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 March 31, 2017
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.)

1101 East Arapaho Road, Suite 200, Richardson, Texas 75081

(Address of principal executive offices)

(Zip Code)

(972) 234-6400

(Registrant’s telephone number, including area code)

Not Applicable

(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.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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	☒
(Do not check if a 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 April 30, 2017 was 12,797,836.

1

INTRUSION INC.

INDEX

PART I – FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016	3
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016	4
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016	5
Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 4. Controls and Procedures	12
PART II – OTHER INFORMATION	12
Item 1. Legal Proceedings	12
Item 1A. Risk Factors	12
Item 6. Exhibits	15
Signature Page	16

2

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

INTRUSION INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

	March 31, 2017			December 31, 2016
ASSETS
Current Assets:
Cash and cash equivalents	$	193		$	64
Accounts receivable		523			745
Inventories		45			45
Prepaid expenses		118			75
Total current assets		879			929
Property and equipment, net		262			308
Other assets		39			40
TOTAL ASSETS	$	1,180		$	1,277
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable and accrued expenses	$	911		$	896
Dividends payable		338			303
Obligations under capital lease, current portion		119			139
Deferred revenue		67			395
Total current liabilities		1,435			1,733
Loan payable to officer		3,465			2,885
Obligations under capital lease, noncurrent portion		45			61
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, $0.01 par value: Authorized shares – 5,000
Series 1 shares issued and outstanding — 200 Liquidation preference of $1,125 in 2017 and $1,113 in 2016		707			707
Series 2 shares issued and outstanding — 460 Liquidation preference of $1,284 in 2017 and $1,270 in 2016		724			724
Series 3 shares issued and outstanding — 289 Liquidation preference of $704 in 2017 and $697 in 2016		412			412
Common stock, $0.01 par value:
Authorized shares — 80,000
Issued shares — 12,808 as of March 31, 2017 and 12,758 as of December 31, 2016 Outstanding shares — 12,798 as of March 31, 2017 and 12,748 as of December 31, 2016		128			128
Common stock held in treasury, at cost – 10 shares		(362	)		(362	)
Additional paid-in capital		56,583			56,595
Accumulated deficit		(61,850	)		(61,499	)
Accumulated other comprehensive loss		(107	)		(107	)
Total stockholders’ deficit		(3,765	)		(3,402	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	1,180		$	1,277

See accompanying notes.

3

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

	Three Months Ended
	March 31, 2017			March 31, 2016
Revenue	$	1,559		$	1,511
Cost of revenue		583			539
Gross Profit		976			972
Operating expenses:
Sales and marketing		361			428
Research and development		585			730
General and administrative		331			327
Operating loss		(301	)		(513	)
Interest expense, net		(50	)		(31	)
Net loss	$	(351	)	$	(544	)
Preferred stock dividend accrued		(35	)		(35	)
Net loss attributable to common stockholders	$	(386	)	$	(579	)
Net loss per share attributable to common stockholders:
Basic	$	(0.03	)	$	(0.05	)
Diluted	$	(0.03	)	$	(0.05	)
Weighted average common shares outstanding:
Basic		12,748			12,703
Diluted		12,748			12,703

See accompanying notes.

4

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

	Three Months Ended
	March 31, 2017			March 31, 2016
Operating Activities:
Net loss	$	(351	)	$	(544	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		55			74
Stock-based compensation		5			42
Penalties and waived penalties on dividends		7			4
Changes in operating assets and liabilities:
Accounts receivable		222			(163	)
Prepaid expenses and other assets		(42	)		(31	)
Accounts payable and accrued expenses		15			91
Deferred revenue		(328	)		(267	)
Net cash used in operating activities		(417	)		(794	)
Investing Activities:
Purchases of property and equipment		(9	)		—
Financing Activities:
Proceeds from line-of-credit		—			364
Borrowings on loan from officer		580			525
Proceeds from stock options exercised		11			99
Principal payments on capital leases		(36	)		(50	)
Net cash provided by financing activities		555			938
Net increase (decrease) in cash and cash equivalents		129			144
Cash and cash equivalents at beginning of period		64			102
Cash and cash equivalents at end of period	$	193		$	246
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES:
Preferred stock dividends accrued	$	35		$	35

See accompanying notes.

5

INTRUSION INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

We develop, market and support a family of entity identification, high speed data mining, cybercrime and advanced persistent threat detection products. Our product families include:

● TraceCop™ for identity discovery and disclosure,

● Savant™ for network data mining and advanced persistent threat detection.

We market and distribute our products through a direct sales force to:

● end-users,

● value-added resellers,

● system integrators,

● managed service providers, and

● distributors.

Our end-user customers include:

● U.S. federal government entities,

● local government entities,

● banks,

● airlines,

● credit unions,

● other financial institutions,

● hospitals and other healthcare providers, and

● other customers.

Essentially, our end-users can be defined as any end-users requiring network security solutions for protecting their mission critical data.

We were organized in Texas in September 1983 and reincorporated in Delaware in October 1995. Our principal executive offices are located at 1101 East Arapaho Road, Suite 200, Richardson, Texas 75081, and our telephone number is (972) 234-6400. Our website URL is www.intrusion.com. References to the “Company”, “we”, “us”, “our”, “Intrusion” or “Intrusion Inc.” refer to Intrusion Inc. and its subsidiaries. TraceCop and Savant are trademarks of Intrusion Inc.

2.Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The December 31, 2016 balance sheet was derived from audited financial statements, but does not include all the disclosures required by accounting principles generally accepted in the United States. However, we believe that the disclosures are adequate to make the information presented not misleading. In our opinion, all the adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. The results of operations for the three month period ended March 31, 2017 are not necessarily indicative of the results that may be achieved for the full fiscal year or for any future period. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2016, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 29, 2017.

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 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, and dividends payable approximate their carrying amounts due to the relatively short maturity of these instruments. Loans payable to officer are with a related party and as a result do not bear market rates of interest.  Management believes based on its current financial position that it could not obtain comparable amounts of third party financing, and as such cannot estimate the fair value of the loans payable to officer. None of these instruments are held for trading purposes.

