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
services. Most of our sales are from consulting services. We also offer software on a subscription basis subject to SaaS. Warranty costs
have not been material.
We recognize sales of its
consulting services in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 606 whereby revenue from contracts with customers are recognized once the criteria under the five steps below
are met:
i) identification of the contract with a customer;
ii) identification of the performance obligations in the contract;
iii) determination of the transaction price;
v) recognition of revenue upon satisfaction of a performance obligation.
Consulting services, including
reporting, are typically done monthly, and revenue is matched accordingly. Product sales may include maintenance and customer support
allocated revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy
using the relative selling price method. All product offering and service offering market values are readily determined based on current
and prior stand-alone sales. We defer and recognize maintenance, updates, and support revenue over the term of the contract period, which
is generally one year.
Normal payment terms offered
to customers, distributors and resellers are net 30 days domestically. We do not offer payment terms that extend beyond one year and rarely
extend payment terms beyond our normal terms. If certain customers do not meet our credit standards, we require payment in advance to
limit our credit exposure.
With our newest product, INTRUSION
Shield, we began offering software on a subscription basis. INTRUSION Shield is a hosted arrangement subject
to SaaS guidance under ASC Topic 606. SaaS arrangements are accounted for as subscription services not arrangements that transfer a license
of intellectual property.
We utilize the five-step process
mentioned above, per ASC Topic 606, to recognize sales and will follow that directive, also, to define revenue items as individual and
distinct. INTRUSION Shield services provided to our customers for a fixed monthly subscription fee include:
Our contract provides for
no other services, and our customers have no rebates or return rights, nor are any such rights anticipated to be offered as part of this
service.
We satisfy our performance
obligation when our INTRUSION Shield solution is available to detect and prevent unauthorized access to a client’s
information networks. Revenue is recognized monthly over the term of the contract. The Company’s standard initial contract terms
automatically renew unless notice is given 30 days before renewal. Upfront payment of fees is deferred and amortized into income over
the period covered by the contract.
Allowances for Credit Losses
We maintain allowances for
credit losses for estimated losses resulting from the inability of our customers to make the required payments. Our receivables are uncollateralized,
and we expect to continue this policy in the future. If the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, increased allowances may be required. Historically, our estimate for sales returns and credit
losses have not differed materially from actual results.
Fair Value of Financial
Instruments
We calculate the fair value
of our assets and liabilities which qualify as financial instruments and include additional information in the Notes to Consolidated Financial
Statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts
receivable, accounts payable and accrued expenses approximate their carrying amounts due to the relatively short maturity of these instruments.
Notes payable and financing and operating leases approximate fair value as they bear market rates of interest. None of these instruments
are held for trading purposes.
Recent Accounting
Pronouncements
See Note 2 to the Consolidated
Financial Statements (Part II, Item 8 of this Form 10-K).
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk.
Not applicable.
Item 8. Financial Statements and
Supplementary Data.
The information required by
this Item 8 begins on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Effectiveness of Disclosure Controls
and Procedures
As of the end of the period
covered by this report, the Company’s management, under the supervision and with the participation of our Chief Executive Officer
and our Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s
disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management, including the
Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required
disclosure.
Management Report on Internal Control over Financial Reporting
The Company’s management
is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of the Company’s financial reporting
and the preparation of Consolidated Financial Statements for external purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2024, the
Company’s management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer,
conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on criteria established
in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Management’s evaluation included an assessment of elements such as the design and operating effectiveness of key financial reporting
controls, process documentation, accounting policies, and the Company’s overall control environment. Based on its evaluation, management
concluded that the Company’s internal control over financial reporting was effective as of December 31, 2024, to provide reasonable
assurance regarding the reliability of the Company’s financial reporting and the preparation of Consolidated Financial Statements
for external reporting purposes in accordance with U.S. generally accepted accounting principles. The Company reviewed the results of
management’s assessment with the Audit Committee of the Board of Directors.
This Annual Report does not
include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of
the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report. This report
shall not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section
and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general
incorporation language in such filing.
Inherent Limitations on Effectiveness of Controls
The Company’s management,
including our Chief Executive Officer and our Chief Financial Officer, does not expect that the Company’s disclosure controls or
internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design
of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation
of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes
in conditions or deterioration in the degree of compliance with policies or procedures.
Changes in Internal Control over Financial
Reporting
During the quarter ended December 31,
2024, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
During the quarter ended December
31, 2024, no director or officer adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, as
each term is defined in Item 408(a) of Regulation S-K.
