Intrusion Inc S-1/A, filed Oct 5, 2020
Intrusion Inc (INTZ)
As filed with the Securities and Exchange Commission on October 5, 2020
Registration No. 333-248398
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT No. 1 to FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Intrusion Inc.
(Exact name of registrant as specified in its charter)
| DELAWARE | 3576 | 75-1911917 | ||
|
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) | ||
|
1101 East Arapaho Road, Suite 200 Richardson, Tx 75081 (972) 234-6400
|
||||
| (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) |
Jack B. Blount
Chief Executive Officer
Intrusion Inc.
110 East Arapaho, Suite 200
Richardson, Texas 75081
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
| Quentin Faust, Esq. | Sara L. Terheggen, Esq | |
| Faust Law Group PLLC | The NBD Group, Inc. | |
|
P.O. Box 700363 Dallas, Texas 75370 |
350 N. Glendale Avenue, Ste B522 Glendale, California 91206 | |
| (214) 727-4591 | (310) 890-0110 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 to Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered |
Proposed Maximum Amount to be Registered(1) |
Proposed Offering Price per Share(2) |
Proposed Maximum Offering Price |
Amount of Registration Fee(3)(4) | ||||
| Common Stock, par value $0.01 | 3,565,000 | $14.32 | $51,050,800 | $5,569.64 | ||||
| (1) | Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended (the “Securities Act”) and based on the maximum amount of shares to be offered and includes 1,100,000 shares to be sold by selling stockholders, up to 2,000,000 shares to be newly issued by the Company in the offering, and up to 465,000 shares under the underwriter’s option to purchase additional shares |
| (2) | Offering price per share based on the last sales price of our common stock on the OTCQB on October 2, 2020. |
| (3) | The fee is calculated by multiplying the aggregate offering amount by 0.00010910, pursuant to Section 6(b) of the Securities Act. |
| (4) | $2,596.00 was previously paid with Form S-1 filed August 25, 2020 |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information contained in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and neither we nor the selling stockholders are soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion, dated October 5, 2020
Preliminary Prospectus
3,100,000 shares
of Common Stock
Intrusion Inc.
Intrusion Inc. is offering 2,000,000 shares of our common stock and the selling stockholders are offering 1,100,000 shares of our common stock in an underwritten public offering (the “Underwritten Shares”). Under the terms and subject to the conditions in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom B. Riley Securities, Inc. is acting as representative, have severally agreed to purchase, and we and the selling stockholders have agreed to sell to them, severally, 3,100,000 shares of common stock.
Our common stock currently trades on the OTCQB, where it is listed under the symbol “INTZ.” As of October 2, 2020, the last sale price of our common stock as reported on OTCQB was $14.32 per share. There is a limited public trading market for our common stock. We have assumed a public offering price of $14.32, which represents the last reported bid price of our common stock as reported on the OTCQB on October 2, 2020. The final public offering price will be determined through negotiation between us and the underwriters in the offering and the assumed public offering price used throughout this prospectus may not be indicative of the actual offering price. We have applied to list our common stock on the Nasdaq Capital Market, under the symbol “INTZ”. We believe that upon completion of the offering contemplated by this prospectus, we will meet the standards for listing on the Nasdaq Capital Market. We cannot guarantee that we will be successful in listing our common stock on the Nasdaq Capital Market.
| Per Share | Total | |||||||
| Public offering price | $ | $ | ||||||
| Underwriting discounts and commissions (1) | $ | $ | ||||||
| Proceeds, before expenses, to us | $ | $ | ||||||
| Proceeds, before expenses, to Selling Stockholders | $ | $ | ||||||
| (1) | The underwriters will receive compensation in addition to the underwriting discounts and commissions. See “Underwriting” beginning on page 49. |
The Company has granted the underwriters an option for a period of 30 days to purchase up to an additional 465,000 shares of common stock.
Certain of our directors and executive officers may purchase shares of common stock in this offering.
Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock in “Risk factors” beginning on page 8 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock to investors on or about , 2020.
B. RILEY SECURITIES
The date of this prospectus is , 2020
Neither we, nor the selling stockholders, nor the underwriters have authorized anyone to provide you with information other than that contained in this prospectus or any free writing prospectus prepared by or on behalf of us or to which we have referred you. The underwriters, selling stockholders, and we take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This is an offer to sell only in jurisdictions where it is lawful to do so. The information contained in this prospectus or any free writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this public offering and the distribution of this prospectus applicable to that jurisdiction.
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This prospectus summary highlights certain information appearing elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision. You should read the entire prospectus carefully, including the information under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes thereto included in this prospectus, before investing. This prospectus includes forward-looking statements that involve risks and uncertainties. See “Information regarding forward-looking statements.”
In this prospectus, unless the context otherwise requires, the terms “Intrusion,” “the Company,” “we,” “us” and “our” refer to Intrusion Inc.
This prospectus includes trademarks, service marks and trade names owned by us or other companies. All trademarks, service marks and trade names included in this prospectus are the property of their respective owners.
Overview
In addition to the historical information contained herein, the discussion in this prospectus contains certain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. The cautionary statements made in this prospectus should be read as being applicable to all related forward-looking statements whenever they appear in this prospectus. Our actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the section captioned “Risk Factors” on page 8 of this prospectus as well as those cautionary statements and other factors set forth elsewhere herein.
Our corporate information
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. We have applied for trademark protection for our new INTRUSION Shield cybersecurity solution.
Our Business
We develop, market and support a family of entity identification, high speed data mining, cybercrime and advanced persistent threat detection solutions. Intrusion’s solutions 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 solutions 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.
Our Solutions
TraceCop
Our TraceCop solution family includes a database of more than 400 terabytes of worldwide IP addresses, registrant information and their associations, along with a plurality of related IP information, some dating back nearly two decades. When combined with Intrusion’s multitude of cyber security ‘global threat feeds’, along with our TraceCop family of proprietary supporting tools, this vast and ever expanding capability is used in conjunction with our customer’s data to help identify areas of vulnerability and potential cyber security threats. In addition to its extensive capability, the TraceCop family includes analytical software with a GUI interface to assist the analysts in locating cybercriminals and other potential ‘bad actors’ or network anomalies.
Savant
Savant is a high speed network data mining and analysis hardware and software solution that organizes the data into networks of relationships and associations. Its patented design exceeds performance expectations and ensures ‘deep dives’ into data-in-motion in order to quickly and accurately detect advanced persistent threats. Savant can operate on networks with data flows of over 20 gigabits per second, and still maintain a 100% inspection rate of all packets.
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Shield
We are in the process of developing a new solution, INTRUSION Shield, that is designed to be a next generation network detection and response solution. After 20 years of providing research, analysis, and tools to the federal government and enterprise corporations, Intrusion possesses a comprehensive and proprietary threat enriched big data Cloud of Internet activity, including information about the activities of malicious online actors. INTRUSION Shield will combine the TraceCop comprehensive, proprietary 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 cybercrimes.
Shield is a combination of plug-n-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 threat-enriched Big Data Cloud 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 require the displacement of any existing solutions but instead provides a new, additional layer of cybersecurity for customers. The U.S. market consists of 34 million businesses of which 70% of this market is the small and medium sized business market. While the company believes that many large enterprises will recognize the need this solution addresses and will be incentivized to purchase Shield, the enterprise market has many decision makers for new cybersecurity purchases; therefore, the sale cycle may be longer for this solution. 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. In addition to direct sales and telesales 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 we have twelve companies who have been testing the Beta release since early 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 seats and the size of the customer’s internet connection be that 1Gb, 10Gb or 100 Gb.
Shield has received very positive feedback from Beta customers who have been surprised and pleased with the ease of installation due to the plug-n-play architecture. Within the first three days of Beta testing, Shield identified and immediately shut down a total of 461,562 threats to three companies, defending them against possible cyber-attacks. Customers went on to say, “It was amazing how many potential threats were blocked in such a short period of time with the Shield solution. We didn’t realize how many connections were being attempted each day,” said the CEO of a defense company that is participating in the Beta testing. A VP of IT at a large manufacturing company commented, “It was easy to install Shield and because of the blocking we have seen we have already installed a second Shield at a subsidiary company and we anticipate purchasing Shield when it is shipping for several of our companies.”
In addition to Shield, we are developing complementary solutions to create a family of Shield offerings, including our first follow on offering, Shield CLOUD, which is targeted for use by businesses with a dedicated or hybrid Cloud network environment. We are in the process of Alpha testing Shield CLOUD, and we are developing additional solutions that will address cybersecurity needs in the areas of lateral traffic, remote employees, WiFi, and mobile devices.
Our Intellectual Property and Licenses
Our success and our ability to compete are dependent, in part, upon our proprietary technology. We principally rely on a combination of contractual rights, trade secrets and copyright laws to establish and protect our proprietary rights in our solutions. In addition, we have received two patents, and we are in the process of applying for patents for our INTRUSION Shield family of solutions. We have also entered into non-disclosure agreements with our suppliers, resellers, and certain customers to limit access to and disclosure of proprietary information. There can be no assurance that the steps taken by us to protect our intellectual property will be adequate to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology, although it would be extremely difficult to replicate our 24-year old proprietary and comprehensive internet databases.
We have entered into software and solution license agreements with various suppliers. These license agreements provide us with additional software and hardware components that add value to our cybersecurity solutions. These license agreements do not provide proprietary rights that are unique or exclusive to us and are generally available to other parties on the same or similar terms and conditions, subject to payment of applicable license fees and royalties. We do not consider any of the solution license, software or supplier agreements to be material to our business, but rather complementary to our business and offerings.
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Our Competition
The market for network and data protection security solutions is intensely competitive and subject to frequent introductions of new technologies, and potentially improved price and performance characteristics. Industry suppliers compete in areas such as conformity to existing and emerging industry standards, interoperability with networking and other cybersecurity solutions, management and security capabilities, performance, price, ease of use, scalability, reliability, flexibility, features and technical support. The market for identity identification and data mining is fragmented and thus allows more opportunities for companies to compete.
There are numerous companies competing in various segments of the data security markets. At this time, we have limited (if any) competitors for TraceCop; however, we expect competitors could emerge in the future. These competitors currently perform only a portion of the functions that we are able to perform with TraceCop. Also, we have been continuously collecting the TraceCop data for more than twenty years. We believe that none of our current or future competitors have the ability to provide this extremely valuable historical data. In our newest market segment, data mining and advanced persistent threat detection, we compete with several companies including Niksun, NetScout, Fireeye, and Darktrace.
We believe that our INTRUSION Shield solution, as well as the complementary offerings in the Shield family, will be novel and unique in our industry because of its plug-n-play installation, proprietary threat-enriched Big Data Cloud, real-time AI, monthly contract and will initially be used as a complement to our customer’s existing cybersecurity processes and third-party solutions and solutions. If Shield receives widespread acceptance in our market, we anticipate that other businesses will seek to compete with Shield; however, we believe our existing, mature, and proprietary database which are integral to the operation of Shield will be difficult, if not impossible, for other companies in our industry to replicate and will be a significant barrier to entry of competitors in the near and long term future of cyber security solutions.
Recent Developments
As of September 30, 2020, all current shares of issued and outstanding preferred stock were 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%. The elimination of these three classes of preferred stock removed 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).
Risks Related to our Business and this Offering
Below is a summary of some of the principal risks you face purchasing shares of our common stock in the offering:
| · | the market price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the public offering price; | |
| · | substantial blocks of our total outstanding shares may be sold into the market when “lock-up” or “market standoff” periods end; | |
| · | we have broad discretion in the use of the net proceeds from our public offering and may not use them effectively; and | |
| · | if you purchase shares of our common stock in our public offering, you may experience substantial and immediate dilution. |
Below is a summary of some of the principal risks we face in operating our business:
| · | the uncertain ramifications related to the coronavirus outbreak; | |
| · | our ability to produce and promote our new commercial solution, INTRUSION Shield, and market it through new sales channels to a new set of prospective customers; | |
| · | our need to increase current revenue levels in order to achieve sustainable profitability; | |
| · | our ability to raise funds through debt or equity offerings related to launching a commercial solution; | |
| · | 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 of our current solutions that are made through indirect channels; and | |
| · | the influence that our management and larger stockholders have over actions taken by the Company. |
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We hope to achieve several purposes through this offering. We wish to raise sufficient funds from the share of common stock we are issuing in the offering to introduce a new family of cybersecurity solutions and to transition the Company from providing a discrete set of information-security solutions primarily for use by governmental agencies to providing an over-all and unique cybersecurity solution that could work equally well for commercial customers as well as government agencies. To achieve that goal, we must transition our operations and focus from our current sales and marketing efforts towards marketing this new solution through expanded sales channels to a wider range of potential customers than we currently market to.
The offering of shares of our currently issued and outstanding common stock now held by the selling stockholders is intended to benefit the company by decreasing the concentration of stock currently held by the Company’s insiders, founders, and current management without deploying any of our cash reserves to effect this result. Upon completion of the offering, we anticipate that the amount of our common stock held by the selling stockholders as a group will decrease from 55.6% to 42.7%, without taking into account any sales by underwriters as a result of the exercise of the over-allotment. We believe that this shift in concentration of control will benefit us and our shareholders and reinforce our goal of transforming the company’s business model to leverage on our existing customers, solutions, and intellectual property assets to provide new solutions to an expanded customer base. In recognition of the fact that certain members of the selling stockholder group currently hold positions as our directors and officers, we have formed a special committee of the Board that excludes those interested members of our board and charged this committee with the authority to conduct all negotiations and provide all approvals related to the offering including those related to the participation of the selling stockholders.
| Common stock offered by the Company | 2,000,000 shares |
| Common stock offered by Selling Stockholders | 1,100,000 shares |
| Common stock to be outstanding after this offering | 16,929,279 shares |
| Option to purchase additional shares | Intrusion has granted the underwriters a 30-day option to purchase up to 465,000 additional shares of our common stock. |
| Use of proceeds |
We estimate that our net proceeds from the sale of 2 million shares of our common stock in this offering will be approximately $26,375,200, assuming a public offering price of $14.32 per share, which was the closing price of our common stock as reported on OTCQB on October 2, 2020, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We will receive no proceeds from the sale of shares by selling stockholders.
We intend to use our net proceeds from this offering (including any additional proceeds that we may receive if the underwriters exercise their option to purchase additional shares of our common stock), together with our existing cash, to complete the development of our new INTRUSION Shield™ solution and to promote, market and sell the INTRUSION Shield solution to commercial customers, as well as for general and administration expenses and other general corporate purposes. See “Use of Proceeds.” |
| Proposed Nasdaq symbol | Our common stock currently trades on the OTCQB under the symbol “INTZ.” In conjunction with this offering, we have applied to list our common stock on the Nasdaq under the symbol “INTZ.” We anticipate being able to list on Nasdaq upon the completion of this offering; however, we can provide no assurances that we will be approved for such a listing. |
| Risk factors | Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 8 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock. |
| Lock-up | We, each of our officers, directors, and all of our selling stockholders have agreed, subject to certain exceptions, including, without limitation, the shares being registered under this prospectus for sale by the selling stockholders, not to sell, offer, agree to sell, contract to sell, hypothecate, pledge, grant any option to purchase, make any short sale of, or otherwise dispose of or hedge, directly or indirectly, any shares of our capital stock or any securities convertible into or exercisable or exchangeable for shares of capital stock, for a period of (i) one-hundred twenty (120) days after the date of this prospectus, without the prior written consent of B. Riley Securities, Inc. See “Shares Eligible For Future Sale” and “Underwriting” for additional information. |
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The number of shares of our common stock to be outstanding immediately after the consummation of this offering is based on shares of common stock outstanding as of September 30, 2020, and does not reflect the potential issuance of up to 988,500 shares of common stock upon the exercise of outstanding stock options under our 2005 and 2015 Stock Option Plans.
Unless otherwise indicated, this prospectus reflects and assumes the following:
| · | the shares of common stock to be sold in this offering are sold at $14.32 per share of common stock, which was the closing price of our common stock as reported on OTCQB on October 2, 2020. | |
| · | no exercise by the underwriters of their option to purchase additional shares from us. |
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements, which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believe,” “estimate,” “project,” “anticipate,” “expect,” “seek,” “predict,” “continue,” “possible,” “intend,” “may,” “might,” “will,” “could,” would” or “should” or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this prospectus and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our solution candidates, research and development, commercialization objectives, prospects, strategies, the industry in which we operate and potential collaborations. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.
Forward-looking statements speak only as of the date of this prospectus. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. All forward-looking statements are based upon information available to us on the date of this prospectus.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition, business and prospects may differ materially from those made in or suggested by the forward-looking statements contained in this prospectus. In addition, even if our results of operations, financial condition, business and prospects are consistent with the forward-looking statements contained in this prospectus, those results may not be indicative of results in subsequent periods.
The factors set forth below under “Risk Factors” and other cautionary statements made in this prospectus should be read and understood as being applicable to all related forward-looking statements wherever they appear in this prospectus. The forward-looking statements contained in this prospectus represent our judgment as of the date of this prospectus. We caution readers not to place undue reliance on such statements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained above and throughout this prospectus.
You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The consolidated statements of income data for each of the years ended December 31, 2017, 2018, and 2019 and the consolidated balance sheets data as of December 31, 2018 and 2019 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.
| For the Years Ended December 31, | ||||||||||||
| Consolidated Statements of Operations Data: | 2017 | 2018 | 2019 | |||||||||
| (in thousands) | ||||||||||||
| Revenue | $ | 6,862 | $ | 10,276 | $ | 13,643 | ||||||
| Cost of Revenue | 2,824 | 3,847 | 5,342 | |||||||||
| Gross Profit | 4,038 | 6,429 | 8,301 | |||||||||
| Operating Expense: | ||||||||||||
| Sales and Marketing | 1,531 | 1,604 | 1,298 | |||||||||
| Research and Development | 2,162 | 1,237 | 1,314 | |||||||||
| General and Administrative | 1,094 | 1,112 | 1,182 | |||||||||
| Total Operating Expenses | 4,787 | 3,953 | 3,794 | |||||||||
| Income (Loss) From Operations | (749 | ) | 2,476 | 4,507 | ||||||||
| Interest Expense, net | (209 | ) | (189 | ) | (42 | ) | ||||||
| Other Income | 928 | – | – | |||||||||
| Income (Loss) Before Taxes | (30 | ) | 2,287 | 4,465 | ||||||||
| Income Tax Provision | – | – | – | |||||||||
| Net Income (Loss) | $ | (30 | ) | $ | 2,287 | $ | 4,465 | |||||
| Preferred Stock Dividends Accrued | (139 | ) | (139 | ) | (139 | ) | ||||||
| Net Income (Loss) Attributable to Common Stockholders | $ | (169 | ) | $ | 2,148 | $ | 4,326 | |||||
| Net Income (Loss) per share Attributable to Common Stockholders, basic | $ | (0.01 | ) | $ | 0.16 | $ | 0.32 | |||||
| Net Income (Loss) per share Attributable to Common Stockholders, diluted | $ | (0.01 | ) | $ | 0.14 | $ | 0.28 | |||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 12,836 | 13,049 | 13,502 | |||||||||
| Diluted | 12,836 | 15,063 | 15,352 | |||||||||
| As of December 31, | ||||||||
| Consolidated Balance Sheet Data: | 2018 | 2019 | ||||||
| (in thousands) | ||||||||
| Cash and cash equivalents | $ | 1,652 | $ | 3,334 | ||||
| Working capital | $ | (458 | ) | $ | 3,109 | |||
| Total Assets | $ | 4,069 | $ | 6,835 | ||||
| Total Liabilities | $ | 5,131 | $ | 3,279 | ||||
| Accumulated Deficit | $ | (59,242 | ) | $ | (54,777 | ) | ||
| Total stockholders' equity (deficit) | $ | (1,062 | ) | $ | 3,556 | |||
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Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our financial statements and related notes included elsewhere in this prospectus, before making an investment decision. If any of the following risks are realized, our business, financial condition, results of operations and prospects would likely be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment.
RISKS RELATED TO THIS OFFERING
The market price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the public offering price.
The price for our common stock in the offering will be determined through negotiations between the underwriters and us and may vary from the market price of our common stock immediately prior to or following our offering. If you purchase shares of our common stock in our public offering, you may not be able to resell those shares at or above the public offering price. We cannot assure you that the public offering price of our common stock, or the market price following our public offering, will equal or exceed the trading price of our stock on the OTCBQ prior to our public offering. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including those risks set forth in this prospectus.
Substantial blocks of our total outstanding shares may be sold into the market when “lock-up” or “market standoff” periods end. If there are substantial sales of shares of our common stock, the price of our common stock could decline.
The price of our common stock could decline if there are substantial sales of our common stock, particularly sales by our directors, executive officers, employees, and significant stockholders, or when there is a large number of shares of our common stock available for sale. After our offering, we will have 16,929,279 shares of our common stock outstanding, with approximately 8,554,218 of those shares subject to lock up agreements preventing their sale into the market for a period of 120 days. Once those shares are no longer subject to those restrictions, those shares of common stock may be sold freely in the public market. The market price of the shares of our common stock could decline as a result of the sale of a substantial number of our shares of common stock in the public market or the perception in the market that the holders of a large number of shares intend to sell their shares.
We have broad discretion in the use of the net proceeds from our public offering and may not use them effectively.
While we intend to apply a significant amount of the net proceeds we receive from the offering to develop, promote, and market our new INTRUSION Shield family of solutions, we cannot specify precisely how much of the offering proceeds will be used for those purposes and how much will be used for other purposes, including general corporate purposes and operating expenses. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from our public offering in a manner that does not produce income or that loses value.
If you purchase shares of our common stock in our public offering, you will experience substantial and immediate dilution.
Net tangible book value as of June 30, 2020, as adjusted to reflect preferred stock conversion, was $2,469,174, or $0.167 per share based on 14,796,279 shares of our common stock outstanding. After giving effect to our sale of newly issued shares of common stock in this offering, at an assumed public offering price of $14.32 per share, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2020, would have been $28,844,374 or $1.72 per share (assuming no exercise of the underwriters’ option to purchase additional shares of our newly issued common stock). This represents an immediate and substantial dilution of $12.60 per share to new investors purchasing common stock in this offering. You will experience additional dilution upon exercise of options to purchase common stock under our equity incentive plans or if we otherwise issue additional shares of our common stock.
| 8 |
RISKS RELATED TO OUR BUSINESS
We had a net loss of $0.7 million for the quarter ended June 30, 2020, and we have an accumulated deficit of $56.0 million as of June 30, 2020. To continue current financial performance, we must increase revenue levels.
For the quarter ended June 30, 2020, we had a net loss of $0.7 million and had an accumulated deficit of approximately $56.0 million as of June 30, 2020, compared to a net income of $1.8 million for the quarter ended June 30, 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 solutions 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.
We do not anticipate net revenue to increase for the third quarter of fiscal year 2020 as compared with the second quarter, which was lower than previous quarters. Lack of increased revenue could adversely affect our results of operation, our liquidity position, and result in a decline in the price of our common stock.
As of the date of this prospectus, the Company anticipates that we will not see any increase in our net revenue for the quarterly period ending on September 30, 2020 as compared with the second quarter, which was lower than previous quarters. While it is premature to determine whether this depressed revenue is a trend or merely a reflection of our customers’ varying ordering patterns, our inability to increase our net revenue could result in lower operating results for the fiscal year 2020, have a negative effect on our cash flow and our overall liquidity position, and potentially affect the perception of the Company’s value in the marketplace and result in a decline in the price of our common stock.
Further, our expense levels are based, in part, upon our expectations as to future revenues and are largely fixed in the short term. Therefore, we may not be able to timely adjust our expenditures in order to compensate for an unanticipated shortfall in revenue in any given quarter. Any significant, unanticipated shortfall in revenues could have an immediate and significant effect on our operating results for that quarter and might lead to a reduced market price for our stock.
We may be unable to successfully market, promote, and sell our new commercial solution, 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 succeed in launching our new INTRUSION Shield solution, including the time, attention, and focus of our senior management and our research and development team, coordination of new marketing strategies highlighting this new 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 solutions and services. In addition, significant financial resources will be required to successfully manage the implementation of this new solution. 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 could experience damage to our reputation in the cybersecurity industry in the event that our INTRUSION Shield solution fails to perform as expected, 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 solutions 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 delivery delays, or if our customers do not perceive the benefits of purchasing and using Shield as part of their comprehensive cybersecurity solution, our position as a leader in this technology space may be damaged and could affect the willingness of our customers, as well as potential customers, to purchase our other solutions that function separately from our INTRUSION Shield. Any reputational damage could result in a decrease in orders for all of our solutions, the loss of current customers, and a decrease in our overall revenues which could in turn have a material adverse effect on our results of operation.
| 9 |
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 have had to allocate resources and adjust budgets to accommodate real and 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 decreased demand by some of our customers for our current solutions. A continued decrease in orders for our solutions by government customers could cause a material adverse effect on our operations and financial results. While we anticipate that widening the scope of our customer base through the introduction of our INTRUSION Shield solution will minimize the effect of this decrease in demand by our government customers, we can offer no assurances as to the effects the Coronavirus may continue to have on our current or future customers.
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. While the price of our common stock has not experienced such volatility or loss in value, we can offer no assurances that the long-term effects on the overall US economy will not negatively affect us in the future.
We must expend time and resources addressing potential cybersecurity 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 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.
Fluctuations in our quarterly revenues may cause the price of our common stock to decline.
Our operating results have varied significantly from quarter to quarter in the past, and we expect our operating results to vary from quarter to quarter in the future due to a variety of factors, many of which are outside of our control. Therefore, if revenues are below our expectations, this shortfall is likely to adversely and disproportionately affect our operating results. Accordingly, we may not attain positive operating margins in future quarters. Any of these factors could cause our operating results to be below the expectations of securities analysts and investors, which likely would negatively affect the price of our common stock.
A large percentage of our current revenues are received from U.S. government entities, and the loss of these customers or our failure to widen the scope of our customer base to include general commercial enterprises could negatively affect our revenues.
A large percentage of our current revenues result from sales to U.S. government entities. If we were to lose one or more of these customers, our revenues could decline and our business and prospects may be materially harmed. Further, sales to the government present risks in addition to those involved in sales to commercial customers, including potential disruption due to appropriation and spending patterns, delays in approving a federal budget and the government’s right to cancel contracts and purchase orders for its convenience. While we expect that developing relationships with non-governmental customers will mitigate or eliminate this dependence on, and risk from, serving governmental entities, we can offer no assurances that we will be able to sufficiently diversify our customer portfolio in a time and manner to adequately mitigate this risk.
| 10 |
Almost all of our revenues are currently from one family of solutions with a limited number of customers, and the decrease of revenue from sales of this family of solutions 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 cybersecurity solution. There was one individual commercial customer in the second quarter of 2020 attributable for 3.5% of total revenue compared to one individual customer with 6.8% of total revenue for the same period in 2019. While we anticipate the introduction of our new INTRUSION Shield solution will minimize our dependence on this single solution, we can offer no assurances as such, and in the absence of a shift in solution mix, we may continue to face risks in the event that sales of this key solution to these limited customers were to decrease.
We are highly dependent on sales of our current solutions through indirect channels, the loss of which would materially adversely affect our operations.
For the years ended December 31, 2017, 2018 and 2019, we derived 64.5%, 70.3% and 70.3% of our revenues from sales through indirect sales channels, such as distributors, value-added resellers, system integrators, original equipment manufacturers and managed service providers. We must expand sales of our current solutions as well as any new solutions, such as the INTRUSION Shield, through these indirect channels in order to increase our revenues. We cannot assure you that our current solutions or future solutions 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 and solutions through these indirect sales channels, which could result in lower prices and reduced profit margins for sales of our solutions.
You will experience substantial dilution upon the exercise of certain stock options currently outstanding.
On September 30, 2020, we had 14,929,279 shares of common stock outstanding. Upon the exercising of current options exercisable at or below the exercise price of $4.25, we would have approximately 15,550,782 shares of common stock outstanding, a 4.2% increase in the number of shares of our common stock outstanding.
We resemble a developmental stage company and our business strategy may not be successful.
We depend exclusively on revenues generated from the sale of our current network security/advanced persistent threat detection solution (Savant), which has received limited market acceptance, and our entity identification, data mining and analytic solution (TraceCop). We can provide no assurances that these solutions or our newly developed INTRUSION Shield solution will ever achieve widespread market acceptance or that an adequate market for these solutions will ever emerge. Consequently, we resemble a developmental stage company and will face the following inherent risks and uncertainties:
| · | the need for our current and in-development solutions to achieve market acceptance and produce a sustainable revenue stream; | |
| · | our ability to manage costs and expenses; | |
| · | our dependence on key personnel; | |
| · | our ability to obtain financing on acceptable terms; and | |
| · | our ability to offer greater value than our competitors. |
Our business strategy may not successfully address these risks. If we fail to recognize significant revenues from the sales of our current and in-development solutions, our business, financial condition and operating results would be materially adversely affected.
If we fail to respond to rapid technological changes in the network security industry, we may lose customers or our solutions may become obsolete.
The network security industry is characterized by frequent product and service introductions, rapidly changing technology and continued evolution of new industry standards. We have and must continue to introduce upgrades to our current solutions rapidly in response to customer needs such as new computer viruses or other novel external attacks on computer networks. Further, our new INTRUSION Shield solution represents our efforts to continue to provide state-of-the art first-in-time innovation for our customer’s cybersecurity solutions. As a result, our success depends upon our ability to develop and introduce in a timely manner such upgrades, enhancements, and new solutions to meet evolving customer requirements and industry standards. The development of technologically advanced network security products and solutions is a complex and uncertain process requiring high levels of innovation, rapid response, and accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced solutions successfully in a timely manner. Further, we or our competitors may introduce new solutions or enhancements that shorten the life cycle of our existing solutions or cause our existing solutions to become obsolete.
| 11 |
We face intense competition from both start-up and established companies that may have significant advantages over us and our solutions.
The market for our solutions is intensely competitive. There are numerous companies competing with us in various segments of the data security markets, and their products or solutions may have advantages over our solutions in areas such as conformity to existing and emerging industry standards, interoperability with networking and other cybersecurity products, management and security capabilities, performance, price, ease of use, scalability, reliability, flexibility, features, and technical support.
Our principal competitors in the data mining and advanced persistent threat market include Niksun, NetScout, Fireeye, and Darktrace. Our current and potential competitors may have one or more of the following significant advantages over us:
| · | greater financial, technical and marketing resources; | |
| · | better name recognition; | |
| · | more comprehensive security solutions; | |
| · | better or more extensive cooperative relationships; and | |
| · | larger customer base. |
We cannot assure you that we will be able to compete successfully with our existing or new competitors. Some of our competitors may have, in relation to us, one or more of the following:
| · | longer operating histories; | |
| · | longer-standing relationships with OEM and end-user customers; and | |
| · | greater customer service, public relations and other resources. |
As a result, these competitors may be able to more quickly develop or adapt to new or emerging technologies and changes in customer requirements, or devote greater resources to the development, promotion and sale of their products or solutions. Additionally, it is likely that new competitors or alliances among existing competitors could emerge and rapidly acquire significant market share.
Our management and larger stockholders currently exercise significant control over our Company and will continue to have influence over our Company after the offering has concluded, and such influence may be in conflict to your interests.
As of September 30, 2020, our executive officers and directors beneficially own approximately 26.2% of our voting power. In addition, other related non-affiliate parties control approximately 33.5% of voting power. As a result, these stockholders have been able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, including the details of this offering. Although we follow our policies regarding related party transactions and have, in fact, created a special committee of our Board to negotiate, arrange, and complete this offering, including determining the extent of the participation of these stockholders in the offering, we cannot entirely eliminate the influence of these stockholders as long as they hold such a concentration of the voting power of our common stock. If all 2,000,000 shares are purchased in this offering, this concentration will be reduced, but not entirely eliminated, as our executive officers and directors will only beneficially own approximately 20.3% of our voting power and other related non-affiliate parties will control approximately 25.6% of our voting power upon its conclusion.
| 12 |
Our solutions are highly technical and if they contain undetected errors, our business could be adversely affected and we might have to defend lawsuits or pay damages in connection with any alleged or actual failure of our solutions and services.
Our solutions are highly technical and complex, are critical to the operation of many networks and, in the case of ours, provide and monitor network security and may protect valuable information. Our solutions have contained and may contain one or more undetected errors, defects or security vulnerabilities. Some errors in our solutions may only be discovered after a solution has been installed and used by end customers. Any errors or security vulnerabilities discovered in our solutions after commercial release could result in loss of revenues or delay in revenue recognition, loss of customers and increased service and warranty cost, any of which could adversely affect our business and results of operations. In addition, we could face claims for product liability, tort, or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention. In addition, if our business liability insurance coverage is inadequate or future coverage is unavailable on acceptable terms or at all, our financial condition could be harmed.
A breach of network security could harm public perception of our cybersecurity solutions, which could cause us to lose revenues.
If an actual or perceived breach of network security occurs in the network of a customer of our cybersecurity solutions, regardless of whether the breach is attributable to our solutions, the market perception of the effectiveness of our solutions could be harmed. This could cause us to lose current and potential end customers or cause us to lose current and potential value-added resellers and distributors. Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques.
If our solutions do not interoperate with our customers’ networks, installations will be delayed or cancelled and could harm our business.
