Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
General
The following discussion
and analysis include 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.
During 2022 we spent significant
time and resources on:
· Developing Shield Cloud and Shield End-Point; both released in September 2022;
· Building out our management team.
We feel that these efforts
provide the resources needed to implement our business plan.
In 2022, we raised $15.6
million through the combined issuance of notes payable pursuant to the Securities Purchase Agreement with Streeterville Capital, LLC dated
March 10, 2022, the sale of common stock through our at-the-market-program and a registered direct offering. On December 31, 2022, we
had $3.0 million in cash. If we are not able to obtain additional debt or equity financing on terms and conditions acceptable to us, we
may be unable to implement our business plan or even continue our operations.
Results of Operations
The following table set forth, the results
of operations for the fiscal years ended December 31, 2022, and 2021. Certain historical amounts have been reclassified
to be presented on a comparable basis. For additional details, see Note 14 Correction of Immaterial Errors to the consolidated
financial statements (Part II, Item 8 of this Form 10-K).
Comparison of the years ended December 31, 2022, and December 31,
2021
Year Ended December 31, Year Ended December 31,
Operating expenses:
Gain on lease termination 385 – 5.1% –
Income tax provision – – – –
Net Revenue
Total revenue increased 3.5%
to $7.5 million in 2022 from $7.3 million in 2021. Shield revenues increased $0.7 million year-over-year as a result of the full year
impact of sales from prior year, the expanded use of Shield from existing customers and new customers signed in 2022. The increase in
Shield revenues was partially offset by a decline in consulting revenues of $0.4 million. The decline in consulting revenues resulted
primarily from the loss of a contract in the fourth quarter in which Intrusion’s prime sponsor chose not to renew the final option
year of a contract that had been in place since 2018. This contract represented annual revenue totaling $2.6 million. While the loss of
this contract significantly impacts Intrusion’s top-line revenue, the gross margin on this contract was 14% and, as a result, has
a marginal impact on profitability. We will continue to pursue new consulting opportunities and expect to see an increase in consulting
revenues in 2023.
Concentration of Revenues.
Revenues from sales to various U.S. government entities totaled $5.0 million, or 65.8% of revenues, for the year ended December 31, 2022,
compared to $5.2 million, or 71.3% of revenues, for the same period in 2021. In both 2022 and 2021, sales to three government entities
individually accounted for over 10% of total revenues. Sales to commercial customers totaled $2.6 million or 34.2% of total revenue for
year ended December 31, 2022, compared to $2.1 million or 28.7% of total revenue for the same period in 2021. Two commercial customers
individually accounted for over 10% of total revenues in 2022 compared to one commercial customer in 2021. We have increased our Shield
sales and marketing efforts by expanding our reseller channels. On December 31, 2022, our Shield opportunities comprised a large percentage
of our sales pipeline. We anticipate our concentration of revenues will vary among customers in future periods depending upon the timing
of certain sales, we anticipate that sales to government customers, while comprising a significant portion of our revenues in future periods,
will represent a lower percentage of our revenue base as we gain traction selling our Shield products into commercial markets.
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 which could have a material adverse effect on our financial results. Currently, we are not aware of
any additional 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.
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 for the 12-months
ended December 31, 2022, and 2021 totaled $4.2 million or 55% compared to $3.7 million or 50%. The improved gross profit in 2022 is mostly
due to Shield revenues representing a larger percentage of revenues, 16% compared to 7% in 2021. To the extent Shield revenues become
a larger percentage of revenues, we anticipate we will continue to see favorable growth in gross profit margins.
Sales
and Marketing
Sales and marketing expenses
decreased to $6.5 million in 2022, compared to $10.9 million in 2021. In 2021, with the launch of the INTRUSION Shield commercial
product, we aggressively ramped up selling and marketing costs in anticipation of driving revenue growth from Shield sales. As a result
of our inability to successfully market and gain traction with sales of the Shield On-Premise solution, we implemented cost saving measures
which included changing our go-to-market strategy. We changed from primarily a direct sales effort to a fully indirect channel program
including value added resellers, managed service providers, managed security service providers and strategic partners. This change contributed
to significantly lowering year-over-year spend with reductions in sales and marketing headcount from a high of 40 in mid-2021 to 9 employees
on December 31, 2021, and 2022. Other cost saving measures implemented in late 2021 that carried forward into 2022 included reduced spend
on web marketing, trade shows and other forms of business development and advertising costs. Sales and marketing expenses may vary in
the future.
