10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019
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)

Registrant’s telephone number, including area code: (972) 234-6400

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, $0.01 par value

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 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 ☒

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 28, 2019: $46,588,000.

As of February 28, 2020, 13,753,030 shares of the issuer’s Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement filed in connection with the Registrant’s 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

INTRUSION INC.

INDEX

PART I
Item 1.	Business	3
Item 1A.	Risk Factors	7
Item 2.	Properties	15
Item 3.	Legal Proceedings	15
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 8.	Financial Statements for years ended December 31, 2019 and 2018	F-1
Item 9A.	Controls and Procedures	22
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	24
Item 11.	Executive Compensation	24
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	24
Item 13.	Certain Relationships and Related Transactions, and Director Independence	24
Item 14.	Principal Accounting Fees and Services	24
PART IV
Item 15.	Exhibits and Financial Statement Schedules	24
Signatures		27

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PART I

Item 1.     Description of Business.

In addition to the historical information contained herein, the discussion in this Annual Report on Form 10-K contains certain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties, such as statements concerning:

● our ability to maintain sufficient cash to operate our business and to meet future liquidity requirements;

● the uncertain ramifications related to the coronavirus outbreak;

● our ability to successfully transitions responsibilities from our president, chairman, and co-founder G. Ward Paxton to Michael Paxton;

● our ability to secure new financing to replace our prior borrowing ability under the note with our former CEO;

● Anticipated fluctuations in quarterly revenues;

● a concentration in governmental customers with unique risks attached;

● competition from companies with greater financial resources;

● our response to rapid technological shifts in the network security industry and consistently changing laws and regulations concerning consumer privacy and personally identifiable information; and

● risks related to our common stock as well as the effect of the superior rights and privileges of our various classes of preferred stock over the rights of the holders of our common stock.

The cautionary statements made in this Form 10-K should be read as being applicable to all related forward-looking statements whenever they appear in this Form 10-K. Our actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the section captioned “Risk Factors” in Item 1A of this Form 10-K as well as those cautionary statements and other factors set forth elsewhere herein.

General

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 entity identification, cybercrime detection and disclosure, and;

● Savant™ for high speed data mining and analytics, and advanced persistent threat detection.

Intrusion’s products help protect critical information assets by quickly detecting, protecting, analyzing and reporting attacks or misuse of classified, private and regulated information for government and enterprise networks.

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

● end-users, and

● value-added resellers.

Our end-user customers include:

● U.S. federal government entities,

● state and local government entities,

● large and diverse conglomerates,

● manufacturing entities, and

● other customers.

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.

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Government Sales

Sales to U.S. government customers accounted for 87.4% of our revenues for the year ended December 31, 2019, compared to 83.9% of our revenue in 2018. We expect to continue to derive a substantial portion of our revenues from sales to governmental entities in the future as we continue to market our entity identification products and data mining products to the government. Sales to the government present risks in addition to those involved in sales to commercial customers that could adversely affect our revenues, including potential disruption due to irregularities in or interruptions to appropriation and spending patterns, delays in approving a federal budget and the government’s reservation of the right to cancel contracts and purchase orders for its convenience.

Generally, we make our sales under purchase orders and contracts. Our customers, including government customers, may cancel their orders or contracts with little or no prior notice and without penalty. Although we transact business with various government entities, we believe that the cancellation of any particular order in itself could have a material adverse effect on our financial results. Because we derive and expect to continue to derive a substantial portion of our revenue from sales to government entities, a large number of cancelled or renegotiated government orders or contracts 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. See risk factor, “Government customers involve unique risks, which could adversely impact our revenues,” on page 10.

Industry Background

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

● The TraceCop™ product line, which includes a number of our proprietary supporting tools, allows our customers and in-house cyber analysts to accurately discover and help identify ‘bad actors’ associated with cybercrime.

● The Savant™ product is a ‘purpose-built’, very high-speed network data mining and analytics software package that is easily installed on commercial off the shelf platforms.

Our customers use our products as an integral part of protecting their critical infrastructure and data information assets. By quickly detecting, protecting, analyzing and reporting attacks, along with the potential misuse of classified information, we have become a key component to the daily challenges of cyber security for both state and federal governments and large private commercial enterprises.

Products

TraceCop

Our TraceCop product family includes a database of worldwide IP addresses, registrant information and their associations, along with a plurality of related IP information, some dating back nearly two decades. When combined with Intrusion’s multitude of cyber security ‘global threat feeds’, along with our TraceCop family of proprietary supporting tools, this vast and ever expanding capability is used in conjunction with our customer’s data to help identify areas of vulnerability and potential cyber security threats. In addition to its extensive capability, the TraceCop family includes analytical software with a GUI interface to assist the analysts in locating cybercriminals and other potential ‘bad actors’ or network anomalies. We offer our customers a daily, weekly or monthly enrichment service to assist them in the culling of ‘good’ data traffic from potential threats.

Intrusion licenses TraceCop to our customers for a yearly fee and offers scheduled updates. Intrusion will either install and update the database at the Intrusion facility or install TraceCop on a customer server onsite. Updates are delivered via secure Internet feed or removable storage devices.

Savant

Savant is a high speed network data mining and analysis product which organizes the data into networks of relationships and associations. Its patented design exceeds performance expectations and ensures ‘deep dives’ into data-in-motion in order to quickly and accurately detect advanced persistent threats. Savant can operate on networks with data flows of over 20 gigabits per second, and still maintain a 100% inspection rate of all packets.

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The Savant solution provides real-time access and insight into a company’s own indisputable and quantifiable network data for more effective, unbiased examination of their flows. Uses of the Savant product include data mining, data loss prevention, advanced persistent threat detection and identification of Internet habits of network users. Savant is a software product which we license to our customers for which we sell data updates. We also offer the option to fully implement a server and re-sell to the customer as a turn-key solution.

Third-Party Products

We currently resell standard commercially available computers and servers from various vendors which we integrate with our different software products for implementation into our customer networks. We do not consider any of these third party relationships to be material to the Company’s business or results of operations.

Customer Services

Our product sales may include installation and threat data interpretation.

Product Development

The network security industry is characterized by rapidly changing technology standards and customer demands all shaped by the current state of the economy. We believe that our future success depends in large part upon the timely enhancement of existing products as well as the development of new technologically advanced products that meet cybersecurity industry needs and perform successfully and efficiently. We are currently marketing TraceCop and Savant products to meet emerging market requirements and are continuously engaged in testing to ensure that our products interoperate with other manufacturers’ products and which comply with industry standards applicable to those products.

During 2019 and 2018, our research and development expenditures were approximately $1.3 and $1.2 million, respectively. All of our expenditures for research and development have been expensed as incurred. At December 31, 2019, we had 25 employees engaged in research, product development and engineering. At certain times during the year, research and development labor expense has been shifted to direct labor to support ongoing projects.

Manufacturing and Supplies

Our internal manufacturing operations consist primarily of software, packaging, testing and quality control of finished units.

The hardware we sell are standard off-the-shelf products.

Intellectual Property and Licenses

Our success and our ability to compete are dependent, in part, upon our proprietary technology. We principally rely on a combination of contractual rights, trade secrets and copyright laws to establish and protect our proprietary rights in our products. In addition, we have received two patents. We have also entered into non-disclosure agreements with our suppliers, resellers and certain customers to limit access to and disclosure of proprietary information. There can be no assurance that the steps taken by us to protect our intellectual property will be adequate to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology.

We have entered into software and product license agreements with various suppliers. These license agreements provide us with additional software and hardware components that add value to our security products. These license agreements do not provide proprietary rights that are unique or exclusive to us and are generally available to other parties on the same or similar terms and conditions, subject to payment of applicable license fees and royalties. We do not consider any of the product license, software or supplier agreements to be material to our business, but rather complementary to our business and product offerings.

Sales, Marketing and Customers

Field Sales Force. Our direct sales organization focuses on major account sales, channel partners including distributors, value added resellers (VARs) and integrators; promotes our products to current and potential customers; and monitors evolving customer requirements. The field sales and technical support force provides training and technical support to our resellers and end users and assists our customers in designing cyber secure data networking solutions. We currently conduct sales and marketing efforts from our principal office in Richardson (Dallas), Texas. In addition, we have sales personnel, sales engineers or sales representatives located in Virginia and California.

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Resellers. Resellers such as domestic and international system integrators and VARs sell our products as stand-alone solutions to end users and integrate our products with products sold by other vendors into network security systems that are sold to end users. Our field sales force and technical support organization provide support to these resellers. Our agreements with resellers are non-exclusive, and our resellers generally sell other products that may compete with our products. Resellers may place higher priority on products of other suppliers who are larger and have more name recognition, and there can be no assurance that resellers will continue to sell and support our products.

Foreign Sales. Export sales did not account for any revenue in 2019 and 2018. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report for a geographic breakdown of our revenue in 2019 and 2018.

Marketing. We have implemented several methods to market our products, including participation in trade shows and seminars, distribution of sales literature and product specifications and ongoing communication with our resellers and installed base of end-user customers.

Customers. Our end-user customers include U.S. federal government, state and local government entities, large and diversified conglomerates and manufacturing entities. Sales to certain customers and groups of customers can be impacted by seasonal capital expenditure approval cycles, and sales to customers within certain geographic regions can be subject to seasonal fluctuations in demand.

In 2019, 87.4% of our revenue was derived from a variety of U.S. government entities through direct sales and indirectly through system integrators and resellers. These sales are attributable to ten U.S. Government customers through direct and indirect channels; three exceeded 10% of total revenue individually in 2019. Comparatively, sales to the U.S. Government through direct and indirect channels totaled 83.9% of total revenues for 2018. Those sales were attributable to ten U.S. Government customers through direct and indirect channels; four exceeded 10% of total revenue individually in 2018. A reduction in our sales to U.S. government entities could have a material adverse effect on our business and operating results if not replaced.

Backlog. We believe that only a small portion of our order backlog is non-cancelable and that the dollar amount associated with the non-cancelable portion is immaterial. We purchase, or contract for the purchase of, our inventory based upon our forecast of customer demand, and we maintain inventories in advance of receiving firm orders from customers. Commercial orders are generally fulfilled within two days to two weeks following receipt of an order. Certain orders may be scheduled over several months, generally not exceeding one year.

Customer Support, Service and Warranty. We service, repair and provide technical support for our products. Our field sales and technical support force works closely with resellers and end-user customers on-site and by telephone to assist with pre- and post-sales support services such as network security design, system installation and technical consulting. By working closely with our customers, our employees increase their understanding of end-user requirements and are then able to provide specific input in our product development process.

We warrant all of our products against defects in materials and workmanship for periods ranging from 90 days to 36 months. Before and after expiration of the product warranty period, we offer both on-site and factory-based support, parts replacement and repair services. Extended warranty services are separately invoiced on a time and materials basis or under an annual maintenance contract.

Competition

The market for network and data protection security solutions is intensely competitive and subject to frequent product introductions with new technologies, improved price and performance characteristics. Industry suppliers compete in areas such as conformity to existing and emerging industry standards, interoperability with networking and other security products, management and security capabilities, performance, price, ease of use, scalability, reliability, flexibility, product features and technical support. The market for identity identification and data mining is more fragmented and thus allows more opportunities for small companies to compete in.

There are numerous companies competing in various segments of the data security markets. At this time, we have limited competitors for TraceCop; however, we expect competitors to emerge in the future. These competitors currently perform only a portion of the functions that we are able to perform with TraceCop. Also, we have been continuously collecting the TraceCop data for more than ten years. We believe that none of our current or future competitors have the ability to provide this historical data. In our newest market segment, data mining and advanced persistent threat detection, we compete with several companies including Niksun, NetScout, Fireeye and Palo Alto Networks.

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However, some of our competitors have substantially greater financial, technical, sales and marketing resources, better name recognition and a larger customer base than we do. Even if we do introduce advanced products that meet evolving customer requirements in a timely manner, there can be no assurance that our new products will gain market acceptance.

Certain companies in the network security industry have expanded their product lines or technologies in recent years as a result of acquisitions. Further, more companies have developed products which conform to existing and emerging industry standards and have sought to compete on the basis of price. We anticipate increased competition from large networking equipment vendors, which are expanding their capabilities in the network security market. In addition, we anticipate increased competition from private “start-up” companies that have developed, or are developing, advanced security products. Increased competition in the security industry could result in significant price competition, reduced profit margins or loss of market share, any of which could have a material adverse effect on our business, operating results and financial condition. There can be no assurance that we will be able to compete successfully in the future with current or new competitors.

Employees

As of December 31, 2019, we employed a total of 32 full time persons, including 4 in sales, marketing and technical support, 25 in research, product development, analysis and engineering, and 3 in administration and finance.

None of our employees are represented by a labor organization, and we are not a party to any collective bargaining agreement. We have not experienced any work stoppages and consider our relations with our employees to be good.

Competition in the recruiting of personnel in the networking and data security industry is intense. We believe that our future success will depend in part on our continued ability to hire, motivate and retain qualified management, sales, marketing, and technical personnel. To date, we have not experienced significant difficulties in attracting or retaining qualified employees.

Item 1A. Risk Factors

In addition to the other information in this Form 10-K, the following factors should be considered in evaluating Intrusion Inc. and our business.

We may be unsuccessful in the transition of responsibilities of our co-founder, G. Ward Paxton upon his unexpected passing on October 24, 2019, which may have a material adverse effect on our results of operations.

Mr. G. Ward Paxton co-founded the Company in 1983, and he served as President, Chief Executive Officer, Director, and Chairman of the Board for most of his 36 year tenure. He demonstrated dedication and leadership, and provided a unique insight and understanding of the Company’s operations and business strategy for decades. The loss of that leadership and experience may cause the expenditure of Company’s and its management’s time and attention as it works through this transition with the Company’s management, staff, vendors, suppliers and customers, any or all of whom may be apprehensive regarding the loss of Ward’s leadership. We can provide no assurance of the smoothness, the diversion of the Company’s resources, or the successfulness of this transition.

The appointment of our current CFO, Mr. Michael L. Paxton, to the positions of Director and Chairman of the Board, as well as his service as Interim President and Interim CEO, may take significant time, attention, and focus from our day to day operations and the Company’s goals and objectives, perhaps in a material way.

Mr. Michael Paxton has been an integral part of our management team for many years, and our Board has expressed confidence that he will provide a smooth transition going forward. Until such time that we are able to fill the CEO position,Mr. Paxton will be tasked with continuing his current obligations of our Chief Financial Officer as well as taking on these additional roles and responsibilities. While we believe that Mike’s long tenure with and understanding of the Company’s operations will be an asset to his ability to quickly adapt to these additional duties, we can provide no assurances of such.

As of October 24, 2019, we have lost the ability to borrow, up to $2.7 million under an unsecured revolving promissory note (the “CEO Note”) from our former CEO, the loss of which may have a material adverse effect on our business, our results of operation, or even our ability to continue as a going concern. We will continue to seek financing alternatives.

With the passing of our former CEO, Mr. G. Ward Paxton, the CEO Note terminated, with the result that future borrowings thereunder will no longer be available to the Company. Our ability to draw funds under the CEO Note has been a major strength behind the Company’s liquidity for a number of years, the loss of which is unable to be measured at this time. However, the lack of this financial backstop could, in the future, have a material adverse effect on our business, our results of our operations, our ability to continue as a going concern, or to continue operations at all. Our management will be assessing whether to replace this borrowing capacity and assessing what terms may be available to the Company, including whether any such terms are acceptable to the Company, if at all; however, we can make no such assurances as to the replacement of this borrowing facility.

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We may not have sufficient cash to operate our business and may not be able to maintain future liquidity requirements. 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 December 31, 2019, we had cash and cash equivalents of approximately $3,334,000, up from approximately $1,652,000 as of December 31, 2018. We generated a net income of $4,465,000 for the year ended December 31, 2019, compared to a net income of $2,287,000 for the year ended December 31, 2018. 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 the current forecast for the year 2020, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures through March 31, 2021. As of October 24, 2019, our funding available from the CEO Note terminated. Our management will be assessing whether to replace this borrowing capacity and assessing what terms may be available to the Company, including whether any such terms available are acceptable to the Company, if at all (the “Potential Replacement Facility”). 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. We expect to fund our operations through anticipated Company profits, possible 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, and a possible Potential Replacement Facility. 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 income of $4.5 million for the year ended December 31, 2019 and have an accumulated deficit of $54.8 million as of December 31, 2019. To continue profitability, we must continue to generate consistent or increased revenue.

For the year ended December 31, 2019, we had a net income of $4.5 million and an accumulated deficit of approximately $54.8 million as of December 31, 2019, compared to a net income of $2.3 million and an accumulated deficit of approximately $59.2 million as of December 31, 2018. We need to continue to generate consistent or greater revenue from the sales of our products and services if we are to continue profitability. If we are unable to generate consistent or greater revenue growth, net losses may occur, and we may not be able to generate positive cash flow from operations in the future.

We anticipate a decrease in net revenue for the first quarter of fiscal year 2020, which could adversely affect our results of operation, our liquidity position, and result in a decline in the price of our common stock.

As of the date of this annual report, the Company anticipates lower net revenue for the quarterly period ending on March 31, 2020. While it is premature to determine whether this is a trend or merely a reflection of our customers’ varying ordering patterns, a decrease in net revenue could result in lower operating results for the quarter or for the fiscal year 2020, have a negative effect on our cash flow and our overall liquidity position, and potentially affect the perception of the Company’s value in the marketplace and result in a decline in the price of our common stock.

Further, our expense levels are based, in part, upon our expectations as to future revenues and are largely fixed in the short term. Therefore, we may not be able to timely adjust our expenditures in order to compensate for an unanticipated shortfall in revenue in any given quarter. Any significant shortfall in revenues that were unanticipated by have an immediate and significant effect on our operating results for that quarter and may lead to a reduced market price for our stock.

Uncertainties surrounding the effects of the coronavirus, particularly potential diversion of time and resources of the federal, state, and local governmental entities which make up a significant concentration of our customer base, could cause a material adverse effect on our results of operations and financial results.

            We have a concentration of customers that are federal, state, and local governmental entities.  Such entities will be required to allocate resources and adjust budgets to accommodate potential contingencies related to the effects of the coronavirus and measures required to be put in place to prevent and contain contamination of the virus.  These uncertainties may result in these customers delaying budget expenditures or re-allocating resources that would result in a decrease in orders from these customers.  Any such decrease in orders from these customers could cause a material adverse effect on our operations and financial results.

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A material disruption in our workplace as a result of the coronavirus could affect our ability to carry on our business operations in the ordinary course and may require additional cost and effort should our employees not be able to be physically on-premises.

Should we experience periods where it is not prudent for some or all of our employees to be physically present on-site, we may not have the benefit of the time and skills of such employees or we may be required to adjust our current business operations and processes to permit some or all of our employees at any one of our locations to work remotely in order to avoid the potential spread of the virus.  We can offer no assurances that these adjustments would not cause material disruptions to our daily operations, require us to expend our time, energy and resources to make necessary adjustments, and may result in a material adverse effect on our sales, research and development and other critical areas of our business model.

Our common stock may experience volatility in trading or loss in value as a result of the effects of the coronavirus on the US and global economies.

            Uncertainties surrounding the effects of the coronavirus on the US and global economies has resulted in an increase in volatility and violent drops in the value of publicly traded securities, including the trading in our common stock.  We can offer no assurances that these effects are temporary or that any losses that are incurred as a result of these uncertainties will be regained if and when this crisis has passed.  As a result, the value of our stock remains subject to such volatility and potential loss of market value.

We must expend time and resources addressing potential cyber-security risk, and any breach of our information security safeguards could have a material adverse affect on the Company.

            The threat of cyber attacks requires additional time and money to be expended in efforts to prevent any breaches of our information security protocols.  However, we can provide no assurances that we can prevent any and all such attempts from being successful, which could result in expenses to address and remediate such breaches as well as potentially losing the confidence of our customers who depend upon our services to prevent and mitigate such attacks on their respective business.  Should a material breach of our information security systems occur, it would likely have a material adverse impact on our business operations, our customer relations, our current and future sales prospects, resulting in a significant loss of revenue.

Fluctuations in our quarterly revenues may cause the price of our common stock to decline.

Our operating results have varied significantly from quarter to quarter in the past, and we expect our operating results to vary from quarter to quarter in the future due to a variety of factors, many of which are outside of our control. Significant portions of our expenses are not variable in the short term and we cannot reduce them quickly to respond to unexpected decreases in revenues. Therefore, if revenues are below our expectations, this shortfall is likely to adversely and disproportionately affect our operating results. Accordingly, we may not attain positive operating margins in future quarters. Any of these factors could cause our operating results to be below the expectations of securities analysts and investors, which likely would negatively affect the price of our common stock

If our products do not achieve market acceptance, our revenue growth may suffer.

Our security products, advanced persistent threat detection and entity identification products have been in the marketplace for a shorter period of time and may have longer sales cycles than our previous products. Accordingly, we may not achieve the meaningful revenue growth needed to sustain operations. We can provide no assurances that sales of our newer products will grow or generate sufficient revenues to sustain our business. If we are unable to recognize revenues due to longer sales cycles or other problems, our results of operations will be adversely affected, perhaps materially.

