INTRUSION INC. 10-K
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2024
OR
For the transition period from to
COMMISSION FILE NUMBER 001-39608
INTRUSION INC.
(Exact name of registrant as specified in its charter)
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including
area code: (972) 234-6400
Securities registered pursuant to Section 12(b)
of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.01 per share INTZ Nasdaq Capital Market
Securities registered pursuant to Section 12(g) of
the Act:
None
(Title of class)
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes ☐ No ☒
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether
the registrant is a large, accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large, accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large, accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company,
indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether
the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm
that prepared or issued its audit report. ☐
If securities are registered
pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing
reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether
any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the
registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☒
State the aggregate
market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common equity, as of June 28, 2024: $4,323,644.
As of February 25, 2025,
19,342,776 shares of the issuer’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the
Registrant’s definitive Proxy Statement to be filed in connection with the Registrant’s 2025 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
INTRUSION INC.
INDEX
PART I
Item 1. Business 1
Item 1A. Risk Factors 5
Item 1B. Unresolved Staff Comments 12
Item 1C. Cybersecurity 12
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Mine Safety Disclosures 12
PART II
Item 6. [Reserved] 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements 20
Item 9A. Controls and Procedures 20
Item 9B. Other Information 21
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 21
PART III
Item 10. Directors, Executive Officers, and Corporate Governance 22
Item 11. Executive Compensation 22
Item 14. Principal Accounting Fees and Services 22
PART IV
Item 15. Exhibits and Financial Statement Schedules 23
Signatures 27
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form
10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements involve
substantial risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form
10-K, including statements regarding our financial position; our ability to continue our business as a going concern; our business, sales,
and marketing strategies and plans; our ability to successfully market, sell, and deliver our INTRUSION Shield commercial
product and solutions to an expanding customer base; are forward-looking statements. In some cases, you can identify forward-looking statements
because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,”
“could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,”
“predict,” “project,” “should,” “target,” “will,” or “would” or
the negative of these words or other similar terms or expressions. Forward-looking statements contained in this Annual Report on Form
10-K include, but are not limited to, such statements.
You should not rely on forward-looking
statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K
primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial
condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties,
and other factors described in the section titled "Risk Factors" and elsewhere in this Annual Report on Form 10-K.
In addition, statements that
“we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on
information available to us as of the date of this Annual Report on Form 10-K. While we believe that such information provides a reasonable
basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have
conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors
are cautioned not to unduly rely on these statements.
The forward-looking statements
made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation
to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of
this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law.
EXPLANATORY NOTE – REVERSE STOCK SPLIT
Unless otherwise stated, all shares and per share amounts for all periods
presented in this Annual Report on Form 10-K have been adjusted to reflect the 1-for-20 reverse stock split we effected on March 22, 2024.
ii
PART I
Item 1. Business.
Our Corporate Information
We were organized in Texas
in September 1983 and reincorporated in Delaware in October 1995. Our principal executive offices are located at 101 East Park Boulevard,
Suite 1200, Plano, Texas 75074, and our telephone number is (972) 234-6400. Our website URL is www.intrusion.com. We post the following
filings in the “Investors” section of our website as soon as reasonably practicable after they are electronically filed with
or furnished to the Securities and Exchange Commission (the “SEC”): our Annual Reports on Form 10-K; our Quarterly Reports
on Form 10-Q; our Current Reports on Form 8-K; and any amendments to those reports or statements filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act. All such filings on our website are available free of charge. Additionally, filings are available
on the SEC’s website (www.sec.gov). In this report, references to the “Company,” “we,” “us,”
“our”, or “Intrusion” refer to Intrusion Inc. and its subsidiaries. TraceCop and Savant
are registered trademarks of the Company. We have also applied for trademark protection for INTRUSION Shield.
Our Business
Intrusion is a cybersecurity
company based in Plano, Texas. The company offers its customers access to its exclusive threat intelligence database containing the historical
data, known associations, and reputational behavior of over 8.5 billion Internet Protocol (“IP”) addresses. After years of
gathering global internet intelligence and working exclusively with government entities, the company released its first commercial product
in 2021.
