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, 2017
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from      to

COMMISSION FILE NUMBER 0-20191

Intrusion Inc.

(Exact name of registrant as specified in its charter)

DELAWARE	75-1911917
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1101 EAST ARAPAHO ROAD, SUITE 200 RICHARDSON, TEXAS	75081
(Address of principal executive offices)	(Zip Code)

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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

☒

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	☐	(Do not check if a smaller reporting company)	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 30, 2017: $4,052,000.

As of February 28, 2018, 13,011,836 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 2018 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	13
Item 3.	Legal Proceedings	14
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 8.	Financial Statements for years ended December 31, 2017 and 2016	F-1
Item 9A.	Controls and Procedures	22
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	23
Item 11.	Executive Compensation	23
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	23
Item 13.	Certain Relationships and Related Transactions, and Director Independence	23
Item 14.	Principal Accounting Fees and Services	23
PART IV
Item 15.	Exhibits and Financial Statement Schedules	23
Item 16.	Form 10-K Summary	25
Signatures		26

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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:

● growth and anticipated operating results;

● developments in our markets and strategic focus;

● new products and product enhancements;

● potential acquisitions and the integration of acquired businesses, products and technologies;

● strategic relationships and future economic and business conditions.

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 identity discovery and disclosure,

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

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

● end-users,

● value-added resellers,

● system integrators,

● managed service providers, and

● distributors.

Our end-user customers include:

● U.S. federal government entities,

● local government entities,

● banks,

● airlines,

● credit unions,

● other financial institutions,

● hospitals and other healthcare providers, and

● other customers.

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

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

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Government Sales

Sales to U.S. government customers accounted for 81.6% of our revenues for the year ended December 31, 2017, compared to 69.3% of our revenue in 2016. 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.

Industry Background

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

● TraceCop for entity identification and;

● Savant for high speed data mining 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.

Products

TraceCop

Our TraceCop product family includes a database of worldwide IP addresses which are regularly updated. In addition, other information and analysis results, such as geo-location data, may also be included. Customers use the TraceCop data to aid in the identification and location of individuals involved in cybercrime. In addition to the IP database, the TraceCop family includes analysis software and a GUI interface to assist analysts in locating cybercriminals and other bad guys. We license TraceCop to our customers for a fee and offer updates for the TraceCop database. We either install and update the database at the Intrusion facility or install the TraceCop database on a customer server onsite.

Savant

Savant is a high speed network data mining and analytic product which organizes the data into networks of relationships and associations. Savant operates on networks with data flows of up to 20 gigabits without dropping packets. Savant provides corporate CIOs and CISOs with the ability to assess and mitigate many of todays’ cybersecurity threats and challenges. The Savant solution provides real-time access and insight into a company’s own indisputable and quantifiable network data for more effective, unbiased decision making. 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 and for which we sell data updates. We also re-sell the server required to implement Savant into the customer’s network.

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.

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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 standards, 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, which comply with industry standards.

During 2017 and 2016, our research and development expenditures were approximately $2.2 and $2.5 million, respectively. All of our expenditures for research and development have been expensed as incurred. At December 31, 2017, we had 21 employees engaged in research, product development and engineering.

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, which we sell directly to OEM customers or resell from our suppliers.

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.

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. We believe that rapidly evolving international markets are potential sources of future sales. Our export sales are currently planned to be made through an indirect sales force comprised of international resellers in Europe and Asia. Export sales did not account for any revenue in 2017 and 2016. 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 2017 and 2016.

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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 entities, financial institutions, energy companies and healthcare providers. 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 2017, 81.6% 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 six U.S. Government customers through direct and indirect channels, three exceeded 10% of total revenue individually in 2017. Comparatively, sales to the U.S. Government through direct and indirect channels totaled 69.3% of total revenues for 2016. These sales are attributable to six U.S. Government customers through direct and indirect channels, three exceeded 10% of total revenue individually in 2016. 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 provide input to the 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 perform only a portion of the functions that we currently perform with TraceCop. Also, we have been collecting the TraceCop data continuously 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 (Mandiant) and Palo Alto Networks.

Furthermore, 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.

6

Employees

As of December 31, 2017, we employed a total of 31 full time persons, including 6 in sales, marketing and technical support, 21 in research, product development and engineering, and 4 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 not have sufficient cash to operate our business and may not be able to maintain certain liquidity requirements under our existing debt instruments. Additional debt and equity offerings to fund future operations may not be available and, if available, may significantly dilute the value of our currently outstanding common stock.

As of December 31, 2017, we had cash and cash equivalents of approximately $224,000, up from approximately $64,000 as of December 31, 2016. We generated a net loss of $30,000 for the year ended December 31, 2017 compared to net loss of $1,552,000 for the year ended December 31, 2016. The net loss in 2017 included other income of 928,000, of which $872,000 came from the sale of certain unusedIP addresses and $56,000 from the sale of an investment. As of February 28, 2018, in addition to cash and cash equivalents, $835,000 of funding is available from a promissory note to borrow up to $3.7 million from G. Ward Paxton, the Company’s Chief Executive Officer. We are obligated to make payments of accrued dividends on all our outstanding shares of preferred stock that will reduce our available cash resources. Based on projections of growth in revenue and net income in the coming quarters, and the borrowings available previously mentioned, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures through March 31, 2019. We expect to fund our operations through anticipated Company profits, borrowings from the Company’s CEO, and possibly additional investments of private equity and debt, which, if we are able to obtain, could have the effect of diluting our existing common stockholders, perhaps significantly. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to our stockholders. If our operations do not generate positive cash flow in the upcoming year, or if we are not able to obtain additional debt or equity financing on terms and conditions acceptable to us, if at all, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations.

We had a net loss of $30 thousand for the year ended December 31, 2017 and have an accumulated deficit of $61.5 million as of December 31, 2017. To achieve sustainable profitability, we must generate increased revenue.

For the year ended December 31, 2017, we had a net loss of $30 thousand and had an accumulated deficit of approximately $61.5 million as of December 31, 2017, compared to a net loss of $1.55 million and an accumulated deficit of approximately $61.5 million as of December 31, 2016. We need to generate greater revenue from the sales of our products and services if we are to achieve profitability. If we are unable to generate greater revenue, net losses may continue and we may never be able to sustain profitability or generate positive cash flow from operations in the future.

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 market place for a limited 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. We cannot assure you 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.

7

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, 2015, 2016 and 2017, sales to U.S. government entities collectively accounted for 54.7%, 69.3% and 81.6% 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. We cannot assure you that U.S. government entities will be customers of ours in future periods or that we will be able to diversify our customer portfolio to adequately mitigate the risk of loss of any of these customers.

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 and 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, 2015, 2016 and 2017, we derived 74.7%, 70.7% and 81.6% 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, 2018, 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, 2018, there were 460,000 shares of the Series 2 Preferred Stock outstanding, representing 460,000 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, 2018, there were 289,377 shares of Series 3 Preferred Stock outstanding, representing 289,377 shares of common stock upon conversion.

8

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.

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. We currently have dividend payments that are past due because we do not currently have a capital surplus or fiscal year net profits. 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 in the future. These dividends continue to accrue on all our outstanding shares of preferred stock, regardless of whether we are legally able to pay them. If we continue to be unable to pay dividends on our preferred stock, we will be required to accrue an additional late fee penalty of 18% per annum on the unpaid dividends for the Series 2 Preferred Stock and Series 3 Preferred Stock. Our CEO, CFO and one outside board member who are invested in Series 2 and Series 3 Preferred Stock have waived any possible late fee penalties. In addition to this late penalty, the holders of our Series 2 Preferred Stock and Series 3 Preferred Stock could elect to present us with written notice of our failure to pay dividends as scheduled, in which case we would have 45 days to cure such a breach. In the event that we failed to cure the breach, the holders of these shares of preferred stock would then have the right to require us to redeem their shares of preferred stock for a cash amount calculated in accordance with their respective certificates of designation. If we were required to redeem all shares of Series 2 Preferred Stock and Series 3 Preferred Stock as of February 28, 2018, the aggregate redemption price we would owe would be $2.0 million.

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, 2018, we had 13,011,836 shares of common stock outstanding. Upon conversion of all outstanding shares of preferred stock, we will have 14,080,114 shares of common stock outstanding, approximately an 8.2% 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 $1.09, which was the ten-day volume weighted average closing price of our common stock on February 23, 2018, and (iv) our 13,011,836 shares of common stock outstanding on February 28, 2018, 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 416,000 shares of our common stock. This would represent an increase of approximately 3.2% in the number of shares of our common stock as of February 28, 2018.

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, 2018, 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, 2018, 605,200 shares of Series 2 Preferred Stock had converted into 605,200 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, 2018, 275,230 shares of Series 3 Preferred Stock had converted into 275,230 shares of common stock.

For the four weeks ended on February 23, 2018, the average daily trading volume of our common stock on the OTCQB was 3,165 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.

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Certain rights of the holders of our preferred stock and the terms of our secured credit line 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.

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

On February 28, 2018, we had 13,011,836 shares of common stock outstanding. Upon the exercising of current options issued at or below the exercise price of $1.00, we will have approximately 14,179,000 shares of common stock outstanding, an 9.0% 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.

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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.

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, 2018, our executive officers, directors and preferred stockholders beneficially own approximately 31% of our voting power. In addition, other related parties control approximately 27% 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. Further, we contemplate the possible issuance of shares of our Common Stock or of securities exercisable or convertible into shares of our Common Stock in the future to our Chief Executive Officer and Chief Financial Officer. Any such issuance will increase the percentage of stock our Chief Executive Officer, Chief Financial Officer and our management group beneficially hold.

