INTRUSION INC. 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2024

OR

☐	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 0-20191

INTRUSION INC.

(Exact name of registrant as specified in its charter)

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

101 East Park Blvd, Suite 1200, Plano, Texas 75074

(Address of principal executive offices)

(Zip Code)

(888) 637-7770

(Registrant’s telephone number, including area code)

N/A

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

* * * * * * * * * *

Securities registered pursuant to Section 12(b) of the Act:

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

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.

Yes ☒ No ☐

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

Yes ☒ No ☐

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

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

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

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

The number of shares outstanding of the Registrant’s Common Stock, $0.01 par value, on November 13, 2024, was 8,056,021.

INTRUSION INC.

INDEX

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements	3

Condensed Consolidated Balance Sheets as of September 30, 2024 (unaudited), and December 31, 2023	3

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2024, and 2023	4

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2024, and 2023	5

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2024, and 2023	7

Notes to Unaudited Condensed Consolidated Financial Statements	8

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk	23

Item 4. Controls and Procedures	23

PART II – OTHER INFORMATION	24

Item 1. Legal Proceedings	24

Item 1A. Risk Factors	24

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Purchases of Equity Securities	27

Item 3. Defaults Upon Senior Securities	27

Item 4. Mine Safety Disclosures	27

Item 5. Other Information	28

Item 6. Exhibits	28

Signature Page	29

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

INTRUSION INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)


	September 30, 2024			December 31, 2023
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	1,051		$	139
Accounts receivable, net		924			364
Prepaid expenses and other assets		500			635
Total current assets		2,475			1,138
Noncurrent Assets:
Property and Equipment:
Equipment		1,886			2,069
Capitalized software development		3,688			2,791
Leasehold improvements		18			15
Property and equipment		5,592			4,875
Accumulated depreciation and amortization		(2,515	)		(1,955	)
Property and equipment, net		3,077			2,920
Finance leases, right-of-use assets, net		154			382
Operating leases, right-of-use assets, net		1,434			1,637
Other assets		274			171
Total noncurrent assets		4,939			5,110
TOTAL ASSETS	$	7,414		$	6,248

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts payable, trade	$	1,142		$	2,215
Accrued expenses		402			222
Finance lease liabilities, current portion		261			384
Operating lease liabilities, current portion		232			178
Notes payable		1,118			10,823
Deferred revenue		298			439
Total current liabilities		3,453			14,261

Noncurrent Liabilities:
Finance lease liabilities, noncurrent portion		–			3
Operating lease liabilities, noncurrent portion		1,394			1,539
Total noncurrent liabilities		1,394			1,542

Commitments and Contingencies – (See Note 5)		–			–

Stockholders’ Equity (Deficit):
Series A preferred stock $0.01 par value: Authorized shares – 20; Issued and outstanding shares – 9 in 2024 and 0 in 2023		8,946			–
Common stock $0.01 par value: Authorized shares – 80,000; Issued shares – 7,516 in 2024 and 1,848 in 2023; Outstanding shares – 7,515 in 2024 and 1,847 in 2023		75			18
Common stock held in treasury, at cost – 1 share		(362	)		(362	)
Additional paid-in capital		110,001			101,049
Accumulated deficit		(116,050	)		(110,217	)
Accumulated other comprehensive loss		(43	)		(43	)
Total stockholders’ equity (deficit)		2,567			(9,555	)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	7,414		$	6,248

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

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


	Three Months Ended						Nine Months Ended
	September 30, 2024			September 30, 2023			September 30, 2024			September 30, 2023
Revenue	$	1,504		$	1,468		$	4,095		$	4,245
Cost of revenue		344			324			920			967

Gross profit		1,160			1,144			3,175			3,278

Operating expenses:
Sales and marketing		1,207			1,357			3,542			4,518
Research and development		1,150			1,171			3,204			4,418
General and administrative		841			1,309			2,972			4,000