Research and Development
Research and development
expenses increased to $6.5 million in 2022 compared to $6.3 million in 2021. In 2022, we implemented the Agile methodology of software
development to manage and track our development costs. As a result, we are now able to accurately quantify and capture the cost associated
with each stage of the development life cycle. As required under ASC Topic 350-40 Internal Use Software Accounting-Capitalization, we
began capitalization of costs incurred during the application development stage. In 2022, we recorded $1.4 million of research and development
costs to internal use software. The net increased spend year-over-year, when including amounts capitalized, of $1.6 million related to
costs to design, develop and launch the new Shield Cloud and End-Point solutions as well as costs to support and enhance Shield On-Premise.
General
and Administrative
General and administrative
expenses increased to $7.5 million from $5.9 million in 2021. The increase in general and administrative costs relates primarily to increased
legal defense costs associated with the various legal proceedings as described in more detail in Item 3. Legal Proceedings of this report.
In late 2022 we hired an in-house General Counsel which we believe will help to reduce any remaining expense for the Legal Proceedings
described herein and expense for legal matters going forward. Also, in late 2021 and early 2022, we experienced significant turnover in
our finance department which resulted in higher contract labor and recruiting costs. Insurance expense for our Directors’ and Officers’
insurance policy increased in 2022 when compared to 2021 as a result of the Class Action lawsuits and related claims activity and, increasing
coverage limits for our new policy year.
Interest
Expense
Interest expense increased
to $2.4 million in 2022 compared to $21 thousand for the year ended December 31, 2021. The increase relates to the Streeterville notes
payable entered into in March and June of 2022 and related debt issuance cost amortization as well as interest expense from finance leases.
Interest expense will vary in the future based on our cash flow and borrowing needs.
Interest and Other Income
Other income totaled $2.0
million for the year ended December 31, 2022, compared to $0.7 million for the year ended December 31, 2021. In 2022 we recorded a $2.0
million to Other Income related to an Employee Retention Credit refund due from the federal government as a result of amending 941 returns
for the 2020 and 2021 tax periods. Other income in 2021 related to the forgiveness of our U.S. Small Business Administration (“SBA”) Payroll Protection
Program (“PPP”) loan principal and accrued interest.
Gain on Lease Termination
In 2022 we recorded a gain of $0.4 million relating
to the settlement of our lease abandonment lawsuit.
Income
Taxes
Our effective income tax
rate was 0% in 2022 and 2021 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,
2022, and 2021 were:
Year Ended
Net cash used in operating activities $ (13,190 ) $ (16,557 )
Net cash used in investing activities (1,479 ) (1,148 )
Net cash provided by financing activities 13,584 5,101
Change in cash and cash equivalents $ (1,085 ) $ (12,604 )
Operating Activities
Net cash used in operations
for the year ended December 31, 2022, was ($13.2) million due to a net loss of ($16.2) million offset by adjustments for non-cash
items of $5.0 million which are mostly comprised of depreciation, stock-based compensation and interest related to Streeterville notes,
and changes in working capital consisting primarily of a reduction in trade receivables $0.5 million; an increase in other receivables
relating principally to the remaining Employee Retention Credits (“ERC”) refund outstanding ($1.5) million; an increase in
accounts payable and accrued expenses $0.2 million; and a decrease in operating lease liabilities ($1.0) million.
Net cash used in operations for the year
ended December 31, 2021 was ($16.6) million due primarily to a net loss of ($18.8) million partially offset by the following sources of
cash and non-cash items: $0.4 million 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 $0.2 million decrease in accounts receivable, primarily caused by timing in receipt of receivables
from our customers, a ($0.6) million in gain on the extinguishment of the PPP Loan, $1.3 million in stock-based compensation, $0.8 million
in depreciation and amortization expense and $0.2 in noncash lease costs.
Investing Activities
Net cash used in investing
activities for the year ended December 31, 2022, totaled ($1.5) million and was primarily related to capitalized internal use software
of ($1.2) million for the new Shield Cloud and End Point solutions as well as enhancements to the Shield On-Premise solution and, the
purchase of equipment for use with the Shield On-Premise solution, in the data center and by employees of ($0.3) million.