Our Solutions
INTRUSION ShieldTM
INTRUSION Shield,
our newest cybersecurity solution is a Zero Trust reputation-based Software as a Service (“SaaS”) solution that inspects and
kills dangerous network (in and outbound) connections. What makes our approach unique is that INTRUSION Shield evaluates
every packet and analyzes the IP addresses (source and destination), as well as domain information and the ports utilized and, when combined
with other threat intelligence data reports, blocks malicious connections. Many breaches today are caused by Zero-Day and malware free
compromises that may not trigger alarms in a traditional firewall or endpoint solution. INTRUSION Shield’s
capabilities are designed to continuously evolve as the threats and landscape change over time. Unlike traditional industry approaches
that rely heavily on signatures, complex rules, and human factors mitigation, which malicious actors and nation states have learned to
bypass, INTRUSION Shield’s proprietary architecture isolates and neutralizes malicious traffic and network
flows that existing solutions are ill equipped to handle.
In September 2022, we expanded
the INTRUSION Shield product line to include the Shield Cloud and Shield End-Point solutions. The initial INTRUSION Shield
offering released in early 2021, the Shield On-Premise solution, utilizes hardware and is placed behind a firewall in a data center. Shield
Cloud extends the effectiveness of the Shield On-Premise solution to Infrastructure as a Service (IaaS), Platform as a Service (PaaS),
SaaS and serverless resources in the public cloud. This product serves as a protective gateway to the cloud, providing both Zero Trust
access to, and protecting outbound connections from, virtual hosts and serverless functions within the cloud. Shield Endpoint helps protect
the network outside of the corporate enclave and data center to include protection for remote workers, mobile, and cloud devices. This
product brings the network protection of the Shield On-Premise to these remote user devices establishing a Zero Trust network, both for
intra-organization connectivity and external internet connectivity.
INTRUSION TraceCop®
INTRUSION TraceCop
is a big data tool with extensive IP intelligence canvassing the entire internet. It contains what we believe to be the largest existing
repository of reputation information on known good and known bad active IP addresses (both IPv4 and IPv6). TraceCop contains
an inventory of network selectors and enrichments useful to support forensic investigations. The data contains a history
of IPv4 and IPv6 block allocations and transfers, historical mappings of IP addresses to Autonomous Systems (ASNs) as observed through
BGP, and approximately one billion historically registered domain names and registration context. TraceCop contains tens
of billions of historic DNS resolutions of Fully Qualified Domain Names (FQDNs or hostnames) on each of these domains. Together, the resulting
data shows relationships, hosting, and attribution for internet resources. TraceCopalso contains web server
surveys of content, such as natural language and topic of the content on hundreds of millions of websites and servers and OS fingerprints
of services showing applications running on a given IP address. TraceCop also contains a history of threat and reputation
for each hostname and IP address over time. All these features combine to create a very effective network forensics and cybersecurity
analysis tool.
INTRUSION Savant®
INTRUSION Savant
is a network monitoring solution that leverages the rich data available in TraceCop to identify suspicious traffic in real-time.
Savant uses several original patents to uniquely characterize and record all network flows. Savant is a network
reconnaissance and attack analysis tool used by forensic analysts in United States (“U.S.”) government agencies and corporations
with in-house threat research teams. For example, Savant users can create various automated rules to inspect packets matching
(or not) certain criteria such as creating a rule to ensure the Source MAC address field in the Ethernet header and Source IP address
from the IP header are always the same, failing which could indicate MAC or IP Spoofing in progress. Similarly, threat investigators can
create rules using regular expressions to analyze multiple fields in the packet headers.
Our Intellectual Property and Licenses
Our success and our ability
to compete are primarily dependent upon our proprietary technology. We principally rely on a combination of contractual rights, trade
secrets and copyright laws to establish and protect our proprietary rights in our solutions. In addition, we have received two patents,
and we have applied for patents for our INTRUSION Shield family of solutions. We have also entered into non-disclosure agreements
with our suppliers, resellers, and certain customers to limit access to and disclosure of our proprietary information. There can be no
assurance that the steps taken by us to protect our intellectual property will be adequate to prevent misappropriation of our technology
or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology, although
it would be extremely difficult to replicate the proprietary and comprehensive internet databases we have developed over the past 25+
years.
We have entered into software
and solution license agreements with various suppliers. These license agreements provide us with additional software and hardware components
that add value to our cybersecurity solutions. These license agreements do not provide proprietary rights that are unique or exclusive
to us and are generally available to other parties on the same or similar terms and conditions, subject to payment of applicable license
fees and royalties. We do not consider any of the solution license, software, or supplier agreements to be material to our business, instead,
they are complementary to our business and offerings.
