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
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
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
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.
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.
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 uncollateralized,
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. Financing leases and PPP loan approximate fair value as they bear market rates
of interest.
Results of Operations
The following tables set forth, for the
periods indicated, certain financial data as a percentage of net revenue.
Year Ended December 31,
Total cost of revenue 40.9 39.2
Operating expenses:
Sales and marketing 57.7 9.5
Research and development 57.4 9.6
General and administrative 42.5 8.7
Operating income (loss) (98.5 ) 33.0
Interest expense (0.1 ) (0.3 )
Interest income 0.1 –
Income (loss) from operations before income taxes (98.5 ) 32.7
Income tax provision – –
Preferred stock dividends accrued (1.2 ) (1.0 )
Net income (loss) attributable to common stockholders (99.7 )% 31.7 %
2020 compared with 2019
Net Revenue
Total revenue decreased 51.5% to $6.6 million
in 2020 from $13.6 million in 2019. We did not meet sales projections for our TraceCop product line. We expect our
product revenues to increase in the future if we can increase sales to existing customers and add new customers.
There were no export sales in 2020 and 2019
primarily due to our focus on domestic revenue sales. Sales of our products internationally may be subject to currency exchange
risk, which may cause our products to effectively increase in price, if the exchange rate moves significantly and the dollar gains
value over the foreign currency.
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 decreased 52.9% to $3.9 million
in 2020 from $8.3 million in 2019. As a percentage of net revenue, gross profit decreased from 60.8% in 2019 to 59.1% in 2020.
Gross profit as a percentage of revenue, decreased in 2020 compared to 2019 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 increased to
$3.8 million or 57.7% of net revenue in 2020, compared to $1.3 million or 9.5% of net revenue in 2019. The increase in sales and
marketing expense was primarily two activities: building, training, and preparing a sales department to sell our new commercial
product in 2021; and applying a dedicated $1.2 million marketing and promotion budget. Sales and marketing expenses may vary in
the future. We expect sales and marketing expenses to increase if net revenue levels increase in 2021.
Research and Development
Research and development expenses increased
to $3.8 million or 57.4% of net revenue in 2020 compared to $1.3 million or 9.6% of net revenue in 2019. 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 if we are able to increase net
revenue levels in 2021. Research and development expense levels may fluctuate due to labor expense shifting to direct labor.
General and Administrative
General and administrative expenses increased
to $2.8 million, or 42.5% of net revenue in 2020 compared to $1.2 million or 8.7% of net revenue in 2019. This was primarily a
result of a non-cash write off for a $1.1 million abandoned operating lease asset. Other contributing expenses were related to
increases in administrative and Human Resources. Excluding the $1.1 million non-cash write off for the abandonment of prior office
lease, we expect general and administration expenses to remain constant but increase if net revenue levels increase in 2021.
Interest Expense
Interest expense decreased to $6 thousand
in 2020, compared to $46 thousand in 2019. Interest expense decreased due to a combination of a zero balance under 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”) and declining balances in financial leases and remained steady for operating leases. Interest expense will
vary in the future based on our cash flow and borrowing needs.
Interest Income
Interest income earned on bank deposits
was $11 thousand in 2020 compared to $4 thousand in 2019.
Income Taxes
Our effective income tax rate was 0% in
2020 and 2019 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,
2020 was $16.7 million of cash and cash equivalents. As of December 31, 2020, we did not hold investments with a stated maturity
beyond one year. Working capital at December 31, 2020 was $16.2 million, while at December 31, 2019, it was $3.1 million.
Net cash used in operations for the twelve
months ended December 31, 2020, was $5.2 million due primarily to a net loss of $6.5 million and the following uses of cash: a
$339 thousand decrease in deferred revenue, a $258 thousand increase in prepaid expenses and other assets, and a $334 thousand
decrease in accounts payable and accrued expenses. This was partially offset by these sources of cash and non-cash items: a $1.1
million non-cash write-off for an abandoned operating lease asset, a $333 thousand decrease in accounts receivable, $322 thousand
in stock-based compensation, $231 thousand in depreciation expense and amortization expense, and $294 thousand in noncash lease
costs.
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, $184 thousand
in depreciation expense and amortization expense, $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. 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
2020 was $320 thousand for purchases of property and equipment. Net cash used in investing activities in 2019 was $260 thousand
for purchases of property and equipment.
