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
reasonable terms could seriously harm our business.
Our solutions are highly technical and if
they contain undetected errors, our business could be adversely affected, and we might have to defend lawsuits or pay damages in connection
with any alleged or actual failure of our solutions and services.
Our solutions are highly technical
and complex, are critical to the operation of many networks and, in the case of ours, provide and monitor network security and may protect
valuable information. Our solutions have contained and may contain one or more undetected errors, defects, or security vulnerabilities.
Some errors in our solutions may only be discovered after a solution has been installed and used by end customers. Any errors or security
vulnerabilities discovered in our solutions after commercial release could result in loss of revenues or delay in revenue recognition,
loss of customers and increased service and warranty cost, any of which could adversely affect our business and results of operations.
In addition, we could face claims for product liability, tort, or breach of warranty. Defending a lawsuit, regardless of its merit, is
costly and may divert management’s attention. In addition, if our business liability insurance coverage is inadequate or future
coverage is unavailable on acceptable terms or at all, our financial condition could be harmed.
Item 1B. Unresolved Staff Comments.
None.
Item 1C. Cybersecurity.
We recognize the importance
of securing our data and information systems and have a process for assessing, mitigating, and managing cybersecurity and related risks.
Our VP of Engineering, who
reports to the CEO, leads our cybersecurity function and is responsible for managing our cybersecurity risk and the protection of our
networks, systems, and data. The VP of Engineering uses both internal and external resources to execute this process including our own
INTRUSION Shield technology, to help prevent, identify, escalate, investigate, and resolve security incidents in a timely
manner. The Company, with the oversight of the CEO, also requires all employees to complete an annual cybersecurity training course.
Governance
Our Board of Directors is
responsible for overseeing our enterprise risk management activities. The CEO reports to the Board of Directors regarding cybersecurity
risks, incidents, and mitigation strategies at least annually.
As of the date of this filing,
we have not experienced any cybersecurity incidents that have materially affected or are reasonably likely to materially affect our company,
including our financial condition and results of operations.
Item 2. Properties.
Our corporate headquarters
is currently located in 10,705 square feet of space at 101 East Park Blvd, Suite 1200, Plano Texas. This facility houses our corporate
administration, engineering, sales, and marketing operations. The lease for this facility extends until March 2035. We also have engineers
and other employees working remotely in Texas as well as several other states.
We believe that the existing
facility will be adequate to meet our operational requirements through the expiration of the lease. We believe that our property insurance
provides adequate coverage for our leased facilities. See Note 5 – Right-of-use Assets and Leasing Liabilities to our Consolidated
Financial Statements for additional information regarding our obligations under leases.
Item 3. Legal Proceedings.
Stockholder Derivative Claim
On June 3, 2022, a verified
stockholder derivative complaint was filed in U.S. District Court, District of Delaware (the “Court”) by the Plaintiff Stockholder
on behalf of Intrusion against certain of the Company’s Defendants. Plaintiff alleges that Defendants through various actions breached
their fiduciary duties, wasted corporate assets, and unjustly enriched Defendants by (a) incurring costs and expenses in connection with
the ongoing SEC investigation, (b) incurring costs and expenses to defend the Company with respect to the consolidated class action, (c)
settling class-wide liability with respect to the consolidated class action, as well as ancillary claims regarding sales of the Company’s
common stock by certain of the Defendants. On September 28, 2023, the Company agreed to settle the claim. On October 2, 2023, public notice
of the settlement was given. The settlement agreement provides in part for (i) an amendment to the Company’s Bylaws, committee Charters,
and other applicable corporate policies to implement certain measures set forth more fully therein, to remain in effect for no less than
three years; (ii) attorneys’ fees and expenses to plaintiff’s counsel of $0.3 million; and (iii) the dismissal of all claims
against the Defendants, including the Company, in connection with the action. The $0.3 million settlement payment was made by the Company’s
insurance provider under its insurance policy since the Company’s $0.5 million retention was previously exhausted. On April 3, 2024,
the Court approved the settlement.