Net cash used in investing
activities for the year ended December 31, 2022, was ($1.1) million which consisted of the purchases of property and equipment and a domain
name.
Financing Activities
Net cash provided by financing
activities was $13.6 million for the year ended December 31, 2022. Primary sources of cash from financing activities included proceeds
from the issuance of the two Streeterville notes payable, net of issuance costs, equal to $9.3 million (see Note 6 Notes Payable
to the consolidated financial statements in Part II, Item 8 of this Form 10-K), net proceeds received from our registered direct offering
of $4.3 million, net proceeds from issuance of shares from our at-the-market program of $2.0 million, and proceeds received from a private
placement sale of common stock equal to $0.1 million. Funds used in financing activities included ($1.5) million in principal repayments
on the Streeterville notes payable and ($0.6) million payments on equipment financing leases.
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.
Liquidity and Capital Resources
As of December 31, 2022,
we had cash and cash equivalents of $3.0 million, down from $4.1 million as of December 31, 2021; and a working capital deficit of ($7.8)
million on December 31, 2022, compared to $2.1 million in working capital on December 31, 2021. As discussed above in Financing Activities,
our principal sources of cash for funding operations in 2022 was through the issuance of the two Streeterville notes which contributed
$9.3 million, net of issuance costs, and $6.4 million from the sale and issuance of common stock and warrants. On February 23, 2023 we sold a secured promissory note to Streeterville in the aggregate principal amount of
$1.4 million plus certain reimbursed expenses in exchange for $1.3 million. The note provided for weekly principal payments of $50 thousand
until its maturity on March 31, 2023. The note was secured by all employee retention credits (“ERC”), or other funds still
owed or otherwise payable to the Company under the Cares Act. We received payment for the ERC owed to Intrusion on March 13, 2023 and
on March 14, 2023 we repaid in full the secured promissory note with Streeterville.
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. As of December 31,
2022, we have received proceeds of approximately $7.5 million net of fees from the sale of 1,843 thousand shares of our common stock
pursuant to the program.
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 24, 2023, our public float calculated in accordance with General Instruction
I.B.6 of Form S-3 was $28.7 million.
2022 Convertible Notes
Issuance.
We entered into a securities
purchase agreement (the “SPA”) with Streeterville Capital, LLC (“Streeterville”) on March 10, 2022, pursuant to
which Streeterville purchased two unsecured promissory notes with substantively identical terms. Streeterville purchased the first note
on March 10th and the second note on June 29th, each note with an aggregate principal amount of $5.4 million in exchange for
$5.0 million less certain expenses. We received approximately $9.3 million, net of transaction expenses, in connection with these issuances.
The notes mature in September
and December 2023 and, as a result, are reflected as a current liability on our consolidated balance sheet. Beginning six months following
the issuance of each note, Streeterville has the right to redeem up to $0.5 million of the outstanding balance of each 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 or (c) a combination of cash and shares of common stock. If paid in common stock, the number of redemption
shares to be issued is based on a 15% discount to market, as further defined in the note agreements. Through December 2022, Streeterville
made three separate redemption requests totaling $1.5 million, we made the redemption payments in cash. In January 2023, the note agreements
were amended whereby Streeterville waived their right to redemptions through March 31, 2023, in exchange for a fee equal to 3.75% of
the outstanding note balance. This fee was added to the outstanding principal balance to be paid at maturity. As of March 24, 2023, our
total outstanding indebtedness to Streeterville including principal, accrued interest and fees was $10.2 million.
We need to raise additional
funds in the near term to continue operations. We intend to obtain these funds from sales of our common stock through registered direct
offerings and the use of our aftermarket program. 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 U. S. 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.
Capitalized Software Development
We capitalize internally developed software using
the Agile software development methodology which allows us to accurately track, and record costs associated with new software development
and enhancements.
Pursuant to ASC Topic 250-40
Internal Use Software Accounting Capitalization, certain development costs related to our products during the application development
stage are capitalized as part of property and equipment. Costs incurred in the preliminary stages of development are expensed as incurred.
The preliminary stage includes such activities as conceptual formulation of alternatives, evaluation of alternatives, determination of
existence of needed technology, and the final selection of alternatives. Once the application development stage is reached, internal and
external costs are capitalized until the software is complete and ready for its intended use. Capitalized internal use software is amortized
on a straight-line basis over its estimated useful life, which is generally three years.
