $0.6 million at March 31, 2019.

 

13

 

Net cash used by operations for the three months ended March 31, 2020 was $142 thousand due primarily to a net loss of $465 thousand and the following uses of cash: a $232 thousand decrease in deferred revenue, a $96 thousand decrease in accounts payable and accrued expenses, and a $17 thousand increase in prepaid expenses and other assets. This was partially offset by the following provisions of cash and non-cash items: a $534 thousand decrease in accounts receivable, $63 thousand in noncash lease costs, $52 thousand in depreciation expense, and $19 thousand in stock-based compensation. Net cash provided by operations for the three months ended March 31, 2019 was $787 thousand due primarily to a net income of $947 thousand and the following sources of cash and non-cash items: a $475 thousand decrease in accounts receivable, $246 thousand in noncash lease costs, $39 thousand in depreciation expense, $6 thousand in penalties and waived penalties on dividends, and $4 thousand in stock-based compensation. This was partially offset by a $529 thousand decrease in deferred revenue, a $307 thousand decrease in accounts payable and accrued expenses, and a $94 thousand increase in prepaid expenses and other assets. Future fluctuations in 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 by investing activities for the three months ended March 31, 2020, was $40 thousand for net purchases of property and equipment, compared to net cash used in investing activities for the three months ended March 31, 2019, was $96 thousand for net purchases of property and equipment.

 

Net cash provided by financing activities in 2019 was $65 thousand from the proceeds on the exercise of stock options of $75 thousand and offset by the use of cash for payments on principal of finance right-of-use leases of $10 thousand. Net cash used by financing activities in 2019 was $1.4 million with payments to the CEO Note of $1.0 million, payments for preferred stock dividends of $597 thousand, and payment on principal of finance right-of-use leases of $15 thousand. This was directly offset by the following provisions of cash: proceeds from exercise of stock options of $220 thousand.

 

At March 31, 2020, the Company did not have any material commitments for capital expenditures.

 

During the three months ended March 31, 2020, the Company funded its operations through the use of cash and cash equivalents.

 

As of March 31, 2020, we had cash and cash equivalents of approximately $3,217,000, down from approximately $3,334,000 as of December 31, 2019. We had a net loss of $465,000 for the quarter ended March 31, 2020 compared to a net income of $947,000 for the quarter ended March 31, 2019. We are obligated to make payments of accrued dividends on all our outstanding shares of preferred stock that will reduce our available cash resources. 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 October 24, 2019, our funding available from the CEO Note terminated. Our management will be assessing whether to replace this borrowing capacity 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, possible additional investments of private equity and debt, and the Potential Replacement Funding Facility. 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. If our operations do not generate positive cash flow in the 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.

 

14

 

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 March 31, 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, 2019, and concluded that there have not been any changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

15

 

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.

 

 

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, 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, 2019 filed on March 27, 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.

 

We may be unsuccessful in the transition of responsibilities of our co-founder, G. Ward Paxton upon his unexpected passing on October 24, 2019, which may have a material adverse effect on our results of operations.

 

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 managements time and attention as it works through this transition with the Company’s management, staff, vendors, suppliers 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 appointment 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.

 

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 may result in these customers delaying budget expenditures or re-allocating resources that would result in a decrease in orders from these customers.  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.

 

16

 

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 must expend time and resources addressing potential cyber-security risk, and any breach of our information security safeguards could have a material adverse effect on the Company.

 

            The threat of cyber-attacks requires additional time and money to be expended in efforts to prevent any breaches of our 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 confidence of our customers who depend upon our services to prevent and mitigate such attacks on their respective business.  Should a material breach of our information security systems occur, it would likely have a material adverse impact on our business operations, our customer relations, and our current and future sales prospects, resulting in a significant loss of 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 March 31, 2020, we had cash and cash equivalents of approximately $3,217,000, down from approximately $3,334,000 as of December 31, 2019. We had a net loss of $465,000 for the quarter ended March 31, 2020 compared to a net income of $947,000 for the quarter ended March 31, 2019. We are obligated to make payments of accrued dividends on all our outstanding shares of preferred stock that will reduce our available cash resources. 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 October 24, 2019, our funding available from the CEO Note terminated. Our management will be assessing whether to replace this borrowing capacity 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, possible additional investments of private equity and debt, and the Potential Replacement Funding Facility. 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. If our operations do not generate positive cash flow in the upcoming year, or if we are not able to obtain additional debt or equity financing on terms and conditions acceptable to us, if at all, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations.