Our Competition
The market for network and
data protection security solutions is intensely competitive and subject to frequent introductions of new technologies, and potentially
improved price and performance characteristics. Industry suppliers compete in areas such as conformity to existing and emerging industry
standards, interoperability with networking and other cybersecurity solutions, management and security capabilities, performance, price,
ease of use, scalability, reliability, flexibility, features, and technical support. Our principal competitors in the data mining and
advanced persistent threat market include Darktrace, Trellix, and Recorded Futures.
There are numerous companies
competing in various segments of the data security market. At this time, we have little or no competitors for TraceCop;
however, we believe competitors could emerge in the future. These competitors currently perform only a portion of the functions that we
can perform with TraceCop. We have been continuously collecting the TraceCop data for more than twenty years,
and we believe that none of our current or future competitors will have the ability to provide and reference this historical data. In
our newest market segment, data mining and advanced persistent threat detection, we compete directly and indirectly with companies and
open-source technologies in the firewall, intrusion detection and prevention, anti-virus, network analysis, endpoint protection, and insider
threat prevention areas of cybersecurity technology.
We believe the INTRUSION
Shield product line is novel and unique in our industry because of our proprietary threat-enriched big data. We believe that
our INTRUSION Shield family of solutions complement our customer’s existing cybersecurity processes and third-party
solutions. If the INTRUSION Shield receives widespread acceptance in the market, we anticipate that other businesses will
seek to compete with INTRUSION Shield; however, we believe our existing, mature, and proprietary database which is integral
to the operation of INTRUSION Shield will be difficult, if not impossible, for other companies in our industry to replicate
and will be a significant barrier to entry of competitors in the near- and long-term future of cyber security solutions.
Our Customers: Government
Sales
Sales to U.S. government customers
accounted for 83.8% of our revenues for the year ended December 31, 2024, compared to 46.2% of our revenues in 2023. We expect to continue
to derive a substantial portion of our revenues from sales to governmental entities in the future as we continue to market our products
and data mining products to the government, and we intend to market INTRUSION Shield not only to our long-standing governmental
customer base but to expand our efforts to include more traditionally administrative and civilian governmental entities. Sales to government
clients present risks in addition to those involved in sales to commercial customers that could adversely affect our revenues, including
potential disruption due to irregularities in or interruptions to appropriation and spending patterns, delays in approving a federal budget
and the government’s reservation of the right to cancel contracts and purchase orders for its convenience.
We make our sales under purchase
orders and contracts. Our customers, including government customers, may cancel their orders or contracts with little or no prior notice
and without penalty. Although we transact business with various government entities, we believe that the cancellation of any order in
itself could have a material adverse effect on our financial results. Because we derive and expect to continue to derive a substantial
portion of our revenue from sales to government entities, a large number of cancelled or renegotiated government orders or contracts could
have a material adverse effect on our financial results.
Third-Party Products
We currently utilize commercially
available computers and servers from various vendors which we integrate with our software products for implementation into our customer
networks. We do not consider any of these third-party relationships to be material to the Company’s business or results of operations.
Customer Services
Our solutions may include
installation, operation of our technology and threat data interpretation and reporting.
Sales, Marketing and Customers
Field Sales Force.
Our sales organization focuses on major account sales, channel partners including distributors, value added resellers (“VARs”)
and integrators; promotes our solutions to current and potential customers; and monitors evolving customer requirements. The field sales
and technical support force provides training and technical support to our resellers and end users and assists our customers in designing
cyber secure data networking solutions. We currently conduct sales and marketing efforts from our principal office in Plano, Texas.
Resellers. Resellers
such as domestic and international system integrators and VARs sell our solutions as stand-alone solutions to end users and integrate
our solutions with products sold by other vendors into network security systems that are sold to end users. Our field sales force and
technical support organization provide support to these resellers. Our agreements with resellers are non-exclusive, and our resellers
generally sell other products and solutions that may compete with our solutions. Resellers may place higher priority on products or solutions
of other suppliers who are larger and have more name recognition, and there can be no assurance that resellers will continue to sell and
support our solutions.
Foreign Sales.
Export sales accounted for 4.7% and 0.8% of revenue in 2024 and 2023, respectively.
Marketing. We
have implemented several methods to market our solutions, including participation in trade shows and seminars, distribution of sales literature
and solution specifications and ongoing communication with our resellers and installed base of end-user customers.