Revenue Recognition
We recognize product revenue
upon shipment or after meeting certain performance obligations. These products can include hardware, software subscriptions and consulting
services. Most of our sales are from consulting services. We also offer software on a subscription basis subject to software as a service
(”SaaS”). Warranty costs and sales returns have not been material.
We recognize sales of its
consulting services in accordance with FASB ASC Topic 606 whereby revenue from contracts with customers are recognized once the criteria
under the five steps below are met:
i) identification of the contract with a customer;
ii) identification of the performance obligations in the contract;
iii) determination of the transaction price;
v) Recognition of revenue upon satisfaction of a performance obligation.
Consulting services include
reporting 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 product offering and service offering market values are readily determined based on current and
prior stand-alone sales. We defer and recognize maintenance, updates, and support revenue over the term of the contract period, which
is generally one year.
Normal payment terms offered
to customers, distributors and resellers are net 30 days domestically. We do not offer payment terms that extend beyond one year and rarely
extend payment terms beyond our normal terms. If certain customers do not meet our credit standards, we require payment in advance 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 guidance under ASC 606. SaaS arrangements are accounted for as subscription services not arrangements that transfer
a license of intellectual property.
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:
Our contract provides 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 is 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 is 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 estimate 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 approximate their carrying amounts due to the relatively short maturity of these instruments.
Notes payable and financing and operating leases 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).
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, 2022, 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, 2022, 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 2023 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 (PCAOB ID 726) F-1
Consolidated Balance Sheets on December 31, 2022, and 2021 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
3.3(2) Bylaws of the Registrant
4.1(6) Specimen Common Stock Certificate
4.2(19) Description of the Registrant’s Capital Stock
10.7(2)+ Amended and Restated 401(k) Savings Plan of the Registrant
10.8(4)+ Intrusion Inc. 401(k) Savings Plan Summary of Material Modifications
10.9(7)+ Amended 2005 Stock Incentive Plan of the Registrant
10.10(8)+ 2015 Stock Incentive Plan of the Registrant
10.11(9)+ Form of Notice of Grant of Stock Option
10.12(9)+ Form of Stock Option Agreement
10.15(9)+ Form of Automatic Stock Option Agreement
10.16(10)+ Intrusion Inc. 2021 Omnibus Incentive Plan
21(1) 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.
+ Indicates management contract or compensatory plan.
(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 31, 2023 INTRUSION INC.
(Registrant)
By: /s/ Anthony Scott
Anthony Scott
Chief Executive Officer, Director
(Principal Executive Officer)
By: /s/ Kimberly Pinson
Kimberly Pinson
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
/s/ Anthony Scott Chief Executive Officer, Director March 31, 2023
Anthony Scott (Principal Executive Officer)
/s/ Kimberly Pinson Chief Financial Officer March 31, 2023
Kimberly Pinson Principal Financial and Accounting Officer
/s/ Anthony J. LeVecchio Executive Chairman, Director March 31, 2023
Anthony J. LeVecchio
/s/ James F. Gero Director March 31, 2023
James F. Gero
/S/ Katrinka B. McCallum Director March 31, 2023
Katrinka B. McCallum
/S/ Gregory K. Wilson Director March 31, 2023
Gregory K. Wilson
/S/ Jamie M. Schnur Director March 31, 2023
Jamie M. Schnur
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders of
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, 2022 and 2021, and the
related consolidated statements of operations, changes in stockholders’ equity (deficit), 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, 2022 and 2021, 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.
Going Concern
The accompanying financial statements have been prepared assuming that
the entity will continue as a going concern. As discussed in Note 2 to the financial statements, the entity has suffered recurring losses
from operations, negative cash flows from operations, and has a net working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
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.
/s/ Whitley
Penn LLP
We have
served as the Company’s auditor since 2009.