Operating loss		(2,038	)		(2,693	)		(6,543	)		(9,658	)

Interest expense		(12	)		(211	)		(274	)		(729	)
Interest accretion and amortization of debt issuance costs, net		–			(309	)		990			(730	)
Other (expense) income, net		–			2			(6	)		43

Net loss	$	(2,050	)	$	(3,211	)	$	(5,833	)	$	(11,074	)

Net loss per share:
Basic	$	(0.35	)	$	(2.78	)	$	(1.49	)	$	(10.13	)
Diluted	$	(0.35	)	$	(2.78	)	$	(1.49	)	$	(10.13	)

Weighted average common shares outstanding:
Basic		6,557			1,154			4,264			1,093
Diluted		6,557			1,154			4,264			1,093

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

INTRUSION INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands)


															Accumulated
	Series A														Other			Additional
	Preferred Stock					Common Stock				Treasury Stock					Comprehensive			Paid-In			Accumulated
	Dollars			Shares		Dollars		Shares		Dollars			Shares		Loss			Capital			Deficit			Total
Balance, December 31, 2023	$	–			–	$	18		1,848	$	(362	)		1	$	(43	)	$	101,049		$	(110,217	)	$	(9,555	)
Stock-based compensation expense		–			–		–		–		–			–		–			142			–			142
Issuance of preferred stock to reduce note payable		9,275			9		–		–		–			–		–			–			–			9,275
Public stock offering, net of fees		–			–		1		115		–			–		–			484			–			485
Issuance of common stock to reduce note payable		–			–		–		52		–			–		–			200			–			200
Net loss		–			–		–		–		–			–		–			–			(1,716	)		(1,716	)
Balance, March 31, 2024	$	9,275			9	$	19		2,015	$	(362	)		1	$	(43	)	$	101,875		$	(111,933	)	$	(1,169	)
Stock-based compensation expense		–			–		–		–		–			–		–			67			–			67
Public stock offering, net of fees		–			–		15		1,466		–			–		–			2,816			–			2,831
Issuance of common stock and warrants associated with warrant inducement		–			–		2		186		–			–		–			565			–			567
Issuance of common stock and warrants, net of fees		–			–		13		1,349		–			–		–			2,606			–			2,619
Exchange of Series A preferred stock for common stock		(609	)		–		4		366		–			–		–			605			–			–
Issuance of preferred stock for payment of preferred return		290			–		–		–		–			–		–			(290	)		–			–
Issuance of common stock in exchange for minority interest in company		–			–		1		59		–			–		–			99			–			100
Net loss		–			–		–		–		–			–		–			–			(2,067	)		(2,067	)
Balance, June 30, 2024	$	8,956			9	$	54		5,441	$	(362	)		1	$	(43	)	$	108,343		$	(114,000	)	$	2,948
Stock-based compensation expense		–			–		–		–		–			–		–			55			–			55
Public stock offering, net of fees		–			–		14		1,380		–			–		–			1,469			–			1,483
Issuance of common stock associated with entry into Standby Equity Purchase Agreement		–			–		3		310		–			–		–			(1	)		–			2
Issuance of common stock for advance on Standby Equity Purchase Agreement, net of fees		–			–		2		150		–			–		–			105			–			107
Issuance of common stock to settle vendor payable		–			–		1		124		–			–		–			135			–			136
Exchange of Series A preferred stock for common stock		(143	)		–		1		111		–			–		–			142			–			–
Issuance of preferred stock for payment of preferred return		246			–		–		–		–			–		–			(247	)		–			(1	)
Redemption of preferred stock		(113	)		–		–		–		–			–		–			–			–			(113	)
Net loss		–			–		–		–		–			–		–			–			(2,050	)		(2,050	)
Balance, September 30, 2024	$	8,946			9	$	75		7,516	$	(362	)		1	$	(43	)	$	110,001		$	(116,050	)	$	2,567