Our solutions are designed to interface with our customers’ existing networks, each of which have different specifications and utilize multiple protocol standards and products or solutions from other vendors. Many of our customers’ networks contain multiple generations of products that have been added over time as these networks have grown and evolved. Our solutions will be required to interoperate with many products and solutions within these networks as well as future products or solutions in order to meet our customers’ requirements. If we find errors in the existing software or defects in the hardware used in our customers’ networks, we may have to modify our software or hardware to fix or overcome these errors so that our solutions will interoperate and scale with the existing software and hardware, which could be costly and negatively impact our operating results. In addition, if our solutions do not interoperate with those of our customers’ networks, demand for our solutions could be adversely affected, orders for our solutions could be cancelled, or our solutions could be returned. This could hurt our operating results, damage our reputation and seriously harm our business and prospects.
We must adequately protect our intellectual property in order to prevent loss of valuable proprietary information.
We rely primarily on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures, and non-disclosure agreements to protect our proprietary technology. However, unauthorized parties may attempt to copy or reverse- engineer aspects of our solutions or to obtain and use information that we regard as proprietary. Policing unauthorized use of our solutions is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our intellectual property. This is particularly true in foreign countries whose laws may not protect proprietary rights to the same extent as the laws of the United States and may not provide us with an effective remedy against unauthorized use. If protection of our intellectual property proves to be inadequate or unenforceable, others may be able to use our proprietary developments without compensation to us, resulting in potential cost advantages to our competitors.
We may incur substantial expenses defending ourselves against claims of infringement.
There are numerous patents held by many companies relating to the design and manufacture of network security systems. Third parties may claim that our solutions infringe on their intellectual property rights. Any claim, with or without merit, could consume our management’s time, result in costly litigation, cause delays in sales or implementations of our solutions or require us to enter into royalty or licensing agreements. Royalty and licensing agreements, if required and available, may be on terms unacceptable to us or detrimental to our business. Moreover, a successful claim of product infringement against us or our failure or inability to license the infringed or similar technology on commercially reasonable terms could seriously harm our business.
| 13 |
Our common stock is thinly traded, which may negatively affect your ability to sell our shares into the market as well as adversely affect the price at which you may be able to sell those shares.
For the four weeks ended on September 18, 2020, the average daily trading volume of our common stock on the OTCQB was 45,199 shares. Even assuming the uplisting of our common stock on Nasdaq, we can offer no assurances that trading in our stock will improve over time. Such thin trading may make it more difficult for you to liquidate your holdings in our common stock or negatively affect the price per share that you are able to realize from such sales.
The price of our common stock has been volatile in the past and may continue to be volatile in the future due to factors outside of our control.
The market price of our common stock has been highly volatile in the past and may continue to be volatile in the future. During fiscal year 2019, the market price of our common stock on the OTCQB fluctuated between $2.90 and $5.55 per share and between $0.81 and $3.91 in 2018. For the six months ended June 30, 2020, the market price of our common stock on the OTCQB fluctuated between $2.34 and $7.40 per share. The market price of our common stock may fluctuate significantly in the future in response to a number of factors, many of which are outside our control, including:
| · | variations in our quarterly operating results; | |
| · | changes in estimates of our financial performance by securities analysts; | |
| · | changes in market valuations of our competitors; | |
| · | thinly traded common stock; | |
| · | our ability to successfully produce, market, and sell our new INTRUSION Shield solution through new and broader sales channels to an expanded potential client market; | |
| · | announcements by us or our competitors of new products or solutions, significant contracts, acquisitions, strategic relationships, joint ventures or capital commitments; | |
| · | product or design flaws, product recalls or similar occurrences; | |
| · | additions or departures of key personnel; | |
| · | sales of common stock in the future; and | |
| · | fluctuations in stock market prices and volume, which are relatively typical for high technology companies. |
| 14 |
We expect to receive net proceeds from this Public Offering of approximately $26,375,200. This amount is based on an assumed public offering price of $14.32 per share, which was the last reported sale price of our common stock on the OTCQB on October 2, 2020, and after deducting the underwriting discounts and commissions in the amount of $2,004,800 and estimated offering expenses payable by us in the amount of $260,000. It does not take into account the underwriter’s exercise of the option to purchase additional shares.
We will not receive any of the proceeds from the sale of the shares of our common stock being offered for sale by the selling stockholders. We will incur all costs associated with the preparation and filing of this registration statement and prospectus.
We intend to use the net proceeds from this offering, together with our existing cash, to complete the development of our INTRUSION Shield solution, to promote and market INTRUSION Shield, to develop sales and distribution channels to sell our solutions to a customer base comprised of commercial customers who are distinct from and our historical customer base of governmental and regulatory customers, and for general and administration expenses.
Our expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition. As of the date of this prospectus, we cannot predict with complete certainty all of the particular uses for the net proceeds to be received upon the completion of this offering or the actual amounts that we will spend on the uses set forth above.
The amounts and timing of our actual expenditures will depend on numerous factors, including the progress of our solution development team, the scale achieved by our sales and marketing team, as well as the amount of cash used in our operations. We therefore cannot estimate with certainty the amount of net proceeds to be used for the purposes described above. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application of the net proceeds.
| 15 |
We intend to retain future earnings, if any, to finance the operation and expansion of our business and do not anticipate paying any cash dividends on shares of our common stock in the foreseeable future.
| 16 |
The following table sets forth our cash, cash equivalents, and marketable securities and capitalization as of June 30, 2020 (a) on an actual basis, (b) on an as-adjusted basis to reflect the conversion of all shares of all series of our outstanding shares of preferred stock as of September 30, 2020, and (c) on a pro forma as adjusted basis to give effect to the issuance and sale by us of 2,000,000 shares of our common stock in the offering, and the receipt of the net proceeds from our sale of these shares at an assumed public offering price of $14.32 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The pro forma information below is illustrative only, and cash, cash equivalents, and marketable securities, additional paid-in capital, retained earnings, total stockholders’ equity, and total capitalization following the completion of our offering will be adjusted based on the actual public offering price and other terms of our offering determined at pricing. You should read this table in conjunction with the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Capital Stock” and our consolidated financial statements and related notes included elsewhere in this prospectus.
| June 30, 2020 | ||||||||||||
(in thousands, except par value amounts)
| Actual | As Adjusted To Reflect Preferred Stock Conversion | Pro Forma After Issuance of 2,000 Shares in the Offering | |||||||||
| Cash and cash equivalents | $ | 2,872 | $ | 2,872 | $ | 29,247 | ||||||
| Stockholders’ equity: | ||||||||||||
| Preferred stock, $0.01 par value: Authorized shares – 5,000 | ||||||||||||
| Series 1 shares issued and outstanding – 200 | 707 | – | – | |||||||||
| Series 2 shares issued and outstanding – 420 | 661 | – | – | |||||||||
| Series 3 shares issued and outstanding – 266 | 379 | – | – | |||||||||
| Common stock, $0.01 par value: | ||||||||||||
| Authorized shares – 80,000 | ||||||||||||
| Issued and outstanding – 13,792; As adjusted – 14,796; Pro forma – 16,796 | 138 | 148 | 168 | |||||||||
| Common stock held in treasury, at cost – 10 shares | (362 | ) | (362 | ) | (362 | ) | ||||||
| Additional paid-in capital | 56,946 | 58,683 | 85,038 | |||||||||
| Accumulated deficit | (55,957 | ) | (55,957 | ) | (55,957 | ) | ||||||
| Accumulated other comprehensive loss | (43 | ) | (43 | ) | (43 | ) | ||||||
| Total stockholders’ equity | $ | 2,469 | $ | 2,469 | $ | 28,844 | ||||||
| 17 |
Net tangible book value as of June 30, 2020, as adjusted to reflect preferred stock conversion, was $2,469,174, or $0.167 per share based on 14,796,279 shares of our common stock outstanding. After giving effect to our sale of newly issued shares of common stock in this offering, at an assumed public offering price of $14.32 per share, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2020, would have been $28,844,374 or $1.72 per share (assuming no exercise of the underwriters’ option to purchase additional shares of our newly issued common stock). This represents an immediate and substantial dilution of $12.60 per share to new investors purchasing common stock in this offering. You will experience additional dilution upon exercise of options to purchase common stock under our equity incentive plans, or if we otherwise issue additional shares of our common stock.
| 18 |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the “Summary Historical Consolidated Financial Data” section of this prospectus and our financial statements and the related notes included at the end of this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. As a result of many factors, including those factors set forth in the “Risk factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
General.
We develop, market and support a family of entity identification products, data mining and advanced persistent threat detection products. Our solution families include:
| · | The TraceCop™ product line, including many of our proprietary supporting tools, allows our customers and in-house cyber analysts to accurately discover and help identify ‘bad actors’ associated with cybercrime. The TraceCop product family is built upon an extensive database based on over 20 years of Internet data, Internet understanding and cyber security analytical experience. Along with a multitude of cyber security ‘global threat feeds’, this vast and ever expanding database is used in conjunction with our customer’s data to help identify areas of vulnerability and potential cyber security threats. We offer our customers a daily, weekly or monthly enrichment service to assist them in the culling of ‘good’ data traffic from potential threats. |
| · | The Savant™ product is a ‘purpose-built’, very high-speed network data mining and analytics software package that is easily installed on COTS (commercial off the shelf) platforms. Its patented design exceeds performance expectations and ensures ‘deep dives’ into data-in-motion in order to quickly and accurately detect advanced persistent threats. |
Our customers use our solutions and services as an integral part of protecting their critical infrastructure and data information assets. By quickly detecting, protecting, analyzing and reporting attacks, along with the potential misuse of classified information, we have become a key component to the daily challenges of cybercrime for both state and federal governments and large private commercial enterprises.
Our revenues have been fairly consistent over the past few years due primarily to our focus on our TraceCop and Savant product lines. To date, we have not encountered significant competition in the TraceCop and Savant markets that has caused us to decrease our sales prices when compared to sales prices in previous years. To help keep our operation expenses under control, we held our employee headcount at a reasonable level in 2019 compared to 2018. At December 31, 2018, we employed 31 full time persons and at December 31, 2019, we employed 32 full time persons. Our gross margins were comparable at 63.0% in 2018, and 61.0% in 2019.
In order for us to operate and grow our business, we must generate and sustain sufficient operating profits and cash flow in future periods. This will require us to continue to generate revenues from sales of our entity identification software, data mining and advanced persistent threat products. In order to obtain these sales, our solutions must gain acceptance in a competitive industry. We believe our ability to market and sell our TraceCop and Savant products into the marketplace in a timely manner and our efforts to effectively control spending levels will help us achieve these results.
New Solution: The INTRUSION Shield
We are in the process of developing a new product offering, INTRUSION Shield, which is designed to be a next generation network detection and response solution. After 20 years of providing research, analysis, and tools to the federal government and enterprise corporations, INTRUSION possesses a comprehensive and proprietary threat-enriched Big Data Cloud of Internet activity, including information about the activities of malicious online actors. INTRUSION Shield will combine that comprehensive, proprietary 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 cybercrimes.
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Shield is a combination of plug-n-play hardware, software, global data, and AI services to 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 how to bypass, INTRUSION Shield uses this combination of our extensive threat-enriched Big Data Cloud with real-time AI technology to prevent illicit behavior. Using advanced metrics, Shield blocks traffic and network flows that other products 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 receives real-time updates as our worldwide installations and big data sources identify new dangers.
Shield does not require the displacement of any existing products but instead provides a new, additional layer of cybersecurity for customers. The U.S. market consists of 34 million businesses of which 70% of this market is the small and medium sized business market. 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 sell-cycle may be longer for this product. 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. In addition to telesales, 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 we have twelve companies who have been testing the Beta release since early 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 seats and the size of the customer’s internet connection be that 1Gb, 10Gb or 100 Gb.
Shield has received very positive feedback from Beta customers who have been surprised and pleased with the ease of installation due to the plug-n-play architecture. Within the first three days of Beta testing, Shield identified and immediately shut down a total of 461,562 threats to three companies, defending them against possible cyber-attacks. Customers went on to say, “It was amazing how many potential threats were blocked in such a short period of time with the Shield solution. We didn’t realize how many connections were being attempted each day,” said the CEO of a defense company that is participating in the Beta testing. A VP of IT at a large manufacturing company commented, “It was easy to install Shield and because of the blocking we have seen we have already installed a second Shield at a subsidiary company and we anticipate purchasing Shield when it is shipping for several of our companies.”
In addition to Shield, we are developing complementary solutions to create a family of Shield offerings, including our first follow on offering, Shield CLOUD, which is targeted for use by businesses with a dedicated or hybrid Cloud network environment. We are in the process of Alpha testing Shield CLOUD, and we are developing additional solutions that will address cybersecurity needs in the areas of lateral traffic, remote employees, WiFi, and mobile devices.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, bad debts, inventories, income taxes, warranty obligations, maintenance contracts and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
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 sales. We do not currently offer software on a subscription basis. Warranty costs and sales returns for our current products have not been material.
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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:
| · | identify the contract with a customer; |
| · | identify the performance obligations in the contract; |
| · | determine the transaction price; |
| · | allocate the transaction price to the separate performance obligations; and |
| · | 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 solution 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, maintenance, training and installation revenue has not been material. 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.
Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our receivables are uncollaterized, and we expect to continue this policy in the future. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, increased allowances may be required. Historically, our estimates for sales returns and doubtful accounts have not differed materially from actual results.
Fair Value of Financial Instruments
We calculate the fair value of our assets and liabilities which qualify as financial instruments and include additional information in the notes to consolidated financial statements when the fair value is different than 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. Capital leases approximate fair value as they bear market rates of interest.
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Results of operations
Years ended December 31, 2018 and 2019 and the 6 Month periods ended June 30, 2019 and 2020
The following table summarizes our results of operations for the Twelve Months ended December 31, 2018 and 2019 and the six month periods (unaudited) ended June 30, 2019 and 2020:
| Year Ended | Six Months Ended | |||||||||||||||
| December
31, 2018 | December
31, 2019 | June 30, 2019 | June 30, 2020 | |||||||||||||
| Total revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Total cost of revenue | 37.4 | 39.2 | 39.9 | 40.5 | ||||||||||||
| Gross profit | 62.6 | 60.8 | 60.1 | 59.5 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing | 15.6 | 9.5 | 6.3 | 28.8 | ||||||||||||
| Research and development | 12.1 | 9.6 | 6.7 | 48.1 | ||||||||||||
| General and administrative | 10.8 | 8.7 | 9.0 | 16.9 | ||||||||||||
| Operating income (loss) | 24.1 | 33.0 | 38.1 | (34.3 | ) | |||||||||||
| Interest income | – | – | – | 0.2 | ||||||||||||
| Interest expense | (1.8 | ) | (0.3 | ) | (0.6 | ) | (0.1 | ) | ||||||||
| Income (loss) before income tax provision | 22.3 | 32.7 | 37.5 | (34.2 | ) | |||||||||||
| Income tax provision | – | – | – | – | ||||||||||||
| Net income (loss) | 22.3 | % | 32.7 | % | 37.5 | % | (34.2 | )% | ||||||||
| Preferred stock dividends accrued | (1.4 | ) | (1.0 | ) | (0.9 | ) | (1.9 | ) | ||||||||
| Net income (loss) attributable to common stockholders | 20.9 | % | 31.7 | % | 36.6 | % | (36.1 | )% | ||||||||
Comparison of Years ended December 31, 2018 and 2019
Net Revenue
Total revenue increased 32.8% to $13.6 million in 2019 from $10.3 million in 2018. The increase in revenue was related to growth in our TraceCop product line. We expect our solution revenues to increase in the future if we are able to increase sales to existing customers and add new customers.
There were no export sales in 2019 and 2018 primarily due to our focus on domestic revenue sales. Sales of our solutions internationally may be subject to currency exchange risk, which may cause our solutions to effectively increase in price, if the exchange rate moves significantly and the dollar gains value over the foreign currency.
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Historically, due to the timing of our sales cycle, a significant portion of our monthly sales occurs in the second half of the month. Accordingly, our receivables increase at the end of each month, which causes a higher accounts receivable balance at month end. This monthly trend also causes an inflated comparative relationship between revenue and accounts receivable. We believe that this monthly trend will continue because monthly sales forecast and planning meetings are held in the first week of every month, the middle of the month is focused on sales calls to customers and the latter half of the month on closing sales.
Gross Profit
Gross profit increased 29.1% to $8.3 million in 2019 from $6.4 million in 2018. As a percentage of net revenue, gross profit decreased from 62.6% in 2018 to 60.8% in 2019. Gross profit as a percentage of revenue, decreased in 2019 compared to 2018 because of higher labor costs related to certain projects.
Gross profit as a percentage of net revenue is impacted by several factors, including shifts in product mix, changes in channels of distribution, sales volume, fluctuations in manufacturing costs, labor costs, pricing strategies, and fluctuations in sales of integrated third-party products.
Sales and Marketing
Sales and marketing expenses decreased to $1.3 million or 9.5% of net revenue in 2019, compared to $1.6 million or 15.6% of net revenue in 2018. The decrease in sales and marketing expense was mainly due to collecting a payment of $200 thousand from a customer related sales and marketing expense that occurred during the year 2018. Sales and marketing expenses may vary in the future. We expect sales and marketing expenses to increase as we take our INTRUSION Shield solution to market.
Research and Development
Research and development expenses increased to $1.3 million or 9.6% of net revenue in 2019 compared to $1.2 million or 12.1% of net revenue in 2018. The increase in research and development expense was due to less labor expense shifted to direct labor costs. Our research and development costs are expensed in the period in which they are incurred. We expect research and development expenses to increase in 2020. Research and development expense levels may fluctuate due to labor expense shifting to direct labor.
General and Administrative
General and administrative expenses remained fairly constant at $1.2 million, or 8.7% of net revenue in 2019 compared to $1.1 million or 10.8% of net revenue in 2018 as a result of continuing efforts to keep spending under control. We expect general and administration expenses to remain fairly constant but increase if we are able to increase net revenue levels in 2020.
Interest Expense
Interest expense decreased to $46 thousand in 2019, compared to $189 thousand in 2018. 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 $4 thousand in 2019 compared to none in 2018.
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Income Taxes
Our effective income tax rate was 0% in 2019 and 2018 as valuation allowances have been recorded for the entire amount of the net deferred tax assets due to uncertainty of realization. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“the Tax Act”) which significantly changed U.S. tax law. The Tax Act lowered the Company’s statutory federal income tax rate from a maximum of 39% to a rate of 21% effective January 1, 2018.
Liquidity and Capital Resources
Our principal source of liquidity at December 31, 2019 was $3.3 million of cash and cash equivalents. As of December 31, 2019, we did not hold investments with a stated maturity beyond one year. Working capital at December 31, 2019 was $3.1 million, while at December 31, 2018, it was $0.5 million.
Net cash provided by operations for the twelve months ended December 31, 2019, was $4.3 million due primarily to a net income of $4.5 million and the following sources of cash and non-cash items: $232 thousand in noncash lease costs, a $401 thousand decrease in accounts receivable, $125 thousand in depreciation expense, $59 thousand in amortization expense of capital leases and other assets, $47 thousand in stock-based compensation, and $6 thousand in waived penalties on dividends. This was partially offset by a $496 thousand decrease in accounts payable and accrued expenses, a $488 thousand decrease in deferred revenue, and a $61 thousand increase in prepaid expenses and other assets. Net cash provided by operations for the twelve months ended December 31, 2018, was $2.6 million due primarily to a net income of $2.3 million and the following sources of cash and non-cash items: a $598 thousand increase in deferred revenue, a $421 thousand increase in accounts payable and accrued expenses, $68 thousand in depreciation expense, $65 thousand in amortization expense of capital leases and other assets, a $64 thousand write-off of the United Kingdom’s cumulative translation adjustment, $47 thousand in waived penalties on dividends, $20 thousand in stock-based compensation, and a $15 thousand decrease in inventories. This was partially offset by a $1.0 million increase in accounts receivable and a $2 thousand increase in prepaid expenses and other assets. Future fluctuations in accounts receivable, inventory balances and accounts payable will be dependent upon several factors, including quarterly sales, timely collection of accounts receivable, and the accuracy of our forecasts of product demand and component requirements.
Net cash used in investing activities in 2019 was $260 thousand for purchases of property and equipment. Net cash used in investing activities in 2018 was $202 thousand for purchases of property and equipment.
Net cash used in financing activities in 2019 was $2.3 million primarily due to payments on the loan by an officer of $1.8 million, $714 thousand payment of dividends on preferred stock, and $58 thousand payments on principal on capital leases. This was directly offset by a provision of cash of $239 thousand from the exercise of stock options. Net cash used in financing activities in 2018 was $0.9 million primarily due to payments on the loan by an officer of $1.2 million with a $66 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 $168 thousand from the exercise of stock options.
At December 31, 2019, we had a commitment of $66 thousand for future finance lease liabilities. Operating lease commitments of $1.8 million are detailed in the Contractual Obligations section below. At December 31, 2018, we had a commitment of $128 thousand for future finance lease liabilities, while operating lease commitments were $2.1 million. During 2019, we funded our operations through the use of available cash and cash equivalents.
As of December 31, 2019, we had cash and cash equivalents in the amount of approximately $3.3 million, increasing from $1.7 million as of December 31, 2018.
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 former Chief Executive Officer (the “CEO Note”). Under the terms of the CEO Note, the Company had the ability to borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $3,700,000 at any given time through March 2020.
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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 base and assessing what terms may be available to the Company, including whether any such terms are acceptable to the Company, if at all.
As of December 31, 2019, we had cash and cash equivalents of approximately $3,334,000, up from approximately $1,652,000 as of December 31, 2018. We generated a net income of $4,465,000 for the year ended December 31, 2019 compared to a net income of $2,287,000 for the year ended December 31, 2018. Based on the current forecast for the year 2020, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures through March 31, 2021. As of October 24, 2019, our funding available from the CEO Note terminated. 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 available are acceptable to the Company, if at all (the “Potential Replacement 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. We expect to fund our operations through anticipated Company profits, possibly 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. 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.
Contractual Obligations
The following table sets forth certain information concerning the future contractual obligations under our leases at December 31, 2019. We had no other significant contractual obligations at December 31, 2019.
Future minimum lease obligations consisted of the following at December 31, 2019 (in thousands):
| Period ending December 31, | Operating ROU Leases | Finance ROU Leases | Total | |||||||||
| 2020 | $ | 362 | $ | 45 | $ | 407 | ||||||
| 2021 | 361 | 21 | 382 | |||||||||
| 2022 | 369 | – | 369 | |||||||||
| 2023 | 380 | – | 380 | |||||||||
| 2024 | 352 | – | 352 | |||||||||
| 1,824 | 66 | $ | 1,890 | |||||||||
| Less Interest* | (225 | ) | (2 | ) | ||||||||
| $ | 1,599 | $ | 64 | |||||||||
*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.
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Off-Balance Sheet Arrangements
As of December 31, 2019, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K.
Recent Accounting Pronouncements
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 year ended December 31, 2019.
Comparison of Six Months Ended June 30, 2019 and 2020.
Net Revenues
Net revenues for the quarter and six months ended June 30, 2020 were $1.7 million and $3.5 million, respectively, compared to $4.0 million and $7.2 million for the same periods in 2019. Product revenues decreased $2.3 million for the quarter ended June 30, 2020, and $3.7 million for the six months ended June 30, 2020 compared to the same periods in 2019. Decreased product revenues were primarily due to a decrease in sales of our TraceCop product line. TraceCop sales for the quarters ended June 30, 2020 and 2019 were $1.6 million and $4.0 million, respectively. Savant sales were $106 thousand for the quarter ended June 30, 2020 and were $29 thousand for the quarter ended June 30, 2019.
Concentration of Revenues
Revenues from sales to various U.S. government entities totaled $1.5 million, or 91.0% of revenues, for the quarter ended June 30, 2020 compared to $3.9 million, or 91.3% of revenues, for the same period in 2019. Revenues from sales to various U.S. government entities totaled $2.8 million, or 80.8% of revenues, for the six months ended June 30, 2020 compared to $6.4 million, or 89.2% of revenues, for the same period in 2019. Sales to commercial customers totaled 9.0% of total revenue for the second quarter of 2020 compared to 8.7% of total revenue for the second quarter of 2019. During the second quarter of 2020 and 2019, no individual commercial customer had revenues over 10.0% of total 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 $1.0 million or 60.7% of net revenues for the quarter ended June 30, 2020, compared to $2.4 million or 60.4% of net revenues for the quarter ended June 30, 2019. Gross profit was $2.1 million or 59.5% of net revenues for the six months ended June 30, 2020 compared to $4.3 million or 60.1% of net revenues for the six months ended June 30, 2019. Gross profit on product revenues was $2.1 million or 59.5% of net revenues for the six months ended June 30, 2020 compared to $4.3 million or 60.1% of net revenues for the six months ended June 30, 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.
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Sales and Marketing
Sales and marketing expenses increased to $0.5 million for the quarter ended June 30, 2020 compared to $46 thousand for the same period in 2019. Sales and marketing expenses increased to $1.0 million for the six months ended June 30, 2020 compared to $0.5 million for the same period in 2019. Sales and marketing expenses may vary in the future. Sales and marketing expenses increased compared to the comparable periods last year due to increases in labor and expenses and the Company was able to collect payment of $200 thousand from a customer related expense in 2018 that reduced expense in 2019. We believe that these costs will increase through the end of 2020 due to increased marketing expense related to the launch of INTRUSION Shield.
Research and Development.
Research and development expenses increased to $0.9 million for the quarter ended June 30, 2020 compared to $0.3 million for the same period in 2019. Research and development expenses increased to $1.7 million for the six months ended June 30, 2020 compared to $0.5 million for the same period in 2019. The increase in research and development expense was due partly to increased costs related to the development of our INTRUSION Shield solution as well as 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 projects. We expect research and development expenses to increase in 2020.
General and Administrative.
General and administrative expenses remained constant at $0.3 million for the quarters ended June 30, 2020 and 2019. General and administrative expenses decreased to $0.6 million for the six months ended June 30, 2020 compared to $0.7 million for the same period in 2019. It is expected that general and administrative expenses will remain relatively constant throughout the remainder of 2020, although expenses may be increased due to increased expenses related to the launch of INTRUSION Shield .
Interest
Interest 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 June 30, 2020 compared to none for the same period in 2019. Interest income increased to $7 thousand for the six months ended June 30, 2020 compared to none for the same period in 2019. This is attributable to investing extra cash in money market accounts and getting better interest rates.
Liquidity and Capital Resources
Our principal source of liquidity at June 30, 2020 was approximately $2.9 million of cash and cash equivalents. At June 30, 2020, we had working capital of $2.4 million compared to $1.4 million at June 30, 2019.
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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 six months ended June 30, 2019 was $2.3 million due primarily to a net income of $2.7 million and the following provisions of cash and non-cash items: $304 thousand in noncash lease costs, a $179 thousand increase in deferred revenue, $86 thousand in depreciation and amortization expense, $14 thousand in stock-based compensation, and $6 thousand in penalties and waived penalties on dividends. This was partially offset by a $738 thousand increase in accounts receivable, a $234 thousand increase in prepaid expenses and other assets, and a $66 thousand decrease in accounts payable and accrued expenses. 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 in investing activities for the six months ended June 30, 2020, was $62 thousand for net purchases of property and equipment, compared to $168 thousand net cash used in investing activities for the six months ended June 30, 2019 for net purchases of property and equipment.
Net cash provided by financing activities in 2020 was $0.6 million 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 in 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 $644 thousand, and payment on principal of finance right-of-use leases of $31 thousand. This was directly offset by the following provisions of cash: proceeds from exercise of stock options of $226 thousand.
At June 30, 2020, the Company did not have any material commitments for capital expenditures.
During the six months ended June 30, 2020, the Company funded its operations through the use of cash and cash equivalents. As of June 30, 2020, we had cash and cash equivalents of approximately $2,872,000, down from approximately $3,334,000 as of December 31, 2019. We had a net loss of $715,000 for the quarter ended June 30, 2020 compared to a net income of $1,758,000 for the quarter ended June 30, 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 October 24, 2019, our funding available from the CEO Note terminated.
We expect to fund our operations through anticipated Company profits and this offering. If our operations do not generate positive cash flow in the future, or if we are not able to successfully close on this offering, we may be unable to implement our business plan, to successfully develop, market, and sell our new INTRUSION Shield solution, to fund our ongoing liquidity needs, or even continue our operations.
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Overview
In addition to the historical information contained herein, the discussion in this prospectus contains certain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties, such as statements concerning:
| · | the uncertain ramifications related to the coronavirus outbreak; | |
| · | our ability to produce and promote our new commercial product, INTRUSION Shield, and market it through new sales channels to a new set of prospective customers; | |
| · | our need to increase current revenue levels in order to achieve sustainable profitability; | |
| · | 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 of our current products that are made through indirect channels; and | |
| · | the influence that our management and larger stockholders have over actions taken by the Company. |
The cautionary statements made in this prospectus should be read as being applicable to all related forward-looking statements whenever they appear in this prospectus. Our actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the section captioned “Risk Factors” on page 8 of this prospectus as well as those cautionary statements and other factors set forth elsewhere herein.
General
We develop, market and support a family of entity identification, high speed data mining, cybercrime and advanced persistent threat detection products.
Industry Background
We develop, market and support a family of entity identification, data mining and advanced persistent threat detection products. Our solution families include:
| · | The TraceCop™ product line, which includes a number of our proprietary supporting tools, allows our customers and in-house cyber analysts to accurately discover and help identify ‘bad actors’ associated with cybercrime. |
| · | The Savant™ product is a ‘purpose-built’, very high-speed network data mining and analytics software package that is easily installed on commercial off the shelf platforms. |
Our customers use our solutions as an integral part of protecting their critical infrastructure and data information assets. By quickly detecting, protecting, analyzing and reporting attacks, along with the potential misuse of classified information, we have become a key component to the daily challenges of cyber security for both state and federal governments and large private commercial enterprises.
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Products
TraceCop
Our TraceCop solution family includes a database of worldwide IP addresses, registrant information and their associations, along with a plurality of related IP information, some dating back over two decades. When combined with INTRUSION’s multitude of cyber security ‘global threat feeds’, along with our TraceCop family of proprietary supporting tools, this vast and ever expanding capability is used in conjunction with our customer’s data to help identify areas of vulnerability and potential cyber security threats. In addition to its extensive capability, the TraceCop family includes analytical software with a GUI interface to assist the analysts in locating cybercriminals and other potential ‘bad actors’ or network anomalies. We offer our customers a daily, weekly or monthly enrichment service to assist them in the culling of ‘good’ data traffic from potential threats.
Intrusion licenses TraceCop to our customers for a yearly fee and offers scheduled updates. Intrusion will either install and update the database at the Intrusion facility or install TraceCop on a customer server onsite. Updates are delivered via secure Internet feed or removable storage devices.
Savant
Savant is a high speed network data mining and analysis solution which organizes the data into networks of relationships and associations. Its patented design exceeds performance expectations and ensures ‘deep dives’ into data-in-motion in order to quickly and accurately detect advanced persistent threats. Savant can operate on networks with data flows of over 20 gigabits per second, and still maintain a 100% inspection rate of all packets.
The Savant solution provides real-time access and insight into a company’s own indisputable and quantifiable network data for more effective, unbiased examination of their flows. Uses of the Savant solution include data mining, data loss prevention, advanced persistent threat detection and identification of Internet habits of network users. Savant is a software solution that we license to our customers for which we sell data updates. We also offer the option to fully implement a server and re-sell to the customer as a turn-key solution.
New Solution Development; General
The network security industry is characterized by rapidly changing technology standards and customer demands all shaped by the current state of the economy. We believe that our future success depends in large part upon the timely enhancement of existing products as well as the development of new technologically advanced products that meet cybersecurity industry needs and perform successfully and efficiently. We are currently marketing TraceCop and Savant products to meet emerging market requirements and are continuously engaged in testing to ensure that our solutions interoperate with other manufacturers’ products and which comply with industry standards applicable to those products.
During 2019 and 2018, our research and development expenditures were approximately $1.3 and $1.2 million, respectively. All of our expenditures for research and development have been expensed as incurred. Research and development expenses increased to $0.9 million for the quarter ended June 30, 2020 compared to $0.3 million for the same period in 2019. Research and development expenses increased to $1.7 million for the six months ended June 30, 2020 compared to $0.5 million for the same period in 2019. The increase in research and development expense was due partly to increased costs related to the development of our INTRUSION Shield solution as well as 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. At August 1, 2020, we had 27 employees engaged in research, solution development and engineering. At certain times during the year, research and development labor expense is shifted to direct labor to support ongoing projects. We expect research and development expenses to increase in 2020.
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Our Offering: INTRUSION Shield
We are in the process of developing a new offering, INTRUSION Shield , that is designed to be the first in a family of next generation network detection and response solutions we plan to introduce in the coming months. After 20 years of providing research, analysis, and tools to the federal government and enterprise corporations, Intrusion possesses a comprehensive and proprietary threat-enriched Big Data Cloud of Internet activity, including information about the activities of malicious online actors. INTRUSION Shield will combine that comprehensive, proprietary 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 cybercrimes.
