SEC Info - Intrusion Inc. - ‘10-Q’ for 9/30/23

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		Alternative Formats (Word, et al.) Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022 Controls and Procedures Exhibits Financial Information Financial Statements Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations Notes to Unaudited Condensed Consolidated Financial Statements Other Information Part I -- Financial Information Part Ii -- Other Information Risk Factors Signature Page Table of Contents Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023, and 2022 Unaudited Condensed Consolidated Statements of Changes in Stockholders' Deficit for the three and nine months ended September 30, 2023, and 2022 Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023, and 2022 Unregistered Sale of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
1	1st Page – Filing Submission
"	Table of Contents
"	Part I -- Financial Information
"	Item 1. Financial Statements
"	Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022
"	Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023, and 2022
"	Unaudited Condensed Consolidated Statements of Changes in Stockholders' Deficit for the three and nine months ended September 30, 2023, and 2022
"	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023, and 2022
"	Notes to Unaudited Condensed Consolidated Financial Statements
"	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
"	Item 4. Controls and Procedures
"	Part Ii -- Other Information
"	Item 1. Legal Proceedings
"	Item 1A. Risk Factors
"	Item 2. Unregistered Sale of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
"	Item 6. Exhibits
"	Signature Page

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(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Indicate by check mark whether the registrant is a large, accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large, accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ i No ☒

The number of shares outstanding of the Registrant’s Common Stock, $0.01 par value, on November 13, 2023, was i 34,401,395.

The accompanying notes are an integral part of these condensed consolidated financial statements.

INTRUSION INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

The accompanying notes are an integral part of these condensed consolidated financial statements.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

The accompanying notes are an integral part of these condensed consolidated financial statements.

INTRUSION INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q, including, without limitation, the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our financial position; our ability to continue our business as a going concern; our business, sales, and marketing strategies and plans; our ability to successfully market, sell, and deliver our INTRUSION Shield commercial product and solutions to an expanding customer base; and our ability to secure additional financing; are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, such statements.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and our most recent Annual Report on Form 10-K, as the same may be amended or updated from time to time.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. While we believe that such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements do not indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.

Intrusion offers businesses of all sizes and industries products and services that leverage the Company’s exclusive threat intelligence database of over 8.5 billion IP addresses and domain names. After many years of gathering intelligence and providing our INTRUSION TraceCop and Savant solutions exclusively to government entities, we released our first commercial product in 2021, the INTRUSION Shield. INTRUSION Shield was designed to allow businesses to incorporate a Zero Trust, reputation-based security solution into their existing infrastructure to observe traffic flow and instantly block known malicious or unknown connections from both entering or exiting a network, making it an ideal solution for protecting from Zero-Day and ransomware attacks.

Much of 2022 was spent improving the INTRUSION Shield On-Premise performance and developing the Shield Cloud and End-Point solutions, both of which were released in September 2022. During the nine months ended September 30, 2023, our primary focus has been building out our sales reseller and channel platform and working with those partners to 1) increase our sales pipeline and 2) progress customer prospects, leads and opportunities through the sales lifecycle. Gaining traction with our Shield solutions has taken longer than initially anticipated. We feel that the progress made with our reseller and channel community along with refining our product messaging will help to shorten the sales cycle and grow revenues in future periods.

As discussed in more detail below on September 30, 2023, we had $0.2 million in cash. If we are not able to obtain additional debt or equity financing on terms and conditions acceptable to us, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations.

Revenues. Revenue for the three and nine month periods ended September 30, 2023, was $1.5 and $4.2 million compared to $2.2 and $6.1 million for the same periods in 2022. Revenue from our consulting business was $1.0 and $3.1 million for the three and nine month periods ended September 30, 2023, compared to $1.9 and $5.2 million for same periods in 2022. INTRUSION Shield revenues were $0.4 and $1.2 million for the three and nine month periods ended September 30, 2023, compared to $0.3 and $0.9 million for the three and nine month periods ended September 30, 2022.

