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Item 7.Management’s Discussion

and Analysis of Financial Condition and Results of Operations.

General

The following discussion and analysis includes

information management believes is relevant to understand and assess our consolidated financial condition and results of operations. This

section should be read in conjunction with our consolidated financial statements, accompanying notes and the risk factors contained in

this report.

Overview

Intrusion Inc. offers businesses of all sizes

and industries products and services that leverage across our exclusive threat intelligence database which contains the historical data,

known associations, and reputational behavior of over 8.5 billion IP addresses. After many years of gathering intelligence and providing

our INTRUSION TraceCop and Savant solutions exclusively to government entities, we released our first commercial

product in 2021, the INTRUSION Shield. INTRUSION Shield was designed to allow businesses to incorporate a

Zero Trust, reputation-based security solution into their existing infrastructure and to observe traffic flow and instantly block known

malicious or unknown connections from both entering or exiting a network, making it an ideal solution for protecting from Zero Day and

ransomware attacks.

We spent considerable financial resources and

energy in 2021 completing beta testing and launching the INTRUSION Shield product, and these efforts included an aggressive

ramp up in our expenditures, particularly in the areas of sales and marketing and other general and administrative expenses. Unfortunately,

these efforts at promoting the launch of INTRUSION Shield were not as successful as the Company had anticipated. The significant

expense of the product launch combined with minimal sales of INTRUSION Shield in 2021 has strained the Company’s capital

resources and caused significant doubt about our ability to continue our current operations as a going concern.

We believe that we must expand our sales and marketing

efforts in order for the INTRUSION Shield to achieve marketplace acceptance and to generate revenue for the Company. However,

these efforts depend, in large part, on the success of our channel partners as they market and sell the INTRUSION Shield,

which may not be successful. Further, our new efforts in forging meaningful relationships with seasoned and well positioned strategic

partners may not yield meaningful results, and any and all such efforts will need to be accomplished despite certain public remarks and

comments that have been made on social media and web-based platforms as well as statements and allegations that have, and will continue

to be, that have and will continue to be advanced in the various pleadings that are publicly filed with the courts. We are also expending

significant research and development resources in order to be able to provide INTRUSION Shield to customers in a cloud-based

environment without the requirement for complementary hardware to be deployed and installed on a customer’s information platforms.

If this alternate product deployment is not achieved, achieved at too great an expense, or does not provide the added incentive to retain

and to attract INTRUSION Shield customers, we may not be able to generate sufficient revenue to justify the expense or to

significantly contribute to our revenues.

In order to finance our operations and to continue

as a going concern, it has been necessary for us to raise additional funds through public and private financings. We engaged B. Riley

Securities Inc. to act as sales agent under an at-the-market stock issuance program that begin in August of 2021 and has generated approximately

$5.5 million net of fees from those stock sales. We also engaged in certain cost-cutting measures in the latter portion of 2021, including

measures to reduce head count in our non-performing segments and negotiating with certain contractors and vendors to appropriately align

our expenses with our revenue trends.

And in March of 2022, we generated $4,682,500

in net proceeds from the issuance of the first of two convertible promissory notes that are issuable under a Securities Purchase

Agreement we entered into with Streeterville Capital, LLC with the ability to receive an additional $4,682,500 in net proceeds from

the issuance of the subsequent note upon the satisfaction of certain conditions, including, without limitation, obtaining certain

stockholder approvals at our upcoming annual meeting of stockholders. (For additional details, see Liquidity and Capital Resources:

2022 Convertible Notes Issuance, below)

We have also streamlined and added focused talent

to our sales and marketing departments and recruited and engaged a new President and Chief Executive Officer to spearhead these and other

initiatives to better align expenses with revenue, provide valuable and meaningful cybersecurity offerings to both governmental and commercial

clients, and to attract the needed capital resources for the Company to execute on these initiatives in 2022.

Results of Operations

The following table set forth, the consolidated

statements of operations in dollar amounts and as a percentage of our total revenue for the periods indicated. The period-to-period comparison

of results is not necessarily indicative of results for future periods.

Comparison of the years ended December 31, 2021 and December 31,

2020

Year Ended December 31, Year Ended December 31,

Operating expenses:

Interest and other income 87 11 1.2% 0.1%

Interest expense (21 ) (6 ) -0.3% -0.1%

Gain on the extinguishment of debt 635 – 8.7% –

Income tax provision – – – –

Preferred stock dividends accrued – (79 ) – -1.2%

Net Revenue

Total revenue increased 9.9% to $7.3 million in

2021 from $6.6 million in 2020. The increases in product revenues were primarily due to $0.6 million in revenues from our INTRUSION

Shield product line which was introduced to the market in the first quarter of 2021 and a $0.1 million increase in TraceCop

revenues between the periods. TraceCop revenues were $6.3 million and $6.2 million for the years ended December

31, 2021 and 2020, respectively. No revenue related to INTRUSION Shield was recognized during the same periods in 2020,

as INTRUSION Shield was introduced in 2021. The increases in revenues during these periods were offset by a de minimus decrease

in revenues related to Savant. 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 2021 and 2020 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.

