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 the Company’s exclusive threat intelligence database of over 8.5
billion IP addresses and domain names. 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 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.
Much of 2022 was spent improving
the INTRUSION Shield On-Premise performance and developing the Shield Cloud and End-Point solutions, both
of which were released in September 2022. During 2023, our primary focus has been building out our sales reseller and channel platform
and working with those partners to 1) increase our sales pipeline and 2) progress customer prospects, leads and opportunities through
the sales lifecycle. Gaining traction with our Shield solutions has taken longer than initially anticipated. We feel that
the progress made with our reseller and channel community along with refining our product messaging will help to shorten the sales cycle
and grow revenues in future periods.
As discussed in more detail below,
on December 31, 2023, we had $0.1 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, fund our liquidity needs or even continue our operations.
Results of Operations
Comparison of the Years ended December 31, 2023, and December 31, 2022
Year Ended December 31, Change
Operating Expenses:
Income Tax – – – –
Revenues
Total revenue decreased $1.9
million or 25.5% to $5.6 million in 2023 from $7.5 million in 2022. Consulting revenues decreased $2.3 million primarily resulting from
the loss of a contract in the fourth quarter 2022 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 impacted Intrusion’s top-line revenue, the gross margin on this contract was 14% and, as a result, had a
marginal impact on profitability. We are continuing to pursue new consulting opportunities and expect to see an increase in consulting
revenues in 2024. The decline in consulting revenues was partially offset by an increase of $0.4 million in Shield revenues
as a result of the expanded use of Shield from existing customers and new customers signed in 2023.
We announced a $5 million
multi-year Shield award in October 2023. The rollout of the Shield services to this customer has been delayed
due to factors outside of our control, we expect this project to be back on track beginning in the second quarter 2024. Additionally,
we were informed by our largest Shield customer that they will not be renewing their contract. This customer was one of
the original users of the product and had a non-standard custom implementation of INTRUSION Shield that is no longer supported.
This non-renewal will impact revenues beginning in the second quarter 2024. We are beginning to see traction with our Shield
products with multiple Shield sales that, essentially, are paid proof of values which have the potential for significant
Shield sales growth beyond the initial engagement. On December 31, 2023, our Shield opportunities comprised
a large percentage of our sales pipeline.
Concentration of Revenues.
Revenues from sales to various
U.S. government entities totaled $2.6 million, or 46.2% of revenues, for the year ended December 31, 2023, compared to $5.0 million, or
65.8% of revenues, for the same period in 2022. In 2023 we had two government entities that individually accounted for over 10% of our
revenues compared to three in 2022. Sales to commercial customers totaled $3.0 million or 53.8% of total revenue for year ended December
31, 2023, compared to $2.6 million or 34.2% of total revenue for the same period in 2022. Two commercial customers individually accounted
for over 10% of total revenues in both 2023 and 2022. We have increased our Shield sales and marketing efforts by expanding
our reseller channels. 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. Fourth quarter 2023 revenues declined 7% sequentially from third quarter 2023 primarily due to the
continuing resolution and the absence of an approved federal budget, which has resulted in many new spending decisions from government
customers being delayed. Specifically, a long-standing Department of Defense contract has not been funded for the 2024 government fiscal
year, this resulted in lower consulting revenues in the fourth quarter and has also impacted first quarter 2024 revenues. 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, 2023, and 2022 totaled $4.4 million or 77.6% compared to $4.2 million or 55.5%. The significantly improved gross margin
in 2023 is mostly due to the loss of the low margin contract discussed above and Shield revenues representing a larger percentage
of revenues, 28.4% compared to 15.6% in 2022. To the extent Shield revenues become a larger percentage of revenues, we anticipate
we will continue to see favorable growth in gross profit margins.
Operating Expenses
Operating expenses for the
year ended December 31, 2023, totaled $16.4 million, a decrease of 19.8% when compared to $20.5 million for the year ended December 31,
2022. The year over year change was most notably due to the reduced legal expense associated with the various litigation matters that
arose in 2021 that for the most part are fully settled, and reduced contractor labor and employee costs. Employee headcount on December
31, 2023, totaled forty-nine compared to sixty-seven on December 31, 2022.
Sales and
Marketing
Sales and marketing expenses
decreased to $5.7 million in 2023, compared to $6.5 million in 2022. Certain discretionary marketing spends inclusive of participation
in trade shows, utilization of third-party contractors for content and product messaging and travel, are likely to vary over time based
on savings initiatives that may be necessary.