Customers. Our
end-user customers include U.S. federal government, state and local government entities, large and diversified conglomerates, and manufacturing
entities. Sales to certain customers and groups of customers can be impacted by seasonal capital expenditure approval cycles, and sales
to customers within certain geographic regions can be subject to seasonal fluctuations in demand.
In 2024, 83.8% of our revenue
was derived from a variety of U.S. government entities through direct sales and indirectly through system integrators and resellers. These
sales are attributable to eight U.S. government customers through direct and indirect channels; three U.S. government customers individually
exceeded 10% of total revenue in 2024. A reduction in our sales to U.S. government entities could have a material adverse effect on our
business and operating results if not replaced.
Backlog. We
believe that only a small portion of our order backlog is non-cancellable, and that the dollar amount associated with the non-cancellable
portion is immaterial. Commercial orders are generally fulfilled within two days to two weeks following receipt of an order. Certain orders
may be scheduled over several months, generally not exceeding one year.
Customer Support, Service
and Warranty. We service, repair, and provide technical support for our solutions. Our field sales and technical support force
works closely with resellers and end-user customers on-site and by telephone to assist with pre- and post- sales support services such
as network security design, system installation and technical consulting. By collaborating closely with our customers, our employees increase
their understanding of end-user requirements and are then able to provide specific input in our solution development process.
We warrant all our solutions
against defects during the service period. Before and after expiration of the solution warranty period, we offer both on-site and factory-based
support, parts replacement, and repair services. Extended warranty services are separately invoiced on a time and materials basis or under
an annual maintenance contract.
Employees
As of December 31, 2024, we
employed a total of fifty people, five of which were part-time. None of our employees are represented by a labor organization, and we are
not a party to any collective bargaining agreement. Competition in the recruiting of personnel in the networking and data security industry
is intense. We believe that our future success will depend in part on our continued ability to hire, motivate and retain qualified management,
sales, marketing, and technical personnel.
Our Code of Conduct
The Company’s directors
and employees, including executive officers, are required to abide by the Company’s Code of Business Conduct and Ethics (the “Code”)
to ensure that the Company’s business is conducted in a consistently legal and ethical manner and to avoid instances of insider
trading. The Code covers areas of professional conduct that include conflicts of interest, fair dealing and the strict adherence to all
laws and regulations applicable to the conduct of the Company’s business.
The Code is published on the
Company’s website under the investor relations tab at www.intrusion.com. The Company intends to disclose future amendments to, or
waivers from, certain provisions of the Codes of Ethics on the Company’s website within four business days following the date of
such amendment or waiver. Upon the written request of any stockholder, the Company will furnish, without charge, a copy of the Code. This
request should be directed to the Company’s Secretary at Intrusion Inc., 101 East Park Blvd., Suite 1200, Plano, TX 75074.
Reverse Stock Split
On March 22, 2024, we effected
a 1-for-20 reverse stock split of our common stock. All share and per share amounts set forth in this Annual Report on Form 10-K, including
the consolidated financial statements and the notes thereto have been retroactively restated to reflect the reverse stock split as if
it had occurred as of the earliest period presented and unless otherwise stated, all other share and per share amounts for all periods
presented.
Item 1A. Risk Factors.
The following are the significant
factors that could materially adversely affect our business, financial condition, or operating results, as well as adversely affect the
value of an investment in our common stock. The risks described below are not the only risks facing our Company. Risks and uncertainties
not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition,
and operating results.
Risks Related to our Financial Position and
Liquidity
Certain regulatory limitations may affect
our ability to consummate future financings.
If our public float as measured
pursuant to General Instruction I.B.6 to Form S-3 falls below $75 million, we will be subject to the restrictions set forth in General
Instruction I.B.6 to Form S-3 that limit our ability to conduct primary offerings under a Form S-3 registration statement. As of February
25, 2025, our public float calculated in accordance with General Instruction I.B.6 of Form S-3 was $112.9 million.
We must increase revenue levels in order
to finance our current operations and to implement our business strategies.
For the year ended December
31, 2024, we had a net loss of $7.8 million and had an accumulated deficit of approximately $118.0 million as of December 31, 2024. We
need to increase current revenue levels from the sales of our solutions if we are to regain profitability, and our new INTRUSION Shield
suite of products may take time to achieve market penetration, which could negatively impact future revenues and results of operations.