														Accumulated
	Series A													Other			Additional
	Preferred Stock				Common Stock				Treasury Stock					Comprehensive			Paid-In			Accumulated
	Dollars		Shares		Dollars		Shares		Dollars			Shares		Loss			Capital			Deficit			Total
Balance, December 31, 2022	$	–		–	$	11		1,060	$	(362	)		1	$	(43	)	$	92,505		$	(96,326	)	$	(4,215	)
Stock-based compensation expense		–		–		–		–		–			–		–			94			–			94
Exercise of stock options		–		–		–		3		–			–		–			7			–			7
Public stock offering, net of fees		–		–		–		–		–			–		–			21			–			21
Tax withholdings related to stock-based compensation awards		–		–		–		–		–			–		–			(5	)		–			(5	)
Net loss		–		–		–		–		–			–		–			–			(4,734	)		(4,734	)
Balance, March 31, 2023	$	–		–	$	11		1,063	$	(362	)		1	$	(43	)	$	92,622		$	(101,060	)	$	(8,832	)
Stock-based compensation expense		–		–		–		–		–			–		–			331			–			331
Public stock offering, net of fees		–		–		–		48		–			–		–			1,309			–			1,309
Issuance of restricted stock, net of forfeitures		–		–		–		11		–			–		–			–			–			–
Net loss		–		–		–		–		–			–		–			–			(3,129	)		(3,129	)
Balance, June 30, 2023	$	–		–	$	11		1,122	$	(362	)		1	$	(43	)	$	94,262		$	(104,189	)	$	(10,321	)
Stock-based compensation expense		–		–		–		–		–			–		–			293			–			293
Public stock offering, net of fees		–		–		1		109		–			–		–			1,705			–			1,706
Net loss		–		–		–		–		–			–		–			–			(3,211	)		(3,211	)
Balance, September 30, 2023	$	–		–	$	12		1,231	$	(362	)		1	$	(43	)	$	96,260		$	(107,400	)	$	11,533

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

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


	Nine Months Ended
	September 30, 2024			September 30, 2023
Operating Activities:
Net loss		(5,833	)	$	(11,074	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,183			1,214
Bad debt expense		29			59
Gain on disposal of fixed assets		8			–
Stock-based compensation		264			718
Noncash lease costs		302			267
Note 1 and 2 interest accretion up to the redemption common stock settlement amount and debt issuance costs		(990	)		446
Other amortization of debt issuance costs		83			831
Other noncash interest		182			–
Changes in operating assets and liabilities:
Accounts receivable		(589	)		21
Prepaid expenses and other assets		115			1,572
Accounts payable and accrued expenses		(555	)		1,037
Operating lease liability		(173	)		(277	)
Deferred revenue		(141	)		407
Net cash used in operating activities		(6,115	)		(4,779	)

Investing Activities:
Purchases of property and equipment		(66	)		(28	)
Capitalized software development		(985	)		(1,013	)
Net cash used in investing activities		(1,051	)		(1,041	)

Financing Activities:
Proceeds from notes payable		1,838			–
Payments on notes payable		(1,443	)		–
Proceeds from public stock offering net of fees		4,799			3,036
Proceeds from warrant inducements		567			–
Proceeds from sales of common stock and warrants, net of fees		2,619			–
Proceeds from sale of stock under standby purchase equity agreement		97			–
Proceeds from stock options exercised		–			7
Tax withholdings related to stock-based compensation awards		–			(5	)
Reduction of finance lease liability		(399	)		(56	)
Net cash provided by financing activities		8,078			2,982

Net increase (decrease) in cash and cash equivalents		912			(2,838	)
Cash and cash equivalents at beginning of period		139			3,015
Cash and cash equivalents at end of period	$	1,051		$	177

SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
Cash paid for interest	$	112		$	166