Research and Development
Research and development expenses
decreased to $5.6 million in 2023 compared to $6.5 million in 2022. Many of the cost reduction measures taken in 2023 related to research
and development costs. Research and development costs may vary over time as we determine the frequency of new releases, improved functionality
and enhancements needed to be competitive with our product offering.
General and
Administrative
General and administrative
expenses totaled $5.2 million in 2023 compared to $7.5 million in 2022. The decrease in general and administrative expenses is primarily
due to a reduction in legal costs of $1.4 million associated with various litigation matters that arose in 2021 and continued through
2023. The majority of all matters have since settled as described in more detail in Item 3. Legal Proceedings of this report. In late
2022 we hired an in-house General Counsel which also contributed to the reduced outside legal costs in 2023. Other factors contributing
to the decreased spend include (i) reduced use of consultants and contractors in 2023, (ii) recruiting fees incurred in the 2022 period,
and (iii) voluntary temporary reductions in director and officer compensation. Insurance expense for our Directors’ and Officers’
insurance policy increased in 2023 when compared to 2022 as a result of the class action lawsuits and related claims activity and, increasing
coverage limits for our new policy year.
Interest Expense
Our interest expense consists
primarily of interest related to the Streeterville notes entered into in March and June of 2022 and related debt issuance cost amortization
as well as interest expense from finance leases. Interest expense for 2023 totaled $1.9 million, a decrease of $0.5 million. The decrease
primarily relates to the reversal of interest recorded to accrete the value of the Streeterville notes to the stock-settled value for
potential redemptions paid in stock as no redemption payments in cash or stock were made in 2023.
Interest and Other Income
Interest and other income were
negligible in 2023. 2022 included $2.0 million related to the Cares Act Employee Retention Credit (“ERC”).
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 2023 and 2022 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, 2023, and 2022 (in thousands) were:
Year Ended
Net cash used in operating activities $ (7,767 ) $ (13,190 )
Net cash used in investing activities (1,448 ) (1,479 )
Net cash provided by financing activities 6,339 13,584
Change in cash and cash equivalents $ (2,876 ) $ (1,085 )
Operating Activities
Net cash used in operations
for the year ended December 31, 2023, was ($7.8) million due to a net loss of ($13.9) million, offset by 1) adjustments for non-cash items
of $4.7 million which are mostly comprised of depreciation, stock-based compensation, and interest related to Streeterville notes and
2) $1.4 million provided from working capital principally relating to the cash receipt of amounts due relating to ERC.
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 of $0.5 million; an increase in other receivables relating
principally to the remaining 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.
Investing Activities
For the year ended December 31,
2023, net cash used in investing activities was ($1.4) million, which was principally the capitalization of internally developed software.
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.
Financing Activities
For year ended December 31,
2023, net cash provided by financing activities was $6.3 million which consisted principally of proceeds from sales of common stock using
our ATM program of $4.7 million and a private placement in November 2023 of $2.3 million offset partially by a $0.4 million paydown on
the Streeterville notes.
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 ATM 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.
Liquidity and Capital Resources
As of December 31, 2023, we had
cash and cash equivalents of $0.1 million and a working capital deficit of ($13.1) million. We need to raise additional funds to continue
operations and comply with our financial obligations.
We are executing a plan to
regain compliance with the Nasdaq listing standards as described more fully in Item 1A Risk Factors. This multi-step plan includes: 1)
continued utilization of our ATM program, 2) private offerings of common stock, 3) a warrant inducement offer for the sale of common stock
at a reduced exercise price to warrant holders from the Company’s 2022 registered direct offering and November 2023 private offerings,
and 4) a series of three transactions in the fourth quarter 2023 and two transactions in March 2024 exchanging $10.0 million in senior
debt for $750 thousand in common stock and $9.3 million new preferred Series A stock. While the debt for equity exchanges does not provide
funding for operations, it substantially deleverages the company and reduces the working capital deficit. We can provide no assurances
that we will be able to close on or obtain such financing on acceptable terms or at all and, in the case of equity or equity-linked financings,
such financings will result in additional dilution to our stockholders.
Our principal sources of cash
for funding operations in 2023 has been net proceeds received from sales of common stock using our ATM program of $4.7 million, a private
placement offering completed in November 2023 of $2.3 million, and net funds through changes in working capital which includes receipt
of the remaining ERC refund in the March quarter of $1.4 million. Our principal source of cash for funding operations and growth in 2022
was 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.