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 where the 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.

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.

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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. For example, in fiscal year 2017, the market price of our common stock on the OTCQB Marketplace (“OTCQB”) fluctuated between $0.19 and $1.35 per share. 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 April 2021.

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 2019.

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We believe that the existing facilities at December 31, 2017, will be adequate to meet our operational requirements through 2018. 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, 2018, there were approximately 120 registered holders of record of our common stock. The following table sets forth, for the periods indicated, the high and low bid prices per share of our common stock, as reported by the OTCQB. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

	2017 (high/low bid prices per share)				2016 (high/low bid prices per share)
	High		Low		High		Low
First Quarter	$	0.43	$	0.19	$	1.09	$	0.51
Second Quarter		0.55		0.24		0.60		0.25
Third Quarter		0.61		0.25		0.43		0.20
Fourth Quarter		1.35		0.26		1.00		0.12

We have not declared or paid cash dividends on our common stock in our two most recent fiscal years. We intend to retain any earnings for use in our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Future dividends on common stock, if any, will be determined by our Board of Directors. However, 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, 2017, 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, 2017 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		1,745.5	(1)	$	0.68		507.0
Equity compensation plans not approved by security holders		—			—		—
Total		1,745.5		$	0.68		507.0

(1) Included in the outstanding options are 1,652,500 from the 2005 Stock Incentive Plan and 93,000 from the 2015 Stock Option Plan.

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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:

● failure to respond to rapid technological changes in the network security industry;

● failure of our regulated information compliance, and entity identification products to achieve market acceptance;

● our status as a developmental stage company;

● our need to generate substantially greater revenues from sales in order to achieve profitability;

● intense competition from both start-up and established companies that may have significant advantages over us and our products;

● disruption to our business due to military actions;

● long sales and implementation cycles of our products;

● insufficient cash to operate our business;

● the effect of consolidation in the network security industry;

● risks involved with Government customers;

● our inability to expand our sales;

● failure to adequately protect our intellectual property; or

● the rights of the holders of our preferred stock and the terms of our secured credit line.

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:

● TraceCop for identity identification; and

● Savant for data mining and analytics/advanced persistent threat detection.

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

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 2017 compared to 2016. At December 31, 2016, we employed 32 full time persons and at December 31, 2017, we employed 31 full time persons. Our margins for direct labor only were comparable at 64.2% in 2016, and 64.0% in 2017.

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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 generate additional 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.

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, 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.

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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 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 loans payable to officer. None of these instruments are held for trading purposes.

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,
	2017			2016
Net product revenue		100.0	%		100.0	%
Total cost of revenue		41.2			35.8
Gross profit		58.8			64.2
Operating expenses:
Sales and marketing		22.3			26.8
Research and development		31.5			41.0
General and administrative		15.9			19.5
Operating loss		(10.9	)		(23.1	)
Interest expense, net		(3.0	)		(2.3	)
Other income, net		13.5			—
Loss from operations before income taxes		(0.4	)		(25.4	)
Income tax provision		—			—
Net loss		(0.4	)		(25.4	)
Preferred stock dividends accrued		(2.1	)		(2.3	)
Net loss attributable to common stockholders		(2.5	)%		(27.7	)%

2017 compared with 2016

Net Revenue

Total revenue increased 12.5% to $6.9 million in 2017 from $6.1 million in 2016. The increase in revenue was related to growth in our TraceCop product line. We expect our product revenues to increase in the future as the market acceptance of our TraceCop and Savant product lines increase.

There were no export sales in 2017 and 2016 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.

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Gross Profit

Gross profit increased 3.0% to $4.0 million in 2017 from $3.9 million in 2016. As a percentage of net revenue, gross profit decreased from 64.2% in 2016 to 58.8% in 2017. Gross profit as a percentage of revenue, decreased in 2017 compared to 2016 because of higher average labor expenses related to new 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 $1.5 million or 22.3% of net revenue in 2017, compared to $1.6 million or 26.8% of net revenue in 2016. The decrease in sales and marketing expense was due to a decrease in sales labor expense. We expect sales and marketing expenses to increase as net revenue levels increase in 2018.

Research and Development

Research and development expenses decreased to $2.2 million or 31.5% of net revenue in 2017 compared to $2.5 million or 41.0% of net revenue in 2016. The decrease in research and development expense was due to labor expense shifted to direct labor costs on new projects. Our research and development costs are expensed in the period in which they are incurred. We expect research and development expenses to increase as net revenue levels increase in 2018.

General and Administrative

General and administrative expenses decreased slightly to $1.1 million, or 15.9% of net revenue in 2017 compared to $1.2 million or 19.5% of net revenue in 2016 as a result of continuing efforts to keep spending under control. We expect general and administration expenses to remain fairly constant but increase as net revenue levels increase in 2018.

Interest Expense

Interest expense increased to $209 thousand in 2017, compared to $145 thousand in 2016. Interest expense increased due to increased amount of Loan Payable to Officer. Interest expense will vary in the future based on our cash flow and borrowing needs.

Other Income

On July 7, 2017, the Company entered into a sale of certain IP addresses that were not currently being used in the Company's business operations and were not required for the Company's future business plans. The net proceeds from the sale of these intellectual property assets were in the amount of $872,000 which the Company received on August 9, 2017. In addition, $56,000 was received on August 3, 2017, from the sale of an investment.

Income Taxes

Our effective income tax rate was 0% in 2017 and 2016 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, 2017 was $0.2 million of cash and cash equivalents. As of December 31, 2017, we do not hold investments with a stated maturity beyond one year. Working capital at December 31, 2017, was a deficiency of $0.8 million, while at December 31, 2016, it was the same at $0.8 million.

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Net cash provided by operations for the twelve months ended December 31, 2017, was $272 thousand due to the following sources of cash and non-cash items: a $291 thousand increase in accounts payable and accrued expenses, a $30 thousand decrease in inventories, an $11 thousand increase in deferred revenue, $69 thousand in depreciation expense, $137 thousand in amortization expense of capital leases and other assets, $18 thousand in stock-based compensation, and $33 thousand in waived penalties on dividends. This was partially offset by a net operating loss of $30 thousand (The net loss in 2017 included other income of 928,000, of which $872,000 came from the sale of certain unused IP addresses and $56,000 from the sale of an investment.), a $217 thousand increase in accounts receivable, $56 thousand gain on sale of investment, and a $14 thousand increase in prepaid expenses and other assets. Net cash used in operations for the twelve months ended December 31, 2016, was $1.243 million due to a net loss of $1.552 million and the following uses of cash: a $165 thousand increase in accounts receivable and a $6 thousand increase in prepaid expenses and other assets. This was partially offset by the following sources of cash and non-cash items: $9 thousand increase in deferred revenue, $60 thousand increase in accounts payable and accrued expenses, $93 thousand in depreciation expense, $201 thousand in amortization expense of capital leases and other assets, $96 thousand in stock-based compensation, and $20 thousand in waived penalties on dividends. 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 provided by investing activities in 2017 was $36 thousand primarily from the proceeds from the sale of investments of $56 thousand and offset by using $20 thousand for purchases of property and equipment. Net cash used in investing activities in 2016 was $47 thousand for purchases of property and equipment.

Net cash used by financing activities in 2017 was $0.1 million primarily due to payments on the loan by an officer of $1.89 million with a $139 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 $1.87 million and $11 thousand from the exercise of stock options. Net cash provided by financing activities in 2016 was $1.252 million primarily due to proceeds from a loan by an officer of $1.355 million. Other provisions were proceeds from the line-of-credit of $364 thousand and $100 thousand from the exercise of stock options. This was directly offset by the following uses of cash: $364 thousand in payments to the line-of-credit and $202 thousand payment on principal on capital leases.

At December 31, 2017, we had a commitment of $62 thousand for future capital lease expenditures. Operating lease commitments of $1.0 million are detailed in the Contractual Obligations section below. During 2017, we funded our operations through the use of available cash, cash equivalents and investments, our line of credit and loans from our Company’s CEO.

As of December 31, 2017, we had cash, cash equivalents, and investments in the amount of approximately $224 thousand, increasing from $64 thousand as of December 31, 2016.

On February 4, 2016, the Company entered into an unsecured revolving promissory note to borrow up to $2,200,000 from G. Ward Paxton, the Company’s Chief Executive Officer (the “CEO Note”). Under the terms of the CEO Note, the Company may borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $2,200,000 at any given time through March 2018.

On September 30, 2016, the Company renewed the CEO Note on the same terms, with the Company being able to borrow, repay and reborrow on the CEO Note as needed up to an outstanding principal balance due of $2,700,000 at any given time through March 2018.

On February 9, 2017, the Company renewed the CEO Note on the same terms, with the Company being able to borrow, repay and reborrow on the CEO Note as needed up to an outstanding principal balance due of $3,400,000 at any given time through March 2019.

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

On February 8, 2018, the Company amended the unsecured revolving promissory note to borrow up to $3,700,000 from G. Ward Paxton, the Company’s Chief Executive Officer. Under the terms of the note, the Company may 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.

Amounts borrowed under the CEO Note officer accrue interest at a floating rate per annum equal to Silicon Valley Bank’s (“SVB”) prime rate plus 1% (5.5% at Deceember 31, 2017). All outstanding borrowings and accrued but unpaid interest is due on March 31, 2020. As of December 31, 2017, the borrowings outstanding totaled $2,865,000 and accrued interest totaled $348,000.