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3.Inventories (In thousands)

	March 31, 2017		December 31, 2016
Inventories consist of:
Finished products		45		45
Net inventory	$	45		45

4. Loan Payable to Officer

On February 9, 2017, the Company entered into an unsecured revolving promissory note to borrow up to $3,400,000 from G. Ward Paxton, the Company’s Chief Executive Officer (the “CEO Note”). Under the terms of the note, the Company may borrow, repay, and re-borrow on the loan as needed up to an outstanding principal balance due of $3,400,000 at any given time through March 2018.

On March 2, 2017, the Company amended the CEO Note described above on the same terms, with the Company being able to borrow, repay, and re-borrow on the note as needed up to an outstanding principal balance due of $3,700,000 at any given time through March 2019.

Amounts borrowed from this officer accrue interest at a floating rate per annum equal to Silicon Valley Bank’s (“SVB”) prime rate plus 1% (5% at March 31, 2017). All outstanding borrowings and accrued but unpaid interest is due on March 31, 2019. As of March 31, 2017, the borrowings outstanding totaled $3,465,000 and accrued interest totaled $224,000.

5.Accounting for Stock-Based Compensation

During the three month periods ended March 31, 2017 and 2016, the Company granted no stock options, respectively, to employees and contractors. The Company recognized $5,000 and $42,000, respectively, in stock-based compensation expense for the three month periods ended March 31, 2017 and 2016. This expense is allocated to the appropriate employee department.

During the three month period ended March 31, 2017, 50,000 options were exercised under the 2005 Plan compared to 136,000 in the previous year comparative quarter.   

Valuation Assumptions

The fair values of employee and director option awards were estimated at the date of grant using a Black-Scholes option-pricing model.

Expected volatility is based on historical volatility and in part on implied volatility. The expected term considers the contractual term of the option as well as historical exercise and forfeiture behavior. The risk-free interest rate is based on the rates in effect on the grant date for U.S. Treasury instruments with maturities matching the relevant expected term of the award. Options granted to non-employees are valued using the fair market value on each measurement date of the option.

6.Net Loss Per Share

Basic net loss per share is computed by dividing net loss attributable to common stockholders for the period by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares and dilutive common stock equivalents outstanding for the period. Our common stock equivalents include all common stock issuable upon conversion of preferred stock and the exercise of outstanding options and warrants. The aggregate number of common stock equivalents excluded from the diluted loss per share calculation for the three month periods ending March 31, 2017 and 2016 are 3,263,277 and 3,572,933, respectively.

7. Concentrations

Our operations are concentrated in one area—security software/entity identification. Sales to the U.S. Government through direct and indirect channels totaled 77.0% of total revenues for the first quarter of 2017 compared to 65.2% of total revenues for the first quarter of 2016. During the first quarter of 2017, approximately 73.8% of total revenues were attributable to four government customers compared to approximately 65.2% of total revenues attributable to four government customers in the first quarter of 2016. There was one individual commercial customer in the first quarter of 2017 attributable for 19.9% of total revenue compared to 25.6% of total revenue to one individual commercial customer for the same period in 2016. Our similar product and service offerings are not viewed as individual segments, as our management analyzes the business as a whole and expenses are not allocated to each product offering.

7

8.Commitments and Contingencies

We are subject from time to time to various legal proceedings and claims that arise during the ordinary course of our business. We do not believe that the outcome of those "routine" legal matters should have a material adverse effect on our consolidated financial position, operating results or cash flows; however, we can provide no assurances that legal claims that may arise in the future will not have such a material impact on the Company.

9.Dividends Payable

During the quarter ended March 31, 2017, we accrued $12,000 in dividends payable to the holders of our 5% Preferred Stock, $15,000 in dividends payable to the holders of our Series 2 5% Preferred Stock and $8,000 in dividends payable to the holders of our Series 3 5% Preferred Stock. As of March 31, 2017, we have $338,000 in accrued and unpaid dividends included in current liabilities.

Delaware law provides that we may only pay dividends out of our capital surplus or, if no surplus is available, out of our net profits for the fiscal year the dividend is declared and/or the preceding fiscal year. These dividends continue to accrue on all our outstanding shares of preferred stock, regardless of whether we are legally able to pay them. If we are unable to pay dividends on our preferred stock, we will be required to accrue an additional late fee penalty of 18% per annum on the unpaid dividends for the Series 2 Preferred Stock and Series 3 Preferred Stock. Our CEO, CFO and one outside board member who are holders of our Series 2 and Series 3 Preferred Stock have waived any possible late fee penalties. In addition to this late penalty, the holders of our Series 2 Preferred Stock and Series 3 Preferred Stock could elect to present us with written notice of our failure to pay dividends as scheduled, in which case we would have 45 days to cure such a breach. In the event that we failed to cure the breach, the holders of these shares of preferred stock would then have the right to require us to redeem their shares of preferred stock for a cash amount calculated in accordance with their respective certificates of designation. If we were required to redeem all shares of Series 2 Preferred Stock and Series 3 Preferred Stock as of April 30, 2017, the aggregate redemption price we would owe would be $2.2 million.