Net cash provided by financing activities
in 2020 was $18.9 million with proceeds of $18.2 million from a stock offering, $629 thousand from a PPP loan, and proceeds from
exercise of stock options of $209 thousand. This was directly offset by the following uses of cash: payments for preferred stock
dividends of $99 thousand and payment on principal of finance right-of-use leases of $43 thousand. 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 financing leases. This was directly offset by a provision of cash
of $239 thousand from the exercise of stock options.
At December 31, 2020, we had a commitment
of $21 thousand for future finance lease liabilities. Operating lease commitments of $2.6 million are detailed in the Contractual
Obligations section below. At December 31, 2019, we had a commitment of $66 thousand for future finance lease liabilities,
while operating lease commitments were $1.8 million. During 2020, we funded our operations through the use of available cash and
cash equivalents.
As of December 31, 2020, we had cash and
cash equivalents of approximately $16.7 million, up from approximately $3.3 million as of December 31, 2019. We generated a net
loss of $6.5 million for the year ended December 31, 2020 compared to a net income of $4.5 million for the year ended December
31, 2019.
We expect to fund our operations through
anticipated Company profits together with the approximately $18 million in net proceeds we received from our Secondary Public Offering,
which we believe will be sufficient to finance our operations, the additional expenses of marketing, promoting, and selling our
new Shield solution and the development of its follow-on solutions, as well as other expected capital expenditures for the next
twelve months.
We may explore the possible acquisitions
of businesses, products and technologies that are complementary to our existing business. We are continuing to identify and prioritize
additional security technologies, which we may wish to develop, either internally or through the licensing, or acquisition of products
from third parties. While we may engage from time to time in discussions with respect to potential acquisitions, there can be no
assurances that any such acquisitions will be made or that we will be able to successfully integrate any acquired business. In
order to finance such acquisitions and working capital it may be necessary for us to raise additional funds through public or private
financings. 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.
Contractual Obligations
The following table sets forth certain information
concerning the future contractual obligations under our leases at December 31, 2020. We had no other significant contractual
obligations at December 31, 2020.
Future minimum lease obligations consisted of the following
at December 31, 2020 (in thousands):
Operating Finance
Period ending December 31, ROU Leases ROU Leases Total
Less Interest* (230 ) –
*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.
Off-Balance Sheet Arrangements
As of December 31, 2020, we did not
have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
Recent Accounting Pronouncements
See Note 2 Consolidated Financial Statements
Item 8.Financial Statements
The information required by this Item 8 begins on page F-1
of this Annual Report on Form 10-K.
Item 9A.Controls and
Procedures
Evaluation of Effectiveness of Disclosure Controls and Procedures
The Company’s management, under the
supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation
of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the
Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be
disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and
communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate,
to allow timely decisions regarding required disclosure.
Management Report on Internal Control over Financial Reporting
The Company’s management is responsible
for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of the Company’s financial
reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted
accounting principles.
The Company’s management, under the
supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer , conducted an evaluation
of the effectiveness of the Company’s internal control over financial reporting based on criteria established in 2013
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Management’s evaluation included an assessment of elements such as the design and operating effectiveness of key financial
reporting controls, process documentation, accounting policies, and the Company’s overall control environment. Based on its
evaluation, management concluded that the Company’s internal control over financial reporting was effective as of the year
ended December 31, 2020 to provide reasonable assurance regarding the reliability of the Company’s financial reporting
and the preparation of consolidated financial statements for external reporting purposes in accordance with U.S. generally accepted
accounting principles. The Company reviewed the results of management’s assessment with the Audit Committee of the Board
of Directors.
This Annual Report does not include an attestation
report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s
report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities
and Exchange Commission that permit the Company to provide only management’s report in this Annual Report. This report shall
not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section,
and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of
any general incorporation language in such filing.
Inherent Limitations on Effectiveness of Controls
The Company’s management, including
our Chief Executive Officer and our Chief Financial Officer, does not expect that the Company’s disclosure controls or internal
control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The
design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if
any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may
become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31,
2020, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
PART III
Certain information required by Part III
is omitted from this Form 10-K because we will file a definitive Proxy Statement for our 2021 annual meeting of stockholders
pursuant to Regulation 14A (the “Proxy Statement”) no later than 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K, and certain information to be included therein is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance.