20

On March 29, 2006, we entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”) to establish a $1.0 million line of credit (the “2006 Credit Line”). The Loan was renewed annually until 2016.On June 21, 2016, the Loan Agreement terminated. Due to increasing fees associated with the Line of Credit, we chose not to renew the loan agreement on the termination date. We replaced the line with an increased commitment under the CEO Note.

As of December 31, 2017, we had cash and cash equivalents of approximately $224,000, up from approximately $64,000 as of December 31, 2016. We generated a net loss of $30,000 for the year ended December 31, 2017 compared to net loss of $1,552,000 for the year ended December 31, 2016. The net loss in 2017 included other income of 928,000, of which $872,000 came from the sale of certain unused IP addresses and $56,000 from the sale of an investment. As of February 28, 2018, in addition to cash and cash equivalents, $835,000 of funding is available from a promissory note to borrow up to $3.7 million from G. Ward Paxton, the Company’s Chief Executive Officer. We are obligated to make payments of accrued dividends on all our outstanding shares of preferred stock that will reduce our available cash resources. Based on projections of growth in revenue and net income in the coming quarters, and the borrowings available previously mentioned, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures through March 31, 2019. We expect to fund our operations through anticipated Company profits, borrowings from the Company’s CEO, and possibly additional investments of private equity and debt, which, if we are able to obtain, could have the effect of diluting our existing common stockholders, perhaps significantly. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to our stockholders. If our operations do not generate positive cash flow in the upcoming year, or if we are not able to obtain additional debt or equity financing on terms and conditions acceptable to us, if at all, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations.

We 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, 2017. We had no other significant contractual obligations at December 31, 2017.

Future minimum lease obligations consisted of the following at December 31, 2017 (in thousands):

	Operating		Capital Lease
Year ending December 31,	Leases		Obligations		Total
2018	$	321	$	45	$	366
2019		305		17		322
2020		311				311
2021 and thereafter		104				104
	$	1,041	$	62	$	1,103

Off-Balance Sheet Arrangements

As of December 31, 2017, 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

21

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 Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures 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 Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s evaluation included an assessment of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and the Company’s overall control environment. Based on its evaluation, management concluded that the Company’s internal control over financial reporting was effective as of the year ended December 31, 2017 to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. The Company reviewed the results of management’s assessment with the Audit Committee of the Board of Directors.

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

Inherent Limitations on Effectiveness of Controls

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

Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2017, 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.

22

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 2018 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, 2017 and 2016	F-2
Consolidated Statements of Operations for the years ended December 31, 2017 and 2016	F-3
Consolidated Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2017 and 2016	F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016	F-5
Notes to Consolidated Financial Statements	F-6

(b)           Exhibits

The following Exhibits are filed herewith pursuant to Item 601 of Regulation S-K or incorporated herein by reference to previous filings as noted:

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

23

Exhibit Number	Description of Exhibit
4.3(8)	Specimen Series 2 5% Convertible Preferred Stock Certificate
4.4(9)	Specimen Series 3 5% Convertible Preferred Stock Certificate
10.3(12)	Form of Indemnification Agreement
10.5(7)	Lease Agreement between CalWest Industrial Holdings Texas, L.P. and Intrusion Inc.
10.7(2)	Amended and Restated 401(k) Savings Plan of the Registrant
10.9(4)	Intrusion Inc. 401(k) Savings Plan Summary of Material Modifications
10.10(10)	Amended 2005 Stock Incentive Plan of the Registrant
10.11(10)	Form of Notice of Grant of Stock Option
10.12(10)	Form of Stock Option Agreement
10.13(10)	Form of Stock Issuance Agreement
10.14(10)	Form of Notice of Grant of Non-Employee Director Automatic Stock Option (Initial Grant)
10.15(10)	Form of Notice of Grant of Non-Employee Director Automatic Stock Option (Annual Grant)
10.16(10)	Form of Automatic Stock Option Agreement
10.17(8)	Securities Purchase Agreement dated as of March 28, 2005, by and among the Registrant and the investors listed on Exhibit A thereto
10.18(9)	Securities Purchase Agreement dated as of December 2, 2005, by and among the Registrant and the investors listed on Exhibit A thereto
10.24(11)	Third Amendment to Lease, executed on March 17, 2017, by and between Intrusion Inc. and ICON 1101 E ARAPAHO RD OWNER POOL 2, LLC.
10.25(12)	Promissory Note dated as of February 8, 2018, by and between the Registrant and G. Ward Paxton
21(12)	List of Subsidiaries of Registrant
23.1(12)	Consent of Whitley Penn LLP, Independent Registered Public Accounting Firm
31.1(12)	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act
31.2(12)	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act
32.1(12)	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(12)	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(12)	XBRL Instance Document.
101.SCH(12)	XBRL Taxonomy Extension Schema Document.
101.CAL(12)	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF(12)	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB(12)	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE(12)	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.

24

(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.

(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, 2016 (as amended), which Exhibit is incorporated herein by reference.

(12) Filed herewith.

Item 16. Form 10-K Summary

None.

25

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 29, 2018	INTRUSION INC.
	(Registrant)
	By:	/s/ G. WARD PAXTON
		G. Ward Paxton
		Chairman, President, and Chief Executive Officer
		(Principal Executive 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/ G. WARD PAXTON	Chairman, President,	March 29, 2018
G. Ward Paxton	Chief Executive Officer, and Director
	(Principal Executive Officer)
/s/ T. JOE HEAD	Vice Chairman, Vice President	March 29, 2018
T. Joe Head	and Director
/s/ MICHAEL L. PAXTON	Vice President, Chief Financial
Michael L. Paxton	Officer, Treasurer and Secretary	March 29, 2018
	(Principal Financial and Accounting Officer)
/s/ JAMES F. GERO	Director	March 29, 2018
James F. Gero
/s/ DALE BOOTH	Director	March 29, 2018
Dale Booth
/s/ DONALD M. JOHNSTON	Director	March 29, 2018
Donald M. Johnston

26

ANNUAL REPORT ON FORM 10-K

ITEM 8

FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 and 2016

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, 2017 and 2016, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, 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 29, 2018

F-1

INTRUSION INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

	December 31,
	2017			2016
Assets
Current Assets:
Cash and cash equivalents	$	224		$	64
Accounts receivable		962			745
Inventories		15			45
Prepaid expenses		89			75
Total current assets		1,290			929
Property and Equipment:
Equipment		1,721			1,708
Furniture and fixtures		43			43
Leasehold improvements		55			48
		1,819			1,799
Accumulated depreciation and amortization		(1,695	)		(1,491	)
		124			308
Other assets		38			40
TOTAL ASSETS	$	1,452		$	1,277
Liabilities and Stockholders’ Deficit
Current Liabilities:
Accounts payable, trade	$	194		$	205
Accrued expenses		988			691
Dividends payable		447			303
Obligations under capital lease, current portion		44			139
Deferred revenue		406			395
Total current liabilities		2,079			1,733
Loan payable to officer		2,865			2,885
Obligations under capital lease, noncurrent portion		17			61
Commitments and contingencies
Stockholders’ Deficit:
Preferred stock, $0.01 par value:
Authorized shares — 5,000
Series 1 shares issued and outstanding — 200 Liquidation preference of $1,163 in 2017 and $1,113 in 2016		707			707
Series 2 shares issued and outstanding — 460 Liquidation preference of $1,328 in 2017 and $1,270 in 2016		724			724
Series 3 shares issued and outstanding — 289 Liquidation preference of $728 in 2017 and $697 in 2016		412			412
Common stock, $0.01 par value:
Authorized shares — 80,000
Issued shares — 12,808 in 2017 and 12,758 in 2016
Outstanding shares — 12,798 in 2017 and 12,748 in 2016		128			128
Common stock held in treasury, at cost—10 shares		(362	)		(362	)
Additional paid-in-capital		56,518			56,595
Accumulated deficit		(61,529	)		(61,499	)
Accumulated other comprehensive loss		(107	)		(107	)
Total stockholders’ deficit		(3,509	)		(3,402	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	1,452		$	1,277

See accompanying notes.

F-2

INTRUSION INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Year Ended December 31,
	2017			2016
Net product revenue	$	6,862		$	6,102
Cost of revenue		2,824			2,183
Gross profit		4,038			3,919
Operating expenses:
Sales and marketing		1,531			1,637
Research and development		2,162			2,499
General and administrative		1,094			1,190
Operating loss		(749	)		(1,407	)
Interest expense, net		(209	)		(145	)
Other income		928			—
Loss from operations before income taxes		(30	)		(1,552	)
Income tax provision		—			—
Net loss		(30	)		(1,552	)
Preferred stock dividends accrued		(139	)		(139	)
Net loss attributable to common stockholders	$	(169	)	$	(1,691	)
Net loss per share attributable to common stockholders, basic	$	(0.01	)	$	(0.13	)
Net loss per share attributable to common stockholders, diluted	$	(0.01	)	$	(0.13	)
Weighted average common shares outstanding:
Basic		12,836			12,737
Diluted		12,836			12,737

See accompanying notes.