If we are unable to increase revenue levels, losses could continue for the near term and possibly longer, and we may not regain profitability
or be able to implement our business plan, fund our liquidity needs, or continue our operations.
Business and Operational Risks
Most of our current revenues are generated
from one family of solutions with a limited number of customers, and the decrease of revenue from sales of this family of solutions could
materially harm our business and prospects.
Approximately 50.4% of our
existing revenues result from sales of TraceCop, a cybersecurity solution. TraceCop revenues were $2.9 million
for the year ended December 31, 2024, compared to $2.5 million for the year ended December 31, 2023. We can offer no assurances that our
new INTRUSION Shield solution will reduce our dependence on this single solution and in the absence of a shift in solution
mix, we may continue to face risks if sales of this key solution to these limited customers were to decrease.
We may not be successful in our efforts
to broaden the marketing and sale of the INTRUSION Shield.
We believe that we must expand
our sales and marketing efforts for 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 INTRUSION Shield,
which may not be successful. If we are unsuccessful in our efforts to leverage channel and strategic partners, we may not be able to generate
sufficient revenue from INTRUSION Shield to improve the Company’s financial position, results of operations, and cash
flow position.
The current geo-political climate may add
uncertainty in the dealings of our customers and could cause them to delay indefinitely certain cybersecurity initiatives or to determine
not to introduce or implement any new or innovative cyber-solution products into their information networks.
Continuing events in many
regions around the world have introduced a significant level of uncertainty in the dealings of our current and potential customers that
could cause them to be hesitant to implement new cybersecurity initiatives regardless of the efficacy of our INTRUSION Shield
product. Further, these entities may also determine not to deploy their cash reserves in the face of such uncertainty. These uncertainties
could depress the interest or the ability of companies and governmental entities to test, evaluate, and deploy our INTRUSION Shield
in their network environments.
A large percentage of our current revenues
are received from U.S. government entities, and the loss of these customers or our failure to widen the scope of our customer base to
include general commercial enterprises could negatively affect our revenues.
A substantial percentage
of our current revenues result from sales to U.S. government entities. If we were to lose one or more of these customers, our revenues
could decline, and our business and prospects may be materially harmed. Further, sales to the government present risks in addition to
those involved in sales to commercial customers, including potential disruption due to appropriation and spending patterns, delays in
approving a federal budget and the government’s right to cancel contracts and purchase orders for its convenience. The factors that
could cause us to lose these U.S. government customers or otherwise materially harm our business, prospects, financial condition, or results
of operations include:
· re-allocation of government resources;
· disruptions in our customers’ ability to access funding from capital markets;
· the adoption of new laws or regulations pertaining to government procurement;
· delays in the payment of our invoices by government payment offices; and
While we expect that developing
relationships with non-governmental customers will mitigate or eliminate this dependence on, and risk from, serving governmental entities,
we can offer no assurances that we will be able to sufficiently diversify our customer portfolio in a time and manner to adequately mitigate
this risk.
A decline in federal,
state, or local government spending would likely negatively affect our product revenues and earnings.
The success of the cybersecurity
solutions we sell depends substantially on the amount of funds budgeted by federal, state, and local government agencies that make up
our current and potential customers. Global credit and financial markets have experienced extreme disruptions in the recent past, including
severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment
rates and uncertainty about economic stability. There can be no assurance that similar disruptions will not occur in the future. Deterioration
in general economic conditions may result in lower tax revenues that could lead to reductions in government spending. Poor economic conditions
could in turn lead to substantial decreases in our net sales or have a material adverse effect on our operating results, financial position,
and cash flows.
We are highly dependent on sales of our
current solutions through indirect channels, the loss of which would materially adversely affect our operations.
For the years ended December
31, 2024, and 2023, we derived 35.4% and 2.6% of our revenues from sales through indirect sales channels, such as distributors, value-added
resellers, system integrators, original equipment manufacturers and managed service providers. We must expand sales of our current solutions
as well as any new solutions through these indirect channels in order to increase our revenues. We cannot assure you that our current
solutions or future solutions will gain market acceptance in these indirect sales channels or that sales through these indirect sales
channels will increase our revenues. Further, many of our competitors are also trying to sell their products and solutions through these
indirect sales channels, which could result in lower prices and reduced profit margins for the sales of our solutions.
Our business depends on the continued service
of our key management and technical personnel.