The information called for by this item
is incorporated herein by reference to the Proxy Statement.
Item 11. Executive Compensation.
The information called for by this item
is incorporated herein by reference to the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information called for by this item
is incorporated herein by reference to the Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information called for by this item
is incorporated herein by reference to the Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information called for by this item
is incorporated herein by reference to the Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) 1. Consolidated
Financial Statements.
The following consolidated financial statements
of Intrusion Inc. and subsidiaries, are submitted as a separate section of this report (See F-pages):
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets at December 31, 2020 and 2019 F-2
Notes to Consolidated Financial Statements F-6
Exhibit Number Description of Exhibit
3.1(3) Restated Certificate of Incorporation of the Registrant
3.2(5) Certificate of Amendment to Certificate of Incorporation of Registrant
3.6(2) Bylaws of the Registrant
4.1(6) Specimen Common Stock Certificate
10.5(2) Amended and Restated 401(k) Savings Plan of the Registrant
10.6(4) Intrusion Inc. 401(k) Savings Plan Summary of Material Modifications
10.7(7) Amended 2005 Stock Incentive Plan of the Registrant
10.8(9) 2015 Stock Incentive Plan of the Registrant
10.9(10) Form of Notice of Grant of Stock Option
10.10(10) Form of Stock Option Agreement
10.13(10) Form of Automatic Stock Option Agreement
21(8) List of Subsidiaries of Registrant
101.INS(1) XBRL Instance Document.
101.SCH(1) XBRL Taxonomy Extension Schema Document.
101.CAL(1) XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF(1) XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB(1) XBRL Taxonomy Extension Label Linkbase Document.
101.PRE(1) XBRL Taxonomy Extension Presentation Linkbase Document.
(1) Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March 9, 2021 INTRUSION INC.
(Registrant)
By: /s/ Jack B. Blount
Jack B. Blount
President, Chief Executive Officer, Director
(Principal Executive Officer)
By: /s/ B. Franklin Byrd
B. Franklin Byrd
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature Title Date
Jack B. Blount (Principal Executive Officer)
/s/ B. Franklin Byrd Chief Financial Officer March 9, 2021
B. Franklin Byrd Principal Financial and Accounting Officer
/s/ Anthony LeVecchio Chairman, Director March 9, 2021
Anthony LeVecchio
/s/ T. Joe Head Vice Chairman, Vice President, Director March 9, 2021
T. Joe Head
/s/ James F. Gero Director March 9, 2021
James F. Gero
/s/ Dale Booth Director March 9, 2021
Dale Booth
/s/ Donald M. Johnston Director March 9, 2021
Donald M. Johnston /S/ Katrinka B. McCallum Director March 9, 2021
Katrinka B. McCallum
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, 2020 and 2019, and the related consolidated statements of operations, changes in
stockholders’ equity, 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, 2020 and 2019, 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.
Critical Audit Matters
Critical audit matters are matters arising
from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee
and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. We determined that there are no critical audit matters.
We have served as the Company’s auditor
since 2009.
/s/ Whitley Penn LLP
Plano, Texas
March 9, 2021
INTRUSION INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
December 31,
Assets
Current Assets:
Property and Equipment:
Furniture and fixtures 43 43
Leasehold improvements 67 63
Accumulated depreciation and amortization (1,097 ) (909 )
Finance leases, right-of-use assets, net 20 62
Operating leases, right-of-use assets, net 1,010 1,348
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable, trade $ 408 $ 252
Dividends payable – 20
Finance leases liabilities, current portion 21 43
Operating leases liabilities, current portion 487 284
PPP loan payable, current portion 421 –
Finance leases liability, noncurrent portion – 21
PPP loan payable, noncurrent portion 212 –
Operating leases liability, noncurrent portion 1,867 1,315
Commitments and contingencies
Stockholders’ Equity:
Preferred stock, $0.01 par value:
Authorized shares — 5,000
Common stock, $0.01 par value:
Authorized shares — 80,000
Common stock held in treasury, at cost—10 shares (362 ) (362 )
Accumulated other comprehensive loss (43 ) (43 )
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 19,882 $ 6,835
See accompanying notes.