F-3

INTRUSION INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(In thousands)

	Year Ended December 31,
	2017			2016
NUMBER OF PREFERRED SHARES—ISSUED AND OUTSTANDING
Balance, beginning of year		949			949
Conversion of preferred stock to common		—			—
Balance, end of year		949			949
PREFERRED STOCK
Balance, beginning of year and end of year	$	1,843		$	1,843
Conversion of preferred stock to common		—			—
Balance, end of year	$	1,843		$	1,843
NUMBER OF COMMON SHARES—ISSUED
Balance, beginning of year		12,758			12,622
Exercise of stock options		50			136
Conversion of preferred stock to common		—			—
Balance, end of year		12,808			12,758
COMMON STOCK
Balance, beginning of year	$	128		$	126
Exercise of stock options		—			2
Conversion of preferred stock to common		—			—
Balance, end of year	$	128		$	128
TREASURY SHARES
Balance, beginning of year and end of year	$	(362	)	$	(362	)
ADDITIONAL PAID-IN-CAPITAL
Balance, beginning of year	$	56,595		$	56,520
Stock-based compensation		18			96
Exercise of stock options		11			98
Conversion of preferred stock to common		—			—
Preferred stock dividends declared, net of waived penalties by shareholders		(106	)		(119	)
Balance, end of year	$	56,518		$	56,595
ACCUMULATED DEFICIT
Balance, beginning of year	$	(61,499	)	$	(59,947	)
Net loss		(30	)		(1,552	)
Balance, end of year	$	(61,529	)	$	(61,499	)
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of year and end of year	$	(107	)	$	(107	)
TOTAL STOCKHOLDERS’ DEFICIT	$	(3,509	)	$	(3,402	)

See accompanying notes.

F-4

INTRUSION INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended December 31,
	2017			2016
Operating Activities:
Net loss	$	(30	)	$	(1,552	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		206			294
Stock-based compensation		18			96
Penalties and waived penalties on dividends		33			20
Gain on sale of investment		(56	)		—
Changes in operating assets and liabilities:
Accounts receivable		(217	)		(165	)
Inventories		30			—
Prepaid expenses and other assets		(14	)		(6	)
Accounts payable and accrued expenses		291			60
Deferred revenue		11			9
Net cash provided by (used in) operating activities		272			(1,244	)
Investing Activities:
Proceeds from sale of investments		56			—
Purchases of property and equipment		(20	)		(47	)
Net cash provided by (used by) investing activities		36			(47	)
Financing Activities:
Proceeds from line of credit		—			364
Payments on line of credit		—			(364	)
Borrowings on loan from officer		1,870			1,355
Payments on loans from officer		(1,890	)		—
Principal payments on capital lease equipment		(139	)		(202	)
Proceeds from stock options exercised		11			100
Net cash provided by (used in) financing activities		(148	)		1,253
Net decrease in cash and cash equivalents		160			(38	)
Cash and cash equivalents at beginning of year		64			102
Cash and cash equivalents at end of year	$	224		$	64
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on leased assets	$	6		$	14
Income taxes paid	$	—		$	—
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES:
Preferred stock dividends accrued	$	139		$	139
Purchase of equipment through capital lease	$	—		$	66

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, 2017, we had cash and cash equivalents of approximately $224,000, up from approximately $64,000 as of December 31, 2016. We generated a net loss of $30,000 for the year ended December 31, 2017 compared to net loss of $1,552,000 for the year ended December 31, 2016. The net loss in 2017 included other income of 928,000, of which $872,000 came from the sale of certain unused IP addresses and $56,000 from the sale of an investment. As of February 28, 2018, in addition to cash and cash equivalents, $835,000 of funding is available from a promissory note to borrow up to $3.7 million from G. Ward Paxton, the Company’s Chief Executive Officer. We are obligated to make payments of accrued dividends on all our outstanding shares of preferred stock that will reduce our available cash resources. Based on projections of growth in revenue and net income in the coming quarters, and the borrowings available previously mentioned, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures through March 31, 2019. We expect to fund our operations through anticipated Company profits, borrowings from the Company’s CEO, and possibly additional investments of private equity and debt, which, if we are able to obtain, will have the effect of diluting our existing common stockholders, perhaps significantly. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to our stockholders. If our operations do not generate positive cash flow in the upcoming year, or if we are not able to obtain additional debt or equity financing on terms and conditions acceptable to us, if at all, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations.

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 in diversified industries worldwide and periodically have receivables from customers, primarily in North America, Europe and Asia. 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, 2017 and 2016.

Inventories

Inventories are stated at the lower of cost or net realizable value. We value our inventories using average cost, which approximates actual cost on a first-in, first-out basis. Our management estimates the allowance required to state inventory at the lower of cost or net realizable value. There is a risk that we will forecast demand for our products and market conditions incorrectly and maintain excess inventories. Therefore, there can be no assurance that we will not maintain excess inventory and incur inventory lower of cost or net realizable value charges in the future. All inventory on hand at December 31, 2017 and 2016 is finished goods inventory.

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 $206,000 and $291,000 for the years ended December 31, 2017 and 2016, 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, 2017 and 2016, 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 2017 and 2016 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.

F-7

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, 2017 and 2016, respectively:

	2017			2016
Weighted average grant date fair value	$	0.26		$	0.28
Weighted average assumptions used:
Expected dividend yield		0.00	%		0.00	%
Risk-free interest rate		1.77	%		1.64	%
Expected volatility		75.46	%		110.24	%
Expected life (in years)		5.00			5.00

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, 2017 and 2016 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 at December 31, 2017 and 2016 totaled 2,941,861 and 3,509,241, respectively.

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, 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.

F-8

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.

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 loans 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, 2017, tax returns related to fiscal years ended December 31, 2014 through December 31, 2016 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, 2017 and 2016.   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.

F-9

Recent Accounting Pronouncements

Revenue Recognition

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes most current revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for us beginning 2018. We will be using the following transition method:  a modified retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We do not believe the adoption of this guidance will have a material impact on our financial statements.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. This guidance will be effective for us in the first quarter of 2019 on a modified retrospective basis and early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements and related disclosures.

3. Balance Sheet Detail (in thousands)

Accrued Expenses

	December 31,
	2017		2016
Accrued payroll	$	131	$	134
Accrued vacation		284		279
Rent payable		139		13
Accrued interest, related party		348		184
Other		86		81
	$	988	$	691

4. Commitments and Contingencies

Leases

We lease office space for our corporate headquarters in Richardson, Texas under an operating lease, the base term of which expires in April 2021. We lease office space in San Diego and San Marcos, California for a portion of our security software research and development staff under two separate operating leases. The California leases normally renew for one to two year terms.

The Company’s lease for the headquarters facility contains escalation provisions. The Company records rent expense on facility leases on a straight-line basis. Rent expense totaled approximately $350,000 and $415,000 for the years ended December 31, 2017 and 2016, respectively.

Future minimum rental payments under these leases as of December 31, 2017 are as follows (in thousands):

Year ending December 31,	Minimum Lease Payments
2018	$	321
2019		305
2020		311
2021 and thereafter		104
	$	1,041

We have other capital lease obligations that consist primarily of computer equipment.

F-10

Future minimum payments under these leases as of December 31, 2017 are as follows (in thousands):

Year ending December 31,	Capital Lease Obligations
2018	$	45
2019		17
2020		—
2021 and thereafter		—
		62
Less amounts representing interest		(1	)
	$	61

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, 2017.

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 $30,000 and $32,000, respectively, for the years ended December 31, 2017 and 2016.

6. Line of Credit

On March 29, 2006, we entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”) to establish a $1.0 million line of credit (the “2006 Credit Line”). The Loan was renewed annually until 2016. On June 21, 2016, the Loan Agreement terminated. Due to increasing fees associated with the Line of Credit, we chose not to renew the loan agreement on the termination date. We replaced the line with an increased commitment under the CEO Note (Note 7 below) as needed.

7. Borrowings from Officer

On February 9, 2017, the Company entered into an unsecured revolving promissory note to borrow up to $3,400,000 from G. Ward Paxton, the Company’s Chief Executive Officer (the “CEO Note”). Under the terms of the CEO Note, the Company may borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $3,400,000 at any given time through March 2019.

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

On February 8, 2018, the Company renewed the CEO Note on the same terms, with the Company being able to borrow, repay and reborrow on the CEO Note as needed up to an outstanding principal balance due of $3,700,000 at any given time through March 2020.

Amounts borrowed under the CEO Note officer accrue interest at a floating rate per annum equal to Silicon Valley Bank’s (“SVB”) prime rate plus 1% (5.5% at December 31, 2017). All outstanding borrowings and accrued but unpaid interest is due on March 31, 2020. As of December 31, 2017, the borrowings outstanding totaled $2,865,000 and accrued interest totaled $348,000.

F-11

8. 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, 2017 and 2016 are as follows (in thousands):

	December 31
	2017			2016
Net operating loss carryforwards	$	21,175		$	32,644
Net operating loss carryforwards of foreign subsidiaries		374			374
Book over tax depreciation		(14	)		(48	)
Stock-based compensation expense		25			38
Other		94			124
Deferred tax assets		21,654			33,132
Valuation allowance for deferred tax assets		(21,654	)		(33,132	)
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 2017 and 2016.

The differences between the provision for income taxes and income taxes computed using the federal statutory rate for the years ended December 31, 2017 and 2016 are as follows (in thousands):

	2017			2016
Reconciliation of income tax benefit to statutory rate:
Income benefit at statutory rate	$	(10	)	$	(528	)
State income taxes (benefit), net of federal income tax benefit		1			(40	)
RTP (ISO expense)		—			38
Permanent differences		11			28
Change in valuation allowance		(11,478	)		890
Remeasurment of Deferreds		11,476			—
Change in state tax rate		—			(345	)
Other		—			(43	)
	$	—		$	—

At December 31, 2017, we had federal net operating loss carryforwards of approximately $87.9 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. We had approximately $6 million of state net operating loss carryforwards beginning to expire in 2017.

9. Stock Options

At December 31, 2017, 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, 2017, 818,835 had been exercised and options to purchase a total of 1,652,500 shares of common stock were outstanding. A total of 3,892,000 options had been granted under the 2005 Plan, of which 1,420,665 have been cancelled. The 2005 Plan expired on December 31, 2015, and no shares remain for grant.