ATM Program
B. Riley Securities, Inc. acts
as sales agent under our ATM program, which allows us to potentially sell up to $50.0 million of our common stock using the shelf-registration
statement on Form S-3 filed on August 5, 2021. On April 11, 2023, as a result of limitations under General Instruction I.B.6 of Form S-3,
and in agreement with the terms of the sales agreement, the Company revised the aggregate offering price of shares of common stock that
we can sell pursuant to the ATM program to $15.0 million. For the year ended December 31, 2023, we received $4.7 million, net of fees
for sales of common stock pursuant to the program.
For as long as our public
float is less than $75 million, we will be subject to the limitations set forth in General Instruction I.B.6 of Form S-3, which limit
our ability to conduct primary offerings. 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 25, 2024, our public float calculated in accordance
with General Instruction I.B.6 of Form S-3 was $6.8 million.
Notes Payable
We entered into a securities
purchase agreement (“SPA”) with Streeterville on March 10, 2022, pursuant to which Streeterville purchased two promissory
notes with substantively identical terms. Streeterville purchased the first note on March 10, 2022, and the second note on June 29, 2022,
each note with an aggregate principal amount of $5.4 million in exchange for $5.0 million less certain expenses. We received an aggregate
of approximately $9.3 million, net of transaction expenses, in connection with these issuances.
In 2023 and 2022 we made $0.4
million and $1.5 million in principal payments, respectively. In the fourth quarter 2023 through 3 separate transactions, we exchanged
$0.6 million in aggregate principal on the First Note for 93.6 thousand shares of our common stock. In March 2024, we exchanged $0.2 million
in principal for 52.2 thousand shares of common stock. Also in March 2024, we exchanged $9.3 million in principle for 9,275 shares of
our newly created Series A preferred stock. The issuance of both common and preferred shares was made pursuant to the exemption from the
registration requirements afforded by Section 3(a)(9) of the Securities Act. The Series A preferred stock has a stated value of $1,100
per share and is subject to the preferences and designations as more fully described in our Amended and Restated Articles of Incorporation
filed on March 15, 2024. Following the exchanges noted herein, the remaining balance on the First Note was $0.5 million. The maturity
date for the First Note is September 2024.
There can be no assurance that
we will improve our liquidity position or our ability to make redemption or principal payments.
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 credit losses, 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 SaaS. Warranty costs
have not been material.
We recognize sales of its consulting
services in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 including
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.
With our newest product, INTRUSION
Shield, we began offering software on a subscription basis. INTRUSION Shield is a hosted arrangement subject
to SaaS guidance under ASC Topic 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 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
Credit Losses
We maintain allowances for
credit losses 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 credit
losses 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, 2023, 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,
2023, 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.
Item
9B. Other Information.
During the quarter ended December 31, 2023, no director or officer adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule
10b5-1 trading arrangement, as each term is defined in Item 408(a) of Regulation S-K.
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 2024 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, 2023, and 2022 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(30) Certificate of Amendment to Certificate of Incorporation of Registrant
3.3(19) Amended and Restated Bylaws of the Company
4.1(5) Specimen Common Stock Certificate
4.2(17) Description of the Registrant’s Capital Stock
4.6(20) Form of Warrant
4.7(20) Form of Placement Agent Warrant
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(6)+ Amended 2005 Stock Incentive Plan of the Registrant
10.8(7)+ 2015 Stock Incentive Plan of the Registrant
10.9(8)+ Form of Notice of Grant of Stock Option
10.10(8)+ Form of Stock Option Agreement
10.13(8)+ Form of Automatic Stock Option Agreement
10.14(9)+ Intrusion Inc. 2021 Omnibus Incentive Plan
10.27(24) Form of Lock-up Agent Agreement
21(18) List of Subsidiaries of Registrant
97(1) Compensation Recovery Policy
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: April 1, 2024 INTRUSION INC.