We have not yet received broad market acceptance for our products. We cannot assure you that our present or future products will achieve market acceptance on a sustained basis. In order to achieve market acceptance and achieve future revenue growth, we must introduce complementary security products, incorporate new technologies into our existing product lines and design, develop, and successfully commercialize higher performance products in a timely manner. There is no assurance that we will be able to offer new or complementary products that gain market acceptance quickly enough to avoid decreased revenues during current or future product introductions or transitions.

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A large percentage of our revenues are received from U.S. government entities, 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. 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 years ended December 31, 2017, 2018 and 2019, sales to U.S. government entities collectively accounted for 81.6%, 83.9% and 87.4% of our total net revenues, respectively. 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. There is no assurance 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.

Government customers involve unique risks, which could adversely impact our revenues.

We expect to continue to derive a substantial portion of our revenues from U.S. government customers in the future. Sales to the government present risks in addition to those involved in sales to commercial customers, including potential disruption due to appropriation and spending patterns, delays in approving a federal budget and the government’s right to cancel contracts and purchase orders for its convenience. General political and economic conditions, which we cannot accurately predict, directly and indirectly may affect the quantity and allocation of expenditures by federal departments. In addition, obtaining government contracts may involve long purchase and payment cycles, competitive bidding, qualification requirements, delays or changes in funding, budgetary constraints, political agendas, extensive specification development and price negotiations and milestone requirements. Each government entity also maintains its own rules and regulations with which we must comply, which can vary significantly among departments. As a result, cutbacks or re-allocations in the federal budget or losses of government sales due to other factors could have a material adverse effect on our revenues and operating results.

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

For the years ended December 31, 2017, 2018 and 2019, we derived 64.5%, 70.3% and 70.3% of our revenues from sales through indirect sales channels, such as distributors, value-added resellers, system integrators, original equipment manufacturers and managed service providers. We must expand 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.

The payment of dividends on our preferred stock may strain our cash resources.

On March 25, 2004, we completed a $5,000,000 private placement pursuant to which we issued 1,000,000 shares of our 5% Convertible Preferred Stock (the “Series 1 Preferred Stock”) and warrants to acquire 556,619 shares of our common stock. The conversion price for the Series 1 Preferred Stock is $3.144 per share. As of February 28, 2020, there were 200,000 shares of the Series 1 Preferred Stock outstanding, representing approximately 318,065 shares of common stock upon conversion.

On March 28, 2005, we completed a $2,663,000 private placement pursuant to which we issued 1,065,200 shares of our Series 2 5% Convertible Preferred Stock (the “Series 2 Preferred Stock”) and warrants to acquire 532,600 shares of our common stock. The conversion price for the Series 2 Preferred Stock is $2.50 per share. As of February 28, 2020, there were 420,000 shares of the Series 2 Preferred Stock outstanding, representing 420,000 shares of common stock upon conversion.

On December 2, 2005, we completed a $1,230,843 private placement pursuant to which we issued 564,607 shares of our Series 3 5% preferred stock (the “Series 3 Preferred Stock”) and warrants to acquire 282,306 shares of our common stock. The conversion price for the Series 3 Preferred Stock is $2.18 per share. As of February 28, 2020, there were 266,184 shares of Series 3 Preferred Stock outstanding, representing 266,184 shares of common stock upon conversion.

During the year ended December 31, 2019, we accrued $50,000 in dividends to the holders of our 5% Preferred Stock, $57,000 in dividends to the holders of our Series 2 5% Preferred Stock and $32,000 in dividends to the holders of our Series 3 5% Preferred Stock. Further, these dividends will continue owing to these preferred stockholders in the future. The ability to make payment of these accrued dividends are conditioned upon the financial condition of the Company and if, and when, we are able to effect such payments may strain our cash resources at the time, perhaps materially.

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If we are unable to pay scheduled dividends on shares of our preferred stock it could potentially result in additional consequences, some of them material.

As of December 31, 2019 and 2018, we had $20,000 and $594,000, respectively, in accrued and unpaid dividends included in other 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. In the past we have become delinquent in our dividend payments that became past due because we did not have a capital surplus or fiscal year net profits. However, in light of our net profits for the fiscal years ended December 31, 2018 and 2019, we were able to pay past due and current dividends as of the date of this Annual Report. However, dividends continue to accrue on all our outstanding shares of preferred stock, regardless of whether we are legally able to pay them, and we cannot assure you that our net assets will exceed our stated capital or that we will have sufficient net profits in order to pay these dividends as they continue to accrue in the future. If we are unable to pay dividends on our preferred stock, we are 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. 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 any 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.

You will experience substantial dilution upon the conversion or redemption of the shares of preferred stock 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 February 28, 2020, we had 13,753,030 shares of common stock outstanding. Upon conversion of all outstanding shares of preferred stock, we would have 14,757,279 shares of common stock outstanding, approximately an 7.3% 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 $5.13, which was the ten-day volume weighted average closing price of our common stock on February 28, 2020, and (iv) our 13,753,030 shares of common stock outstanding on February 28, 2020, 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 556,000 shares of our common stock. This would represent an increase of approximately 4.0% in the number of shares of our common stock as of February 28, 2020.

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 February 28, 2020, 800,000 shares of our 5% Preferred Stock had converted into 1,272,263 shares of common stock.

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 February 28, 2020, 645,200 shares of Series 2 Preferred Stock had converted into 645,200 shares of common stock.

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 February 28, 2020, 298,423 shares of Series 3 Preferred Stock had converted into 298,423 shares of common stock.

For the four weeks ended on February 28, 2020, the average daily trading volume of our common stock on the OTCQB was 23,020 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.

Certain rights of the holders of our preferred stock may hinder our ability to raise additional financing.

Under the terms of our preferred stock instruments, we cannot issue shares of capital stock with rights senior to those of our existing 5% Preferred Stock, Series 2 5% Preferred Stock or Series 3 5% Preferred Stock without the approval of at least a majority of the holders of our 5% Preferred Stock, all of the holders of our Series 2 5% Preferred Stock, and holders of at least 75% of our Series 3 5% Preferred Stock voting or acting as separate classes. We also cannot incur certain indebtedness without the approval of at least a majority of the holders of each class of our Preferred Stock. These restrictions could prevent us from obtaining additional financing that would require the issuance of equity with superior rights, even is such financing would benefit the Company, strengthen its financial position, and improve our results of operation.

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

On February 28, 2020, we had 13,753,030 shares of common stock outstanding. Upon the exercising of current options issued at or below the exercise price of $2.00, we will have approximately 14,647,000 shares of common stock outstanding, a 6.5% increase in the number of shares of our common stock outstanding.

We resemble a developmental stage company and our business strategy may not be successful.

We depend exclusively on revenues generated from the sale of our network security/advanced persistent threat detection products (Savant), which have received limited market acceptance, and our entity identification, data mining and analytic product (TraceCop). We can provide no assurances that our products will ever achieve widespread market acceptance or that an adequate market for these products will ever emerge. Consequently, we resemble a developmental stage company and will face the following inherent risks and uncertainties:

● the need for our entity identification, data mining and advanced persistent threat detection products to achieve market acceptance and produce a sustainable revenue stream;

● our ability to manage costs and expenses;

● our dependence on key personnel;

● our ability to obtain financing on acceptable terms; and

● our ability to offer greater value than our competitors.

Our business strategy may not successfully address these risks. If we fail to recognize significant revenues from the sales of our entity identification, data mining and advanced persistent threat detection products, our business, financial condition and operating results would be materially adversely affected.

If we fail to respond to rapid technological changes in the network security industry, we may lose customers or our products may become obsolete.

The network security industry is characterized by frequent product introductions, rapidly changing technology and continued evolution of new industry standards. We must also introduce upgrades to our products rapidly in response to customer needs such as new computer viruses or other novel external attacks on computer networks. In addition, the nature of the network security industry requires our products to be compatible and interoperable with numerous security products, networking products, workstation and personal computer architectures and computer and network operating systems offered by various vendors, including our competitors. As a result, our success depends upon our ability to develop and introduce in a timely manner new products and enhancements to our existing products that meet changing customer requirements and evolving industry standards. The development of technologically advanced network security products is a complex and uncertain process requiring high levels of innovation, rapid response and accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully in a timely manner. Further, we or our competitors may introduce new products or product enhancements that shorten the life cycle of our existing products or cause our existing products to become obsolete.

We face intense competition from both start-up and established companies that may have significant advantages over us and our products.

The market for our products is intensely competitive. There are numerous companies competing with us in various segments of the data security markets, and their products may have advantages over our products in areas such as conformity to existing and emerging industry standards, interoperability with networking and other security products, management and security capabilities, performance, price, ease of use, scalability, reliability, flexibility, product features, and technical support.

Our principal competitors in the data mining and advanced persistent threat market include Niksun, NetScout, Fireeye (Mandiant) and Palo Alto Networks. Our current and potential competitors may have one or more of the following significant advantages over us:

● greater financial, technical and marketing resources;

● better name recognition;

● more comprehensive security solutions;

● better or more extensive cooperative relationships; and

● larger customer base.

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We cannot assure you that we will be able to compete successfully with our existing or new competitors. Some of our competitors may have, in relation to us, one or more of the following:

● longer operating histories;

● longer-standing relationships with OEM and end-user customers; and

● greater customer service, public relations and other resources.

As a result, these competitors may be able to more quickly develop or adapt to new or emerging technologies and changes in customer requirements, or devote greater resources to the development, promotion and sale of their products. Additionally, it is likely that new competitors or alliances among existing competitors could emerge and rapidly acquire significant market share.

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

As of February 28, 2020, our executive officers, directors and preferred stockholders beneficially own approximately 24% of our voting power. In addition, other related parties control approximately 35% of our 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 other holders of our Common Stock.

Our products are highly technical and if they contain undetected errors, our business could be adversely affected and we might have to defend lawsuits or pay damages in connection with any alleged or actual failure of our products and services.

Our products are highly technical and complex, are critical to the operation of many networks and, in the case of our security products, provide and monitor network security and may protect valuable information. Our products have contained and may contain one or more undetected errors, defects or security vulnerabilities. Some errors in our products may only be discovered after a product has been installed and used by end customers. Any errors or security vulnerabilities discovered in our products after commercial release could result in loss of revenues or delay in revenue recognition, loss of customers and increased service and warranty cost, any of which could adversely affect our business and results of operations. In addition, we could face claims for product liability, tort, or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention. In addition, if our business liability insurance coverage is inadequate or future coverage is unavailable on acceptable terms or at all, our financial condition could be harmed.

A breach of network security could harm public perception of our security products, which could cause us to lose revenues.

If an actual or perceived breach of network security occurs in the network of a customer of our security products, regardless of whether the breach is attributable to our products, the market perception of the effectiveness of our products could be harmed. This could cause us to lose current and potential end customers or cause us to lose current and potential value-added resellers and distributors. Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques.

If our products do not interoperate with our customers’ networks, installations will be delayed or cancelled and could harm our business.

Our products are designed to interface with our customers’ existing networks, each of which have different specifications and utilize multiple protocol standards and products from other vendors. Many of our customers’ networks contain multiple generations of products that have been added over time as these networks have grown and evolved. Our products will be required to interoperate with many or all of the products within these networks as well as future products in order to meet our customers’ requirements. If we find errors in the existing software or defects in the hardware used in our customers’ networks, we may have to modify our software or hardware to fix or overcome these errors so that our products will interoperate and scale with the existing software and hardware, which could be costly and negatively impact our operating results. In addition, if our products do not interoperate with those of our customers’ networks, demand for our products could be adversely affected, orders for our products could be cancelled, or our products could be returned. This could hurt our operating results, damage our reputation and seriously harm our business and prospects.

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Our products can have long sales and implementation cycles, which may result in us incurring substantial expenses before realizing any associated revenues.

The sale and implementation of our products to large companies and government entities typically involves a lengthy education process and a significant technical evaluation and commitment of capital and other resources. This process is also subject to the risk of delays associated with customers’ internal budgeting and other procedures for approving capital expenditures, deploying new technologies within their networks, and testing and accepting new technologies that affect key operations. As a result, sales and implementation cycles for our products can be lengthy, and we may expend significant time and resources before we receive any revenues from a customer or potential customer. Our quarterly and annual operating results could be materially harmed if orders forecast for a specific customer and for a particular period are not realized.

Consolidation in the network security industry may limit market acceptance of our products.

Several of our competitors have acquired security companies with complementary technologies in the past. We expect consolidation in the network security industry to continue in the future. These acquisitions may permit our competitors to accelerate the development and commercialization of broader product lines and more comprehensive solutions than we currently offer. Acquisitions of vendors or other companies with which we have a strategic relationship by our competitors may limit our access to commercially significant technologies. Further, business combinations in the network security industry are creating companies with larger market shares, customer bases, sales forces, product offerings and technology and marketing expertise, which may make it more difficult for us to compete.

We must adequately protect our intellectual property in order to prevent loss of valuable proprietary information.

We rely primarily on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures, and non-disclosure agreements to protect our proprietary technology. However, unauthorized parties may attempt to copy or reverse-engineer aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our intellectual property. This is particularly true in foreign countries whose laws may not protect proprietary rights to the same extent as the laws of the United States and may not provide us with an effective remedy against unauthorized use. If our protection of our intellectual property proves to be inadequate or unenforceable, others may be able to use our proprietary developments without compensation to us, resulting in potential cost advantages to our competitors.

We may incur substantial expenses defending ourselves against claims of infringement.

There are numerous patents held by many companies relating to the design and manufacture of network security systems. Third parties may claim that our products infringe on their intellectual property rights. Any claim, with or without merit, could consume our management’s time, result in costly litigation, cause delays in sales or implementations of our products or require us to enter into royalty or licensing agreements. Royalty and licensing agreements, if required and available, may be on terms unacceptable to us or detrimental to our business. Moreover, a successful claim of product infringement against us or our failure or inability to license the infringed or similar technology on commercially reasonable terms could seriously harm our business.

Our common stock is thinly traded, which may negatively affect your ability to sell our shares on the OTCQB Marketplace (the “OTCQB”) as well as adversely affect the price at which you may be able to sell those shares.

For the four weeks ended on February 28, 2020, the average daily trading volume of our common stock on the OTCQB was 23,020 shares. Such thin trading may make it more difficult for you to liquidate your holdings in our common stock or negatively affect the price per share that you are able to realize from such sales.

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The price of our common stock has been volatile in the past and may continue to be volatile in the future due to factors outside of our control.

The market price of our common stock has been highly volatile in the past and may continue to be volatile in the future. During fiscal year 2019, the market price of our common stock on the OTCQB fluctuated between $2.90 and $5.55 per share and between $0.81 and $3.91 in 2018. The market price of our common stock may fluctuate significantly in the future in response to a number of factors, many of which are outside our control, including:

● variations in our quarterly operating results;

● changes in estimates of our financial performance by securities analysts;

● changes in market valuations of our competitors;

● thinly traded common stock;

● announcements by us or our competitors of new products, significant contracts, acquisitions, strategic relationships, joint ventures or capital commitments;

● product or design flaws, product recalls or similar occurrences;

● additions or departures of key personnel;

● sales of common stock in the future; and

● fluctuations in stock market prices and volume, which are relatively typical for high technology companies.

Our acquisition of complementary products or businesses may adversely affect our financial condition.

We have made acquisitions in the past and, in the future we may acquire or invest in additional companies, business units, product lines or technologies to accelerate the development of products and sales channels complementary to our existing products and sales channels. Negotiation of potential acquisitions and integration of acquired products, technologies or businesses could divert our management’s time and resources. Future acquisitions could cause us to issue equity securities that would dilute your ownership of us, incur debt or contingent liabilities, amortize intangible assets or write off in-process research and development, goodwill and other acquisition-related expenses that could seriously harm our financial condition and operating results. Further, if we are not able to properly integrate acquired products, technologies or businesses with our existing products and operations, train, retain and motivate personnel from the acquired business or combine potentially different corporate cultures, we may not receive the intended benefits of our acquisitions, which could adversely affect our business, operating results and financial condition.

Compliance with export regulations may hinder our sales to foreign customers.

Certain of our data security products incorporate encryption and other technology that may require clearance and export licenses from the U.S. Department of Commerce under United States export regulations. Any inability to obtain these clearances or licenses or any foreign regulatory approvals, if required, on a timely basis could delay sales and have a material adverse effect on our operating results.

Item 2.     Properties.

Our headquarters are located in a two-story building in Richardson, Texas. We occupy approximately 23,000 square feet of floor space in this facility. This facility houses our corporate administration, operations, marketing, research and development, engineering, sales and technical support personnel. The lease for this facility extends through November 2024.

Approximately thirty percent of our security software research and development and engineering staff are located in two separate small facilities in San Diego, California. The leases for these facilities are currently set to expire in March 2020 and March 2021. The two San Diego facilities are in the process of closing due to all California employees currently working from home offices.

We believe that the existing facilities at December 31, 2019, will be adequate to meet our operational requirements through 2020. We believe that all such facilities are adequately covered by appropriate property insurance. See Note 4 to our Consolidated Financial Statements for additional information regarding our obligations under leases.

Item 3.     Legal Proceedings.

We are subject to legal proceedings and claims that arise in the ordinary course of business. We do not believe that any claims exist where the outcome of such matters would have a material adverse effect on our consolidated financial position, operating results or cash flows. However, there can be no assurance such legal proceedings will not have a material impact on future results.

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PART II

Item 5.     Market for Common Equity and Related Stockholder Matters and Business Issuer Purchases of Equity Securities.

Our common stock trades on the OTCQB, where it is currently listed under the symbol “INTZ.” As of February 28, 2020, there were approximately 120 registered holders of record of our common stock. Quotations on the OTCQB reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

Shares of our 5% convertible preferred stock accrue cash dividends equal to $0.25 per share per annum, payable in arrears on March 31 and September 30 of each year, and shares of our Series 2 5% and Series 3 5% convertible preferred stock accrue cash dividends equal to $0.125 and $0.109 per share per annum, respectively, payable in arrears on the first business day of March, June, September and December of each year. During the fiscal year ended December 31, 2019, we accrued $50,000 in dividends to the holders of our 5% Preferred Stock, $57,000 in dividends to the holders of our Series 2 5% Preferred Stock and $32,000 in dividends to the holders of our Series 3 5% Preferred Stock. 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.

All stock option plans under which our common stock is reserved for issuance have previously been approved by our stockholders. The following table provides summary information as of December 31, 2019 for all of our equity compensation plans (in thousands, except per share data). See Note 9 to our consolidated financial statements for additional discussion.

	Number of shares of common stock to be issued upon exercise of outstanding options			Weighted average exercise price of outstanding options		No. of shares of common stock remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders		975.1	(1)	$	0.96		449.0
Equity compensation plans not approved by security holders		—			—		—
Total		975.1		$	0.96		449.0

(1) Included in the outstanding options are 824,100 from the 2005 Stock Incentive Plan and 151,000 from the 2015 Stock Option Plan.

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

This Annual Report on Form 10-K, including the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Description of Business,” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology. You should not place undue reliance on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, levels of activity, performance or achievements. Factors that may cause actual results to differ materially from current expectations, which we describe in more detail elsewhere in this Annual Report on Form 10-K under the heading “Risk Factors,” include, but are not limited to:

● our ability to maintain sufficient cash to operate our business and to meet future liquidity requirements;

● our ability to successfully transition responsibilities from our president, chairman, and co-founder G. Ward Paxton to Michael Paxton;

● our ability to secure new financing to replace our prior borrowing ability under the note with our former CEO and our facility with Silicon Valley Bank, neither of which is available to us moving forward;

● anticipated fluctuations in quarterly revenues;

● a concentration in governmental customers with unique risks attached;

● competition from companies with greater financial resources;

● our response to rapid technological shifts in the network security industry and consistently changing laws and regulations concerning consumer privacy and personally identifiable information; and

● risks related to our common stock as well as the effect of the superior rights and privileges of our various classes of preferred stock over the rights of the holders of our common stock.

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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. Any forward-looking statement you read in this filing 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.

Overview

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

● The TraceCop™ product line, including many of our proprietary supporting tools, allows our customers and in-house cyber analysts to accurately discover and help identify ‘bad actors’ associated with cybercrime. The TraceCop product family is built upon an extensive database based on over 20 years of Internet data, Internet understanding and cyber security analytical experience. Along with a multitude of cyber security ‘global threat feeds’, this vast and ever expanding database is used in conjunction with our customer’s data to help identify areas of vulnerability and potential cyber security threats. We offer our customers a daily, weekly or monthly enrichment service to assist them in the culling of ‘good’ data traffic from potential threats.

● The Savant™ product is a ‘purpose-built’, very high-speed network data mining and analytics software package that is easily installed on COTS (commercial off the shelf) platforms. Its patented design exceeds performance expectations and ensures ‘deep dives’ into data-in-motion in order to quickly and accurately detect advanced persistent threats.

Our customers’ use our products and services as an integral part of protecting their critical infrastructure and data information assets. By quickly detecting, protecting, analyzing and reporting attacks, along with the potential misuse of classified information, we have become a key component to the daily challenges of cybercrime for both state and federal governments and large private commercial enterprises.

Our revenues have been fairly consistent over the past few years due primarily to our focus on our TraceCop and Savant product lines. To date, we have not encountered significant competition in the TraceCop and Savant markets that has caused us to decrease our sales prices when compared to sales prices in previous years. To help keep our operation expenses under control, we held our employee headcount at a reasonable level in 2019 compared to 2018. At December 31, 2018, we employed 31 full time persons and at December 31, 2019, we employed 32 full time persons. Our margins for direct labor only were comparable at 63.0% in 2018, and 61.0% in 2019.