Shield is a combination of plug-n-play hardware, software, global data, and AI services to 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 how to bypass, INTRUSION Shield uses this combination of our extensive database with real-time AI technology to prevent illicit behavior. Using advanced metrics, Shield blocks traffic and network flows that other products 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 receives real-time updates as our worldwide installations and big data sources identify new dangers.
Shield does not require the displacement of any existing products or solutions but instead provides a new, additional layer of cybersecurity for customers. The U.S. market consists of 34 million businesses of which 70% of this market is the small and medium sized business market. While the company believes that many large enterprises will recognize the need this solution addresses and will be incentivized to purchase Shield, the enterprise market has many decision makers for new cybersecurity purchases; therefore, the sell-cycle may be longer for this solution. 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. In addition to direct sales and telesales, 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 we have identified twelve companies which have been testing the Beta release since early 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 seats and the size of the customer’s internet connection be that 1Gb, 10Gb or 100 Gb.
Shield has received very positive feedback from Beta customers who have been surprised and pleased with the ease of installation due to the plug-n-play architecture. Within the first three days of Beta testing, Shield identified and immediately shut down a total of 461,562 threats to three companies, defending them against possible cyber-attacks. Customers went on to say, “It was amazing how many potential threats were blocked in such a short period of time with the Shield solution. We didn’t realize how many connections were being attempted each day,” said the CEO of a defense company that is participating in the Beta testing. A VP of IT at a large manufacturing company commented, “It was easy to install Shield and because of the blocking we have seen we have already installed a second Shield at a subsidiary company and we anticipate purchasing Shield when it is shipping for several of our companies.”
In addition to Shield, we are developing complementary solutions to create a family of Shield offerings, including our first follow on offering, Shield CLOUD, which is targeted for use by businesses with a dedicated or hybrid Cloud network environment. We are in the process of Alpha testing Shield CLOUD, and we are developing additional solutions that will address cybersecurity needs in the areas of lateral traffic, remote employees, WiFi, and mobile devices.
Our Customers: Government Sales
Sales to U.S. government customers accounted for 87.4% of our revenues for the year ended December 31, 2019, compared to 83.9% of our revenue in 2018. We expect to continue to derive a substantial portion of our revenues from sales to governmental entities in the future as we continue to market our entity identification products and data mining products to the government. Sales to the government present risks in addition to those involved in sales to commercial customers that could adversely affect our revenues, including potential disruption due to irregularities in or interruptions to appropriation and spending patterns, delays in approving a federal budget and the government’s reservation of the right to cancel contracts and purchase orders for its convenience.
Generally, we make our sales under purchase orders and contracts. Our customers, including government customers, may cancel their orders or contracts with little or no prior notice and without penalty. Although we transact business with various government entities, we believe that the cancellation of any particular order in itself could have a material adverse effect on our financial results. Because we derive and expect to continue to derive a substantial portion of our revenue from sales to government entities, a large number of cancelled or renegotiated government orders or contracts 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.
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Third-Party Products
We currently resell standard commercially available computers and servers from various vendors which we integrate with our different software products for implementation into our customer networks. We do not consider any of these third party relationships to be material to the Company’s business or results of operations.
Customer Services
Our solution sales may include installation and threat data interpretation.
Manufacturing and Supplies
Our internal manufacturing operations consist primarily of software, packaging, testing and quality control of finished units. The hardware we sell are standard off-the-shelf solutions.
Intellectual Property and Licenses
Our success and our ability to compete are dependent, in part, upon our proprietary technology. We principally rely on a combination of contractual rights, trade secrets and copyright laws to establish and protect our proprietary rights in our solutions. In addition, we have received two patents, and we are in the process of applying for patents for In addition to Shield, we are developing complementary solutions to create a family of Shield offerings, including our first follow on offering, Shield CLOUD, which is targeted for use by businesses with a dedicated or hybrid Cloud network environment. We are in the process of Alpha testing Shield CLOUD, and we are developing additional solutions that will address cybersecurity needs in the areas of lateral traffic, remote employees, WiFi, and mobile devices.
We have also entered into non-disclosure agreements with our suppliers, resellers and certain customers to limit access to and disclosure of proprietary information. There can be no assurance that the steps taken by us to protect our intellectual property will be adequate to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology, although it would be extremely difficult to replicate our 24 year old proprietary and comprehensive internet databases.
We have entered into software and product license agreements with various suppliers. These license agreements provide us with additional software and hardware components that add value to our security solutions. These license agreements do not provide proprietary rights that are unique or exclusive to us and are generally available to other parties on the same or similar terms and conditions, subject to payment of applicable license fees and royalties. We do not consider any of the license, software or supplier agreements to be material to our business, but rather complementary to our business and solution offerings.
Sales, Marketing and Customers
Field Sales Force. Our direct sales organization focuses on major account sales, channel partners including distributors, value added resellers (VARs) and integrators; promotes our solutions to current and potential customers; and monitors evolving customer requirements. The field sales and technical support force provides training and technical support to our resellers and end users and assists our customers in designing cyber secure data networking solutions. We currently conduct sales and marketing efforts from our principal office in Richardson (Dallas), Texas. In addition, we have sales personnel, sales engineers or sales representatives located in Virginia and California.
Resellers. Resellers such as domestic and international system integrators and VARs sell our solutions as stand-alone solutions to end users and integrate our solutions with products sold by other vendors into network security systems that are sold to end users. Our field sales force and technical support organization provide support to these resellers. Our agreements with resellers are non- exclusive, and our resellers generally sell other products and solutions that may compete with our solutions. Resellers may place higher priority on products or solutions of other suppliers who are larger and have more name recognition, and there can be no assurance that resellers will continue to sell and support our solutions.
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Foreign Sales. Export sales did not account for any revenue in 2019 and 2018. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above for a geographic breakdown of our revenue in 2019 and 2018.
Marketing. We have implemented several methods to market our solutions, including participation in trade shows and seminars, distribution of sales literature and solution specifications and ongoing communication with our resellers and installed base of end-user customers.
Customers. Our end-user customers include U.S. federal government, state and local government entities, large and diversified conglomerates and manufacturing entities. Sales to certain customers and groups of customers can be impacted by seasonal capital expenditure approval cycles, and sales to customers within certain geographic regions can be subject to seasonal fluctuations in demand.
In 2019, 87.4% of our revenue was derived from a variety of U.S. government entities through direct sales and indirectly through system integrators and resellers. These sales are attributable to ten U.S. Government customers through direct and indirect channels; three exceeded 10% of total revenue individually in 2019. Comparatively, sales to the U.S. Government through direct and indirect channels totaled 83.9% of total revenues for 2018. Those sales were attributable to ten U.S. Government customers through direct and indirect channels; four exceeded 10% of total revenue individually in 2018. A reduction in our sales to U.S. government entities could have a material adverse effect on our business and operating results if not replaced.
Backlog. We believe that only a small portion of our order backlog is non-cancelable and that the dollar amount associated with the non-cancelable portion is immaterial. We purchase, or contract for the purchase of, our inventory based upon our forecast of customer demand, and we maintain inventories in advance of receiving firm orders from customers. Commercial orders are generally fulfilled within two days to two weeks following receipt of an order. Certain orders may be scheduled over several months, generally not exceeding one year.
Customer Support, Service and Warranty. We service, repair and provide technical support for our solutions. Our field sales and technical support force works closely with resellers and end-user customers on-site and by telephone to assist with pre- and post- sales support services such as network security design, system installation and technical consulting. By working closely with our customers, our employees increase their understanding of end-user requirements and are then able to provide specific input in our solution development process.
We warrant all of our solutions against defects in materials and workmanship for periods ranging from 90 days to 36 months. Before and after expiration of the solution warranty period, we offer both on-site and factory-based support, parts replacement and repair services. Extended warranty services are separately invoiced on a time and materials basis or under an annual maintenance contract.
Competition
The market for network and data protection security solutions is intensely competitive and subject to frequent product or solution introductions with new technologies, improved price and performance characteristics. Industry suppliers compete in areas such as conformity to existing and emerging industry standards, interoperability with networking and other security products, management and security capabilities, performance, price, ease of use, scalability, reliability, flexibility, product features and technical support. The market for identity identification and data mining is more fragmented and thus allows more opportunities for small companies to compete in.
There are numerous companies competing in various segments of the data security markets. At this time, we have limited competitors for TraceCop; however, we expect competitors to emerge in the future. These competitors currently perform only a portion of the functions that we are able to perform with TraceCop. Also, we have been continuously collecting the TraceCop data for more than twenty years. We believe that none of our current or future competitors have the ability to provide this historical data. In our newest market segment, data mining and advanced persistent threat detection, we compete with several companies including Niksun, NetScout, Fireeye and Darktrace Networks.
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We believe that our INTRUSION Shield solution, as well as the complementary offerings in the Shield family, will be novel and unique in our industry because of its plug-n-play, proprietary databases, real-time AI, monthly contract and will initially be used as a complement to our customer’s existing cybersecurity processes and third-party products or solution. If Shield receives widespread acceptance in our market, we anticipate that other businesses will seek to compete with Shield; however, we believe our existing, mature, and proprietary database which are integral to the operation of Shield will be difficult, if not impossible, for other companies in our industry to replicate and will be a significant barrier to entry of competitors in the near and long term future of cybersecurity solutions.
Employees
As of September 1, 2020, we employed a total of 38 full time persons, including 5 in sales, marketing and technical support, 28 in research, development, analysis and engineering, and 5 in administration and finance.
None of our employees are represented by a labor organization, and we are not a party to any collective bargaining agreement. We have not experienced any work stoppages and consider our relations with our employees to be good.
Competition in the recruiting of personnel in the networking and data security industry is intense. We believe that our future success will depend in part on our continued ability to hire, motivate and retain qualified management, sales, marketing, and technical personnel. To date, we have not experienced significant difficulties in attracting or retaining qualified employees.
Properties
Our headquarters are located in a two-story building in Richardson, Texas. We occupy approximately 23,000 square feet of floor space in this facility. This facility houses our corporate administration, operations, marketing, research and development, engineering, sales and technical support personnel. The lease for this facility extends through November 2024.
Approximately thirty percent of our security software research and development and engineering staff are currently working either in a small facility in San Diego, California under a lease currently set to expire in March 2021 or working remotely from home offices.
We believe that the existing facilities at September 1, 2020, will be adequate to meet our operational requirements through 2020, although we periodically review our leased space to in order to ensure such space is secure and suitable for our current and future needs. We believe that all such facilities are adequately covered by appropriate property insurance. See Note 4 to our Consolidated Financial Statements for additional information regarding our obligations under leases.
Legal Proceedings.
We are subject to legal proceedings and claims that arise in the ordinary course of business. We do not believe that any claims exist where the outcome of such matters would have a material adverse effect on our consolidated financial position, operating results or cash flows. However, there can be no assurance such legal proceedings will not have a material impact on future results.
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| Name | Age | Position |
| Jack B. Blount | 68 | Chief Executive Officer, President, and Director |
| Michael L. Paxton | 59 | Chief Financial Officer, Secretary, Treasurer and Director |
| Anthony J. LeVecchio (1)(2)(3)* | 73 | Chairman and Director |
| T. Joe Head | 63 | Vice Chairman, Vice President and Director |
| Dale A. Booth (1)(2)(3)* | 61 | Director |
| James F. Gero (1)(2)(3)* | 75 | Director |
| Donald M. Johnston (1)(2)(3)* | 71 | Director |
__________________________
| * | Independent Director as defined by Nasdaq Rule 5605(a)(2). |
| (1) | Member of the Compensation Committee. |
| (2) | Member of the Audit Committee. |
| (3) | Member of the Nominating Committee. |
Jack B. Blount was appointed as our Chief Executive Officer, President, and a Director on May 27, 2020. Blount had an extensive career in technology as a visionary in the personal computer, local area networking, ERP, mobile computing, big data, cybersecurity, and AI. Most recently, Blount founded a strategic consultancy for enterprise, startup and federal government organizations. Prior to that, he served as CIO in the federal government where he was responsible for designing a new, 10-layer cyber security architecture that protected more than 100,000 employees and billions of dollars. Blount began his career as an engineer at IBM and was then recruited from IBM for the role of SVP of Business Development at Novell in the 1980’s where he helped expand its business from $50M to $2B in just six years. He has served as the CTO, COO, and CEO of eight technology, turnaround companies and has served on twelve technology company Board of Directors, five of which were public companies, and he held the role of Chairman of five of those companies. Blount has conducted business in more than 40 countries and has been a speaker at many public conferences in China, France, Germany, Norway, Russia, and the United States. He graduated from Southern Methodist University with a degree in Mathematics and did his graduate MBA studies while working at IBM. Mr. Blount’s leadership skills combined with his extensive experience in the technology/cybersecurity industry makes him uniquely qualified to lead the Company as it seeks to expand its solution offerings and widen its customer base.
Michael L. Paxton was appointed by the Board to serve as Interim President and Interim Chief Executive Officer of the Company and Chairman of the Board on November 1, 2019, after the unexpected death of G. Ward Paxton on October 24, 2019. Mr. Paxton acted as Interim President and Interim Chief Executive Officer until May 27, 2020 when Mr. Blount was appointed our Chief Executive Officer and President and as Chairman until Mr. LeVecchio’s appointment to that role on August 20, 2020. Mr. Paxton joined the Company on August 13, 2002 as Vice President, Chief Financial Officer, Secretary and Treasurer. He was also employed by the Company from 1986 until May 1998. Mr. Paxton previously held positions with the Company as Vice President and Secretary from 1995 to 1998, Controller of Finance and Accounting from 1987 to 1995 and Accounting Manager from 1986 to 1987. From 1998 to August 2002, Mr. Paxton served as General Partner for Paxton Ventures, L.P. Mr. Paxton holds a B.B.A. degree from the University of Oklahoma. As our CFO, Mr. Paxton has demonstrated dedication and leadership, and possesses a unique insight and understanding of our operations and business strategy. Mr. Paxton’s extensive business, senior management and administrative experience, as well as his intimate familiarity with the day to day management of the Company make him particularly qualified for service as Chairman of our Board.
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Anthony J. LeVecchio was appointed by the Board to serve as a Director on August 6, 2020 and as Chairman on August 20, 2020. Anthony J. LeVecchio is President and Owner of The James Group, Inc., a general business consulting firm that has advised CEOs across a wide range of industries in both public and private companies. LeVecchio has served on the board of over 20 private companies ranging from pre-revenue startups to companies with over $100 million in annual revenues. In this capacity, he has guided companies through all phases of corporate growth including startup operations; achieving profitability; asset, debt and equity financing; merger and acquisitions and implementation of corporate governance best practices. His previous board experience includes serving as Chairman of the Board of LegacyTexas Bank (LTXB) and as Co-chairman of the Board for UniPixel, Inc. (UNXL). LeVecchio has also served on boards for Microtune, Inc., DG FastChannel, Inc., Maxum Health, Inc., Medical Alliance and ASDS. As a public company director, he has experience with IPOs; secondary offerings; Sarbanes Oxley preparedness and qualification for 404 accelerated filers; NASDAQ de-listing and relisting; SEC stock option backdating investigations and class action lawsuit resolution; and Dodd Frank implementation. In addition to his business activities, Mr. LeVecchio is a lecturing professor in the School of Management at University of Texas, Dallas, and is a member of the advisory board for The Institute for Excellence in Corporate Governance at UTD. In 2014, he was named as an Outstanding Public Company Director by the Dallas Business Journal. He has participated as a speaker and panelist on several occasions for Bank Director and Corporate Board Member. Prior to forming The James Group in 1988, Mr. LeVecchio was the Senior Vice President and Chief Financial Officer for VHA Southwest, Inc., a regional healthcare system. Previous to that, Mr. LeVecchio held financial management positions with Philips Information Systems, Exxon Office Systems and Xerox Corporation. Mr. LeVecchio received a Bachelor of Economics from Rollins College, Winter Park, Florida and an M.B.A. in Finance from the same institution where he remains an active alumnus and a former member of their Board of Trustees. Mr. LeVecchio was selected to serve as Chairman of our Board and on our Audit Committee because of his standing as a financial expert and corporate governance expert.
T. Joe Head is co-founder of the Company and has served as a director since the Company’s inception in September 1983. Mr. Head was named Vice Chairman of the Board of Directors in June 2000 and was named Vice Chairman and Vice President on February 14, 2003. He also served as Senior Vice President from 1983 until 1998 and Executive Vice President from 1998 until June 2000. Prior to co-founding the Company, Mr. Head held the positions of Product Marketing Manager and Marketing Engineer of Honeywell Optoelectronics, from 1980 to 1983. Mr. Head holds a B.S. degree in Electrical Engineering from Texas A&M University. Mr. Head’s extensive experience and vision in technology and his knowledge in the area of government sales make him particularly qualified for service on the Board.
Dale A. Booth was appointed to the Board of Directors on February 9, 2015 . Mr. Booth is currently Chief Financial Officer and Chief Operating Officer of Beard Integrated Systems Inc. and is a private investor. Prior to being the COO of Beard Integrated, Mr. Booth was Sr. Managing Director of TurnPoint Advisors LLC., a management strategy and advisory firm he founded in 2009. Mr. Booth also serves on the board of Bell Industries Inc. Mr. Booth is a former Chief Executive Officer of NetVersant Solutions LLC., a $50M provider of advanced communications and networking solutions for large enterprise clients. Prior to NetVersant, Mr. Booth served as Chairman and Chief Executive Officer of Sensor Logic Inc., a leading provider of wireless data management and connectivity solutions. Prior to Sensor Logic, Mr. Booth served as Chief Executive Officer of NextiraOne LLC., a $500M provider of communications solutions to mid-market and Fortune 500 clients. Prior to NextiraOne, Mr. Booth was Senior Vice President and Chief Information Officer of Fujitsu Network Communications Inc., a $3B provider of optical communications products to the telecom carrier market. Mr. Booth earned an engineering degree with honors from DeVry University and completed his educational studies at Wharton and the University of Chicago, Gleacher School of Business. Mr. Booth is a member of the National Association of Corporate Directors (NACD) and a Board Leadership Fellow, and he completed NACD’s comprehensive program of study for corporate directors. Mr. Booth’s extensive business experience in various technical, managerial and financial positions make him particularly qualified as a member of our Board, Audit Committee and Compensation Committee.
James F. Gero was named a director of the Company on October 27, 2003. Mr. Gero is former Chairman of the Board and a principal stockholder of Sierra Technologies, Inc., which was formed in September 1991, and is a private investor. Mr. Gero serves as Chairman of the Board of LCI, a public company which supplies a broad array of components for recreational vehicles and manufactured homes, and is the former Chairman of Orthofix, N.V., a publicly traded medical device manufacturer. Mr. Gero is a former Chairman and Chief Executive Officer of Varo Inc., a manufacturer of high technology systems. Prior to becoming Chairman and CEO of Varo Inc., Mr. Gero served as Vice President and General Manager at Allied Signal Corporation. Mr. Gero holds a B.S. degree from State University of New York, an M.B.A. degree from University of New Haven and an M.S. degree from Fairleigh Dickinson. Mr. Gero’s extensive experience serving on boards of both public and private companies and his knowledge in the areas of strategic planning, finance, and corporate governance make him particularly qualified for service on our Board, Audit Committee and Chairman of our Compensation Committee.
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Donald M. Johnston has served as a director of the Company since November 1983. Mr. Johnston is President of Massey Burch Capital Corp., a venture capital firm. He served as President of Massey Burch Investment Group, Inc., a venture capital firm, from 1990 until December 1993, where he had been a principal since 1982. Prior to that time, Mr. Johnston was the President of InterFirst Venture Corporation, a venture capital subsidiary of Interfirst Bancshares, Inc., and the Executive Director of First Dallas, Ltd., a corporate finance group in London, England. Mr. Johnston holds a B.A. degree from Vanderbilt University and an M.B.A. degree from Southern Methodist University. Mr. Johnston’s broad array of business experience and expertise in financial matters and venture capital investing, as well as a demonstrated commitment to corporate governance make him particularly qualified for service on our Board, Compensation Committee and Chairman of our Audit Committee.
Al directors of the Company hold office until the next ensuing annual meeting of stockholders or until their respective successors are duly elected and qualified. All officers of the Company are elected annually by the Board and serve at the discretion of the Board. There are no family relationships between any director or officer of the Company and any other such person.
Director Independence
Each of Messrs. LeVecchio, Booth, Gero, and Johnston are “independent” members of our board of directors as “independence” is defined in Nasdaq Marketplace Rule 5605(a)(2).
Family Relationships
There are no family relationships between any director or officer of the Company and any other such person.
Board Role in Risk Oversight and Management
The Board has an active role in the oversight and management of the Company’s risks and carries out its role directly and through Board committees. The Board’s direct role in the Company’s risk management process includes regular or periodic receipt and discussion of reports from management and the Company’s outside counsel and advisers on areas of material risk to the Company, including operational, strategic, financial, legal and regulatory risks.
While overall enterprise-wide risk management is ultimately the responsibility of the Board, the Audit Committee is delegated with the authority to oversee the identifying, assessing, and monitoring of such risks, delegating authority for discrete risk management oversight to the appropriate committees of the Board or to a Risk Oversight sub-committee of the Audit Committee. The Audit Committee shall report regularly to the Board at-large on its activities in risk oversight, pass along reports from any Committees or sub-committees with oversight authority, and make recommendations for any changes, modifications, improvements, or expansions of the Company’s risk assessment and management policies and procedures.
The Board has also addressed risk through the adoption of corporate policies. The Board has adopted a Code of Business Conduct and Ethics designed to ensure that directors, officers and employees of the Company are aware of their legal and ethical responsibilities and conduct the Company’s business in a consistently legal and ethical manner.
The Company has not adopted any practices or policies regarding the ability of our employees (including officers) or Directors, or any of their designees, to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds), or otherwise engage in transactions, that hedge or offset, or are designed to hedge or offset, any decrease in the market value of our common stock either granted to the employee or director by the Company as part of the compensation of the employee or director; or held, directly or indirectly, by the employee or director.
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Committees
The Board has established Audit, Compensation, and Nominating Committees to devote attention to specific subjects and to assist it in the discharge of its responsibilities. The functions of the Audit Committee, the Compensation Committee, and the Nominating Committee are described below.
Audit Committee. The Audit Committee is composed of Donald M. Johnston (Chairman), James F. Gero, Anthony J. LeVecchio, and Dale A. Booth. Each member of the Audit Committee is independent (as defined in Nasdaq Marketplace Rule 5605(a)(2)). The Audit Committee has at least one financial expert (as defined by 407 (d)(5)(ii) of Regulation S-K). Mr. Johnston is currently the Audit Committee financial expert. The functions performed by the Audit Committee, its membership and the number of meetings held during the fiscal year, are set forth in the “Report of the Audit Committee,” included in this prospectus. The Audit Committee is governed by a written charter, which was amended and restated by the Board on September 14, 2020, and is included under the “investor relations” section on the Company’s website, www.intrusion.com. The Audit Committee held six meetings during fiscal year 2019.
Compensation Committee. The Compensation Committee is composed of Mr. Gero (Chairman), Mr. Booth, Mr. LeVecchio, and Mr. Johnston, each of whom is an independent director, as defined by Nasdaq Rule 5605(a)(2). The Compensation Committee met five times during the 2019 fiscal year. The Compensation Committee is empowered to advise management and make recommendations to the Board with respect to the compensation and other employment benefits of executive officers, key employees and directors of the Company. The Compensation Committee also administers the Company’s stock incentive plan for officers, key employees and directors, and the Company’s incentive bonus programs for executive officers and employees. The Compensation Committee is authorized, among other powers, to determine from time to time the individuals to whom options shall be granted, the number of shares to be covered by each option and the time or times at which options shall be granted pursuant to the stock incentive plan. The Compensation Committee is governed by a written charter that was approved by the Board on September 14, 2020.
Nominating Committee. The Nominating Committee is composed of Mr. Gero (Chairman), Mr. Booth, Mr. LeVecchio, and Mr. Johnston, each of whom is an independent director, as defined by Nasdaq Rule 5605(a)(2). The Nominating Committee was newly formed on August 17, 2020 and is governed by a written charter that was approved by the Board on September 14, 2020.The Nominating Committee is not expected to meet formally until sometime in 2021.
Appointment of Special Committee to Oversee this Offering. The offering of shares of our currently issued and outstanding common stock now held by the selling stockholders is intended to benefit the Company by decreasing the concentration of stock currently held by the Company’s insiders, founders, and current management without deploying any of our cash reserves to effect this result. Upon completion of the offering, we anticipate that the amount of our common stock held by the selling stockholders as a group will decrease from 55.6% to 44.0%, without taking into account any sales by underwriters as a result of the exercise of the over-allotment. without taking into account any sales by underwriters as a result of the exercise of the over-allotment. We believe that this shift in concentration of control will benefit us and our stockholders and reinforce our goal of transforming the company’s business model to leverage on our existing customers, solutions, and intellectual property assets to provide new solutions to an expanded customer base. In recognition of the fact that certain members of the selling stockholder group currently hold positions as our directors and officers, we have formed a special committee of the Board that excludes those interested members of our board and charged this committee with the authority to conduct all negotiations and provide all approvals related to the offering including those related to the participation of the selling stockholders. This special committee was formed on July 28, 2020, and includes Messrs. Blount, LeVecchio, Booth, Johnston, and Gero.
Code of Business Conduct and Ethics
All of the Company’s directors and employees are required to abide by the Company’s Code of Business Conduct and Ethics, which the Company adopted on September 14, 2020 (the “Code”) to insure that the Company’s business is conducted in a consistently legal and ethical manner. The Code cover areas of professional conduct that include conflicts of interest, fair dealing and the strict adherence to all laws and regulations applicable to the conduct of the Company’s business. The full text of the Code is published on the Company’s website at under the investor relations tab at www.intrusion.com. The Company intends to disclose future amendments to, or waivers from, certain provisions of the Codes of Ethics on the Company’s website within four business days following the date of such amendment or waiver. Upon the written request of any stockholder, the Company will furnish, without charge, a copy of of the Code. This request should be directed to the Company’s Secretary at 1101 E. Arapaho Road, Suite 200, Richardson, TX 75081.
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Summary Compensation Table
The following table sets forth certain summary information regarding all cash compensation earned by the Company’s Chief Executive Officer, Chief Financial Officer and each of the Company’s other two executive officers for the last three fiscal years in all capacities in which they served the Company and its subsidiaries for such period. The individuals listed below shall be referred to as the “Named Executive Officers”.
2019 SUMMARY COMPENSATION TABLE (6)
Name and Principal Position |
Year |
Salary |
Bonus (1) | All Other Compensation (2) |
Total | |||||||||||||||
| Jack B. Blount (3) | 2019 | $ | – | $ | – | $ | – | $ | – | |||||||||||
| Chief Executive Officer, President, and Director | 2018 | – | – | – | – | |||||||||||||||
| Michael L. Paxton, (4) | 2019 | 195,000 | 11,700 | 1,890 | 208,590 | |||||||||||||||
| Chief Financial Officer, Director, Treasurer and Secretary | 2018 | 195,000 | 9,750 | 1,890 | 206,640 | |||||||||||||||
| T. Joe Head, | 2019 | 270,000 | 116,200 | 2,640 | 388,840 | |||||||||||||||
| Vice-Chairman, Vice President and Director | 2018 | 270,000 | 13,500 | 2,640 | 286,140 | |||||||||||||||
| G. Ward Paxton, | 2019 | 205,000 | 12,300 | 2,440 | 219,740 | |||||||||||||||
| Former Chairman, President, and Director, (5) | 2018 | 250,000 | 12,500 | 2,440 | 264,940 | |||||||||||||||
| (1) | Includes bonus compensation and/or commission earned during the fiscal year indicated, a portion of which may have been or will be paid during the subsequent fiscal year. Mr. Head’s bonus includes a $100,000 performance bonus paid in 2019. |
| (2) | This amount includes the annual employer matching contributions under the Company’s tax qualified Section 401(k) Savings Plan for Mr. G. Ward Paxton, Mr. Michael L. Paxton and T. Joe Head, respectively. |
| (3) | Mr. Jack B. Blount was appointed Chief Executive Officer, President, and Director on May 27, 2020, therefore no compensation was paid to Mr. Blount for fiscal years 2018 or 2019. |
| (4) | Mr. Michael Paxton took a total of sixty-eight days off without pay during 2018 resulting in net earnings received of $144,000. |
| (5) | Mr. G. Ward Paxton passed away on October 24, 2019. All wages and bonus paid or payable are allocated based on date of death. |
| (6) | No stock awards were paid, no non-equity incentive plan compensation was paid, and no pension or non-qualified deferred compensation earnings were charged to the Named Executive Officers for the last two fiscal years. These columns have been omitted from the table. |
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Base Salary
The salaries of the executive officers, including the Chief Executive Officer, are determined annually by the Compensation Committee with reference to the following without specific weighting:
| · | salaries paid to executives with similar responsibilities at companies of a comparable size and sales volume, primarily in the high technology industry; |
| · | each officer’s performance; and |
| · | the Company’s overall financial results. |
The Compensation Committee believes that other companies likely compete with the Company for executive talent and that the Company must offer salaries within a competitive market range to attract and retain talented executives. However, the Compensation Committee manages salaries for the executive group as a whole in a conservative fashion in order to place more emphasis on incentive compensation. Compensation paid to our executive officers is below industry averages; in addition, in 2019 the Compensation Committee did not increase the base salaries of the executive officers. A bonus of six percent ($40,200 total) was payable under the 2019 management incentive plan for executive officers based on 2019 financial results. Joe Head received a performance bonus of $100,000 in 2019. A bonus of five percent ($35,750 total) was paid to executive officers for 2018 financial results. The Company does not consider the performance of any comparison group in determining compensation of its executive officers.
Bonus
To reinforce the attainment of corporate objectives, the Compensation Committee believes that a substantial portion of the potential annual compensation of each executive officer should be in the form of short-term, variable incentive pay. The incentive cash bonus program for executives is established annually by the Compensation Committee based upon the Company’s achievement of sales and/or net income targets established at the beginning of the fiscal year. The incentive plan for executives requires a threshold level of Company financial performance before any incentives are awarded. Once the threshold objective for sales and/or net income of a fiscal year is reached, specific formulas are in place to calculate the actual incentive payment for each executive for such year.
At the beginning of fiscal year 2019, the Compensation Committee adopted the 2019 management incentive plan. Under the terms of the 2019 management incentive plan, the bonus payable to each executive officer was based on sales targets.
Bonuses Awarded
In fiscal year 2019, the Company did not achieve its targeted sales goal but did reach its threshold level of sales for bonuses. Per the employee incentive plan, the Company awarded full-time, non-commissioned employees a six percent bonus. This included our three executive officers. G. Ward Paxton passed away on October 24, 2019. Awarded bonus payable is allocated based on date of death. Certain employees in the sales organization, received incentive sales commission in fiscal 2019 based upon the Company’s sales. Joe Head received a performance bonus of $100,000 in 2019.
Stock Option and Equity Incentive Programs
The goal of the Company’s equity-based incentive awards is to align the interests of executive officers with the Company’s stockholders. The Compensation Committee determines the value allocated to equity-based incentives according to each executive’s position within the Company, individual performance, contributions to achievement of corporate objectives and related factors, and grants stock options to create a meaningful opportunity for stock ownership. Because of the direct relationship between stock option value and the market price, it is believed that granting options is the best method to motivate executives to mirror the concerns of other stockholders.
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Stock Options Granted
The Company grants stock option awards to the executive officers and key employees in order to retain their services and increase their performance potential to help attain long-term goals of the Company. However, there is no set formula for the granting of awards to individual executives or employees. In each of the past three fiscal years, 2019, 2018 and 2017, the Company has granted stock options to purchase 34,000, 24,000 and 24,000 shares of the Company’s Common Stock, respectively. Of these amounts, no shares have been granted to the Named Executive Officers for each of the past three years. During fiscal year 2019, a total of three non-employee directors received stock options to purchase an aggregate of 0.17% of the outstanding shares of Common Stock.
Timing of Grants
Stock awards to executive officers and other key employees are typically granted annually in conjunction with the review of the individual’s performance. This review typically takes place in January. Stock option awards are granted to non-employee directors on the date of the annual meeting of stockholders, in accordance with the terms of the 2015 Plan. Grants to newly hired employees are effective on the first Compensation Committee meeting following the employee’s first day of employment, after approval by the committee. The exercise price of all stock options is set at the then current day’s closing price of the Common Stock.
Stock Ownership Guidelines
The Company does not have any standard stock ownership guidelines. However, all executives are encouraged to retain stock options and other shares that they directly own.
Perquisites
The Company limits the perquisites that are made available to executive officers. The Company does not have a pension program for executives or employees.
The perquisites provided by the Company in fiscal year 2019 are as follows. All employees who participated in the Company’s 401(k) plan may receive up to $2,700 in matching funds. All of the Named Executive Officers who participated in the 401(k) plan received matching funds. The health and life insurance plans are the same for all employees. In general, all employees’ base health premiums are paid 100% and the employee pays approximately 32% of the health premiums for dependents. All employees are also provided life insurance up to $10,000. This policy is the same for all employees, including executive officers.
Grants of Plan-Based Awards During Fiscal Year 2019
The Company did not grant options to acquire shares of Common Stock to the Named Executive Officers during fiscal year 2019. Also, the Company did not grant any stock awards or non-equity incentive plan units during fiscal year 2019.