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

Forward Looking Statements

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 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements are generally accompanied by words such as “estimate,” “expect,” “believe,” “should,” “would,” “could,” “anticipate,” “may” or other words that convey uncertainty of future events or outcomes. These statements relate to future events or to our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations, which we describe in more detail elsewhere in this Quarterly Report on Form 10-Q in Part II Item 1A ”Risk Factors”, and in our 2016 Annual Report on Form 10-K in Item 1A “Risk Factors” include, but are not limited to:

● insufficient cash to operate our business and inability to meet our liquidity requirements;

● loss of revenues due to the failure of our newer products to achieve market acceptance;

● our need to increase current revenue levels in order to achieve sustainable profitability;

● concentration of our revenues from U.S. government entities or commercial customers and the possibility of loss of one of these customers and the unique risks associated with government customers;

● our dependence on sales made through indirect channels;

● our dependence on equity or debt financing provided primarily by our Chief Executive Officer under the CEO Note in order to meet our cash flow requirements;

● the adverse effect that payment of accrued dividends on our preferred stock would have on our cash resources and the substantial dilution upon the conversion or redemption of our preferred stock;

● the consequences of our inability to pay scheduled dividends on shares of our preferred stock;

● the potentially detrimental impact that the conversion of preferred stock would have on the price of our common stock;

● the ability of our preferred stockholders to hinder additional financing; and

● the influence that our management and larger stockholders have over actions taken by the Company.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what we projected. These forward-looking statements and other statements made elsewhere in this report are made in reliance on the Private Securities Litigation Reform Act of 1995. Any forward-looking statement you read in this Quarterly Report on Form 10-Q or our Annual Report on Form 10-K reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. We assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. The section below entitled “Factors That May Affect Future Results of Operations” sets forth and incorporates by reference certain factors that could cause actual future results of the Company to differ materially from these statements.

Results of Operations

The following table sets forth, for the periods indicated, certain financial data as a percentage of net revenues. The period-to-period comparison of financial results is not necessarily indicative of future results.

9

	Three Months Ended
	March 31, 2017			March 31, 2016
Total revenue		100.0	%		100.0	%
Total cost of revenue		37.4			35.7
Gross profit		62.6			64.3
Operating expenses:
Sales and marketing		23.2			28.3
Research and development		37.5			48.3
General and administrative		21.2			21.6
Operating loss		(19.3	)		(33.9	)
Interest expense, net		(3.2	)		(2.1	)
Loss before income tax provision		(22.5	)		(36.0	)
Income tax provision		—			—
Net loss		(22.5	)%		(36.0	)%
Preferred stock dividends accrued		(2.3	)		(2.3	)
Net loss attributable to common stockholders		(24.8	)%		(38.3	)%

	Three Months Ended
	March 31, 2017			March 31, 2016
Domestic revenues		100.0	%		100.0	%
Export revenues		—			—
Net revenues		100.0	%		100.0	%

Net Revenues. Product revenues remained constant for the quarter ended March 31, 2017 at $1.6 million, compared to $1.5 million for the quarter ended March 31, 2016. TraceCop revenues remained constant at $1.5 million for the quarter ended March 31, 2017, just as the first quarter in 2016. Savant revenues remained constant at $0.1 million for the quarter ended March 31, 2017, just as the first quarter in 2016. Substantially all of our revenue for the quarters ended March 31, 2017 and 2016 were derived from TraceCop/Savant sales.

Concentration of Revenues. Revenues from sales to various U.S. government entities totaled $1.2 million, or 77.0% of revenues, for the quarter ended March 31, 2017, compared to $1.0 million, or 65.2% of revenues, for the same period in 2016. 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 with government customers will be renegotiated, a large number of cancelled or renegotiated government orders could have a material adverse effect on our financial results. Currently, we are not aware of any proposed cancellation or renegotiation of any of our existing arrangements with government entities and, historically, government entities have not cancelled or renegotiated orders which had a material adverse effect on our business. There was one individual commercial customer in the first quarter of 2017 attributable for 19.9% of total revenue compared to 25.6% of total revenue to one individual commercial customer for the same period in 2016.

Gross Profit. Gross profit was $1.0 million or 62.6% of net revenues for the quarter ended March 31, 2017, compared to $1.0 million or 64.3% of net revenues for the quarter ended March 31, 2016. Gross profit on product revenues for the quarter ended March 31, 2017, trended to 62.6% from 64.3% for the quarter ended March 31, 2016, mainly due to TraceCop/Savant product mix. Gross profit as a percentage of net revenues is impacted by several factors, including shifts in product mix, changes in channels of distribution, revenue volume, pricing strategies, and fluctuations in revenues of integrated third-party products.

10

Sales and Marketing. Sales and marketing expenses remained constant at $0.4 million for the quarter ended March 31, 2017, compared to $0.4 million for the quarter ended March 31, 2016. Sales and marketing expenses may vary in the future. We believe that these costs may increase through the end of 2017, if we achieve anticipated increases in revenue.

Research and Development. Research and development expenses decreased to $0.6 million for the quarter ended March 31, 2017, compared to $0.7 million for the quarter ended March 31, 2016. Research and development costs are expensed in the period incurred. Research and development expenses may vary in the future; however, we believe that these costs will remain relatively constant through the end of 2017, although expenses may be increased if we achieve anticipated increases in revenue.

General and Administrative. General and administrative expenses remained constant at $0.3 million for the quarters ended March 31, 2017 and 2016. It is expected that general and administrative expenses will remain relatively constant throughout the remainder of 2017, although expenses may be increased if we achieve anticipated increases in revenue.

Interest. Net interest expense increased to $50 thousand for the quarter ended March 31, 2017 compared to $31 thousand interest expense for the same period in 2016. Net interest expense may vary in the future based on our level of borrowing, which will be affected by our cash flow, operating income and capital expenditures.

Liquidity and Capital Resources

Our principal source of liquidity at March 31, 2017, was approximately $193 thousand of cash and cash equivalents. At March 31, 2017, we had a working capital deficiency of $0.6 million compared to a $0.7 million deficiency at March 31, 2016.

Net cash used in operations for the three months ended March 31, 2017, was $417 thousand due to a net loss of $351 thousand and the following uses of cash: $329 thousand decrease in deferred revenue and a $42 thousand increase in prepaid expenses and other assets. This was partially offset by the following sources of cash and non-cash items: a $222 thousand decrease in accounts receivable, a $16 thousand increase in accounts payable and accrued expenses, $5 thousand in stock-based compensation, $55 thousand in depreciation expense, and $7 thousand in penalties and waived penalties on dividends. Net cash used in operations for the three months ended March 31, 2016, was $794 thousand due to a net loss of $544 thousand and the following uses of cash: $267 thousand decrease in deferred revenue, a $163 thousand increase in accounts receivable, and a $31 thousand increase in prepaid expenses and other assets. This was partially offset by the following sources of cash and non-cash items: a $91 thousand increase in accounts payable and accrued expenses, $42 thousand in stock-based compensation, $74 thousand in depreciation expense, and $4 thousand in penalties and waived penalties on dividends. Future fluctuations in working capital balances will be dependent upon several factors, including, but not limited to, quarterly sales volumes and timing of invoicing, and the accuracy of our forecasts of product demand and component requirements. 