In order for us to operate and grow our business, we must generate and sustain sufficient operating profits and cash flow in future periods. This will require us to continue to generate revenues from sales of our entity identification software, data mining and advanced persistent threat products. In order to obtain these sales, our products must gain acceptance in a competitive industry. We believe our ability to market and sell our TraceCop and Savant products into the marketplace in a timely manner and our efforts to effectively control spending levels will help us achieve these results.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, bad debts, inventories, income taxes, warranty obligations, maintenance contracts and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We generally recognize product revenue upon shipment. These products can include hardware, perpetual software licenses and data sets. Data set updates are the majority of our sales. We do not currently offer software on a subscription basis. Warranty costs and sales returns have not been material.

We recognize sales of our data sets in accordance with FASB ASC Topic 606 whereby revenue from contracts with customers is not recognized until all five of the following have been met:

i) identify the contract with a customer;

ii) identify the performance obligations in the contract;

iii) determine the transaction price;

iv) allocate the transaction price to the separate performance obligations; and

v) recognize revenue upon satisfaction of a performance obligation.

Data updates are typically done monthly and revenue will be 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 of our product offering and service offering market values are readily determined based on current and prior stand-alone sales. We may defer and recognize maintenance, updates and support revenue over the term of the contract period, which is generally one year.

Service revenue, primarily including maintenance, training and installation, are recognized upon delivery of the service and typically are unrelated to product sales. To date, maintenance, training and installation revenue has not been material. Our normal payment terms offered to customers, distributors and resellers are net 30 days domestically and net 45 days internationally. We do not offer payment terms that extend beyond one year and rarely do we extend payment terms beyond our normal terms. If certain customers do not meet our credit standards, we do require payment in advance to limit our credit exposure.

Shipping and handling costs are billed to the customer and included in product revenue. Shipping and handling expenses are included in cost of product revenue.

Allowances for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our receivables are uncollaterized, and we expect to continue this policy in the future. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, increased allowances may be required. Historically, our estimates for sales returns and doubtful accounts have not differed materially from actual results.

Fair Value of Financial Instruments

We calculate the fair value of our assets and liabilities which qualify as financial instruments and include additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued expenses, and dividends payable approximate their carrying amounts due to the relatively short maturity of these instruments. Loan payable to officer is with a related party and as a result does not bear market rates of interest. Capital leases approximate fair value as they 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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Results of Operations

The following tables set forth, for the periods indicated, certain financial data as a percentage of net revenue.

	Year Ended December 31,
	2019			2018
Net product revenue		100.0	%		100.0	%
Total cost of revenue		39.2			37.4
Gross profit		60.8			62.6
Operating expenses:
Sales and marketing		9.5			15.6
Research and development		9.6			12.1
General and administrative		8.7			10.8
Operating income		33.0			24.1
Interest expense		(0.3	)		(1.8	)
Interest income		—			—
Income from operations before income taxes		32.7			22.3
Income tax provision		—			—
Net income		32.7			22.3
Preferred stock dividends accrued		(1.0	)		(1.4	)
Net income attributable to common stockholders		31.7	%		20.9	%

2019 compared with 2018

Net Revenue

Total revenue increased 32.8% to $13.6 million in 2019 from $10.3 million in 2018. The increase in revenue was related to growth in our TraceCop product line. We expect our product revenues to increase in the future if we are able to increase sales to existing customers and add new customers.

There were no export sales in 2019 and 2018 primarily due to our focus on domestic revenue sales. Sales of our products internationally may be subject to currency exchange risk, which may cause our products to effectively increase in price, if the exchange rate moves significantly and the dollar gains value over the foreign currency.

Historically, due to the timing of our sales cycle, a significant portion of our monthly sales occurs in the second half of the month. Accordingly, our receivables increase at the end of each month, which causes a higher accounts receivable balance at month end. This monthly trend also causes an inflated comparative relationship between revenue and accounts receivable. We believe that this monthly trend will continue because monthly sales forecast and planning meetings are held in the first week of every month, the middle of the month is focused on sales calls to customers and the latter half of the month on closing sales.

Gross Profit

Gross profit increased 29.1% to $8.3 million in 2019 from $6.4 million in 2018. As a percentage of net revenue, gross profit decreased from 62.6% in 2018 to 60.8% in 2019. Gross profit as a percentage of revenue, decreased in 2019 compared to 2018 because of higher labor costs related to certain projects.

Gross profit as a percentage of net revenue is impacted by several factors, including shifts in product mix, changes in channels of distribution, sales volume, fluctuations in manufacturing costs, labor costs, pricing strategies, and fluctuations in sales of integrated third-party products.

Sales and Marketing

Sales and marketing expenses decreased to $1.3 million or 9.5% of net revenue in 2019, compared to $1.6 million or 15.6% of net revenue in 2018. The decrease in sales and marketing expense was mainly due to collecting a payment of $200 thousand from a customer related sales and marketing expense that occurred during the year 2018. Sales and marketing expenses may vary in the future. We expect sales and marketing expenses to increase if we are able to increase net revenue levels in 2020. Sales and marketing expense levels may fluctuate due to labor expense shifting to direct labor.

19

Research and Development

Research and development expenses increased to $1.3 million or 9.6% of net revenue in 2019 compared to $1.2 million or 12.1% of net revenue in 2018. The increase in research and development expense was due to less labor expense shifted to direct labor costs. Our research and development costs are expensed in the period in which they are incurred. We expect research and development expenses to increase if we are able to increase net revenue levels in 2020. Research and development expense levels may fluctuate due to labor expense shifting to direct labor.

General and Administrative

General and administrative expenses remained fairly constant at $1.2 million, or 8.7% of net revenue in 2019 compared to $1.1 million or 10.8% of net revenue in 2018 as a result of continuing efforts to keep spending under control. We expect general and administration expenses to remain fairly constant but increase if we are able to increase net revenue levels in 2020.

Interest Expense

Interest expense decreased to $46 thousand in 2019, compared to $189 thousand in 2018. Interest expense decreased due to decreased amount of Loan Payable to Officer culminating in our repayment of the balance in May 2019. Interest expense will vary in the future based on our cash flow and borrowing needs.

Interest Income

Interest income earned on bank deposits was $4 thousand in 2019 compared to none in 2018.

Income Taxes

Our effective income tax rate was 0% in 2019 and 2018 as valuation allowances have been recorded for the entire amount of the net deferred tax assets due to uncertainty of realization. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“the Tax Act”) which significantly changed U.S. tax law.  The Tax Act lowered the Company’s statutory federal income tax rate from a maximum of 39% to a rate of 21% effective January 1, 2018.

Liquidity and Capital Resources

Our principal source of liquidity at December 31, 2019 was $3.3 million of cash and cash equivalents. As of December 31, 2019, we did not hold investments with a stated maturity beyond one year. Working capital at December 31, 2019 was $3.1 million, while at December 31, 2018, it was $0.5 million.

Net cash provided by operations for the twelve months ended December 31, 2019, was $4.3 million due primarily to a net income of $4.5 million and the following sources of cash and non-cash items: $232 thousand in noncash lease costs, a $401 thousand decrease in accounts receivable, $125 thousand in depreciation expense, $59 thousand in amortization expense of capital leases and other assets, $47 thousand in stock-based compensation , and $6 thousand in waived penalties on dividends. This was partially offset by a $496 thousand decrease in accounts payable and accrued expenses, a $488 thousand decrease in deferred revenue, and a $61 thousand increase in prepaid expenses and other assets. Net cash provided by operations for the twelve months ended December 31, 2018, was $2.6 million due primarily to a net income of $2.3 million and the following sources of cash and non-cash items: an $598 thousand increase in deferred revenue, a $421 thousand increase in accounts payable and accrued expenses, $68 thousand in depreciation expense, $65 thousand in amortization expense of capital leases and other assets, a $64 thousand write-off of the United Kingdom’s cumulative translation adjustment, $47 thousand in waived penalties on dividends, $20 thousand in stock-based compensation, and a $15 thousand decrease in inventories. This was partially offset by a $1.0 million increase in accounts receivable and a $2 thousand increase in prepaid expenses and other assets. Future fluctuations in accounts receivable, inventory balances and accounts payable will be dependent upon several factors, including quarterly sales, timely collection of accounts receivable, and the accuracy of our forecasts of product demand and component requirements.

Net cash used in investing activities in 2019 was $260 thousand for purchases of property and equipment. Net cash used in investing activities in 2018 was $202 thousand for purchases of property and equipment.

20

Net cash used in financing activities in 2019 was $2.3 million primarily due to payments on the loan by an officer of $1.8 million, $714 thousand payment of dividends on preferred stock, and $58 thousand payments on principal on capital leases. This was directly offset by a provision of cash of $239 thousand from the exercise of stock options. Net cash used in financing activities in 2018 was $0.9 million primarily due to payments on the loan by an officer of $1.2 million with a $66 thousand payment on principal on capital leases. This was directly offset by the following provisions of cash: proceeds from a loan by an officer of $150 thousand and $168 thousand from the exercise of stock options.

At December 31, 2019, we had a commitment of $66 thousand for future finance lease liabilites. Operating lease commitments of $1.8 million are detailed in the Contractual Obligations section below. At December 31, 2018, we had a commitment of $128 thousand for future finance lease liabilties, while operating lease commitments were $2.1 million. During 2019, we funded our operations through the use of available cash and cash equivalents.

As of December 31, 2019, we had cash and cash equivalents in the amount of approximately $3.3 million, increasing from $1.7 million as of December 31, 2018.

On February 8, 2018, the Company entered into an unsecured revolving promissory note to borrow up to $3,700,000 from G. Ward Paxton, the Company’s former Chief Executive Officer (the “CEO Note”). Under the terms of the CEO Note, the Company had the ability to borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $3,700,000 at any given time through March 2020.

On February 7, 2019, the Company amended the unsecured revolving promissory note to borrow up to $2,700,000 from G. Ward Paxton, the Company’s former Chief Executive Officer. Amounts borrowed under the CEO Note accrued interest at a floating rate per annum equal to Silicon Valley Bank’s (“SVB”) prime rate plus 1%. Under the terms of the note, the Company had the ability to borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $2,700,000 at any given time through March 2021. We reduced our borrowing under this note to zero as of May 2019.

As of October 24, 2019, G. Ward Paxton passed away, terminating the CEO Note with the result that future borrowings thereunder will no longer be available to the Company. Our management will be assessing whether to replace this borrowing base and assessing what terms may be available to the Company, including whether any such terms are acceptable to the Company, if at all.

As of December 31, 2019, we had cash and cash equivalents of approximately $3,334,000, up from approximately $1,652,000 as of December 31, 2018. We generated a net income of $4,465,000 for the year ended December 31, 2019 compared to a net income of $2,287,000 for the year ended December 31, 2018. 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 the current forecast for the year 2020, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures through March 31, 2021. As of October 24, 2019, our funding available from the CEO Note terminated. Our management will be assessing whether to replace this borrowing base and assessing what terms may be available to the Company, including whether any such terms available are acceptable to the Company, if at all (the “Potential Replacement Facility”). 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. We expect to fund our operations through anticipated Company profits, 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, and a possible Potential Replacement Facility. 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 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.

Contractual Obligations

The following table sets forth certain information concerning the future contractual obligations under our leases at December 31, 2019. We had no other significant contractual obligations at December 31, 2019.

21

Future minimum lease obligations consisted of the following at December 31, 2019 (in thousands):

	Operating			Finance
Period ending December 31,	ROU Leases			ROU Leases			Total
2020	$	362		$	45		$	407
2021		361			21			382
2022		369			—			369
2023		380			—			380
2024		352			—			352
	$	1,824		$	66		$	1,890
Less Interest*		(225	)		(2	)
	$	1,599		$	64

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

Off-Balance Sheet Arrangements

As of December 31, 2019, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Recent Accounting Pronouncements

See Note 2 Consolidated Financial Statements

Item 9A.     Controls and Procedures

Evaluation of Effectiveness of Disclosure Controls and Procedures

The Company’s management, under the supervision and with the participation of the Interim Chief Executive Officer and Chief Financial Officer (Michael L. Paxton currently holds both positions), conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, the Interim Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Management Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

The Company’s management, under the supervision and with the participation of the Interim Chief Executive Officer and Chief Financial Officer (Michael L. Paxton currently holds both positions), conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s evaluation included an assessment of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and the Company’s overall control environment. Based on its evaluation, management concluded that the Company’s internal control over financial reporting was effective as of the year ended December 31, 2019 to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. The Company reviewed the results of management’s assessment with the Audit Committee of the Board of Directors.

22

This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report. This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Inherent Limitations on Effectiveness of Controls

The Company’s management, including the Interim Chief Executive Officer and Chief Financial Officer (Michael L. Paxton currently holds both positions), does not expect that the Company’s disclosure controls or internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2019, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART III

Certain information required by Part III is omitted from this Form 10-K because we will file a definitive Proxy Statement for our 2020 annual meeting of stockholders pursuant to Regulation 14A (the “Proxy Statement”) no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information to be included therein is incorporated herein by reference.

Item 10. Directors, Executive Officers and Corporate Governance.

The information called for by this item is incorporated herein by reference to the Proxy Statement.

Item 11. Executive Compensation.

The information called for by this item is incorporated herein by reference to the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information called for by this item is incorporated herein by reference to the Proxy Statement.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information called for by this item is incorporated herein by reference to the Proxy Statement.

Item 14. Principal Accounting Fees and Services.

The information called for by this item is incorporated herein by reference to the Proxy Statement.

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a)     1.   Consolidated Financial Statements.

The following consolidated financial statements of Intrusion Inc. and subsidiaries, are submitted as a separate section of this report (See F-pages):

Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets at December 31, 2019 and 2018	F-2
Consolidated Statements of Operations for the years ended December 31, 2019 and 2018	F-3
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2019 and 2018	F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018	F-5
Notes to Consolidated Financial Statements	F-6

Exhibit Number	Description of Exhibit
3.1(3)	Restated Certificate of Incorporation of the Registrant
3.2(5)	Certificate of Amendment to Certificate of Incorporation of Registrant
3.3(6)	Certificate of Designations for the Registrant’s 5% Convertible Preferred Stock
3.4(8)	Certificate of Designations of the Registrant’s Series 2 5% Convertible Preferred Stock
3.5(9)	Certificate of Designations for the Registrant’s Series 3 5% Convertible Preferred Stock
3.6(2)	Bylaws of the Registrant
4.1(7)	Specimen Common Stock Certificate
4.2(6)	Specimen 5% Convertible Preferred Stock Certificate
4.3(8)	Specimen Series 2 5% Convertible Preferred Stock Certificate
4.4(9)	Specimen Series 3 5% Convertible Preferred Stock Certificate
10.1(11)	Form of Indemnification Agreement

24

Exhibit Number	Description of Exhibit
10.2(7)	Lease Agreement between CalWest Industrial Holdings Texas, L.P. and Intrusion Inc.
10.3(13)	Fourth Amendment to Lease, executed on September 27, 2018, by and between Intrusion Inc. and JP-CORPORATE PLACE, LP.
10.4(2)	Amended and Restated 401(k) Savings Plan of the Registrant
10.5(4)	Intrusion Inc. 401(k) Savings Plan Summary of Material Modifications
10.6(10)	Amended 2005 Stock Incentive Plan of the Registrant
10.7(12)	2015 Stock Incentive Plan of the Registrant
10.8(13)	Form of Notice of Grant of Stock Option
10.9(13)	Form of Stock Option Agreement
10.10(13)	Form of Notice of Grant of Non-Employee Director Automatic Stock Option (Initial Grant)
10.11(13)	Form of Notice of Grant of Non-Employee Director Automatic Stock Option (Annual Grant)
10.12(13)	Form of Automatic Stock Option Agreement
21(11)	List of Subsidiaries of Registrant
23.1(14)	Consent of Whitley Penn LLP, Independent Registered Public Accounting Firm
31.1(14)	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act
31.2(14)	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act
32.1(14)	Certification of Chief Executive Officer 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
32.2(14)	Certification of Chief Financial Officer 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(14)	XBRL Instance Document.
101.SCH(14)	XBRL Taxonomy Extension Schema Document.
101.CAL(14)	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF(14)	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB(14)	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE(14)	XBRL Taxonomy Extension Presentation Linkbase Document.

(1) Filed as an Exhibit in the Registrant’s Registration Statement on Form S-1, as amended (File No. 33-6899), which was declared effective on May 21, 1992, by the Securities and Exchange Commission, which Exhibit is incorporated herein by reference.

(2) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K, for the fiscal year ended December 31, 2000, which Exhibit is incorporated herein by reference.

(3) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated June 15, 2010, which Exhibit is incorporated herein by reference.

(4) Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, which Exhibit is incorporated herein by reference.

(5) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (as amended), which Exhibit is incorporated herein by reference.

(6) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated March 26, 2004 (as amended), which Exhibit is incorporated by reference.

(7) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (as amended), which Exhibit is incorporated herein by reference.

(8) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated March 29, 2005, which Exhibit is incorporated herein by reference

(9) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated December 6, 2005, which Exhibit is incorporated herein by reference.

25

(10) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated June 15, 2005, which Exhibit is incorporated herein by reference.

(11) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (as amended), which Exhibit is incorporated herein by reference.

(12) Filed as an Exhibit to the Registrant’s Definitive Proxy Statement on Schedule 14A in connection with the solicitation of proxies for its Annual Meeting of Stockholders held May 14, 2015, which Exhibit is incorporated herein by reference.

(13) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (as amended), which Exhibit is incorporated herein by reference.

(14) Filed herewith.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 27, 2020	INTRUSION INC.
	(Registrant)
	By:	/s/ MICHAEL L. PAXTON
		Michael L. Paxton
		Chairman, Interim President, Interim Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary
		(Principal Executive Officer and Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ MICHAEL L. PAXTON	Chairman, Interim President, Interim Chief Executive Officer,	March 27, 2020
Michael L. Paxton	Chief Financial Officer, Treasurer, Secretary and Director
	(Principal Executive Officer, Principal Financial and Accounting Officer)
/s/ T. JOE HEAD	Vice Chairman, Vice President	March 27, 2020
T. Joe Head	and Director
/s/ JAMES F. GERO	Director	March 27, 2020
James F. Gero
/s/ DALE BOOTH	Director	March 27, 2020
Dale Booth
/s/ DONALD M. JOHNSTON	Director	March 27, 2020
Donald M. Johnston

27

ANNUAL REPORT ON FORM 10-K

ITEM 8

FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2019 and 2018

INTRUSION INC.

RICHARDSON, TEXAS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Intrusion Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Intrusion Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company's auditor since 2009.

/s/ Whitley Penn LLP

Dallas, Texas

March 27, 2020

F-1

INTRUSION INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

	December 31,
	2019			2018
Assets
Current Assets:
Cash and cash equivalents	$	3,334		$	1,652
Accounts receivable		1,566			1,967
Prepaid expenses		152			91
Total current assets		5,052			3,710
Property and Equipment:
Equipment		1,138			881
Furniture and fixtures		43			43
Leasehold improvements		63			63
		1,244			987
Accumulated depreciation and amortization		(909	)		(787	)
		335			200
Finance leases, right-of-use assets, net		62			121
Operating leases, right-of-use assets, net		1,348			—
Other assets		38			38
TOTAL ASSETS	$	6,835		$	4,069
Liabilities and Stockholders’ Equity (Deficit)
Current Liabilities:
Accounts payable, trade	$	252		$	193
Accrued expenses		828			1,403
Dividends payable		20			594
Finance leases liabilities, current portion		43			58
Operating leases liabilities, current portion		284			—
Deferred revenue		516			1,004
Total current liabilities		1,943			3,252
Loan payable to officer		—			1,815
Finance leases liability, noncurrent portion		21			64
Operating leases liability, noncurrent portion		1,315			—
Commitments and contingencies
Stockholders’ Equity (Deficit):
Preferred stock, $0.01 par value:
Authorized shares — 5,000
Series 1 shares issued and outstanding — 200 Liquidation preference of $1,013 in 2019 and $1,213 in 2018		707			707
Series 2 shares issued and outstanding — 460 Liquidation preference of $1,155 in 2019 and $1,385 in 2018		724			724
Series 3 shares issued and outstanding — 289 Liquidation preference of $634 in 2019 and $760 in 2018		412			412
Common stock, $0.01 par value:
Authorized shares — 80,000
Issued shares — 13,552 in 2019 and 13,259 in 2018
Outstanding shares — 13,542 in 2019 and 13,249 in 2018		136			133
Common stock held in treasury, at cost—10 shares		(362	)		(362	)
Additional paid-in-capital		56,759			56,609
Accumulated deficit		(54,777	)		(59,242	)
Accumulated other comprehensive loss		(43	)		(43	)
Total stockholders’ equity (deficit)		3,556			(1,062	)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	6,835		$	4,069

See accompanying notes.