Concentration of Revenues. For the three and nine month periods ended and September 30, 2023, revenues from sales to various U.S. government entities totaled $0.6 and $1.9 million, or 43.0% and 45.8% of revenues compared to $1.4 and $4.1 million, or 63.3% and 66.8% of revenues, for the same periods in 2022. Although we expect our concentration of revenues to vary among customers in future periods depending upon the timing of certain sales, we anticipate that sales to government customers will continue to account for a significant portion of our revenues in future periods. 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. Although we do not anticipate that any of our revenues from government customers will be renegotiated, any cancelled or renegotiated government orders could have a material adverse effect on our financial results. We had two commercial customers in the three and nine months ended September 30, 2023, and 2022, that each contributed individually to more than 10% of our total revenue. Our 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 was $1.1 and $3.3 million or 77.9% and 77.2% of revenues for the three and nine month periods ended September 30, 2023, compared to $1.2 and $3.3 million or 54.6% and 53.8% of revenues for the three and nine month periods ended September 30, 2022. The increased gross profit is largely due to the loss of the low margin government contract and a shift in product mix with Shield representing a greater percentage of sales.

Operating Expenses. Operating expenses for the three and nine months ended September 30, 2023, totaled $3.8 and $12.9 million, a decrease of 23.6% and 14.0% when compared to $5.0 and $15.0 million for the same periods in 2022. The period over period change was most notably due to reduced legal expense associated with the various litigation matters that arose in 2021, and reduced contract labor and employee costs. Employee headcount on September 30, 2023, totaled 48 compared to 64 on September 30, 2022.

In late March 2023, we implemented cost reduction measures that resulted in approximately $1.5 million in savings per quarter on a go-forward basis. There was no impact on operating expenses in the March quarter resulting from these reductions. In the quarters ended June 30, 2023, and September 30, 2023, we realized $1.5 million and $1.6 million in cost savings, respectively, excluding the impact of non-cash stock-based compensation and capitalized software development. The reductions included the voluntary reduction in compensation for certain of our executive officers for a 6-month period, elimination of 16 full-time positions (“RIF”) and decreased use of contractors. As a form of retention incentive for employees not impacted by the RIF and in exchange for the voluntary reduction in compensation, we issued 553 thousand options for the purchase of shares of common stock.

Sales and Marketing. Sales and marketing expenses were $1.4 and $4.5 million for the three and nine month periods ended September 30, 2023, compared to $1.7 and $4.5 million for the three and nine month periods in 2022. Certain discretionary marketing spend 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. For the three and nine month periods ended September 30, 2023, research and development expenses were $1.2 and $4.4 million compared to $1.5 and $4.6 million for the three and nine month period ended September 30, 2022. In the second quarter of 2022, we implemented the Agile methodology of software development to manage and track our development costs. As a result, we are able to accurately quantify and capture the cost associated with each stage of the development life cycle and, accordingly, are capitalizing costs incurred during the application development stage. For the three and nine month periods ended September 30, 2023, we recorded $0.3 and $1.1 million of research and development costs to internal use software compared to $0.5 million and $0.9 million for the three and nine month periods ended September 30, 2022, respectively. The net increased spend for the nine month period, including amounts capitalized, of $0.3 million related to costs to harden the design and user interface related to the Shield suite of products. 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 were $1.3 and $4.0 million for the three and nine month periods ended September 30, 2023, compared to $1.9 and $6.0 million for the three and nine month periods ended September 30, 2022. The decrease in general and administrative expenses is primarily due to a reduction in legal costs of $0.2 and $1.1 million for the three and nine month periods associated with various litigation matters that arose in 2021. The reduction in legal for the nine month period is net of $0.3 million expense related to a registered direct offering and S-1 filing that were withdrawn. Additional items contributing to the reduction for the three and nine month periods included (i) reduced use of consultants and contractors in 2023 of $0.1 and $0.4 million, respectively (ii) recruiting fees incurred in the September 2022 period of $0.1 million, and (iii) voluntary temporary reductions in director and officer compensation of $0.1 and $0.2 million, respectively for the three and nine month periods.

