4. Revenue Recognition

3 Months Ended

Mar. 31, 2021

Revenue from Contract with Customer [Abstract]

Revenue Recognition

4. 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. Most of our sales are data set updates. 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 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.

With our newest product, Shield, Intrusion began offering software on a subscription basis. Shield is a hosted arrangement subject to software as a service (“SaaS”) guidance under ASC 606. SaaS arrangements are accounted for as service obligations, not arrangements that transfer a license of IP.

We use the five-step process, mentioned above, per FASB ASC Topic 606 to recognize sales. We will follow that directive, also, to define revenue items as individual and distinct. Shield services include:

· Intrusion’s proprietary software and database to detect and prevent unauthorized access to its clients’ information networks.

· All software, associated media, printed materials, data, files, online documentation, and any equipment that Intrusion provides for customers to access the Intrusion Shield.

· Tech support, post contract customer support (PCS) includes daily program releases or corrections provided by Intrusion without additional charge.

· The contract provides for no other services – no setup fees, consulting, training, or maintenance.

The contract price is stated at $20 per authorized user per month. There are no rebates or return rights, nor are any anticipated. The contract does not provide a renewal rate. Intrusion anticipates that upon renewal the contract rates will remain the same.

Intrusion satisfies its performance obligation when the Shield solution is available to detect and prevent unauthorized access to its client’s information networks. Revenue should be recognized monthly over the term of the contract. Shield contracts can range from a 1-month term to 3-years. Initial contract terms of 1 year or 3 years automatically renew unless notice is given 30 days before renewal, and there is no early termination for convenience. Upfront payment of fees should be deferred and amortized into income over the period covered by the contract.

Contract assets represent contract billings for sales per contracts with customers and are classified as current. Our contract assets include our accounts receivables. On March 31, 2021, the Company had contract assets balance of $1,305,000. At December 31, 2020, the Company had contract assets balance of $1,233,000.

Contract liabilities consist of cash payments in advance of the Company satisfying performance obligations and recognizing revenue. The Company currently classifies deferred revenue as a contract liability. At March 31, 2021, the Company had contract liabilities balance of $146,000 At December 31, 2020, the Company had contract liabilities balance of $177,000.