F-2

INTRUSION INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Year Ended December 31,
	2019			2018
Net product revenue	$	13,643		$	10,276
Cost of revenue		5,342			3,847
Gross profit		8,301			6,429
Operating expenses:
Sales and marketing		1,298			1,604
Research and development		1,314			1,237
General and administrative		1,182			1,112
Operating income		4,507			2,476
Interest expense		(46	)		(189	)
Interest income		4			—
Income from operations before income taxes		4,465			2,287
Income tax provision		—			—
Net income		4,465			2,287
Preferred stock dividends accrued		(139	)		(139	)
Net income attributable to common stockholders	$	4,326		$	2,148
Net income per share attributable to common stockholders, basic	$	0.32		$	0.16
Net income per share attributable to common stockholders, diluted	$	0.28		$	0.14
Weighted average common shares outstanding:
Basic		13,502			13,049
Diluted		15,352			15,063

See accompanying notes.

F-3

INTRUSION INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands)

	Year Ended December 31,
	2019			2018
NUMBER OF PREFERRED SHARES—ISSUED AND OUTSTANDING
Balance, beginning of year and end of year		949			949
PREFERRED STOCK
Balance, beginning of year and end of year	$	1,843		$	1,843
NUMBER OF COMMON SHARES—ISSUED
Balance, beginning of year		13,259			12,808
Exercise of stock options		293			451
Balance, end of year		13,552			13,259
COMMON STOCK
Balance, beginning of year	$	133		$	128
Exercise of stock options		3			5
Balance, end of year	$	136		$	133
TREASURY SHARES
Balance, beginning of year and end of year	$	(362	)	$	(362	)
ADDITIONAL PAID-IN-CAPITAL
Balance, beginning of year	$	56,609		$	56,518
Stock-based compensation		47			20
Exercise of stock options		236			163
Preferred stock dividends declared, net of waived penalties by shareholders		(133	)		(92	)
Balance, end of year	$	56,759		$	56,609
ACCUMULATED DEFICIT
Balance, beginning of year	$	(59,242	)	$	(61,529	)
Net income		4,465			2,287
Balance, end of year	$	(54,777	)	$	(59,242	)
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of year	$	(43	)	$	(107	)
Extinguishment of U.K. cumulative translation adjustment		—			64
Balance, end of year	$	(43	)	$	(43	)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)	$	3,556		$	(1,062	)

See accompanying notes.

F-4

INTRUSION INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended December 31,
	2019			2018
Operating Activities:
Net income	$	4,465		$	2,287
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		184			133
Noncash lease costs		232			—
Stock-based compensation		47			20
Penalties and waived penalties on dividends		6			47
Extinguishment of U.K. cumulative translation adjustment		—			64
Changes in operating assets and liabilities:
Accounts receivable		401			(1,005	)
Inventories		—			15
Prepaid expenses and other assets		(61	)		(2	)
Accounts payable and accrued expenses		(496	)		421
Deferred revenue		(488	)		598
Net cash provided by operating activities		4,290			2,578
Investing Activities:
Purchases of property and equipment		(260	)		(202	)
Net cash used in investing activities		(260	)		(202	)
Financing Activities:
Borrowings on loan from officer		—			150
Payments on loan from officer		(1,815	)		(1,200	)
Payments of dividends		(714	)		—
Principal payments on capital lease equipment		(58	)		(66	)
Proceeds from stock options exercised		239			168
Net cash used in financing activities		(2,348	)		(948	)
Net increase in cash and cash equivalents		1,682			1,428
Cash and cash equivalents at beginning of year		1,652			224
Cash and cash equivalents at end of year	$	3,334		$	1,652
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on leased assets	$	4		$	3
Interest paid on loan from officer	$	513		$	—
Income taxes paid	$	—		$	—
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES:
Preferred stock dividends accrued	$	139		$	139
Purchase of equipment through capital lease	$	—		$	128

See accompanying notes.

F-5

INTRUSION INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

We develop, market, and support a family of entity identification, data mining, regulated information compliance and data privacy protection. Our product families include: TraceCop for identity identification, Savant for data mining and advanced persistent threat detection and Compliance Commander for regulated information and data privacy protection. Intrusion’s products help protect critical information assets by quickly detecting, protecting, analyzing and reporting attacks or misuse of classified, private and regulated information for government and enterprise networks.

We market and distribute our products through a direct sales force to end-users, distributors and numerous system integrators, managed service providers and value-added resellers. Our end-user customers include banks, credit unions, other financial institutions, U.S. federal government entities, foreign government entities, hospitals and other healthcare providers. Essentially, our end-users can be defined as end-users requiring network security solutions for protecting their mission critical data.

References to the “Company”, “we”, “us”, “our”, “Intrusion” or “Intrusion Inc.” refer to Intrusion Inc. and its subsidiaries. Compliance Commander™ and TraceCop™ are registered trademarks of Intrusion Inc.

As of December 31, 2019, we had cash and cash equivalents of approximately $3,334,000, up from approximately $1,652,000 as of December 31, 2018. We generated a net income of $4,465,000 for the year ended December 31, 2019 compared to a net income of $2,287,000 for the year ended December 31, 2018. 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 the current forecast for the year 2020, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures through March 31, 2021. As of October 24, 2019, our funding available from the CEO Note terminated. Our management will be assessing whether to replace this borrowing base and assessing what terms may be available to the Company, including whether any such terms available are acceptable to the Company, if at all (the “Potential Replacement Facility”). 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. We expect to fund our operations through anticipated Company profits, 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, and a possible Potential Replacement Facility. 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.

2. Summary of Significant Accounting Policies

Principles of Consolidation

Our consolidated financial statements include our accounts and those of our wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

Cash and all highly liquid investments purchased with an original maturity of less than three months are considered to be cash and cash equivalents.

Risk Concentration

Financial instruments, which potentially subject us to concentrations of credit risk, are primarily cash and cash equivalents, investments and accounts receivable. Cash and cash equivalent deposits are at risk to the extent that they exceed Federal Deposit Insurance Corporation insured amounts. To minimize risk, we place our investments in U.S. government obligations, corporate securities and money market funds. Substantially all of our cash, cash equivalents and investments are maintained with two major U.S. financial institutions. We do not believe that we are subject to any unusual financial risk with our banking arrangements. We have not experienced any significant losses on our cash and cash equivalents.

We sell our products to customers primarily in the United States. In the future, we may sale our products internationally. Fluctuations in currency exchange rates and adverse economic developments in foreign countries could adversely affect the Company’s operating results. We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral. We maintain reserves for potential credit losses, and such losses, in the aggregate, have historically been minimal.

F-6

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are stated at the amount we expect to collect. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. If the financial condition of our customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, we provide for estimated uncollectible amounts through a charge to earnings and an increase to a valuation allowance. Balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance. There was no allowance at December 31, 2019 and 2018.

Property and Equipment

Equipment and furniture and fixtures are stated at cost less accumulated depreciation and depreciated on a straight-line basis over the estimated useful lives of the assets. Such lives vary from 1 to 5 years. Leasehold improvements are stated at cost less accumulated amortization and are amortized on a straight-line basis over the shorter of estimated useful lives of the assets or the remaining terms of the leases. Such lives vary from 2 to 5 years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Repair and maintenance costs are expensed as incurred. Depreciation and amortization expense totaled approximately $184,000 and $133,000 for the years ended December 31, 2019 and 2018, respectively.

Long-Lived Assets

We review long-lived assets, including property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows to be generated by the asset. If the carrying value exceeds the future undiscounted cash flows, the assets are written down to fair value. During the years ended December 31, 2019 and 2018, there was no impairment of long-lived assets.

Foreign Currency

All assets and liabilities in the balance sheets of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at year-end exchange rates. All revenues and expenses in the statement of operations of these foreign subsidiaries are translated at average exchange rates for the year. Translation gains and losses are not included in determining net income but are shown in accumulated other comprehensive loss in the stockholders’ deficit section of the consolidated balance sheet. Foreign currency transaction gains and losses are included in determining net loss and were not significant.

Accounting for Stock Options

We account for stock options using the guidance in Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 718. FASB ASC Topic 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.

Stock-based compensation expense recognized in the statements of operations for the years ended 2019 and 2018 is based on awards ultimately expected to vest, reduced by estimated forfeitures. FASB ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Valuation Assumptions

The fair values of option awards were estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions for fiscal years ended December 31, 2019 and 2018, respectively:

	2019			2018
Weighted average grant date fair value	$	3.69		$	0.49
Weighted average assumptions used:
Expected dividend yield		0.00	%		0.00	%
Risk-free interest rate		2.00	%		0.83	%
Expected volatility		124.58	%		225.21	%
Expected life (in years)		5.00			4.91

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.

F-7

Net Loss Per Share

We report two separate net loss per share numbers, basic and diluted. Basic net loss attributable to common stockholders per share is computed by dividing net loss attributable to common stockholders for the year by the weighted average number of common shares outstanding for the year. Diluted net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders for the year by the weighted average number of common shares and dilutive common stock equivalents outstanding for the year. Our common stock equivalents include all common stock issuable upon conversion of convertible preferred stock and the exercise of outstanding options. Common stock equivalents are included in the diluted loss per share for the years ended December 31, 2019 and 2018 except in cases where the issuance would be anti-dilutive. The aggregate number of common stock equivalents excluded from the diluted loss per share calculation for the year ended December 31, 2019 and 2018 totaled 30,630 and zero, respectively.

Revenue Recognition

On January 1, 2018 we adopted ASU No. 2014-09, Revenue from Contracts with Customers, as amended, using the modified retrospective approach. At the date of adoption there was no impact on the balance sheet or statement of operation. ASU No. 2014-09 did not have a material effect on the Company’s financial position, results of operations or cash flows for the year ended December 31, 2019.

We generally recognize product revenue upon shipment or after meeting certain performance obligations. These products can include hardware, perpetual software licenses and data sets. Data set updates are the majority of our sales. We do not currently offer software on a subscription basis. Warranty costs and sales returns have not been material.

We recognize sales of our data sets in accordance with FASB ASC Topic 606 whereby revenue from contracts with customers is not recognized until all five of the following have been met:

i) identify the contract with a customer;

ii) identify the performance obligations in the contract;

iii) determine the transaction price;

iv) allocate the transaction price to the separate performance obligations; and

v) recognize revenue upon satisfaction of a performance obligation.

Data updates are typically done monthly and revenue will be 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 of our product offering and service offering market values are readily determined based on current and prior stand-alone sales. We may defer and recognize maintenance, updates and support revenue over the term of the contract period, which is generally one year.

Service revenue, primarily including maintenance, training and installation are recognized upon delivery of the service and typically are unrelated to product sales. To date, training and installation revenue has not been material. These revenues are included in net customer support and maintenance revenues in the statement of operations.

Our normal payment terms offered to customers, distributors and resellers are net 30 days domestically and net 45 days internationally. We do not offer payment terms that extend beyond one year and rarely do we extend payment terms beyond our normal terms. If certain customers do not meet our credit standards, we do require payment in advance to limit our credit exposure.

Shipping and handling costs are billed to the customer and included in product revenue. Shipping and handling expenses are included in cost of product revenue. We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods.

Research and Development Costs

We incur research and development costs that relate primarily to the development of new security software, appliances and integrated solutions, and major enhancements to existing services and products. Research and development costs are comprised primarily of salaries and related benefits expenses, contract labor and prototype and other related expenses.

F-8

Software development costs are included in research and development and are expensed as incurred. FASB ASC Topic 350 Intangibles—Goodwill and Other requires that software development costs incurred subsequent to reaching technological feasibility be capitalized, if material. If the process of developing a new product or major enhancement does not include a detailed program design, technological feasibility is determined only after completion of a working model. To date, the period between achieving technological feasibility and the general availability of such software has been short, and the software development costs qualifying for capitalization have been insignificant.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates are used for, but not limited to, the accounting for doubtful accounts, sales discounts, sales returns, revenue recognition, warranty costs, inventory obsolescence, depreciation and income taxes. Actual results could differ from these estimates.

Fair Value of Financial Instruments

We calculate the fair value of our assets and liabilities which qualify as financial instruments and include additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued expenses, 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.  Capital leases approximate fair value as they 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 loan payable to officer. None of these instruments are held for trading purposes.

Income Taxes

Deferred income taxes are determined using the liability method in accordance with FASB ASC 740, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

FASB ASC 740 creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FASB ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. There are no unrecognized tax benefits to disclose in the notes to the consolidated financial statements.

We file income tax returns in the United States federal jurisdiction. At December 31, 2019, tax returns related to fiscal years ended December 31, 2016 through December 31, 2018 remain open to possible examination by the tax authorities. No tax returns are currently under examination by any tax authorities. We did not incur any penalties or interest during the years ended December 31, 2019 and 2018.   On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“the Tax Act”) which significantly changed U.S. tax law.  The Tax Act lowered the Company’s statutory federal income tax rate from a maximum of 39% to a rate of 21% effective January 1, 2018.

Recent Accounting Pronouncements

On January 1, 2019 we adopted ASU No. 2016-02, Leases (topic 842). At the date of adoption there was no impact on the statement of operations, while the balance sheet reflects recording both assets and liabilities applicable to the operating right-of-use asset lease identified. ASU No. 2016-02 did not have a material effect on the Company’s results of operations or cash flows for the year ended December 31, 2019.

F-9

3. Accrued Expenses (in thousands)

	December 31,
	2019		2018
Accrued payroll	$	193	$	154
Accrued vacation		311		310
Accrued bonus		245		170
Rent payable		—		191
Accrued interest, related party		—		479
Other		79		99
	$	828	$	1,403

4. Commitments and Contingencies

Right-of-use Asset and Leasing Liabilities

Under the new lease accounting standard, we have determined that we have leases for right-of-use (ROU) assets. We have both finance right-of-use assets and operating right-of-use assets with a related lease liability. Our finance lease right-of-use assets consist of computer hardware and a copying machine. Our operating lease right-of-use assets include our rental agreements for our offices in Richardson and San Marcos, CA. Both types of lease liabilities are determined by the net present value of total payments and are amortized over the life of the lease. Both types of lease obligations are designed to terminate with the last scheduled payment. All of the finance lease right-of-use assets have a three year life and are in various stages of completion. The Richardson operating lease liability has a life of four years and eleven months as of December 31, 2019. The San Marcos operating lease liability has a life of fifteen months as of December 31, 2019. The adoption of the lease accounting standard resulted in the recognition of an operating ROU asset of $1,580 thousand and a related lease liability of $1,771 thousand.

Additional qualitative and quantitative disclosures regarding the Company's leasing arrangements are also required. The Company adopted ASC 842 prospectively and elected the package of transition practical expedients that does not require reassessment of: (1) whether any existing or expired contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition, the Company has elected other available practical expedients to not separate 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 agreement, the Company uses an estimated incremental borrowing rate to determine the initial present value of lease payments. This discount rate for the lease approximates SVB's prime rate.

Supplemental cash flow information includes operating cash flows related to operating leases. For the years ended December 31, 2019 and 2018, the Company had approximately $294,000 and $264,000, respectively, in operating cash flows related to operating leases.

Schedule of Items Appearing on the Statement of Operations:

	Year Ended
	December 30, 2019		December 31, 2018
Operating expense:
Amortization expense – Finance ROU		59		65
Lease expense – Operating ROU		433		316
Other expense:
Interest expense – Finance ROU		4		5

F-10

Future minimum lease obligations consisted of the following at December 31, 2019 (in thousands):

	Operating			Finance
Period ending December 31,	ROU Leases			ROU Leases			Total
2020	$	362		$	45		$	407
2021		361			21			382
2022		369			—			369
2023		380			—			380
2024		352			—			352
	$	1,824		$	66		$	1,890
Less Interest*		(225	)		(2	)
	$	1,599		$	64

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

Legal Proceedings

We are subject to legal proceedings and claims that arise in the ordinary course of business. We do not believe that the outcome of those matters will have a material adverse effect on our consolidated financial position, operating results or cash flows. However, there can be no assurance such legal proceedings will not have a material impact.

We are not aware of any material claims outstanding or pending against Intrusion Inc. at December 31, 2019.

5. Employee Benefit Plan

Employee 401(k) Plan

We have a plan known as the Intrusion Inc. 401(k) Savings Plan (the “Plan”) to provide retirement and incidental benefits for our employees. The Plan covers substantially all employees who meet minimum age and service requirements. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax deferred salary deductions for eligible employees.

Employees may contribute from 1% to 25% of their annual compensation to the Plan, limited to a maximum amount as set by the Internal Revenue Service. Participants who are over the age of 50 may contribute an additional amount of their salary per year, as defined annually by the Internal Revenue Service. We match employee contributions at the rate of $0.25 per each $1.00 of contribution on the first 4% of compensation. Matching contributions to the Plan were approximately $32,000 and $30,000, respectively, for the years ended December 31, 2019 and 2018.

6. Borrowings from Officer

On February 8, 2018, the Company entered into an unsecured revolving promissory note to borrow up to $3,700,000 from G. Ward Paxton, the Company’s former Chief Executive Officer (the “CEO Note”). Under the terms of the CEO Note, the Company had the ability to borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $3,700,000 at any given time through March 2020.

On February 7, 2019, the Company amended the unsecured revolving promissory note to borrow up to $2,700,000 from G. Ward Paxton, the Company’s former Chief Executive Officer. Amounts borrowed under the CEO Note accrued interest at a floating rate per annum equal to Silicon Valley Bank’s (“SVB”) prime rate plus 1%. Under the terms of the note, the Company had the ability to borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $2,700,000 at any given time through March 2021. We reduced our borrowing under this note to zero as of May 2019

As of October 24, 2019, G. Ward Paxton passed away, terminating the CEO Note with the result that future borrowings thereunder will no longer be available to the Company. Our management will be assessing whether to replace this borrowing base and assessing what terms may be available to the Company, including whether any such terms are acceptable to the Company, if at all.

F-11

7. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets (liabilities) as of December 31, 2019 and 2018 are as follows (in thousands):

	December 31
	2019			2018
Net operating loss carryforwards	$	18,771		$	20,720
Net operating loss carryforwards of foreign subsidiaries		374			374
Depreciation expense		(77	)		4
Stock-based compensation expense		36			28
Other		68			78
Net deferred tax assets		19,172			21,204
Valuation allowance for net deferred tax assets		(19,172	)		(21,204	)
Net deferred tax assets, net of allowance	$	—		$	—

Deferred tax assets are required to be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. Realization of the future benefits related to the deferred tax assets is dependent on many factors, including the Company’s ability to generate taxable income within the near to medium term. Management has considered these factors in determining the valuation allowance for 2019 and 2018.

The differences between the provision for income taxes and income taxes computed using the federal statutory rate for the years ended December 31, 2019 and 2018 are as follows (in thousands):

	2019			2018
Reconciliation of income tax benefit to statutory rate:
Income benefit at statutory rate	$	938		$	480
State income taxes (benefit), net of federal income tax benefit		1,066			57
Permanent differences		10			(91	)
Change in valuation allowance		(2,030	)		(450	)
Other		16			4
	$	—		$	—

At December 31, 2019, we had federal net operating loss carryforwards of approximately $81.7 million for income tax purposes that begin to expire in 2022 and are subject to the ownership change limitations under Internal Revenue Code Section 382.

8. Stock Options

At December 31, 2019, we had two stock-based compensation plans, which are described below. These plans were developed to retain and attract key employees and directors.

On March 17, 2005, the Board approved the 2005 Stock Incentive Plan (the “2005 Plan”), which was approved by the stockholders on June 14, 2005. The 2005 Plan provided for the issuance of up to 750,000 shares of common stock upon exercise of options granted pursuant to the 2005 Plan. On May 30, 2007, the stockholders approved an Amendment to the 2005 Plan that increased this amount by 750,000 for a total of 1,500,000 shares of common stock that may be issued upon the exercise of options granted pursuant to the 2005 Plan. On May 29, 2008 and May 21, 2009, the stockholders approved an increase of 500,000 shares, respectively, of common stock that may be issued pursuant to the 2005 Plan for a total of 2,500,000 shares. On May 20, 2010, the stockholders approved an additional increase of 500,000 shares of common stock that may be issued pursuant to the 2005 Plan for a total of 3,000,000 shares. On May 19, 2011, the stockholders approved an additional increase of 400,000 shares of common stock that may be issued pursuant to the 2005 Plan for a total of 3,400,000 shares. Finally, on May 17, 2012, the stockholders approved an additional increase of 300,000 shares of common stock that may be issued pursuant to the 2005 Plan for a total of 3,700,000 shares. At December 31, 2019, 1,563,235 had been exercised and options to purchase a total of 824,100 shares of common stock were outstanding. A total of 3,892,000 options had been granted under the 2005 Plan, of which 1,504,665 have been cancelled. The 2005 Plan expired on June 14, 2015, and no shares remain for grant.

On March 19, 2015, the Board approved the 2015 Stock Incentive Plan (the “2015 Plan”), which was approved by the stockholders on May 14, 2015. The 2015 Plan serves as a replacement for the 2005 Plan which expired by its terms on June 14, 2015. The approval of the 2015 Plan had no effect on the 2005 Plan or any options granted pursuant to the plan. All options will continue with their existing terms and will be subject to the 2005 Plan. Further, the Company will not be able to re-issue any option which is cancelled or terminated under the 2005 Plan. The 2015 Plan provided for the issuance of up to 600,000 shares of common stock upon exercise of options granted pursuant to the 2015 Plan.

