10-K
1
intrusion_10k-123120.htm
FORM 10-K
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020
OR
For the transition period from to
COMMISSION FILE NUMBER 0-20201
Intrusion Inc.
(Exact name of registrant as specified in
its charter)
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including
area code: (972) 234-6400
Securities registered pursuant
to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A N/A
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, $0.01 par value
(Title of class)
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by
check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report
on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued
its audit report. Yes ☐ No ☒
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
State the aggregate market value of the voting
and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold,
or the average bid and asked price of such common equity, as of June 30, 2020: $14,303,875.
As of February 12, 2021, 17,538,779 shares
of the issuer’s Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive
Proxy Statement filed in connection with the Registrant’s 2021 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Annual Report on Form 10-K.
INTRUSION INC.
INDEX
PART I
Item 1. Business 1
Item 1A. Risk Factors 5
Item 2. Properties 11
Item 3. Legal Proceedings 11
PART II
Item 8. Financial Statements for years ended December 31, 2020 and 2019 18
Item 9A. Controls and Procedures 18
PART III
Item 10. Directors, Executive Officers and Corporate Governance 20
Item 11. Executive Compensation 20
Item 14. Principal Accounting Fees and Services 20
PART IV
Item 15. Exhibits and Financial Statement Schedules 21
Signatures 23
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which statements involve substantial
risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K,
including statements regarding our future results of operations or financial condition; business strategy and plans; the expected
benefits from the roll out of our new products and solutions to an expanding customer base; are forward-looking statements. In
some cases, you can identify forward-looking statements because they contain words such as "anticipate," "believe,"
"contemplate," "continue," "could," "estimate," "expect," "intend,"
"may," "plan," "potential," "predict," "project," "should," "target,"
"will," or "would" or the negative of these words or other similar terms or expressions. Forward-looking statements
contained in this Annual Report on Form 10-K include, but are not limited to, statements about: our future financial performance;
our expectations about our new products and solutions; our ability to attract new customers in new and expanded markets and retain
existing customers; and our ability to manage and implement our current growth strategies.
You should not rely on forward-looking statements
as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily
on our current expectations and projections about future events and trends that we believe may affect our business, financial condition,
and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties,
and other factors described in the section titled "Risk Factors" and elsewhere in this Annual Report on Form 10-K.
In addition, statements that "we believe"
and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available
to us as of the date of this Annual Report on Form 10-K. While we believe that such information provides a reasonable basis for
these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted
an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are
cautioned not to unduly rely on these statements.
The forward-looking statements made in this
Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to
update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date
of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required
by law.
ii
PART I
Item 1.Description of
Business.
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 101 East Park Boulevard, Suite
1300, Plano, Texas 75074, 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..
Our Business
We develop, sell and support products that
protect any-sized company or government organization by fusing advanced threat intelligence with real-time artificial intelligence
to neutralize cyberattacks as they occur – including Zero-Day attacks. We market and distribute our solutions through a direct
sales force and value-added resellers. Our end-user customers include U.S. federal government entities, state and local government
entities, and companies ranging in size from mid-market to large enterprises.
Our Solutions
INTRUSION Shield tm
INTRUSION Shield, our cornerstone
cybersecurity solution is a comprehensive, real-time AI-based Security-as-a-Service that inspects and kills all dangerous network
connections before they can do damage. What makes our approach unique is that it inspects every packet of inbound and outbound
traffic and analyzes the reputation of the IP addresses (source and destination), the domain and ports it is communicating on,
along with many other fields in the packet to neutralize malicious connections.
Most breaches today are caused by malware
free compromises that trigger no alarms in a firewall or endpoint solution. The common denominator is network , which Shield
monitors and analyses, allowing Shield to identify and stop all attacks, even malware-free attacks. Shield’s
capabilities continuously evolve based on constant machine learning and neural networking technology. Unlike traditional industry
approaches that rely heavily on human mitigation and defensive approaches, which malicious actors and nation states have learned
to bypass. Shield’s proprietary architecture isolates and neutralizes malicious traffic and network
flows that existing solutions cannot identify before they harm a corporation or government organization.
Shield is designed as a next
generation Network Detection and Response solution. After 30 years of providing research, analysis, tools and services to the federal
government and enterprise corporations, Intrusion possesses a comprehensive and proprietary data set of petabytes of Internet traffic,
including information about the activities of malicious online actors. Shield integrates this rich TraceCop
data set with artificial intelligence (AI) and Savant real-time process flow technology to provide our customers
with a unique and affordable tool to detect, identify, and neutralize cyberattacks. In particular, the Shield AI
has been specifically trained to identify and stop Zero-Day attacks and ransomware, the most prolific and crippling forms of malware
today.