Interest Expense. Our interest expense consists primarily of interest related to the Streeterville notes entered into in March and June of 2022 and related debt issuance cost amortization as well as interest expense from finance leases. Interest expense for the quarter ended September 30, 2023, decreased $0.5 million to $0.5 million. The decrease primarily relates to the reversal of interest recorded to accrete the value of the Streeterville notes to the stock-settled value for potential redemptions paid in stock as no redemption payments in cash or stock were made in the quarter. Interest expense for the nine months ended September 30, 2023, totaled $1.5 million compared to $1.7 million for the nine months ended September 30, 2022. The increase is due to the Streeterville notes not being outstanding for the full nine-months in 2022. Interest expense will vary in the future based on our cash flow and borrowing needs.

Interest and Other Income. Interest and other income were negligible for the three and nine month periods ended September 30, 2023. The September 2022 period included $2.0 million related to the Cares Act Employee Retention Credit.

As of November 10, 2023, we had $2.4 million of cash which includes $2.4 million in net proceeds received from the sale of common stock through a private placement which closed on November 8, 2023.

On August 11, 2023, we filed an S-1 Registration Statement for a public offering of our common stock and warrants to purchase common stock. The filing was subsequently amended on August 25^th and September 18^th. On October 10, 2023, we withdrew the S-1 filing prior to going effective. We currently do not have plans to pursue an S-1 public offering in the near future.

However, we will need to raise additional funds to continue operations and comply with our financial obligations. We intend to obtain these funds through one or more offerings of debt or equity securities, including through private placements, and the use of our ATM program. We can provide no assurances that we will be able to obtain such financing on acceptable terms or at all and, in the case of equity or equity-linked financings, such financings will result in additional dilution to our stockholders.

As of September 30, 2023, we had cash and cash equivalents of $0.2 million, down from $3.0 million as of December 31, 2022, and a working capital deficit of ($14.8) million compared to ($7.8) million as of December 31, 2022.

Our principal sources of cash for funding operations in 2023 has been net proceeds received from sales of common stock using our ATM program of $3.0 million and net funds through changes in working capital which includes receipt of the remaining ERC refund in the March quarter of $1.4 million. Our principal source of cash for funding operations and growth in 2022 was issuance of the two Streeterville notes which contributed $9.3 million, net of issuance costs, and $6.4 million from the sale and issuance of common stock and warrants.

We entered into a 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.

The notes had original maturity dates in September and December 2023. In August 2023, we entered into a Forbearance Agreement with Streeterville whereby the maturity date for each note was extended by 12 months to September 2024 and December 2024, respectively.

Streeterville has the right to redeem up to $0.5 million of the outstanding balance of each note per month. Payments may be made by the Company, generally at the Company’s option, (a) in cash, (b) by paying the redemption amount in the form of shares of common stock or (c) a combination of cash and shares of common stock. If paid in common stock, the number of redemption shares to be issued is based on a 15% discount to market, as further defined in the note agreements. Through December 2022, Streeterville made three separate redemption requests totaling $1.5 million, which we satisfied in cash. In January 2023, the note agreements were amended whereby Streeterville waived their right to redemptions through March 31, 2023, in exchange for a fee equal to 3.75% of the outstanding note balance. This fee was added to the outstanding principal balance to be paid at maturity. No redemptions have been made in 2023. As of September 30, 2023, the total outstanding amount payable to Streeterville under the notes payable which includes principal, accrued interest and fees associated with agreement modifications was $10.6 million.

On October 11, and October 17, 2023, we agreed to exchange $0.4 million in aggregate principal on Note 1 for 1.0 million shares of our common stock. The issuance of the shares was made pursuant to the exemption from the registration requirements afforded by Section 3(a)(9) of the Securities Act of 1933, as amended.

There can be no assurance that we will improve our liquidity position or our ability to make redemption or principal payments.