INTRUSION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
Operating expenses:
Interest expense (6 ) (46 )
Interest income 11 4
Income (loss) from operations before income taxes (6,518 ) 4,465
Income tax provision – –
Preferred stock dividends accrued (79 ) (139 )
Net income (loss) attributable to common stockholders $ (6,597 ) $ 4,326
Weighted average common shares outstanding:
See accompanying notes.
INTRUSION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
(In thousands)
Year Ended December 31,
NUMBER OF PREFERRED SHARES—ISSUED AND OUTSTANDING
Balance, beginning of year 949 949
Conversion of preferred shares to common shares (949 ) –
Balance, end of year – 949
PREFERRED STOCK
Balance, beginning of year $ 1,843 $ 1,843
Conversion of preferred shares to common shares (1,843 ) –
Balance, end of year $ – $ 1,843
NUMBER OF COMMON SHARES—ISSUED
Exercise of stock options 343 293
Conversion of preferred shares to common shares 1,068 –
Public offering 2,465 –
COMMON STOCK
Balance, beginning of year $ 136 $ 133
Exercise of stock options 3 3
Conversion of preferred shares to common shares 10 –
Public offering 25 –
Balance, end of year $ 174 $ 136
TREASURY SHARES
Balance, beginning of year and end of year $ (362 ) $ (362 )
ADDITIONAL PAID-IN-CAPITAL
Stock-based compensation 322 47
Exercise of stock options 206 236
Conversion of preferred shares to common shares 1,833 –
ACCUMULATED DEFICIT
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of year and end of year $ (43 ) $ (43 )
See accompanying notes.
INTRUSION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
Operating Activities:
Depreciation and amortization 231 184
Stock-based compensation 322 47
Loss on abandoned real estate operating lease 1,092 –
Penalties and waived penalties on dividends – 6
Changes in operating assets and liabilities:
Prepaid expenses and other assets (258 ) (61 )
Accounts payable and accrued expenses (334 ) (496 )
Net cash provided by (used in) operating activities (5,177 ) 4,290
Investing Activities:
Purchases of property and equipment (320 ) (260 )
Net cash used in investing activities (320 ) (260 )
Financing Activities:
Payments on loan from officer – (1,815 )
Proceeds from PPP loan payable 629 –
Payments of dividends (99 ) (714 )
Principal payments on financing lease equipment (43 ) (58 )
Proceeds from public stock offering 18,171 –
Proceeds from stock options exercised 209 239
Net cash provided by (used in) financing activities 18,867 (2,348 )
Net increase in cash and cash equivalents 13,370 1,682
Cash and cash equivalents at beginning of year 3,334 1,652
Cash and cash equivalents at end of year $ 16,704 $ 3,334
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on leased assets $ 2 $ 4
Interest paid on loan from officer $ – $ 513
Income taxes paid $ – $ –
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES:
Preferred stock dividends accrued $ 79 $ 139
Conversion of preferred shares to common shares $ 1,843 $ –
See accompanying notes.
INTRUSION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of 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 kill cyberattacks as they occur – including Zero-Days. 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.
References to the “Company”,
“we”, “us”, “our”, “Intrusion” or “Intrusion Inc.” refer to Intrusion Inc.
and its subsidiaries. SavantTM and TraceCopTM are registered trademarks of Intrusion Inc.
As of December 31, 2020, we had cash and
cash equivalents of approximately $16,704,000, up from approximately $3,334,000 as of December 31, 2019. We generated a net loss
of $6,518,000 for the year ended December 31, 2020 compared to a net income of $4,465,000 for the year ended December 31, 2019.
Based on the current forecast for the year 2021, we believe that we will have sufficient cash resources to finance our operations
and expected capital expenditures through March 31, 2022. As of October 24, 2019, our funding available terminated under 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”). 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.
2. Summary of Significant Accounting Policies
Principles of Consolidation
Our consolidated financial statements include
our accounts and those of our wholly owned subsidiaries, and are prepared in accordance with accounting principles generally accepted
in the United States of America. 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. As of December 31, 2020, the
Company had approximately $16,204,000 of uninsured cash balances in excess of Federal Depository Insurance Company limits.
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 creditworthiness, 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,
2020 and 2019.
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