Concentration of

Revenues. Revenues from sales to various U.S. government entities totaled $5.2 million, or 71.3% of revenues, for the year ended December

31, 2021, compared to $5.7 million, or 86.3% of revenues, for the same period in 2020. Sales to commercial customers totaled $2.1 million

or 28.7% of total revenue for year ended December 31, 2021, compared to $0.9 million or 13.7% of total revenue for the same period in

2020. Although we expect our concentration of revenues to vary among customers in future periods depending upon the timing of certain

sales, we anticipate that sales to government customers will continue to account for a significant portion of our revenues in future periods.

Sales to the government present risks in addition to those involved in sales to commercial customers which could adversely affect our

revenues, including, without limitation, potential disruption to appropriation and spending patterns and the government’s reservation

of the right to cancel contracts and purchase orders for its convenience. Although we do not anticipate that any of our revenues with

government customers will be renegotiated, any cancelled or renegotiated government orders 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 and, historically, cancellations or renegotiated orders by government entities have not resulted in a material adverse

effect on our business. One individual commercial customer during the year ended December 31, 2021, individually accounted for over 10.0%

of total revenues. During the year ended December 31, 2020, no individual commercial customer accounted for revenues that were over 10.0%

of total revenues. The Company’s similar product and service offerings are not viewed as individual segments, as its management

analyzes the business as a whole and expenses are not allocated to each product offering.

Gross Profit

Gross profit increased 19.0% to $4.7 million in

2021 from $3.9 million in 2020. As a percentage of revenue, gross profit increased from 59.1% in 2020 to 63.9% in 2021. Gross profit as

a percentage of 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. The

increase in gross profit in 2021 was attributable to the introduction of the new INTRUSION Shield product, which has lower

direct labor costs than our legacy products.

Sales and Marketing

Sales and marketing expenses

increased to $11.9 million or 164.0% of net revenue in 2021, compared to $3.8 million or 57.7% of net revenue in 2020. The increase is

primarily related to an aggressive ramp up in selling and marketing costs in anticipation of increased revenues from sales of our new

INTRUSION Shield commercial product which failed to materialize in 2021. Some of the more significant increases include:

an increase of $3.6 million in labor costs including share-based compensation expense, an increase of $1.6 million in web marketing, trade

shows and other forms of business development advertising costs, an increase of $1.3 million in contract labor and consulting costs and

a $1.3 million increase in general and administrative costs allocated to the sales and marketing departments. These increases were offset

by certain other minor increases and decreases between both periods. In light of our inability to generate significant revenues from sales

of our INTRUSION Shield products in 2021, we determined that these sales costs should be significantly reduced. During the

third and fourth quarter of 2021, we started implementing certain cost saving measures such as a reduction in force as well as negotiations

with certain contractors and vendors to appropriately align our expenses with our revenue trends. Sales and marketing expenses may vary

in the future.

Research and Development

Research and development expenses

increased to $6.3 million or 87.0% of net revenue in 2021 compared to $3.8 million or 57.4% of net revenue in 2020. The increase in research

and development expense was due to increases in direct labor expenses and increases in costs associated with the development and testing

of our legacy and INTRUSION Shield products. As discussed above, during the third quarter of 2021, we started implementing

certain cost saving measures such as a reduction in force as well as negotiations with certain contractors and vendors to appropriately

align our expenses with our revenue trends. Research and development costs are expensed in the period in which they are incurred. Research

and development expenses may vary in the future; mainly dependent on levels of research and development labor expense charged to direct

labor.