F-12

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, 2017, no options had been exercised and options to purchase a total of 93,000 shares of common stock were outstanding. A total of 96,000 options had been granted under the 2015 Plan, 3,000 shares have been cancelled, and options for 507,000 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 3,319,943 shares at December 31, 2017 as follows, in thousands:

(In thousands)	Common Shares Reserved for Future Issuance
Preferred Stock		1,067
2015 Plan		600
2005 Plan		1,653
Total		3,320

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).

F-13

Stock Incentive Plan Summary

A summary of our stock option activity and related information for the years ended December 31, 2017 and 2016 is as follows:

	2017					2016
	Number of Options (in thousands)			Weighted Average Exercise Price		Number of Options (in thousands)			Weighted Average Exercise Price
Outstanding at beginning of year		2,254		$	0.64		2,598		$	0.63
Granted at price = market value		24			0.42		69			0.36
Granted at price > market value		—			—		—			—
Exercised		(50	)		0.22		(136	)		0.73
Forfeited		—			—		(18	)		1.80
Expired		(482	)		0.55		(259	)		0.35
Outstanding at end of year		1,746		$	0.68		2,254		$	0.64
Options exercisable at end of year		1,662		$	0.68		2,079		$	0.59

Stock Options Outstanding and Exercisable

Information related to stock options outstanding at December 31, 2017, is summarized below:

			Options Outstanding						Options Exercisable
Range of Exercise Prices			Outstanding at 12/31/17 (in thousands)		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Exercisable at 12/31/17 (in thousands)		Weighted Average Exercise Price
$ 0.20	-	$0.50		985		2.52	$	0.34		914	$	0.34
$ 0.51	-	$1.00		481		2.98	$	0.65		481	$	0.65
$ 1.01	-	$2.73		280		4.94	$	1.92		267	$	1.90
				1,746		3.03	$	0.68		1,662	$	0.68

Summarized information about outstanding stock options as of December 31, 2017, 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, 2017
Number of outstanding options (in thousands)		1,738		1,662
Weighted average remaining contractual life		3.01		2.75
Weighted average exercise price per share	$	0.68	$	0.68
Intrinsic value (in thousands)	$	1,178	$	1,123

* Includes effects of expected forfeitures

As of December 31, 2017, the total unrecognized compensation cost related to non-vested options not yet recognized in the statement of operations totaled approximately $12 thousand (including expected forfeitures) and the weighted average period over which these awards are expected to vest was 1.11 years.

10. 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 CEO and 60,000 shares purchased by a director of the Company.

F-14

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 stock holders 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, 2017, 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 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 stock holders 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 stock holders 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, 2017 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 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 stock holders have expired.

F-15

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, 2017 there were 289,377 shares of Series 3 Preferred Stock outstanding, representing 289,377 shares of common stock upon conversion.

Dividends Payable

During the fiscal year ended December 31, 2017, 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, 2017 and 2016, we had $447,000 and $303,000 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. If we continue to be unable to pay dividends on our preferred stock, we will be required to accrue an additional late fee penalty of 18% per annum on the unpaid dividends for the Series 2 Preferred Stock and Series 3 Preferred Stock. Our CEO, CFO and one outside board member who are invested in Series 2 and Series 3 Preferred Stock have waived any possible late fee penalties.

11.  Concentrations

Our operations are concentrated in one area—security software/entity identification. Sales to the U.S. Government through direct and indirect channels totaled 81.6% of total revenues for 2017 and 69.3% of total revenues for 2016. During 2017 approximately 58.8% of total revenues were attributable to three government customers. During 2016 approximately 49.7% of total revenues are attributable to three government customers. No individual commercial customer in 2017 or 2016 exceeded 30% of total revenues for the year. Five individual commercial customers at December 31, 2017 and four at December 31, 2016 exceeded 10% of total accounts receivable balance at respective year ends. 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.

12.  Other Income

On July 7, 2017, the Company entered into a sale of certain IP addresses that were not currently being used in the Company's business operations and were not required for the Company's future business plans. The net proceeds from the sale of these intellectual property assets were in the amount of $872,000 which the Company received on August 9, 2017. In addition, $56,000 was received on August 3, 2017 from the sale of an investment. The receipt of these transactions had an immediate positive impact on the Company's liquidity position.

13.  Subsequent Events

On February 8, 2018, the Company amended the unsecured revolving promissory note to borrow up to $3,700,000 from G. Ward Paxton, the Company’s Chief Executive Officer. Under the terms of the note, the Company may 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.

F-16

EX-10.3

EXHIBIT 10.3

INDEMNIFICATION AGREEMENT

THIS INDEMINIFICATION AGREEMENT (the "Agreement"), dated as of Insert Date, is by and between Intrusion.com, Inc., a Delaware corporation (the "Company"), and Insert Name (the "Indemnitee").

RECITALS:

WHEREAS, the Indemnitee currently serves as Vice President, and in such capacity is performing a valuable service to the Company; and

WHEREAS, the Company's Certificate of Incorporation (the "Certificate") and Bylaws (the "Bylaws") provide for the indemnification of the directors and officers of the Company; and

WHEREAS, the Certificate provides that the Company shall indemnify the directors and officers of the Company to the fullest extent permitted by any applicable law, including, without limitation, the Delaware General Corporation Law, as amended to date and as may be amended from time to time (the "Act"); and

WHEREAS, the Act specifically provides that indemnification and advancement of expenses provided in such statute shall not be deemed exclusive of any other rights under any agreement, and; thereby contemplates that agreements may be entered into between the Company and directors and officers of the Company with respect to the indemnification of such directors and officers; and

WHEREAS, in accordance with the authorization provided in the Act, the Company may

purchase one or more policies of directors' and officers' liability insurance (the "Insurance") covering certain liabilities, which may be incurred by the Company's directors and officers in the performance of their services to the Company; and

WHEREAS, applicability, amendment and enforcement of statutory and bylaw indemnification provisions have raised questions concerning the adequacy and reliability of the protection afforded thereby; and

WHEREAS, in order to resolve such questions and to induce the Indemnitee to continue to serve as an officer of the Company for the remainder of his term and for any subsequent terms to which he is elected by the directors of the Company, the Company has deemed it to be in its best interests to enter into this Agreement;

INDEMNIFICATION AGREEMENT Page 1

EXHIBIT 10.3

NOW, THEREFORE, in consideration of the Indemnitee's willingness to continue to serve as an officer of the Company after the date hereof, the parties hereto agree as follows:

1.     Definitions. As used in this Agreement, the following terms shall have the following meanings:

(a)     Change in Control. A "Change in Control" shall be deemed to have occurred if (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes, through one or a series of related transactions or through one or more intermediaries, the "beneficial owner" (as such term is defined in Rule 13(d) under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the outstanding securities of the Company, other than a person who is such a beneficial owner on the effective date of this Agreement or an affiliate of such person on such date; (ii) as a result of, or in connection with, any tender offer or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions (a Transaction"), the individuals who were Directors of the Company before the Transaction cease for any reason to constitute a majority of the Board of Directors of the Company or any successor to the Company; (iii) the Company is merged or consolidated with any other entity and as a result of such merger or consolidation less than 40% of the outstanding voting securities of the surviving corporation shall then be owned in the aggregate by the former stockholders of the Company, other than (x) any party to such merger or consolidation, or (y) any affiliates of any such party; (iv) a tender offer or exchange offer is made and consummated for the ownership of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or (v) the Company transfers more than 50% of its assets, or the last of a series of transfers results in the transfer of more than 50% of the assets of the Company, to another corporation that is not a wholly owned subsidiary of the Company. For purposes of this subsection l(a), the determination of what constitutes more than 50% of the assets of the Company shall be determined based on the sum of the values attributed to the net book value of all assets of the Company taken as of the date of the Transaction involved. Notwithstanding the foregoing, events otherwise constituting a Change in Control in accordance with the foregoing shall not constitute a Change in Control if such events are solicited by the Company and are approved, recommended or supported by the Board of Directors of the Company (the "Board") in actions taken prior to, and with respect to, such events.

(b)     Reviewing Party. A “Reviewing Party" means (i) the Board of Directors of the Company, provided, that a determination by the Board under this Agreement shall require a majority vote of a quorum of directors of the Board of the Company who are not or were not parties to the action, suit or proceeding or (ii) independent legal counsel selected by the Board.

2.Indemnification of Indeminitee. The Company hereby agrees that it shall hold harmless and Indemnify the Indemnitee to the fullest extent authorized and permitted by the provisions of the Certificate and Bylaws and the provisions of the Act as currently in effect and as hereinafter amended or other statutory provisions authorizing or permitting such indemnification which are adopted after the date hereof. Subject to the exclusions and provisions set forth in this Agreement, the Act, the Certificate and the Bylaws, the Company hereby agrees that it shall hold harmless and indemnify the Indemnitee against any and all judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses, including attorneys' fees and court costs, actually and reasonably incurred by the Indemnitee in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding, and any inquiry or investigation that could lead to such an action, suit or proceeding (a “Proceeding”), including without limitation, an action by or on behalf of the stockholders of the Company or by or in the right of the Company (collectively, “Derivative Suites”) to which the Indemnitee is, was or at any time becomes a party, or is threatened to be made a party , or was or is a witness without being named a party, by reason of the fact that the Indemnitee is or was an officer of the Company, or, while an officer of the Company, is or was serving at the request of the Company as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, partnership, joint venture, sole proprietorship, trust, nonprofit entity, employee benefit plan, or other enterprise.