In addition to these legal
proceedings, we are subject to various other claims that may arise in the ordinary course of business. We do not believe that any claims
exist where the outcome of such matters would have a material adverse effect on our consolidated financial position, operating results,
or cash flows. However, there can be no assurance such legal proceedings will not have a material impact on our future results.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s
Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock trades on
the Nasdaq Capital Market, where it is currently listed under the symbol “INTZ.” As of February 26, 2025, there were approximately
sixty-four record holders of record of our common stock. The Company does not have a history of paying dividends on its common stock and
has no present intention of declaring any dividends in the foreseeable future.
All equity compensation plans
under which our common stock is reserved for issuance have previously been approved by our stockholders. The following table provides
summary information as of December 31, 2024, for all our equity compensation plans (in thousands, except per share data). See Note 10
– Stock-Based Compensation to our Consolidated Financial Statements for additional discussion.
Weighted average exercise price of outstanding options $61.26
Number of shares unvested restricted stock units 203
Weighted average grant date fair value $1.38
Item 6. [Reserved]
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.
During 2023 and 2024, our
primary focus has been building out our sales reseller and channel platform and collaborating 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.
Results of Operations
Comparison of the Years ended December 31, 2024, and December 31,
2023
Year Ended December 31, Change
Operating Expenses:
Other (expense) income, net (6 ) 43 (49 ) -114.0%
Revenues
Revenue for the year ended
December 31, 2024, totaled $5.8 million an increase of $0.2 million or 2.9% from $5.6 million in 2023. Revenues in the first half of 2024
were hampered by both the delay in the approval of a federal budget which impacted the timing of renewals and task orders received and
the loss of a large early Shield customer that had a non-standard custom implementation that was no longer supported. Revenues
increased in the second half of 2024 as a result of new customers signed in recent quarters and, to a large degree, the new government
awards for the combined use of both threat reporting and the use of Shield technology. Consulting revenues totaled $4.2
million in 2024 compared to $4.0 million in 2023. Shield revenues totaled $1.6 million in 2024 which is flat when compared
to 2023. The loss of the large early Shield customer which accounted for greater than 70% of the Shield revenue base has
been fully offset by the expanded use of Shield from existing customers and new customers signed in 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, 2024, our Shield
opportunities comprised a large percentage of our sales pipeline.
Concentration of Revenues.
Revenues from sales to
various U.S. government entities totaled $4.8 million, or 83.8% of revenues, for the year ended December 31, 2024, compared to $2.6
million, or 46.2% of revenues, for the same period in 2023. In 2024 we had three government entities that individually accounted for
over 10% of our revenues compared to two in 2023. Sales to commercial customers totaled $0.9 million or 16.2% of total revenue for
the year ended December 31, 2024, compared to $3.0 million or 53.8% of total revenue for the same period in 2023. Two commercial
customers individually accounted for over 10% of total revenues in 2023. No commercial customers accounted for 10% or greater of
total revenues in 2024. Over 2024, we have expanded the number of Shield resellers and referral partners. 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. 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, 2024, and 2023 totaled $4.4 million or 76.8% and $4.4 million or 77.6%, respectively. The gross profit margin remained
relatively flat year-over-year as Shield revenues represented 26% and 28% of revenues in each of 2024 and 2023, respectively. To the extent
Shield revenues become a larger percentage of revenues, we anticipate we will see favorable growth in gross profit margins.
Operating Expenses
Operating expenses for the
year ended December 31, 2024, totaled $12.9 million, a decrease of 21.5% when compared to $16.4 million for the year ended December 31,
2023. Factors contributing to the decrease most notably related to a reduction in staffing and contract labor expenses, in addition to
reduced spending on sales and marketing.