Net cash used in investing activities for the three months ended March 31, 2017, was $9 thousand for net purchases of property and equipment, compared to no investing activities for the three months ended March 31, 2016.

Net cash provided by financing activities for the three months ended March 31, 2017, was $555 thousand resulting from proceeds of $580 thousand from an officer’s loan and $11 thousand on the exercise of stock options. This was offset by a provision of cash for $36 thousand payment on the principal of capital leases. Net cash provided by financing activities for the three months ended March 31, 2016, was $938 thousand resulting from proceeds of $525 thousand from an officer’s loan, proceeds of $364 thousand from the line of credit, and $99 thousand on the exercise of stock options. This was offset by a provision of cash for $50 thousand payment on the principal of capital leases.

At March 31, 2017, the Company did not have any material commitments for capital expenditures.

During the three months ended March 31, 2017, the Company funded its operations through the use of cash and cash equivalents and advances on the loan from our Chief Executive Officer.

As of March 31, 2017, we had cash and cash equivalents of approximately $193,000, up from approximately $64,000 as of December 31, 2016. We generated a net loss of $351,000 for the quarter ended March 31, 2017 compared to a net loss of $544,000 for the quarter ended March 31, 2016. As of March 31, 2017, in addition to cash and cash equivalents of $193,000, we had $235,000 of funding available from a promissory note to borrow up to $3.7 million from G. Ward Paxton, the Company’s Chief Executive Officer. We are obligated to make payments of accrued dividends on all our outstanding shares of preferred stock that will reduce our available cash resources. Based on projections of growth in revenue and net income in the coming quarters, and the borrowings available previously mentioned, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures for the next twelve months. We expect to fund our operations through anticipated Company profits and borrowings from the Company’s CEO, and possibly additional investments of private equity and debt, which, if we are able to obtain, will have the effect of diluting our existing common stockholders, perhaps significantly. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to our stockholders. If our operations do not generate positive cash flow in the upcoming year, or if we are not able to obtain additional debt or equity financing on terms and conditions acceptable to us, if at all, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations.

11

We may explore the possible acquisitions of businesses, products and technologies that are complementary to our existing business. We are continuing to identify and prioritize additional security technologies, which we may wish to develop, either internally or through the licensing, or acquisition of products from third parties. While we may engage from time to time in discussions with respect to potential acquisitions, there can be no assurances that any such acquisitions will be made or that we will be able to successfully integrate any acquired business. In order to finance such acquisitions and working capital it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms, which are not favorable to us and, in the case of equity financings, may result in dilution to our stockholders.

Item 4. CONTROLS AND PROCEDURES

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 necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

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 as of March 31, 2017, and concluded that the disclosure controls and procedures were effective.

Our management, with the participation of our principal officer and principal financial officer, evaluated our “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) as of December 31, 2016. There have not been any changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

We are subject from time to time to various legal proceedings and claims that arise during the ordinary course of our business. We do not believe that the outcome of those "routine" legal matters should have a material adverse effect on our consolidated financial position, operating results or cash flows; however, we can provide no assurances that legal claims that may arise will not have such a material impact in the future.

Item 1A.          RISK FACTORS

Factors That May Affect Future Results of Operations

We are providing the following information regarding changes that have occurred to previously disclosed risk factors from our Annual Report on Form 10-K for the year ended December 31, 2016. In addition to the other information set forth below and elsewhere in this report, you should consider the factors discussed under the heading “Risk Factors” in our Form 10-K for the year ended December 31, 2016. The risks described in our Quarterly Reports on Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

12

We may not have sufficient cash to operate our business and may not be able to maintain certain liquidity requirements under our existing debt instruments. Additional debt and equity offerings to fund future operations may not be available and, if available, may significantly dilute the value of our currently outstanding common stock.

As of March 31, 2017, we had cash and cash equivalents of approximately $193,000, . We generated a net loss of $351,000 for the quarter ended March 31, 2017. As of March 31, 2017, in addition to cash and cash equivalents of $193,000, we had $235,000 of funding is available from a promissory note to borrow up to $3.7 million from G. Ward Paxton, the Company’s Chief Executive Officer. We are obligated to make payments of accrued dividends on all our outstanding shares of preferred stock that will reduce our available cash resources. We expect to fund our operations through anticipated Company profits and borrowings from the Company’s CEO, and possibly additional investments of private equity and debt, which, if we are able to obtain, will have the effect of diluting our existing common stockholders, perhaps significantly. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to our stockholders. If our operations do not generate positive cash flow in the upcoming year, or if we are not able to obtain additional debt or equity financing on terms and conditions acceptable to us, if at all, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations.

We had a net loss of $351 thousand for the quarter ended March 31, 2017, and have an accumulated deficit of $61.9 million as of March 31, 2017. To achieve annual profitability, we must generate increased revenue levels.

For the quarter ended March 31, 2017, we generated a net loss of $351 thousand and had an accumulated deficit of approximately $61.9 million as of March 31, 2017, compared to a net loss of $544 thousand for the quarter ended March 31, 2016 and an accumulated deficit of approximately $60.5 million at March 31, 2016. We need to sustain greater revenue levels from the sales of our products if we are to achieve annual profitability. If we are unable to achieve these revenue levels, losses could happen for the near term and possibly longer, and we may not sustain profitability or generate positive cash flow from operations.

A large percentage of our revenues are received from U.S. government entities/resellers, and the loss of any one of these customers could reduce our revenues and materially harm our business and prospects.