INDEMNIFICATION AGREEMENT Page 2

EXHIBIT 10.3

3.     Requirements for Indemnification.     Unless otherwise provided by the Act, the indemnification provided for in this Agreement shall be paid by the Company if the Reviewing Party determines that the Indemnitee (i) acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and (ii) with respect to any Proceeding which is a criminal action, that he had no reasonable cause to believe his conduct was unlawful; provided, however, that with respect to any Proceeding pursuant to a Derivative Suit, no indemnification shall be made in respect of any claim, issue or matter as to which such person has been adjudged to be liable to the Company.

4.     Insurance.

(a)     So long as the Indemnitee may be subject to any Proceeding by reason of the fact that the Indemnitee is or was an officer of the Company, to the extent that the Company maintains one or more insurance policies providing directors' and officers' liability insurance, the Indemnitee shall be covered by such policy or policies in accordance with its or their terms, to the maximum extent of the coverage applicable to any officer then serving the Company.

(b)     The Company shall not be required to maintain directors' and officers' liability insurance or any policy or policies of comparable insurance if such insurance is not reasonably available or if, in the reasonable business judgment of the Board, or any appropriate committee thereof, which shall be conclusively established by such determination by the Board, or such appropriate committee thereof, either (i) the premium cost for such insurance is significantly disproportionate to the amount of coverage there under or (ii) the coverage provided by such insurance is so limited by exclusions that there is insufficient benefit from such insurance.

5.     Advancement of Expenses. In the event of any Proceeding in which the Indemnitee is a party or is involved and which may give rise to a right of indemnification under this Agreement, following written request to the Company by the Indemnitee, the Company shall promptly pay to the Indemnitee amounts to cover expenses incurred by the Indemnitee in such Proceeding in advance of its final disposition upon the receipt by the Company of (i) a written affirmation by the Indemnitee of his good faith belief that he has met the standard of conduct necessary for indemnification under Section 3 of this Agreement (the "Standard of Conduct"), (ii) a written undertaking executed by or on behalf of the Indemnitee to repay the advance if it shall ultimately be determined by the Reviewing Party that the Indemnitee is not entitled to be indemnified by the Company for such expenses as provided in this Agreement, the Act or the Certificate and Bylaws and (iii) satisfactory evidence as to the amount of such expenses.

INDEMNIFICATION AGREEMENT Page 3

EXHIBIT 10.3

6.     Repayment of Expenses. Indemnitee shall reimburse the Company for all reasonable expenses paid by the Company in defending any Proceeding against the Indemnitee in the event and only to the extent that it shall be determined by the Reviewing Party that the Indemnitee is not entitled to be indemnified by the Company for such expenses under the Certificate, the Bylaws, this Agreement, the provisions of the Act or any other applicable law.

7.     Determination of Indemnification; Burden of Proof. With respect to all matters concerning the rights of the Indemnitee to indemnification and payment of expenses under this Agreement, the Act or under the provisions of the Certificate and Bylaws now or hereafter in effect, any determination by the Reviewing Party shall be conclusive and binding on the Company. If the entitlement of the Indemnitee to be indemnified under this Agreement depends on whether the Standard of Conduct has been met, the burden of proof of establishing that the Indemnitee did not act in accordance with such Standard of Conduct shall rest with the Company. The Indemnitee shall be presumed to have acted in accordance with such Standard of Conduct and shall be entitled to indemnification or advancement of expenses hereunder, as the case may be, unless it shall be determined by the Reviewing Party that the Indemnitee did not meet such Standard of Conduct, which determination shall be final. For purposes of this Agreement, unless otherwise expressly stated herein, the termination of any Proceeding by judgment, order, settlement, whether with or without court approval, or conviction, or upon a plea of nolo contendere or its equivalent shall not create a presumption that the Indemnitee did not meet the Standard of Conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law.

8.     Effect of Change in Control. If there has not been a Change in Control after the date of this Agreement, the determination of (i) the rights of the Indemnitee to indemnification and payment of expenses under this Agreement or under the provisions of the Certificate and the Bylaws, (ii) whether the Standard of Conduct has been met and (iii) the reasonableness of amounts claimed by the Indemnitee, shall be made by the Reviewing Party or such other body or persons as may be permitted by the Act. If there has been a Change in Control after the date of this Agreement, such determination and evaluation shall be made by a special, independent counsel who is selected by the Indemnitee and approved by the Company, which approval shall not be unreasonably withheld, and who has not otherwise performed services for the Indemnitee or the Company.

9.     Continuation of Indemnification. All agreements and obligations of the Company contained herein shall continue during the period that the Indemnitee is an officer of the Company, or, while an officer of the Company, is or was serving at the request of the Company as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another corporation, partnership, joint venture, sole proprietorship, trust, nonprofit entity, employee benefit plan, or other enterprise, and shall continue following the period that the Indemnitee served in such capacities during any period that the Indemnitee shall be subject to any Proceeding, any appeal in any such Proceeding, or any inquiry or investigation that could lead to any such Proceeding, by reason of the fact that the Indemnitee was an officer of the Company or served in any other capacity referred to herein.

10.     Notification and Defense of Claim. Subject to the provisions of the Certificate and the Bylaws, within 30 calendar days after receipt by the Indemnitee of notice of the commencement of any Proceeding, the Indemnitee shall, if a claim in respect hereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof. With respect to any such Proceeding as to which the Indemnitee notifies the Company of the commencement thereof:

(a)     The Company shall be entitled to participate therein at its own expense;

INDEMNIFICATION AGREEMENT Page 4

EXHIBIT 10.3

(b)     Except as otherwise provided below, to the extent that it may wish, the Company, jointly with any other indemnifying party similarly notified, shall be entitled to assume the defense thereof and to employ counsel reasonably satisfactory to the Indemnitee. After notice from the Company to the Indemnitee of its election to so assume the defense thereof, the Company shall not be liable to the Indemnitee under this Agreement for any legal or other expenses subsequently incurred by the Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. The Indemnitee shall have the right to employee counsel of his own choosing in such proceeding but the fees and expenses of such counsel incurred after notice from the Company of assumption by the Company shall be at the expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee has been specifically authorized by the Company, such authorization to be conclusively established by action by disinterested members of the Board though less than a quorum; (ii) representation by the same counsel of both the Indemnitee and the Company would, in the reasonable judgment of the Indemnitee and the Company, be inappropriate due to an actual or potential conflict of interest between the Company and the Indemnitee in the conduct of the defense of such Proceeding, such conflict of interest to be conclusively established by an opinion of counsel to the Company to such effect; (iii) the counsel employed by the Company and reasonably satisfactory to the Indemnitee has advised the Indemnitee in writing that such counsel's representation of the Indemnitee would likely involve such counsel in representing differing interests, which could adversely affect the judgment or loyalty of such counsel to the Indemnitee, whether it be a conflicting, inconsistent, diverse or other interest; or (iv) the Company shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be paid, as provided herein, by the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which a conflict of interest has been established as provided in subsection (ii) hereof; and

(c)     The Company shall not be liable to indemnify the Indemnitee under this Agreement for any amounts paid in settlement of any Proceeding effected without its written consent. The Company shall not settle any Proceeding in any manner, which would impose any liability or penalty on the Indemnitee without the Indemnitee's written consent. Neither the Company nor the Indemnitee shall unreasonably withhold consent to any proposed settlement.

11.     Enforcement.

(a)     The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on the Company hereby in order to induce the Indemnitee to continue to serve as an officer of the Company and acknowledges that the Indemnitee is relying upon this Agreement in serving in such capacity.

(b)     Absent a determination by the Reviewing Party that the Indemnitee is not entitled to indemnification hereunder, if a claim for indemnification or advancement of expenses is not paid in full by the Company within thirty (30) days after a written claim by the Indemnitee has been received by the Company, the Indemnitee may at any time bring suite against the Company to recover the unpaid amount of the claim. In the event the Indemnitee is required to bring any action to enforce rights or to collect monies due under this Agreement and is successful in such action, the Company shall reimburse the Indemnitee for all of the Indemnitee's reasonable attorneys' fees and expenses in bringing and pursuing such action.

INDEMNIFICATION AGREEMENT Page 5

EXHIBIT 10.3

12.     Effectiveness. This Agreement is effective for, and shall apply to (i) any claim which is asserted or threatened before, on or after the date of this Agreement but for which no Proceeding has been brought prior to the date hereof and (ii) any Proceeding which is threatened before, on or after the date of this Agreement but which is not pending prior to the date hereof. This Agreement shall not apply to any Proceeding which was brought before the date of this Agreement. So long as the foregoing is satisfied, this Agreement shall be effective for, and be applicable to, acts or omissions occurring prior to, on or after the date hereof.

13.     Nonexclusivity. The rights of the Indemnitee under this Agreement shall not be deemed exclusive, or in limitation of, any rights to which the Indemnitee may be entitled under any applicable common or statutory law, or pursuant to the Certificate, the Bylaws, vote of stockholders or otherwise.

14.     Other Payments. The Company shall not be liable to make any payment under this Agreement in connection with any Proceeding against the Indemnitee to the extent the Indemnitee has otherwise received payment of the amounts otherwise payable by the Company hereunder from a third party.

15.     Subrogation. In the event the Company makes any payment under this Agreement, the Company shall be subrogated, to the extent of such payment, to all rights of recovery of the Indemnitee with respect thereto, and the Indemnitee shall execute all agreements, instruments, certificates or other documents and do or cause to be done all things necessary or appropriate to secure such recovery rights to the Company including, without limitation, executing such documents as shall enable the Company to bring an action or suit to enforce such recovery rights.