Our success depends upon the
continued contributions of our key management, sales, marketing, research and development and operational personnel, including Anthony
Scott, our President, and Chief Executive Officer; T. Joe Head, our Chief Technology Officer; Kimberly Pinson, our Chief Financial Officer;
and other key technical personnel. The loss of the services of one or more of our key employees in the future could have a material adverse
effect on our operating results. We also believe our future success will depend upon our ability to attract and retain additional highly
skilled management, technical, marketing, research and development, and operational personnel with experience in managing large and rapidly
changing companies, as well as training, motivating and supervising employees. The market for hiring and retaining certain technical personnel,
including software engineers, has become more competitive and intense in recent years. Failure to attract and retain a sufficient number
of qualified technical personnel, including software engineers, or retain our key personnel could have a material adverse effect on our
operating results.
We could experience damage to our reputation
in the cybersecurity industry in the event that our INTRUSION Shield solution fails to meet our customers’ needs or to achieve
market acceptance.
Our reputation in the industry
may be harmed if we experience delivery delays, or if our customers do not perceive the benefits of purchasing and using INTRUSION
Shield as part of their comprehensive cybersecurity solution, our position as a leader in this technology space may be damaged
and could affect the willingness of our customers, as well as potential customers, to purchase our other solutions that function separately
from INTRUSION Shield. Any reputational damage could result in a decrease in orders for all our solutions, the loss of current
customers, and a decrease in our overall revenues which could in turn have a material adverse effect on our results of operations.
If we fail to respond to rapid technological
changes in the network security industry, we may lose customers, or our solutions may become obsolete.
The network security industry
is characterized by frequent product and service introductions, rapidly changing technology, and continued evolution of new industry standards.
We have and must continue to introduce upgrades to our current solutions rapidly in response to changing circumstances and customer needs
such as the creation and introduction of new computer viruses or other novel external attacks on computer networks. Further, our new INTRUSION
Shield solution represents our efforts to continue to provide state-of-the art first-in-time innovation for our customers’
cybersecurity solutions. As a result, our success depends upon our ability to develop and introduce timely upgrades, enhancements, and
new solutions to meet evolving customer requirements and industry standards. The development of technologically advanced network security
products and solutions is a complex and uncertain process requiring high levels of innovation, rapid response, and accurate anticipation
of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new
or enhanced solutions successfully in a timely manner. Further, we or our competitors may introduce new solutions or enhancements that
shorten the life cycle of our existing solutions or cause our existing solutions to become obsolete.
We must expend time and resources addressing
potential cybersecurity risk, and any breach of our information security safeguards could have a material adverse effect on the Company.
The threat of cyber-attacks
requires additional time and money to be expended in efforts to prevent any breaches of our information security protocols. However, we
can provide no assurances that we can prevent all such attempts from being successful, which could result in expenses to address and remediate
such breaches as well as potentially losing the confidence of our customers who depend upon our services to prevent and mitigate such
attacks on their respective business. Should a material breach of our information security systems occur, it would likely have a material
adverse impact on our business operations, our customer relations, and our current and future sales prospects, resulting in a significant
loss of revenue.
A breach of network security could harm
public perception of our cybersecurity solutions, which could cause us to lose revenues.
If an actual or perceived
breach of network security occurs in the network of a customer of our cybersecurity solutions, regardless of whether the breach is attributable
to our solutions, the market perception of the effectiveness of our solutions could be harmed. This could cause us to lose current and
potential end customers or cause us to lose current and potential value-added resellers and distributors. Because the techniques used
by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target,
we may be unable to anticipate these techniques.
If our solutions do not interoperate with
our customers’ networks, installations will be delayed or cancelled and could harm our business.
Our solutions are designed
to interface with our customers’ existing networks, each of which has different specifications and utilize multiple protocol standards
and products or solutions from other vendors. Many of our customers’ networks contain multiple generations of products that have
been added over time as these networks have grown and evolved. Our solutions will be required to interoperate with many products and solutions
within these networks as well as future products or solutions to meet our customers’ requirements. If we find errors in the existing
software or defects in the hardware used in our customers’ networks, we may have to modify our software or hardware to fix or overcome
these errors so that our solutions will interoperate and scale with the existing software and hardware, which could be costly and negatively
impact our operating results. In addition, if our solutions do not interoperate with those of our customers’ networks, demand for
our solutions could be adversely affected, orders for our solutions could be cancelled, or our solutions could be returned. This could
hurt our operating results, damage our reputation, and seriously harm our business and prospects.