A large percentage of our revenues result from sales to U.S. government entities/resellers. If we were to lose one or more of these key relationships, our revenues could decline and our business and prospects may be materially harmed. We expect that even if we are successful in developing relationships with non-governmental customers, our revenues will continue to be concentrated among government entities. For the quarter ended March 31, 2017, sales to U.S. government entities/resellers collectively accounted for 77.0% of our revenues, compared to 65.2% for the comparable period in 2016. The loss of any of these key relationships may send a negative message to other U.S. government entities or non-governmental customers concerning our product offering. We cannot assure you that U.S. government entities will be customers of ours in future periods or that we will be able to diversify our customer portfolio to adequately mitigate the risk of loss of any of these customers.

A large percentage of our revenues are from one product line with a limited number of customers, and the decrease of revenue from sales of this product line could materially harm our business and prospects.

A large percentage of our revenues result from sales of our security product line. Savant revenues were $0.1 million for the quarter ended March 31, 2017, remaining the same as the first quarter in 2016. TraceCop revenues were $1.5 million for the quarter ended March 31, 2017, remaining the same as the first quarter in 2016. There was one individual commercial customer in the first quarter of 2017 attributable for 19.9% of total revenue compared to one individual customer at 25.6% for the same period in 2016 that exceeded 10% of total revenues for that quarter. If sales of this key product line were to decrease, our revenues could decline and our business and prospects may be materially harmed.

We are highly dependent on sales made through indirect channels, the loss of which would materially adversely affect our operations.

We derived 77.0% of revenue in the first quarter of 2017 through indirect channels of mainly government resellers, compared to 67.7% of our revenues in the quarter ended March 31, 2016. We must continue to expand our sales through these indirect channels in order to increase our revenues. We cannot assure you that our products will gain market acceptance in these indirect sales channels or that sales through these indirect sales channels will increase our revenues. Further, many of our competitors are also trying to sell their products through these indirect sales channels, which could result in lower prices and reduced profit margins for sales of our products.

13

You will experience substantial dilution upon the conversion or redemption of the shares of preferred stock that we issued in our private placements or in the event we raise additional funds through the issuance of new shares of our common stock or securities convertible or exercisable into shares of common stock.

On April 30, 2017, we had 12,797,836 shares of common stock outstanding. Upon conversion of all outstanding shares of preferred stock, we will have 13,855,279 shares of common stock outstanding, approximately an 8.3% increase in the number of shares of our common stock outstanding.

In addition, management may issue additional shares of common stock or securities exercisable or convertible into shares of common stock in order to finance our continuing operations. Any future issuances of such securities would have additional dilutive effects on the existing holders of our Common Stock.

Further, the occurrence of certain events could entitle holders of our Series 2 Preferred Stock and Series 3 Preferred Stock to require us to redeem their shares for a certain number of shares of our common stock. Assuming (i) we have paid all liquidated damages and other amounts to the holders, (ii) paid all outstanding dividends, (iii) a volume weighted average price of $0.27, which was the ten-day volume weighted average closing price of our common stock on April 30, 2017, and (iv) our 12,797,836 shares of common stock outstanding on April 30, 2017, upon exercise of their redemption right by the holders of the Series 3 Preferred Stock and the Series 2 Preferred Stock, we would be obligated to issue approximately 1,832,000 shares of our common stock. This would represent an increase of approximately 14.4% in the number of shares of our common stock as of April 30, 2017.

The conversion of preferred stock we issued in the private placements may cause the price of our common stock to decline.

The holders of the shares of our 5% Preferred Stock may freely convert their shares of preferred stock and sell the underlying shares of common stock pursuant to Rule 144 of the Securities and Exchange Commission. As of April 30, 2017, 800,000 shares of our 5% Preferred Stock had converted into 1,272,263 shares of common stock and 200,000 shares of our 5% preferred stock remain outstanding.

The holders of the shares of Series 2 5% Preferred Stock may freely convert their shares of preferred stock and sell the underlying shares of common stock pursuant to Rule 144 of the Securities and Exchange Commission. As of April 30, 2017, 605,200 shares of Series 2 Preferred Stock had converted into 605,200 shares of common stock and 460,000 shares of Series 2 5% preferred stock remain outstanding.

The holders of the shares of Series 3 5% Preferred Stock may freely convert their shares of Series 3 Preferred Stock and sell the underlying shares of common stock pursuant to Rule 144 of the Securities and Exchange Commission. As of April 30, 2017, 275,230 shares of Series 3 Preferred Stock had converted into 275,230 shares of common stock and 289,377 shares of Series 3 5% preferred stock remain outstanding.

For the four weeks ended on April 30, 2017, the average daily trading volume of our common stock on the OTCQB was 2,300 shares. Consequently, if holders of preferred stock elect to convert their remaining shares and sell a material amount of their underlying shares of common stock on the open market, the increase in selling activity could cause a decline in the market price of our common stock. Furthermore, these sales, or the potential for these sales, could encourage short sales, causing additional downward pressure on the market price of our common stock.

You will experience substantial dilution upon the exercise of stock options currently outstanding.

On April 30, 2017, we had 12,797,836 shares of common stock outstanding. Upon the exercising of current options issued at or below the exercise price of $1.00, we will have approximately 14,700,000 shares of common stock outstanding, a 14.8% increase in the number of shares of our common stock outstanding.

Our management and larger stockholders exercise significant control over our company and have the ability to approve or take actions that may be adverse to your interests.

As of April 30, 2017, our executive officers, directors and preferred stockholders beneficially own approximately 29% of our voting power. In addition, other related parties control approximately 30% of voting power. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could delay or prevent someone from acquiring or merging with us. These stockholders may use their influence to approve or take actions that may be adverse to the interests of holders of our Common Stock. Further, we contemplate the possible issuance of shares of our Common Stock or of securities exercisable or convertible into shares of our Common Stock in the future to our Chief Executive Officer and Chief Financial Officer. Any such issuance will increase the percentage of stock our Chief Executive Officer, Chief Financial Officer and our management group beneficially holds.