In August of 2021, we engaged B. Riley Securities, Inc. to act as sales agent under our at-the-market program, which allows us to potentially sell up to $50.0 million of our common stock using the shelf-registration statement on Form S-3 filed on August 5, 2021. On April 11, 2023, as a result of limitations under General Instruction I.B.6 of Form S-3, and in agreement with the terms of the sales agreement, the Company revised the aggregate offering price of shares of common stock that we can sell pursuant to the ATM program to $15.0 million. For the nine months ended September 30, 2023, we received $3.0 million, net of fees for sales of common stock pursuant to the program.

For as long as our public float is less than $75 million, we will be subject to the limitations set forth in General Instruction I.B.6 of Form S-3, which limit our ability to conduct primary offerings. Under such limitations, we may not sell, during any 12-month period, securities on Form S-3 having an aggregate market value of more than one-third of our public float. As of November 13, 2023, our public float calculated in accordance with General Instruction I.B.6 of Form S-3 was $13.2 million.

Our cash flows for the nine months ended September 30, 2023, and 2022 (in thousands) were:

Net cash used in operations for the nine months ended September 30, 2023, was ($4.8) million due to a net loss of ($11.1) million, offset by 1) adjustments for non-cash items of $3.5 million which are mostly comprised of depreciation, stock-based compensation, and interest related to Streeterville notes and 2) $2.8 million provided from working capital principally relating to the cash receipt of amounts due relating to Employee Retention Credit, and increased accounts payable of $1.0 million.

Net cash used in operations for the nine months ended September 30, 2022, was ($9.6) million due primarily to a net loss of ($11.0) million partially offset by the following sources of cash and non-cash items: $1.5 million add back of non-cash expense comprised mostly of depreciation and stock-based compensation and ($0.1) million changes in working capital.

For the nine months ended September 30, 2023, net cash used in investing activities was ($1.0) million, which was principally the capitalization of internally developed software. Net cash used by investing activities, for the nine months ended September 30, 2022, was ($1.1) million consisting of ($0.9) million of capitalized internally developed software and ($0.2) million for purchases of property and equipment.

For nine months ended September 30, 2023, net cash provided by financing activities was $3.0 million which consisted principally of proceeds from sales of common stock using our ATM program. Cash provided by financing activities for the 2022 period totaled $13.5 million which was primarily the result of proceeds from issuance of the Streeterville notes, net of issuance costs and principal repayment of $8.8 million, $3.3 million in net proceeds from the sale of shares and warrants pursuant to our registered direct offering and sales of stock using our ATM program of $1.9 million, partially offset by finance lease payments of ($0.6) million.

Our condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

We believe the critical accounting policies and estimates discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 31, 2023, reflect our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements. There have been no other significant changes to our critical accounting policies and estimates as filed in such report.

We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we must apply our reasonable judgment in evaluating the cost-benefit relationship of potential disclosure controls and procedures.

As of September 30, 2023, our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures and concluded that the disclosure controls and procedures were effective as of September 30, 2023.

There have not been any changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

On April 16, 2021, a class action lawsuit was filed in the United States District Court, Eastern District of Texas, Sherman Division, captioned Celeste v. Intrusion Inc. et al., Case No. 4:21-cv-00307 (E.D. Tex.) against us, our now-former chief financial officer, and now-former chief executive officer alleging, among other things, that the defendants made false and/or misleading statements or omissions about our business, operations, and prospects in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, as well as Section 20(a) of the Exchange Act. The Celeste lawsuit claimed compensatory damages and legal fees.

On May 14, 2021, a related class action lawsuit was filed in the United States District Court, Eastern District of Texas, Sherman Division, captioned Neely v. Intrusion Inc., et al., Case No. 4:12-cv-00374 (E.D. Tex.) against us, our now-former chief financial officer, and now-former chief executive officer. The Neely lawsuit alleged the same violations under the federal securities laws as those alleged in the Celeste lawsuit. The Neely lawsuit also sought compensatory damages and legal fees.

On November 23, 2021, the Court consolidated the Celeste and Neely actions, and appointed a lead plaintiff and lead plaintiff’s counsel. The lead plaintiff filed his amended complaint on February 7, 2022.