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capitalized asset and capitalized software included in accounts payable	$	88		$	358
Accounts payable on capitalized assets settled with vendor	$	116		$	–
Common stock issued to reduce notes payable	$	200		$	–
Preferred stock issued to reduce notes payable	$	9,275		$	–
Modification of right-of-use finance lease	$	273		$	–
Common stock used for minority investment in company	$	100		$	–
Common stock issued to settle accounts payable	$	136		$	–
Redemption of preferred stock to reduce notes payable	$	100		$	–

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

INTRUSION INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Description of Business

Intrusion Inc. (together with its condensed consolidated subsidiaries, the “Company”, “Intrusion”, “Intrusion Inc.”, “we”, “us”, “our”, or similar terms) was organized in Texas in September 1983 and reincorporated in Delaware in October 1995. Our principal executive offices are located at 101 East Park Boulevard, Suite 1200, Plano, Texas 75074, and our telephone number is (888) 637-7770. Our website URL is www.intrusion.com.

The Company develops, sells, and supports products that protect any-sized company or government organization by fusing advanced threat intelligence with real-time mitigation to kill cyberattacks as they occur – including Zero-Days. The Company markets and distributes the Company’s solutions through value-added resellers, managed service providers and a direct sales force. The Company’s end-user customers include United States (“U.S.”) federal government entities, state and local government entities, and companies ranging in size from mid-market to large enterprises.

TraceCop (“TraceCop™”) and Savant (“Savant™”) are registered trademarks of Intrusion Inc. The Company has applied for trademark protection for the Company’s new INTRUSION Shield cybersecurity solution.

2.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Item 10-01 of Regulation S-X. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. All adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods have been made and are of a recurring nature unless otherwise disclosed herein. The results of operations for such interim periods are not necessarily indicative of the results of operations for a full year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 1, 2024. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to condensed consolidated financial statements when the fair value is different from 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.

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As of September 30, 2024, the Company had cash and cash equivalents of $1.1 million and a working capital deficit of $1.0 million. In addition, the Company has incurred net operating losses during the last four years. These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date of these financial statements. The Company’s principal source of funding operations in 2024 has been proceeds received from the issuance of common stock in a series of transactions which include $4.8 million from ATM sales, $2.6 million from a private placement, and $0.6 million from the exercise of warrants. Management plans to continue to fund the operations of the Company through the issuance of common stock using a combination of ATM and equity financings. If the Company is not able to raise adequate funds under the Company’s ATM program or obtain additional equity financing, the Company may be unable to implement the Company’s business plan, fund its liquidity needs or even continue its operations. The financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that may be necessary if the Company is unable to continue as a going concern.

The audit opinion that accompanied the Company’s financial statements as of and for the year ended December 31, 2023, was qualified in that the Company’s auditors expressed substantial doubt about the Company’s ability to continue as a going concern.

Reverse Stock Split

The Company effected a reverse stock split of 1-for-20 on March 22, 2024. Unless otherwise stated, all share and per share amounts for all periods presented have been adjusted to reflect the reverse stock split.

3.	Right-of-use Asset and Leasing Liabilities

The Company has operating and finance leases where it records the right-of-use (“ROU”) assets and related lease liabilities as required under the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) 842. The lease liabilities are determined by the net present value of total lease payments and amortized over the life of the lease. The Company’s leases are for the following types of assets:

	·	Computer hardware and copy machines- The Company’s finance lease ROU assets consist of computer hardware and copy machines. These leases have a three-year life and are near completion.

	·	Office space - The Company’s operating lease ROU assets include its rental agreements for its offices in Plano, TX, and a data service center in Allen, TX. In October 2023, the Company signed a new lease with a remaining term of ten years and ten months and commenced upon completion of tenant improvements in April 2024. The data service center operating lease liability has a remaining life of one year as of September 30, 2024.

In accordance with ASC 842, the Company has elected practical expedients to combine lease and non-lease components, which consist principally of common area maintenance charges, for all classes of underlying assets and to exclude leases with an initial term of 12 months or less.