14

Item 6. Exhibits

The following Exhibits are filed with this report form 10-Q:

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

15

S I G N A T U R E S

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.

	INTRUSION INC.
Date: May 15, 2017	/s/ G. Ward Paxton
	G. Ward Paxton
	Chairman, President & Chief Executive Officer
	(Principal Executive Officer)
Date: May 15, 2017	/s/ Michael L. Paxton
	Michael L. Paxton
	Vice President, Chief Financial Officer, Treasurer & Secretary
	(Principal Financial & Accounting Officer)

 16

EX-31.1

EXHIBIT 31.1

I, G. Ward Paxton, Chief Executive Officer of Intrusion Inc., certify that:

(1) I have reviewed this quarterly report on Form 10-Q of Intrusion Inc.;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 15, 2017	/s/ G. Ward Paxton
	G. Ward Paxton
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

I, Michael L. Paxton, Chief Financial Officer of Intrusion Inc., certify that:

(1) I have reviewed this quarterly report on Form 10-Q of Intrusion Inc.;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 15, 2017	/s/ Michael L. Paxton
	Michael L. Paxton
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO RULE 13a-14(b) OF THE EXCHANGE ACT AND 18 U.S.C. SECTION 1350, AS ENACTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Intrusion Inc. (the “Company”) on Form 10-Q, for the quarter ended March 31, 2017 (the “Report”) as filed with the Securities and Exchange Commission on the date hereof, each of the undersigned Officers of the Company does hereby certify, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

May 15, 2017	/s/ G. Ward Paxton
	G. Ward Paxton
	Chief Executive Officer

May 15, 2017	/s/ Michael L. Paxton
	Michael L. Paxton
	Chief Financial Officer

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the Report or as a separate disclosure document.

XML

Document And Entity Information - shares	3 Months Ended
	Mar. 31, 2017	Apr. 30, 2017
Document Information [Line Items]
Entity Registrant Name	Intrusion Inc
Entity Central Index Key	0000736012
Trading Symbol	intz
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		12,797,836
Document Type	10-Q
Document Period End Date	Mar. 31, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q1
Amendment Flag	false

XML

Unaudited Condensed Consolidated Balance Sheets - USD ($)	Mar. 31, 2017	Dec. 31, 2016
Current Assets:
Cash and cash equivalents	$ 193,000	$ 64,000
Accounts receivable	523,000	745,000
Inventories	45,000	45,000
Prepaid expenses	118,000	75,000
Total current assets	879,000	929,000
Property and equipment, net	262,000	308,000
Other assets	39,000	40,000
TOTAL ASSETS	1,180,000	1,277,000
Current Liabilities:
Accounts payable and accrued expenses	911,000	896,000
Dividends payable	338,000	303,000
Obligations under capital lease, current portion	119,000	139,000
Deferred revenue	67,000	395,000
Total current liabilities	1,435,000	1,733,000
Loan payable to officer	3,465,000	2,885,000
Obligations under capital lease, noncurrent portion	45,000	61,000
Commitments and contingencies
Stockholders’ deficit:
Common stock, $0.01 par value: Authorized shares — 80,000, Issued shares — 12,808 as of March 31, 2017 and 12,758 as of December 31, 2016 Outstanding shares — 12,798 as of March 31, 2017 and 12,748 as of December 31, 2016	128,000	128,000
Common stock held in treasury, at cost – 10 shares	(362,000)	(362,000)
Additional paid-in capital	56,583,000	56,595,000
Accumulated deficit	(61,850,000)	(61,499,000)
Accumulated other comprehensive loss	(107,000)	(107,000)
Total stockholders’ deficit	(3,765,000)	(3,402,000)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	1,180,000	1,277,000
Series 1 [Member]
Stockholders’ deficit:
Preferred stock	707,000	707,000
Series 2 [Member]
Stockholders’ deficit:
Preferred stock	724,000	724,000
Series 3 [Member]
Stockholders’ deficit:
Preferred stock	$ 412,000	$ 412,000

XML

Unaudited Condensed Consolidated Balance Sheets (Parentheticals) - $ / shares shares in Thousands	Mar. 31, 2017	Dec. 31, 2016
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized (in shares)	5,000	5,000
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	80,000	80,000
Common stock, shares issued (in shares)	12,808	12,758
Common stock, shares outstanding (in shares)	12,798	12,748
Common stock held in treasury, shares (in shares)	10	10
Series 1 [Member]
Preferred stock, shares issued (in shares)	200	200
Preferred stock, shares outstanding (in shares)	200	200
Preferred stock, liquidation preference (in dollars per share)	$ 1,125	$ 1,113
Series 2 [Member]
Preferred stock, shares issued (in shares)	460	460
Preferred stock, shares outstanding (in shares)	460	460
Preferred stock, liquidation preference (in dollars per share)	$ 1,284	$ 1,270
Series 3 [Member]
Preferred stock, shares issued (in shares)	289	289
Preferred stock, shares outstanding (in shares)	289	289
Preferred stock, liquidation preference (in dollars per share)	$ 704	$ 697

XML

Unaudited Condensed Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Revenue	$ 1,559	$ 1,511
Cost of revenue	583	539
Gross Profit	976	972
Operating expenses:
Sales and marketing	361	428
Research and development	585	730
General and administrative	331	327
Operating loss	(301)	(513)
Interest expense, net	(50)	(31)
Net loss	(351)	(544)
Preferred stock dividend accrued	(35)	(35)
Net loss attributable to common stockholders	$ (386)	$ (579)
Net loss per share attributable to common stockholders:
Basic (in dollars per share)	$ (0.03)	$ (0.05)
Diluted (in dollars per share)	$ (0.03)	$ (0.05)
Weighted average common shares outstanding:
Basic (in shares)	12,748	12,703
Diluted (in shares)	12,748	12,703