The parties to the consolidated class action held a mediation on April 5, 2022, at the conclusion of which the parties executed a settlement term sheet setting forth the material terms associated with the resolution of the action, subject to the preparation of formal documents and a plan of distribution approved by the Court. The settlement agreement was subject to certain terms and conditions and received final approval by the Court on December 16, 2022. At that time, a final judgment was entered dismissing the case, with the Court retaining jurisdiction over the action for purposes of enforcing the terms of the class settlement agreement. The $3.3 million settlement was paid by our insurance provider under our insurance policy as our retention had previously been exhausted.

The lead plaintiff in the class action filed a motion for distribution of settlement funds on February 21, 2023. The Court approved the parties’ class action settlement and plan of allocation on March 22, 2023, and cancelled the previously rescheduled March 31, 2023, hearing on the motion for distribution, all remaining matters in the class action then-pending have been fully and finally adjudicated.

On August 8, 2021, we received a notification from the Securities and Exchange Commission, Division of Enforcement, that it was conducting an investigation captioned In the Matter of Intrusion Inc. and requesting we produce certain documents and information. On November 9, 2021, the Securities and Exchange Commission served a subpoena to us in connection with this investigation which formally requested substantially similar information as in the prior request. On September 26, 2023, we consented to the entry of final judgment, in the action styled Securities and Exchange Commission v Intrusion Inc., No. 4:23-cv-00859 (E.D. Tex. filed September 26, 2023). On October 5,2023, the court approved the final judgment with no penalties assessed against the Company.

On June 3, 2022, a stockholder derivative complaint was filed in U.S. District Court, District of Delaware by plaintiff Nathan Prawitt on behalf of Intrusion against certain of our current and former officers and directors. 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 us 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 our common stock by certain of the Defendants. On September 28, 2023, we agreed to settle the claim. On October 2, 2023, public notice of the settlement agreement was given. The settlement agreement provides in part for (i) an amendment to our 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 will be paid by our insurance provider under our insurance policy since our $0.5 million retention was previously exhausted. A hearing is scheduled for January 17, 2024, to obtain court approval of the settlement, agreement for the court to rule upon any objections to the proposed settlement, and for entry of final judgment in the matter.

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 condensed 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.

In addition to the information set forth elsewhere in this Quarterly Report on Form 10-Q and the risk factor set forth below, you should carefully consider the risk factors we previously disclosed in our Annual Report on Form 10-K, filed with the SEC on March 31, 2023, as of and for the year ended December 31, 2022 (the “Annual Report”). These risks could materially and adversely affect our business, financial condition, results of operations, and cash flows. However, these risks are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business, financial condition, results of operations, and cash flows.

We may not be able to implement our current business plan or continue operations unless we are able to raise additional funds through public or private financings.

As of November 10, 2023, we had $2.4 million in cash. We need to raise additional funds in the near term to continue operations and comply with our financial obligations. We intend to obtain these funds through one or more offerings of debt or equity securities, including through private placements, and the use of our ATM program. We can provide no assurances that we will be able to obtain such financing on acceptable terms or at all and, in the case of equity or equity-linked financings, such financings will result in additional dilution to our stockholders.

If we are unable to obtain additional debt or equity financing on acceptable terms, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations. Specifically, we may have to further reduce our workforce, sell our assets, and reduce or cease activities to grow our business. Such actions may impact our ability to comply with the obligations under our commercial contracts, including those under the government contract for which we received prepayment of the full one-year term in April 2023. Failure to comply with such contracts may result in the termination of such contracts and us being obligated to return some or any prepayments we received. We may also fail to satisfy our obligations under the Streeterville notes.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

On October 11 and October 17, 2023, we agreed to exchange $0.4 million in aggregate principal on Streeterville Note #1 for 1.0 million shares of our common stock. The issuance of the shares was made pursuant to the exemption from the registration requirements afforded by Section 3(a)(9) of the Securities Act of 1933, as amended.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

i ☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended i September 30, 2023