Dallas,
Texas
March 31, 2023
INTRUSION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
December 31
ASSETS
Current Assets:
Cash and cash equivalents $ 3,015 $ 4,100
Prepaid expenses and other assets 1,877 356
Noncurrent Assets:
Property and equipment:
Capitalized software development 1,380 –
Furniture and fixtures 43 43
Leasehold improvements 78 67
Property and equipment, gross 4,366 2,627
Accumulated depreciation and amortization (2,208 ) (1,567 )
Finance leases, right-of-use assets, net 1,048 1,709
Operating leases, right-of-use assets, net 504 808
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts payable, trade $ 1,273 $ 718
Finance lease liabilities, current portion 667 644
Operating lease liabilities, current portion 294 935
Noncurrent Liabilities:
Finance lease liabilities, noncurrent portion 10 673
Operating lease liabilities, noncurrent portion 231 1,250
Total noncurrent liabilities 241 1,923
Commitments and Contingencies – (See Note 7) – –
Stockholders’ Equity (Deficit):
Common stock held in treasury, at cost – 10 shares (362 ) (362 )
Accumulated other comprehensive loss (43 ) (43 )
Total stockholders’ equity (deficit) (4,215 ) 3,919
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) $ 9,275 $ 9,233
The accompanying notes are an integral part of
these consolidated financial statements.
INTRUSION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
Operating Expenses:
Interest Expense (2,359 ) (21 )
Gain on Lease Termination 385 –
Income Tax – –
Net Loss Per Share:
Diluted $ (.82 ) $ (1.05 )
Weighted Average Common Shares Outstanding:
The accompanying notes are an integral part of
these consolidated financial statements.
INTRUSION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY (DEFICIT)
(In thousands)
Dollars Shares Dollars Shares Dollars Dollars Dollars Dollars
Restricted Stock Awards 1 149 – – – (1 ) – –
Stock-based compensation expense – – – – – 1,260 – 1,260
Stock-based compensation expense – – – – – 1,456 – 1,456
Exercise of stock options 1 99 – – – 66 – 67
Restricted stock awards 1 103 – – – (1 ) – –
Registered direct offering proceeds, net of fees 12 1,213 – – – 4,284 – 4,296
Issuance of common stock to terminate operating lease 1 75 – – – 199 – 200
Nonregistered private placement – 32 – – – 100 – 100
The accompanying notes are an integral part of
these consolidated financial statements.
INTRUSION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
Operating Activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,308 780
Bad debt expense – 27
Amortization of debt issuance costs 861 –
Non-cash interest on notes payable 1,463 –
Gain on termination/modification of operating lease (385 ) (17 )
Gain on extinguishment of debt – (635 )
Changes in operating assets and liabilities:
Prepaid expenses and other assets (1,533 ) 7
Accounts payable and accrued expenses 206 218
Operating lease liabilities (1,040 ) (193 )
Net cash used in operating activities (13,190 ) (16,557 )
Investing Activities:
Purchases of property and equipment (307 ) (1,063 )
Capitalized software development (1,172 ) –
Purchases of intangible assets – domain name – (85 )
Net cash used in investing activities (1,479 ) (1,148 )
Financing Activities:
Proceeds from note payable, net of original issue discount 10,000 –
Payments of debt issuance costs (710 ) –
Principal payments on notes payable (1,500 ) –
Reduction of finance lease liability (645 ) (699 )
Proceeds from public stock offering, net of fees 1,985 5,556
Proceeds from registered direct offering, net of fees 4,296 –
Proceeds from non-registered private placement 100 –
Proceeds from stock options exercised 67 244
Tax withholdings related to stock-based compensation awards (9 ) –
Net cash provided by financing activities 13,584 5,101
Net decrease in cash and cash equivalents (1,085 ) (12,604 )
Cash and cash equivalents at beginning of year 4,100 16,704
Cash and cash equivalents at end of year $ 3,015 $ 4,100
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
Cash paid for interest $ 35 $ 20
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for lease termination $ 200 $ –
Assets acquired under a Right of Use (“ROU”) operating lease $ – $ 489
Assets acquired under a ROU finance lease $ 5 $ 1,995
The accompanying notes are an integral part of
these consolidated financial statements.
INTRUSION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Intrusion, Inc. (together with its consolidated
subsidiaries, the “Company,” Intrusion,” “Intrusion Inc.”, “we”, “us”, “our”,
or similar terms) was 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 1200, Plano, Texas 75074, and our telephone number is (972) 234-6400. Our website URL is
www.intrusion.com.
The Company develops, sells, and supports products
that protect any-sized company or government organization by fusing advanced threat intelligence with real-time mitigation to kill cyberattacks
as they occur – including Zero-Days. The Company markets and distributes its solutions through a direct sales force and value-added
resellers. The Company’s 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.