F-12

The 2015 Plan consists of three separate equity incentive programs: the Discretionary Option Grant Program; the Stock Issuance Program; and the Automatic Option Grant Program for non-employee Board members. Officers and employees, non-employee Board members and independent contractors are eligible to participate in the Discretionary Option Grant and Stock Issuance Programs. Participation in the Automatic Option Grant Program is limited to non-employee members of the Board. Each non-employee Board member will receive an option grant for 10,000 shares of common stock upon initial election or appointment to the Board, provided that such individual has not previously been employed by the Company in the preceding three (3) months. In addition, on the date of each annual stockholders meeting, each Board member will automatically be granted an option to purchase 8,000 shares of common stock, provided he or she has served as a non-employee Board member for at least three months. At December 31, 2019, no options had been exercised and options to purchase a total of 151,000 shares of common stock were outstanding. A total of 154,000 options had been granted under the 2015 Plan, 3,000 shares have been cancelled, and options for 449,000 shares remained available for future grant. No shares have been issued pursuant to the Stock Issuance Program.

Common shares reserved for future issuance, including conversions of preferred stock, outstanding options and options available for future grant under all of the stock option plans totaled 2,491,543 shares at December 31, 2019 as follows, in thousands:

(In thousands)	Common Shares Reserved for Future Issuance
Preferred Stock		1,067
2015 Plan		600
2005 Plan		824
Total		2,491

The Compensation Committee of our Board of Directors determines for all employee options, the term of each option, option exercise price within limits set forth in the plans, number of shares for which each option is granted and the rate at which each option is exercisable (generally ratably over one, three or five years from grant date). However, the exercise price of any incentive stock option may not be less than the fair market value of the shares on the date granted (or less than 110% of the fair market value in the case of optionees holding more than 10% of our voting stock of the Company), and the term cannot exceed ten years (five years for incentive stock options granted to holders of more than 10% of our voting stock).

Stock Incentive Plan Summary

A summary of our stock option activity and related information for the years ended December 31, 2019 and 2018 is as follows:

	2019					2018
	Number of Options (in thousands)			Weighted Average Exercise Price		Number of Options (in thousands)			Weighted Average Exercise Price
Outstanding at beginning of year		1,235		$	0.83		1,746		$	0.68
Granted at price = market value		34			4.40		24			1.15
Granted at price > market value		—			—		—			—
Exercised		(294	)		0.81		(451	)		0.37
Forfeited		—			—		—			—
Expired		—			—		(84	)		0.22
Outstanding at end of year		975		$	0.96		1,235		$	0.83
Options exercisable at end of year		917		$	0.84		1,172		$	0.84

F-13

Stock Options Outstanding and Exercisable

Information related to stock options outstanding at December 31, 2019, is summarized below:

			Options Outstanding						Options Exercisable
Range of Exercise Prices			Outstanding at 12/31/19 (in thousands)		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Exercisable at 12/31/19 (in thousands)		Weighted Average Exercise Price
$ 0.34	-	$0.50		391		2.86	$	0.42		383	$	0.42
$ 0.51	-	$1.00		330		1.53		0.68		330		0.68
$ 1.01	-	$2.00		173		4.69		1.71		157		1.77
$ 2.01	-	$4.75		81		6.95		3.12		47		2.20
				975		3.08	$	0.96		917	$	0.84

Summarized information about outstanding stock options as of December 31, 2019, that are fully vested and those that are expected to vest in the future as well as stock options that are fully vested and currently exercisable, are as follows:

	Outstanding Stock Options (Fully Vested and Expected to Vest)*		Options that are Exercisable
As of December 31, 2019
Number of outstanding options (in thousands)		970		917
Weighted average remaining contractual life		3.04		2.71
Weighted average exercise price per share	$	0.95	$	0.84
Intrinsic value (in thousands)	$	4,411	$	4,278

* Includes effects of expected forfeitures

As of December 31, 2019, the total unrecognized compensation cost related to non-vested options not yet recognized in the statement of operations totaled approximately $86 thousand (including expected forfeitures) and the weighted average period over which these awards are expected to vest was 1.18 years.

9. Preferred Stock

5% Preferred Stock

On March 25, 2004, we completed a $5.0 million private placement of our 5% convertible preferred stock and warrants. In the private placement, we sold 1,000,000 shares of our 5% preferred stock at a price of $5.00 per share for gross proceeds of $5.0 million, less $275,000 of issuance costs. The 5% preferred shares were initially convertible into 1,590,331 shares of common stock at a conversion price of $3.144 per share. Holders of the 5% convertible preferred stock include 140,000 shares purchased by our former CEO and 60,000 shares purchased by a director of the Company.

The 5% dividends related to the 5% preferred stock are paid semi-annually on the last business day in March and September of each year, beginning with September 2004. Preferred stockholders vote together with common stockholders on an as converted to common stock basis. Based on the conversion rate of the preferred stock, holders of our 5% preferred stock will receive 1.5903 votes per share rounded to the nearest whole number. The liquidation preference for the 5% preferred stock is an amount equal to $5.00 per share plus any accrued and unpaid dividends. Holders of our 5% preferred stock have liquidation preference rights over common stockholders.

All warrants previously issued to 5% convertible preferred stockholders have expired.

We have the right to redeem any or all of the outstanding 5% preferred stock at a price of $5.00 per share plus accrued dividends at any time if certain conditions are met.

At December 31, 2019, there were 200,000 shares of the Series 1 Preferred Stock outstanding, representing approximately 318,065 shares of common stock upon conversion.

F-14

Series 2 5% Preferred Stock

On March 28, 2005, we completed a $2.7 million private placement of Series 2 5% convertible preferred stock and warrants. In the private placement, we sold 1,065,200 shares of preferred stock at a price of $2.50 per share for gross proceeds of $2.7 million, less $173,000 of issuance costs. The shares of Series 2 5% preferred stock are convertible into 1,065,200 shares of common stock at an initial conversion price of $2.50 per share. Holders of the Series 2 5% preferred stock include 260,000 shares by our former CEO, 100,000 shares by our CFO and 60,000 shares by a director of the Company.

The 5% dividends accruing on the Series 2 5% preferred stock are required to be paid quarterly on the first business day in March, June, September and December of each year, beginning with June 2005. The liquidation preference for the preferred stock is an amount equal to $2.50 per share plus any accrued and unpaid dividends. Holders of our Series 2 5% preferred stock have liquidation preference rights over our 5% preferred stockholders as well as our common stockholders. The holders of the Series 2 5% preferred stock are not entitled to vote on any matter, except as otherwise required by law or with respect to certain limited matters specified in the certificate of designations.

All warrants previously issued to Series 2 5% convertible preferred stockholders have expired.

Holders of Series 2 5% preferred stock have the right to require us to redeem any or all of the their shares upon the occurrence of certain events within the Company’s control that are defined in Certificate of Designation at a price equal the sum of (1) the greater of $3.25 and the product of the volume weighted average price of our common stock on the trading day immediately preceding the event multiplied by $2.50 divided by the conversion price then in effect plus (2) any accrued but unpaid dividends on the Series 2 5% preferred stock plus (3) all liquidated damages or other amounts payable to the holders of Series 2 5% preferred stock.

At December 31, 2019 there were 460,000 shares of the Series 2 Preferred Stock outstanding, representing 460,000 shares of common stock upon conversion.

Series 3 5% Preferred Stock

On December 2, 2005, we completed a $1.2 million private placement of Series 3 5% convertible preferred stock and warrants. In the private placement, we sold 564,607 shares of preferred stock at a price of $2.18 per share for gross proceeds of $1.2 million, less $100,000 of issuance costs. The shares of Series 3 5% preferred stock are convertible into 564,607 shares of common stock at an initial conversion price of $2.18 per share. Holders of the Series 3 5% preferred stock include 123,853 shares by our former CEO, 68,808 shares by our CFO and 27,523 shares purchased by a director of the Company.

The 5% dividends accruing on the Series 3 5% preferred stock are required to be paid quarterly on the first business day in March, June, September and December of each year, beginning with March 1, 2006. The liquidation preference for the preferred stock is an amount equal to $2.18 per share plus any accrued and unpaid dividends. Holders of our Series 3 5% preferred stock have liquidation preference rights over holders of our 5% preferred, Series 2 5% preferred stock and common stock. The holders of the Series 3 5% preferred stock are not entitled to vote on any matter, except as otherwise required by law or with respect to certain limited matters specified in the certificate of designations.

All warrants previously issued to Series 3 5% convertible preferred stockholders have expired.

Holders of Series 3 5% preferred stock have the right to require us to redeem any or all of their shares upon the occurrence of certain events within the Company’s control that are defined in the certificate of designation at a price equal the sum of (1) the greater of $2.834 and the product of the volume weighted average price of our common stock on the trading day immediately preceding the event multiplied by $2.18 divided by the conversion price then in effect plus (2) any accrued but unpaid dividends on the Series 3 5% preferred stock plus (3) all liquidated damages or other amounts payable to the holders of Series 3 5% preferred stock.

At December 31, 2019 there were 289,377 shares of Series 3 Preferred Stock outstanding, representing 289,377 shares of common stock upon conversion.

Dividends Payable

During the year ended December 31, 2019, we accrued $50,000 in dividends to the holders of our 5% Preferred Stock, $57,000 in dividends to the holders of our Series 2 5% Preferred Stock and $32,000 in dividends to the holders of our Series 3 5% Preferred Stock. As of December 31, 2019 and 2018, we had $20,000 and $594,000 in accrued and unpaid dividends included in other 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. This has been in effect since December 31, 2014. However, in light of our net profits for the fiscal year ended December 31, 2019 and 2018, we are able to and have paid these past due dividends as of the date of this Annual Report. However, dividends continue to accrue on all our outstanding shares of preferred stock, regardless of whether we are legally able to pay them, and we cannot assure you that our net assets will exceed our stated capital or that we will have sufficient net profits in order to pay these dividends as they continue to accrue in the future. 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.

F-15

10. Concentrations

Our operations are concentrated in one area—security software/entity identification. Sales to the U.S. Government through direct and indirect channels totaled 87.4% of total revenues for 2019 and 83.9% of total revenues for 2018. During 2019 approximately 68.1% of total revenues were attributable to three government customers. During 2018 approximately 61.4% of total revenues are attributable to four government customers. Three individual government customers at December 31, 2019 and four at December 31, 2018 exceeded 10% of total accounts receivable balance at respective year ends, comprising 78.8% and 48.9% of the respective total accounts receivable balance. During 2019 approximately 10.4% of total revenues were attributable to one commercial customer, and during 2018, 14.1% of total revenues were attributable to one commercial customer. Only one individual commercial customer at December 31, 2019 exceeded 10% of total accounts receivable balance, and only one at December 31, 2018. 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.

11. Contract Assets and Contract Liabilities

Contract assets represent contract billings for sales per contracts with customers and are classified as current. Our contract assets include our accounts receivables. For the year ended December 31, 2019, the Company had contract assets balance of $1,566,000, a decrease of $401,000 from the prior year due to cash receipts exceeding new contract assets. For the year ended December 31, 2018, the Company had contract assets balance of $1,967,000.

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 liablility. For the year ended December 31, 2019, the Company had contract liabilities balance of $516,000. For the year ended December 31, 2018, the Company had contract liabilities balance of $1,004,000.

12. Coronavirus Outbreak in the United States

                Uncertainties surrounding the effects of the coronavirus, particularly potential diversion of time and resources of federal government entities which make up a significant concentration of our customer base, could cause a material adverse effect on our results of operations and financial results.  The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers, employees and vendors all of which are uncertain and cannot be predicted.  A material disruption in our workplace as a result of the coronavirus could affect our ability to carry on our business operations in the ordinary course and may require additional cost and effort should our employees not be able to be physically on-premises.

F-16

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement Nos. 333-125816,
333-167577 and 333-224810 on Form S-8 of our report dated March 27, 2020, with respect to the consolidated financial statements of Intrusion Inc. and subsidiaries included in this Annual Report on Form 10-K for the year ended December 31, 2019.

/s/Whitley Penn LLP

Dallas, Texas

March 27, 2020

EX-31.1

EXHIBIT 31.1

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

(1) I have reviewed this annual report on Form 10-K 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(s) 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 cause 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 principals;

(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(s) 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: March 27, 2020	/s/ Michael L. Paxton
	Michael L. Paxton
	Interim 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 annual report on Form 10-K 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(s) 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 cause 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 principals;

(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(s) 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: March 27, 2020	/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 Annual Report of Intrusion Inc. (the “Company”) on Form 10-K for the fiscal year ending December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael L. Paxton, Interim Chief Executive Officer of the Company 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; and

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

March 27, 2020	/s/ Michael L. Paxton
	Michael L. Paxton
	Interim Chief Executive Officer

EX-32.2

EXHIBIT 32.2

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 Annual Report of Intrusion Inc. (the “Company”) on Form 10-K for the fiscal year ending December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael L. Paxton, Chief Financial Officer of the Company 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; and

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

March 27, 2020	/s/ Michael L. Paxton
	Michael L. Paxton
	Chief Financial Officer

XML

Note 2 - Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block]

2.

Summary of Significant Accounting Policies

Principles of Consolidation

Our consolidated financial statements include our accounts and those of our wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

Cash and all highly liquid investments purchased with an original maturity of less than

three

months are considered to be cash and cash equivalents.

Risk Concentration

Financial instruments, which potentially subject us to concentrations of credit risk, are primarily cash and cash equivalents, investments and accounts receivable. Cash and cash equivalent deposits are at risk to the extent that they exceed Federal Deposit Insurance Corporation insured amounts. To minimize risk, we place our investments in U.S. government obligations, corporate securities and money market funds. Substantially all of our cash, cash equivalents and investments are maintained with

two

major U.S. financial institutions. We do

not

believe that we are subject to any unusual financial risk with our banking arrangements. We have

not

experienced any significant losses on our cash and cash equivalents.

We sell our products to customers primarily in the United States. In the future, we

may

sale our products internationally. Fluctuations in currency exchange rates and adverse economic developments in foreign countries could adversely affect the Company’s operating results. We perform ongoing credit evaluations of our customers’ financial condition and generally require

no

collateral. We maintain reserves for potential credit losses, and such losses, in the aggregate, have historically been minimal.

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are stated at the amount we expect to collect. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. If the financial condition of our customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, we provide for estimated uncollectible amounts through a charge to earnings and an increase to a valuation allowance. Balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance. There was

no

allowance at

December 

31,

2019

and

2018.

Property and Equipment

Equipment and furniture and fixtures are stated at cost less accumulated depreciation and depreciated on a straight-line basis over the estimated useful lives of the assets. Such lives vary from

1

to

5

years. Leasehold improvements are stated at cost less accumulated amortization and are amortized on a straight-line basis over the shorter of estimated useful lives of the assets or the remaining terms of the leases. Such lives vary from

2

to

5

years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Repair and maintenance costs are expensed as incurred. Depreciation and amortization expense totaled approximately

$184,000

and

$133,000

for the years ended

December 

31,

2019

and

2018,

respectively.

Long-Lived Assets

We review long-lived assets, including property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset

may

not

be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows to be generated by the asset. If the carrying value exceeds the future undiscounted cash flows, the assets are written down to fair value. During the years ended

December 

31,

2019

and

2018,

there was

no

impairment of long-lived assets.

Foreign Currency

All assets and liabilities in the balance sheets of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at year-end exchange rates. All revenues and expenses in the statement of operations of these foreign subsidiaries are translated at average exchange rates for the year. Translation gains and losses are

not

included in determining net income but are shown in accumulated other comprehensive loss in the stockholders’ deficit section of the consolidated balance sheet. Foreign currency transaction gains and losses are included in determining net loss and were

not

significant.

Accounting for Stock Options

We account for stock options using the guidance in Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic

718.

FASB ASC Topic

718

requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.

Stock-based compensation expense recognized in the statements of operations for the years ended

2019

and

2018

is based on awards ultimately expected to vest, reduced by estimated forfeitures. FASB ASC Topic

718

requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Valuation Assumptions

The fair values of option awards were estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions for fiscal years ended

December 

31,

2019

and

2018,

respectively:

	201 9			2018
Weighted average grant date fair value	$	3.69		$	0.49
Weighted average assumptions used:
Expected dividend yield		0.00	%		0.00	%
Risk-free interest rate		2.00	%		0.83	%
Expected volatility		124.58	%		225.21	%
Expected life (in years)		5.00			4.91

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.

Net Loss Per Share

We report

two

separate net loss per share numbers, basic and diluted. Basic net loss attributable to common stockholders per share is computed by dividing net loss attributable to common stockholders for the year by the weighted average number of common shares outstanding for the year. Diluted net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders for the year by the weighted average number of common shares and dilutive common stock equivalents outstanding for the year. Our common stock equivalents include all common stock issuable upon conversion of convertible preferred stock and the exercise of outstanding options. Common stock equivalents are included in the diluted loss per share for the years ended

December 

31,

2019

and

2018

except in cases where the issuance would be anti-dilutive. The aggregate number of common stock equivalents excluded from the diluted loss per share calculation for the year ended

December 

31,

2019

and

2018

totaled

30,630

and

zero

, respectively.

Revenue Recognition

On

January 1, 2018

we adopted ASU

No.

2014

-

09,

Revenue from Contracts with Customers

, as amended, using the modified retrospective approach. At the date of adoption there was

no

impact on the balance sheet or statement of operation. ASU

No.

2014

-

09

did

not

have a material effect on the Company’s financial position, results of operations or cash flows for the year ended

December 31, 2019.

We generally recognize product revenue upon shipment or after meeting certain performance obligations. These products can include hardware, perpetual software licenses and data sets. Data set updates are the majority of our sales. We do

not

currently offer software on a subscription basis. Warranty costs and sales returns have

not

been material.

We recognize sales of our data sets in accordance with FASB ASC Topic

606

whereby revenue from contracts with customers is

not

recognized until all

five

of the following have been met:

i) identify the contract with a customer;

ii) identify the performance obligations in the contract;

iii) determine the transaction price;

iv) allocate the transaction price to the separate performance obligations; and

v) recognize revenue upon satisfaction of a performance obligation.

Data updates are typically done monthly and revenue will be 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 of our product offering and service offering market values are readily determined based on current and prior stand-alone sales. We

may

defer and recognize maintenance, updates and support revenue over the term of the contract period, which is generally

one

year.

Service revenue, primarily including maintenance, training and installation are recognized upon delivery of the service and typically are unrelated to product sales. To date, training and installation revenue has

not

been material. These revenues are included in net customer support and maintenance revenues in the statement of operations.

Our normal payment terms offered to customers, distributors and resellers are net

30

days domestically and net

45

days internationally. We do

not

offer payment terms that extend beyond

one

year and rarely do we extend payment terms beyond our normal terms. If certain customers do

not

meet our credit standards, we do require payment in advance to limit our credit exposure.

Shipping and handling costs are billed to the customer and included in product revenue. Shipping and handling expenses are included in cost of product revenue. We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods.

Research and Development Costs

We incur research and development costs that relate primarily to the development of new security software, appliances and integrated solutions, and major enhancements to existing services and products. Research and development costs are comprised primarily of salaries and related benefits expenses, contract labor and prototype and other related expenses.

Software development costs are included in research and development and are expensed as incurred. FASB ASC Topic

350

Intangibles—Goodwill and Other

requires that software development costs incurred subsequent to reaching technological feasibility be capitalized, if material. If the process of developing a new product or major enhancement does

not

include a detailed program design, technological feasibility is determined only after completion of a working model. To date, the period between achieving technological feasibility and the general availability of such software has been short, and the software development costs qualifying for capitalization have been insignificant.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates are used for, but

not

limited to, the accounting for doubtful accounts, sales discounts, sales returns, revenue recognition, warranty costs, inventory obsolescence, depreciation and income taxes. Actual results could differ from these estimates.

Fair Value of Financial Instruments

We calculate the fair value of our assets and liabilities which qualify as financial instruments and include additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued expenses, 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.  Capital leases approximate fair value as they 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 loan payable to officer.

None

of these instruments are held for trading purposes.

Income Taxes

Deferred income taxes are determined using the liability method in accordance with FASB ASC

740,

Accounting for Income Taxes

. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than

not

that some portion of the deferred tax asset will

not

be realized.

FASB ASC

740

creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FASB ASC

740

also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. There are

no

unrecognized tax benefits to disclose in the notes to the consolidated financial statements.

We file income tax returns in the United States federal jurisdiction. At

December 

31,

2019,

tax returns related to fiscal years ended

December 

31,

2016

through

December 

31,

2018

remain open to possible examination by the tax authorities.

No

tax returns are currently under examination by any tax authorities. We did

not

incur any penalties or interest during the years ended

December 

31,

2019

and

2018.

   On

December 22, 2017,

the U.S. enacted the Tax Cuts and Jobs Act (“the Tax Act”) which significantly changed U.S. tax law.  The Tax Act lowered the Company’s statutory federal income tax rate from a maximum of

39%

to a rate of

21%

effective

January 1, 2018.

Recent Accounting Pronouncements

On

January 1, 2019

we adopted ASU

No.

2016

-

02,

Leases (topic

842

)

. At the date of adoption there was

no

impact on the statement of operations, while the balance sheet reflects recording both assets and liabilities applicable to the operating right-of-use asset lease identified. ASU

No.

2016

-

02

did

not

have a material effect on the Company’s results of operations or cash flows for the year ended

December 31, 2019.