General and Administrative

General and administrative expenses increased

to $5.9 million, or 81.0% of revenue in 2021 compared to $2.8 million or 42.5% of revenue in 2020. The increase in general and administrative

costs was also related to an aggressive ramp up in general and administrative costs in anticipation of increased revenues from sales of

our new INTRUSION Shield commercial product which failed to materialize in 2021. Some of the more significant increases

include: Employee related expenses such as direct labor, benefits and recruitment agency fees increased by $2.4 million during the year

ended December 31, 2021, when compared to 2020. Legal costs increased by $1.3 million specifically related to non-recurring projects during

the year ended December 31, 2021, when compared to 2020. Stock compensation expense increased by $0.6 million during 2021, when compared

to 2020. The increase during 2021, was related to options granted to new employees as well as compensation expense recognized during this

period, related to the accelerated vesting of stock options granted to certain members of our Board upon retirement during 2021, when

compared to 2020. These increases were offset by the $1.1 million loss incurred in 2021 related to the abandonment of our old office lease,

as well as a $2.3 million increase related to costs allocated to other departments within the research and development group and the sales

and marketing group during year ended 2021, when compared with 2020. During the year 2021, the Company executed a series of reduction

as part of a larger effort on the Company’s part to reduce expenses and overhead as a result of the challenges the Company anticipates

in meeting its liquidity and cash-flow needs in the near term, as a result of lower-than-expected 2021 revenues from its newly introduced

INTRUSION Shield service offering.

Interest Expense

Interest expense increased to $21,000 or 0.3%

of revenues for the year ended December 31, 2021, compared to $6,000 or 0.1% of revenues for the year ended December 31, 2020. Our

interest expense consists primarily of interest related to finance leases and in 2020 interest specifically related to the SBA PPP

Loan entered in April of 2020. During 2021, we entered multiple finance lease arrangements in the amount of $1.9 million, $1.5

million of which related to new sever systems replacing our old and outdated sever systems and $0.4 million related to equipment

necessary for our INTRUSION Shield commercial product. The PPP Loan along with accrued interest amounts was forgiven

in April 2021 and a gain in the extinguishment of debt was recognized on the consolidated statements of operations. The increase in

Interest Expense for the periods presented above is primarily related to the increase in finance leases between the periods and the

extinguishment of the PPP Loan. Interest expense will vary in the future based on our cash flow and borrowing needs.

Interest and Other Income

Interest and other income were

$87,000 for the year ended December 31, 2021, compared to $11,000 for the year ended December 31, 2020.

Gain on Extinguishment of Debt

Gain on extinguishment of debt increased $0.6

million for the year ended December 31, 2021, compared to no gains or losses on the extinguishment of debt incurred for the year ended

December 31, 2020. This increase due to the forgiveness of our SBA PPP Loan principal and accrued interest entered in April 2020 and forgiven

in April 2021. There were no other gains or losses on the extinguishment of debt incurred for the year ended December 31, 2021.

Income Taxes

Our effective income tax rate was 0% in 2021 and

2020 as valuation allowances have been recorded for the entire amount of the net deferred tax assets due to uncertainty of realization.

Consolidated Statements of Cash Flows

Our cash flows for the years ended December 31,

2021 and 2020 were:

Year Ended

Net cash used in operating activities $ (16,557 ) $ (5,177 )

Net cash used in investing activities (1,148 ) (320 )

Net cash provided by financing activities 5,101 18,867

Change in cash and cash equivalents $ (12,604 ) $ 13,370

Operating Activities

Net cash used in operations for the twelve months

ended December 31, 2021, was $16.6 million due primarily to a net loss of $18.8 million offset by the following sources of cash and non-cash

items: a $383 thousand increase in deferred revenue, primarily due to increases in cash advances from certain customers shifting to making

upfront payments for our services for their contract term of one year and an increased customer base related to our INTRUSION Shield

product, a $172 thousand decrease in accounts receivable, primarily caused by timing in receipt of receivables from our customers, a $25

thousand increase in accounts payable and accrued expense, a $0.6 million in gain on the extinguishment of the PPP Loan, $1.3 million

in stock-based compensation, $780 thousand in depreciation expense and amortization expense, $243 thousand in noncash lease costs and

$17 thousand in other operating activities.

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, due to shorter term upfront fee payments received from our customers, a $258 thousand increase in prepaid

expenses and other assets, driven by increases in prepaid software and insurance costs, 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, primarily related to the timing in receipt of receivables

from our customers, $322 thousand in stock-based compensation, $231 thousand in depreciation expense and amortization expense, and $294

thousand in noncash lease costs.

Investing Activities

Net cash used in investing activities for the

year ended December 31, 2021 was $1.1 million, which was primarily the result of additions to property and equipment specifically related

to $0.4 million related to hardware utilized to administer our INTRUSION Shield product, $0.3 million of hardware and software

equipment utilized in our data center, $0.1 million of in-house software and computer systems for employees, $0.2 million of AI related

computer systems and $0.1 million related to website design and intangible assets – domain name (“www.Cyberwarfare.com”).

Net cash used in investing activities for the

year ended December 31, 2020, was $320 thousand for purchases of property and equipment.