As the implicit rate is not readily determinable for the Company's lease agreements, the Company uses an estimated incremental borrowing rate to determine the initial present value of lease payments. This discount rate for the leases approximates the federal reserve’s prime rate.

For the three and nine months ended September 30, 2024, the Company had $0.1 million and $0.2 million, respectively, in lease payments related to operating leases and had $0.1 million and $0.4 million, respectively, in lease payments related to financing leases.

Schedule of Items Appearing on the Unaudited Condensed Consolidated Statements of Operations (in thousands):

Schedule of lease cost
	Three Months Ended				Nine Months Ended
	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
Operating expense:
Amortization expense – Finance ROU	$	172	$	166	$	501	$	499
Lease expense – Operating ROU	$	101	$	112	$	302	$	268
Other expense:
Interest expense – Finance ROU	$	–	$	2	$	–	$	13

Future minimum lease obligations consisted of the following as of September 30, 2024 (in thousands):


	Operating			Finance
Year ending December 31,	ROU Leases			ROU Leases		Total
Remaining 2024	$	118		$	258	$	376
2025		256			3		259
2026		196			–		196
2027		165			–		165
2028		223			–		223
Thereafter		1,517			–		1,517
	$	2,475		$	261	$	2,736
Less Interest*		(849	)		–
	$	1,626		$	261

*	Interest is imputed for operating ROU leases and classified as lease expense and is included in operating expenses in the accompanying unaudited condensed consolidated statements of operations.

4.	Notes Payable

Streeterville Security Purchase Agreement

On March 10, 2022, Intrusion Inc. entered into an unsecured loan agreement (“SPA”) with Streeterville Capital, LLC (“Streeterville”) whereby the Company issued two separate promissory notes of $5.4 million each with an initial rate of 7%. On March 10, 2022, the Company received $4.6 million in net funds from the first tranche (Note 1) pursuant to a promissory note executed contemporaneously with the execution of the loan agreement. On June 29, 2022, the Company received an additional $4.7 million in net funds from the second tranche (Note 2) pursuant to a promissory note. Each note has an 18-month maturity, may be prepaid subject to varying prepayment premiums, and may be redeemed at any time after six months into the term of such note in amounts up to $0.5 million per calendar month upon the noteholder’s election. On January 11, 2023, the Company amended the promissory notes issued pursuant to the unsecured loan agreement with Streeterville whereby the noteholder agreed to waive their redemption rights through March 31, 2023, in exchange for a fee equal to 3.75% of the outstanding principal balance which increased the outstanding indebtedness due at maturity with Streeterville and increased the associated debt issuance costs recorded on the condensed consolidated balance sheets by $0.4 million. On August 2, 2023, the Company entered into a Forbearance Agreement with Streeterville which was subsequently amended on August 7, 2023. The Forbearance Agreement and amendment extended the maturity dates for each Note by twelve months to September 2024 and December 2024. In consideration of the extension of the maturity dates, the Company entered into a Security Agreement with Streeterville, dated August 2, 2023 (the “Security Agreement”), under which Streeterville was granted a first-position security interest in all assets of the Company.

In March 2024, the Company entered into an agreement with Streeterville to exchange $0.2 million in principal for 52.2 thousand shares of common stock. Also in March 2024, the Company exchanged $9.3 million in Streeterville debt for 9.3 thousand shares of newly created Series A Preferred. The issuance of both common and preferred shares was made pursuant to the exemption from the registration requirements afforded by the Securities Act, as amended. The designations for the Series A Preferred preclude the Company from repaying any indebtedness for so long as any Series A Preferred shares are outstanding. The Series A Preferred have a stated value of $1,100 per share and are subject to preferences and designations as more fully described in our Amended and Restated Articles of Incorporation filed on March 15, 2024, see also Note 6 Stockholders’ Equity. Following the exchanges noted herein, the remaining balance on Note One was $0.5 million. The maturity date for Note One was September 10, 2024, which conflicts with the Series A Preferred designation prohibiting repayment of any indebtedness. Note One is pending an amendment to extend the maturity date.