XML

Consolidated Statements of Operations - USD ($) shares in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Net product revenue	$ 13,643,000	$ 10,276,000
Cost of revenue	5,342,000	3,847,000
Gross profit	8,301,000	6,429,000
Operating expenses:
Sales and marketing	1,298,000	1,604,000
Research and development	1,314,000	1,237,000
General and administrative	1,182,000	1,112,000
Operating income	4,507,000	2,476,000
Interest expense	(46,000)	(189,000)
Interest income	4,000
Income from operations before income taxes	4,465,000	2,287,000
Income tax provision
Net income	4,465,000	2,287,000
Preferred stock dividends accrued	(139,000)	(139,000)
Net income attributable to common stockholders	$ 4,326,000	$ 2,148,000
Net income per share attributable to common stockholders, basic (in dollars per share)	$ 0.32	$ 0.16
Net income per share attributable to common stockholders, diluted (in dollars per share)	$ 0.28	$ 0.14
Weighted average common shares outstanding:
Basic (in shares)	13,502	13,049
Diluted (in shares)	15,352	15,063

XML

Note 6 - Borrowings From Officer

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

6

. Borrowings from Officer

On

February 8, 2018,

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

$3,700,000

from G. Ward Paxton, the Company’s former Chief Executive Officer (the “CEO Note”). Under the terms of the CEO Note, the Company had the ability to borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of

$3,700,000

at any given time through

March 2020.

On

February 

7,

2019,

the Company amended the unsecured revolving promissory note to borrow up to

$2,700,000

from G. Ward Paxton, the Company’s former Chief Executive Officer. Amounts borrowed under the CEO Note accrued interest at a floating rate per annum equal to Silicon Valley Bank’s (“SVB”) prime rate plus

1%.

Under the terms of the note, the Company had the ability to borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of

$2,700,000

at any given time through

March 

2021.

We reduced our borrowing under this note to

zero

as of

May 2019

As of

October 24, 2019,

G. Ward Paxton passed away, terminating the CEO Note with the result that future borrowings thereunder will

no

longer be available to the Company. Our management will be assessing whether to replace this borrowing base and assessing what terms

may

be available to the Company, including whether any such terms are acceptable to the Company, if at all.

XML

Note 10 - Concentrations

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Concentration Risk Disclosure [Text Block]

1

0

. Concentrations

Our operations are concentrated in

one

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

87.4%

of total revenues for

2019

and

83.9%

of total revenues for

2018.

During

2019

approximately

68.1%

of total revenues were attributable to

three

government customers. During

2018

approximately

61.4%

of total revenues are attributable to

four

government customers.

Three

individual government customers at

December 31, 2019

and

four

at

December 31, 2018

exceeded

10%

of total accounts receivable balance at respective year ends, comprising

78.8%

and

48.9%

of the respective total accounts receivable balance. During

2019

approximately

10.4%

of total revenues were attributable to

one

commercial customer, and during

2018,

14.1%

of total revenues were attributable to

one

commercial customer. Only

one

individual commercial customer at

December 31, 2019

exceeded

10%

of total accounts receivable balance, and only

one

at

December 31, 2018.

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.

XML

Note 7 - Income Taxes - Deferred Tax Assets and Liabilities (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Net operating loss carryforwards	$ 18,771	$ 20,720
Net operating loss carryforwards of foreign subsidiaries	374	374
Depreciation expense, liability	(77)
Depreciation expense, asset		4
Stock-based compensation expense	36	28
Other	68	78
Net deferred tax assets	19,172	21,204
Valuation allowance for net deferred tax assets	(19,172)	(21,204)
Net deferred tax assets, net of allowance

XML

Note 4 - Commitments and Contingencies - Future Minimum Lease Obligations (Details) $ in Thousands	Dec. 31, 2019 USD ($)
Operating ROU Leases, 2020	$ 362
Finance ROU Leases, 2020	45
2020	407
Operating ROU Leases, 2021	361
Finance ROU Leases, 2021	21
2021	382
Operating ROU Leases, 2022	369
Finance ROU Leases, 2022
2022	369
Operating ROU Leases, 2023	380
Finance ROU Leases, 2023
2023	380
Operating ROU Leases, 2024	352
Finance ROU Leases, 2024
2024	352
Operating ROU Leases Undiscounted Obligation	1,824
Finance ROU Leases Undiscounted Obligation	66
	1,890
Operating ROU Leases, Less Interest*	(225)	[1]
Finance ROU Leases, Less Interest*	(2)	[1]
Operating ROU Leases	1,599
Finance ROU Leases	$ 64

[1] Interest is imputed for operating ROU leases and classified as lease expense and is included in operating expenses in the accompanying condensed consolidated statement of operations.

XML

Note 8 - Stock Options - Number & Weighted Average Exercise Price (Details) - $ / shares shares in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Outstanding at beginning of year (in shares)	1,235	1,746
Outstanding at beginning of year (in dollars per share)	$ 0.83	$ 0.68
Granted at price = market value (in shares)	34	24
Granted at price = market value (in dollars per share)	$ 4.40	$ 1.15
Granted at price > market value (in shares)
Granted at price > market value (in dollars per share)
Exercised (in shares)	(294)	(451)
Exercised (in dollars per share)	$ 0.81	$ 0.37
Forfeited (in shares)
Forfeited (in dollars per share)
Expired (in shares)		(84)
Expired (in dollars per share)		$ 0.22
Outstanding at end of year (in shares)	975	1,235
Outstanding at end of year (in dollars per share)	$ 0.96	$ 0.83
Options exercisable at end of year (in shares)	917	1,172
Options exercisable at end of year (in dollars per share)	$ 0.84	$ 0.84

XML

Note 3 - Accrued Expenses (in Thousands) - Accrued Expenses (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Accrued payroll	$ 193	$ 154
Accrued vacation	311	310
Accrued bonus	245	170
Rent payable		191
Accrued interest, related party		479
Other	79	99
Total accrued expenses	$ 828	$ 1,403

XML

Note 2 - Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	201 9			2018
Weighted average grant date fair value	$	3.69		$	0.49
Weighted average assumptions used:
Expected dividend yield		0.00	%		0.00	%
Risk-free interest rate		2.00	%		0.83	%
Expected volatility		124.58	%		225.21	%
Expected life (in years)		5.00			4.91

XML

Note 8 - Stock Options (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Common Shares Reserved for Future Issuance [Table text Block]

(In thousands)	Common Shares Reserved for Future Issuance
Preferred Stock		1,067
2015 Plan		600
2005 Plan		824
Total		2,491

Share-based Payment Arrangement, Option, Activity [Table Text Block]

	201 9					201 8
	Number of Options (in thousands)			Weighted Average Exercise Price		Number of Options (in thousands)			Weighted Average Exercise Price
Outstanding at beginning of year		1,235		$	0.83		1,746		$	0.68
Granted at price = market value		34			4.40		24			1.15
Granted at price > market value		—			—		—			—
Exercised		(294	)		0.81		(451	)		0.37
Forfeited		—			—		—			—
Expired		—			—		(84	)		0.22
Outstanding at end of year		975		$	0.96		1,235		$	0.83
Options exercisable at end of year		917		$	0.84		1,172		$	0.84

Share-based Payment Arrangement, Option, Exercise Price Range [Table Text Block]

			Options Outstanding						Options Exercisable
Range of Exercise Prices			Outstanding at 12/31/1 9 (in thousands)		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Exercisable at 12/31/1 9 (in thousands)		Weighted Average Exercise Price
$ 0.34	-	$0.50		391		2.86	$	0.42		383	$	0.42
$ 0.51	-	$1.00		330		1.53		0.68		330		0.68
$ 1.01	-	$2.00		173		4.69		1.71		157		1.77
$ 2.01	-	$4.75		81		6.95		3.12		47		2.20
				975		3.08	$	0.96		917	$	0.84

Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding and Exercisable [Table Text Block]

	Outstanding Stock Options (Fully Vested and Expected to Vest)*		Options that are Exercisable
As of December 31, 201 9
Number of outstanding options (in thousands)		970		917
Weighted average remaining contractual life		3.04		2.71
Weighted average exercise price per share	$	0.95	$	0.84
Intrinsic value (in thousands)	$	4,411	$	4,278

XML

Note 8 - Stock Options - Outstanding (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands		12 Months Ended
		Dec. 31, 2019	Dec. 31, 2018
Number of outstanding options (in thousands) (in shares)	[1]	970
Number of outstanding options (in thousands) (in shares)		917	1,172
Weighted average remaining contractual life (Year)	[1]	3 years 14 days
Weighted average remaining contractual life (Year)		2 years 259 days
Weighted average exercise price per share (in dollars per share)	[1]	$ 0.95
Weighted average exercise price per share (in dollars per share)		$ 0.84	$ 0.84
Intrinsic value (in thousands)	[1]	$ 4,411
Intrinsic value (in thousands)		$ 4,278

[1] Includes effects of expected forfeitures

XML

Note 3 - Accrued Expenses (In Thousands) (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Accrued Liabilities [Table Text Block]

	December 31,
	201 9		201 8
Accrued payroll	$	193	$	154
Accrued vacation		311		310
Accrued bonus		245		170
Rent payable		—		191
Accrued interest, related party		—		479
Other		79		99
	$	828	$	1,403

XML

Note 1 - Description of Business (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Cash and Cash Equivalents, at Carrying Value, Ending Balance	$ 3,334,000	$ 1,652,000	$ 224,000
Net Income (Loss) Attributable to Parent, Total	$ 4,465,000	$ 2,287,000

XML

Note 4 - Commitments and Contingencies (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Jan. 01, 2019
Lessee, Finance Lease, Term of Contract	3 years
Operating Lease, Right-of-Use Asset	$ 1,348,000
Operating Lease, Liability, Total	1,599,000
Operating Lease, Payments	$ 294,000	$ 264,000
Accounting Standards Update 2016-02 [Member]
Operating Lease, Right-of-Use Asset			$ 1,580,000
Operating Lease, Liability, Total			$ 1,771,000
Richardson Property [Member]
Lessee, Operating Lease, Term of Contract	5 years 150 days
The San Marcos Property [Member]
Lessee, Operating Lease, Term of Contract	1 year 90 days

XML

Note 11 - Contract Assets and Contract Liabilities (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Contract with Customer, Asset, Net, Current, Total	$ 1,566,000	$ 1,967,000
Increase (Decrease) in Contract with Customer, Asset	401,000
Contract with Customer, Liability, Current	$ 516,000	$ 1,004,000

XML

Note 8 - Stock Options - Exercise Price (Details) shares in Thousands	12 Months Ended
	Dec. 31, 2019 $ / shares shares
Outstanding at the end of the period (in shares) | shares	975
Options outstanding weighted average remaining contractual life (Year)	3 years 29 days
Options outstanding weighted average exercise price (in dollars per share)	$ 0.96
Options exercisable (in shares) | shares	917
Options exercisable weighted average exercise price (in dollars per share)	$ 0.84
Range 1 [Member]
Exercise price, low end of range (in dollars per share)	0.34
Exercise price, high end of range (in dollars per share)	$ 0.50
Outstanding at the end of the period (in shares) | shares	391
Options outstanding weighted average remaining contractual life (Year)	2 years 313 days
Options outstanding weighted average exercise price (in dollars per share)	$ 0.42
Options exercisable (in shares) | shares	383
Options exercisable weighted average exercise price (in dollars per share)	$ 0.42
Range 2 [Member]
Exercise price, low end of range (in dollars per share)	0.51
Exercise price, high end of range (in dollars per share)	$ 1
Outstanding at the end of the period (in shares) | shares	330
Options outstanding weighted average remaining contractual life (Year)	1 year 193 days
Options outstanding weighted average exercise price (in dollars per share)	$ 0.68
Options exercisable (in shares) | shares	330
Options exercisable weighted average exercise price (in dollars per share)	$ 0.68
Range 3 [Member]
Exercise price, low end of range (in dollars per share)	1.01
Exercise price, high end of range (in dollars per share)	$ 2
Outstanding at the end of the period (in shares) | shares	173
Options outstanding weighted average remaining contractual life (Year)	4 years 251 days
Options outstanding weighted average exercise price (in dollars per share)	$ 1.71
Options exercisable (in shares) | shares	157
Options exercisable weighted average exercise price (in dollars per share)	$ 1.77
Range 4 [Member]
Exercise price, low end of range (in dollars per share)	2.01
Exercise price, high end of range (in dollars per share)	$ 4.75
Outstanding at the end of the period (in shares) | shares	81
Options outstanding weighted average remaining contractual life (Year)	6 years 346 days
Options outstanding weighted average exercise price (in dollars per share)	$ 3.12
Options exercisable (in shares) | shares	47
Options exercisable weighted average exercise price (in dollars per share)	$ 2.20

XML

Consolidated Statements of Changes in Stockholders' Equity (Deficit) - USD ($) shares in Thousands	Preferred Stock [Member]	Common Stock [Member]	Treasury Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	AOCI Attributable to Parent [Member]	Total
Balance, beginning of year and end of year (in shares)	949	12,808
Balance, beginning of year and end of year (in shares) at Dec. 31, 2017	949	12,808
Balance, beginning of year and end of year at Dec. 31, 2017	$ 1,843,000	$ 128,000		$ 56,518,000	$ (61,529,000)	$ (107,000)
Exercise of stock options (in shares)		451					451
Balance, end of year (in shares) at Dec. 31, 2018	949	13,259	(362)	56,609
Exercise of stock options		$ 5,000		$ 163,000
Balance, end of year at Dec. 31, 2018	$ 1,843,000	$ 133,000		$ 56,609,000	(59,242,000)	(43,000)	$ (1,062,000)
Balance, beginning of year and end of year (in shares)	949	12,808	(362)	56,609
Stock-based compensation				$ 20,000
Preferred stock dividends declared, net of waived penalties by shareholders				$ (92,000)
Net income					2,287,000		2,287,000
Extinguishment of U.K. cumulative translation adjustment						64,000	$ 64,000
Balance, beginning of year and end of year (in shares)	949	13,259	(362)	56,609
Exercise of stock options (in shares)		293					294
Balance, end of year (in shares) at Dec. 31, 2019		13,552	(362)	56,759
Exercise of stock options		$ 3,000		$ 236,000
Balance, end of year at Dec. 31, 2019		$ 136,000			(54,777,000)	(43,000)	$ 3,556,000
Balance, beginning of year and end of year (in shares)	949	13,552	(362)	56,609
Stock-based compensation				$ 47,000
Preferred stock dividends declared, net of waived penalties by shareholders				$ (133,000)
Net income					$ 4,465,000		4,465,000
Extinguishment of U.K. cumulative translation adjustment
Balance, beginning of year and end of year (in shares)		13,552	(362)	56,759

XML

Document And Entity Information - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Feb. 28, 2020	Jun. 28, 2019
Document Information [Line Items]
Entity Registrant Name	Intrusion Inc
Entity Central Index Key	0000736012
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Interactive Data Current	Yes
Entity Common Stock, Shares Outstanding (in shares)		13,753,030
Entity Public Float			$ 46,588
Entity Shell Company	false
Document Type	10-K
Document Period End Date	Dec. 31, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	FY
Amendment Flag	false
Title of 12(g) Security	Common Stock, $0.01 par value

XML

Note 3 - Accrued Expenses (In Thousands)

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Accounts Payable and Accrued Liabilities Disclosure [Text Block]

3.

Accrued Expenses

(in thousands)

	December 31,
	201 9		201 8
Accrued payroll	$	193	$	154
Accrued vacation		311		310
Accrued bonus		245		170
Rent payable		—		191
Accrued interest, related party		—		479
Other		79		99
	$	828	$	1,403

XML

Note 7 - Income Taxes

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

7

. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets (liabilities) as of

December 

31,

2019

and

2018

are as follows (in thousands):

	December 31
	201 9			201 8
Net operating loss carryforwards	$	18,771		$	20,720
Net operating loss carryforwards of foreign subsidiaries		374			374
Depreciation expense		(77	)		4
Stock-based compensation expense		36			28
Other		68			78
Net deferred tax assets		19,172			21,204
Valuation allowance for net deferred tax assets		(19,172	)		(21,204	)
Net deferred tax assets, net of allowance	$	—		$	—

Deferred tax assets are required to be reduced by a valuation allowance if it is more likely than

not

that some portion or all of the deferred tax assets will

not

be realized. Realization of the future benefits related to the deferred tax assets is dependent on many factors, including the Company’s ability to generate taxable income within the near to medium term. Management has considered these factors in determining the valuation allowance for

2019

and

2018.

The differences between the provision for income taxes and income taxes computed using the federal statutory rate for the years ended

December 

31,

2019

and

2018

are as follows (in thousands):

	201 9			201 8
Reconciliation of income tax benefit to statutory rate:
Income benefit at statutory rate	$	938		$	480
State income taxes (benefit), net of federal income tax benefit		1,066			57
Permanent differences		10			(91	)
Change in valuation allowance		(2,030	)		(450	)
Other		16			4
	$	—		$	—

At

December 

31,

2019,

we had federal net operating loss carryforwards of approximately

$81.7

million for income tax purposes that begin to expire in

2022

and are subject to the ownership change limitations under Internal Revenue Code Section 

382.

XML

Note 11 - Contract Assets and Contract Liabilities

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

1

1

.

Contract Assets and Contract Liabilities

Contract assets represent contract billings for sales per contracts with customers and are classified as current. Our contract assets include our accounts receivables. For the year ended

December 31, 2019,

the Company had contract assets balance of

$1,566,000,

a decrease of

$401,000

from the prior year due to cash receipts exceeding new contract assets. For the year ended

December 31, 2018,

the Company had contract assets balance of

$1,967,000.

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 liablility. For the year ended

December 31, 2019,

the Company had contract liabilities balance of

$516,000.

For the year ended

December 31, 2018,

the Company had contract liabilities balance of

$1,004,000.

XML

Note 8 - Stock Options - Common Shares Reserved for Future Issuance (Details)	Dec. 31, 2019 shares
Common shares reserved for future issuance (in shares)	2,491,543
The 2015 Stock Incentive Plan [Member]
Common shares reserved for future issuance (in shares)	600,000
The 2005 Stock Incentive Plan [Member]
Common shares reserved for future issuance (in shares)	824,000
Preferred Stock [Member]
Common shares reserved for future issuance (in shares)	1,067,000

XML

Note 7 - Income Taxes (Details Textual) $ in Millions	Dec. 31, 2019 USD ($)
Domestic Tax Authority [Member]
Operating Loss Carryforwards, Total	$ 81.7

XML

Note 4 - Commitments and Contingencies - Schedule of Items Appearing on the Statement of Operations (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Amortization expense – Finance ROU	$ 59	$ 65
Lease expense – Operating ROU	433	316
Interest expense – Finance ROU	$ 4	$ 5

XML

Note 7 - Income Taxes (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Schedule of Deferred Tax Assets and Liabilities [Table Text Block]

	December 31
	201 9			201 8
Net operating loss carryforwards	$	18,771		$	20,720
Net operating loss carryforwards of foreign subsidiaries		374			374
Depreciation expense		(77	)		4
Stock-based compensation expense		36			28
Other		68			78
Net deferred tax assets		19,172			21,204
Valuation allowance for net deferred tax assets		(19,172	)		(21,204	)
Net deferred tax assets, net of allowance	$	—		$	—

Schedule of Effective Income Tax Rate Reconciliation [Table Text Block]

	201 9			201 8
Reconciliation of income tax benefit to statutory rate:
Income benefit at statutory rate	$	938		$	480
State income taxes (benefit), net of federal income tax benefit		1,066			57
Permanent differences		10			(91	)
Change in valuation allowance		(2,030	)		(450	)
Other		16			4
	$	—		$	—

XML

Note 2 - Summary of Significant Accounting Policies - Valuation Assumptions (Details) - $ / shares	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Weighted average grant date fair value (in dollars per share)	$ 3.69	$ 0.49
Expected dividend yield	0.00%	0.00%
Risk-free interest rate	2.00%	0.83%
Expected volatility	124.58%	225.21%
Expected life (in years) (Year)	5 years	4 years 332 days

XML

Note 9 - Preferred Stock (Details Textual)				12 Months Ended
	Dec. 02, 2005 USD ($) $ / shares shares	Mar. 28, 2005 USD ($) $ / shares shares	Mar. 25, 2004 USD ($) $ / shares shares	Dec. 31, 2019 USD ($) shares	Dec. 31, 2018 USD ($)
Preferred Stock Dividends, Income Statement Impact | $				$ 139,000	$ 139,000
Dividends Payable, Current | $				20,000	594,000
Other Current Liabilities [Member]
Dividends Payable, Current | $				$ 20,000	$ 594,000
Series A Preferred Stock [Member]
Stock Issued During Period, Value, New Issues | $			$ 5,000,000
Preferred Stock, Dividend Rate, Percentage			5.00%
Stock Issued During Period, Shares, New Issues			1,000,000
Share Price | $ / shares			$ 5
Proceeds from Issuance of Preferred Stock and Preference Stock | $			$ 5,000,000
Preferred Stock Issuance Costs | $			$ 275,000
Convertible Preferred Stock, Shares Issued upon Conversion			1,590,331	318,065
Preferred Stock, Conversion Price Per Share | $ / shares			$ 3.144
Preferred Stock, Voting Rights Number			1.5903
Preferred Stock, Liquidation Preference Per Share | $ / shares			$ 5
Preferred Stock, Redemption Price Per Share | $ / shares			$ 5
Preferred Stock, Shares Outstanding, Ending Balance				200,000
Preferred Stock Dividends, Income Statement Impact | $				$ 50,000
Series A Preferred Stock [Member] | Chief Executive Officer [Member]
Stock Issued During Period, Shares, New Issues			140,000
Series A Preferred Stock [Member] | Director [Member]
Stock Issued During Period, Shares, New Issues			60,000
Series B Preferred Stock [Member]
Stock Issued During Period, Value, New Issues | $		$ 2,700,000
Preferred Stock, Dividend Rate, Percentage		5.00%
Stock Issued During Period, Shares, New Issues		1,065,200
Share Price | $ / shares		$ 2.50
Proceeds from Issuance of Preferred Stock and Preference Stock | $		$ 2,700,000
Preferred Stock Issuance Costs | $		$ 173,000
Convertible Preferred Stock, Shares Issued upon Conversion		1,065,200		460,000
Preferred Stock, Conversion Price Per Share | $ / shares		$ 2.50
Preferred Stock, Liquidation Preference Per Share | $ / shares		2.50
Preferred Stock, Shares Outstanding, Ending Balance				460,000
Preferred Stock Dividends, Income Statement Impact | $				$ 57,000
Series B Preferred Stock [Member] | Minimum [Member]
Preferred Stock, Redemption Price Per Share | $ / shares		$ 3.25
Series B Preferred Stock [Member] | Chief Executive Officer [Member]
Stock Issued During Period, Shares, New Issues		260,000
Series B Preferred Stock [Member] | Director [Member]
Stock Issued During Period, Shares, New Issues		60,000
Series B Preferred Stock [Member] | Chief Financial Officer [Member]
Stock Issued During Period, Shares, New Issues		100,000
Series C Preferred Stock [Member]
Stock Issued During Period, Value, New Issues | $	$ 1,200,000
Preferred Stock, Dividend Rate, Percentage	5.00%
Stock Issued During Period, Shares, New Issues	564,607
Share Price | $ / shares	$ 2.18
Proceeds from Issuance of Preferred Stock and Preference Stock | $	$ 1,200,000
Preferred Stock Issuance Costs | $	$ 100,000
Convertible Preferred Stock, Shares Issued upon Conversion	564,607			289,377
Preferred Stock, Conversion Price Per Share | $ / shares	$ 2.18
Preferred Stock, Liquidation Preference Per Share | $ / shares	2.18
Preferred Stock, Shares Outstanding, Ending Balance				289,377
Preferred Stock Dividends, Income Statement Impact | $				$ 32,000
Series C Preferred Stock [Member] | Minimum [Member]
Preferred Stock, Redemption Price Per Share | $ / shares	$ 2.834
Series C Preferred Stock [Member] | Chief Executive Officer [Member]
Stock Issued During Period, Shares, New Issues	123,853
Series C Preferred Stock [Member] | Director [Member]
Stock Issued During Period, Shares, New Issues	27,523
Series C Preferred Stock [Member] | Chief Financial Officer [Member]
Stock Issued During Period, Shares, New Issues	68,808
Series 2 Preferred Stock and Series 3 Preferred Stock [Member]
Preferred Stock Unpaid Dividends Additional Late Fee Penalty Percentage				18.00%

XML

Note 1 - Description of Business

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Nature of Operations [Text Block]

1.