 

We had a net loss of $0.5 million for the quarter ended March 31, 2020, and we have an accumulated deficit of $55.2 million as of March 31, 2020. To continue current financial performance, we must increase revenue levels.

 

For the quarter ended March 31, 2020, we had a net loss of $0.5 million and had an accumulated deficit of approximately $55.2 million as of March 31, 2020, compared to a net income of $947 thousand for the quarter ended March 31, 2019 and an accumulated deficit of approximately $54.8 million at December 31, 2019. We need to increase current revenue levels from the sales of our products if we are to regain profitability. If we are unable to achieve these revenue levels, losses could continue for the near term and possibly longer, and we may not regain 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 March 31, 2020, sales to U.S. government entities/resellers collectively accounted for 71.4% of our revenues, compared to 86.4% for the comparable period in 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.

 

17

 

Almost 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 volatility in growth.

 

Almost all of our revenues result from sales of one security product line. TraceCop revenues were $1.7 million for the quarter ended March 31, 2020, compared to $3.1 million for the first quarter 2019. Savant revenues remained constant at $0.1 thousand for the quarters ended March 31, 2020 and 2019. There was one individual commercial customer in the first quarter of 2020 attributable for 22.0% of total revenue compared to one individual customer with 11.1% of total revenue for the same period in 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.

 

We are highly dependent on sales made through indirect channels, the loss of which would materially adversely affect our operations.

 

We derived 37.3% of revenue in the first quarter of 2020 through indirect channels of mainly government resellers, compared to 67.6% of our revenues in the quarter ended March 31, 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 May 1, 2020, we had 13,778,030 shares of common stock outstanding. Upon conversion of all outstanding shares of preferred stock, we would have 14,782,278 shares of common stock outstanding, approximately a 7.3% 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 $3.17, which was the ten-day volume weighted average closing price of our common stock on May 1, 2020, and (iv) our 13,778,030 shares of common stock outstanding on May 1, 2020, 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 906,550 shares of our common stock. This would represent an increase of approximately 6.6% in the number of shares of our common stock as of May 1, 2020.

 

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 May 1, 2020, 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. For the quarter ended March 31, 2020, 40,000 shares of Series 2 5% Preferred Stock was converted to common stock. As of May 1, 2020, 645,200 shares of Series 2 Preferred Stock had converted into 645,200 shares of common stock and 420,000 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. For the quarter ended March 31, 2020, 23,194 shares of Series 3 5% Preferred Stock was converted to common stock. As of May 1, 2020, 298,424 shares of Series 3 Preferred Stock had converted into 298,424 shares of common stock and 266,183 shares of Series 3 5% preferred stock remain outstanding.

 

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Our common stock is thinly traded, which may negatively affect your ability to sell our shares on the OTCQB Marketplace (the “OTCQB”) as well as adversely affect the price at which you may be able to sell those shares. For the four weeks ended on May 1, 2020, the average daily trading volume of our common stock on the OTCQB was 14,995 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 May 1, 2020, we had 13,778,030shares of common stock outstanding. Upon the exercising of current options exercisable at or below the exercise price of $2.73, we would have approximately 14,523,000 shares of common stock outstanding, a 5.4% 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 May 1, 2020, our executive officers, directors and preferred stockholders beneficially own approximately 27% of our voting power. In addition, other related non-affiliate parties control approximately 36% 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 Interim Chief Executive Officer and Chief Financial Officer. Any such issuance will increase the percentage of stock our Interim Chief Executive Officer, Chief Financial Officer 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

Certification Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

 

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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: May 14, 2020

        /s/ Michael L. Paxton

   
 

Michael L. Paxton

 
 

Director, Chairman of the Board, Interim President & Interim Chief Executive Officer

 
 

(Principal Executive Officer)

 
     
     

Date: May 14, 2020

        /s/ Michael L. Paxton

   
 

Michael L. Paxton

 
 

Chief Financial Officer,
Treasurer & Secretary

 
 

(Principal Financial & Accounting Officer)

 

 

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