As a result of exchanging $9.5 million principal in aggregate for equity, the Company reversed the interest accretion associated with the ability to stock-settle principal redemptions and wrote off the balance of unamortized debt issuance costs of $1.0 million in March 2024. Simple interest of $12 thousand $274 thousand was incurred for the three and nine months ended September 30, 2024, respectively.

Streeterville Notes Payable

On September 30, 2024, the Company 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 is not repaid on the maturity date weekly payments increase to $50 thousand. The note bears no interest.

Scott Notes Payable

During the period ended March 31, 2024, the Company entered into two separate note purchase agreements with the Company’s 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 thousand until maturity on June 15, 2024. Interest accrued on the balance of the note at 7% per annum compounding daily. During the period ended March 31, 2024, the Company made $0.2 million in principal payments on the first note payable.

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, the Company 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 outstanding balance of $1.1 million for both notes in exchange for common stock and common stock purchase warrants.

The Company recorded no interest expense for both notes in the accompanying condensed consolidated statement of operations for the three months ended September 30, 2024. For the nine months ended September 30, 2024, $83 thousand in amortization of debt issuance cost was recorded.

5.	Commitments and Contingencies

The Company is periodically involved in various litigation claims asserted in the normal course of its business. The Company believes these actions are routine and incidental to the business. While the outcome of these actions cannot be predicted with certainty, the Company does not believe that any will have a material adverse impact on the Company’s business.

Stockholder Derivative Claim

On June 3, 2022, a verified stockholder derivative complaint was filed in U.S. District Court, District of Delaware (the “Court”) by the Plaintiff Stockholder on behalf of Intrusion against certain of the Company’s Defendants. Plaintiff alleges that Defendants through various actions breached their fiduciary duties, wasted corporate assets, and unjustly enriched Defendants by (a) incurring costs and expenses in connection with the ongoing SEC investigation, (b) incurring costs and expenses to defend the Company with respect to the consolidated class action, (c) settling class-wide liability with respect to the consolidated class action, as well as ancillary claims regarding sales of the Company’s common stock by certain of the Defendants. On September 28, 2023, the Company agreed to settle the claim. On October 2, 2023, public notice of the settlement was given. The settlement agreement provides in part for (i) an amendment to the Company’s Bylaws, committee Charters, and other applicable corporate policies to implement certain measures set forth more fully therein, to remain in effect for no less than three years; (ii) attorneys’ fees and expenses to plaintiff’s counsel of $0.3 million; and (iii) the dismissal of all claims against the Defendants, including the Company, in connection with the action. The $0.3 million settlement payment was made by the Company’s insurance provider under its insurance policy since the Company’s $0.5 million retention was previously exhausted. On April 3, 2024, the Court approved the settlement.

In addition to these legal proceedings, the Company is subject to various other claims that may arise in the ordinary course of business. The Company does not believe that any claims exist where the outcome of such matters would have a material adverse effect on the Company’s 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 the Company’s future results.

6.	Stockholder’s Equity

Standby Equity Purchase Agreement

On July 3, 2024, the Company entered into a $10 million Standby Equity Purchase Agreement (“SEPA”) with 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.

Upon execution of the SEPA, the Company issued 93 thousand shares of common stock for payment of the commitment fee equal to 1% of the $10 million commitment and Streeterville purchased 217 thousand shares for a purchase price of $0.01 per common share (“pre-delivery shares”). Following termination of the SEPA Streeterville will deliver to the Company the same amount of pre delivery shares and the Company will pay $0.01 per pre delivery share.

During the quarter ended September 30, 2024, pursuant to the SEPA, Streeterville purchased 150,000 shares of Common Stock for an aggregate purchase price of $131,460.