OR

i ☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number i 001-39608

i Delaware	i 75-1911917
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
i Common Stock, par value $0.01 per share	i INTZ	i Nasdaq Capital Market

Large, accelerated filer	☐	Accelerated filer	☐
i Non-accelerated Filer	☒	Smaller reporting company	i ☒
		Emerging growth company	i ☐


	September 30, 2023			December 31, 2022
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	i 177		$	i 3,015
Accounts receivable, net		i 450			i 530
Prepaid expenses and other assets		i 305			i 1,877
Total current assets		i 932			i 5,422
Noncurrent Assets:
Property and equipment:
Equipment		i 3,115			i 2,865
Capitalized software development		i 2,527			i 1,380
Furniture and fixtures		i 43			i 43
Leasehold improvements		i 78			i 78
Property and equipment, gross		i 5,763			i 4,366
Accumulated depreciation and amortization		( i 2,921	)		( i 2,208	)
Property and equipment, net		i 2,842			i 2,158
Finance leases, right-of-use assets, net		i 549			i 1,048
Operating leases, right-of-use assets, net		i 237			i 504
Other assets		i 161			i 143
Total noncurrent assets		i 3,789			i 3,853
TOTAL ASSETS	$	i 4,721		$	i 9,275

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable, trade	$	i 2,497		$	i 1,273
Accrued expenses		i 635			i 446
Finance lease liabilities, current portion		i 617			i 667
Operating lease liabilities, current portion		i 113			i 294
Notes payable, current portion		i 11,021			i 10,114
Deferred revenue		i 862			i 455
Total current liabilities		i 15,745			i 13,249

Noncurrent Liabilities:
Finance lease liabilities, noncurrent portion		i 4			i 10
Operating lease liabilities, noncurrent portion		i 135			i 231
Notes payable, noncurrent portion		i 370			i –
Total noncurrent liabilities		i 509			i 241

Commitments and Contingencies – (See Note 5)		–			–

Stockholders’ Deficit:
Preferred stock, $ i i 0.01 / par value: Authorized shares – i i 5,000 / Issued shares – i i 0 / in 2023 and 2022		i –			i –
Common stock, $ i i 0.01 / par value: Authorized shares – i i 80,000 / ; Issued shares – i 24,620 in 2023 and i 21,198 in 2022; Outstanding shares – i 24,610 in 2023 and i 21,188 in 2022		i 246			i 212
Common stock held in treasury, at cost – i i 10 / shares		( i 362	)		( i 362	)
Additional paid-in capital		i 96,026			i 92,304
Accumulated deficit		( i 107,400	)		( i 96,326	)
Accumulated other comprehensive loss		( i 43	)		( i 43	)
Total stockholders’ deficit		( i 11,533	)		( i 4,215	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	i 4,721		$	i 9,275

Intrusion Inc. – ‘10-Q’ for 9/30/23

On: Tuesday, 11/14/23, at 4:07pm ET · For: 9/30/23 · Accession #: 1683168-23-8126 · File #: 1-39608

Previous ‘10-Q’: ‘10-Q’ on 8/14/23 for 6/30/23 · Latest ‘10-Q’: This Filing · 7 References:

Quarterly Report — Form 10-Q

Filing Table of Contents

‘10-Q’ — Quarterly Report

Document Table of Contents

This is an HTML Document rendered as filed. [ Alternative Formats ]

Dates Referenced Herein and Documents Incorporated by Reference

3 Subsequent Filings that Reference this Filing

4 Previous Filings that this Filing References

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements	3

Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022	3

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023, and 2022	4

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the three and nine months ended September 30, 2023, and 2022	5

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023, and 2022	6

Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 4. Controls and Procedures	22

PART II – OTHER INFORMATION

Item 1. Legal Proceedings	23

Item 1A. Risk Factors	24

Item 2. Unregistered Sale of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	25