16.     No Employment Rights. Notwithstanding any provision or inference herein to the contrary, express or implied, this Agreement shall not, directly or indirectly, create any right of the Indemnitee with respect to continuation of employment by the Company or any subsidiary of the Company, and shall not be deemed to interfere in any way with the Company's right to terminate or otherwise modify, Indemnitee's employment with the Company at any time.

17.     Survival; Continuation. The rights of the Indemnitee under this Agreement shall inure to the benefit of the Indemnitee, his heirs, executors, administrators and personal representatives, and this Agreement shall be binding upon the Company, its successors and assigns. The rights of the Indemnitee under this Agreement shall continue as provided in Section 9 hereof.

18.     Amendment and Termination.        No amendment, modification, termination or cancellation of this Agreement shall be effective unless made in writing and signed by both parties hereto.

19.     Headings.   Section headings of the sections and paragraphs of this Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement.

INDEMNIFICATION AGREEMENT Page 6

EXHIBIT 10.3

20.     Choice of Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Texas.

21.     Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, mailed by certified mail (return receipt requested) or sent by overnight delivery service, cable, telegram, facsimile transmission or telex to the parties at the following addresses or at such other addresses as shall be specified by the parties by like notice:

(a)     if to the Company, to:

  1101 East Arapaho Road

  Richardson, Texas 75081

  Attention:

Vice President, Chief Financial Officer, Secretary and Treasurer

(b)     if to the Indemnitee, to:

  Insert Name

  Insert Address

Notice so given shall, in the case of notice so given by mail, be deemed to be given and received on the fourth calendar day after posting, in the case of notice so given by overnight delivery service, on the date of actual delivery and, in the case of notice so given by cable, telegram, facsimile transmission, telex or personal delivery, on the date of actual transmission or, as the case may be, personal delivery.

22.     Severability. If any provision of this Agreement shall be held to be illegal, invalid or unenforceable under any applicable law, then such contravention or invalidity shall not invalidate the entire Agreement. Such provision shall be deemed to be modified to the extent necessary to render it legal, valid and enforceable, and if no such modification shall render it legal, valid and enforceable, then this Agreement shall be construed as if not containing the provision held to be invalid, and the rights and obligations of the parties shall be construed and enforced accordingly.

23.     Complete Agreement. This Agreement and those documents expressly referred to herein embody the complete agreement and understanding among the parties hereto and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way.

24.     Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, with the same effect as if all parties had signed the same document. All such counterparts shall be deemed an original, shall be construed together and shall constitute one and the same instrument.

INDEMNIFICATION AGREEMENT Page 7

EXHIBIT 10.3

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day of year first above written.

INTRUSION INC.

By: ___________________________________

President and Chief Executive Officer     

INDEMNITEE:

_______________________________________

Insert Name

INDEMNIFICATION AGREEMENT Page 8

EX-10.25

EXHIBIT 10.25

AMENDED AND RESTATED PROMISSORY NOTE

(Revolving Loan)

$3,700,000.00 Effective February 8, 2018

FOR VALUE RECEIVED, on or before March 31, 2020 (“Maturity Date”), INTRUSION INC., a Delaware corporation (“Borrower”), promises to pay to the order of G. WARD PAXTON, of Richardson, TX (“Payee”), at 1101 E. Arapaho Road, Suite 200, the principal amount of THREE MILLION AND NO/100 DOLLARS ($3,700,000.00), or such lesser amount as may have been advanced by Payee to Borrower pursuant to this Amended and Restated Promissory Note (“Note”), together with interest on the unpaid principal balance of this Note from time to time outstanding at a floating rate per annum equal to one percent (1%) above the Prime Rate (as hereinafter defined), calculated on the basis of actual days elapsed but computed as if each year consisted of 360 days. This Note amends, restates and replaces in full that certain Promissory Note dated March 2, 2017, in the original principal amount of $3,700,000.00, executed by Borrower and originally payable to the order of Payee on or before December 31, 2019. As used herein, the term “Prime Rate” shall mean the most recently announced “prime rate” of Silicon Valley Bank, even if it is not such bank’s lowest rate. Changes to the interest rate on this Note based upon changes in the Prime Rate shall be effective on the effective date of any changes to the Prime Rate and to the extent of any such change.

The outstanding principal balance of this Note, together with all accrued but unpaid interest, shall be due and payable in full on the Maturity Date.

Subject to the terms and conditions of this Note, Payee has agreed to make advances during the period beginning on the date of this Note and ending on the Maturity Date in an aggregate principal amount of up to $3,700,000 outstanding at any date upon three (3) Business Days prior written notice. Payee is authorized to endorse on the schedule annexed hereto and made a part hereof amounts advanced to Borrower through the Maturity Date. Borrower and Payee have agreed that Payee shall be obligated to make such advances to Borrower only so long as of the date of each such advance, no Event of Default (as hereinafter defined) exists or would occur by reason of the making of such advance. Subject to the foregoing, amounts repaid may be reborrowed by Borrower.

Borrower may from time to time prepay all or any portion of the principal of this Note without premium or penalty. Unless otherwise agreed to in writing, or otherwise required by applicable law, payments will be applied first to unpaid accrued interest, then to principal, and any remaining amount to any unpaid collection costs; provided, however, upon delinquency or other Event of Default, Payee reserves the right to apply payments among principal, interest and collection cost, at its discretion. All prepayments shall be applied to the indebtedness owing hereunder in such order and manner as Payee may from time to time determine in its sole discretion. All payments and prepayments of principal of or interest on this Note shall be made in lawful money of the United States of America in immediately available funds, at the address of Payee indicated above, or such other place as the holder of this Note shall designate in writing to Borrower. If any payment of principal of or interest on this Note shall become due on a day which is not a Business Day (as hereinafter defined), such payment shall be made on the next succeeding Business Day and any such extension of time shall be included in computing interest in connection with such payment. As used herein, the term “Business Day” shall mean any day other than a Saturday, Sunday or any other day on which national banking associations are authorized to be closed.

Borrower represents and warrants to Payee as follows:

(a)     This Note is the legal, valid and binding obligation of Borrower, enforceable against it in accordance with its terms.

(b)     The approval, execution, delivery and performance of, and compliance by Borrower with the terms of this Note, will not cause Borrower to be in violation of any applicable law or regulation, or of any order or regulation applicable to it. The approval, execution, delivery and performance of, and compliance by Borrower with the terms of, this Note will not conflict with or result in a breach of any of the terms of any material agreement or instrument to which Borrower is a party or by which it is bound, or constitute a default thereunder.

Borrower agrees that upon the occurrence of any one or more of the following events of default (“Event of Default”):

(a)     failure of Borrower to pay any installment of principal of or interest on this Note or on any other indebtedness of Borrower to Payee when due; or

(b)     any representation or warranty made by Borrower in this Note shall be untrue in any material respect when made; or

(c)     the bankruptcy or insolvency of, the assignment for the benefit of creditors by, or the appointment of a receiver for any of the property of, or the liquidation, termination, dissolution or death or legal incapacity of, any party liable for the payment of this Note, whether as maker, endorser, guarantor, surety or otherwise;

the holder of this Note may, at its option, without further notice or demand, (i) declare the outstanding principal balance of and accrued but unpaid interest on this Note at once due and payable, (ii) refuse to advance any additional amounts under this Note, (iii) pursue any and all other rights, remedies and recourses available to the holder hereof, including but not limited to any such rights, remedies or recourses at law or in equity, or (iv) pursue any combination of the foregoing.

The failure to exercise the option to accelerate the maturity of this Note or any other right, remedy or recourse available to the holder hereof upon the occurrence of an Event of Default hereunder shall not constitute a waiver of the right of the holder of this Note to exercise the same at that time or at any subsequent time with respect to such Event of Default or any other Event of Default. The rights, remedies and recourses of the holder hereof, as provided in this Note, shall be cumulative and concurrent and may be pursued separately, successively or together as often as occasion therefore shall arise, at the sole discretion of the holder hereof. The acceptance by the holder hereof of any payment under this Note which is less than the payment in full of all amounts due and payable at the time of such payment shall not (i) constitute a waiver of or impair, reduce, release or extinguish any right, remedy or recourse of the holder hereof, or nullify any prior exercise of any such right, remedy or recourse, or (ii) impair, reduce, release or extinguish the obligations of any party liable under this Note as originally provided herein.

Notwithstanding anything herein to the contrary, if at any time the interest rate set forth above, together with all fees, charges and other amounts which are treated as interest on the indebtedness evidenced by this Note under applicable law (collectively the “Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) which may be contracted for, charged, taken, received or reserved by Payee in accordance with applicable law, the rate of interest payable hereunder in respect of such indebtedness, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate.

If this Note is placed in the hands of an attorney for collection, or is collected in whole or in part by suit or through probate, bankruptcy or other legal proceedings of any kind, Borrower agrees to pay, in addition to all other sums payable hereunder, all costs and expenses of collection, including but not limited to reasonable attorneys’ fees.

Borrower and any and all endorsers and guarantors of this Note severally waive presentment for payment, notice of nonpayment, protest, demand, notice of protest, notice of intent to accelerate, notice of acceleration and dishonor, diligence in enforcement and indulgences of every kind and without further notice hereby agree to renewals, extensions, exchanges or releases of collateral, taking of additional collateral, indulgences or partial payments, either before or after maturity.

THIS NOTE HAS BEEN EXECUTED UNDER, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.