In late March 2023 we implemented
cost reduction measures that resulted in the reduction of sixteen permanent positions, the reduced use of contractors and renegotiated
or replaced spend on certain sales support and marketing services with less costly programs. As a retention incentive, employees were
granted equity awards in March 2023 with a one-year vesting. Reduced non-cash share-based compensation in 2024 in addition to one time
negotiated contract savings, and an insurance settlement for legal defense costs associated with litigation matters that arose in 2021,
contributed $1.4 million in savings over 2023. Many of the reductions were in Research and Development, which will impact the number and
frequency of product releases. As we grow our customer base and increase our revenues, we may choose to accelerate our product development
in future periods, which would result in increased spending. Employee headcount on December 31, 2024, totaled fifty compared to forty-nine
on December 31, 2023.
Sales
and Marketing
Sales and marketing expenses
decreased to $4.7 million in 2024, compared to $5.7 million in 2023. The 2024 period included approximately $0.2 million in one-time negotiated
contract savings. 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 $4.4 million in 2024 compared to $5.6 million in 2023. The savings in 2024 are a result of cost reduction measures implemented
in late March 2023 which included the reduction of 13 FTEs and the reduced use of contractors. 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 $3.7 million in 2024 compared to $5.2 million in 2023. The $1.5 million reduction in the 2024 period relates principally
to the elimination of two positions, reduced share-based compensation, and one-time negotiated cost savings of $0.5 million.
Interest
Expense
Interest expense for the
twelve months ended December 31, 2024, was $328 thousand consisting principally of the stated interest related to the Streeterville and
Scott notes, and finance leases. Interest expense for the year ended December 31, 2023, was $958 thousand. The decreased interest expense
resulted principally from the $9.5 million aggregate exchange of the Streeterville debt to both common and preferred stock. As of December
31, 2024, $529 thousand of the Streeterville Note One remained outstanding. Interest expenses will vary in the future based on our
cash flow and borrowing needs.
Interest
Accretion and Amortization of Debt Issuance Costs
During March 2024, the
Company entered into exchange agreements to convert $9.5 million in Streeterville debt to $9.3 million of Series A preferred stock and
$0.2 million to common stock and, as a result, the Company reversed the interest accretion associated with the ability to stock-settle
principal redemptions and wrote-off the remaining deferred debt issue costs resulting in a net credit to interest expense of $1.0 million.
For the year ended December 31, 2023, the interest accretion and amortization of debt issuance costs totaled $0.9 million in expense.
Other (Expense) Income, Net
Interest and other income
were negligible in 2024 and 2023.
Consolidated Statements of Cash Flows
Our cash flows for the years
ended December 31, 2024, and 2023 (in thousands) were:
Year Ended
Net cash used in operating activities $ (6,293 ) $ (7,767 )
Net cash used in investing activities (1,809 ) (1,448 )
Net cash provided by financing activities 12,814 6,339
Change in cash and cash equivalents $ 4,712 $ (2,876 )
Operating Activities
Net cash used in operations
for the year ended December 31, 2024, was ($6.3) million due to a net loss of ($7.8) million, offset by 1) adjustments for non-cash items
of $1.7 million which are mostly comprised of depreciation, stock-based compensation, and interest related to Streeterville notes and
2) ($0.2) million used for working capital.
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.
Investing Activities
For the year ended December
31, 2024, net cash used in investing activities was ($1.8) million of which $1.2 million was the capitalization of internally developed
software, $0.5 million was the purchase of equipment and $0.1 million was the deposit on financed equipment.
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.
Financing Activities
For year ended December 31,
2024, net cash provided by financing activities was $12.8 million which consisted principally of proceeds from sales of common stock using
our ATM program of $9.8 million, a private placement in April 2024 of $2.6 million and proceeds from the sale of common stock and warrants
pursuant to warrant inducement offerings of $0.8 million offset partially by principal payments on equipment finance leases of $0.5 million.
For the 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.
Liquidity and Capital Resources
As of December 31, 2024, we
had cash and cash equivalents of $4.9 million and $1.9 million in working capital.