Employment Agreements
Neither the Company nor its subsidiaries has any employment agreements with any of its Named Executive Officers.
Outstanding Equity Awards at the End of Fiscal Year 2019
The following table sets forth information with respect to the options outstanding by the Named Executive Officers held at fiscal year-end.
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2019 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
Number of Securities Underlying Unexercised Options (#) | Number of Securities Underlying Unexercised Options (#) (1) | Option Exercise Price ($) | Option Expiration Date (2) | |||||||||||
| Name | Exercisable | Unexercisable | ||||||||||||
| T. Joe Head | 100,000 | – | 0.40 | 02/04/20 | ||||||||||
| 80,000 | – | 0.70 | 02/03/21 | |||||||||||
| 70,000 | – | 0.65 | 02/09/22 | |||||||||||
| 50,000 | – | 0.48 | 02/07/23 | |||||||||||
| 50,000 | – | 1.80 | 02/06/24 | |||||||||||
| (1) | Options become exercisable in three equal annual installments beginning on the first anniversary date of grant. |
| (2) | The expiration date of each option occurs between ten years after the date of grant of each option. |
DIRECTOR COMPENSATION
| Name | Fees Earned or Paid in Cash ($) | Option Awards ($)(2)(3)(6) | Total ($) | |||||||||
Michael L. Paxton, (1) Member | – | – | – | |||||||||
T. Joe Head, (1) Vice Chairman of the Board | – | – | – | |||||||||
| Dale A. Booth, (2) Member | 20,400 | 34,000 | 54,400 | |||||||||
| James F. Gero, (2) Member | 20,400 | 34,000 | 54,400 | |||||||||
| Donald M. Johnston, (2) Member | 20,400 | 34,000 | 54,400 | |||||||||
| Jack B. Blount (4) Member | ||||||||||||
| Anthony J. LeVecchio (5) Chairman of the Board | ||||||||||||
| (1) | Mr. Paxton and Mr. Head are employee directors of the Company. All compensation paid to them is paid for their services as employee executives of the Company, which are detailed in the 2019 Summary Compensation Table. No additional fees were paid to Mr. Paxton or Mr. Head for their services as Directors of the Company as noted above. |
| (2) | Mr. Gero, Mr. Johnston, and Mr. Booth were each granted 8,000 stock options with an exercise price of $4.25, the closing fair market value on such date. |
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| (3) | Represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. The FASB ASC Topic 718 full grant date fair value of $34,000 for Mr. Gero, Mr. Johnston and Mr. Booth which will be expensed and reported as the options vests for each non-employee director. Refer to Note 9, “Stock Options”, in the Notes to Consolidated Financial Statements included in this prospectus for the relevant assumptions used to determine the valuation of the stock option awards. |
| (4) | Mr. Blount was appointed to the Board on May 27, 2020. |
| (5) | Mr. LeVecchio was appointed as Chairman of the Board on August 20, 2020. |
| (6) | The following are the aggregate number of option awards outstanding that have been granted to each of the non-employee directors as of December 31, 2019: Mr. Gero – 65,000; and Mr. Johnston – 65,000; and Mr. Booth. – 50,000. |
Overview of Compensation and Procedures
The Compensation Committee reviews the level of compensation of non-employee Directors on an annual basis. The Company has historically used data from a number of different sources to determine the compensation for non-employee Directors. Some examples of the data used include publicly available data describing director compensation in peer companies and survey data collected by the Company.
We compensate non-employee members of the Board through a mixture of cash and equity-based compensation. Each non-employee Director receives a cash retainer fee of $1,200 per month. Each non-employee Director also receives a fee of $1,200 for each meeting of the Board attended (excluding telephonic meetings) and for each meeting of a committee of the Board attended (exclusive of committee meetings held on the same day as Board meetings). Each non-employee Director also receives a fee of $600 for each telephonic meeting attended. Each non-employee Director is also reimbursed for all reasonable expenses incurred in attending such meetings. No Director who is an employee of the Company receives any fees for service as a Director. However, Michael L. Paxton and T. Joe Head each earned compensation for his services to the Company as an employee as set forth in the Summary Compensation Table. No options were received by Michael Paxton or Joe Head in 2019 and 2018. Neither Mr. Paxton nor Mr. Head received any additional fees for his services as a Director.
Under the Automatic Option Grant Program of the 2015 Plan, each non-employee Director will automatically be granted an option to purchase 10,000 shares of Common Stock upon joining the Board and an option to purchase 10,000 shares of Common Stock on the date of each annual stockholder meeting as long as the director has served at least three months prior to the date of grant.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
February 7, 2019 Promissory Note
On February 7, 2019, the Company entered into an unsecured revolving promissory note to borrow up to $2,700,000 from G. Ward Paxton, the Company’s former Chairman, President and Chief Executive Officer. Under the terms of the note, the Company may borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $2,700,000 at any given time. Amounts the Company borrows under the note accrue interest at a floating rate per annum equal to the announced prime rate of Silicon Valley Bank plus 1% and are unsecured. All outstanding principal and accrued interest was paid to Mr. Paxton during 2019. With the passing of Mr. G. Ward Paxton on October 24, 2019, the CEO Note terminated, with the result that future borrowings thereunder will no longer be available to the Company.
During 2018 and up until March 31, 2020, there have been no other transactions, or currently proposed transactions, between the Company and any of its executive officers, directors or 5% beneficial holders, or member of the immediate family of the foregoing persons, in which one of the foregoing individuals or entities had an interest of more than $120,000.
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Oversight of this Offering; Appointment of Special Committee of the Board.
The offering of shares of our currently issued and outstanding common stock now held by the selling stockholders is intended to benefit the company by decreasing the concentration of stock currently held by the Company’s insiders, founders, and current management without deploying any of our cash reserves to effect this result. Upon completion of the offering, we anticipate that the amount of our common stock held by the selling stockholders as a group will decrease from 55.6% to 44.0%, without taking into account any sales by underwriters as a result of the exercise of the over-allotment. We believe that this shift in concentration of control will benefit us and our shareholders and reinforce our goal of transforming the company’s business model to leverage on our existing customers, solutions, and intellectual property assets to provide new solutions to an expanded customer base. In recognition of the fact that certain members of the selling stockholder group currently hold positions as our directors and officers, we have formed a special committee of the Board that excludes those interested members of our board and charged this committee with the authority to conduct all negotiations and provide all approvals related to the offering including those related to the participation of the selling stockholders.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership of the Common Stock as of September 30, 2020, unless otherwise indicated, by (1) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (2) each director of the Company, (3) the Company’s current executive officers, (4) all current directors and executive officers of the Company as a group, and any selling stockholders not included in any of the prior groups. The persons and entities named in the table have sole voting and investment power with respect to all such shares owned by them, unless otherwise indicated. The percentage of class beneficially owned after the offering is based on an issuance of 2,000,000 shares of common stock by the Company in the offering, and does not take into account any shares subject to the underwriters’ purchase option.
| Name of Beneficial Owner or Group (1) | Amount and Nature of Beneficial Ownership Prior to the Offering (2) | Percent of Class (%) Prior to the Offering | Shares To Be Sold In The Offering | Amount and Nature of Beneficial Ownership After the Offering | Percent of Class (%) After The Offering | |||||
| Patsy A. Paxton (1)(3) | 1,412,925 | 9.5% | 190,651 | 1,222,274 | 7.2% | |||||
| T. Joe Head (1)(4) | 1,029,115 | 6.8% | 100,000 | 929,115 | 5.4% | |||||
| Dale A. Booth (5) | 49,251 | * | -- | 49,251 | * | |||||
| James F. Gero (6) | 455,818 | 3.0% | -- | 455,818 | 2.7% | |||||
| Donald M. Johnston (7) | 75,858 | * | -- | 75,858 | * | |||||
| Michael L. Paxton (1)(8) | 2,404,388 | 16.1% | 324,432 | 2,079,956 | 12.3% | |||||
| Julie Paxton Puckett (1)(9) | 1,967,250 | 13.2% | 265,448 | 1,407,033 | 10.1% | |||||
| Jack B.Blount | 0 | * | -- | 0 | * | |||||
| Tony J. LeVecchio | 0 | * | -- | 0 | * | |||||
| Mark A. Paxton(1)(10) | 1,626,502 | 10.9% | 219,469 | 1,407,033 | 8.3% | |||||
| James W. Harpel (1) (11) | 737,507 | 4.9% | -- | 737,507 | 4.4% | |||||
| ARS Investment Partners LLC (1) | 1,177,381 | 7.9% | -- | 1,177,381 | 7.0% | |||||
| All directors and executive officers as a group (7 persons) (12) | 4,014,429 | 26.2% | 424,432 | 3,589,997 | 20.7% |
___________________
* Represents beneficial ownership of less than 1% of the outstanding shares of Common Stock.
| (1) | The addresses of the persons or entities shown in the foregoing table who are beneficial owners of more than 5% of the Common Stock are as follows: Patsy A. Paxton, T. Joe Head, Michael L. Paxton, A Mark. Paxton, Julie Paxton Puckett and James Gero, 1101 East Arapaho Road, Suite 200, Richardson, Texas 75081, James W. Harpel, 525 South Flagler Drive, Suite 201, West Palm Beach, FL 33401 and ARS Investments Partners LLC, 500 Fifth Avenue, STE 1440, New York, NY 10110. |
| (2) | Beneficial ownership is calculated in accordance with the rules of the SEC in accordance with Rule 13d-3(d)(1) of the Exchange Act. Percentage of beneficial ownership is based on 14,929,279 shares of Common Stock issued outstanding as of September 30, 2020. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options or warrants held by that person that are currently exercisable or will become exercisable within 60 days following September 30, 2020 are deemed outstanding. However, these shares are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated in the footnotes to this table, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. |
| (3) | Includes 3,667 shares held by Patsy A. Paxton in the Intrusion Stock Fund in the Intrusion 401(k) Savings Plan and 606,499 shares hold by G. Ward Paxton FLP 1, Ltd. |
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| (4) | Includes 100,000 shares held by the Biblical Studies Foundation in which Mr. Head is President. Includes 250,000 shares that Mr. Head may acquire upon exercise of options that are currently exercisable or will become exercisable within 60 days of September 30, 2020. |
| (5) | Includes 42,001 shares that Mr. Booth may acquire upon exercise of options that are currently exercisable or will become exercisable within 60 days of September 30, 2020. |
| (6) | Includes 52,001 shares that Mr. Gero may acquire upon exercise of options that are currently exercisable or will become exercisable within 60 days of September 30, 2020. |
| (7) | Includes 52,001 shares that Mr. Johnston may acquire upon exercise of options that are currently exercisable or will become exercisable within 60 days of September 30, 2020. |
| (8) | Includes 570,000 shares pre-offering, 80,000 shares to be sold in the offering, with 490,000 shares to be held post-offering by trusts of Mr. Paxton’s children of which Michael Paxton and Kathryn Paxton are co- trustees. |
| (9) | Includes 1,140,000 shares pre-offering, 160,000 shares to be sold in the offering, with 980,000 shares to be held post-offering by trusts of Mrs. Puckett’s children of which Julie Puckett and Mark Puckett are co-trustees. |
| (10) | Includes 855,000 shares pre-offering, 120,000 shares to be sold in the offering, with 735,000 shares post-offering by trusts of Mr. Paxton’s children of which Mark Paxton is sole trustee. |
| (11) | Includes the equivalent of 70,000 shares that Mr. Harpel may be deemed a beneficial owner. |
| (12) | Includes an aggregate of 396,003 shares that may be acquired upon exercise of options of officers and directors that are currently exercisable or will become exercisable within 60 days of September 30, 2020. |
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The following description is intended as a summary of our certificate of incorporation (which we refer to as our “charter”) and our bylaws, each of which will become effective prior to the effectiveness of the registration statement of which this prospectus forms a part and which will be filed as exhibits to the registration statement of which this prospectus forms a part, and to the applicable provisions of the Delaware General Corporation Law. Because the following is only a summary, it does not contain all of the information that may be important to you. For a complete description, you should refer to our charter and bylaws.
General
Our charter authorizes 80,000,000 shares of common stock, $0.01 par value per share, and 5,000,000 shares of preferred stock, $0.01 per value per share.
As of September 30, 2020, there were 14,929,279 shares of our common stock outstanding and approximately 120 stockholders of record. No shares of our preferred stock are designated, issued or outstanding.
Common stock
Voting rights
Each holder of our common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. Our stockholders do not have cumulative voting rights in the election of directors. Accordingly, holders of a majority of the voting shares are able to elect all of the directors.
Dividends
Subject to preferences that may be applicable to any then-outstanding preferred stock which may be issued in the future, holders of our common stock are entitled to receive dividends, if any, as may be declared from time to time by our board of directors out of legally available funds. We intend to retain future earnings, if any, to finance the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.
Liquidation
In the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then-outstanding shares of preferred stock.
Rights and preferences
Holders of our common stock have no preemptive, conversion, subscription or other rights, and there are no redemption or sinking fund provisions applicable to our common stock.
Fully paid and nonassessable
All of our outstanding shares of common stock are, and the shares of common stock to be issued in this offering will be, fully paid and nonassessable.
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Issuance of Preferred Stock by our Board
While we currently have no shares of preferred stock issued and outstanding Our Certificate of Incorporation provides that shares of up to five million shares of preferred stock may be issued from time to time in one or more series, at the discretion of the Board of Directors without stockholder approval, with each such series to consist of such number of shares and to have such voting powers (whether full or limited, or no voting powers) and such designations, powers, preferences and relative, participating, optional, redemption, conversion, exchange or other special rights, and such qualifications, limitations or restrictions thereof, as shall be stated in the resolution or resolutions providing for the issuance of such series adopted by the Board of Directors prior to the issuance thereof. This means that our Board has the discretion to issue shares of preferred stock that had provisions that could be superior in rights and preferences to shares of our common stock and which could be dilutive to holders of our common stock. Further, such rights and preferences could have the effect of preventing or hindering certain fundamental transactions, such as a merger or sale of all or substantially all of our assets or another change of control that would otherwise be beneficial to the holders of our common stock.
Charter and bylaws provisions
Our charter and our bylaws, include a number of provisions that could deter hostile takeovers or delay or prevent changes in control of our company, including the following:
| · | Board of Directors Vacancies: Our charter and bylaws authorize only our board of directors to fill vacant directorships, including newly created seats. In addition, the number of directors constituting our board of directors may only be set by a resolution adopted by a majority vote of our entire board of directors. These provisions would prevent a stockholder from increasing the size of our board of directors and then gaining control of our board of directors by filling the resulting vacancies with its own nominees. This makes it more difficult to change the composition of our board of directors but promotes continuity of management. | |
| · | Stockholder Action; Special Meetings of Stockholders: Our charter provides that our stockholders may not take action by written consent, but may only take action at annual or special meetings of our stockholders. As a result, a holder controlling a majority of our capital stock would not be able to amend our bylaws or remove directors without holding a meeting of our stockholders called in accordance with our bylaws. Further, our bylaws and charter will provide that special meetings of our stockholders may be called only by a majority of our board of directors, the Chairman of our board of directors or our Chief Executive Officer, thus prohibiting a stockholder from calling a special meeting. These provisions might delay the ability of our stockholders to force consideration of a proposal or for stockholders controlling a majority of our capital stock to take any action, including the removal of directors. | |
| · | Advance Notice Requirements for Stockholder Proposals and Director Nominations: Our bylaws provide advance notice procedures for stockholders seeking to bring matters before our annual meeting of stockholders or to nominate candidates for election as directors at our annual meeting of stockholders. Our bylaws also specify certain requirements regarding the form and content of a stockholder’s notice. These provisions might preclude our stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders if the proper procedures are not followed. We expect that these provisions might also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company. | |
| · | No Cumulative Voting: The DGCL provides that stockholders are not entitled to the right to cumulate votes in the election of directors unless a corporation’s certificate of incorporation provides otherwise. Our charter does not provide for cumulative voting. |
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Delaware law
We are subject to the provisions of Section 203 of the DGCL, regulating corporate takeovers. In general, DGCL Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the date on which the person became an interested stockholder unless:
| · | prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; | |
| · | upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, but not the outstanding voting stock owned by the interested stockholder, (i) shares owned by persons who are directors and also officers and (ii) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or | |
| · | at or subsequent to the date of the transaction, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. |
Generally, a business combination includes a merger, asset or stock sale, or other transaction or series of transactions together resulting in a financial benefit to the interested stockholder. An interested stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own 15% or more of a corporation’s outstanding voting stock. We expect the existence of this provision to have an anti-takeover effect with respect to transactions our board of directors does not approve in advance. We also anticipate that DGCL Section 203 may also discourage attempts that might result in a premium over the market price for the shares of common stock held by stockholders.
Limitations on liability, indemnification of officers and directors and insurance
Our charter and bylaws contain provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by Delaware law.
Listing
Our common stock is currently listed on the OTCQB under the symbol “INTZ.” In conjunction with this offering, we have applied to list our common stock on the Nasdaq Capital Market, under the symbol “INTZ.” We can provide no assurances, however, that we will be approved for such a listing.
Transfer agent and registrar
The transfer agent and registrar for the shares of our common stock is Computershare.
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SHARES ELIGIBLE FOR FUTURE SALE
Sale of restricted shares
Based on the number of shares of our common stock outstanding as of September 30, 2020, upon the closing of the offering, and assuming the issuance of 2,000,000 shares of common stock and no exercise of the underwriters’ option to purchase additional shares of common stock, we will have outstanding 16,929,279 shares of common stock. Following this offering, 8,554,218 shares will be restricted as a result of securities laws or lock-up agreements but may be able to be sold commencing 120 days after the offering.
All of the shares of common stock to be sold in the offering, and shares of common stock being sold by the selling stockholder, and any shares sold upon exercise of the underwriters’ option to purchase additional shares, will be freely tradable in the public market without restriction or further registration under the Securities Act, unless the shares are held by any of our “affiliates” as such term is defined in Rule 144 of the Securities Act. All remaining shares of common stock held by existing stockholders immediately prior to the consummation of this offering will be freely tradable as well, but for any “restricted securities” as such term is defined in Rule 144 that will then be held by our “affiliates”. These restricted securities will only be eligible for public sale if registered under the Securities Act or if they qualify for an exemption from registration under the Securities Act, including the exemptions provided by Rule 144 or Rule 701, which rules are summarized below. As a result of the contractual 120-day lock-up period described below and the provisions of Rule 144 and 701 of the Securities Act, the restricted securities will be available for sale in the public markets as follows:
| Date Available for Sale | Shares
Eligible for Sale |
Description | ||
| Date of Prospectus | 2,000,000 | Shares newly issued in the offering | ||
| 1,100,000 | Shares registered for sale by the selling stockholders | |||
| 5,908,173 | Shares of unrestricted common stock not registered in the offering not otherwise subject to lock-up | |||
| 0 | Shares of restricted stock eligible for resale under Rule 144 and 701 and not otherwise subject to lockup | |||
| 120 Days after Prospectus Date | 8,554,218 | Lock-up shares released and saleable under Rules 144 and 701 |
Rule 144
In general, under Rule 144, as currently in effect, a person (or persons whose shares are required to be aggregated) who is not deemed to have been one of our “affiliates” for purposes of Rule 144 at any time during the three months preceding a sale, and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months, including the holding period of any prior owner other than one of our “affiliates,” is entitled to sell those shares in the public market (subject to the lock-up agreement referred to below, if applicable) without complying with the manner of sale, volume limitations or notice provisions of Rule 144, but subject to compliance with the public information requirements of Rule 144. Rule 144(a)(1) defines an “affiliate” of an issuing company as a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer. Directors, officers and holders of ten percent or more of the Company’s voting securities (including securities which are issuable within the next sixty days) are deemed to be affiliates of the issuing company. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than “affiliates,” then such person is entitled to sell such shares in the public market without complying with any of the requirements of Rule 144 (subject to the lock-up agreement referred to below, if applicable). In general, under Rule 144, as currently in effect, our “affiliates,” as defined in Rule 144, who have beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than one of our “affiliates,” are entitled to sell in the public market, upon expiration of any applicable lock-up agreements and within any three-month period, a number of those shares of our common stock that does not exceed the greater of:
| 50 |
| · | 1% of the number of common shares then outstanding, which will equal approximately 169,293 shares of common stock immediately after this offering (calculated assuming no exercise of the underwriters’ option to purchase additional shares and no exercise of outstanding options or warrants); or |
| · | the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. |
Such sales under Rule 144 by our “affiliates” or persons selling shares on behalf of our “affiliates” are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about us. Notwithstanding the availability of Rule 144, the holders of substantially all of our restricted securities have entered into lock-up agreements as referenced above and their restricted securities will become eligible for sale (subject to the above limitations under Rule 144) upon the expiration of the restrictions set forth in those agreements.
Rule 701
The Rule 701 exemption is not available to Exchange Act reporting companies. In general, under Rule 701 as currently in effect, any of our employees, directors, officers, consultants or advisors who acquired common stock from us in connection with a written compensatory stock or option plan or other written agreement in compliance with Rule 701 under the Securities Act before the effective date of the registration statement of which this prospectus is a part (to the extent such common stock is not subject to a lock-up agreement) is entitled to rely on Rule 701 to resell such shares. Our affiliates can resell shares in reliance on Rule 144 without having to comply with the holding period requirement, and non-affiliates of the Company can resell shares in reliance on Rule 144 without having to comply with Rule 144’s current public information and holding period requirements in Rule 144. Accordingly, subject to any applicable lock-up agreements, under Rule 701 persons who are non-affiliates may resell those shares without complying with the minimum holding period or public information requirements of Rule 144, and affiliates of the Company may resell those shares without compliance with Rule 144’s minimum holding period requirements.
Lock-up Agreements
We and our executive officers, directors and certain affiliates, and the selling stockholders, have agreed, subject to limited exceptions, for a period of 120 days after the date of this prospectus supplement, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of, directly or indirectly any shares of common stock or any securities convertible into or exchangeable for our common stock either owned as of the date of the underwriting agreement or thereafter acquired without the prior written consent of the representative. The representative may, in its sole discretion and at any time or from time to time before the termination of the lock-up period, without notice, release all or any portion of the securities subject to lock-up agreements.
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B. Riley Securities, Inc. is the representative of each of the underwriters named below. Subject to the terms and conditions set forth in an underwriting agreement among us, the selling stockholders and the underwriters, we and the selling stockholders have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us and the selling stockholders, the number of shares of our common stock set forth opposite its name below.
| Underwriters | Number of Shares | |||
| B. Riley Securities, Inc. | 3,100,000 | |||
| Total | 3,100,000 | |||
We and the selling stockholders have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act relating to losses or claims resulting from material misstatements in or omissions from this prospectus, the registration statement of which this prospectus is a part, certain free writing prospectuses that may be used in the offering and in certain marketing materials used in connection with this offering and to contribute to payments the underwriters may be required to make in respect of those liabilities.
Certain of our directors and executive officers may purchase shares of common stock in this offering.
The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officers’ certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
Over-Allotment Option
We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to 465,000 additional shares of common stock. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common stock as the number listed next to the underwriter’s name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table.
Discount, Commissions and Expenses
The following table shows the public offering price, underwriting discount and proceeds before expenses to us and to the selling stockholders. The information assumes either no exercise or full exercise by the underwriters of their overallotment option.
| Per Share | Total | |||||||
| Public offering price | $ | $ | ||||||
| Underwriting discounts and commissions | $ | $ | ||||||
| Proceeds, before expenses, to us | $ | $ | ||||||
| Proceeds, before expenses, to Selling Stockholders | $ | $ | ||||||
The underwriters initially propose to offer part of the shares of common stock directly to the public at the offering price listed on the cover page of this prospectus and part to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives.
| 52 |
The estimated offering expenses payable by us, exclusive of the underwriting discounts, are approximately $260,000, which includes legal, accounting and printing costs, expenses incurred by the selling stockholders and various other fees associated with the registration and listing of our common stock. We have also agreed to pay the expenses of the underwriters in connection with the offering, including filing fees and investor presentation expenses, as well as underwriters’ counsel legal fees. In addition, Wellington Shields acted as a financial advisor in this transaction and we have agreed to pay them a portion of the fee to be earned by B. Riley Securities, Inc. equal to 25% of the amount payable to the Representative after payment of underwriter expenses.
In compliance with guidelines of the Financial Industry Regulatory Authority, or FINRA, the maximum consideration or discount to be received by any FINRA member will not exceed 8% of the aggregate proceeds of the offering.
Lock-Up Agreements
We and our executive officers, directors and certain affiliates, and the selling stockholders, have agreed, subject to limited exceptions, for a period of 120 days after the date of this prospectus supplement, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of, directly or indirectly any shares of common stock or any securities convertible into or exchangeable for our common stock either owned as of the date of the underwriting agreement or thereafter acquired without the prior written consent of the representative. The representative may, in its sole discretion and at any time or from time to time before the termination of the lock-up period, without notice, release all or any portion of the securities subject to lock-up agreements.
Listing
Our shares of common stock are currently listed on the OTCQB Marketplace under the symbol “INTZ.” We have applied to list our common stock on the Nasdaq Capital Market under the symbol “INTZ.” We believe that upon the completion of the offering contemplated, we will meet the standards for listing on the Nasdaq Capital Market or other national exchange. There can be no assurance that our common stock will be approved for listing on the Nasdaq Capital Market.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing shares of our common stock. However, the representatives may engage in transactions that stabilize the price of our common stock, such as bids or purchases to peg, fix or maintain that price.
In connection with this offering, the underwriters may purchase and sell shares of our common stock in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in this offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ overallotment option described above. The underwriters may close out any covered short position by either exercising their overallotment option or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the overallotment option. “Naked” short sales are sales in excess of the overallotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common stock in the open market after pricing that could adversely affect investors who purchase in this offering. Stabilizing transactions consist of various bids for or purchases of shares of our common stock made by the underwriters in the open market prior to the closing of this offering.
The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.
| 53 |
Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. The underwriters may conduct these transactions on NASDAQ, in the over-the-counter market or otherwise.
None of us, the selling stockholders or any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, none of us, the selling stockholders or any of the underwriters make any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
Electronic Distribution
In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses by electronic means, such as e-mail. In addition, one or more of the underwriters may facilitate Internet distribution for this offering to certain of their Internet subscription customers. Any such underwriter may allocate a limited number of shares for sale to its online brokerage customers. An electronic prospectus is available on the Internet websites maintained by any such underwriter. Other than the prospectus in electronic format, the information on the websites of any such underwriter is not part of this prospectus.
Other
The underwriters and their respective affiliates are full-service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The underwriters and certain of their affiliates have provided from time to time, and may provide in the future, investment and commercial banking and financial advisory services to us and our affiliates in the ordinary course of business, for which they have received and may continue to receive customary fees and commissions. In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of ours. The underwriters and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
Selling Restrictions
This prospectus does not constitute an offer to sell to, or a solicitation of an offer to buy from, anyone in any country or jurisdiction (a) in which such an offer or solicitation is not authorized; (b) in which any person making such offer or solicitation is not qualified to do so; or (c) in which any such offer or solicitation would otherwise be unlawful. No action has been taken that would, or is intended to, permit a public offer of the shares of common stock or possession or distribution of this prospectus or any other offering or publicity material relating to the shares in any country or jurisdiction (other than the United States) where any such action for that purpose is required. Accordingly, each underwriter has undertaken that it will not, directly or indirectly, offer or sell any shares or have in its possession, distribute or publish any prospectus, form of application, advertisement or other document or information in any country or jurisdiction except under circumstances that will, to the best of its knowledge and belief, result in compliance with any applicable laws and regulations and all offers and sales of shares by it will be made on the same terms.
Canada. The common stock may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the common stock must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
| 54 |
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus supplement (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
United Kingdom. This prospectus supplement and any other material in relation to the shares of common stock described herein is only being distributed to, and is only directed at, persons in the United Kingdom who are “qualified investors” or otherwise in circumstances which do not require publication by the Company of a prospectus pursuant to section 85(1) of the UK Financial Services and Markets Act 2000. Any investment or investment activity to which this prospectus relates is available only to, and will be engaged in only with, investment professionals falling within Article 19(5), or high net worth entities falling within Article 49(2), of the UK Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or other persons to whom such investment or investment activity may lawfully be made available (together, “relevant persons”). Persons who are not relevant persons should not take any action on the basis of this prospectus and should not act or rely on it.
Switzerland. The securities will not be offered, directly or indirectly, to the public in Switzerland and this prospectus does not constitute a public offering prospectus as that term is understood pursuant to article 652a or 1156 of the Swiss Federal Code of Obligations.
European Economic Area. In relation to each Member State of the European Economic Area that has implemented the European Prospectus Directive (each, a “Relevant Member State”), an offer of our shares may not be made to the public in a Relevant Member State other than:
| · | to any legal entity which is a qualified investor, as defined in the European Prospectus Directive; |
| · | to fewer than 150 natural or legal persons (other than qualified investors as defined in the European Prospectus Directive), subject to obtaining the prior consent of the representatives for any such offer; or |
| · | in any other circumstances falling within Article 3(2) of the European Prospectus Directive; |
provided that no such offer of our shares shall require us or any underwriter to publish a prospectus pursuant to Article 3 of the European Prospectus Directive or supplement prospectus pursuant to Article 16 of the European Prospectus Directive.
For the purposes of this description, the expression an “offer to the public” in relation to the securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe for the securities, as the expression may be varied in that Relevant Member State by any measure implementing the European Prospectus Directive in that member state, and the expression “European Prospectus Directive” means Directive 2003/71/EC (and amendments hereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State) and includes any relevant implementing measure in each Relevant Member State. The expression 2010 PD Amending Directive means Directive 2010/73/EU.
We have not authorized and do not authorize the making of any offer of securities through any financial intermediary on our behalf, other than offers made by the underwriters and their respective affiliates, with a view to the final placement of the securities as contemplated in this document. Accordingly, no purchaser of the shares, other than the underwriters, is authorized to make any further offer of shares on our behalf or on behalf of the underwriters.
| 55 |
Faust Law Group, PLLC will pass upon the validity of the shares of common stock offered hereby for us. The underwriters are represented by The NBD Group, Inc.
The financial statements as of December 31, 2018 and 2019 included in this prospectus have been so included in reliance on the report of Whitley Penn LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of our common stock being offered by this prospectus. This prospectus, which constitutes part of that registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules that are part of the registration statement. Some items included in the registration statement are omitted from the prospectus in accordance with the rules and regulations of the SEC. For further information with respect to us and the common stock offered in this prospectus, we refer you to the registration statement and the accompanying exhibits and schedules filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement.
A copy of the registration statement and the accompanying exhibits and any other document we file may be inspected without charge at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549 and copies of all or any part of the registration statement may be obtained from that office upon the payment of the fees prescribed by the SEC. The public may obtain information on the operation of the public reference facilities in Washington, D.C. by calling the SEC at 1-800-SEC-0330. Our filings with the SEC are available to the public from the SEC’s website at www.sec.gov.
Upon the completion of this offering, we will be subject to the information and periodic reporting requirements of the Exchange Act and, in accordance therewith, we will file proxy statements, periodic information and other information with the SEC. All documents filed with the SEC are available for inspection and copying at the public reference room and website of the SEC referred to above. We maintain a website at www.Intrusion.com. You may access our reports, proxy statements and other information free of charge at this website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed through, our website is not incorporated by reference and is not a part of this prospectus.