XML

Unaudited Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Operating Activities:
Net loss	$ (351)	$ (544)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	55	74
Stock-based compensation	5	42
Penalties and waived penalties on dividends	7	4
Changes in operating assets and liabilities:
Accounts receivable	222	(163)
Prepaid expenses and other assets	(42)	(31)
Accounts payable and accrued expenses	15	91
Deferred revenue	(328)	(267)
Net cash used in operating activities	(417)	(794)
Investing Activities:
Purchases of property and equipment	(9)
Financing Activities:
Proceeds from line-of-credit		364
Borrowings on loan from officer	580	525
Proceeds from stock options exercised	11	99
Principal payments on capital leases	(36)	(50)
Net cash provided by financing activities	555	938
Net increase (decrease) in cash and cash equivalents	129	144
Cash and cash equivalents at beginning of period	64	102
Cash and cash equivalents at end of period	193	246
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES:
Preferred stock dividends accrued	$ 35	$ 35

XML

Note 1 - Description of Business

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Nature of Operations [Text Block]

1. Description of Business

We develop, market and support a family of entity identification, high speed data mining, cybercrime and advanced persistent threat detection products. Our product families include:

● TraceCop™ for identity discovery and disclosure,

● Savant™ for network data mining and advanced persistent threat detection.

We market and distribute our products through a direct sales force to:

● end-users,

● value-added resellers,

● system integrators,

● managed service providers, and

● distributors.

Our end-user customers include:

● U.S. federal government entities,

● local government entities,

● banks,

● airlines,

● credit unions,

● other financial institutions,

● hospitals and other healthcare providers, and

● other customers.

Essentially, our end-users can be defined as any end-users requiring network security solutions for protecting their mission critical data.

We were organized in Texas in

September

1983

and reincorporated in Delaware in

October

1995.

Our principal executive offices are located at

1101

East Arapaho Road, Suite

200,

Richardson, Texas

75081,

and our telephone number is

(972)

234

-

6400.

Our website URL is www.intrusion.com. References to the “Company”, “we”, “us”, “our”, “Intrusion” or “Intrusion Inc.” refer to Intrusion Inc. and its subsidiaries. TraceCop and Savant are trademarks of Intrusion Inc.

XML

Note 2 - Basis of Presentation

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Basis of Presentation and Significant Accounting Policies [Text Block]

2.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The

December

31,

2016

balance sheet was derived from audited financial statements, but does not include all the disclosures required by accounting principles generally accepted in the United States. However, we believe that the disclosures are adequate to make the information presented not misleading. In our opinion, all the adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. The results of operations for the

three

month period ended

March

31,

2017

are not necessarily indicative of the results that

may

be achieved for the full fiscal year or for any future period. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form

10

-K for the year ended

December

 

31,

2016,

filed with the U.S. Securities and Exchange Commission (the “SEC”) on

March

29,

2017.

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 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, and dividends payable approximate their carrying amounts due to the relatively short maturity of these instruments.

Loans payable to officer are with a related party and as a result do not bear market rates of interest.  Management believes based on its current financial position that it could not obtain comparable amounts of

third

party financing, and as such cannot estimate the fair value of the loans payable to officer. None of these instruments are held for trading purposes.

XML

Note 3 - Inventories

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Inventory Disclosure [Text Block]

3.

Inventories (In thousands)

	March 31 , 20 17		December 31, 20 16
Inventories consist of:
Finished products		45		45
Net inventory	$	45		45

XML

Note 4 - Loan Payable to Officer

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

4.

Loan Payable to Officer

On

February

9,

2017,

the Company entered into an unsecured revolving promissory note to borrow up to

$3,400,000

from G. Ward Paxton, the Company’s Chief Executive Officer (the “CEO Note”). Under the terms of the note, the Company

may

borrow, repay, and re-borrow on the loan as needed up to an outstanding principal balance due of

$3,400,000

at any given time through

March

2018.

On

March

2,

2017,

the Company amended the CEO Note described above on the same terms, with the Company being able to borrow, repay, and re-borrow on the note as needed up to an outstanding principal balance due of

$3,700,000

at any given time through

March

2019.

Amounts borrowed from this officer accrue interest at a floating rate per annum equal to Silicon Valley Bank’s (“SVB”) prime rate plus

1%

(5%

at

March

31,

2017).

All outstanding borrowings and accrued but unpaid interest is due on

March

31,

2019.

As of

March

31,

2017,

the borrowings outstanding totaled

$3,465,000

and accrued interest totaled

$224,000.

XML

Note 5 - Accounting for Stock-based Compensation

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

5.

Accounting for Stock-Based Compensation

During the

three

month periods ended

March

31,

2017

and

2016,

the Company granted

no

stock options, respectively, to employees and contractors. The Company recognized

$5,000

and

$42,000,

respectively, in stock-based compensation expense for the

three

month periods ended

March

31,

2017

and

2016.

This expense is allocated to the appropriate employee department.

During the

three

month period ended

March

31,

2017,

50,000

options were exercised under the

2005

Plan compared to

136,000

in the previous year comparative quarter.   

Valuation Assumptions

The fair values of employee and director option awards were estimated at the date of grant using a Black-Scholes option-pricing model.

Expected volatility is based on historical volatility and in part on implied volatility. The expected term considers the contractual term of the option as well as historical exercise and forfeiture behavior. The risk-free interest rate is based on the rates in effect on the grant date for U.S. Treasury instruments with maturities matching the relevant expected term of the award. Options granted to non-employees are valued using the fair market value on each measurement date of the option.

XML

Note 6 - Net Loss Per Share

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Earnings Per Share [Text Block]

6.

Net Loss Per Share

Basic net loss per share is computed by dividing net loss attributable to common stockholders for the period by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares and dilutive common stock equivalents outstanding for the period. Our common stock equivalents include all common stock issuable upon conversion of preferred stock and the exercise of outstanding options and warrants. The aggregate number of common stock equivalents excluded from the diluted loss per share calculation for the

three

month periods ending

March

31,

2017

and

2016

are

3,263,277

and

3,572,933,

respectively.

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Note 7 - Concentrations

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Concentration Risk Disclosure [Text Block]

7.