Our principal sources of cash
for funding operations in 2024 have been net proceeds received from sales of common stock using our ATM program of $9.8 million, a private
placement offering completed in April 2024 of $2.6 million, and $0.8 million from the exercise of warrants. Our principal source of cash
for funding operations in 2023 was $4.7 million from sales of common stock utilizing the ATM program, a private placement offering completed
in November 2023 of $2.3 million and net funds through changes in working capital which included the receipt of the remaining ERC refund
of $1.4 million.
ATM Program
B. Riley Securities, Inc.
acts as sales agent under our ATM program, which, using the shelf-registration statement on Form S-3 filed on August 5, 2021, allowed
us to potentially sell up to $50.0 million of our common stock. 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 could be sold pursuant to the ATM program to $15.0 million. In December 2024, we completed the sale of $15 million
in common stock. For the year ended December 31, 2024, we received $9.8 million, net of fees for sales of common stock pursuant to the
program.
We filed a replacement shelf
registration on Form S-3 on January 30, 2025 with an effective date of February 10, 2025, pursuant to which we can sell up to $50.0 million
of our common stock. As of February 25, 2025, our public float calculated in accordance with General Instruction I.B.1 of Form S-3,was
$112.9 million based on 19,342,776 shares of common stock outstanding of which 17,861,513 shares are held by non-affiliates, and a per
share price of $6.32 based on the average of the bid and asked prices of our common stock on the Nasdaq Capital Market on December 30,
2024.
Standby Equity Purchase
Agreement
On July 3, 2024, we entered
into a $10 million Standby Equity Purchase Agreement (“SEPA”) with Streeterville Capital, LLC (“Streeterville”)
pursuant to which the Company has the right to direct Streeterville during the 24-month term of the agreement to purchase common stock
subject to certain limitations and conditions set forth in the SEPA.
The shares of common stock
purchased pursuant to SEPA will be at a purchase price equal to 95% of the lowest daily VWAP of the shares of Common Stock during the
three consecutive trading days commencing on the date of the delivery of an advance notice. “VWAP” is defined as the daily
volume weighted average price of the shares of Common Stock for such trading day on the Nasdaq Stock Market during regular trading hours
as reported by Bloomberg L.P. The Company will use 10% of the proceeds associated with each Advance to redeem the outstanding Series A
Preferred Stock held by Streeterville.
During 2024, pursuant to the
SEPA, Streeterville purchased 1.2 million shares of common stock resulting in aggregate net proceeds of $1.8 million of which $0.1 million
was received in 2024 and the remaining $1.7 million was received on January 2nd and 3rd, 2025.
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 was September 2024, we are in discussions with Streeterville to redeem or amend this note.
In September 2024, we entered
into a note purchase agreement with Streeterville where Streeterville purchased a note payable in the principal amount of $0.6 million
in exchange for $0.5 million in cash after redemption of $0.1 million of Series A preferred stock. The note called for weekly payments
of $25 thousand until the maturity on November 18, 2024. In the event the note was not repaid on the maturity date, weekly payments would
increase to $50 thousand. The note bore no interest. This note was repaid in full in December 2024.
During 2024, we entered
into two separate note purchase agreements with our Chief Executive Officer, Anthony Scott. On January 2, 2024, Scott purchased a note
payable in the principal amount of $1.1 million in exchange for $1.0 million in cash. The note called for weekly payments of $40,000 until
maturity on June 15, 2024. Interest accrued on the balance of the note at 7% per annum compounding daily. During the quarter ended March
31, 2024, we made $200 thousand in principal payments. On March 20, 2024, Scott purchased a second note payable in the principal amount
of $343 thousand in exchange for $340 thousand in cash. The note was non-interest bearing and matured on April 19, 2024. On April 2, 2024,
we reduced the principal balance due under the note by $101 thousand which reflected the amount due from Scott for the exercise of common
stock purchase warrants. On April 19, 2024, Scott entered into a private placement subscription agreement to convert the aggregate remaining
outstanding balance of $1.1 million for both notes in exchange for common stock and common stock purchase warrants.
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 350-40
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 activities such 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