Item 9C. Disclosure Regarding Foreign
Jurisdictions that Prevent Inspections.
Not applicable.
PART III
Item 10. Directors, Executive Officers, and
Corporate Governance.
Certain information called
for by this item regarding our directors will be included in our definitive proxy statement, to be filed with the SEC no later than 120
calendar days after December 31, 2024, for our 2025 Annual Meeting of Stockholders (the “Proxy Statement”), under the headings
“Proposal One—Election of Directors” and “Corporate Governance” and is incorporated herein by reference.
Certain information called for by this item regarding
our directors and executive officers’ compliance with Section 16(a) of the Exchange Act will be included in the Proxy Statement,
if required, under the heading “Delinquent Section 16(a) Reports” and, if included in the Proxy Statement, is incorporated
herein by reference.
Certain information called
for by this item regarding the Nominating and Governance Committee of our Board of Directors and the procedures by which our stockholders
may recommend nominees to our Board of Directors, and information regarding the Audit Committee of our Board of Directors and its audit
committee financial expert will be included in the Proxy Statement under the headings “Corporate Governance—Committees,”
“Nomination of Directors,” and “Stockholder Proposals” and is incorporated herein by reference.
Information called for by
this item regarding our Insider Trading Policy will be included in the Proxy Statement under the heading “Insider Trading Policy.”
Information called for by
this item regarding our equity grant timing policies will be included in the Proxy Statement under the heading “Equity Grant Timing
Policies.”
Code of Business Conduct and Ethics
All of the Company’s
directors and employees are required to abide by the Company’s Code of Business Conduct and Ethics, which the Company adopted on
September 14, 2020, as amended on March 16, 2022 (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 full text of 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 101 East Park Blvd.,
Suite 1200, Plano, TX 75074.
Item 11. Executive Compensation.
The information called for by this item will be included in the Proxy Statement under the headings “Executive
Compensation” and “Director Compensation” and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters.
The information called for
by this item will be included in the Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management”
and is incorporated herein by reference to the Proxy Statement.
Item 13. Certain Relationships and Related
Transactions, and Director Independence.
The information called for
by this item will be included in the Proxy Statement under the headings “Certain Relationships and Related Party Transactions,”
“Proposal One—Election of Directors,” Corporate Governance—Director Independence” and “Croporate Governance—Committees”
and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information called for
by this item will be included in the Proxy Statement under the heading “Proposal Two—Ratification of the Appointment of Independent
Registered Proxy Accounting Firm” and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) 1.
Consolidated Financial Statements.
The following Consolidated
Financial Statements of Intrusion Inc. and subsidiaries, are submitted as a separate section of this report (See F-pages):
Report of Independent Registered Public Accounting Firm (PCAOB ID 726) F-1
Consolidated Balance Sheets on December 31, 2024, and 2023 F-2
Notes to Consolidated Financial Statements F-6
(b) Exhibits.
Exhibit Number Description of Exhibit
3.1(3) Restated Certificate of Incorporation of the Registrant
3.2(30) Certificate of Amendment to Certificate of Incorporation of Registrant
3.3(19) Amended and Restated Bylaws of the Company
4.1(5) Specimen Common Stock Certificate
4.2(17) Description of the Registrant’s Capital Stock
4.6(20) Form of Warrant
4.7(20) Form of Placement Agent Warrant
10.5(2)+ Amended and Restated 401(k) Savings Plan of the Registrant
10.6(4)+ Intrusion Inc. 401(k) Savings Plan Summary of Material Modifications
10.7(6)+ Amended 2005 Stock Incentive Plan of the Registrant
10.8(7)+ 2015 Stock Incentive Plan of the Registrant
10.9(8)+ Form of Notice of Grant of Stock Option
10.10(8)+ Form of Stock Option Agreement
10.13(8)+ Form of Automatic Stock Option Agreement
10.14(9)+ Intrusion Inc. 2021 Omnibus Incentive Plan
10.27(24) Form of Lock-up Agent Agreement
10.38(35) Standby Equity Purchase Agreement, dated July 3, 2024.
19.1(1) Insider Trading Policy
21(18) List of Subsidiaries of Registrant
97(31) Compensation Recovery Policy
101.INS(1) XBRL Instance Document
101.SCH(1) XBRL Taxonomy Extension Schema Document
101.CAL(1) XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF(1) XBRL Taxonomy Extension Definition Linkbase Document
101.LAB(1) XBRL Taxonomy Extension Label Linkbase Document
101.PRE(1) XBRL Taxonomy Extension Presentation Linkbase Document
+ Indicates management contract or compensatory plan.