Concentrations

Our operations are concentrated in

one

area—security software/entity identification. Sales to the U.S. Government through direct and indirect channels totaled

77.0%

of total revenues for the

first

quarter of

2017

compared to

65.2%

of total revenues for the

first

quarter of

2016.

During the

first

quarter of

2017,

approximately

73.8%

of total revenues were attributable to

four

government customers compared to approximately

65.2%

of total revenues attributable to

four

government customers in the

first

quarter of

2016.

There was

one

individual commercial customer in the

first

quarter of

2017

attributable for

19.9%

of total revenue compared to

25.6%

of total revenue to

one

individual commercial customer for the same period in

2016.

Our similar product and service offerings are not viewed as individual segments, as our management analyzes the business as a whole and expenses are not allocated to each product offering.

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Note 8 - Commitments and Contingencies

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

8.

Commitments and Contingencies

We are subject from time to time to various legal proceedings and claims that arise during the ordinary course of our business. We do not believe that the outcome of those "routine" legal matters should have a material adverse effect on our consolidated financial position, operating results or cash flows; however, we can provide no assurances that legal claims that

may

arise in the future will not have such a material impact on the Company.

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Note 9 - Dividends Payable

3 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

9.

Dividends Payable

During the quarter ended

March

31,

2017,

we accrued

$12,000

in dividends payable to the holders of our

5%

Preferred Stock,

$15,000

in dividends payable to the holders of our Series

2

5%

Preferred Stock and

$8,000

in dividends payable to the holders of our Series

3

5%

Preferred Stock. As of

March

31,

2017,

we have

$338,000

in accrued and unpaid dividends included in current liabilities.

Delaware law provides that we

may

only pay dividends out of our capital surplus or, if no surplus is available, out of our net profits for the fiscal year the dividend is declared and/or the preceding fiscal year. These dividends continue to accrue on all our outstanding shares of preferred stock, regardless of whether we are legally able to pay them. If we are unable to pay dividends on our preferred stock, we will be required to accrue an additional late fee penalty of

18%

per annum on the unpaid dividends for the Series

2

Preferred Stock and Series

3

Preferred Stock. Our CEO, CFO and

one

outside board member who are holders of our Series

2

and Series

3

Preferred Stock have waived any possible late fee penalties. In addition to this late penalty, the holders of our Series

2

Preferred Stock and Series

3

Preferred Stock could elect to present us with written notice of our failure to pay dividends as scheduled, in which case we would have

45

days to cure such a breach. In the event that we failed to cure the breach, the holders of these shares of preferred stock would then have the right to require us to redeem their shares of preferred stock for a cash amount calculated in accordance with their respective certificates of designation. If we were required to redeem all shares of Series

2

Preferred Stock and Series

3

Preferred Stock as of

April

30,

2017,

the aggregate redemption price we would owe would be

$2.2

million.

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Note 3 - Inventories (Tables)

3 Months Ended

Mar. 31, 2017

Notes Tables

Schedule of Inventory, Current [Table Text Block]

	March 31 , 20 17		December 31, 20 16
Inventories consist of:
Finished products		45		45
Net inventory	$	45		45

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Note 3 - Inventories - Summary of Inventory (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Inventories consist of:
Finished products	$ 45	$ 45
Net inventory	$ 45	$ 45

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Note 4 - Loan Payable to Officer (Details Textual) - Revolving Credit Facility [Member] - Chief Executive Officer [Member] - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 02, 2017	Feb. 09, 2017
Line of Credit Facility, Maximum Borrowing Capacity		$ 3,700,000	$ 3,400,000
Line of Credit Facility, Interest Rate at Period End	5.00%
Long-term Line of Credit	$ 3,465,000
Interest Payable, Current	$ 224,000
Prime Rate [Member]
Debt Instrument, Basis Spread on Variable Rate	1.00%

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Note 5 - Accounting for Stock-based Compensation (Details Textual) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	0	0
Allocated Share-based Compensation Expense	$ 5,000	$ 42,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period	50,000	136,000

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Note 6 - Net Loss Per Share (Details Textual) - shares	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	3,263,277	3,572,933

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Note 7 - Concentrations (Details Textual)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Number of Areas in Which Operations are Concentrated	1
Customer Concentration Risk [Member] | Sales Revenue, Net [Member] | U.S. Government [Member]
Concentration Risk, Percentage	77.00%	65.20%
Customer Concentration Risk [Member] | Sales Revenue, Net [Member] | Government Customers [Member]
Concentration Risk, Percentage	73.80%	65.20%
Number of Major Customers	4	4
Customer Concentration Risk [Member] | Sales Revenue, Net [Member] | Commercial Customers [Member]
Concentration Risk, Percentage	19.90%	25.60%
Number of Major Customers	1	1

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Note 9 - Dividends Payable (Details Textual)	3 Months Ended
	Mar. 31, 2017 USD ($)	Mar. 31, 2016 USD ($)	Apr. 30, 2017 USD ($)	Dec. 31, 2016 USD ($)
Preferred Stock Dividends, Income Statement Impact	$ 35,000	$ 35,000
Dividends Payable, Current	338,000			$ 303,000
Series 1 [Member]
Preferred Stock Dividends, Income Statement Impact	$ 12,000
Preferred Stock, Dividend Rate, Percentage	5.00%
Series 2 [Member]
Preferred Stock Dividends, Income Statement Impact	$ 15,000
Preferred Stock, Dividend Rate, Percentage	5.00%
Series 3 [Member]
Preferred Stock Dividends, Income Statement Impact	$ 8,000
Preferred Stock, Dividend Rate, Percentage	5.00%
Series 2 Preferred Stock and Series 3 Preferred Stock [Member]
Preferred Stock Unpaid Dividends Additional Late Fee Penalty Percentage	18.00%
Number of Outside Board Members Holding Interest In Preferred Stock	1
Period From Issuance of Written Notice For Failure to Pay Dividend Within Which Entity Must Cure Breach	45 days
Series 2 Preferred Stock and Series 3 Preferred Stock [Member] | Subsequent Event [Member]
Preferred Stock, Redemption Amount			$ 2,200,000