We face intense competition from both start-up
and established companies that may have significant advantages over us and our solutions.
The market for our solutions
is intensely competitive. There are numerous companies competing with us in various segments of the data security markets, and their products
or solutions may have advantages over our solutions in areas such as conformity to existing and emerging industry standards, interoperability
with networking and other cybersecurity products, management and security capabilities, performance, price, ease of use, scalability,
reliability, flexibility, features, and technical support.
Our principal competitors
in the data mining and advanced persistent threat market include Darktrace, Trellix, and Recorded Futures. Our current and potential competitors
may have one or more of the following significant advantages over us:
· greater financial, technical, and marketing resources;
· better name recognition;
· more comprehensive security solutions;
· better or more extensive cooperative relationships; and
· larger customer base.
We cannot assure you that
we will be able to compete successfully with our existing or new competitors. Some of our competitors may have, in relation to us, one
or more of the following:
· longer operating histories;
· longer-standing relationships with OEM and end-user customers; and
· greater customer service, public relations, and other resources.
As a result, these competitors
may be able to more quickly develop or adapt to new or emerging technologies and changes in customer requirements, or devote greater resources
to the development, promotion and sale of their products or solutions. Additionally, it is likely that new competitors or alliances among
existing competitors could emerge and rapidly acquire significant market share.
If we are unable to implement and maintain
effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our
financial reports and the market price of our common stock may decline.
As a public company, we are
required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Further,
we are required to report any changes in internal controls on a quarterly basis. In addition, we are required to furnish a report by management
on the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended
(the “Sarbanes-Oxley Act”).
If we identify material weaknesses
in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner,
or if we assert that our internal control over financial reporting is ineffective, investors may lose confidence in the accuracy and completeness
of our financial reports and the market price of the common stock could be negatively affected. We also could become subject to investigations
by the stock exchange on which our securities are listed, the Securities Exchange Commission (“SEC”), or other regulatory
authorities, which could require additional financial and management resources, and could have a material adverse effect on the market
price of our common stock.
Scarcity of products and materials in the
supply chain could hinder or prevent the deployment of our INTRUSION Shield for our customers who elect to use the wired version of our
solution.
Should any of the component
parts required for the hardware interface our customers use to access and to utilize the INTRUSION Shield product become
scarce, we may have to delay or cancel our fulfillment of orders that could defer potential revenues or even result in customer cancellations,
which would have a negative effect on our financial position and results of operations.
We incur significantly increased costs because
of operating as a public company, and our management is required to devote substantial time to compliance matters and initiatives.
As a public company with an
obligation to file reports with the SEC under the Exchange Act, we incur significant legal, accounting, and other expenses that we would
not incur as a private company. In addition, the Sarbanes-Oxley Act imposes various requirements on public companies, including requiring
establishment and maintenance of effective disclosure and financial controls. Our management and other personnel devote a substantial
amount of time to these compliance initiatives. We cannot predict or estimate the amount of additional costs we will incur to meet our
additional disclosure obligations under the Exchange Act or the timing of such costs.
The Sarbanes-Oxley Act requires,
among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. We report
on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In addition,
in the first Annual Report on Form 10-K following the date on which we no longer qualify as a smaller reporting company, we will be required
to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting.
Our compliance with Section 404 of the Sarbanes-Oxley Act could require that we incur substantial accounting expense and expend significant
management efforts including the potential of hiring additional accounting and financial staff with appropriate public company experience
and technical accounting knowledge. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or
our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed
to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC
or other regulatory authorities, which would require additional financial and management resources.
Investment Risks
We experience volatility in the market for
our common stock, particularly with respect to swings in the market price as well as volatility in the trading of our common stock.
We experience significant
shifts in the market value of our common stock as it trades on the Nasdaq Capital Market (“Nasdaq") as well as volatility in
the trading volume of our shares on that market. For example, the market price of our common stock fluctuated between $7.34 and $0.35
during the year ended December 31, 2024. These fluctuations may result in a hesitancy for investors to purchase and hold shares of our
common stock, continued depression of the market value of our stock, and ultimately negatively affect our ability to raise capital through
the issuance and sale of our common stock, particularly through our At the Market (“ATM”) program or otherwise.
Nasdaq may delist our common stock from
trading on its exchange, which could limit stockholders’ ability to trade our common stock.