(1) Filed or furnished herewith.
Item 16. Form 10K Summary.
None.
SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: February 27, 2025 INTRUSION INC.
(Registrant)
By: /s/ Anthony Scott
Anthony Scott
President & Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kimberly Pinson
Kimberly Pinson
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Title Date
/s/ Anthony Scott Chief Executive Officer, Director February 27, 2025
Anthony Scott (Principal Executive Officer)
/s/ Kimberly Pinson Chief Financial Officer February 27, 2025
Kimberly Pinson Principal Financial and Accounting Officer
/s/ Anthony J. LeVecchio Executive Chairman, Director February 27, 2025
Anthony J. LeVecchio
/s/ Dion Hinchcliffe Director February 27, 2025
Dion Hinchcliffe
/s/ Katrinka B. McCallum Director February 27, 2025
Katrinka B. McCallum
/s/ Gregory K. Wilson Director February 27, 2025
Gregory K. Wilson
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders of
Intrusion Inc.
Opinion on the Financial Statements
We have audited
the accompanying consolidated balance sheets of Intrusion Inc. and subsidiaries (the “Company”) as of December 31, 2024 and 2023, and the related consolidated statements of operations, changes in stockholders’
equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of their operations and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are
a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from
the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and
that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ Whitley Penn LLP
We have served as the Company’s auditor since 2009.
Dallas, Texas
February 27, 2025
INTRUSION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
December 31
ASSETS
Current Assets:
Cash and cash equivalents $ 4,851 $ 139
Accounts receivable, net 169 364
Prepaid expenses and other assets 514 635
Noncurrent Assets:
Property and equipment:
Capitalized software development 3,948 2,791
Leasehold improvements 18 15
Property and equipment, gross 6,656 4,875
Accumulated depreciation and amortization (2,809 ) (1,955 )
Finance leases, right-of-use assets, net 491 382
Operating leases, right-of-use assets, net 1,356 1,637
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Finance lease liabilities, current portion 405 384
Operating lease liabilities, current portion 209 178
Noncurrent Liabilities:
Finance lease liabilities, noncurrent portion 172 3
Operating lease liabilities, noncurrent portion 1,414 1,539
Commitments and Contingencies – (See Note 7) – –
Stockholders’ Equity (Deficit):
Common stock held in treasury, at cost – 1 shares (362 ) (362 )
Stock subscription receivable (1,872 ) –
Accumulated other comprehensive loss (43 ) (43 )
Total stockholders’ equity (deficit) 6,251 (9,555 )
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) $ 11,509 $ 6,248
The accompanying notes are an integral part of
these Consolidated Financial Statements.
INTRUSION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
Operating Expenses:
Interest accretion and amortization of debt issuance costs, net 990 (930 )
Other (expense) income, net (6 ) 43
Income Tax – –
Net Loss Per Share:
Weighted Average Common Shares Outstanding:
The accompanying notes are an integral part of
these Consolidated Financial Statements.
INTRUSION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY (DEFICIT)
(In thousands)
Accumulated
Series A Other Additional Stock
Stock-based compensation expense – – – – – – – 972 – – 972
Exercise of stock options – – – 3 – – – 8 – – 8
Public stock offering, net of fees – – 4 405 – – – 4,674 – – 4,678
Restricted stock awards – – – 11 – – – – – – –
Private offering proceeds, net of fees – – 2 218 – – – 2,344 – – 2,346
Issuance of common stock to reduce notes payable – – 1 93 – – – 549 – – 550
Stock-based compensation expense – – – – – – – 343 – – 343
Issuance of common stock to reduce notes payable – – – 52 – – – 200 – – 200
Issuance of common stock to settle vendor payable – – 6 574 – – – 354 – – 360
Redemption of preferred stock (119 ) – – – – – – – – (119 )
Amortization of preferred stock exchange premium 624 – – – – – – (624 ) –
Net loss – – – – – – – – – (7,790 ) (7,790 )
The accompanying notes are an integral part of
these Consolidated Financial Statements.
INTRUSION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
Operating Activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,648 1,659
Gain on disposal of fixed assets 8 –
Provision for credit losses 89 69
Stock-based compensation 343 972
Other non-cash interest 171 729
Changes in operating assets and liabilities:
Accounts receivable 106 97
Prepaid expenses and other assets 89 1,214
Accounts payable and accrued expenses (461 ) 411
Operating lease liabilities (269 ) (269 )
Deferred revenue 291 (16 )