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Notes Payable
 3 Months Ended
Mar. 31, 2023
Debt Disclosure [Abstract]  
Notes Payable

 

4. Notes Payable

 

On March 10, 2022, Intrusion Inc. entered into an unsecured loan agreement with Streeterville Capital, LLC whereby the Company could draw up to $10.0 million in two separate tranches of $5.0 million through the issuance of two separate promissory notes of $5.4 million each, with an initial interest rate of 7%, subject to some increases in the case of, among other things, an event of default. On March 10, 2022, the Company received $4.6 million in net funds from the first tranche (Note 1) pursuant to a promissory note executed contemporaneously with the execution of the loan agreement. On June 29, 2022, the Company received an additional $4.7 million in net funds from the second tranche (Note 2) pursuant to a promissory note. Each note has an 18-month maturity, may be prepaid subject to varying prepayment premiums, and may be redeemed at any time after six months into the term of such note in amounts up to $0.5 million per calendar month upon the noteholder’s election. The Company has the option, in its sole discretion, to satisfy any redemption demands in cash or shares of its common stock that will be issued in an amount equal to the dollar amount of the redemption demand divided by the number that represents 85% of the average of the two lowest daily volume weighted average prices of common stock over a fifteen-day trailing period. This option to settle in shares at a 15% discount is deemed a beneficial conversion feature (“BCF”). Any remaining indebtedness at maturity is payable in cash.

 

The loan agreement and accompanying notes are subject to standard and customary events of default, including, without limitation, the Company’s continued listing on the Nasdaq or New York Stock Exchange. While the notes remain outstanding, the Company will be subject to certain conditions and restrictions, including, without limitation the following: the noteholder’s right to consent to any future variable rate transactions (excluding ATMs, equity offerings, or private placements without market adjustable features) and any debt (excluding bank loans, lines of credit, mortgagees, leases, or asset backed loans); the noteholder’s right to participate in any debt or equity financings, excluding (ATMs, loans, lines of credit, mortgagees, leases, or asset backed loans); a prohibition on the Company’s ability to extend or enter into any agreement restricting its ability to issue common stock under the notes; as well as a prohibition on its ability to permit any other lender to participate alongside the noteholder via any debt financing structures.

 

The Company evaluated the Note 1 and Note 2 in accordance with ASC 480 “Distinguishing Liabilities from Equity” because the promissory note (1) embodies an option redemption obligation, (2) may require the Company to settle the optional redemption obligation by issuing a variable number of its common shares, and (3) is based solely on a fixed monetary amount known at inception.

The lender does not benefit if the fair value of the Company’s Common Stock increases and does not bear the risk that the fair value of the Company’s Common Stock might decrease. In accordance with ASC 480, the promissory notes have been recorded as a liability and the company is recording interest expense over the term of the promissory note is being recorded using the interest method from ASC 835-30, to accrete the carrying amount of the promissory note up to the redemption common stock settlement amount.

 

On March 10, 2022, the Company recorded debt issue costs of $0.7 million to be amortized over the 18-month term associated with the Note 1. On June 29, 2022, the Company recorded debt issue costs of $0.7 million to be amortized over the 18-month term associated with the Note 2. As of March 31, 2023, the balance of unamortized debt issuance costs for both notes were $0.6 million. For the period ended March 31, 2023, and 2022, the Company recorded $0.3 million and $37 thousand for amortization of the debt issue costs, respectively, related to both notes to interest expense in the accompanying Condensed Consolidated Statements of Operations.

 

For the period ended March 31, 2023, and 2022, the Company recorded $0.3 million and $23 thousand, respectively of interest expense in the accompanying Condensed Consolidated Statements of Operations. The interest recorded associated with the unsecured promissory notes increases the associated notes payable on the accompanying Condensed Consolidated Balance Sheets. The balances on the notes payable mature in September and December 2023. The effective interest rate of the notes payable including amortization of the debt issuance costs and accretion of BCF is 23.9%.

 

On January 11, 2023, the Company amended the promissory notes issued pursuant to the unsecured loan agreement with Streeterville Capital, LLC whereby the noteholder agreed to waive their redemption rights through March 31, 2023, in exchange for a fee equal to 3.75% of the outstanding principal balance which increased the outstanding indebtedness due at maturity with Streeterville Capital, LLC and increased the associated debt issuance costs recorded on the Condensed Consolidated Balance Sheets by $0.4 million. Subsequent to March 31, 2023, no redemptions have been made to date.