Series A Preferred Stock

On March 15, 2024, the Company filed a certificate of designation of preferences and rights (the “Certificate of Designation”) of Series A Preferred Stock (the “Series A Stock”), with the Secretary of State of Delaware, designating 20,000 shares of preferred stock, par value $0.01 of the Company, as Series A Preferred Stock. Each share of Series A Stock shall have a stated face value of $1,100.00 (“Stated Value”). The Series A Stock is not convertible into common shares of the capital stock of the Company and as such is non-dilutive to current stockholders.

Each share of Series A Stock shall accrue a rate of return on the Stated Value at the rate of 10% per year, compounded annually from the date of issuance and payable quarterly in cash or the issuance of additional shares of Series A Stock.

Commencing on the one-year anniversary of the issuance date of each share of Series A Stock to the two-year anniversary, each share of Series A Stock shall accrue an automatic quarterly dividend, calculated on the Stated Value at a rate of 2.5% per quarter. For all periods following the two-year anniversary of the issuance date of each share of Series A Stock, the quarterly dividend shall be 5%. The quarterly dividend shall be payable quarterly in cash or the issuance of additional shares of Series A Stock. In the event the Company is unable to pay the Quarterly Dividend of Preferred Return in cash and no remaining shares of Series A Stock are available for issuance, the Quarterly Dividend and Preferred Return will continue to accrue until such time the Company can make payment. The Company classified the Series A Preferred Stock as equity as all events that could trigger redemption are fully within the Company’s control.

On March 15, 2024, the Company entered into an Exchange Agreement with Streeterville Capital that exchanged $9.3 million in debt for 9,275 shares of newly created Series A Preferred Stock.

On April 3, 2024, the Company exchanged 91 shares of Series A Preferred Stock for 32,248 shares of our common stock. On May 10, 2024, the Company exchanged 125 shares of Series A Preferred Stock for 90,460 shares of our common stock. On May 30, 2024, the Company exchanged 339 shares of Series A Preferred Stock for 243,725 shares of our common stock. On August 22, 2024, the Company exchanged 130 shares of Series A Preferred Stock for 110,852 shares of our common stock. All of these exchanges were made pursuant to the exemption from the registration requirements afforded by Section 3(a)(9) of the Securities Act of 1933, as amended.

On September 18, 2024, the Company redeemed 11 shares of Series A Preferred Stock in conjunction with the sale of Common Stock under the SEPA. Also, during the quarter ended September 2024, the Company redeemed 90 shares of Series A Preferred Stock.

Through September 30, 2024, the Company has paid a preferred return of $0.5 million through the issuance of 489 additional shares of Series A Preferred Stock.

Private Offering

On April 22, 2024, the Company sold to certain purchasers 1,348,569 shares of the Company’s common stock together with accompanying common stock purchase warrants to purchase 2,697,138 shares of common stock, at a purchase price of $1.95 per share (or common stock equivalent) and two accompanying Common Stock Purchase Warrants, for net proceeds of approximately $2.6 million. The Common Stock Purchase Warrants will be exercisable at any time following the date of issuance, expire five years following the date of issuance, and have an exercise price of $1.70 per share. None of the shares of Common Stock and shares underlying the Common Stock Purchase Warrants have been registered under the Securities Act of 1933, as amended, and do not carry registration rights.

ATM Offering

B. Riley Securities, Inc. acts as sales agent for the Company’s ATM program, which allows the Company to potentially sell up to $50.0 million of the Company’s common stock using a shelf registration statement on Form S-3 filed on August 5, 2021. On March 31, 2023, the date the Company filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2022, the Company became subject to the offering limits in General Instruction I.B.6 of Form S-3. As a result, the Company filed a prospectus supplement to the prospectus relating to the registration of offerings under the program that reduced the amount the Company may sell to aggregate proceeds of up to $15 million. For the nine months ended September 30, 2024, the Company received proceeds of approximately $4.8 million net of fees from the sale of common stock pursuant to the program. As of September 30, 2024, the Company has received proceeds of approximately $17.0 million net of fees from the sales of 3.5 million shares of common stock since the inception of the program.