(Registrant)
By: /s/ Anthony Scott
Anthony Scott
President & Chief Executive Officer
(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 April 1, 2024
Anthony Scott (Principal Executive Officer)
/s/ Kimberly Pinson Chief Financial Officer April 1, 2024
Kimberly Pinson Principal Financial and Accounting Officer
/s/ Anthony J. LeVecchio Executive Chairman, Director April 1, 2024
Anthony J. LeVecchio
/s/ James F. Gero Director April 1, 2024
James F. Gero
/S/ Katrinka B. McCallum Director April 1, 2024
Katrinka B. McCallum
/S/ Gregory K. Wilson Director April 1, 2024
Gregory K. Wilson
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, 2023 and 2022, and the related consolidated
statements of operations, changes in stockholders’ 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, 2023, and 2022, 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
April 1, 2024
INTRUSION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
December 31
ASSETS
Current Assets:
Cash and cash equivalents $ 139 $ 3,015
Accounts receivable, net 364 530
Prepaid expenses and other assets 635 1,877
Noncurrent Assets:
Property and equipment:
Capitalized software development 2,791 1,380
Furniture and fixtures – 43
Leasehold improvements 15 78
Property and equipment, gross 4,875 4,366
Accumulated depreciation and amortization (1,955 ) (2,208 )
Finance leases, right-of-use assets, net 382 1,048
Operating leases, right-of-use assets, net 1,637 504
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Finance lease liabilities, current portion 384 667
Operating lease liabilities, current portion 178 294
Noncurrent Liabilities:
Finance lease liabilities, noncurrent portion 3 10
Operating lease liabilities, noncurrent portion 1,539 231
Total noncurrent liabilities 1,542 241
Commitments and Contingencies – (See Note 7) – –
Stockholders’ Deficit:
Common stock held in treasury, at cost – 1 shares (362 ) (362 )
Accumulated other comprehensive loss (43 ) (43 )
Total stockholders’ deficit (9,555 ) (4,215 )
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT $ 6,248 $ 9,275
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 and Other Income 43 2,028
Gain on Lease Termination – 385
Income Tax – –
Net Loss Per Share:
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
Registered direct offering proceeds, net of fees 1 61 – – – 4,295 – 4,296
Restricted stock awards – 5 – – – – – –
Public stock offering, net of fees – 27 – – – 1,985 – 1,985
Issuance of common stock to terminate operating lease – 4 – – – 200 – 200
Nonregistered private placement – 1 – – – 100 – 100
Stock-based compensation expense – – – – – 1,456 – 1,456
Exercise of stock options – 5 – – – 67 – 67
Stock-based compensation expense – – – – – 972 – 972
Exercise of stock options – 3 – – – 8 – 8
Restricted stock awards – 11 – – – – – –
Withholdings related to stock-based compensation awards – – – – – (5 ) – (5 )
Private offering proceeds, net of fees 2 218 – – – 2,344 – 2,346
Issuance of common stock to reduce notes payable 1 93 – – – 549 – 550
Purchase of common stock through employee stock purchase plan – 1 – – – 2 – 2
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 1,659 1,308
Provision for credit losses 69 –
Amortization of debt issuance costs 496 861
Non-cash interest on notes payable 1,163 1,463
Gain on lease termination – (385 )
Changes in operating assets and liabilities:
Accounts receivable 97 504
Prepaid expenses and other assets 1,214 (1,533 )
Accounts payable and accrued expenses 411 206
Operating lease liabilities (269 ) (1,040 )
Deferred revenue (16 ) (105 )
Net cash used in operating activities (7,767 ) (13,190 )
Investing Activities:
Purchases of property and equipment (157 ) (307 )
Capitalized software development (1,291 ) (1,172 )
Net cash used in investing activities (1,448 ) (1,479 )
Financing Activities:
Proceeds from notes payable – 10,000
Payments of notes payable issuance costs – (710 )
Principal payments on notes payable (400 ) (1,500 )
Reduction of finance lease liabilities (290 ) (645 )
Proceeds from public stock offering, net of fees 4,678 1,985
Proceeds from sale of common stock and warrants, net of fees 2,346 –
Proceeds from registered direct offering, net of fees – 4,296
Proceeds from non-registered private placement – 100
Proceeds from stock options exercised 8 67
Proceeds related to the issuance of common stock under stock purchase plan 2 –
Withholdings related to stock-based compensation awards (5 ) (9 )
Net cash provided by financing activities 6,339 13,584
Net decrease in cash and cash equivalents (2,876 ) (1,085 )
Cash and cash equivalents at beginning of year 3,015 4,100
Cash and cash equivalents at end of year $ 139 $ 3,015
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
Cash paid for interest $ 229 $ 35
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for lease termination $ – $ 200
Common stock issued to reduce notes payable $ 550 $ –
Assets acquired under a right of use (“ROU”) operating lease $ 1,461 $ –
Assets acquired under a ROU finance lease $ – $ 5
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 the Company’s solutions through value-added resellers,
managed service providers and a direct sales force. The Company’s end-user customers include U.S. federal government entities, state