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Accounting for Stock-Based Compensation

9 Months Ended

Sep. 30, 2021

Share-based Payment Arrangement [Abstract]

3.	Accounting for Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation, which requires that compensation related to all stock-based awards be recognized in the condensed consolidated financial statements. Stock-based compensation cost is valued at fair value at the date of grant, and the grant date fair value is recognized as expense over each award’s requisite service period with a corresponding increase to equity or liability based on the terms of each award and the appropriate accounting treatment under ASC 718.

During 2021, the Company added a new incentive plan (the “2021 Omnibus Incentive Plan”). The purpose of the 2021 Omnibus Incentive Plan is to provide a means through which the Company may attract and retain key personnel and to provide a means whereby directors, officers, employees, consultants and advisors of the Company can acquire and maintain an equity interest in the Company, or be paid incentive compensation, including incentive compensation measured by reference to the value of common stock, thereby strengthening their commitment to the welfare of the Company and aligning their interests with those of the Company’s stockholders.

The aggregate number of shares of Common Stock that may be issued or used for reference purposes or with respect to which Awards may be granted under the 2021 Omnibus Incentive Plan shall not exceed 2,500,000 shares and is subject to any increase or decrease, which shares may be either authorized and unissued Common Stock or Common Stock held in or acquired for the treasury of the Company or both.

During the nine-month period ended September 30, 2021, the Company issued new Restricted Stock Awards (RSAs) under the 2021 Omnibus Incentive Plan in the amount of $70,000 in value of restricted stock to each of the Company’s outside directors, with a valuation to be based on the closing price of the Company’s common stock on the Nasdaq Capital Market (the “Outside Director Awards”). Accordingly, 27,540 shares were granted and are expected to fully vest on the anniversary of the grant date.

The following table summarizes the activities for the Company’s unvested RSAs in Intrusion Inc. stock for the nine months ended September 30, 2021:

Schedule of RSA activity

	Unvested Restricted Stock Units
	Number of Shares		Weighted-Average Grant-Date Fair Value
Unvested as of December 31, 2020	–	$	–
Granted	27,540		12.71
Vested	–		–
Forfeited/canceled	–		–
Unvested as of September 30, 2021	27,540	$	12.71

The Company recognized compensation expense related to its RSAs of $88,000 and $130,000, respectively, during the three- and nine-month periods ended September 30, 2021. As of September 30, 2021, there was $220,000 of unrecognized compensation cost related to unvested RSAs. This amount is expected to be recognized over a weighted-average period of eight months.

During the nine-month period ended September 30, 2021, the Company also granted new option awards under the 2021 Omnibus Incentive Plan to its employees with the option price for each option set at the closing price for the Company’s Common Stock on the Nasdaq Capital Market on the grant date (the “May 2021 Option Awards”). Accordingly, 480,000 options were granted under this plan during the nine-month period ended September 30, 2021.

During the nine months ended September 30, 2021, the Company granted 65,000 stock options under its 2015 Stock Incentive Plan (the “2015 Plan”). The Company did not grant any options under the 2015 Plan during the three months ended September 30, 2021. The Company did not grant any options under its 2005 Stock Incentive Plan (the “2005 Plan”) during the three- and nine-month periods ended September 30, 2021. During the three- and nine-month periods ended September 30, 2020, the Company granted 10,000 and 333,000, respectively, of stock options under these plans to employees or directors.

During the three-month periods ended September 30, 2021 and 2020, 53,500 (24,000 under the 2015 Plan and 29,500 under the 2005 Plan) and 133,000 (30,000 under the 2015 Plan and 103,000 under the 2005 Plan) options were exercised, respectively. During the nine-month periods ended September 30, 2021, and 2020, 256,727 (25,000 under the 2015 Plan and 231,727 under the 2005 Plan) and 319,600 (45,000 under the 2015 Plan and 274,600 under the 2005 Plan) options were exercised, respectively. With recent employee resignations, terminations, and departures, a number of unexercised and unvested options were forfeited resulting in an addition of 420,333 (270,333 under the 2015 Plan and 150,000 under the 2021 Omnibus Incentive Plan) and 505,333 (305,333 under the 2015 Plan and 200,000 under the 2021 Omnibus Incentive Plan) option shares during the three and nine months ended September 30, 2021, respectively, that are now available for re-granting under each respective plan.

During the nine months ended September 30, 2021, the Board of Directors (“Board”) approved a new clause to the 2015 Plan, to accelerate the vesting of any unvested equity grants held by outside directors upon their retirement from the Board. Pursuant to the approval of the acceleration clause, during the second quarter of 2021, the equity awards held by two outside board members who retired from the Board in May 2021 became fully vested. The Company accounts for the acceleration of the related stock options as a modification of the option award under ASC 718. Accordingly, the Company recognized incremental stock compensation expense of approximately $237,000 during the nine-month period ended September 30, 2021.

The following table summarizes the activities for the Company’s stock options for the nine months ended September 30, 2021:

Schedule of stock option activities
	September 30, 2021
	Number of Options		Weighted-Average Exercise Price
Outstanding at beginning of year	1,035,000	$	2.87
Granted	545,000		14.00
Exercised	(256,727)		0.97
Forfeited	(505,333)		9.29
Cancelled	–		–
Expired	(90,000)		2.12
Outstanding at September 30, 2021	727,940	$	7.49
Options exercisable at September 30, 2021	349,610		1.64

The Company recognized compensation (benefit) expense related to its stock option awards of ($26,000) and $100,000, for the three months ended September 30, 2021, and 2020, respectively, and $943,000 and $174,000, for the nine months ended September 30, 2021, and 2020, respectively.

Valuation Assumptions

The fair values of employee and director option awards were estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:


	For Three Months Ended September 30, 2021		For Three Months Ended September 30, 2020		For Nine Months Ended September 30, 2021		For Nine Months Ended September 30, 2020

Weighted average grant date fair value	$	–	$	4.98	$	8.99	$	2.86
Weighted average assumptions used:
Expected dividend yield		–		0.0%		0.0%		0.0%
Risk-free interest rate		–		0.23%		0.80%		0.42%
Expected volatility		–		70.85%		81.81%		76.85%
Expected life (in years)		–		5.0		5.0		6.1

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.