Common Stock Warrants

On April 1, 2024, the Company’s Board of Directors approved entry into a warrant inducement offering that provided, during the period beginning on April 2, 2024 and continuing through April 23, 2024, for the lowering of the exercise price of all outstanding warrants and, for each share of common stock exercised under the warrants, providing the participating warrant holder with a new warrant for that same number of shares of common stock. The reduced exercise price of the warrants was $3.04. The new warrant exercise price is $2.91 with an exercise period of five years. On April 8, 2024, certain holders of the warrants exercised 186 thousand shares of the Company’s common stock resulting in gross proceeds of $0.6 million and the issuance of 186 thousand new warrants. The issuance of the new Warrants was undertaken pursuant to the exemption from registration provided in Rule 506(b) under Regulation D pursuant to the Securities Act of 1933, as amended.

On September 30, 2024, the Company had 52,471 warrants to purchase one share of common stock at an exercise price of $104.40, 257,604 warrants to purchase one share of common stock at an exercise price of $12.00, 186,492 warrants to purchase one share of common stock at an exercise price of $2.91, and 2,697,138 warrants to purchase one share of common stock at an exercise price of $1.70.

7.	Revenue Recognition

The Company recognizes product revenue upon shipment or after meeting certain performance obligations. These products can include hardware, software subscriptions and consulting services. The Company also offers software on a subscription basis subject to software as a service (“SaaS”). Warranty costs have not been material.

The Company recognizes sales of the Company’s datasets in accordance with FASB ASC Topic 606 whereby revenue from contracts with customers are recognized once the criteria under the five steps below have been met:

	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 the separate performance obligations; and

	v)	recognize revenue upon satisfaction of a performance obligation.

Consulting services include reporting and 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. The Company defers and recognizes 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. The Company does not offer payment terms that extend beyond one year and rarely does it extend payment terms beyond its normal terms. If certain customers do not meet its credit standards, the Company typically requires payment in advance to limit its credit exposure.

With the Company’s newest product, INTRUSION Shield, the Company began offering software on a subscription basis. INTRUSION Shield is a hosted arrangement subject to SaaS guidance under ASC 606. SaaS arrangements are accounted for as subscription services, not arrangements that transfer a license of intellectual property.

The Company utilizes the five-step process, mentioned above, per FASB 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 its customers for a fixed monthly subscription fee include:

	·	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.

INTRUSION Shield contracts provide for no other services, and the Company’s customers have no rebates or return rights, nor are any such rights anticipated to be offered as part of this service.

The Company satisfies its performance obligation when the INTRUSION Shield solution is available to detect and prevent unauthorized access to a client’s information networks. Revenue should be 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.

The Company’s accounts receivable represents unconditional contract billings for sales per contracts with customers and are classified as current assets. As of September 30, 2024, and December 31, 2023, the Company had accounts receivable balances of $0.9 million and $0.4 million, respectively. As of September 30, 2024, and December 31, 2023, the Company had an allowance for credit losses of $0.1 million.

The Company classifies its contract assets as receivables because the Company generally has an unconditional right to payment for the Company’s sales or services performed at the end of the reporting period.

Contract liabilities consist of cash payments in advance of the Company satisfying performance obligations and recognizing revenue. The Company currently classifies deferred revenue as a contract liability.

The following table presents changes in the Company’s contract liability during the nine months ended September 30, 2024, and the year ended December 31, 2023 (in thousands):

Schedule of contract liability
	September 30, 2024		December 31, 2023
Balance at beginning of period	$	439	$	455
Additions		1,876

SEC Form 10-Q filed by Intrusion Inc.