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INTRUSION INC.
| F-1 |
INTRUSION INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
June 30, 2020 | December 31, 2019 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 2,872 | $ | 3,334 | ||||
| Accounts receivable | 1,067 | 1,566 | ||||||
| Prepaid expenses | 388 | 152 | ||||||
| Total current assets | 4,327 | 5,052 | ||||||
| Noncurrent Assets: | ||||||||
| Property and equipment, net | 311 | 335 | ||||||
| Finance leases, right-of-use assets, net | 41 | 62 | ||||||
| Operating leases, right-of-use asset, net | 1,223 | 1,348 | ||||||
| Other assets | 36 | 38 | ||||||
| Total noncurrent assets | 1,611 | 1,783 | ||||||
| TOTAL ASSETS | $ | 5,938 | $ | 6,835 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 1,152 | $ | 1,080 | ||||
| Dividends payable | 19 | 20 | ||||||
| Finance leases liability, current portion | 38 | 43 | ||||||
| Operating leases liability, current portion | 291 | 284 | ||||||
| PPP loan payable, current portion | 285 | – | ||||||
| Deferred revenue | 164 | 516 | ||||||
| Total current liabilities | 1,949 | 1,943 | ||||||
| Noncurrent Liabilities: | ||||||||
| Finance leases liability, noncurrent portion | 5 | 21 | ||||||
| Operating leases liability, noncurrent portion | 1,170 | 1,315 | ||||||
| PPP loan payable, noncurrent portion | 345 | – | ||||||
| Total noncurrent liabilities | 1,520 | 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 $1,012 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 $1,154 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 — 13,802 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 | ) | ||||
| Additional paid-in capital | 56,946 | 56,759 | ||||||
| Accumulated deficit | (55,957 | ) | (54,777 | ) | ||||
| Accumulated other comprehensive loss | (43 | ) | (43 | ) | ||||
| Total stockholders’ equity | 2,469 | 3,556 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 5,938 | $ | 6,835 | ||||
See accompanying notes.
| F-2 |
INTRUSION INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | |||||||||||||
| Revenue | $ | 1,655 | $ | 4,020 | $ | 3,450 | $ | 7,211 | ||||||||
| Cost of revenue | 651 | 1,590 | 1,398 | 2,874 | ||||||||||||
| Gross profit | 1,004 | 2,430 | 2,052 | 4,337 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing | 485 | 46 | 995 | 458 | ||||||||||||
| Research and development | 907 | 296 | 1,660 | 477 | ||||||||||||
| General and administrative | 326 | 321 | 582 | 652 | ||||||||||||
| Operating income (loss) | (714 | ) | 1,767 | (1,185 | ) | 2,750 | ||||||||||
| Interest income | 1 | – | 7 | – | ||||||||||||
| Interest expense | (2 | ) | (9 | ) | (2 | ) | (44 | ) | ||||||||
| Net income (loss) | $ | (715 | ) | $ | 1,758 | $ | (1,180 | ) | $ | 2,706 | ||||||
| Preferred stock dividends accrued | (33 | ) | (35 | ) | (66 | ) | (69 | ) | ||||||||
| Net income (loss) attributable to common stockholders | $ | (748 | ) | $ | 1,723 | $ | (1,246 | ) | $ | 2,637 | ||||||
| Net income (loss) per share attributable to common stockholders: | ||||||||||||||||
| Basic | $ | (0.05 | ) | $ | 0.13 | $ | (0.09 | ) | $ | 0.20 | ||||||
| Diluted | $ | (0.05 | ) | $ | 0.11 | $ | (0.09 | ) | $ | 0.17 | ||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 13,784 | 13,523 | 13,743 | 13,466 | ||||||||||||
| Diluted | 13,784 | 15,371 | 13,743 | 15,314 | ||||||||||||
See accompanying notes.
| F-3 |
INTRUSION INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
| 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.
| F-4 |
INTRUSION INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Six Months Ended | ||||||||
June 30, 2020 | June 30, 2019 | |||||||
| 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 | 107 | 86 | ||||||
| Stock-based compensation | 74 | 14 | ||||||
| Penalties on dividends | – | 6 | ||||||
| Noncash lease costs | 124 | 304 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 499 | (738 | ) | |||||
| Prepaid expenses and other assets | (234 | ) | (234 | ) | ||||
| Accounts payable and accrued expenses | (64 | ) | (66 | ) | ||||
| Deferred revenue | (352 | ) | 179 | |||||
| Net cash provided by (used in) operating activities | (1,026 | ) | 2,257 | |||||
| Investing Activities: | ||||||||
| Purchases of property and equipment | (62 | ) | (168 | ) | ||||
| Financing Activities: | ||||||||
| Proceeds from PPP loan payable | 629 | – | ||||||
| Payments on loan from officer | – | (1,815 | ) | |||||
| Proceeds from stock options exercised | 85 | 226 | ||||||
| Payments of dividends | (67 | ) | (644 | ) | ||||
| Reduction of finance lease liability | (21 | ) | (31 | ) | ||||
| Net cash provided by (used in) financing activities | 626 | (2,264 | ) | |||||
| Net decrease in cash and cash equivalents | (462 | ) | (175 | ) | ||||
| Cash and cash equivalents at beginning of period | 3,334 | 1,652 | ||||||
| Cash and cash equivalents at end of period | $ | 2,872 | $ | 1,477 | ||||
| SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES: | ||||||||
| Preferred stock dividends accrued | $ | 66 | $ | 68 | ||||
| Conversion of preferred stock to common | $ | 96 | $ | – | ||||
See accompanying notes.
| F-5 |
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 mining, analytics, detection, reporting and mitigation of cybersecurity threats. |
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.
| F-6 |
In addition to Shield, we are developing complementary solutions to create a family of Shield offerings, including our first follow on offering, Shield CLOUD, which is targeted for use by businesses with a dedicated or hybrid Cloud network environment. We are in the process of Alpha testing Shield CLOUD, and we are developing additional solutions that will address cybersecurity needs in the areas of lateral traffic, remote employees, WiFi, and mobile devices.
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. Trademarks of Intrusion include:
| ● | INTRUSION SHIELD |
| ● | PROCESS FLOW TECHNOLOGY |
| ● | INTRUSION SAVANT |
| ● | BRINGING SCIENCE INTO DECISION MAKING |
| ● | TRACECOP |
| ● | INTRUSION PROTECT EVERYTHING. TRUST NOTHING |
| ● | PROTECT EVERYTHING. TRUST NOTHING. |
| F-7 |
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 and six month periods ended June 30, 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.
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 six month periods ended June 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. 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 June 30, 2020 and 2019, the Company granted 323,000 and 24,000, respectively, of stock options to employees or directors. The Company recognized $55,000 and $10,000, respectively, of stock-based compensation expense for the three month periods ended June 30, 2020 and 2019. During the six month periods ended June 30, 2020 and 2019, the Company granted 323,000 and 24,000, respectively, of stock options to employees and directors. The Company recognized $74,000 and $14,000, respectively, of stock-based compensation expense for the six month periods ended June 30, 2020 and 2019.
| F-8 |
During the three month periods ended June 30, 2020 and 2019, 14,000 and 14,000 were exercised under the 2005 Plan, respectively. During the six month periods ended June 30, 2020 and 2019, 186,600 and 280,500 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 June 30, 2020 | For Three Months Ended June 30, 2019 | For Six Months Ended June 30, 2020 | For Six Months Ended June 30, 2019 | |||||||||||||
| Weighted average grant date fair value | $ | 2.80 | $ | 3.61 | $ | 2.80 | $ | 3.61 | ||||||||
| Weighted average assumptions used: | ||||||||||||||||
| Expected dividend yield | 0.0% | 0.0% | 0.0% | 0.0% | ||||||||||||
| Risk-free interest rate | 0.43% | 2.19% | 0.43% | 2.19% | ||||||||||||
| Expected volatility | 76.00% | 127.52% | 76.00% | 127.52% | ||||||||||||
| Expected life (in years) | 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 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. |
| F-9 |
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.
Contract assets represent contract billings for sales per contracts with customers and are classified as current. Our contract assets include our accounts receivables. At June 30, 2020, the Company had contract assets balance of $1,067,000. 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 June 30, 2020, the Company had contract liabilities balance of $164,000. 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 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 June 30, 2020 and 2019 are 1,942,990 and 12,132, respectively. The aggregate number of common stock equivalents excluded from the diluted income (loss) per share calculation for the six month periods ended June 30, 2020 and 2019 are 1,909,289 and 6,066, 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 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 91.0% of total revenues for the second quarter of 2020 compared to 91.3% of total revenues for the second quarter of 2019. During the second quarter of 2020, approximately 91.0% of total revenues were attributable to four government customers compared to approximately 73.2% of total revenues attributable to three government customers in the second quarter of 2019. In the second quarter of 2020, no individual commercial customer had revenues over 10.0% of total revenue compared to no 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.
| F-10 |
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 June 30, 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 June 30, 2020, we had $19,000 in accrued and unpaid dividends, all of which have been paid as of the date of this prospectus.
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 five months as of June 30, 2020. The San Marcos operating lease liability has a life of nine months as of June 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.
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 | Six Months Ended | |||||||||||||||
| June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | |||||||||||||
| Operating expense: | ||||||||||||||||
| Amortization expense – Finance ROU | $ | 11 | $ | 16 | $ | 21 | $ | 32 | ||||||||
| Lease expense – Operating ROU | $ | 82 | $ | 83 | $ | 165 | $ | 162 | ||||||||
| Other expense: | ||||||||||||||||
| Interest expense – Finance ROU | $ | – | $ | 1 | $ | 1 | $ | 1 | ||||||||
| F-11 |
Future minimum lease obligations consisted of the following at June 30, 2020 (in thousands):
| Operating | Finance | |||||||||||
| Period ending June 30, | ROU Leases | ROU Leases | Total | |||||||||
| 2021 | $ | 363 | $ | 35 | $ | 402 | ||||||
| 2022 | 363 | 9 | 368 | |||||||||
| 2023 | 375 | – | 375 | |||||||||
| 2024 | 384 | – | 384 | |||||||||
| 2025 | 159 | – | 159 | |||||||||
| Thereafter | – | – | – | |||||||||
| $ | 1,644 | $ | 44 | $ | 1,688 | |||||||
| Less Interest* | (183 | ) | (1 | ) | ||||||||
| $ | 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 do 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% 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):
| Period ending June 30, | PPP Loan | |||
| 2021 | $ | 285 | ||
| 2022 | 392 | |||
| 2023 | – | |||
| 2024 | – | |||
| 2025 | – | |||
| Thereafter | – | |||
| 641 | ||||
| Less Interest* | (11 | ) | ||
| $ | 630 | |||
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 Event
As of August 14, 2020, 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.
| F-12 |
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2019 and 2018 INTRUSION INC.
RICHARDSON, TEXAS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders Intrusion Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Intrusion Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2009.
/s/ Whitley Penn LLP
Dallas, Texas
March 27, 2020
| F-13 |
INTRUSION INC. AND SUBSIDIARIES
(In thousands, except par value amounts)
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 3,334 | $ | 1,652 | ||||
| Accounts receivable | 1,566 | 1,967 | ||||||
| Prepaid expenses | 152 | 91 | ||||||
| Total current assets | 5,052 | 3,710 | ||||||
| Property and Equipment: | ||||||||
| Equipment | 1,138 | 881 | ||||||
| Furniture and fixtures | 43 | 43 | ||||||
| Leasehold improvements | 63 | 63 | ||||||
| 1,244 | 987 | |||||||
| Accumulated depreciation and amortization | (909 | ) | (787 | ) | ||||
| 335 | 200 | |||||||
| Finance leases, right-of-use assets, net | 62 | 121 | ||||||
| Operating leases, right-of-use assets, net | 1,348 | – | ||||||
| Other assets | 38 | 38 | ||||||
| TOTAL ASSETS | $ | 6,835 | $ | 4,069 | ||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable, trade | $ | 252 | $ | 193 | ||||
| Accrued expenses | 828 | 1,403 | ||||||
| Dividends payable | 20 | 594 | ||||||
| Finance leases liabilities, current portion | 43 | 58 | ||||||
| Operating leases liabilities, current portion | 284 | – | ||||||
| Deferred revenue | 516 | 1,004 | ||||||
| Total current liabilities | 1,943 | 3,252 | ||||||
| Loan payable to officer | – | 1,815 | ||||||
| Finance leases liability, noncurrent portion | 21 | 64 | ||||||
| Operating leases liability, noncurrent portion | 1,315 | – | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity (Deficit): | ||||||||
| Preferred stock, $0.01 par value: Authorized shares — 5,000 | ||||||||
| Series 1 shares issued and outstanding — 200 Liquidation preference of $1,013 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 $634 in 2019 and $760 in 2018 | 412 | 412 | ||||||
| Common stock, $0.01 par value: Authorized shares — 80,000 | ||||||||
| Issued shares — 13,552 in 2019 and 13,259 in 2018 | ||||||||
| Outstanding shares — 13,542 in 2019 and 13,249 in 2018 | 136 | 133 | ||||||
| Common stock held in treasury, at cost—10 shares | (362 | ) | (362 | ) | ||||
| Additional paid-in-capital | 56,759 | 56,609 | ||||||
| Accumulated deficit | (54,777 | ) | (59,242 | ) | ||||
| Accumulated other comprehensive loss | (43 | ) | (43 | ) | ||||
| Total stockholders’ equity (deficit) | 3,556 | (1,062 | ) | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 6,835 | $ | 4,069 | ||||
See accompanying notes.
| F-14 |
INTRUSION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Net product revenue | $ | 13,643 | $ | 10,276 | ||||
| Cost of revenue | 5,342 | 3,847 | ||||||
| Gross profit | 8,301 | 6,429 | ||||||
| Operating expenses: | ||||||||
| Sales and marketing | 1,298 | 1,604 | ||||||
| Research and development | 1,314 | 1,237 | ||||||
| General and administrative | 1,182 | 1,112 | ||||||
| Operating income | 4,507 | 2,476 | ||||||
| Interest expense | (46 | ) | (189 | ) | ||||
| Interest income | 4 | – | ||||||
| Income from operations before income taxes | 4,465 | 2,287 | ||||||
| Income tax provision | – | – | ||||||
| Net income | 4,465 | 2,287 | ||||||
| Preferred stock dividends accrued | (139 | ) | (139 | ) | ||||
| Net income attributable to common stockholders | $ | 4,326 | $ | 2,148 | ||||
Net income per share attributable to common stockholders, basic | $ | 0.32 | $ | 0.16 | ||||
| Net income per share attributable to common stockholders, diluted | $ | 0.28 | $ | 0.14 | ||||
| Weighted average common shares outstanding: | ||||||||
| Basic | 13,502 | 13,049 | ||||||
| Diluted | 15,352 | 15,063 | ||||||
See accompanying notes.
| F-15 |
INTRUSION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands)
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| NUMBER OF PREFERRED SHARES—ISSUED AND OUTSTANDING | ||||||||
| Balance, beginning of year and end of year | 949 | 949 | ||||||
| PREFERRED STOCK | ||||||||
| Balance, beginning of year and end of year | $ | 1,843 | $ | 1,843 | ||||
| NUMBER OF COMMON SHARES—ISSUED | ||||||||
| Balance, beginning of year | 13,259 | 12,808 | ||||||
| Exercise of stock options | 293 | 451 | ||||||
| Balance, end of year | 13,552 | 13,259 | ||||||
| COMMON STOCK | ||||||||
| Balance, beginning of year | $ | 133 | $ | 128 | ||||
| Exercise of stock options | 3 | 5 | ||||||
| Balance, end of year | $ | 136 | $ | 133 | ||||
| TREASURY SHARES | ||||||||
| Balance, beginning of year and end of year | $ | (362 | ) | $ | (362 | ) | ||
| ADDITIONAL PAID-IN-CAPITAL | ||||||||
| Balance, beginning of year | $ | 56,609 | $ | 56,518 | ||||
| Stock-based compensation | 47 | 20 | ||||||
| Exercise of stock options | 236 | 163 | ||||||
| Preferred stock dividends declared, net of waived penalties by shareholders | (133 | ) | (92 | ) | ||||
| Balance, end of year | $ | 56,759 | $ | 56,609 | ||||
| ACCUMULATED DEFICIT | ||||||||
| Balance, beginning of year | $ | (59,242 | ) | $ | (61,529 | ) | ||
| Net income | 4,465 | 2,287 | ||||||
| Balance, end of year | $ | (54,777 | ) | $ | (59,242 | ) | ||
| ACCUMULATED OTHER COMPREHENSIVE LOSS | ||||||||
| Balance, beginning of year | $ | (43 | ) | $ | (107 | ) | ||
| Extinguishment of U.K. cumulative translation adjustment | – | 64 | ||||||
| Balance, end of year | $ | (43 | ) | $ | (43 | ) | ||
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 3,556 | $ | (1,062 | ) | |||
See accompanying notes.
| F-16 |
INTRUSION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Operating Activities: | ||||||||
| Net income | $ | 4,465 | $ | 2,287 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 184 | 133 | ||||||
| Noncash lease costs | 232 | – | ||||||
| Stock-based compensation | 47 | 20 | ||||||
| Penalties and waived penalties on dividends | 6 | 47 | ||||||
| Extinguishment of U.K. cumulative translation adjustment | – | 64 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 401 | (1,005 | ) | |||||
| Inventories | – | 15 | ||||||
| Prepaid expenses and other assets | (61 | ) | (2 | ) | ||||
| Accounts payable and accrued expenses | (496 | ) | 421 | |||||
| Deferred revenue | (488 | ) | 598 | |||||
| Net cash provided by operating activities | 4,290 | 2,578 | ||||||
| Investing Activities: | ||||||||
| Purchases of property and equipment | (260 | ) | (202 | ) | ||||
| Net cash used in investing activities | (260 | ) | (202 | ) | ||||
| Financing Activities: | ||||||||
| Borrowings on loan from officer | – | 150 | ||||||
| Payments on loan from officer | (1,815 | ) | (1,200 | ) | ||||
| Payments of dividends | (714 | ) | – | |||||
| Principal payments on capital lease equipment | (58 | ) | (66 | ) | ||||
| Proceeds from stock options exercised | 239 | 168 | ||||||
| Net cash used in financing activities | (2,348 | ) | (948 | ) | ||||
| Net increase in cash and cash equivalents | 1,682 | 1,428 | ||||||
| Cash and cash equivalents at beginning of year | 1,652 | 224 | ||||||
| Cash and cash equivalents at end of year | $ | 3,334 | $ | 1,652 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| Interest paid on leased assets | $ | 4 | $ | 3 | ||||
| Interest paid on loan from officer | $ | 513 | $ | – | ||||
| Income taxes paid | $ | – | $ | – | ||||
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES: | ||||||||
| Preferred stock dividends accrued | $ | 139 | $ | 139 | ||||
| Purchase of equipment through capital lease | $ | – | $ | 128 | ||||
See accompanying notes.
| F-17 |
INTRUSION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Description of Business |
We develop, market, and support a family of entity identification, data mining, regulated information compliance and data privacy protection. Our product families include: TraceCop for identity identification, Savant for data mining and advanced persistent threat detection and Compliance Commander for regulated information and data privacy protection. 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, distributors and numerous system integrators, managed service providers and value-added resellers. Our end-user customers include banks, credit unions, other financial institutions, U.S. federal government entities, foreign government entities, hospitals and other healthcare providers. Essentially, our end-users can be defined as end-users requiring network security solutions for protecting their mission critical data.
References to the “Company”, “we”, “us”, “our”, “Intrusion” or “Intrusion Inc.” refer to Intrusion Inc. and its subsidiaries. Compliance Commander™ and TraceCop™ are registered trademarks of Intrusion Inc.
As of December 31, 2019, we had cash and cash equivalents of approximately $3,334,000, up from approximately $1,652,000 as of December 31, 2018. We generated a net income of $4,465,000 for the year ended December 31, 2019 compared to a net income of $2,287,000 for the year ended December 31, 2018. 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 the current forecast for the year 2020, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures through March 31, 2021. As of October 24, 2019, our funding available from the CEO Note terminated. 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. We expect to fund our operations through anticipated Company profits, this offering, and possible additional investments of equity and debt, which, if we are able to obtain, will have the effect of diluting our existing common stockholders, perhaps significantly. 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.
| 2. | Summary of Significant Accounting Policies |
Principles of Consolidation
Our consolidated financial statements include our accounts and those of our wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and all highly liquid investments purchased with an original maturity of less than three months are considered to be cash and cash equivalents.
| F-18 |
Risk Concentration
Financial instruments, which potentially subject us to concentrations of credit risk, are primarily cash and cash equivalents, investments and accounts receivable. Cash and cash equivalent deposits are at risk to the extent that they exceed Federal Deposit Insurance Corporation insured amounts. To minimize risk, we place our investments in U.S. government obligations, corporate securities and money market funds. Substantially all of our cash, cash equivalents and investments are maintained with two major U.S. financial institutions. We do not believe that we are subject to any unusual financial risk with our banking arrangements. We have not experienced any significant losses on our cash and cash equivalents.
We sell our products to customers primarily in the United States. In the future, we may sale our products internationally. Fluctuations in currency exchange rates and adverse economic developments in foreign countries could adversely affect the Company’s operating results. We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral. We maintain reserves for potential credit losses, and such losses, in the aggregate, have historically been minimal.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are stated at the amount we expect to collect. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. If the financial condition of our customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, we provide for estimated uncollectible amounts through a charge to earnings and an increase to a valuation allowance. Balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance. There was no allowance at December 31, 2019 and 2018.
Property and Equipment
Equipment and furniture and fixtures are stated at cost less accumulated depreciation and depreciated on a straight-line basis over the estimated useful lives of the assets. Such lives vary from 1 to 5 years. Leasehold improvements are stated at cost less accumulated amortization and are amortized on a straight-line basis over the shorter of estimated useful lives of the assets or the remaining terms of the leases. Such lives vary from 2 to 5 years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Repair and maintenance costs are expensed as incurred. Depreciation and amortization expense totaled approximately $184,000 and $133,000 for the years ended December 31, 2019 and 2018, respectively.
Long-Lived Assets
We review long-lived assets, including property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows to be generated by the asset. If the carrying value exceeds the future undiscounted cash flows, the assets are written down to fair value. During the years ended December 31, 2019 and 2018, there was no impairment of long-lived assets.
Foreign Currency
All assets and liabilities in the balance sheets of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at year-end exchange rates. All revenues and expenses in the statement of operations of these foreign subsidiaries are translated at average exchange rates for the year. Translation gains and losses are not included in determining net income but are shown in accumulated other comprehensive loss in the stockholders’ deficit section of the consolidated balance sheet. Foreign currency transaction gains and losses are included in determining net loss and were not significant.
| F-19 |
Accounting for Stock Options
We account for stock options using the guidance in Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 718. FASB ASC Topic 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.
Stock-based compensation expense recognized in the statements of operations for the years ended 2019 and 2018 is based on awards ultimately expected to vest, reduced by estimated forfeitures. FASB ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Valuation Assumptions
The fair values of option awards were estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions for fiscal years ended December 31, 2019 and 2018, respectively:
| 2019 | 2018 | |||||||
| Weighted average grant date fair value | $ | 3.69 | $ | 0.49 | ||||
| Weighted average assumptions used: | ||||||||
| Expected dividend yield | 0.00 | % | 0.00 | % | ||||
| Risk-free interest rate | 2.00 | % | 0.83 | % | ||||
| Expected volatility | 124.58 | % | 225.21 | % | ||||
| Expected life (in years) | 5.00 | 4.91 | ||||||
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.
Net Loss Per Share
We report two separate net loss per share numbers, basic and diluted. Basic net loss attributable to common stockholders per share is computed by dividing net loss attributable to common stockholders for the year by the weighted average number of common shares outstanding for the year. Diluted net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders for the year by the weighted average number of common shares and dilutive common stock equivalents outstanding for the year. Our common stock equivalents include all common stock issuable upon conversion of convertible preferred stock and the exercise of outstanding options. Common stock equivalents are included in the diluted loss per share for the years ended December 31, 2019 and 2018 except in cases where the issuance would be anti-dilutive. The aggregate number of common stock equivalents excluded from the diluted loss per share calculation for the year ended December 31, 2019 and 2018 totaled 30,630 and zero, respectively.
Revenue Recognition
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 operation. ASU No. 2014-09 did not have a material effect on the Company’s financial position, results of operations or cash flows for the year ended December 31, 2019.
| F-20 |
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 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.
Research and Development Costs
We incur research and development costs that relate primarily to the development of new security software, appliances and integrated solutions, and major enhancements to existing services and products. Research and development costs are comprised primarily of salaries and related benefits expenses, contract labor and prototype and other related expenses.
Software development costs are included in research and development and are expensed as incurred. FASB ASC Topic 350 Intangibles—Goodwill and Other requires that software development costs incurred subsequent to reaching technological feasibility be capitalized, if material. If the process of developing a new product or major enhancement does not include a detailed program design, technological feasibility is determined only after completion of a working model. To date, the period between achieving technological feasibility and the general availability of such software has been short, and the software development costs qualifying for capitalization have been insignificant.
| F-21 |
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates are used for, but not limited to, the accounting for doubtful accounts, sales discounts, sales returns, revenue recognition, warranty costs, inventory obsolescence, depreciation and income taxes. Actual results could differ from these estimates.
Fair Value of Financial Instruments
We calculate the fair value of our assets and liabilities which qualify as financial instruments and include additional information in the notes to consolidated financial statements when the fair value is different than 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. Capital leases approximate fair value as they 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 loan payable to officer. None of these instruments are held for trading purposes.
Income Taxes
Deferred income taxes are determined using the liability method in accordance with FASB ASC 740, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.
FASB ASC 740 creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FASB ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. There are no unrecognized tax benefits to disclose in the notes to the consolidated financial statements.
We file income tax returns in the United States federal jurisdiction. At December 31, 2019, tax returns related to fiscal years ended December 31, 2016 through December 31, 2018 remain open to possible examination by the tax authorities. No tax returns are currently under examination by any tax authorities. We did not incur any penalties or interest during the years ended December 31, 2019 and 2018. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“the Tax Act”) which significantly changed U.S. tax law. The Tax Act lowered the Company’s statutory federal income tax rate from a maximum of 39% to a rate of 21% effective January 1, 2018.
Recent Accounting Pronouncements
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 year ended December 31, 2019.
| F-22 |
| 3. | Accrued Expenses (in thousands) |
| December 31, | ||||||||
| 2019 | 2018 | |||||||
Accrued payroll | $ | 193 | $ | 154 | ||||
| Accrued vacation | 311 | 310 | ||||||
| Accrued bonus | 245 | 170 | ||||||
| Rent payable | – | 191 | ||||||
| Accrued interest, related party | – | 479 | ||||||
| Other | 79 | 99 | ||||||
| $ | 828 | $ | 1,403 | |||||
| 4. | Commitments and Contingencies |
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 eleven months as of December 31, 2019. The San Marcos operating lease liability has a life of fifteen months as of December 31, 2019. The adoption of the lease accounting standard resulted in the recognition of an operating ROU asset of $1,580 thousand and a related lease liability of $1,771 thousand.
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 years ended December 31, 2019 and 2018, the Company had approximately $294,000 and $264,000, respectively, in operating cash flows related to operating leases.
Schedule of Items Appearing on the Statement of Operations:
| Year Ended | ||||||||
December 30, 2019 | December 31, 2018 | |||||||
| Operating expense: | ||||||||
| Amortization expense – Finance ROU | $ | 59 | $ | 65 | ||||
| Lease expense – Operating ROU | $ | 433 | $ | 316 | ||||
| Other expense: | ||||||||
| Interest expense – Finance ROU | $ | 4 | $ | 5 | ||||
| F-23 |
Future minimum lease obligations consisted of the following at December 31, 2019 (in thousands):
Period ending December 31, | Operating ROU Leases | Finance ROU Leases |
Total | |||||||||
| 2020 | $ | 362 | $ | 45 | $ | 407 | ||||||
| 2021 | 361 | 21 | 382 | |||||||||
| 2022 | 369 | – | 369 | |||||||||
| 2023 | 380 | – | 380 | |||||||||
| 2024 | 352 | – | 352 | |||||||||
| $ | 1,824 | $ | 66 | $ | 1,890 | |||||||
| Less Interest* | (225 | ) | (2 | ) | ||||||||
| $ | 1,599 | $ | 64 | |||||||||
*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.
Legal Proceedings
We are subject to legal proceedings and claims that arise in the ordinary course of business. We do not believe that the outcome of those matters will have a material adverse effect on our consolidated financial position, operating results or cash flows. However, there can be no assurance such legal proceedings will not have a material impact.
We are not aware of any material claims outstanding or pending against Intrusion Inc. at December 31, 2019.
| 5. | Employee Benefit Plan |
Employee 401(k) Plan
We have a plan known as the Intrusion Inc. 401(k) Savings Plan (the “Plan”) to provide retirement and incidental benefits for our employees. The Plan covers substantially all employees who meet minimum age and service requirements. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax deferred salary deductions for eligible employees.
Employees may contribute from 1% to 25% of their annual compensation to the Plan, limited to a maximum amount as set by the Internal Revenue Service. Participants who are over the age of 50 may contribute an additional amount of their salary per year, as defined annually by the Internal Revenue Service. We match employee contributions at the rate of $0.25 per each $1.00 of contribution on the first 4% of compensation. Matching contributions to the Plan were approximately $32,000 and $30,000, respectively, for the years ended December 31, 2019 and 2018.
| 6. | Borrowings from 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 former Chief Executive Officer (the “CEO Note”). Under the terms of the CEO Note, the Company had the ability to borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $3,700,000 at any given time through March 2020.
| F-24 |
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 base and assessing what terms may be available to the Company, including whether any such terms are acceptable to the Company, if at all.
| 7. | Income Taxes |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets (liabilities) as of December 31, 2019 and 2018 are as follows (in thousands):
| December 31 | ||||||||
| 2019 | 2018 | |||||||
| Net operating loss carryforwards | $ | 18,771 | $ | 20,720 | ||||
| Net operating loss carryforwards of foreign subsidiaries | 374 | 374 | ||||||
| Depreciation expense | (77 | ) | 4 | |||||
| Stock-based compensation expense | 36 | 28 | ||||||
| Other | 68 | 78 | ||||||
| Net deferred tax assets | 19,172 | 21,204 | ||||||
| Valuation allowance for net deferred tax assets | (19,172 | ) | (21,204 | ) | ||||
| Net deferred tax assets, net of allowance | $ | – | $ | – | ||||
Deferred tax assets are required to be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. Realization of the future benefits related to the deferred tax assets is dependent on many factors, including the Company’s ability to generate taxable income within the near to medium term. Management has considered these factors in determining the valuation allowance for 2019 and 2018.
The differences between the provision for income taxes and income taxes computed using the federal statutory rate for the years ended December 31, 2019 and 2018 are as follows (in thousands):
| 2019 | 2018 | |||||||
| Reconciliation of income tax benefit to statutory rate: | ||||||||
| Income benefit at statutory rate | $ | 938 | $ | 480 | ||||
| State income taxes (benefit), net of federal income tax benefit | 1,066 | 57 | ||||||
| Permanent differences | 10 | (91 | ) | |||||
| Change in valuation allowance | (2,030 | ) | (450 | ) | ||||
| Other | 16 | 4 | ||||||
| $ | – | $ | – | |||||
| F-25 |
At December 31, 2019, we had federal net operating loss carryforwards of approximately $81.7 million for income tax purposes that begin to expire in 2022 and are subject to the ownership change limitations under Internal Revenue Code Section 382.
| 8. | Stock Options |
At December 31, 2019, we had two stock-based compensation plans, which are described below. These plans were developed to retain and attract key employees and directors.
On March 17, 2005, the Board approved the 2005 Stock Incentive Plan (the “2005 Plan”), which was approved by the stockholders on June 14, 2005. The 2005 Plan provided for the issuance of up to 750,000 shares of common stock upon exercise of options granted pursuant to the 2005 Plan. On May 30, 2007, the stockholders approved an Amendment to the 2005 Plan that increased this amount by 750,000 for a total of 1,500,000 shares of common stock that may be issued upon the exercise of options granted pursuant to the 2005 Plan. On May 29, 2008 and May 21, 2009, the stockholders approved an increase of 500,000 shares, respectively, of common stock that may be issued pursuant to the 2005 Plan for a total of 2,500,000 shares. On May 20, 2010, the stockholders approved an additional increase of 500,000 shares of common stock that may be issued pursuant to the 2005 Plan for a total of 3,000,000 shares. On May 19, 2011, the stockholders approved an additional increase of 400,000 shares of common stock that may be issued pursuant to the 2005 Plan for a total of 3,400,000 shares. Finally, on May 17, 2012, the stockholders approved an additional increase of 300,000 shares of common stock that may be issued pursuant to the 2005 Plan for a total of 3,700,000 shares. At December 31, 2019, 1,563,235 had been exercised and options to purchase a total of 824,100 shares of common stock were
outstanding. A total of 3,892,000 options had been granted under the 2005 Plan, of which 1,504,665 have been cancelled. The 2005 Plan expired on June 14, 2015, and no shares remain for grant.
On March 19, 2015, the Board approved the 2015 Stock Incentive Plan (the “2015 Plan”), which was approved by the stockholders on May 14, 2015. The 2015 Plan serves as a replacement for the 2005 Plan which expired by its terms on June 14, 2015. The approval of the 2015 Plan had no effect on the 2005 Plan or any options granted pursuant to the plan. All options will continue with their existing terms and will be subject to the 2005 Plan. Further, the Company will not be able to re-issue any option which is cancelled or terminated under the 2005 Plan. The 2015 Plan provided for the issuance of up to 600,000 shares of common stock upon exercise of options granted pursuant to the 2015 Plan.
The 2015 Plan consists of three separate equity incentive programs: the Discretionary Option Grant Program; the Stock Issuance Program; and the Automatic Option Grant Program for non-employee Board members. Officers and employees, non- employee Board members and independent contractors are eligible to participate in the Discretionary Option Grant and Stock Issuance Programs. Participation in the Automatic Option Grant Program is limited to non-employee members of the Board. Each non-employee Board member will receive an option grant for 10,000 shares of common stock upon initial election or appointment to the Board, provided that such individual has not previously been employed by the Company in the preceding three (3) months. In addition, on the date of each annual stockholders meeting, each Board member will automatically be granted an option to purchase 8,000 shares of common stock, provided he or she has served as a non-employee Board member for at least three months. At December 31, 2019, no options had been exercised and options to purchase a total of 151,000 shares of common stock were outstanding. A total of 154,000 options had been granted under the 2015 Plan, 3,000 shares have been cancelled, and options for 449,000 shares remained available for future grant. No shares have been issued pursuant to the Stock Issuance Program.