Description of Business

We develop, market, and support a family of entity identification, data mining, regulated information compliance and data privacy protection. Our product families include: TraceCop for identity identification, Savant for data mining and advanced persistent threat detection and Compliance Commander for regulated information and data privacy protection. Intrusion’s products help protect critical information assets by quickly detecting, protecting, analyzing and reporting attacks or misuse of classified, private and regulated information for government and enterprise networks.

We market and distribute our products through a direct sales force to end-users, distributors and numerous system integrators, managed service providers and value-added resellers. Our end-user customers include banks, credit unions, other financial institutions, U.S. federal government entities, foreign government entities, hospitals and other healthcare providers. Essentially, our end-users can be defined as end-users requiring network security solutions for protecting their mission critical data.

References to the “Company”, “we”, “us”, “our”, “Intrusion” or “Intrusion Inc.” refer to Intrusion Inc. and its subsidiaries. Compliance Commander™ and TraceCop™ are registered trademarks of Intrusion Inc.

As of

December 31, 2019,

we had cash and cash equivalents of approximately

$3,334,000,

up from approximately

$1,652,000

as of

December 31, 2018.

We generated a net income of

$4,465,000

for the year ended

December 31, 2019

compared to a net income of

$2,287,000

for the year ended

December 31, 2018.

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 the current forecast for the year

2020,

we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures through

March 31, 2021.

As of

October 24, 2019,

our funding available from the CEO Note terminated. Our management will be assessing whether to replace this borrowing base and assessing what terms

may

be available to the Company, including whether any such terms available are acceptable to the Company, if at all (the “Potential Replacement Facility”). 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. We expect to fund our operations through anticipated Company profits, 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, and a possible Potential Replacement Facility. 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.

XML

Consolidated Balance Sheets (Parentheticals) - $ / shares shares in Thousands	Dec. 31, 2019	Dec. 31, 2018
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)	13,552	13,259
Common stock, shares outstanding (in shares)	13,542	13,249
Common stock held in treasury, at cost, shares (in shares)	10	10
Series 1 Preferred Stock [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)	$ 1,013	$ 1,213
Series 2 Preferred Stock [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)	$ 1,155	$ 1,385
Series 3 Preferred Stock [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)	$ 634	$ 760

XML

Note 7 - Income Taxes - Income Tax Reconciliation (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Income benefit at statutory rate	$ 938	$ 480
State income taxes (benefit), net of federal income tax benefit	1,066	57
Permanent differences	10	(91)
Change in valuation allowance	(2,030)	(450)
Other	$ 16	$ 4

XML

Note 5 - Employee Benefit Plan (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Defined Contribution Plan, Minimum age Required for Contribution of Additional Amount of Salary Per Year	50 years
Defined Contribution Plan, Employer Matching Contribution, Percent of Match	0.25%
Defined Contribution Plan, Employer Matching Contribution, Percent of Employees' Gross Pay	4.00%
Defined Contribution Plan, Cost	$ 32,000	$ 30,000
Minimum [Member]
Define Contribution Plan, Percentage of Contribution by Employees	1.00%
Maximum [Member]
Define Contribution Plan, Percentage of Contribution by Employees	25.00%

XML

Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2019

Accounting Policies [Abstract]

Consolidation, Policy [Policy Text Block]

Principles of Consolidation

Our consolidated financial statements include our accounts and those of our wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash and Cash Equivalents

Cash and all highly liquid investments purchased with an original maturity of less than

three

months are considered to be cash and cash equivalents.

Concentration Risk, Credit Risk, Policy [Policy Text Block]

Risk Concentration

Financial instruments, which potentially subject us to concentrations of credit risk, are primarily cash and cash equivalents, investments and accounts receivable. Cash and cash equivalent deposits are at risk to the extent that they exceed Federal Deposit Insurance Corporation insured amounts. To minimize risk, we place our investments in U.S. government obligations, corporate securities and money market funds. Substantially all of our cash, cash equivalents and investments are maintained with

two

major U.S. financial institutions. We do

not

believe that we are subject to any unusual financial risk with our banking arrangements. We have

not

experienced any significant losses on our cash and cash equivalents.

We sell our products to customers primarily in the United States. In the future, we

may

sale our products internationally. Fluctuations in currency exchange rates and adverse economic developments in foreign countries could adversely affect the Company’s operating results. We perform ongoing credit evaluations of our customers’ financial condition and generally require

no

collateral. We maintain reserves for potential credit losses, and such losses, in the aggregate, have historically been minimal.

Accounts Receivable [Policy Text Block]

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are stated at the amount we expect to collect. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. If the financial condition of our customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, we provide for estimated uncollectible amounts through a charge to earnings and an increase to a valuation allowance. Balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance. There was

no

allowance at

December 

31,

2019

and

2018.

Property, Plant and Equipment, Policy [Policy Text Block]

Property and Equipment

Equipment and furniture and fixtures are stated at cost less accumulated depreciation and depreciated on a straight-line basis over the estimated useful lives of the assets. Such lives vary from

1

to

5

years. Leasehold improvements are stated at cost less accumulated amortization and are amortized on a straight-line basis over the shorter of estimated useful lives of the assets or the remaining terms of the leases. Such lives vary from

2

to

5

years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Repair and maintenance costs are expensed as incurred. Depreciation and amortization expense totaled approximately

$184,000

and

$133,000

for the years ended

December 

31,

2019

and

2018,

respectively.

Impairment or Disposal of Long-Lived Assets, Policy [Policy Text Block]

Long-Lived Assets

We review long-lived assets, including property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset

may

not

be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows to be generated by the asset. If the carrying value exceeds the future undiscounted cash flows, the assets are written down to fair value. During the years ended

December 

31,

2019

and

2018,

there was

no

impairment of long-lived assets.

Foreign Currency Transactions and Translations Policy [Policy Text Block]

Foreign Currency

All assets and liabilities in the balance sheets of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at year-end exchange rates. All revenues and expenses in the statement of operations of these foreign subsidiaries are translated at average exchange rates for the year. Translation gains and losses are

not

included in determining net income but are shown in accumulated other comprehensive loss in the stockholders’ deficit section of the consolidated balance sheet. Foreign currency transaction gains and losses are included in determining net loss and were

not

significant.

Share-based Payment Arrangement [Policy Text Block]

Accounting for Stock Options

We account for stock options using the guidance in Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic

718.

FASB ASC Topic

718

requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.

Stock-based compensation expense recognized in the statements of operations for the years ended

2019

and

2018

is based on awards ultimately expected to vest, reduced by estimated forfeitures. FASB ASC Topic

718

requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Valuation Assumptions

The fair values of option awards were estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions for fiscal years ended

December 

31,

2019

and

2018,

respectively:

	201 9			2018
Weighted average grant date fair value	$	3.69		$	0.49
Weighted average assumptions used:
Expected dividend yield		0.00	%		0.00	%
Risk-free interest rate		2.00	%		0.83	%
Expected volatility		124.58	%		225.21	%
Expected life (in years)		5.00			4.91

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.

Earnings Per Share, Policy [Policy Text Block]

Net Loss Per Share

We report

two

separate net loss per share numbers, basic and diluted. Basic net loss attributable to common stockholders per share is computed by dividing net loss attributable to common stockholders for the year by the weighted average number of common shares outstanding for the year. Diluted net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders for the year by the weighted average number of common shares and dilutive common stock equivalents outstanding for the year. Our common stock equivalents include all common stock issuable upon conversion of convertible preferred stock and the exercise of outstanding options. Common stock equivalents are included in the diluted loss per share for the years ended

December 

31,

2019

and

2018

except in cases where the issuance would be anti-dilutive. The aggregate number of common stock equivalents excluded from the diluted loss per share calculation for the year ended

December 

31,

2019

and

2018

totaled

30,630

and

zero

, respectively.

Revenue from Contract with Customer [Policy Text Block]

Revenue Recognition

On

January 1, 2018

we adopted ASU

No.

2014

-

09,

Revenue from Contracts with Customers

, as amended, using the modified retrospective approach. At the date of adoption there was

no

impact on the balance sheet or statement of operation. ASU

No.

2014

-

09

did

not

have a material effect on the Company’s financial position, results of operations or cash flows for the year ended

December 31, 2019.

We generally recognize product revenue upon shipment or after meeting certain performance obligations. These products can include hardware, perpetual software licenses and data sets. Data set updates are the majority of our sales. We do

not

currently offer software on a subscription basis. Warranty costs and sales returns have

not

been material.

We recognize sales of our data sets in accordance with FASB ASC Topic

606

whereby revenue from contracts with customers is

not

recognized until all

five

of the following have been met:

i) identify the contract with a customer;

ii) identify the performance obligations in the contract;

iii) determine the transaction price;

iv) allocate the transaction price to the separate performance obligations; and

v) recognize revenue upon satisfaction of a performance obligation.

Data updates are typically done monthly and revenue will be 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 of our product offering and service offering market values are readily determined based on current and prior stand-alone sales. We

may

defer and recognize maintenance, updates and support revenue over the term of the contract period, which is generally

one

year.

Service revenue, primarily including maintenance, training and installation are recognized upon delivery of the service and typically are unrelated to product sales. To date, training and installation revenue has

not

been material. These revenues are included in net customer support and maintenance revenues in the statement of operations.

Our normal payment terms offered to customers, distributors and resellers are net

30

days domestically and net

45

days internationally. We do

not

offer payment terms that extend beyond

one

year and rarely do we extend payment terms beyond our normal terms. If certain customers do

not

meet our credit standards, we do require payment in advance to limit our credit exposure.

Shipping and handling costs are billed to the customer and included in product revenue. Shipping and handling expenses are included in cost of product revenue. We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods.

Research and Development Expense, Policy [Policy Text Block]

Research and Development Costs

We incur research and development costs that relate primarily to the development of new security software, appliances and integrated solutions, and major enhancements to existing services and products. Research and development costs are comprised primarily of salaries and related benefits expenses, contract labor and prototype and other related expenses.

Software development costs are included in research and development and are expensed as incurred. FASB ASC Topic

350

Intangibles—Goodwill and Other

requires that software development costs incurred subsequent to reaching technological feasibility be capitalized, if material. If the process of developing a new product or major enhancement does

not

include a detailed program design, technological feasibility is determined only after completion of a working model. To date, the period between achieving technological feasibility and the general availability of such software has been short, and the software development costs qualifying for capitalization have been insignificant.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates are used for, but

not

limited to, the accounting for doubtful accounts, sales discounts, sales returns, revenue recognition, warranty costs, inventory obsolescence, depreciation and income taxes. Actual results could differ from these estimates.

Fair Value of Financial Instruments, Policy [Policy Text Block]

Fair Value of Financial Instruments

We calculate the fair value of our assets and liabilities which qualify as financial instruments and include additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued expenses, 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.  Capital leases approximate fair value as they 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 loan payable to officer.

None

of these instruments are held for trading purposes.

Income Tax, Policy [Policy Text Block]

Income Taxes

Deferred income taxes are determined using the liability method in accordance with FASB ASC

740,

Accounting for Income Taxes

. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than

not

that some portion of the deferred tax asset will

not

be realized.

FASB ASC

740

creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FASB ASC

740

also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. There are

no

unrecognized tax benefits to disclose in the notes to the consolidated financial statements.

We file income tax returns in the United States federal jurisdiction. At

December 

31,

2019,

tax returns related to fiscal years ended

December 

31,

2016

through

December 

31,

2018

remain open to possible examination by the tax authorities.

No

tax returns are currently under examination by any tax authorities. We did

not

incur any penalties or interest during the years ended

December 

31,

2019

and

2018.

   On

December 22, 2017,

the U.S. enacted the Tax Cuts and Jobs Act (“the Tax Act”) which significantly changed U.S. tax law.  The Tax Act lowered the Company’s statutory federal income tax rate from a maximum of

39%

to a rate of

21%

effective

January 1, 2018.

New Accounting Pronouncements, Policy [Policy Text Block]

Recent Accounting Pronouncements

On

January 1, 2019

we adopted ASU

No.

2016

-

02,

Leases (topic

842

)

. At the date of adoption there was

no

impact on the statement of operations, while the balance sheet reflects recording both assets and liabilities applicable to the operating right-of-use asset lease identified. ASU

No.

2016

-

02

did

not

have a material effect on the Company’s results of operations or cash flows for the year ended

December 31, 2019.

XML

Note 5 - Employee Benefit Plan

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Pension and Other Postretirement Benefits Disclosure [Text Block]

5.

Employee Benefit Plan

Employee

401

(k) Plan

We have a plan known as the Intrusion Inc.

401

(k) Savings Plan (the “Plan”) to provide retirement and incidental benefits for our employees. The Plan covers substantially all employees who meet minimum age and service requirements. As allowed under Section 

401

(k) of the Internal Revenue Code, the Plan provides tax deferred salary deductions for eligible employees.

Employees

may

contribute from

1%

to

25%

of their annual compensation to the Plan, limited to a maximum amount as set by the Internal Revenue Service. Participants who are over the age of

50

may

contribute an additional amount of their salary per year, as defined annually by the Internal Revenue Service. We match employee contributions at the rate of

$0.25

per each

$1.00

of contribution on the

first

4%

of compensation. Matching contributions to the Plan were approximately

$32,000

and

$30,000,

respectively, for the years ended

December 

31,

2019

and

2018.

XML

Note 9 - Preferred Stock

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Preferred Stock [Text Block]

9

. Preferred Stock

5%

Preferred Stock

On

March 

25,

2004,

we completed a

$5.0

million private placement of our

5%

convertible preferred stock and warrants. In the private placement, we sold

1,000,000

shares of our

5%

preferred stock at a price of

$5.00

per share for gross proceeds of

$5.0

million, less

$275,000

of issuance costs. The

5%

preferred shares were initially convertible into

1,590,331

shares of common stock at a conversion price of

$3.144

per share. Holders of the

5%

convertible preferred stock include

140,000

shares purchased by our former CEO and

60,000

shares purchased by a director of the Company.

The

5%

dividends related to the

5%

preferred stock are paid semi-annually on the last business day in

March 

and

September 

of each year, beginning with

September 

2004.

Preferred stockholders vote together with common stockholders on an as converted to common stock basis. Based on the conversion rate of the preferred stock, holders of our

5%

preferred stock will receive

1.5903

votes per share rounded to the nearest whole number. The liquidation preference for the

5%

preferred stock is an amount equal to

$5.00

per share plus any accrued and unpaid dividends. Holders of our

5%

preferred stock have liquidation preference rights over common stockholders.

All warrants previously issued to

5%

convertible preferred stockholders have expired.

We have the right to redeem any or all of the outstanding

5%

preferred stock at a price of

$5.00

per share plus accrued dividends at any time if certain conditions are met.

At

December 

31,

2019,

there were

200,000

shares of the Series 

1

Preferred Stock outstanding, representing approximately

318,065

shares of common stock upon conversion.

Series 

2

5%

Preferred Stock

On

March 

28,

2005,

we completed a

$2.7

million private placement of Series 

2

5%

convertible preferred stock and warrants. In the private placement, we sold

1,065,200

shares of preferred stock at a price of

$2.50

per share for gross proceeds of

$2.7

million, less

$173,000

of issuance costs. The shares of Series 

2

5%

preferred stock are convertible into

1,065,200

shares of common stock at an initial conversion price of

$2.50

per share. Holders of the Series 

2

5%

preferred stock include

260,000

shares by our former CEO,

100,000

shares by our CFO and

60,000

shares by a director of the Company.

The

5%

dividends accruing on the Series 

2

5%

preferred stock are required to be paid quarterly on the

first

business day in

March,

June,

September 

and

December 

of each year, beginning with

June 

2005.

The liquidation preference for the preferred stock is an amount equal to

$2.50

per share plus any accrued and unpaid dividends. Holders of our Series 

2

5%

preferred stock have liquidation preference rights over our

5%

preferred stockholders as well as our common stockholders. The holders of the Series 

2

5%

preferred stock are

not

entitled to vote on any matter, except as otherwise required by law or with respect to certain limited matters specified in the certificate of designations.

All warrants previously issued to Series 

2

5%

convertible preferred stockholders have expired.

Holders of Series 

2

5%

preferred stock have the right to require us to redeem any or all of the their shares upon the occurrence of certain events within the Company’s control that are defined in Certificate of Designation at a price equal the sum of (

1

) the greater of

$3.25

and the product of the volume weighted average price of our common stock on the trading day immediately preceding the event multiplied by

$2.50

divided by the conversion price then in effect plus (

2

) any accrued but unpaid dividends on the Series 

2

5%

preferred stock plus (

3

) all liquidated damages or other amounts payable to the holders of Series 

2

5%

preferred stock.

At

December 

31,

2019

there were

460,000

shares of the Series 

2

Preferred Stock outstanding, representing

460,000

shares of common stock upon conversion.

Series 

3

5%

Preferred Stock

On

December 

2,

2005,

we completed a

$1.2

million private placement of Series 

3

5%

convertible preferred stock and warrants. In the private placement, we sold

564,607

shares of preferred stock at a price of

$2.18

per share for gross proceeds of

$1.2

million, less

$100,000

of issuance costs. The shares of Series 

3

5%

preferred stock are convertible into

564,607

shares of common stock at an initial conversion price of

$2.18

per share. Holders of the Series 

3

5%

preferred stock include

123,853

shares by our former CEO,

68,808

shares by our CFO and

27,523

shares purchased by a director of the Company.

The

5%

dividends accruing on the Series 

3

5%

preferred stock are required to be paid quarterly on the

first

business day in

March,

June,

September 

and

December 

of each year, beginning with

March 

1,

2006.

The liquidation preference for the preferred stock is an amount equal to

$2.18

per share plus any accrued and unpaid dividends. Holders of our Series 

3

5%

preferred stock have liquidation preference rights over holders of our

5%

preferred, Series 

2

5%

preferred stock and common stock. The holders of the Series 

3

5%

preferred stock are

not

entitled to vote on any matter, except as otherwise required by law or with respect to certain limited matters specified in the certificate of designations.

All warrants previously issued to Series 

3

5%

convertible preferred stockholders have expired.

Holders of Series 

3

5%

preferred stock have the right to require us to redeem any or all of their shares upon the occurrence of certain events within the Company’s control that are defined in the certificate of designation at a price equal the sum of (

1

) the greater of

$2.834

and the product of the volume weighted average price of our common stock on the trading day immediately preceding the event multiplied by

$2.18

divided by the conversion price then in effect plus (

2

) any accrued but unpaid dividends on the Series 

3

5%

preferred stock plus (

3

) all liquidated damages or other amounts payable to the holders of Series 

3

5%

preferred stock.