Financing Activities

Net cash provided by financing activities was

$5.1 million for the year ended December 31, 2021, which was primarily the result of net proceeds from our at-the-market program public

offering of $5.6 million, proceeds from exercise of stock options of $0.2 million offset by the payment on principal of finance right-of-use

leases of $0.7 million.

Net cash provided by financing activities was

$18.9 million for the year ended December 31, 2020, 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.

Liquidity and Capital Resources

As of December 31, 2021, we had cash and cash

equivalents of $4.1 million, down from approximately $16.7 million as of December 31, 2020, and working capital of $2.1 million as of

December 31, 2021, compared to $16.2 million as of December 31, 2020. Our principal source of cash for funding operations and growth had

been through cash flows generated from operating activities together with the approximately $5.6 million in net proceeds received from

our at-the-market program during 2021 and the approximately $18.0 million in net proceeds received from our secondary public offering

in 2020.

Current At-The Market Offering.

In August of 2021, we engaged

B. Riley Securities, Inc. to act as sales agent under our at-the-market program, which allows us to potentially sell up to $50.0 million

of our common stock on a delayed or continuous basis through the use of a shelf-registration statement on Form S-3, which we initially

filed on August 5, 2021. The shelf registration became effective on August 16, 2021. As of December 31, 2021, we have received proceeds

of approximately $5.6 million net of fees from the sale of 1,302,033 shares of our common stock pursuant to the program. As of the

date hereof, we have we have received proceeds of approximately $1,000,000 net of fees from the sale of 2478,690 shares of our common

stock pursuant to the program in 2022 to date.

For so long as our public float is less than $75

million, we will be subject to the restrictions set forth in General Instruction I.B.6 to Form S-3, which limit our ability to conduct

primary offerings under a Form S-3 registration statement, including with respect to issuances under our at-the-market program. Under

such limitations, we may not sell, during any 12-month period, securities on Form S-3 having an aggregate market value of more than one-third

of our public float. As of March 9, 2022, our public float calculated in accordance with General Instruction I.B.6 of Form S-3 was

$16.1 million.

2022 Convertible Notes Issuance.

We entered into a securities purchase agreement

(the “SPA”) with Streeterville Capital, LLC (the “Investor”) on March 10, 2022, pursuant to which, among other

things, the Investor (i) purchased an unsecured promissory note (“Note #1”) in the aggregate principal amount totaling $5,350,000

in exchange for $5,000,000 less certain expenses and (ii) agreed to purchase another unsecured promissory note at the Company’s

election (“Note #2” and, together with Note #1, the “Notes”) in aggregate principal amount totaling $5,350,000

in exchange for $5,000,000, with the Company’s election being subject to the Company satisfying, among others, the following conditions

within six months of the issuance of Note #1: (A) obtaining stockholder approval for the issuance of shares of the Company’s common

stock (“Common Stock”) in excess of 19.99% of the outstanding shares of Common Stock in connection with the potential redemption

of the Notes (as described below) and (B) there being no Trigger Event (as defined in the Notes) under Note #1. If Note #2 is issued,

the terms of Note #1 and Note #2 will be substantively identical. The Company received approximately $4.6 million, net of transaction

expenses, in connection with the issuance of Note #1 and intends to use the proceeds from such issuance for general corporate purposes.

Under the SPA, the parties provided customary representations

and warranties to each other. Also, until amounts due under the Notes are paid in full, the Company agreed, among other things, to: (i)

timely make all filings under the Securities Exchange Act of 1934, (ii) ensure the Common Stock continues to be listed on the Nasdaq Stock

Market (“Nasdaq”) or the New York Stock Exchange, (iii) not issue debt securities or certain equity securities where the pricing

of such equity securities is tied to the public trading price of the Common Stock, in each case, without the Investor’s prior consent,

and (iv) offer the Investor the right to purchase up to 10% of future equity and debt securities offerings, subject to certain exceptions

and limitations. The Company also agreed under the SPA to reserve with the Company’s transfer agent 6.5 million shares of Common

Stock for potential issuance under each Note for shares that may be delivered in connection with the redemption right, which reservation

may be increased and decreased in certain circumstances.

The Notes have an interest rate of 7% per annum.

The maturity date of each Note is 18 months from the issuance date of such Note (the “Maturity Date”). Each of the Notes carry

an original issue discount totaling $350,000, which is included in the principal balance of the Note. If the Company elects to prepay

the Notes prior to the Maturity Date, it must pay a premium of (i) 5%, if the prepayment occurs prior to the three-month anniversary of

issuance, (ii) 7.5%, if the prepayment occurs between the three-month anniversary and six-month anniversary of issuance and (iii) 10%

if the prepayment occurs after the six-month anniversary of issuance (in each case, plus the principal, interest, and fees owed as of

the prepayment date).