Common shares reserved for future issuance, including conversions of preferred stock, outstanding options and options available for future grant under all of the stock option plans totaled 2,491,543 shares at December 31, 2019 as follows, in thousands:
(In thousands)
Common Shares Reserved for Future Issuance
| Preferred Stock | 1,067 | |||
| 2015 Plan | 600 | |||
| 2005 Plan | 824 | |||
| Total | 2,491 |
| F-26 |
The Compensation Committee of our Board of Directors determines for all employee options, the term of each option, option exercise price within limits set forth in the plans, number of shares for which each option is granted and the rate at which each option is exercisable (generally ratably over one, three or five years from grant date). However, the exercise price of any incentive stock option may not be less than the fair market value of the shares on the date granted (or less than 110% of the fair market value in the case of optionees holding more than 10% of our voting stock of the Company), and the term cannot exceed ten years (five years for incentive stock options granted to holders of more than 10% of our voting stock).
Stock Incentive Plan Summary
A summary of our stock option activity and related information for the years ended December 31, 2019 and 2018 is as follows:
| 2019 | 2018 | |||||||||||||||
| Number of Options (in thousands) | Weighted Average Exercise Price | Number of Options (in thousands) | Weighted Average Exercise Price | |||||||||||||
| Outstanding at beginning of year | 1,235 | $ | 0.83 | 1,746 | $ | 0.68 | ||||||||||
| Granted at price = market value | 34 | 4.40 | 24 | 1.15 | ||||||||||||
| Granted at price > market value | – | – | – | – | ||||||||||||
| Exercised | (294 | ) | 0.81 | (451 | ) | 0.37 | ||||||||||
| Forfeited | – | – | – | – | ||||||||||||
| Expired | – | – | (84 | ) | 0.22 | |||||||||||
Outstanding at end of year | 975 | $ | 0.96 | 1,235 | $ | 0.83 | ||||||||||
| Options exercisable at end of year | 917 | $ | 0.84 | 1,172 | $ | 0.84 | ||||||||||
Stock Options Outstanding and Exercisable
Information related to stock options outstanding at December 31, 2019, is summarized below:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Range of Exercise Prices | Outstanding at 12/31/19 (in thousands) | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | Exercisable at 12/31/19 (in thousands) | Weighted Average Exercise Price | |||||||||||||||
| $0.34 - $0.50 | 391 | 2.86 | $ | 0.42 | 383 | $ | 0.42 | |||||||||||||
| $ 0.51 - $1.00 | 330 | 1.53 | 0.68 | 330 | 0.68 | |||||||||||||||
| $ 1.01 - $2.00 | 173 | 4.69 | 1.71 | 157 | 1.77 | |||||||||||||||
| $ 2.01 - $4.75 | 81 | 6.95 | 3.12 | 47 | 2.20 | |||||||||||||||
| 975 | 3.08 | $ | 0.96 | 917 | $ | 0.84 | ||||||||||||||
| F-27 |
Summarized information about outstanding stock options as of December 31, 2019, that are fully vested and those that are expected to vest in the future as well as stock options that are fully vested and currently exercisable, are as follows:
| Outstanding Stock Options (Fully Vested and Expected to Vest)* | Options that are Exercisable | |||||||
| As of December 31, 2019 | ||||||||
| Number of outstanding options (in thousands) | 970 | 917 | ||||||
| Weighted average remaining contractual life | 3.04 | 2.71 | ||||||
| Weighted average exercise price per share | $ | 0.95 | $ | 0.84 | ||||
| Intrinsic value (in thousands) | $ | 4,411 | $ | 4,278 | ||||
* Includes effects of expected forfeitures
As of December 31, 2019, the total unrecognized compensation cost related to non-vested options not yet recognized in the statement of operations totaled approximately $86 thousand (including expected forfeitures) and the weighted average period over which these awards are expected to vest was 1.18 years.
| 9. | Preferred Stock |
5% Preferred Stock
On March 25, 2004, we completed a $5.0 million private placement of our 5% convertible preferred stock and warrants. In the private placement, we sold 1,000,000 shares of our 5% preferred stock at a price of $5.00 per share for gross proceeds of $5.0 million, less $275,000 of issuance costs. The 5% preferred shares were initially convertible into 1,590,331 shares of common stock at a conversion price of $3.144 per share. Holders of the 5% convertible preferred stock include 140,000 shares purchased by our former CEO and 60,000 shares purchased by a director of the Company.
The 5% dividends related to the 5% preferred stock are paid semi-annually on the last business day in March and September of each year, beginning with September 2004. Preferred stockholders vote together with common stockholders on an as converted to common stock basis. Based on the conversion rate of the preferred stock, holders of our 5% preferred stock will receive 1.5903 votes per share rounded to the nearest whole number. The liquidation preference for the 5% preferred stock is an amount equal to $5.00 per share plus any accrued and unpaid dividends. Holders of our 5% preferred stock have liquidation preference rights over common stockholders.
All warrants previously issued to 5% convertible preferred stockholders have expired.
We have the right to redeem any or all of the outstanding 5% preferred stock at a price of $5.00 per share plus accrued dividends at any time if certain conditions are met.
At December 31, 2019, there were 200,000 shares of the Series 1 Preferred Stock outstanding, representing approximately 318,065 shares of common stock upon conversion.
| F-28 |
Series 2 5% Preferred Stock
On March 28, 2005, we completed a $2.7 million private placement of Series 2 5% convertible preferred stock and warrants. In the private placement, we sold 1,065,200 shares of preferred stock at a price of $2.50 per share for gross proceeds of $2.7 million, less $173,000 of issuance costs. The shares of Series 2 5% preferred stock are convertible into 1,065,200 shares of common stock at an initial conversion price of $2.50 per share. Holders of the Series 2 5% preferred stock include 260,000 shares by our former CEO, 100,000 shares by our CFO and 60,000 shares by a director of the Company.
The 5% dividends accruing on the Series 2 5% preferred stock are required to be paid quarterly on the first business day in March, June, September and December of each year, beginning with June 2005. The liquidation preference for the preferred stock is an amount equal to $2.50 per share plus any accrued and unpaid dividends. Holders of our Series 2 5% preferred stock have liquidation preference rights over our 5% preferred stockholders as well as our common stockholders. The holders of the Series 2 5% preferred stock are not entitled to vote on any matter, except as otherwise required by law or with respect to certain limited matters specified in the certificate of designations.
All warrants previously issued to Series 2 5% convertible preferred stockholders have expired.
Holders of Series 2 5% preferred stock have the right to require us to redeem any or all of the their shares upon the occurrence of certain events within the Company’s control that are defined in Certificate of Designation at a price equal the sum of (1) the greater of $3.25 and the product of the volume weighted average price of our common stock on the trading day immediately preceding the event multiplied by $2.50 divided by the conversion price then in effect plus (2) any accrued but unpaid dividends on the Series 2 5% preferred stock plus (3) all liquidated damages or other amounts payable to the holders of Series 2 5% preferred stock.
At December 31, 2019 there were 460,000 shares of the Series 2 Preferred Stock outstanding, representing 460,000 shares of common stock upon conversion.
As of the date of this Prospectus, all current and accrued dividends have been paid, all shares of Preferred Stock have converted, and no shares of Preferred Stock remain issued and outstanding.
Series 3 5% Preferred Stock
On December 2, 2005, we completed a $1.2 million private placement of Series 3 5% convertible preferred stock and warrants. In the private placement, we sold 564,607 shares of preferred stock at a price of $2.18 per share for gross proceeds of $1.2 million, less $100,000 of issuance costs. The shares of Series 3 5% preferred stock are convertible into 564,607 shares of common stock at an initial conversion price of $2.18 per share. Holders of the Series 3 5% preferred stock include 123,853 shares by our former CEO, 68,808 shares by our CFO and 27,523 shares purchased by a director of the Company.
The 5% dividends accruing on the Series 3 5% preferred stock are required to be paid quarterly on the first business day in March, June, September and December of each year, beginning with March 1, 2006. The liquidation preference for the preferred stock is an amount equal to $2.18 per share plus any accrued and unpaid dividends. Holders of our Series 3 5% preferred stock have liquidation preference rights over holders of our 5% preferred, Series 2 5% preferred stock and common stock. The holders of the Series 3 5% preferred stock are not entitled to vote on any matter, except as otherwise required by law or with respect to certain limited matters specified in the certificate of designations.
| F-29 |
All warrants previously issued to Series 3 5% convertible preferred stockholders have expired.
Holders of Series 3 5% preferred stock have the right to require us to redeem any or all of their shares upon the occurrence of certain events within the Company’s control that are defined in the certificate of designation at a price equal the sum of (1) the greater of $2.834 and the product of the volume weighted average price of our common stock on the trading day immediately preceding the event multiplied by $2.18 divided by the conversion price then in effect plus (2) any accrued but unpaid dividends on the Series 3 5% preferred stock plus (3) all liquidated damages or other amounts payable to the holders of Series 3 5% preferred stock.
At December 31, 2019 there were 289,377 shares of Series 3 Preferred Stock outstanding, representing 289,377 shares of common stock upon conversion.
Dividends Payable
During the year ended December 31, 2019, we accrued $50,000 in dividends to the holders of our 5% Preferred Stock, $57,000 in dividends to the holders of our Series 2 5% Preferred Stock and $32,000 in dividends to the holders of our Series 3 5% Preferred Stock. As of December 31, 2019 and 2018, we had $20,000 and $594,000 in accrued and unpaid dividends included in other current liabilities. 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. This has been in effect since December 31, 2014. However, in light of our net profits for the fiscal year ended December 31, 2019 and 2018, we are able to and have paid these past due dividends as of the date of this prospectus. However, dividends continue to accrue on all our outstanding shares of preferred stock, regardless of whether we are legally able to pay them, and we cannot assure you that our net assets will exceed our stated capital or that we will have sufficient net profits in order to pay these dividends as they continue to accrue in the future. 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.
| 10. | Concentrations |
Our operations are concentrated in one area—security software/entity identification. Sales to the U.S. Government through direct and indirect channels totaled 87.4% of total revenues for 2019 and 83.9% of total revenues for 2018. During 2019 approximately 68.1% of total revenues were attributable to three government customers. During 2018 approximately 61.4% of total revenues are attributable to four government customers. Three individual government customers at December 31, 2019 and four at December 31, 2018 exceeded 10% of total accounts receivable balance at respective year ends, comprising 78.8% and 48.9% of the respective total accounts receivable balance. During 2019 approximately 10.4% of total revenues were attributable to one commercial customer, and during 2018, 14.1% of total revenues were attributable to one commercial customer. Only one individual commercial customer at December 31, 2019 exceeded 10% of total accounts receivable balance, and only one at December 31, 2018. Our similar product and service offerings are not viewed as individual segments, as our management analyzes the business as a whole and expenses are not allocated to each product offering.
| 11. | Contract Assets and Contract Liabilities |
Contract assets represent contract billings for sales per contracts with customers and are classified as current. Our contract assets include our accounts receivables. For the year ended December 31, 2019, the Company had contract assets balance of $1,566,000, a decrease of $401,000 from the prior year due to cash receipts exceeding new contract assets. For the year ended December 31, 2018, the Company had contract assets balance of $1,967,000.
| F-30 |
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. For the year ended December 31, 2019, the Company had contract liabilities balance of $516,000. For the year ended December 31, 2018, the Company had contract liabilities balance of $1,004,000.
| 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.
| F-31 |
PROSPECTUS
Intrusion Inc.
3,100,000 Shares of Common Stock
B. RILEY SECURITIES
, 2020
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
| Item 13. | Other Expenses of Issuance and Distribution. |
The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable in connection with the sale of common stock being registered. All amounts shown are estimates, except the Securities and Exchange Commission registration fee, the Financial Industry Regulatory Authority filing fee and the Exchange listing fee.
| Securities and Exchange Commission registration fee | $ | 5,500 | ||
| Financial Industry Regulatory Authority filing fee | 2,000 | |||
| Exchange listing fee | 5,000 | |||
| Legal fees and expenses | 139,000 | |||
| Accountants’ fees and expenses | 75,000 | |||
| Printing expenses | 7,500 | |||
| Transfer agent and registrar fees and expenses | 1,000 | |||
| Miscellaneous | 25,000 | |||
| Total | $ | 260,000 |
| Item 14. | Indemnification of Directors and Officers. |
We are incorporated under the laws of the state of Delaware. Section 145 of the Delaware General Corporation Law provides that a Delaware corporation may indemnify any persons who are, or are threatened to be made, parties to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer, director, employee or agent of such corporation, or is or was serving at the request of such person as an officer, director, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was illegal. A Delaware corporation may indemnify any persons who are, or are threatened to be made, a party to any threatened, pending or completed action or suit by or in the right of the corporation by reason of the fact that such person was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit provided such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him or her against the expenses that such officer or director has actually and reasonably incurred. Our charter and bylaws provide for the indemnification of our directors and officers to the fullest extent permitted under the Delaware General Corporation Law.
| II-1 |
Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duties as a director, except for liability for:
| · | any breach of the director’s duty of loyalty to the corporation or its stockholders; |
| · | any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law; |
| · | any act related to unlawful stock repurchases, redemptions or other distributions or payment of dividends; or |
| · | any transaction from which the director derived an improper personal benefit. |
These limitations of liability do not affect the availability of equitable remedies such as injunctive relief or rescission. Our charter also authorizes us to indemnify our officers, directors and other agents to the fullest extent permitted under Delaware law.
As permitted by Section 145 of the Delaware General Corporation Law, our bylaws provide that:
| · | we may indemnify our directors, officers and employees to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; | ||
| · | we may advance expenses to our directors, officers and employees in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; and | ||
| · | the rights provided in our bylaws are not exclusive. |
Section 174 of the Delaware General Corporation Law provides, among other things, that a director who willfully or negligently approves of an unlawful payment of dividends or an unlawful stock purchase or redemption may be held liable for such actions. A director who was either absent when the unlawful actions were approved, or dissented at the time, may avoid liability by causing his or her dissent to such actions to be entered in the books containing minutes of the meetings of the board of directors at the time such action occurred or immediately after such absent director receives notice of the unlawful acts.
Article Six, Section 3 of our Certificate of Incorporation provides that no director shall be liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted by the DGCL.
We have entered into Indemnification Agreements with the each of our directors and executive officers. Pursuant to our agreements, we will be obligated, to the extent permitted by applicable law, to indemnify our directors and officers against all expenses, judgments, fines and penalties incurred in connection with the defense or settlement of any actions brought against them by reason of the fact that they were our directors or officers or assumed certain responsibilities at our direction.
We also have purchased directors and officer’s liability insurance in order to limit our exposure to liability of indemnification of directors and officers.
The form of Underwriting Agreement, to be filed as Exhibit 1.1 hereto, provides for indemnification by the underwriters of us and our officers who sign this Registration Statement and directors for specified liabilities, including matters arising under the Securities Act.
| II-2 |
| Item 15. | Recent Sales of Unregistered Securities. |
None.
| Item 16. | Exhibits and Financial Statement Schedules. |
(a) Exhibits. The following exhibits are filed as part of this Registration Statement:
Exhibit Number |
Description of Exhibit | |
| 1.1* | Form of Underwriting Agreement | |
| 3.1(1) | Restated Certificate of Incorporation of the Registrant | |
| 3.2(2) | Certificate of Amendment to Certificate of Incorporation of Registrant | |
| 3.6(3) | Bylaws of the Registrant | |
| 4.1(4) | Specimen Common Stock Certificate | |
| 5.1* | Opinion of Faust Law Group | |
| 10.1(5) | Form of Indemnification Agreement | |
| 23.1* | Consent of Whitley Penn LLP | |
| 23.2* | Consent of Faust Law Group (included in Exhibit 5.1) | |
| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Taxonomy Extension Schema | |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase | |
_________________
| (1) | Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated June 15, 2010, which Exhibit is incorporated herein by reference. |
| (2) | Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (as amended), which Exhibit is incorporated herein by reference. |
| (3) | Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K, for the fiscal year ended December 31, 2000, which Exhibit is incorporated herein by reference. |
| (4) | Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, which Exhibit is incorporated herein by reference. |
| (5) | Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which Exhibit is incorporated herein by reference. |
| * | Filed herewith |
| Item 17. | Undertakings. |
(A) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increases or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
| II-3 |
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
(i) If the registrant is relying on Rule 430B:
(A) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
(B) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or
(ii) If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
| II-4 |
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(6) To provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
(B) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(C) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
| II-5 |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized on October 5, 2020.
.
| INTRUSION INC. | |||
| By: |
/s/ Jack B. Blount | ||
| Jack B. Blount | |||
| Chief Executive Officer, President, & Director | |||
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Jack B. Blount | Chief Executive Officer, President, and Director | October 5, 2020 | ||
| Jack B. Blount | (Principal Executive Officer) | |||
| /s/ Michael L. Paxton | Chief Financial Officer & Director & | October 5, 2020 | ||
| Michael L. Paxton | (Principal Financial and Accounting Officer) | |||
| ** | Chairman & Director | October 5, 2020 | ||
| Anthony J. LeVecchio | ||||
| ** | Vice Chairman, Sr. Vice President, & Director | October 5, 2020 | ||
| T. Joe Head | ||||
| ** | Director | October 5, 2020 | ||
| James F. Gero | ||||
| ** | Director | October 5, 2020 | ||
| Dale Booth | ||||
| ** | Director | October 5, 2020 | ||
| Donald M. Johnston |
** By Jack B. Blount, Attorney-in Fact
| II-6 |
EXHIBIT INDEX
Exhibit Number |
Description of Exhibit | |
| 1.1* | Form of Underwriting Agreement | |
| 3.1(1) | Restated Certificate of Incorporation of the Registrant | |
| 3.2(2) | Certificate of Amendment to Certificate of Incorporation of Registrant | |
| 3.6(3) | Bylaws of the Registrant | |
| 4.1(4) | Specimen Common Stock Certificate | |
| 5.1* | Opinion of Faust Law Group | |
| 10.1(5) | Form of Indemnification Agreement | |
| 23.1* | Consent of Whitley Penn LLP | |
| 23.2* | Consent of Faust Law Group (included in Exhibit 5.1) | |
| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Taxonomy Extension Schema | |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase |
_________________
| (1) | Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated June 15, 2010, which Exhibit is incorporated herein by reference. |
| (2) | Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (as amended), which Exhibit is incorporated herein by reference. |
| (3) | Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K, for the fiscal year ended December 31, 2000, which Exhibit is incorporated herein by reference. |
| (4) | Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, which Exhibit is incorporated herein by reference. |
| (5) | Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which Exhibit is incorporated herein by reference. |
| * | Filed herewith |
Exhibit 1.1
INTRUSION INC.
(a Delaware corporation)
Common Stock
UNDERWRITING AGREEMENT
[______], 2020
B. Riley Securities, Inc.
As Representative of the Several Underwriters
set forth on Schedule C hereto
11100 Santa Monica Boulevard
Suite 800
Los Angeles, CA 90025
Ladies and Gentlemen:
Intrusion Inc., a Delaware corporation (the “Company”), proposes, subject to the terms and conditions stated herein, to issue and sell to the several underwriters named in Schedule C hereto (the “Underwriters”), an aggregate of [______] shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), of which (a) [_________] shares are to be issued and sold by the Company, and (b) 1,100,000 shares are to be sold by the Selling Stockholders, each Selling Stockholder selling the number of shares set forth opposite such Selling Stockholder’s name in Schedule A hereto (collectively, the “Selling Stockholders”), pursuant to this Underwriting Agreement (this “Agreement”). The aggregate of [______] shares to be purchased from the Company and the Selling Stockholders are called the “Firm Shares.” In addition, the Company has agreed to sell to the Underwriters, upon the terms and conditions stated herein, up to an additional [_____] shares of Common Stock (the “Option Shares”). The Firm Shares and the Option Shares are collectively referred to in this Agreement as the “Shares.” B. Riley Securities, Inc. is acting as the representative of the Underwriters and in such capacity is hereinafter referred to as the “Representative.”
SECTION 1. Sale and Purchase.
On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, (i) the Company agrees to issue and sell an aggregate of [______] Firm Shares to the Underwriters and (ii) the Selling Stockholders, severally and not jointly, agree to sell an aggregate of 1,100,000 Firm Shares to the Underwriters, each Selling Stockholder selling the number of Firm Shares set forth opposite the name of such Selling Stockholders on Schedule A hereto and (iii) each Underwriter agrees, severally and not jointly, to purchase from the Company and the Selling Stockholders on the pricing terms set forth in Schedule A hereto.
The Company and the Selling Stockholders have been advised by the Underwriters that they propose to make a public offering of the Shares as soon after this Agreement has become effective as in their judgment is advisable.
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In addition, the Company hereby grants to the Underwriters the option to purchase, and upon the basis of the representations, warranties and agreements contained herein and subject to the terms and conditions herein set forth, the Underwriters shall have the right to purchase from the Company, all or a portion of the Option Shares, at the same purchase price per share to be paid by the Underwriters to the Company for the Firm Shares as set forth opposite the names of such Underwriters on Schedule C hereto. This option may be exercised by the Underwriters any time and from time to time on or before the thirtieth (30th) day following the date hereof, by written notice from the Representative to the Company, which notice may be electronic (“Option Shares Notice”). The Option Shares Notice shall set forth the aggregate number of Option Shares as to which the option is being exercised, and the date and time when the Option Shares are to be delivered (such date and time being herein referred to as the “Option Closing Date”); provided, however, that the Option Closing Date may be the same date and time as the Closing Date (as defined below), but shall not be earlier than the Closing Date nor earlier than the second (2nd) business day after the date on which the option for Option Shares shall have been exercised no later than the tenth (10th) business day after the date of the Option Shares Notice. As of the Option Closing Date, the Company will issue and sell to the Underwriters, and the Underwriters will purchase, the number of Option Shares set forth in the Option Shares Notice.
SECTION 2. Payment and Delivery.
Payment of the purchase price for the Shares shall be made to the Selling Stockholders by same day Federal Funds wire transfer against delivery of the Shares to the Underwriters through the facilities of The Depository Trust Company for the account of the Underwriters. Such payment and delivery shall be made at 10:00 A.M., New York time, on [________], 2020 (the “Closing Date”), which date shall be the second business day after the date of this Agreement (unless another time or date shall be agreed to by the Representative and the Selling Stockholders). Electronic transfer of the Shares shall be made to or as instructed by the Representative at the Closing Date in such names and in such denominations as the Representative shall specify, with any transfer taxes payable in connection with the transfer of the Shares to the Underwriters duly paid, against payment of the purchase price therefor.
If the option for Option Shares is exercised, payment of the purchase price for the Option Shares shall be made at the Option Closing Date in the same manner and at the same office as the payment for the Firm Shares. Electronic transfer of the Option Shares shall be made to or as instructed by the Representative at the Option Closing Date in such names and in such denominations as the Representative shall specify.
Deliveries of the documents described in Section 7 with respect to the purchase of the Shares shall be made at the offices of The NBD Group, Inc., counsel for the Underwriters, at 10:00 A.M., New York time, on the Closing Date or Option Closing Date, as applicable.
SECTION 3. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company represents and warrants to the Underwriters as of the Applicable Time (as defined below), the Closing Date and any Option Closing Date, and agrees with the Underwriters, as follows:
(i) Registration Statement and Prospectuses. The Company has prepared and filed with the Securities and Exchange Commission (“Commission”) a registration statement on Form S-1 (File No. 333-248398) under the Securities Act of 1933, as amended (the “1933 Act”) and the rules and regulation (the “1933 Act Regulations”) of the Commission thereunder, which registration statement was declared effective by the Commission and the Shares have been and remain eligible for registration by the Company on such registration statement. Such registration statement, including all amendments and exhibits thereto, the documents incorporated by reference therein and the documents and information otherwise deemed to be part thereof or included therein pursuant to Rule 430B of the 1933 Act Regulations is referred to as the “Registration Statement.”
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Each of the Registration Statement and any post-effective amendment thereto has become effective under the 1933 Act. No stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto has been issued under the 1933 Act, no order preventing or suspending the use of any preliminary prospectus or the Prospectus (as defined below) has been issued and no proceedings for any of those purposes have been instituted or are pending or, to the Company’s knowledge, threatened. The Company has complied to the Commission’s satisfaction with each request (if any) from the Commission for additional information.
Each of the Registration Statement and any post-effective amendment thereto, excluding exhibits thereto, at the time of its effectiveness and at each deemed effective date with respect to the Underwriters pursuant to Rule 430B(f)(2) under the 1933 Act Regulations, complied in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. Each preliminary prospectus (including the Prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto), at the time it was filed, complied in all material respects with the 1933 Act Regulations and each preliminary prospectus and the Prospectus delivered to the Underwriters for use in connection with this offering was virtually identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the “462(b) Registration Statement” and, from and after the date and time of filing of the Rule 462(b) Registration Statement, the term “Registration Statement” shall include the Rule 462(b) Registration Statement.
The documents incorporated or deemed to be incorporated by reference in the Registration Statement and the Prospectus, when they became effective or at the time they were filed with the Commission, complied in all material respects with the requirements of the Securities Exchange Act of 1934, as amended (the “1934 Act”), and the rules and regulations promulgated thereunder (collectively, the “1934 Act Regulations”).
(ii) Accurate Disclosure; Certain Defined Terms. Neither the Registration Statement nor any amendment thereto, at its effective time, at the Closing Date or any Option Closing Date, contained, contains or will contain an untrue statement of a material fact or omitted, omits or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As of the Applicable Time, neither (A) the General Disclosure Package nor (B) any individual Issuer Free Writing Prospectus, when considered together with the General Disclosure Package, included an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Neither the Prospectus nor any amendment or supplement thereto (including any prospectus wrapper), as of its issue date, at the time of any filing with the Commission pursuant to Rule 424(b), at the Closing Date or at any Option Closing Date, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement (or any amendment thereto), the General Disclosure Package or the Prospectus (or any amendment or supplement thereto) made in reliance upon and in conformity with written information furnished to the Company by any Selling Stockholder or the Underwriters through the Representative, specifically for use therein, including the Selling Stockholder Information and the Underwriter Information.
As used in this Agreement:
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“Applicable Time” means [_____], New York City time, on the date of this Agreement.
“General Disclosure Package” means any Issuer Free Writing Prospectuses issued at or prior to the Applicable Time and the preliminary prospectus dated [_______] (including any documents incorporated therein by reference) and the information included on Schedule A hereto, all considered together.
“Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433 of the 1933 Act Regulations (“Rule 433”), including without limitation any “free writing prospectus” (as defined in Rule 405 of the 1933 Act Regulations (“Rule 405”)) relating to the Shares that is (i) required to be filed with the Commission by the Company, (ii) a “road show that is a written communication” within the meaning of Rule 433(d)(8)(i), whether or not required to be filed with the Commission, or (iii) exempt from filing with the Commission pursuant to Rule 433(d)(5)(i) because it contains a description of the Shares or of the offering that does not reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g).
“Preliminary Prospectus” means any preliminary form of the Prospectus.
“Prospectus” means the base prospectus included in the initial Registration Statement at the time of effectiveness thereof, as supplemented by the final prospectus supplement relating to the offer and sale of the Shares, in the form filed pursuant to Rule 424(b) under the 1933 Act Regulations.
“Selling Stockholder Information” means the information under the heading “Selling Stockholders” in the Final Prospectus.
“Underwriter Information” means the information under the heading “Underwriting” in the General Disclosure Package or the Prospectus (or any amendment or supplement thereto).
All references in this Agreement to financial statements and schedules and other information which is “contained,” “included” or “stated” (or other references of like import) in the Registration Statement, any preliminary prospectus or the Prospectus shall be deemed to include all such financial statements and schedules and other information incorporated or deemed incorporated by reference in the Registration Statement, any preliminary prospectus or the Prospectus, as the case may be, prior to the time of the execution and delivery of this Agreement (the “Execution Time”); and all references in this Agreement to amendments or supplements to the Registration Statement, any preliminary prospectus or the Prospectus shall be deemed to include the filing of any document under the 1934 Act, and the 1934 Regulations, incorporated or deemed to be incorporated by reference in the Registration Statement, any preliminary prospectus or the Prospectus, as the case may be, at or after the Execution Time.
(iii) Issuer Free Writing Prospectuses. No Issuer Free Writing Prospectus conflicts or will conflict with the information contained in the Registration Statement or the Prospectus, including any document incorporated by reference therein, and any preliminary or other prospectus deemed to be a part thereof that has not been superseded or modified. Each Issuer Free Writing Prospectus satisfied, as of its issue date and at all subsequent times to the Applicable Time, all other conditions to use thereof as set forth in Rules 164 and 433 under the 1933 Act.
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(iv) Company Not Ineligible Issuer. At the time of filing the Registration Statement and any post-effective amendment thereto, at the earliest time thereafter that the Company or another offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) of the 1933 Act Regulations) of the Shares and at the date hereof, the Company was not and is not an “ineligible issuer,” as defined in Rule 405 under the 1933 Act, including the Company or any subsidiary in the preceding three years not having been convicted of a felony or misdemeanor or having been made the subject of a judicial or administrative decree or order as described in Rule 405 of the 1933 Regulations (without taking into account of any determination by the Commission pursuant to Rule 405 of the 1933 Regulations that it is not necessary that the Company be considered an ineligible issuer), nor an “excluded issuer” as defined in Rule 164 under the 1933 Act.
(v) No Other Offering Materials. The Company has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares other than any preliminary prospectus, the General Disclosure Package or the Prospectus or other materials permitted by the 1933 Act to be distributed by the Company; provided, however, that the Company has not made and will not make any offer relating to the Shares that would constitute an Issuer Free Writing Prospectus except in accordance with this Agreement.
(vi) Independent Accountants. Whitley Penn LLP, who have expressed their opinion with respect to the financial statements and supporting schedules included or incorporated by reference in the Registration Statement are independent registered public accountants as required by the 1933 Act, the 1933 Act Regulations, the 1934 Act, the 1934 Act Regulations and the Public Company Accounting Oversight Board, any non-audit services provided by Whitley Penn LLP to the Company or any of its subsidiaries have been approved by the Audit Committee of the Board of Directors of the Company.
(vii) Financial Statements. The financial statements included or incorporated by reference in the Registration Statement, the General Disclosure Package and the Prospectus, together with the related schedules and notes, present fairly in all material respects the consolidated financial position of the Company and its subsidiaries at the dates indicated and the results of operations, stockholders’ equity and cash flows for the periods specified; said financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods involved. The supporting schedules, if any, present fairly in all material respects, in accordance with GAAP, the information required to be stated therein. All non-GAAP financial information included in the Registration Statement, the General Disclosure Package and the Prospectus complies with the requirements of Regulation G and Item 10 of Regulation S-K under the 1933 Act; and, except as disclosed in the Registration Statement, General Disclosure Package and the Prospectus, there are no material off-balance sheet arrangements (as defined in Regulation S-K under the 1933 Act, Item 303(a)(4)(ii)) or any other relationships with unconsolidated entities or other persons, that may have a material current or, to the Company’s knowledge, material future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures, capital resources or significant components of revenue or expenses. Except as included therein, no historical or pro forma financial statements or supporting schedules are required to be included or incorporated by reference in the Registration Statement, the General Disclosure Package or the Prospectus under the 1933 Act or the 1933 Act Regulations. The interactive data in eXtensible Business Reporting Language incorporated by reference in the Registration Statement, the General Disclosure Package and the Prospectus fairly presents in all material respects the information called for and has been prepared in accordance with the Commission’s rules and guidelines applicable thereto.
(viii) No Material Adverse Change in Business. Except as otherwise stated therein, since the respective dates as of which information is included or incorporated by reference, in the Registration Statement, the General Disclosure Package or the Prospectus, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs, management, properties, operations or results of operations of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a “Material Adverse Effect”), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, that are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) except as disclosed in the General Disclosure Package or the Prospectus, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of capital stock.
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(ix) Good Standing of the Company. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the General Disclosure Package and the Prospectus and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or to be in good standing would not result in a Material Adverse Effect.
(x) Good Standing of Subsidiaries. Each subsidiary of the Company identified on listed on Exhibit 21 to the Company’s Annual Report on Form 10-K (each, a “Subsidiary” and, collectively, the “Subsidiaries”) has been duly organized and is validly existing in good standing under the laws of the jurisdiction of its incorporation or organization, has corporate or similar power and authority to own, lease and operate its properties and to conduct its business as described in the General Disclosure Package and the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or to be in good standing would not result in a Material Adverse Effect. Except as otherwise disclosed in the General Disclosure Package and the Prospectus, all of the issued and outstanding capital stock of each Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance or claim. None of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. The only subsidiaries of the Company are (a) the subsidiaries listed on Exhibit 21 to the Company’s Annual Report on Form 10-K incorporated by reference into the Registration Statement and (b) certain other subsidiaries which, considered in the aggregate as a single subsidiary, do not constitute a “significant subsidiary” as defined in Rule 1-02 of Regulation S-X.
(xi) Capitalization. The authorized, issued and outstanding shares of capital stock of the Company are as set forth in the General Disclosure Package and the Prospectus (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the General Disclosure Package and the Prospectus or pursuant to the exercise or conversion of convertible securities or options referred to in the General Disclosure Package and the Prospectus). The outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable. None of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company.
(xii) Authorization. This Agreement has been duly authorized, executed and delivered by the Company.
(xiii) Authorization and Description of Shares. The Shares to be purchased by the Underwriters from the Selling Stockholders have been duly authorized, and are validly issued and fully paid and non-assessable; and the sale of the Shares is not subject to the preemptive or other similar rights of any securityholder of the Company. The Shares conform in all material respects to all statements relating thereto contained in the General Disclosure Package and the Prospectus and such description conforms to the rights set forth in the instruments defining the same.