Our common stock is listed
for trading on the Nasdaq Capital Market, which requires us to meet certain financial, public float, bid price and liquidity standards
on an ongoing basis to continue the listing of our common stock. If we fail to meet these continued listing requirements, our common stock
may be subject to delisting.
On October 28, 2024, Intrusion,
Inc. (the “Company”) received a written notice (the “Bid Price Notice”) from the Listing Qualifications department
(the “Nasdaq Staff”) of The Nasdaq Stock Market (“Nasdaq”) indicating that the Company is not in compliance with
the $1.00 minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”)
for continued listing on the Nasdaq Capital Market. The notification of noncompliance had no immediate effect on the listing or trading
of the Company’s common stock on The Nasdaq Capital Market under the symbol “INTZ,” and the Company is currently monitoring
the closing bid price of its common stock and evaluating its alternatives, if appropriate, to resolve the deficiency and regain compliance
with this rule.
The Nasdaq rules require
listed securities to maintain a minimum bid price of $1.00 per share and, based upon the closing bid price for the last thirty
consecutive business days as of October 25, 2024, the Company no longer met this requirement. The Bid Price Notice indicated that
the Company has been provided 180 calendar days, or until April 28, 2025, in which to regain compliance. If at any time during this
period the closing bid price of the Company’s common stock is at least $1.00 per share for a minimum of ten consecutive
business days, the Nasdaq Staff will provide the Company with a written confirmation of compliance and the matter will be closed. On
January 29, 2025, the Company received notification from the Nasdaq Staff that it had met the minimum bid price requirement and,
accordingly, had regained compliance with the listing requirement.
There can be no assurance
that we will be able to meet the financial, public float, bid price and liquidity standards on an ongoing basis to for continued listing
of our common stock on the Nasdaq Capital Market. If our common stock is delisted and we are not able to list our common stock on another
national securities exchange, we expect our securities would be quoted on an over-the-counter market. If this were to occur, our stockholders
could face significant material adverse consequences, including limited availability of market quotations for our common stock and reduced
liquidity for the trading of our securities. In addition, we could experience a decreased ability to issue additional securities and obtain
additional financing in the future.
Shares eligible for future sale may adversely
affect the market.
Our equity incentive plans
allow us to issue stock options and award shares of our common stock. We may in the future create additional equity incentive plans, which
may at that time require us to file a registration statement under the Securities Act to cover the issuance of shares upon the exercise
or vesting of awards granted or otherwise purchased under those plans. As a result, any shares issued or granted under the plans may be
freely tradable in the public market. If equity securities are issued under the plans, if implemented, and it is perceived that they will
be sold in the public market, then the price of our common stock could decline substantially.
We have never paid dividends on our common
stock and have no plans to do so in the future.
Holders of shares of our common
stock are entitled to receive such dividends as may be declared by our Board. To date, we have paid no cash dividends on our shares of
common stock, and we do not expect to pay cash dividends on our common stock in the foreseeable future. We intend to retain future earnings,
if any, to provide funds for the operations of our business. Therefore, any return investors in our common stock may have will be in the
form of appreciation, if any, in the market value of their shares of common stock.
Risks Related to our Intellectual Property
We must adequately protect our intellectual
property to prevent loss of valuable proprietary information.
We rely primarily on a combination
of patent, copyright, trademark and trade secret laws, confidentiality procedures, and non-disclosure agreements to protect our proprietary
technology. However, unauthorized parties may attempt to copy or reverse engineer aspects of our solutions or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our solutions is difficult, and we cannot be certain that the steps we have
taken will prevent misappropriation of our intellectual property. This is particularly true in foreign countries whose laws may not protect
proprietary rights to the same extent as the laws of the U.S. and may not provide us with an effective remedy against unauthorized use.
If protection of our intellectual property proves to be inadequate or unenforceable, others may be able to use our proprietary developments
without compensation to us, resulting in potential cost advantages to our competitors.
We may incur substantial expenses defending
ourselves against claims of infringement.
There are numerous patents
held by many companies relating to the design and manufacture of network security systems. Third parties may claim that our solutions
infringe on their intellectual property rights. Any claim, with or without merit, could consume our management’s time, result in
costly litigation, cause delays in sales or implementations of our solutions or require us to enter into royalty or licensing agreements.
Royalty and licensing agreements, if required and available, may be on terms unacceptable to us or detrimental to our business. Moreover,
a successful claim of product infringement against us or our failure or inability to license the infringed or similar technology on commercially