INTRUSION TraceCop TM
INTRUSION TraceCop is
our big data tool with extensive IP intelligence canvassing the entire Internet. It contains largest repository of reputation information
on known good and known bad active IP addresses (both IPv4 and IPv6). TraceCop contains an inventory of network selectors
and enrichments useful to support forensic investigations. The data contains a history of IPv4 and IPv6 block
allocations and transfers, historical mappings of IP addresses to Autonomous Systems (ASNs) as observed through BGP, and approximately
one billion historically registered domain names and registration context. TraceCop contains tens of billions
of historic DNS resolutions of Fully Qualified Domain Names (FQDNs or hostnames) on each of these domains. Together, this shows
relationships, hosting, and attribution for Internet resources. TraceCopalso contains web server
content surveys of content, such as natural language and topic of the content on hundreds of millions of websites and servers and
OS fingerprints of services showing applications running on an IP. This context allows Shield to assess the use and
purpose of an Internet resource. TraceCopalso contains a history of threat and reputation for each
hostname and IP address over time. All this makes it a very effective network forensics and cybersecurity analysis tool to inform
Shield.
INTRUSION Savant TM
INTRUSION Savant is a network
monitoring solution that leverages the rich data available in TraceCop to identify suspicious traffic in real-time.
Savant uses several original patents to uniquely characterize and record all network flows. Savant
is a network reconnaissance and attack analysis tool used by forensic analysts in the DoD, Federal Government and corporations
with in-house threat research teams. For example, Savant users can create various automated rules to inspect packets
matching (or not) certain criteria such as creating a rule to ensure the Source MAC address field in the Ethernet header and Source
IP address from the IP header are always the same, failing which could indicate MAC or IP Spoofing in progress. Similarly, threat
investigators can create rules using regular expressions by combining multiple fields in the packet headers. Ultimately, the rich
capabilities of Savant provides the real-time analysis that Shield uses to make decisions on whether
or not a packet is malicious.
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 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 the proprietary and comprehensive internet databases we
have developed over the past 24 years.
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.
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 highly 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 little or no 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. We have been continuously collecting the TraceCop data for more than
twenty years, and we believe that none of our current or future competitors will have the ability to provide and reference 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 expect that our 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 and monthly contract, will complement our
customer’s existing cybersecurity processes and third-party solutions. When 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.
Our Customers: Government Sales
Sales to U.S. government customers accounted
for 86.3% of our revenues for the year ended December 31, 2020, compared to 87.4% of our revenue in 2019. Adverse effects from
the proliferation of the COVID-19 virus have resulted in decreased demand by some of our customers for our current product offerings
and cybersecurity solutions, negatively affecting our 2020 revenue levels. 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.
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.
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 Plano (Dallas),
Texas. In addition, we have sales personnel, sales engineers or sales representatives located in several other states.
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.
Foreign Sales. Export sales
did not account for any revenue in 2020 and 2019.
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 2020, 86.3 % 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 five U.S. Government customers through direct and indirect channels; three exceeded 10% of total revenue
individually in 2020. Comparatively, sales to the U.S. Government through direct and indirect channels totaled 87.4% of total revenues
for 2019. Those sales were attributable to ten U.S. Government customers through direct and indirect channels; three exceeded 10%
of total revenue individually in 2019. 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.
Employees
As of December 31, 2020, we employed a
total of 63 full time persons, including 23 in sales, marketing and technical support, 32 in research, development, analysis and
engineering, and 8 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.
Item 1A. Risk Factors
We had a net loss of $6.5 million for the
year ended December 31, 2020, and we have an accumulated deficit of $61.3 million as of December 31, 2020. To improve our financial
performance, we must increase revenue levels.
For the year ended December
31, 2020, we had a net loss of $6.5 million and had an accumulated deficit of approximately $61.3 million as of December 31, 2020,
compared to a net income of $4.5 million for the year ended December 31, 2019 and an accumulated deficit of approximately $54.8
million at December 31, 2019. We need to increase current revenue levels from the sales of our solutions if we are to regain profitability.
If we are unable to increase 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 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 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 Shield solution fails to meet our customers’ needs or to achieve market
acceptance.
Our reputation in the industry
as a provider of entity identification, data mining, and advanced persistent threat detection solutions may be harmed, perhaps
significantly, in the event that 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 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.
The effect of the coronavirus, particularly
in the diversion of time and resources of the federal, state, and local governmental entities which make up a significant concentration
of our customer base, have and may continue to cause material adverse effects on our operations and our financial results.
A significant concentration
of our federal, state, and local governmental customers have been forced to allocate scarce and competing resources and balance
budgetary demands placed upon them as a result of the effects of the coronavirus, mandatory quarantines, decreased travel, interruptions
in workforce populations, scarcity of commodities, and similar economic and operational effects of the virus upon their own constituencies.
Considerable uncertainties continue with respect to the spread and containment of the pandemic, including, without limitation,
the effects of mutations in the virus and the efficacy of vaccination efforts throughout the country and the world. These adverse
effects have resulted in decreased demand by some of our customers for our current product offerings and cybersecurity solutions,
negatively affecting historic revenue levels for the Company. In turn, we are continuing to adapt our operations and the efficiency
of our own staff, employees, and strategic partners, including increased reliance on remote workplace solutions during 2020 and
continuing indefinitely into 2021. A continued decrease in orders for our solutions by our government customers and losses of efficiency
or diversions of resources in our own operations may continue to cause material adverse effect on our operations and financial
results, which may not be offset even with the successful introduction of Shield solution into the marketplace.
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.