(xiv) Registration Rights. Except as otherwise disclosed in the General Disclosure Package and the Prospectus, there are no persons with registration rights or other similar rights to have any securities registered for sale pursuant to the Registration Statement or otherwise registered for sale by the Company under the 1933 Act.
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(xv) Absence of Violations, Defaults and Conflicts. Neither the Company nor any of its subsidiaries is (A) in violation of its charter, by-laws or similar organizational document, (B) in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound or to which any of the properties or assets of the Company or any subsidiary is subject, except for such defaults that would not, singly or in the aggregate, result in a Material Adverse Effect, or (C) in violation of any law, statute, rule, regulation, judgment, order, writ or decree of any arbitrator, court, governmental body, regulatory body, administrative agency or other authority, body or agency having jurisdiction over the Company or any of its subsidiaries or any of their respective properties, assets or operations (each, a “Governmental Entity”), except for such violations that would not, singly or in the aggregate, result in a Material Adverse Effect.
(xvi) No Resulting Defaults and Conflicts. The execution, delivery and performance by the Company of this Agreement, the sale of the Shares, the compliance by the Company with the terms hereof and the consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary corporate action and do not and will not (i) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any material indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound or to which any of the properties or assets of the Company or any of its Subsidiaries is subject, (ii) result in any violation of the provisions of the charter or bylaws (or similar organizational document) of the Company or any of its Subsidiaries or (iii) result in the violation of any law or statute or any judgment, order, rule or regulation of any court or arbitrator or governmental or regulatory authority, except, in the case of clauses (i) and (iii) above, for any such conflict, breach, violation or default that would not, individually or in the aggregate, have a Material Adverse Effect; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the execution, delivery and performance by the Company of this Agreement, the sale of the Shares and compliance by the Company with the terms hereof and the consummation of the transactions contemplated hereby, except as have been made or obtained and except as may be required by and made with or obtained from state securities laws or regulations.
(xvii) Absence of Labor Dispute. No labor problem or dispute with the employees of the Company or any of its subsidiaries exists or, to the Company’s knowledge, is threatened or imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or its subsidiaries’ principal suppliers, contractors or customers, that could have a Material Adverse Effect.
(xviii) Absence of Proceedings. Except as set forth in the Registration Statement, the General Disclosure Package and the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which would, individually or in the aggregate, have a Material Adverse Effect or would materially and adversely affect the ability of the Company or its subsidiaries to perform their respective obligations under this Agreement.
(xix) Accuracy of Exhibits. There are no contracts or documents that are required to be described in the Registration Statement or to be filed as exhibits thereto that have not been so described and filed as required.
(xx) Absence of Further Requirements. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any Governmental Entity is necessary or required for the performance by the Company of its obligations hereunder, in connection with the Company’s execution, delivery and performance of this Agreement or the consummation of the transactions contemplated by this Agreement, except such as have been already obtained or as may be required under the 1933 Act, the 1933 Act Regulations, the OTCQB Marketplace (“OTCQB”), the rules of The Nasdaq Capital Market (“NASDAQ”), state securities laws or the rules of Financial Industry Regulatory Authority, Inc. (“FINRA”).
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(xxi) Possession of Licenses and Permits. The Company and its subsidiaries possess adequate certificates, authorities or permits issued by appropriate Governmental Entities necessary to conduct the business now operated by them, except where the failure so to possess would not, singly or in the aggregate, result in a Material Adverse Effect. Neither the Company nor any of its subsidiaries has received any written notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, if determined adversely to the Company or any of its subsidiaries, would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
(xxii) Title to Property. The Company and its subsidiaries have good and marketable title to all property (whether real or personal) owned by them, in each case, free and clear of all liens, security interests, claims or encumbrances or defects of any kind except such as (A) are described in the General Disclosure Package and the Prospectus or (B) would not, individually or in the aggregate, have a Material Adverse Effect. The property held under lease by the Company and its subsidiaries is held by them under valid, subsisting and enforceable leases with only such exceptions with respect to any particular lease as do not interfere in any material respect with the conduct of the business of the Company or its subsidiaries.
(xxiii) Intellectual Property. The Company and each of its subsidiaries owns, possesses, has a valid license to use, or can acquire on reasonable terms, all Intellectual Property necessary for the conduct of the Company’s and its subsidiaries’ business as now conducted or as described in the Registration Statement, the General Disclosure Package and the Prospectus to be conducted, except as such failure to own, possess, license or acquire such rights would not result in a Material Adverse Effect. “Intellectual Property” means all patents, patent applications, provisional patents, trade and service marks, trade and service mark registrations, trade names, copyrights, licenses, inventions, trade secrets, domain names, technology, know-how and other intellectual property. Except as described in the Registration Statement, in the General Disclosure Package and in the Prospectus or as would not individually or in the aggregate be expected to result in a Material Adverse Effect, (1) to the Company’s knowledge, there is no infringement, misappropriation or violation by third parties of any such Intellectual Property; (2) there is no pending or, to the Company’s knowledge, threatened, action, suit, proceeding or claim by others challenging the Company’s or any of its subsidiaries’ rights in or to any such Intellectual Property, and the Company is unaware of any facts which would form a reasonable basis for any such claim; (3) the Intellectual Property owned by the Company and its subsidiaries, and, to the Company’s knowledge, the Intellectual Property licensed to the Company and its subsidiaries, has not been adjudged invalid or unenforceable, in whole or in part, and there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the validity or scope of any such Intellectual Property, and the Company is unaware of any facts which would form a reasonable basis for any such claim; (4) there is no pending or, to the Company’s knowledge threatened action, suit, proceeding or claim by others that the Company or any of its subsidiaries infringes, misappropriates or otherwise violates any Intellectual Property or other proprietary rights of others, neither the Company or any of its subsidiaries has received any written notice of such claim and the Company is unaware of any other fact which would form a reasonable basis for any such claim; and (5) to the Company’s knowledge, no employee of the Company or any of its subsidiaries is in or has, within the past three years, been in violation of any term of any employment contract, patent disclosure agreement, invention assignment agreement, non-competition agreement, non-solicitation agreement, nondisclosure agreement or any restrictive covenant to or with a former employer where the basis of such violation relates to such employee’s employment with the Company or any of its subsidiaries or actions undertaken by the employee while employed with the Company or any of its subsidiaries. The Company and its subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their Intellectual Property, except where failure to do so would not result in a Material Adverse Effect.
(xxiv) Environmental Laws. Except as disclosed in the General Disclosure Package and the Prospectus or would not individually or in the aggregate be expected to result in a Material Adverse Effect, (i) the Company and its subsidiaries (A) are in compliance with all applicable federal, state, local and foreign laws, rules, regulations, requirements, decisions and orders relating to the protection of human health or safety, the environment, hazardous or toxic substances or wastes, pollutants or contaminants (collectively, “Environmental Laws”), (B) have and are in compliance with all permits, licenses, certificates or other authorizations or approvals required under applicable Environmental Laws to conduct their respective businesses, and (C) have not received, and have no knowledge of any event or condition that would reasonably be expected to result in, any notice of any actual or potential liability or claim under or relating to any Environmental Laws and (ii) there are no costs or liabilities associated with Environmental Laws of or relating to the Company or its subsidiaries.
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(xxv) Accounting Controls and Disclosure Controls. The Company and each of its subsidiaries maintain internal control over financial reporting (as defined under Rule 13a-15 under the 1934 Act Regulations) and a system of internal accounting controls designed to provide reasonable assurances that (A) transactions are executed in accordance with management’s general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management’s general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as disclosed in the General Disclosure Package and the Prospectus, the Company’s internal control over financial reporting is effective and none of the Company, its board of directors and audit committee is aware of any “significant deficiencies” or “material weaknesses” (each as defined by the Public Company Accounting Oversight Board) in its internal control over financial reporting, or any fraud, whether or not material, that involves management or other employees of the Company or its subsidiaries who have a significant role in the Company’s internal controls; and since the end of the latest audited fiscal year, there has been no change in the Company’s internal control over financial reporting (whether or not remediated) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company’s board of directors has, subject to the exceptions, cure periods and the phase in periods specified in the applicable stock exchange rules (“Exchange Rules”), validly appointed an audit committee to oversee internal accounting controls whose composition satisfies the applicable requirements of the Exchange Rules and the Company’s board of directors and/or the audit committee has adopted a charter that satisfies the requirements of the Exchange Rules. The Company and each of its subsidiaries maintain an effective system of disclosure controls and procedures (as defined in Rule 13a-15 under the 1934 Act Regulations) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and is accumulated and communicated to the Company’s management, including its principal executive officer or officers and principal financial officer or officers, as appropriate, to allow timely decisions regarding disclosure.
(xxvi) Compliance with the Sarbanes-Oxley Act. There is and has been no failure on the part of the Company or, to the Company’s knowledge, any of the Company’s directors or officers, in their capacities as such, to comply in all material respects with any provision of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated in connection therewith, including Section 402 related to loans and Sections 302 and 906 related to certifications.
(xxvii) Payment of Taxes. The Company and its subsidiaries have timely filed all United States federal income and other material tax returns that they were required by law to file (taking into account any valid extensions thereof), and all taxes required to be paid by the Company and each of its subsidiaries that are due and payable have been paid, except for such taxes as are being contested in good faith by appropriate proceedings and as to which adequate reserves have been established by the Company and its subsidiaries or except where the failure to pay such taxes would not have a Material Adverse Effect.
(xxviii) Insurance. The Company and its subsidiaries carry or are entitled to the benefits of insurance, with reputable insurers, in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties, and all such insurance is in full force and effect. Neither the Company nor any of its subsidiaries has (A) received written notice from any insurer or agent of such insurer that material capital improvements or other expenditures are required or necessary to be made in order to continue such insurance or (B) any reason to believe that it will not be able (x) to renew its existing insurance coverage as and when such policies expire or (y) to obtain comparable coverage from similar insurers as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Effect.
(xxix) Investment Company Act. The Company is not required, and upon the sale of the Shares as herein contemplated will not be required, to register as an “investment company” under the Investment Company Act of 1940, as amended.
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(xxx) Absence of Manipulation. Neither the Company nor any subsidiary or controlled affiliate of the Company nor, to the Company’s knowledge, any other affiliate of the Company, has taken or will take, directly or indirectly, any action which is designed, or would reasonably be expected, to cause or result in, or which has constituted, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares.
(xxxi) Foreign Corrupt Practices Act. None of the Company, any of its subsidiaries or, to the knowledge of the Company, any director, officer, agent, employee, affiliate or other person acting on behalf of the Company or any of its subsidiaries is aware of or has taken any action, directly or indirectly, that would result in a violation by such persons of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “FCPA”), including, without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of anything of value to any “foreign official” (as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA and the Company and, to the knowledge of the Company, its affiliates have conducted their businesses in compliance with the FCPA and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.
(xxxii) Money Laundering Laws. The operations of the Company and its subsidiaries are and have been conducted at all times in compliance in all material respects with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any Governmental Entity (collectively, the “Money Laundering Laws”); and no action, suit or proceeding by or before any Governmental Entity involving the Company or any of its subsidiaries with respect to the Money Laundering Laws is pending or, to the knowledge of the Company, threatened.
(xxxiii) No Conflict with Sanctions Laws. Neither the Company nor any of its subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee or affiliate of the Company or any of its subsidiaries (i) is the subject or target of any sanctions administered or enforced by the U.S. government (including, without limitation, the Office of Foreign Assets Control of the U.S. Treasury Department, the U.S. Department of Commerce or the U.S. Department of State), the United Nations Security Council, the European Union, Her Majesty’s Treasury, or other relevant sanctions authority (collectively, “Sanctions”), (ii) is located, organized or resident in a country or territory that is the subject or target of Sanctions (including, but not limited to, Crimea, Cuba, Iran, North Korea and Syria) (each a “Sanctioned Country”), (iii) is a person or entity (“Person”) on the list of “Specially Designated Nationals and Blocked Persons” or any other Sanctions-related list, or (iv) is owned or otherwise controlled by any Person on a Sanctions-related list. The Company will not, directly or indirectly, use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds, to any subsidiary, joint venture partner or other person (i) to fund or facilitate any activities of or business with any Person that, at the time of such funding or facilitating, is the subject or target of Sanctions, or is located, organized or resident in a Sanctioned Country, or (ii) in any other manner that will result in a violation by any Person (including any Person participating in the offering, whether as underwriter, advisor, investor or otherwise) of Sanctions.
(xxxiv) Brokerage Commissions. Neither the Company nor any of its subsidiaries is a party to any contract, agreement or understanding with any person (other than this Agreement) that could reasonably be expected to give rise to a valid claim against the Company or any of its subsidiaries or the Underwriters for a brokerage commission, finder’s fee or like payment in connection with the offering and sale of the Shares.
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(xxxv) Exchange Rules. Except as described in the General Disclosure Package or the Prospectus, the Company is, and after giving effect to the sale of Shares will be, in compliance in all material respects with all applicable corporate governance requirements set forth by the OTCQB and NASDAQ. No approval of stockholders of the Company under the rules and regulations of either OTCQB or NASDAQ is required for the Selling Stockholders to deliver the Shares to the Underwriters.
(xxxvi) Six Month Period Prior to Offering. Except as described in the General Disclosure Package, the Company has not sold, issued or distributed any shares of Common Stock during the six-month period preceding the date hereof, including any sales pursuant to Rule 144A under, or Regulation D or S of, the 1933 Act, other than shares issued pursuant to employee benefit plans, qualified stock option plans or other employee or consultant compensation plans or pursuant to outstanding options, restricted stock units, rights or warrants.
(xxxvii) Cybersecurity; Data Protection. The Company and its subsidiaries’ information technology assets and equipment, computers, systems, networks, hardware, software, websites, applications, and databases (collectively, “IT Systems”) are adequate for, and operate and perform in all material respects as required in connection with the operation of the business of the Company and its subsidiaries as currently conducted, free and clear of all material bugs, errors, defects, Trojan horses, time bombs, malware and other corruptants. The Company and its subsidiaries have implemented and maintained commercially reasonable controls, policies, procedures, and safeguards to maintain and protect their material confidential information and the integrity, continuous operation, redundancy and security of all IT Systems and data (including all personal, personally identifiable, sensitive, confidential or regulated data (“Personal Data”)) used in connection with their businesses, and there have been no breaches, violations, outages or unauthorized uses of or accesses to same, except for those that have been remedied without material cost or liability. The Company and its subsidiaries are presently in material compliance with all applicable laws or statutes and all judgments, orders, rules and regulations of any court or arbitrator or governmental or regulatory authority, internal policies and contractual obligations relating to the privacy and security of IT Systems and Personal Data and to the protection of such IT Systems and Personal Data from unauthorized use, access, misappropriation or modification.
(xxxviii) Related Party Transactions. No relationship, direct or, to the Company’s knowledge, indirect, exists between or among any of the Company or any affiliate of the Company, on the one hand, and any director, officer, member, stockholder, customer or supplier of the Company or any affiliate of the Company, on the other hand, which is required by the 1933 Act to be disclosed in a registration statement on Form S-1 which is not so disclosed in the Registration Statement. Except as otherwise disclosed in the Registration Statement, there are no outstanding loans, advances (except advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company or any affiliate of the Company to or for the benefit of any of the officers or directors of the Company or any affiliate of the Company or any of their respective family members.
(xxxix) Statistical and Market-Related Data. Any third-party statistical and market-related data included in the General Disclosure Package or the Prospectus are based on or derived from sources that the Company reasonably and in good faith believes are reliable and accurate in all material respects and such data agree with the sources from which they are derived.
(b) Representations and Warranties by the Selling Stockholders. Each of the Selling Stockholders, severally and not jointly, represents and warrants to the Underwriters as of the Applicable Time (as defined below) and the Closing Date, and agrees with the Underwriters, as follows:
(i) Organization and Good Standing of the Selling Stockholders. To the extent such Selling Stockholder is an entity, such Selling Stockholder has been duly formed and is validly existing and in good standing under the laws of its jurisdiction of organization, with power and authority (corporate and other) to own, lease and/or operate its properties and conduct its business, and has been duly registered or qualified as may be necessary for the transaction of business, and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, except where the failure to so qualify or to be in good standing would not reasonably be expected to result in a material adverse effect upon the ability of such Selling Stockholder to consummate the transactions contemplated in this Agreement.
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(ii) Valid Title to Shares. Such Selling Stockholder has, and on the Closing Date hereinafter mentioned will have valid and unencumbered title to, or a valid “security entitlement” within the meaning of Section 8-501 of the New York Uniform Commercial Code in respect of, the Shares to be delivered by such Selling Stockholder on the Closing Date and has the legal right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver the Shares to be delivered by such Selling Stockholder under this Agreement on the Closing Date hereunder free and clear of all liens, encumbrances, equities or claims arising under this Agreement.
(iii) Authority. Such Selling Stockholder has, and on the Closing Date will have, full legal right, power and authority, and all authorization and approval required by law, to enter into this Agreement.
(iv) Enforceability. This Agreement has been duly authorized, executed and delivered by such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable as to such Selling Stockholder in accordance with its terms, except to the extent enforceability may be limited by (i) the application of bankruptcy, reorganization, insolvency and other laws affecting creditors’ rights generally, (ii) equitable principles being applied at the discretion of a court before which a proceeding may be brought and (iii) except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws.
(v) Absence of Further Requirements. No consent, approval, authorization or order of, or filing with, any third party (including any governmental agency or body or any court) is required to be obtained or made by such Selling Stockholder for the consummation of the transactions contemplated by this Agreement in connection with the sale of the Shares sold by the Selling Stockholder, except as expressly contemplated hereby and such as have been obtained and made under the Act and such as may be required under state securities laws.
(vi) Absence of Defaults and Conflicts Resulting from Transaction. The execution, delivery and performance of this Agreement and the consummation of the transactions therein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or which any of the property or assets of such Selling Stockholder is subject, except for such conflicts, breaches, violations or defaults that would not, individually or in the aggregate, reasonably be expected to result in a material adverse effect upon the ability of such Selling Stockholder to consummate the transactions contemplated by this Agreement; nor will such action result in any violation of the provisions of the organizational documents of such Selling Stockholder; nor will such action result in any violation of any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over such Selling Stockholder or any of its respective properties, except where such violations would not, individually or in the aggregate, reasonably be expected to result in a material adverse effect upon the ability of such Selling Stockholder to consummate the transactions contemplated by this Agreement.
(vii) Compliance with Securities Act Requirements. (i) (A) At the time the Registration Statement initially became effective, (B) at the time of each amendment thereto for the purposes of complying with Section 10(a)(3) of the Act (whether by post-effective amendment, incorporated report or form of prospectus), (C) at the Effective Time relating to the Shares and (D) on the Closing Date, the Registration Statement did not and will not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) (A) on its date, (B) at the time of filing the Final Prospectus pursuant to Rule 424(b) and (C) on the Closing Date, the Final Prospectus will not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The preceding sentence applies only to statements in or omissions from any such document that are made in reliance upon and in conformity with the written information furnished to the Company by such Selling Stockholder specifically for use therein, it being understood and agreed that the only information furnished by such Selling Stockholder is the Selling Stockholder Information.
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(viii) No Undisclosed Material Information. The sale of the Shares by such Selling Stockholder pursuant to this Agreement is not prompted by any material information known to such Selling Stockholder concerning the Company or any of its subsidiaries that is not set forth in the General Disclosure Package.
(ix) Authorization of Agreement. This Agreement has been duly authorized, executed and delivered by such Selling Stockholder.
(x) Absence of Manipulation. Such Selling Stockholder has not taken, directly or indirectly, any action that is designed to or that has constituted or that would reasonably be expected to cause or result in any stabilization or manipulation of the price of the Shares.
(xi) No Finder’s Fee. There are no contracts, agreements, or understandings between such Selling Stockholder and any person that would give rise to a valid claim against such Selling Stockholder or any Underwriter for a brokerage commission, finder’s fee or other like payment in connection with the sale of the Shares (other than this Agreement).
(xii) No Conflict with Sanctions Laws. Neither such Selling Stockholder nor, to the knowledge of such Selling Stockholder, any director, officer, agent, employee or affiliate of such Selling Stockholder (i) is the subject or target of any Sanctions, (ii) is located, organized or resident in a Sanctioned Country, (iii) is a Person on the list of “Specially Designated Nationals and Blocked Persons” or any other Sanctions-related list, or (iv) is owned or otherwise controlled by any Person on a Sanctions-related list. Such Selling Stockholder will not, directly or indirectly, use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person, (i) to fund or facilitate any activities of or business with any Person that, at the time of such funding or facilitating, is the subject or target of Sanctions, or is located, organized or resident in a Sanctioned Country, or (ii) in any other manner that will result in a violation by any Person (including any Person participating in the offering, whether as underwriter, advisor, investor or otherwise) of Sanctions.
(c) Officer’s Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries or any officer of any Selling Stockholder that is delivered to the Underwriters or to counsel for the Underwriters shall be deemed a representation and warranty by the Company or such Selling Stockholder, as applicable, to the Underwriters as to the matters covered thereby.
SECTION 4. Covenants of the Company. The Company covenants with the Underwriters as follows:
(a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 4(b), will comply with the requirements of Rule 430B, and will notify the Underwriters promptly, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective or any amendment or supplement to the Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus, including any document incorporated by reference therein or for additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(e) of the 1933 Act concerning the Registration Statement and (v) if the Company becomes the subject of a proceeding under Section 8A of the 1933 Act in connection with the offering of the Shares. The Company will effect all filings required under Rule 424(b), in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order, prevention or suspension and, if any such order is issued, to obtain the lifting thereof at the earliest possible moment.
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(b) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and in the General Disclosure Package and the Prospectus. If at any time when a prospectus relating to the Shares is (or, but for the exception afforded by Rule 172 of the 1933 Act Regulations (“Rule 172”), would be) required by the 1933 Act to be delivered in connection with sales of the Shares, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to (i) amend the Registration Statement in order that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) amend or supplement the General Disclosure Package or the Prospectus in order that the General Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser or (iii) amend the Registration Statement or amend or supplement the General Disclosure Package or the Prospectus, as the case may be, in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly (A) give the Underwriters notice of such event, (B) prepare any amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the General Disclosure Package or the Prospectus comply with such requirements and, a reasonable amount of time prior to any proposed filing or use, furnish the Underwriters with copies of any such amendment or supplement and (C) file with the Commission any such amendment or supplement; provided that the Company shall not file or use any such amendment or supplement to which the Underwriters or counsel for the Underwriters shall reasonably object. The Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. The Company has given the Underwriters notice of any filings made by it pursuant to the 1934 Act or 1934 Act Regulations within 48 hours prior to the Applicable Time; the Company will give the Underwriters notice of its intention to make any such filing from the Applicable Time to the Closing Date and will furnish the Underwriters with copies of any such documents a reasonable amount of time prior to such proposed filing, as the case may be, and, subject to the requirements of applicable laws and regulations, will not file or use any such document to which the Underwriters or counsel for the Underwriters shall reasonably object.
(c) Delivery of Registration Statements. To the extent not available through EDGAR, the Company will furnish or deliver to the Underwriters and counsel for the Underwriters, without charge, upon request, (i) copies of the Registration Statement as originally filed and each amendment thereto (including exhibits filed therewith or incorporated by reference therein and documents incorporated or deemed to be incorporated by reference therein) and (ii) copies of all consents and certificates of experts.
(d) Delivery of Prospectuses. The Company has delivered to the Underwriters as many copies of each preliminary prospectus as the Underwriters reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to the Underwriters during the period when a prospectus relating to the Shares is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the 1933 Act, such number of copies of the Prospectus (as amended or supplemented) as the Underwriters may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) Blue Sky Qualifications. To take promptly from time to time such actions as the Representative may reasonably request to qualify the Shares for offering and sale under the securities or Blue Sky laws of such jurisdictions (domestic or foreign) as the Representative may designate and to continue such qualifications in effect, and to comply with such laws, for so long as required to permit the offer and sale of Shares in such jurisdictions; provided that the Company and its subsidiaries shall not be obligated to (i) qualify as foreign corporations in any jurisdiction in which they are not so qualified, (ii) to file a general consent to service of process in any jurisdiction or (iii) subject themselves to taxation in any such jurisdiction if they are not otherwise so subject. The parties acknowledge and agree that to the extent that the Shares qualify as Covered Securities (as defined under Section 18 of the 1933 Act), no such actions shall be required with respect to the qualification of the Shares in any state.
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(f) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide to the Underwriters the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(g) Listing. The Shares have been approved for listing on the NASDAQ under the symbol “INTZ”, and the Company is in compliance with the designation and maintenance criteria applicable to NASDAQ issuers.
(h) FINRA Filing. The Company will use its best efforts to assist the Underwriters, if requested by the Underwriters, with any filings with FINRA and obtaining clearance from FINRA as to the amount of compensation allowable or payable to the Underwriters.
(i) Reporting Requirements. The Company, during the period when a prospectus relating to the Shares is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the 1933 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and 1934 Act Regulations.
(j) Issuer Free Writing Prospectuses. The Company agrees that, unless it obtains the prior written consent of the Representative and subject to the requirements of the 1934 Act and the 1934 Act Regulations, it will not make any offer relating to the Shares that would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a “free writing prospectus,” or a portion thereof, required to be filed by the Company with the Commission or retained by the Company under Rule 433; provided that the Representative will be deemed to have consented to the Issuer Free Writing Prospectuses listed on Schedule B hereto, if any, and any “road show that is a written communication” within the meaning of Rule 433(d)(8)(i) that has been reviewed by the Representative. The Company represents that it has treated or agrees that it will treat each such free writing prospectus consented to, or deemed consented to, by the Representative as an “issuer free writing prospectus,” as defined in Rule 433, and that it has complied and will comply with the applicable requirements of Rule 433 with respect thereto, including timely filing with the Commission where required, legending and record keeping. If at any time following issuance of an Issuer Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading (other than with respect to any Underwriter Information), the Company will promptly notify the Representative and will promptly amend or supplement, at its own expense, such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.
(k) Communications Prior to Closing. Prior to the Applicable Time and the Closing Date, the Company will not issue any press release or other communication directly or indirectly or hold any press conference with respect to the Company, its condition, financial or otherwise, or earnings, business affairs or business prospects (except for routine oral marketing communications in the ordinary course of business and consistent with the past practices of the Company and of which the Representative is notified), without the prior written consent of the Representative, unless in the judgment of the Company and its counsel, and after notification to the Representative, such press release or communication is required by law or applicable stock exchange rules.
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The Company agrees
SECTION 5. Covenants of the Selling Stockholders. The Selling Stockholders, severally and not jointly, covenant with the Underwriters as follows:
(a) Lock-Up Agreements. Each Selling Stockholder will execute and deliver a Lock-Up Agreement prior to the effectiveness of the Registration Statement.
(b) Transfer Taxes. The Selling Stockholders will pay any transfer taxes, if applicable, on the sale by the Selling Stockholders of the Shares to the
Underwriters.
(c) IRS Forms. The Selling Stockholders shall deliver to the Underwriters, prior to or at the Closing Date, a properly completed and signed IRS Form W-8 or IRS Form W-9, as appropriate, together with all required attachments to such form.
SECTION 6. Payment of Expenses.
(a) All out-of-pocket expenses of the Company incident to the performance of its obligations under this Agreement shall be borne by the Company, including, without limiting the generality of the foregoing, the following: (i) the accounting fees of the Company; (ii) the fees and disbursements of counsel for the Company; (iii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters; (iv) the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, the preliminary prospectus, any Issuer Free Writing Prospectus, the Prospectus, this Agreement, any Blue Sky survey, in each case, any supplements or amendments thereto; (v) the filing fees of the Commission, if any; (vi) the filing fees and expenses incident to securing any required review by FINRA of the terms of the sale of the Shares; (vii) the cost of printing certificates, if any, representing the Shares; (viii) the costs and charges of any transfer agent, registrar or depositary; (ix) the fees and expenses associated with listing the Shares on NASDAQ; (x) any roadshow expenses of the Company and its representatives (including the Underwriters), including, without limiting the generality of the foregoing, the costs and expenses of the Company relating to the production of roadshow slides and graphics, communication and electronic marketing expenses, the fees and expenses of any consultants engaged by the Company in connection with the roadshow presentations, travel and lodging expenses (including airfare and ground transportation) of the representatives and officers of the Company, and any consultants, and, with the prior written consent of the Company, the cost of aircraft and other transportation chartered in connection with the roadshow; and (xi) the reasonable and documented fees and disbursements of counsel for the Underwriters, including reasonable and documented fees and disbursements in connection with qualification under FINRA regulations and state securities or Blue Sky laws. Other than the division of out-of-pocket expenses set forth above with the Selling Stockholders, the Company shall not be required to pay any other costs, expenses or fees related to the transactions contemplated by this Agreement. The Selling Stockholders shall be responsible for their pro rata portion of these out-of-pocket expenses except for those described in (ii) above, determined by dividing the number of shares sold in the offering by the Selling Stockholders by the number of total shares sold by the Selling Stockholders and the Company in the offering. In addition to the division of out-of-pocket expenses with the Company, the Selling Stockholders shall be responsible for all fees and expenses of the Selling Stockholders including, without limiting the generality of the foregoing: (i) the fees and disbursements of counsel to the Selling Stockholders; (ii) any transfer taxes; and (iii) the underwriting discounts and commissions, incentive or advisory fees payable to the Underwriters in connection with the transactions contemplated hereby.
(b) Termination of Agreement. If this Agreement is terminated by the Underwriters in accordance with the provisions of Section 7, Section 11(a)(i) or (iii) or Section 12 hereof, the Company and the Selling Stockholders shall share equally in reimbursing the Underwriters for all of their reasonable, documented out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriters.
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SECTION 7. Conditions of Underwriters’ Obligations. The obligations of the Underwriters hereunder are subject to the accuracy, when made and as of the Applicable Time and as of the Closing Date or any Option Closing Date, of the representations and warranties of the Company and the Selling Stockholders contained herein, to the accuracy of the statements made in certificates of any officer of the Company or any of its subsidiaries or any officer of any Selling Stockholder delivered pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholder of their respective covenants and obligations hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration Statement has become effective and at the Closing Date or any Option Closing Date, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto has been issued under the 1933 Act, no order preventing or suspending the use of any preliminary prospectus or the Prospectus has been issued and no proceedings for any of those purposes have been instituted or are pending or, to the Company’s knowledge, threatened; and the Company has complied, to the Commission’s satisfaction, with each request (if any) from the Commission for additional information.
(b) Contents of Registration Statement. The Representative shall not have discovered and disclosed to the Company on or prior to the Applicable Time, Closing Date or any Option Closing Date that the Registration Statement or any amendment or supplement thereto contains an untrue statement of a fact which, in the opinion of counsel for the Underwriters, is material or omits to state any fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading, or that the General Disclosure Package, any Issuer Free Writing Prospectus or the Prospectus or any amendment or supplement thereto contains an untrue statement of fact which, in the opinion of such counsel, is material or omits to state any fact which, in the opinion of such counsel, is material and is necessary in order to make the states, in light of the circumstances in which they were made, not misleading.
(c) No Material Adverse Change. Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development or event involving a prospective change, in the condition (financial or otherwise), results of operations, business, properties or prospects of the Company and its subsidiaries taken as a whole which, in the judgment of the Representative, is material and adverse and makes it impractical or inadvisable to market the Shares; (ii) any downgrading in the rating of any debt securities or preferred stock of the Company by any “nationally recognized statistical rating organization” (as defined in Section 3(a)(62) of the Exchange Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities or preferred stock of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating) or any announcement that the Company has been placed on negative outlook; (iii) any change in U.S. or international financial, political or economic conditions or currency exchange rates or exchange controls the effect of which is such as to make it, in the judgment of the Representative, impractical to market or to enforce contracts for the sale of the Shares, whether in the primary market or in respect of dealings in the secondary market; (iv) any suspension or material limitation of trading in securities generally on the OTCQB, New York Stock Exchange or the NASDAQ, or any setting of minimum or maximum prices for trading on such exchange; (v) or any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market; (vi) any banking moratorium declared by any U.S. federal or New York authorities; (vii) any major disruption of settlements of securities, payment, or clearance services in the United States or any other country where such securities are listed or (viii) any attack on, outbreak or escalation of hostilities or act of terrorism involving the United States, any declaration of war by Congress or any other national or international calamity or emergency if, in the judgment of the Representative, the effect of any such attack, outbreak, escalation, act, declaration, calamity or emergency is such as to make it impractical or inadvisable to market the Shares or to enforce contracts for the sale of the Shares.
(d) Opinion of Counsel and Negative Assurance Letter for Company. At the Closing Date and in connection with any Option Closing Date, the Representative shall have received the opinion and negative assurance letter, dated the Closing Date or Option Closing Date, as applicable, of Faust Law Group, special counsel for the Company, in form and substance reasonably satisfactory to counsel for the Underwriters.
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(e) Opinion of Counsel for Selling Stockholders. At the Closing Date, the Representative shall have received the opinion, dated the Closing Date of Michael B. Glazer, Attorney at Law, P.C., special counsel for the Selling Stockholders, in form and substance reasonably satisfactory to counsel for the Underwriters.