Beginning on the date that is six (6) months after

the issuance date of the applicable Note, the Noteholder has the right to redeem up to $500,000 of the outstanding balance of such Note

per month. Payments may be made by the Company, generally at the Company’s option, (a) in cash, (b) by paying the redemption amount

in the form of shares of Common Stock with the number of redemption shares being equal to the portion of the applicable redemption amount

divided by the Redemption Conversion Price or (c) a combination of cash and shares of Common Stock. The “Redemption Conversion Price”

shall equal 85% multiplied by the average of the two lowest daily volume weighted average prices per share of the Common Stock during

the 15 trading days immediately preceding the date that the Noteholder delivers notice electing to redeem a portion of the Note. The Company’s

right to satisfy the redemption amount in shares of Common Stock is subject to certain limitations, including (i) there not being any

Equity Conditions Failure (as defined in the Note), (ii) the Noteholder and its affiliates together not owning more than 9.99% of the

outstanding shares of Common Stock, and (iii) for Note #1, the aggregate shares of Common Stock issued upon redemption of Note #1 not

exceeding 19.99% of the outstanding Common Stock unless the Company has obtained stockholder approval under Nasdaq rules for such issuance.

The Notes contain certain Trigger Events that generally,

if uncured within five (5) trading days, may result in an event of default in accordance with the terms of the Notes (such event, an “Event

of Default”). Upon a Trigger Event, the Noteholder may increase the outstanding balance by 15% for certain major Trigger Events

and 5% for all other Trigger Events. Additionally, upon an Event of a Default, the Noteholder may consider the Note immediately due and

payable. Upon an Event of Default, the interest rate may also be increased to the lesser of 18% per annum or the maximum rate permitted

under applicable law.

In order to finance our operations

and to continue as a going concern, we believe it will be necessary for us to raise additional funds through public or private financings,

including through the utilization of our at-the-market program. Based on the current forecast for the year 2022, we believe that we will

have sufficient cash resources to finance our operations and expected capital expenditures through March 18, 2023. While we can provide

no assurances that we will be able to raise additional funds through any future equity or debt financings, the terms of those financings,

if available at all, may be on terms, which are not favorable to us and, in the case of equity financings, will result in dilution to

our stockholders.

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, 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 revenue upon shipment or

after meeting certain performance obligations. Our products can include hardware, perpetual software licenses and data sets. Data set

updates are the majority of our sales. Warranty costs and sales returns have not been material.

We recognize sales of our data sets in accordance

with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 606 whereby revenue from contracts

with customers are recognized once the criteria under the five steps below are met:

i) identify the contract with a customer;

ii) identify the performance obligations in the contract;

iii) determine the transaction price;

iv) allocate the transaction price to the separate performance obligations; and

v) recognize revenue upon satisfaction of a performance obligation.

Data updates are typically done monthly, and revenue

is 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 product offering and service offering market values are readily determined based on current and prior stand-alone sales. We may defer

and recognize maintenance, updates and support revenue over the term of the contract period, which is generally one year.

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 on some of our smaller sized customers, to limit our credit exposure.

Shipping and handling costs are billed to the

customer and included in revenue. Shipping and handling expenses are included in cost of revenue. We have elected to account for shipping

and handling costs as fulfillment costs after the customer obtains control of the goods.

With our newest product, INTRUSION

Shield, we began offering software on a subscription basis. INTRUSION Shield is a hosted arrangement subject

to software as a service (“SaaS”) guidance under ASC 606. SaaS arrangements are accounted for as service obligations, not

arrangements that transfer a license of IP.

We utilize the five-step process,

mentioned above, per FASB ASC Topic 606 to recognize sales and will follow that directive, also, to define revenue items as individual

and distinct. INTRUSION Shield services provided to our customers for a fixed monthly subscription fee include:

The contract provided for

no other services, and our customers have no rebates or return rights, nor are any such rights anticipated to be offered as part of this

service.

We satisfy our performance

obligation when our INTRUSION Shield solution is available to detect and prevent unauthorized access to a client’s

information networks. Revenue should be recognized monthly over the term of the contract. The Company’s standard initial contract

terms automatically renew unless notice is given 30 days before renewal. Upfront payment of fees are deferred and amortized into income

over the period covered by the contract.

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. None of these instruments

are held for trading purposes.

Recent Accounting Pronouncements

See Note 2 to the consolidated financial statements (Part II, Item

8 of this Form 10-K) for further discussion.

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 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, 2021 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, 2021,

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 2022 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.