Almost all of our existing 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 existing revenues
result from sales of one cybersecurity solution. TraceCop revenues were $6.2 million for the year ended December
31, 2020, compared to $13.4 million for the year ended December 31, 2019. While we anticipate the introduction of our new Shield
solution will reduce 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, 2019 and
2020, we derived 70.3% and 49.3% 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 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 February 12, 2021, we had
17,538,779 shares of common stock outstanding. Upon the exercising of current options exercisable at or below the exercise price
of $4.75, we would have approximately 18,014,116 shares of common stock outstanding, a 2.71% 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 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:
· 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 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 timely 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.
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 such influence may be in conflict to your interests.
As of February 12, 2021, our
executive officers and directors beneficially own approximately 8.7% of our voting power. In addition, other related affiliate
parties control approximately 47.5% 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.
Although we follow our policies regarding related party transactions, 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.
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.
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. Our common stock was traded on the OTCQB until
October 9, 2020, when it began trading on the Nasdaq Capital Market. For the twelve months ended December 31, 2020, the market
price of our common stock fluctuated between $2.70 and $19.09. The market value of our common stock may fluctuate significantly
in the future in response to a number of factors, some 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;
· product or design flaws, product recalls or similar occurrences;
· additions or departures of key personnel;
· sales of common stock in the future; and
Item 2. Properties
Our corporate headquarters are currently
located in 8,331 square feet of space at 101 East Park Blvd, Suite 1300, Plano Texas. This facility houses our corporate administration,
sales and marketing. The lease for this facility extends until September 2023. The Company vacated its previous space in Richardson,
Texas beginning in the fourth quarter of 2020. The lease for this 23,000 square foot facility extends through November 2024 and
is the subject of a lawsuit the Company filed against the landlord on February 16, 2021. We have charged this landlord with breach
of contract, constructive eviction, and we have requested a declaratory judgment relieving us of any further payment obligations
under this lease.
For a variety of reasons, the Company encouraged
its Texas based engineers and analysts to work remotely beginning in fourth quarter 2020. Approximately 13 percent of our security
software research and development and engineering staff are currently working remotely from home offices in California. We have
one small facility in San Marcos, California under a lease and expiring in March 2021. We have one engineer working from home in
New Mexico.
We believe that the existing facilities
will be adequate to meet our operational requirements through 2021, 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.
Item 3. Legal Proceedings.
On February 16, 2021, Intrusion Inc. instituted
legal proceedings in the District Court of Dallas County, Texas, 14th Judicial District against Purple Plaza LLC, the
landlord for the facilities we previously occupied in Richardson, Texas. This lawsuit claims damages for breach of contract for,
among other things, failure to maintain and repair the leased facilities and to provide adequate heating, air conditioning, and
ventilation on the premises, resulting in a constructive eviction. Intrusion is seeking damages in excess of $1,000,000 together
with a declaratory judgment that any of Intrusion’s remaining obligations under the lease have terminated. The landlord filed
a general denial on March 5, 2021.
In addition to this pending litigation,
we are subject to various other legal proceedings and claims that may 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.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters and Business Issuer Purchases of Equity Securities. – Intrusion Equity Accounting
Our common stock trades on the Nasdaq Capital
Market, where it is currently listed under the symbol “INTZ.” As of February 12, 2021, there were approximately 105
registered holders of record of our common stock. Quotations on the OTCQB reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
All stock option plans under which our common
stock is reserved for issuance have previously been approved by our stockholders. The following table provides summary information
as of December 31, 2020 for all of our equity compensation plans (in thousands, except per share data). See Note 9 to our
consolidated financial statements for additional discussion.
Equity compensation plans approved by security holders 1 1,035 2.87 46
Equity compensation plans not approved by security holders – – –
__________________
Item 7.Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
Our Business
We develop, sell and support products that
protect any-sized company or government organization by fusing advanced threat intelligence with real-time artificial intelligence
to neutralize cyberattacks as they occur – including Zero-Day attacks. We market and distribute our solutions through a direct
sales force and value-added resellers. Our end-user customers include U.S. federal government entities, state and local government
entities, and companies ranging in size from mid-market to large enterprises.
Our Solutions
INTRUSION Shield
INTRUSION Shield, our cornerstone
cybersecurity solution is a comprehensive, real-time AI-based Security-as-a-Service that inspects and kills all dangerous network
connections before they can do damage. What makes our approach unique is that it inspects every packet of inbound and outbound
traffic and analyzes the reputation of the IP addresses (source and destination), the domain and ports it is communicating on,
along with many other fields in the packet to neutralize malicious connections.
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, which
Shield monitors and analyses, allowing Shield to identify and stop all attacks, even malware-free attacks.
Shield’s capabilities continuously evolve based on constant machine learning and neural networking technology.
Unlike traditional industry approaches that rely heavily on human mitigation and defensive approaches, which malicious actors and
nation states have learned to bypass, Shield’s proprietary architecture isolates and neutralizes malicious
traffic and network flows that existing solutions cannot identify before they harm a corporation or government organization.
Shield is designed as a next
generation Network Detection and Response solution. After 30 years of providing research, analysis, tools and services to the federal