(f) Opinion of Counsel and Negative Assurance Letter for Underwriters. At the Closing Date, the Representative shall have received the opinion and negative assurance letter, dated the Closing Date, of The NBD Group, Inc., special counsel for the Underwriters.
(g) Officers’ Certificates. At the Closing Date and in connection with any Option Closing Date, there shall not have been, since the date hereof or since the respective dates as of which information is given in the General Disclosure Package or the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings or business affairs of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Representative shall have received a certificate, (A) of an executive officer of the Company and a principal financial or accounting officer of the Company, in which such officers shall state that: the representations and warranties of the Company in this Agreement are true and correct as of the Closing Date or any Option Closing Date; the Company has complied in all material respects with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date or any such Option Closing Date; no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or, to the best of their knowledge and after reasonable investigation, are contemplated by the Commission; and, subsequent to the date of the most recent financial statements in the General Disclosure Package, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or otherwise), results of operations, business, properties or prospects of the Company and its subsidiaries taken as a whole except as set forth in the General Disclosure Package or as described in such certificate and (B) of each of the Selling Stockholders confirming that the representations and warranties of such Selling Stockholder in this Agreement are true and correct as of the Closing Date or Option Closing Date and that such Selling Stockholder has complied in all material respects with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date or Option Closing Date.
(h) CFO Certificate. On the date of this Agreement, the Closing Date and any Option Closing Date, the Representative shall have received a certificate, dated the respective dates of delivery thereof and addressed to the Underwriters, of its Chief Financial Officer with respect to certain financial data contained in the Registration Statement, the General Disclosure Package and the Prospectus, providing “management comfort” with respect to such information, in form and substance reasonably satisfactory to the Representative.
(i) Auditor Comfort Letter. At the Execution Time, the Representative shall have received from Whitley Penn LLP a letter, dated such date, in form and substance satisfactory to the Representative, together with signed or reproduced copies of such letter for each of the other Underwriters containing statements and information of the type ordinarily included in accountants’ “comfort letters” to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, the General Disclosure Package and the Prospectus.
(j) Bring-down Comfort Letter. At the Closing Date and any Option Closing Date, the Representative shall have received from Whitley Penn LLP a letter, dated as of the Closing Date or Option Closing Date, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to the Closing Date or Option Closing Date.
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(k) Lock-Up Agreements. At or prior to the Execution Time, the Representative shall have received the written Lock-Up Agreements substantially in the form attached as Exhibit A from each of the Company’s officers, directors and Selling Stockholders listed in Schedule D.
(l) Additional Documents. At the Closing Date and any Option Closing Date, counsel for the Underwriters shall have been furnished with such documents as they may reasonably require from the Company and the Selling Stockholders for the purpose of enabling them to pass upon the sale of the Shares as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the sale of the Shares as herein contemplated shall be satisfactory in form and substance to the Representative and counsel for the Underwriters.
(m) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the Underwriters by notice to the Company at any time at or prior to Closing Date or any Option Closing Date and such termination shall be without liability of any party to any other party except as provided in Section 6 and except that Sections 1, 7, 8, 9, 15 and 16 shall survive any such termination and remain in full force and effect.
SECTION 8. Indemnification.
(a) Indemnification of Underwriters by the Company. The Company agrees to indemnify and hold harmless each Underwriter, its affiliates and each of its and their respective directors, officers, members, employees, representatives and agents and their respective affiliates (as such term is defined in Rule 501(b) under the 1933 Act (each, an “Affiliate”)), its selling agents and each person, if any, who controls such Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act (each, an “Indemnified Party”) as follows:
(i) against any and all direct loss, liability, claim, damage and expense whatsoever, as incurred, arising out of or based on any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including any information deemed to be a part thereof pursuant to Rule 430B, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus, any Issuer Free Writing Prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and
(ii) against any and all direct loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 8(d) below) any such settlement is effected with the written consent of the Company;
(iii) against any and all reasonable, documented out-of-pocket expenses, as incurred (including the reasonable fees and disbursements of counsel chosen by the Representative), incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in the Registration Statement (or any amendment thereto), including any information deemed to be a part thereof pursuant to Rule 430B, the General Disclosure Package or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with the Underwriter Information or the Selling Stockholder Information.
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(b) Indemnification of Underwriters by the Selling Stockholders. The Selling Stockholders, severally and not jointly, agrees to indemnify and hold harmless each Indemnified Party as follows:
(i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of or based on any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including any information deemed to be a part thereof pursuant to Rule 430B, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus, any Issuer Free Writing Prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and
(ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 8(d) below) any such settlement is effected with the written consent of the Company;
(iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by the Representative), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that each Selling Stockholder shall be liable in any such case only to the extent that such loss, liability, claim, damage or expense arises out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with its Selling Stockholder Information; provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in the Registration Statement (or any amendment thereto), including any information deemed to be a part thereof pursuant to Rule 430B, the General Disclosure Package or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with the Underwriter Information.
(c) Indemnification of Company and Selling Stockholders. The Underwriters agree to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and the Selling Stockholders, their respective directors and each person, if any, who controls such Selling Stockholders, against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including any information deemed to be a part thereof pursuant to Rule 430B, the General Disclosure Package or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with the Underwriter Information.
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(d) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, if any, to assume the defense thereof, with counsel selected in accordance with the next sentence, and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 8 for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable, documented out-of-pocket costs of investigation; provided, however, the indemnifying party shall not, under any of the circumstances described in clauses (i), (ii), (iii) and (iv) below, have the right to assume or direct the defense thereof and shall be liable to such indemnified party under this Section 8 for any reasonable, documented out-of-pocket legal expenses of other counsel or any other reasonable, documented out-of-pocket expenses in connection with the defense thereof if, in the reasonable judgment of the indemnified party (i) the use of the counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) representation of the indemnified party by such counsel would be inappropriate due to differing interests between the indemnifying party and any indemnified party, (iii) there are likely to be defenses available to the indemnified party that are different from, or in addition to, the defenses available to the indemnifying party, or (iv) the indemnifying party fails to use reasonable diligence in defending against such action. In the case of parties indemnified pursuant to Section 8(a) or 8(b) above, counsel to the indemnified parties shall be selected by the Representative, and, in the case of parties indemnified pursuant to Section 8(c) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties (which consent shall not be unreasonable withheld), settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 8 or Section 9 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party.
(e) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 8(a)(ii) or Section 8(b)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request for reimbursement, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 45 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement or shall not have disputed in good faith the indemnified party’s entitlement to such reimbursement.
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SECTION 9. Contribution. To the extent the indemnification provided for in Section 8 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company or Selling Stockholder, on the one hand, and the Underwriters, on the other hand, from the offering of the Shares pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company or Selling Stockholders, on the one hand, and of the Underwriters, on the other hand, in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company or the Selling Stockholders, on the one hand, and the Underwriters, on the other hand, in connection with the offering of the Shares pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Shares pursuant to this Agreement (before deducting expenses) received by the Selling Stockholders, on the one hand, and the total underwriting discounts and commissions received by the Underwriters, on the other hand, in each case as set forth on the cover of the Prospectus, bear to the aggregate public offering price of the Shares as set forth on the cover of the Prospectus.
The relative fault of the Company or Selling Stockholders, on the one hand, and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company, Selling Stockholders or by the Underwriters and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
The Company, Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 9. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 9 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 9, the Underwriters shall not be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which the Underwriters have otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 9, no Selling Stockholder shall be obligated or required to contribute any amount in excess of the amount by which the aggregate proceeds (after deducting any underwriting discounts and commissions received by the Underwriters) from the Shares sold by such Selling Stockholder exceed the amount of any damages which such Selling Stockholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
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For purposes of this Section 9, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and the Underwriter’s Affiliates and selling agents shall have the same rights to contribution as such Underwriter; each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company; and each person, if any, who controls any Selling Stockholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Selling Stockholder.
SECTION 10. Representations, Warranties and Agreements to Survive. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or any of its subsidiaries submitted pursuant hereto, shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of the Underwriters or their Affiliates or selling agents, any person controlling the Underwriter, its officers or directors or any person controlling the Company and (ii) delivery of and payment for the Shares.
SECTION 11. Termination of Agreement.
(a) Termination. The Underwriters may terminate this Agreement, by notice to the Company and the Selling Stockholders, at any time at or prior to the Closing Date (or, in the case of an Option Closing Date that is subsequent to the Closing Date for the Firm Shares), (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the General Disclosure Package or the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings or business affairs of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, in each case the effect of which is such as to make it, in the judgment of the Underwriters, impracticable or inadvisable to proceed with the completion of the offering or to enforce contracts for the sale of the Shares, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof involving the United States or other material calamity or crisis or any material adverse change or development involving a prospective material adverse change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the reasonable good faith judgment of the Representative, impracticable or inadvisable to proceed with the completion of the offering or to enforce contracts for the sale of the Shares, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission, OTCQB or NASDAQ where trading has not been suspended or materially limited as described in the immediately following clause, or (iv) if trading generally on the OTCQB, New York Stock Exchange or on the NASDAQ has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by order of the Commission, FINRA or any other governmental authority, or (v) a material disruption has occurred in commercial banking or securities settlement or clearance services in the United States, or (vi) if a banking moratorium has been declared by either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 6 hereof, and provided further that Sections 1, 8, 9, 10, 16, 17 and 18 shall survive such termination and remain in full force and effect.
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SECTION 12. Default by the Company or Selling Stockholders. If the Company or Selling Stockholders shall fail at the Closing Date (or, in the case of an Option Closing Date that is subsequent to the Closing Date for the Firm Shares) to sell the number of Shares that they are obligated to sell hereunder, then this Agreement shall terminate without any liability on the part of any non-defaulting party; provided, however, that the provisions of Sections 1, 6, 8, 9, 10, 16, 17 and 18 shall remain in full force and effect. No action taken pursuant to this Section shall relieve the Selling Stockholders from liability, if any, in respect of such default.
SECTION 13. Default by the Underwriters. If, on the Closing Date or an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Shares set forth opposite their respective names in Schedule C bears to the aggregate number of Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 13 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Shares and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares to be purchased on such date, and arrangements satisfactory to you, the Company and the Selling Stockholders for the purchase of such Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Stockholders. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Option Shares and the aggregate number of Option Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Option Shares to be purchased on such Option Closing Date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase the Option Shares to be sold on such Option Closing Date or (ii) purchase not less than the number of Option Shares that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement.
SECTION 14. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Representative shall be directed to B. Riley Securities, Inc. at 11100 Santa Monica Blvd., Suite 800, Attention: Michael Guzman and Salomon Kamalodine, and a copy to The NBD Group, Inc., 350 N. Glendale Avenue, Suite B-522, Glendale, CA 91206, attention of Sara L. Terheggen; notices to the Company shall be directed to it at Intrusion Inc., 1101 East Arapaho Road, Suite 200, Richardson, Texas 75081, attention of Jack B. Blount, with a copy to Faust Law Group, 2309 S. Joplin Avenue, Joplin, Missouri 64801, attention of Quentin Faust; notices to the Selling Stockholders shall be directed to them at c/o [______], [_______], attention [______], with a copy to Michael B. Glazer, Attorney at Law, P.C., 9241 LBJ Freeway, Suite 119, Dallas, Texas 75243, attention of Michael Glazer.
SECTION 15. No Advisory or Fiduciary Relationship. The Company and each Selling Stockholder acknowledges and agrees that (a) the purchase and sale of the Shares pursuant to this Agreement, including the determination of the public offering price of the Shares and any related discounts and commissions, is an arm’s-length commercial transaction between the Company, on the one hand, and the Underwriters, on the other hand, (b) in connection with the offering of the Shares and the process leading thereto, each Underwriter is and has been acting solely as a principal and is not the agent or fiduciary of the Company, any of its subsidiaries, or its respective stockholders, creditors, employees or any other party, (c) no Underwriter has assumed or will assume an advisory or fiduciary responsibility in favor of the Company with respect to the offering of the Shares or the process leading thereto (irrespective of whether the Underwriters has advised or is currently advising the Company or any of its subsidiaries on other matters) and the Underwriters have no obligation to the Company with respect to the offering of the Shares except the obligations expressly set forth in this Agreement, (d) each Underwriter and their respective affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Company, and (e) the Underwriters have not provided any legal, accounting, regulatory or tax advice with respect to the offering of the Shares and the Company has consulted its own legal, accounting, regulatory and tax advisors to the extent it deemed appropriate.
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SECTION 16. Parties. This Agreement shall each inure to the benefit of and be binding upon the Underwriters, the Company, the Selling Stockholders and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters, the Company, the Selling Stockholders and their respective successors and the controlling persons and officers and directors referred to in Sections 8 and 9 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Underwriters, the Company, the Selling Stockholders and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Shares from the Underwriters shall be deemed to be a successor by reason merely of such purchase.
SECTION 17. Trial by Jury. Each of the Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates), the Selling Stockholders and the Underwriters hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
SECTION 18. GOVERNING LAW. THIS AGREEMENT AND ANY CLAIM, CONTROVERSY OR DISPUTE ARISING UNDER OR RELATED TO THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF, THE STATE OF NEW YORK WITHOUT REGARD TO ITS CHOICE OF LAW PROVISIONS.
SECTION 19. TIME. EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 20. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable.
SECTION 21. Research Analyst Independence. The Company acknowledges that each Underwriter’s research analysts and research departments are required to be independent from its investment banking division and are subject to certain regulations and internal policies, and that such Underwriter’s research analysts may hold views and make statements or investment recommendations and/or publish research reports with respect to the Company and/or the sale of Shares that differ from the views of their investment banking division. The Company acknowledges that each Underwriter is a full service securities firm and as such from time to time, subject to applicable securities laws, rules and regulations, may effect transactions for its own account or the account of its customers and hold long or short positions in debt or equity securities of the Company; provided, however, that nothing in this Section 21 shall relieve any Underwriter of any responsibility or liability it may otherwise bear in connection with activities in violation of applicable securities laws, rules or regulation.
SECTION 22. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement.
SECTION 23. Effect of Headings. The Section headings herein are for convenience only and shall not affect the construction hereof.
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If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company and the Selling Stockholders a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Underwriters, the Company and the Selling Stockholders in accordance with its terms.
| Very truly yours, | |
| COMPANY: | |
| INTRUSION INC. | |
| By: ____________________________ | |
| Name: | |
| Title: |
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| SELLING STOCKHOLDERS: | |
| MARK A PAXTON | |
| By: _______________________________ | |
| Name: Mark A. Paxton | |
| MICHAEL L. & KATHRYN A. PAXTON | |
| By: _______________________________ | |
| Name: Michael L. Paxton | |
| By: _______________________________ | |
| Name: Kathryn A. Paxton | |
| MARK C. & JULIE A. PUCKETT | |
| By: _______________________________ | |
| Name: Mark C. Puckett | |
| By: _______________________________ | |
| Name: Julie A. Puckett | |
THE DANIEL W. PAXTON TRUST UNDER TRUST AGREEMENT DATED NOVEMBER 26, 1996 | |
| By: _______________________________ | |
| Name: Mark A. Paxton | |
| Title: Trustee | |
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THE ZACHARY A. PAXTON TRUST UNDER TRUST AGREEMENT DATED NOVEMBER 26, 1996 | |
| By: _______________________________ | |
| Name: Mark. A Paxton | |
| Title: Trustee | |
| THE ELLEN P. PAXTON TRUST UNDER TRUST AGREEMENT DATED NOVEMBER 26, 1996 | |
| By: _______________________________ | |
| Name: Mark A. Paxton | |
| Title: Trustee | |
| THE KYLE A. PAXTON TRUST UNDER TRUST AGREEMENT DATED NOVEMBER 26, 1996 | |
| By: _______________________________ | |
| Name: Michael L. Paxton | |
| Title: Trustee | |
| By: _______________________________ | |
| Name: Kathryn A. Paxton | |
| Title: Trustee | |
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| THE KRISTIN M. PAXTON TRUST UNDER TRUST AGREEMENT DATED NOVEMBER 26, 1996 | |
| By: _______________________________ | |
| Name: Michael L. Paxton | |
| Title: Trustee | |
THE JENNIFER A. PUCKETT TRUST UNDER TRUST AGREEMENT DATED NOVEMBER 26, 1996 | |
| By: _______________________________ | |
| Name: Mark C. Puckett | |
| Title: Trustee | |
| By: _______________________________ | |
| Name: Julie A. Puckett | |
| Title: Trustee | |
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| THE STEPHANIE L. PUCKETT TRUST UNDER TRUST AGREEMENT DATED NOVEMBER 26, 1996 | |
| By: _______________________________ | |
| Name: Mark C. Puckett | |
| Title: Trustee | |
| By: _______________________________ | |
| Name: Julie A. Puckett | |
| Title: Trustee | |
THE NATALIE C. PUCKETT TRUST UNDER TRUST AGREEMENT DATED NOVEMBER 26, 1996 | |
| By: _______________________________ | |
| Name: Mark C. Puckett | |
| Title: Trustee | |
| By: _______________________________ | |
| Name: Julie A. Puckett | |
| Title: Trustee | |
| THE MALLORIE M. PUCKETT TRUST UNDER TRUST AGREEMENT DATED NOVEMBER 26, 1996 | |
| By: _______________________________ | |
| Name: Mark C. Puckett | |
| Title: Trustee | |
| By: _______________________________ | |
| Name: Julie A. Puckett | |
| Title: Trustee | |
| 30 |
| PATSY A. PAXTON | |
| By: _______________________________ | |
| Name: Patsy A. Paxton | |
| T. JOE HEAD | |
| By: _______________________________ | |
| Name: T. Joe Head |
| 31 |
CONFIRMED AND ACCEPTED,
as of the date first above written:
B. RILEY SECURITIES, INC.
By: ____________________________
Name:
Title:
| 32 |
SCHEDULE A
Number of Shares to be Sold by the Company: [________]
Total Number of Shares to be Sold by the Selling Stockholders: 1,100,000
| Selling Stockholder | Number of Shares to be Sold |
| 1. Mark Paxton | 99,469 |
| 2. Michael L. & Kathryn Paxton | 244,432 |
| 3. Mark C. & Julie A. Puckett | 105,448 |
| 4. The Daniel W. Paxton Trust under Trust Agreement dated November 26, 1996 | 40,000 |
| 5. The Zachary A. Paxton Trust under Trust Agreement dated November 26, 1996 | 40,000 |
| 6. The Ellen P. Paxton Trust under Trust Agreement dated November 26, 1996 | 40,000 |
| 7. The Kyle A. Paxton Trust under Trust Agreement dated November 26, 1996 | 40,000 |
| 8. The Kristin M. Paxton Trust under Trust Agreement dated November 26, 1996 | 40,000 |
| 9. The Jennifer A. Puckett Trust under Trust Agreement dated November 26, 1996 | 40,000 |
| 10. The Stephanie L. Puckett Trust under Trust Agreement dated November 26, 1996 | 40,000 |
| 11. The Natalie C. Puckett Trust under Trust Agreement dated November 26, 1996 | 40,000 |
| 12. The Mallorie M. Puckett Trust under Trust Agreement dated November 26, 1996 | 40,000 |
| 13. Patsy A. Paxton | 190,651 |
| 14. T. Joe Head | 100,000 |
Public Offering Price: $[_____] per Share
Underwriting Discount: $[_____] per Share
| 33 |
SCHEDULE B
Free Writing Prospectuses
None.
| 34 |
SCHEDULE C
| Underwriter | Number of Shares |
| B. Riley Securities, Inc. | [________] |
| 35 |
SCHEDULE D
Persons Subject to Lock-Up
| 1. | Jack Blount |
| 2. | Michael Paxton |
| 3. | Anthony LeVecchio |
| 4. | T. Joe Head |
| 5. | Dale Booth |
| 6. | James Gero |
| 7. | Donald Johnston |
| 8. | Mark Paxton |
| 9. | Michael L. & Kathryn Paxton |
| 10. | Mark C. & Julie A. Puckett |
| 11. | Mark A. Paxton, Trustee of The Daniel W. Paxton Trust under Trust Agreement dated November 26, 1996 |
| 12. | Mark A. Paxton, Trustee of The Zachary A. Paxton Trust under Trust Agreement dated November 26, 1996 |
| 13. | Mark A. Paxton, Trustee of The Ellen P. Paxton Trust under Trust Agreement dated November 26, 1996 |
| 14. | Michael L. Paxton and Kathryn A. Paxton, Trustees of The Kyle A. Paxton Trust under Trust Agreement dated November 26, 1996 |
| 15. | Michael L. Paxton and Kathryn A. Paxton, Trustees of The Kristin M. Paxton Trust under Trust Agreement dated November 26, 1996 |
| 16. | Mark C. Puckett and Julie A. Puckett, Trustees of The Jennifer A. Puckett Trust under Trust Agreement dated November 26, 1996 |
| 17. | Mark C. Puckett and Julie A. Puckett, Trustees of The Stephanie L. Puckett Trust under Trust Agreement dated November 26, 1996 |
| 18. | Mark C. Puckett and Julie A. Puckett, Trustees of The Natalie C. Puckett Trust under Trust Agreement dated November 26, 1996 |
| 19. | Mark C. Puckett and Julie A. Puckett, Trustees of The Mallorie M. Puckett Trust under Trust Agreement dated November 26, 1996 |
| 20. | Patsy A. Paxton |
| 36 |
EXHIBIT A
Form of Lock-up Agreement
________, 2020
B. Riley Securities, Inc.
11100 Santa Monica Blvd., Suite 800
Los Angeles, CA 90025
Re: Intrusion Inc. (the “Company”) - Restriction on Stock Sales
This letter agreement is delivered to you pursuant to the Underwriting Agreement (the “Underwriting Agreement”) to be entered into by the Company, [__________], as Selling Stockholders and B. Riley Securities, Inc., as representative of the underwriters (the “Representative”) named therein. Upon the terms and subject to the conditions of the Underwriting Agreement, the Underwriters intend to effect a public offering of shares of Common Stock, $0.01 par value per share, of the Company (the “Shares”), as described in and contemplated by the registration statement of the Company on Form S-1, File No. 333-248398 (the “Registration Statement”), initially filed with the Securities and Exchange Commission on August 25, 2020, as amended (the “Offering”). Terms used herein, but not defined, shall have the meaning ascribed to them in the Underwriting Agreement.
The undersigned recognizes that it is in the best financial interests of the undersigned, as an officer or director, or an owner of Common Stock, options, warrants, performance units or other securities convertible into or exchangeable for Common Stock of the Company (the “Company Securities”), that the undersigned not sell Company Securities in the public market for a reasonable period following the Offering.
The undersigned further recognizes that the Company Securities held by the undersigned are, or may be, subject to certain restrictions on transferability, including those imposed by United States federal securities laws. Notwithstanding these restrictions, the undersigned has agreed to enter into this letter agreement to further assure the Underwriters that the Company Securities of the undersigned, now held or hereafter acquired, will not enter the public market at a time that might impair the underwriting effort.
Therefore, as an inducement to the Underwriters to execute the Underwriting Agreement, the undersigned hereby acknowledges and agrees that the undersigned will not, without the prior written consent of the Representative, (1) offer, sell, contract to sell, pledge, grant any option to purchase or otherwise dispose of (collectively, a “Disposition”) any Company Securities or any securities convertible into or exercisable or exchangeable for, or any rights to purchase or otherwise acquire, any Company Securities held by the undersigned or acquired by the undersigned after the date hereof, or that may be deemed to be beneficially owned by the undersigned (collectively, the “Lock-Up Shares”), pursuant to the Rules and Regulations promulgated under the Securities Act of 1933, as amended (the “Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for a period commencing on the date hereof and ending 120 days after the date of the Underwriting Agreement, inclusive (the “Lock-Up Period”), (2) during the Lock-Up Period, exercise or seek to exercise or effectuate in any manner any rights of any nature that the undersigned has or may have hereafter to require the Company to register under the Act the undersigned’s Disposition of any of the Lock-Up Shares held by the undersigned, (3) otherwise participate as a selling securityholder in any manner in any registration of Lock-Up Shares effected by the Company under the Act, including under the Registration Statement, during the Lock-Up Period, or (4) engage in any hedging, collar (whether or not for any consideration) or other transaction that is designed to or reasonably expected to lead to or result in a Disposition of Lock-Up Shares during the Lock-Up Period, even if such Lock-Up Shares would be disposed of by someone other than such holder, and such prohibited hedging or other transactions would include any short sale or any purchase, sale or grant of any right (including any put or call option or reversal or cancellation thereof) with respect to any Lock-Up Shares or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Lock-Up Shares.
| 37 |
Notwithstanding the agreement not to make any Disposition during the Lock-Up Period, the Underwriters have agreed that the foregoing restrictions shall not apply to:
| (1) | any Disposition or transfer of Lock-Up Shares to a family member, trust, or entity in which more than fifty percent of the voting interests are owned by the undersigned or the undersigned’s immediate family members (as defined in General Instruction A.1(a)(5) to Form S-8 under the Act); |
| (2) | any bona fide gift; |
| (3) | any Disposition or transfer of Lock-Up Shares by will, intestate succession or by operation of law pursuant to a qualified domestic order or in connection with a divorce settlement; |
| (4) | any transfer of Lock-Up Shares solely to cover applicable withholding taxes due upon the vesting of stock-based awards under the Company’s equity compensation plans; |
| (5) | the conversion or exchange of convertible or exchangeable Company Securities outstanding as of the date of this letter agreement; |
| (6) | the forfeiture or surrender to the Company of Lock-Up Shares for failure to achieve vesting requirements associated with such Lock-Up Shares; |
| (7) | Dispositions or forfeiture of Lock-Up Shares of the undersigned or the retention of Lock-Up Shares by the Company (A) to satisfy tax withholding obligations in connection with the exercise of options to purchase Shares, the vesting of restricted stock units or performance shares or the settlement of deferred stock units of the Company or (B) in payment of the exercise or purchase price with respect to the exercise of options to purchase Shares, the vesting of restricted stock units or performance shares or the settlement of deferred stock units of the Company; |
| (8) | the Disposition or transfer of Lock-Up Shares pursuant to a trading plan established pursuant to Rule 10b5-1 under the Exchange Act prior to the date of this letter agreement; |
| (9) | any Disposition or transfer of Lock-Up Shares pursuant to a bona fide third-party tender offer, merger, consolidation or other similar transaction that is approved by the board of directors of the Company, made to all holders of the Company Securities involving a Change of Control (as defined below) (including any support or voting agreement entered into in connection therewith), provided that in the event that the tender offer, merger, consolidation or other such transaction is not completed, the Lock-up Shares of the undersigned shall remain subject to the restrictions contained in this letter agreement; or |
| (10) | distributions, transfers or dispositions of Lock-up Shares (i) to another corporation, partnership, limited liability company, trust or other business entity that is an affiliate (as defined in Rule 405 promulgated under the Securities Act of 1933, as amended) of the undersigned, or to any investment fund or other entity controlled or managed by the undersigned or affiliates of the undersigned (collectively, “Affiliates”), or (ii) as part of a distribution, transfer or disposition without consideration by the undersigned to its stockholders, current or former partners (general or limited), members, beneficiaries, or other equity holders, or to the estates of such stockholders, partners, members, beneficiaries or other equity holders; |
| (11) | the conversion of the outstanding preferred stock of the Company into shares of Common Stock prior to or in connection with the Offering; provided that any such shares of Common Stock received upon such conversion shall be subject to the terms of this letter agreement; |
provided that in the case of any transfer, gift or other disposition pursuant to the immediately preceding clauses (1) or (2), except in the case of a bona fide gift to a charitable organization, the transferee, trust, donee or other recipient agrees to be bound in writing by the terms of this letter agreement prior to such transfer and no filing by any party (donor, donee, transferor or transferee) under the Exchange Act shall be required or shall be voluntarily made in connection with such transfer (other than required filings under Section 16(a) and Section 13(d) or 13(g) of the Exchange Act and any filings made after the expiration of the Lock-Up Period). For purposes of clause (9) above, “Change of Control” shall mean any bona fide third-party tender offer, merger, amalgamation, consolidation or other similar transaction the result of which would be that any “person” (as defined in Section 13(d)(3) of the Exchange Act), or group of persons, other than the Company, becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 of the Exchange Act) of more than 50% of the total voting power of the voting stock of the Company.
| 38 |
Furthermore, the undersigned may, during the Lock-Up Period, sell shares of Common Stock purchased by the undersigned on the open market following the closing of the Offering if and only if (i) such sales are not required to be reported in any public report or filing under the Exchange Act and (ii) the undersigned does not otherwise voluntarily effect any public report or filing regarding such sales.
It is understood that, if the Underwriting Agreement does not become effective on or before October 31, 2020, or if the Underwriting Agreement (other than the provisions thereof that survive termination) shall terminate or be terminated prior to payment for and delivery of the Shares, the obligations under this letter agreement shall automatically terminate.
In furtherance of the foregoing, the Company and its transfer agent and registrar are hereby authorized to decline to make any transfer of Lock-Up Shares if such transfer would constitute a violation or breach of this letter agreement. This letter agreement shall be binding on the undersigned and the respective successors, heirs, personal representatives and assigns of the undersigned. Capitalized terms used but not defined herein have the respective meanings assigned to such terms in the Underwriting Agreement.
Very truly yours,
By: _____________________________
Print Name: _______________________
| 39 |
Exhibit 5.1
|
FAUST LAW GROUP, PLLC P.O. Box 700363 Dallas, Texas 75370 qfaust@faustlawgroup.com
| |
| October 5, 2020 |
Intrusion Inc.
1101 East Arapaho Road, Suite 200
Richardson, Tx 75081
Re: Registration Statement on Form S-1 (No. 333-248398)
Ladies and Gentlemen:
I have acted as counsel to Intrusion Inc., a Delaware corporation (the “Company”), in connection with the Registration Statement on Form S-1, with the File No. 333-248398, as amended (the “Registration Statement”), filed by the Company with the Securities and Exchange Commission (“Commission”) under the Securities Act of 1933, as amended (the “Securities Act”). The Registration Statement relates to the offer and sale of shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”) in the following amounts: 2,000,000 shares (the “Company Shares”) of Common Stock to be sold by the Company; 1,100,000 shares (the “Selling Stockholder Shares”) of Common Stock to be sold by the selling stockholders identified in the Registration Statement; and up to 465,000 shares (the “Overallotment Shares”) of the Common Stock subject to the underwriters’ over-allotment option described in the Registration Statement (collectively, the Company Shares, the Selling Stockholder Shares, and the Overallotment Shares are referred to herein as the “Offered Shares”).
I have examined originals or copies, certified or otherwise identified to my satisfaction, of such documents, corporate records, certificates of public officials and other instruments as I have deemed necessary for the purposes of rendering this opinion, including, without limitation: (a) the Registration Statement, including the exhibits thereto; (b) the Company’s Articles of Incorporation, as amended to date; (c) the Company’s Bylaws, as amended to date; (d) certain resolutions of the board of directors of the Company; (e) the form of underwriting agreement to be executed by the Company and the underwriters substantially in the form filed as Exhibit 1.1 to the Registration Statement; and (f) such other documents, corporate records, and instruments as I have deemed necessary for purposes of rendering the opinion set forth herein. During this my examination, I have assumed without verification the genuineness of all signatures, the authenticity of all documents submitted as originals, the conformity with the originals of all documents submitted copies, and the legal competence of all signatories to such documents. As to questions of fact material to this opinion, I have relied on certificates or comparable documents of public officials and of officers and representatives of the Company
I express no opinion herein as to the laws of any state or jurisdiction other than the laws of the State of Delaware and the federal laws of the United States of America.
It is understood that this opinion is to be used only in connection with the offer and sale of the Shares while the Registration Statement is in effect.
On the basis of the foregoing, and subject to the qualifications, assumptions and limitations stated herein, I am of the opinion that the Offered Shares have been duly authorized and, when the Company Shares and the Overallotment Shares have been duly issued and delivered against payment therefor in accordance with the terms of the Underwriting Agreement, those shares of Common Stock will be validly issued, fully paid and nonassessable.
This opinion is for your benefit in connection with the Registration Statement and may be relied upon by you and by persons entitled to rely upon it pursuant to the applicable provisions of the Securities Act. I hereby consent to the filing of this opinion letter as Exhibit 5.1 to the Registration Statement and to the use of the firm’s name under the caption “Legal Matters” in the Prospectus included in the Registration Statement. In giving such consent, I do not thereby admit that the firm is in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission thereunder. In addition, I give such consent on the condition and understanding that (i) this letter speaks only as of the date hereof and (ii) I have no responsibility or obligation to update this letter, to consider its applicability or correctness to other than its addressee, or to take into account changes in law, facts or any other developments of which I may later become aware.
| Regards | |
| Faust Law Group, PLLC | |
| /s/ Quentin Collin Faust | |
| Quentin Collin Faust |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the inclusion in this Amendment No. 1 to the Registration Statement on Form S-1 of Intrusion Inc. of our report dated March 27, 2020, relating to the consolidated financial statements of Intrusion Inc. as of and for the years ended December 31, 2019 and 2018. We also consent to the reference to our firm under the heading “Experts” in this Amendment No. 1 to the Registration Statement on Form S-1.
/s/ Whitley Penn LLP
Dallas, Texas
October 2, 2020