Item 6. Exhibits	25

Signature Page	26


	Nine Months Ended
	September 30, 2023			September 30, 2022
Operating Activities:
Net loss	$	( i 11,074	)	$	( i 11,035	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		i 1,214			i 925
Bad debt expense		i 59			i –
Stock-based compensation		i 718			i 1,106
Non-cash lease costs		i 267			i 227
Amortization of debt issuance costs		i 446			i 590
Non-cash interest and interest accretion up to the redemption common stock settlement amount		i 831			i 1,038
Employee retention credit		i –			( i 2,000	)
Gain on lease termination		i –			( i 385	)
Changes in operating assets and liabilities:
Accounts receivable		i 21			i 118
Prepaid expenses and other assets		i 1,572			( i 473	)
Accounts payable and accrued expenses		i 1,037			i 1,018
Operating lease liabilities		( i 277	)		( i 995	)
Deferred revenue		i 407			i 309
Net cash used in operating activities		( i 4,779	)		( i 9,557	)

Investing Activities:
Capitalization of software development		( i 1,013	)		( i 890	)
Purchases of property and equipment		( i 28	)		( i 223	)
Net cash used in investing activities		( i 1,041	)		( i 1,113	)

Financing Activities:
Proceeds from notes payable		i –			i 10,000
Payment on notes payable issuance costs		i –			( i 710	)
Principal payments on notes payable		i –			( i 500	)
Proceeds from stock options exercised		i 7			i 66
Proceeds from registered direct offering, net of fees		i –			i 3,312
Proceeds from public stock offering, net of fees		i 3,036			i 1,891
Withholdings related to stock-based compensation awards		( i 5	)		i –
Reduction of finance lease liability		( i 56	)		( i 583	)
Net cash provided by financing activities		i 2,982			i 13,476

Net (decrease) increase in cash and cash equivalents		( i 2,838	)		i 2,806
Cash and cash equivalents at beginning of period		i 3,015			i 4,100
Cash and cash equivalents at end of period	$	i 177		$	i 6,906

SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
Cash paid for interest	$	i 166		$	i 30

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for lease termination	$	i –		$	i 200
Equipment purchases and capitalized software included in accounts payable	$	i 358		$	i –

	·	Computer hardware and copy machines- The Company’s finance lease right-of-use assets consist of computer hardware and copy machines. These leases have a three-year life and are in various stages of completion.

	·	Office space - The Company’s operating lease right-of-use assets include its rental agreements for its offices in Plano, TX, and a data service center in Allen, TX. The Plano offices operating lease expired on September 30, 2023. In October 2023, the Company signed a new lease with a term of eleven years and one month that commences upon completion of tenant improvements. A temporary lease has been signed and is effective until tenant improvements are complete. The data service center operating lease liability has a life of two years and one month as of September 30, 2023.

Schedule of stock option activities
	September 30, 2023
	Number of Options			Weighted Average
	(In thousands)			Exercise Price
Outstanding at beginning of year		i 668		$	i 5.22
Granted		i 626			i 1.25
Exercised		( i 72	)		i 0.48
Forfeited		( i 170	)		i 4.32
Expired		( i 42	)		i 8.19
Outstanding on September 30, 2023		i 1,010		$	i 3.12
Options exercisable on September 30, 2023		i 434		$	i 4.24

	i)	identification of the contract with a customer;

	ii)	identification of the performance obligations in the contract;

	iii)	determination of the transaction price;

	iv)	allocation of the transaction price to each separate performance obligations; and

	v)	recognition of revenue upon satisfaction of a performance obligation.

	·	Access to Intrusion’s proprietary software and database to detect and prevent unauthorized access to its clients’ information networks;

	·	Use of all software, associated media, printed materials, data, files, online documentation, and any equipment that Intrusion provides for customers to access the INTRUSION Shield; and

	·	Tech support, post contract customer support (PCS) includes daily program releases or corrections provided by Intrusion without additional charge.