At

December 

31,

2019

there were

289,377

shares of Series 

3

Preferred Stock outstanding, representing

289,377

shares of common stock upon conversion.

Dividends Payable

During the year ended

December 

31,

2019,

we accrued

$50,000

in dividends to the holders of our

5%

Preferred Stock,

$57,000

in dividends to the holders of our Series 

2

5%

Preferred Stock and

$32,000

in dividends to the holders of our Series 

3

5%

Preferred Stock. As of

December 

31,

2019

and

2018,

we had

$20,000

and

$594,000

in accrued and unpaid dividends included in other 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. This has been in effect since

December 31, 2014.

However, in light of our net profits for the fiscal year ended

December 31, 2019

and

2018,

we are able to and have paid these past due dividends as of the date of this Annual Report. However, dividends continue to accrue on all our outstanding shares of preferred stock, regardless of whether we are legally able to pay them, and we cannot assure you that our net assets will exceed our stated capital or that we will have sufficient net profits in order to pay these dividends as they continue to accrue in the future. 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.

XML

Consolidated Statements of Cash Flows - USD ($)	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Operating Activities:
Net income	$ 4,465,000	$ 2,287,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	184,000	133,000
Noncash lease costs	232,000
Stock-based compensation	47,000	20,000
Penalties and waived penalties on dividends	6,000	47,000
Extinguishment of U.K. cumulative translation adjustment		64,000
Changes in operating assets and liabilities:
Accounts receivable	401,000	(1,005,000)
Inventories		15,000
Prepaid expenses and other assets	(61,000)	(2,000)
Accounts payable and accrued expenses	(496,000)	421,000
Deferred revenue	(488,000)	598,000
Net cash provided by operating activities	4,290,000	2,578,000
Investing Activities:
Purchases of property and equipment	(260,000)	(202,000)
Net cash used in investing activities	(260,000)	(202,000)
Financing Activities:
Borrowings on loan from officer		150,000
Payments on loan from officer	(1,815,000)	(1,200,000)
Payments of dividends	(714,000)
Principal payments on capital lease equipment	(58,000)	(66,000)
Proceeds from stock options exercised	239,000	168,000
Net cash used in financing activities	(2,348,000)	(948,000)
Net increase in cash and cash equivalents	1,682,000	1,428,000
Cash and cash equivalents at beginning of year	1,652,000	224,000
Cash and cash equivalents at end of year	3,334,000	1,652,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on leased assets	4,000	3,000
Interest paid on loan from officer	513,000
Income taxes paid
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES:
Preferred stock dividends accrued	139,000	139,000
Purchase of equipment through capital lease		$ 128,000

XML

Consolidated Balance Sheets - USD ($)	Dec. 31, 2019	Dec. 31, 2018
Current Assets:
Cash and cash equivalents	$ 3,334,000	$ 1,652,000
Accounts receivable	1,566,000	1,967,000
Prepaid expenses	152,000	91,000
Total current assets	5,052,000	3,710,000
Property and Equipment:
Equipment	1,138,000	881,000
Furniture and fixtures	43,000	43,000
Leasehold improvements	63,000	63,000
	1,244,000	987,000
Accumulated depreciation and amortization	(909,000)	(787,000)
	335,000	200,000
Finance leases, right-of-use assets, net	62,000	121,000
Operating leases, right-of-use assets, net	1,348,000
Other assets	38,000	38,000
TOTAL ASSETS	6,835,000	4,069,000
Current Liabilities:
Accounts payable, trade	252,000	193,000
Accrued expenses	828,000	1,403,000
Dividends payable	20,000	594,000
Finance leases liabilities, current portion	43,000	58,000
Operating leases liabilities, current portion	284,000
Deferred revenue	516,000	1,004,000
Total current liabilities	1,943,000	3,252,000
Loan payable to officer		1,815,000
Finance leases liability, noncurrent portion	21,000	64,000
Operating leases liability, noncurrent portion	1,315,000
Commitments and contingencies
Stockholders’ Equity (Deficit):
Common stock, $0.01 par value: Authorized shares — 80,000, Issued shares — 13,552 in 2019 and 13,259 in 2018, Outstanding shares — 13,542 in 2019 and 13,249 in 2018	136,000	133,000
Common stock held in treasury, at cost—10 shares	(362,000)	(362,000)
Additional paid-in-capital	56,759,000	56,609,000
Accumulated deficit	(54,777,000)	(59,242,000)
Accumulated other comprehensive loss	(43,000)	(43,000)
Total stockholders’ equity (deficit)	3,556,000	(1,062,000)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	6,835,000	4,069,000
Series 1 Preferred Stock [Member]
Stockholders’ Equity (Deficit):
Preferred stock	707,000	707,000
Series 2 Preferred Stock [Member]
Stockholders’ Equity (Deficit):
Preferred stock	724,000	724,000
Series 3 Preferred Stock [Member]
Stockholders’ Equity (Deficit):
Preferred stock	$ 412,000	$ 412,000

XML

Note 8 - Stock Options (Details Textual) $ in Thousands						12 Months Ended
	May 17, 2012 shares	May 19, 2011 shares	May 20, 2010 shares	May 29, 2008 shares	May 30, 2007 shares	Dec. 31, 2019 USD ($) shares	Dec. 31, 2018 shares	Dec. 31, 2017 shares	Mar. 19, 2015 shares	May 21, 2009 shares
Number of Stock-based Compensation Plans						2
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance						975,000	1,235,000	1,746,000
Common Stock, Capital Shares Reserved for Future Issuance						2,491,543
Share-based Compensation Arrangement by Share-based Payment Award, Award Exercisable Period 2						3 years
Share-based Compensation Arrangement by Share-based Payment Award, Award Exercisable Period 3						5 years
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period						10 years
Share-based Compensation Arrangements By Share-based Payment Award, Options Expiration Term For Options Granted To Holders Of More Than Specified Percentage Of Voting Stock						5 years
Share-based Payment Arrangement, Nonvested Award, Option, Cost Not yet Recognized, Amount | $						$ 86
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition						1 year 65 days
Maximum [Member]
Share-based Compensation Arrangement By Share-based Payment Award Of Exercise Price Of Common Stock Percentage In Case Of Optionees Holding More Than Specified Percentage Of Voting Stock						110.00%
Minimum [Member]
Share-based Compensation Arrangement By Share-based Payment Award Voting Stock Percentage To Be Held By Optionees						10.00%
The 2005 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized	3,700,000	3,400,000	3,000,000		1,500,000	750,000				2,500,000
Share-based Compensation Arrangement by Share-based Payment Award, Number of Additional Shares Authorized	300,000	400,000	500,000	500,000	750,000
Aggregate Stock Options Exercised for the Plan						1,563,235
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance						824,100
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants Aggregate						3,892,000
Share-based Compensation Arrangement by Share-based Payment Award, Options Forfeitures Aggregate						1,504,665
Common Stock, Capital Shares Reserved for Future Issuance						824,000
The 2015 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized						449,000			600,000
Aggregate Stock Options Exercised for the Plan						0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance						151,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants Aggregate						154,000
Share-based Compensation Arrangement by Share-based Payment Award, Options Forfeitures Aggregate						3,000
Number of Equity Incentive Programs						3
Shares Issued, Shares, Share-based Payment Arrangement, before Forfeiture						0
Common Stock, Capital Shares Reserved for Future Issuance						600,000
The 2015 Stock Incentive Plan [Member] | Non-employee Board Member [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options That Will Be Granted Upon Initial Election Or Appointment to Board						10,000
Share-based Compensation Arrangement by Share-based Payment Award, Preceding Period With in Which Individual Should Not Be Employed						90 days
Share-based Compensation Arrangement by Share-based Payment Award, Option That Will Be Granted to Purchase Shares On Date of Each Annual Stockholders Meeting						8,000

XML

Note 6 - Borrowings From Officer (Details Textual) - Revolving Credit Facility [Member] - Chief Executive Officer [Member] - USD ($)	Feb. 07, 2019	Oct. 24, 2019	Sep. 30, 2019	Feb. 08, 2018
Line of Credit Facility, Maximum Borrowing Capacity	$ 2,700,000	$ 0		$ 3,700,000
Long-term Line of Credit, Total			$ 0
Prime Rate [Member]
Debt Instrument, Basis Spread on Variable Rate	1.00%

XML

Note 4 - Commitments and Contingencies

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

4.

Commitments and Contingencies

Right-of-use Asset and Leasing Liabilities

Under the new lease accounting standard, we have determined that we have leases for right-of-use (ROU) assets. We have both finance right-of-use assets and operating right-of-use assets with a related lease liability. Our finance lease right-of-use assets consist of computer hardware and a copying machine. Our operating lease right-of-use assets include our rental agreements for our offices in Richardson and San Marcos, CA. Both types of lease liabilities are determined by the net present value of total payments and are amortized over the life of the lease. Both types of lease obligations are designed to terminate with the last scheduled payment. All of the finance lease right-of-use assets have a

three

year life and are in various stages of completion. The Richardson operating lease liability has a life of

four

years and

eleven

months as of

December 31, 2019.

The San Marcos operating lease liability has a life of

fifteen

months as of

December 31, 2019.

The adoption of the lease accounting standard resulted in the recognition of an operating ROU asset of

$1,580

thousand and a related lease liability of

$1,771

thousand.

Additional qualitative and quantitative disclosures regarding the Company's leasing arrangements are also required. The Company adopted ASC

842

prospectively and elected the package of transition practical expedients that does

not

require reassessment of: (

1

) whether any existing or expired contracts are or contain leases, (

2

) lease classification and (

3

) initial direct costs. In addition, the Company has elected other available practical expedients to

not

separate 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 agreement, the Company uses an estimated incremental borrowing rate to determine the initial present value of lease payments. This discount rate for the lease approximates SVB's prime rate.

Supplemental cash flow information includes operating cash flows related to operating leases. For the years ended

December 31, 2019

and

2018,

the Company had approximately

$294,000

and

$264,000,

respectively, in operating cash flows related to operating leases.

Schedule of Items Appearing on the S

tatement of Operations:

	Year Ended
	December 30, 2019		December 31, 2018
Operating expense:
Amortization expense – Finance ROU		59		65
Lease expense – Operating ROU		433		316
Other expense:
Interest expense – Finance ROU		4		5

Future minimum lease obligations consisted of the following at

December 31, 2019 (

in thousands):

	Operating			Finance
Period ending December 31,	ROU Leases			ROU Leases			Total
2020	$	362		$	45		$	407
2021		361			21			382
2022		369			—			369
2023		380			—			380
2024		352			—			352
	$	1,824		$	66		$	1,890
Less Interest*		(225	)		(2	)
	$	1,599		$	64

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

Legal Proceedings

We are subject to legal proceedings and claims that arise in the ordinary course of business. We do

not

believe that the outcome of those matters will have a material adverse effect on our consolidated financial position, operating results or cash flows. However, there can be

no

assurance such legal proceedings will

not

have a material impact.

We are

not

aware of any material claims outstanding or pending against Intrusion Inc. at

December 

31,

2019.

XML

Note 8 - Stock Options

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Share-based Payment Arrangement [Text Block]

8

. Stock Options

At

December 

31,

2019,

we had

two

stock-based compensation plans, which are described below. These plans were developed to retain and attract key employees and directors.

On

March 

17,

2005,

the Board approved the

2005

Stock Incentive Plan (the

“2005

Plan”), which was approved by the stockholders on

June 

14,

2005.

The

2005

Plan provided for the issuance of up to

750,000

shares of common stock upon exercise of options granted pursuant to the

2005

Plan. On

May 

30,

2007,

the stockholders approved an Amendment to the

2005

Plan that increased this amount by

750,000

for a total of

1,500,000

shares of common stock that

may

be issued upon the exercise of options granted pursuant to the

2005

Plan. On

May 

29,

2008

and

May 

21,

2009,

the stockholders approved an increase of

500,000

shares, respectively, of common stock that

may

be issued pursuant to the

2005

Plan for a total of

2,500,000

shares. On

May 

20,

2010,

the stockholders approved an additional increase of

500,000

shares of common stock that

may

be issued pursuant to the

2005

Plan for a total of

3,000,000

shares. On

May 

19,

2011,

the stockholders approved an additional increase of

400,000

shares of common stock that

may

be issued pursuant to the

2005

Plan for a total of

3,400,000

shares. Finally, on

May 

17,

2012,

the stockholders approved an additional increase of

300,000

shares of common stock that

may

be issued pursuant to the

2005

Plan for a total of

3,700,000

shares. At

December 

31,

2019,

1,563,235

had been exercised and options to purchase a total of

824,100

 shares of common stock were outstanding. A total of

3,892,000

options had been granted under the

2005

Plan, of which

1,504,665

have been cancelled. The

2005

Plan expired on

June 14, 2015,

and

no

shares remain for grant.

On

March 

19,

2015,

the Board approved the

2015

Stock Incentive Plan (the

“2015

Plan”), which was approved by the stockholders on

May 

14,

2015.

The

2015

Plan serves as a replacement for the

2005

Plan which expired by its terms on

June 

14,

2015.

The approval of the

2015

Plan had

no

effect on the

2005

Plan or any options granted pursuant to the plan. All options will continue with their existing terms and will be subject to the

2005

Plan. Further, the Company will

not

be able to re-issue any option which is cancelled or terminated under the

2005

Plan. The

2015

Plan provided for the issuance of up to

600,000

shares of common stock upon exercise of options granted pursuant to the

2015

Plan.

The

2015

Plan consists of

three

separate equity incentive programs: the Discretionary Option Grant Program; the Stock Issuance Program; and the Automatic Option Grant Program for non-employee Board members. Officers and employees, non-employee Board members and independent contractors are eligible to participate in the Discretionary Option Grant and Stock Issuance Programs. Participation in the Automatic Option Grant Program is limited to non-employee members of the Board. Each non-employee Board member will receive an option grant for

10,000

shares of common stock upon initial election or appointment to the Board, provided that such individual has

not

previously been employed by the Company in the preceding

three

(

3

) months. In addition, on the date of each annual stockholders meeting, each Board member will automatically be granted an option to purchase

8,000

shares of common stock, provided he or she has served as a non-employee Board member for at least

three

months. At

December 

31,

2019,

no

options had been exercised and options to purchase a total of

151,000

shares of common stock were outstanding. A total of

154,000

options had been granted under the

2015

Plan,

3,000

shares have been cancelled, and options for

449,000

 shares remained available for future grant.

No

shares have been issued pursuant to the Stock Issuance Program.

Common shares reserved for future issuance, including conversions of preferred stock, outstanding options and options available for future grant under all of the stock option plans totaled

2,491,543

shares at

December 

31,

2019

as follows, in thousands:

(In thousands)	Common Shares Reserved for Future Issuance
Preferred Stock		1,067
2015 Plan		600
2005 Plan		824
Total		2,491

The Compensation Committee of our Board of Directors determines for all employee options, the term of each option, option exercise price within limits set forth in the plans, number of shares for which each option is granted and the rate at which each option is exercisable (generally ratably over one,

three

or

five

years from grant date). However, the exercise price of any incentive stock option

may

not

be less than the fair market value of the shares on the date granted (or less than

110%

of the fair market value in the case of optionees holding more than

10%

of our voting stock of the Company), and the term cannot exceed

ten

years (

five

years for incentive stock options granted to holders of more than

10%

of our voting stock).

Stock Incentive Plan Summary

A summary of our stock option activity and related information for the years ended

December 

31,

2019

and

2018

is as follows:

	201 9					201 8
	Number of Options (in thousands)			Weighted Average Exercise Price		Number of Options (in thousands)			Weighted Average Exercise Price
Outstanding at beginning of year		1,235		$	0.83		1,746		$	0.68
Granted at price = market value		34			4.40		24			1.15
Granted at price > market value		—			—		—			—
Exercised		(294	)		0.81		(451	)		0.37
Forfeited		—			—		—			—
Expired		—			—		(84	)		0.22
Outstanding at end of year		975		$	0.96		1,235		$	0.83
Options exercisable at end of year		917		$	0.84		1,172		$	0.84

Stock Options Outstanding and Exercisable

Information related to stock options outstanding at

December 

31,

2019,

is summarized below:

			Options Outstanding						Options Exercisable
Range of Exercise Prices			Outstanding at 12/31/1 9 (in thousands)		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Exercisable at 12/31/1 9 (in thousands)		Weighted Average Exercise Price
$ 0.34	-	$0.50		391		2.86	$	0.42		383	$	0.42
$ 0.51	-	$1.00		330		1.53		0.68		330		0.68
$ 1.01	-	$2.00		173		4.69		1.71		157		1.77
$ 2.01	-	$4.75		81		6.95		3.12		47		2.20
				975		3.08	$	0.96		917	$	0.84

Summarized information about outstanding stock options as of

December 

31,

2019,

that are fully vested and those that are expected to vest in the future as well as stock options that are fully vested and currently exercisable, are as follows:

	Outstanding Stock Options (Fully Vested and Expected to Vest)*		Options that are Exercisable
As of December 31, 201 9
Number of outstanding options (in thousands)		970		917
Weighted average remaining contractual life		3.04		2.71
Weighted average exercise price per share	$	0.95	$	0.84
Intrinsic value (in thousands)	$	4,411	$	4,278

* Includes effects of expected forfeitures

As of

December 

31,

2019,

the total unrecognized compensation cost related to non-vested options

not

yet recognized in the statement of operations totaled approximately

$86

thousand (including expected forfeitures) and the weighted average period over which these awards are expected to vest was

1.18

years.

XML

Note 12 - Coronavirus Outbreak in the United States

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Contingencies Disclosure [Text Block]

12.

Coronavirus Outbreak in the United States

Uncertainties surrounding the effects of the coronavirus, particularly potential diversion of time and resources of federal government entities which make up a significant concentration of our customer base, could cause a material adverse effect on our results of operations and financial results.  The extent of the impact of COVID-

19

on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers, employees and vendors all of which are uncertain and cannot be predicted.  A material disruption in our workplace as a result of the coronavirus could affect our ability to carry on our business operations in the ordinary course and

may

require additional cost and effort should our employees

not

be able to be physically on-premises.

XML

Note 4 - Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2019

Notes Tables

Lease, Cost [Table Text Block]

	Year Ended
	December 30, 2019		December 31, 2018
Operating expense:
Amortization expense – Finance ROU		59		65
Lease expense – Operating ROU		433		316
Other expense:
Interest expense – Finance ROU		4		5

Lessee, Operating and Finance Lease, Liability, Maturity [Table Text Block]

	Operating			Finance
Period ending December 31,	ROU Leases			ROU Leases			Total
2020	$	362		$	45		$	407
2021		361			21			382
2022		369			—			369
2023		380			—			380
2024		352			—			352
	$	1,824		$	66		$	1,890
Less Interest*		(225	)		(2	)
	$	1,599		$	64

XML

Note 2 - Summary of Significant Accounting Policies (Details Textual)	12 Months Ended
	Dec. 31, 2019 USD ($) shares	Dec. 31, 2018 USD ($) shares	Dec. 31, 2017
Number of Major United States Financial Institutions	2
Accounts Receivable, Allowance for Credit Loss, Ending Balance	$ 0	$ 0
Depreciation, Depletion and Amortization, Total	184,000	133,000
Impairment of Long-Lived Assets Held-for-use	$ 0	$ 0
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount | shares	30,630	0
Period of Payment Terms Offered to Customers Distributions and Resellers Domestically	30 days
Period of Payment Terms Offered to Customers Distributors and Resllers Internationally	45 days
Unrecognized Tax Benefits, Ending Balance	$ 0
Income Tax Examination, Penalties and Interest Accrued, Total	$ 0	$ 0
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent		21.00%	39.00%
Equipment and Furniture and Fixtures [Member] | Minimum [Member]
Property, Plant and Equipment, Useful Life	1 year
Equipment and Furniture and Fixtures [Member] | Maximum [Member]
Property, Plant and Equipment, Useful Life	5 years
Leasehold Improvements [Member] | Minimum [Member]
Property, Plant and Equipment, Useful Life	2 years
Leasehold Improvements [Member] | Maximum [Member]
Property, Plant and Equipment, Useful Life	5 years

XML

Note 10 - Concentrations (Details Textual) - Customer Concentration Risk [Member]	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Revenue Benchmark [Member] | U.S. Government [Member]
Concentration Risk, Percentage	87.40%	83.90%
Revenue Benchmark [Member] | Three Government Customers [Member]
Concentration Risk, Percentage	68.10%
Number of Major Customers	3
Revenue Benchmark [Member] | Four Government Customers [Member]
Concentration Risk, Percentage		61.40%
Number of Major Customers		4
Revenue Benchmark [Member] | One Commercial Customer [Member]
Concentration Risk, Percentage	10.40%	14.10%
Number of Major Customers	1	1
Accounts Receivable [Member] | Three Government Customers [Member]
Concentration Risk, Percentage	78.80%
Number of Major Customers	3
Accounts Receivable [Member] | Four Government Customers [Member]
Concentration Risk, Percentage		48.90%
Number of Major Customers		4
Accounts Receivable [Member] | One Commercial Customer [Member]
Number of Major Customers	1	1