Schedule of contract liability
	September 30, 2023			December 31, 2022
Balance at beginning of period	$	i 455		$	i 560
Additions		i 2,619			i 1,877
Revenue recognized		( i 2,212	)		( i 1,982	)
Balance at end of period	$	i 862		$	i 455

	Nine Months Ended
	September 30, 2023			September 30, 2022
Net cash used in operating activities	$	(4,779	)	$	(9,557	)
Net cash used in investing activities		(1,041	)		(1,113	)
Net cash provided by financing activities		2,982			13,476
Change in cash and cash equivalents	$	(2,838	)	$	2,806

3.1	Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on October 2, 2023).
4.1	Form of Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on November 9, 2023).
4.2	Form of Placement Agent Warrant (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on November 9, 2023).
10.1	Forbearance and Standstill Agreement dated August 2, 2023, by and between Registrant and Streeterville Capital, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K on August 7, 2023).
10.2	Amendment to Forbearance Agreement dated August 7, 2023, by and between Registrant and Streetervile Capital, LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on August 7, 2023).
10.3	Stipulation of Compromise and Settlement dated September 28, 2023 (Prawatt V Blount, et al.) (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on October 2, 2023).
10.4	Exchange Agreement dated October 11, 2023, by and between registrant and Streeterville Capital, LLC (incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on October 17, 2023).
10.5	Exchange Agreement dated October 17, 2023, by and between Registrant and Streeterville Capital, LLC (incorporated by reference to Exhibit 99.2 of the Registrant’s Current Report on Form 8-K filed on October 17, 2023).
10.6	Form of Securities Purchase Agreement between the Company and the Purchasers dated November 8, 2023 (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on November 9, 2023).
10.7	Form of Placement Agent Agreement between the Company and Wellington Shields & Co. LLC dated November 8, 2023 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on November 9, 2023).
10.8	Form of Lock-up Agent Agreement (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on November 9, 2023).
31.1*	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
31.2*	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
32.1**	Certification Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*	Filed herewith.
**	Furnished herewith.

	INTRUSION INC.

Date: November 14, 2023	/s/ *Anthony Scott*
	Anthony Scott
	President & Chief Executive Officer (Principal Executive Officer)



Date: November 14, 2023	/s/ *Kimberly Pinson*
	Kimberly Pinson
	Chief Financial Officer, (Principal Financial & Accounting Officer)

This ‘10-Q’ Filing	Date	Other Filings

	9/14/27
	1/17/24
Filed on:	11/14/23	8-K
	11/13/23	4
	11/10/23
	11/9/23	4, 8-K
	11/8/23	4, 8-K
	10/26/23	8-K
	10/17/23	8-K
	10/11/23	8-K
	10/10/23	8-K, RW
	10/5/23
	10/2/23	8-K
For Period end:	9/30/23
	9/28/23	3, 4
	9/26/23	8-K
	8/11/23	S-1
	8/7/23	8-K
	8/2/23
	6/30/23	10-Q
	4/11/23	424B5, 8-K
	3/31/23	10-K, 10-Q, 8-K
	3/22/23
	2/21/23
	1/11/23	8-K
	12/31/22	10-K
	12/16/22	8-K
	11/10/22	4
	9/30/22	10-Q
	9/14/22	424B5
	9/12/22	8-K
	6/30/22	10-Q
	6/29/22	8-K
	6/3/22
	4/5/22	8-K, PRE 14A
	3/31/22	10-Q
	3/10/22	8-K
	2/7/22
	12/31/21	10-K
	11/23/21
	11/9/21
	8/8/21
	8/5/21	8-K, S-3
	5/14/21
	4/16/21
		List all Filings

Intrusion Inc. – ‘10-Q’ for 9/30/23

On: Tuesday, 11/14/23, at 4:07pm ET · For: 9/30/23 · Accession #: 1683168-23-8126 · File #: 1-39608

Quarterly Report — Form 10-QFiling Table of Contents

‘10-Q’ — Quarterly ReportDocument Table of Contents

This is an HTML Document rendered as filed. [ Alternative Formats ]

Dates Referenced Herein and Documents Incorporated by Reference

3 Subsequent Filings that Reference this Filing

4 Previous Filings that this Filing References

Quarterly Report — Form 10-Q

Filing Table of Contents

‘10-Q’ — Quarterly Report

Document Table of Contents