[Signature Page Follows]

BORROWER:
	INTRUSION INC.
By:	/s/ Michael L. Paxton
Name:	Michael L. Paxton
Title:	Vice President and Chief Financial Officer

ACKNOWLEDGED AND AGREED:

/s/ G. Ward Paxton

G. WARD PAXTON

EX-21

Exhibit 21

Intrusion Inc. and Subsidiaries

Subsidiaries of the Registrant

The following table lists the subsidiaries of the Registrant as of December 31, 2017, the state or other jurisdiction of incorporation and the names under which such subsidiaries do business. The Registrant owns all of the outstanding voting securities of each subsidiary.

Name of Subsidiary	Jurisdiction	Name under which doing business
Intrusion.com GmbH	Germany	Intrusion Inc.
Intrusion Ltd.	United Kingdom	Intrusion Inc.

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement No. 333-125816 and No. 333-167577 on Form S-8 pertaining to the Intrusion Inc. 2005 Stock Incentive Plan of our report dated March 29, 2018, with respect to the consolidated financial statements of Intrusion Inc. included in this Annual Report on Form 10-K for the year ended December 31, 2017.

/s/ Whitley Penn LLP

Dallas, Texas

March 29, 2018

EX-31.1

EXHIBIT 31.1

I, G. Ward Paxton, 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 29, 2018	/s/ G. Ward Paxton
	G. Ward Paxton
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

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

(1) I have reviewed this 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 29, 2018	/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, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, G. Ward Paxton, 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 29, 2018	/s/ G. Ward Paxton
	G. Ward Paxton
	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, 2017 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 29, 2018	/s/ Michael L. Paxton
	Michael L. Paxton
	Chief Financial Officer

XML

Document And Entity Information - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Feb. 28, 2018	Jun. 30, 2017
Document Information [Line Items]
Entity Registrant Name	Intrusion Inc
Entity Central Index Key	0000736012
Trading Symbol	intz
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		13,011,836
Entity Public Float			$ 4,052
Document Type	10-K
Document Period End Date	Dec. 31, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	FY
Amendment Flag	false

XML

Consolidated Balance Sheets - USD ($)	Dec. 31, 2017	Dec. 31, 2016
Current Assets:
Cash and cash equivalents	$ 224,000	$ 64,000
Accounts receivable	962,000	745,000
Inventories	15,000	45,000
Prepaid expenses	89,000	75,000
Total current assets	1,290,000	929,000
Property and Equipment:
Equipment	1,721,000	1,708,000
Furniture and fixtures	43,000	43,000
Leasehold improvements	55,000	48,000
	1,819,000	1,799,000
Accumulated depreciation and amortization	(1,695,000)	(1,491,000)
	124,000	308,000
Other assets	38,000	40,000
TOTAL ASSETS	1,452,000	1,277,000
Current Liabilities:
Accounts payable, trade	194,000	205,000
Accrued expenses	988,000	691,000
Dividends payable	447,000	303,000
Obligations under capital lease, current portion	44,000	139,000
Deferred revenue	406,000	395,000
Total current liabilities	2,079,000	1,733,000
Loan payable to officer	2,865,000	2,885,000
Obligations under capital lease, noncurrent portion	17,000	61,000
Commitments and contingencies
Stockholders’ Deficit:
Common stock	128,000	128,000
Common stock held in treasury, at cost—10 shares	(362,000)	(362,000)
Additional paid-in-capital	56,518,000	56,595,000
Accumulated deficit	(61,529,000)	(61,499,000)
Accumulated other comprehensive loss	(107,000)	(107,000)
Total stockholders’ deficit	(3,509,000)	(3,402,000)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	1,452,000	1,277,000
Series 1 Preferred Stock [Member]
Stockholders’ Deficit:
Preferred stock	707,000	707,000
Series 2 Preferred Stock [Member]
Stockholders’ Deficit:
Preferred stock	724,000	724,000
Series 3 Preferred Stock [Member]
Stockholders’ Deficit:
Preferred stock	$ 412,000	$ 412,000

XML

Consolidated Balance Sheets (Parentheticals) - $ / shares shares in Thousands	Dec. 31, 2017	Dec. 31, 2016
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized (in shares)	5,000	5,000
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	80,000	80,000
Common stock, shares issued (in shares)	12,808	12,758
Common stock, shares outstanding (in shares)	12,798	12,748
Common stock held in treasury, 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)	$ 1,163	$ 1,113
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)	$ 1,328	$ 1,270
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)	$ 728	$ 697

XML

Consolidated Statements of Operations - USD ($) shares in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Net product revenue	$ 6,862,000	$ 6,102,000
Cost of revenue	2,824,000	2,183,000
Gross profit	4,038,000	3,919,000
Operating expenses:
Sales and marketing	1,531,000	1,637,000
Research and development	2,162,000	2,499,000
General and administrative	1,094,000	1,190,000
Operating loss	(749,000)	(1,407,000)
Interest expense, net	(209,000)	(145,000)
Other income	928,000
Loss from operations before income taxes	(30,000)	(1,552,000)
Income tax provision
Net loss	(30,000)	(1,552,000)
Preferred stock dividends accrued	(139,000)	(139,000)
Net loss attributable to common stockholders	$ (169,000)	$ (1,691,000)
Net loss per share attributable to common stockholders, basic (in dollars per share)	$ (0.01)	$ (0.13)
Net loss per share attributable to common stockholders, diluted (in dollars per share)	$ (0.01)	$ (0.13)
Weighted average common shares outstanding:
Basic (in shares)	12,836	12,737
Diluted (in shares)	12,836	12,737

XML

Consolidated Statements of Changes in Stockholders' 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	12,622
Balance, beginning of year (in shares) at Dec. 31, 2015	949	12,622
Balance, end of year (in shares) at Dec. 31, 2016	949	12,758	(362)
Balance, beginning of year and end of year at Dec. 31, 2015	$ 1,843,000	$ 126,000		$ 56,520,000	$ (59,947,000)
Conversion of preferred stock to common
Balance, end of year at Dec. 31, 2016	$ 1,843,000	$ 128,000		56,595,000	(61,499,000)	$ (107,000)	$ (3,402,000)
Exercise of stock options (in shares)		136					136
Exercise of stock options		$ 2,000		98,000
Balance, beginning of year and end of year (in shares)	949	12,758	(362)
Stock-based compensation				96,000
Preferred stock dividends declared, net of waived penalties by shareholders				(119,000)
Net loss					(1,552,000)		$ (1,552,000)
Balance, beginning of year and end of year (in shares)	949	12,758	(362)
Balance, end of year (in shares) at Dec. 31, 2017	949	12,808	(362)
Conversion of preferred stock to common
Balance, end of year at Dec. 31, 2017	$ 1,843,000	$ 128,000		56,518,000	(61,529,000)	$ (107,000)	$ (3,509,000)
Exercise of stock options (in shares)		50					50
Exercise of stock options				11,000
Balance, beginning of year and end of year (in shares)	949	12,758	(362)
Stock-based compensation				18,000
Preferred stock dividends declared, net of waived penalties by shareholders				$ (106,000)
Net loss					$ (30,000)		$ (30,000)
Balance, beginning of year and end of year (in shares)	949	12,808	(362)

XML

Consolidated Statements of Cash Flows - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Operating Activities:
Net loss	$ (30,000)	$ (1,552,000)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	206,000	291,000
Stock-based compensation	18,000	96,000
Penalties and waived penalties on dividends	33,000	20,000
Gain on sale of investment	(56,000)
Changes in operating assets and liabilities:
Accounts receivable	(217,000)	(165,000)
Inventories	30,000
Prepaid expenses and other assets	(14,000)	(6,000)
Accounts payable and accrued expenses	291,000	60,000
Deferred revenue	11,000	9,000
Net cash provided by (used in) operating activities	272,000	(1,244,000)
Investing Activities:
Proceeds from sale of investments	56,000
Purchases of property and equipment	(20,000)	(47,000)
Net cash provided by (used by) investing activities	36,000	(47,000)
Financing Activities:
Proceeds from line of credit		364,000
Payments on line of credit		(364,000)
Borrowings on loan from officer	1,870,000	1,355,000
Payments on loans from officer	(1,890,000)
Principal payments on capital lease equipment	(139,000)	(202,000)
Proceeds from stock options exercised	11,000	100,000
Net cash provided by (used in) financing activities	(148,000)	1,253,000
Net decrease in cash and cash equivalents	160,000	(38,000)
Cash and cash equivalents at beginning of year	64,000	102,000
Cash and cash equivalents at end of year	224,000	64,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on leased assets	6,000	14,000
Income taxes paid
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES:
Preferred stock dividends accrued	139,000	139,000
Purchase of equipment through capital lease		$ 66,000

XML

Note 1 - Description of Business

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Nature of Operations [Text Block]

1.

Description of Business

We develop, market, and support a family of entity identification, data mining, regulated in

formation 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 distr

ibute 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, 2017,

we had cash and cash equivalents of approximatel

y

$224,000,

up from approximately

$64,000

as of

December 31, 2016.

We generated a net loss of

$30,000

for the year ended

December 31, 2017

compared to net loss of

$1,552,000

for the year ended

December 31, 2016.

The net loss in

2017

included other income of

928,000,

of which

$872,000

came from the sale of certain unused IP addresses and

$56,000

from the sale of an investment. As of

February 28, 2018,

in addition to cash and cash equivalents,

$835,000

of funding is available from a promissory note to borrow up to

$3.7

million from G. Ward Paxton, the Company’s Chief Executive Officer. We are obligated to make payments of accrued dividends on all our outstanding shares of preferred stock that will reduce our available cash resources. Based on projections of growth in revenue and net income in the coming quarters, and the borrowings available previously mentioned, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures through

March 31, 2019.

We expect to fund our operations through anticipated Company profits, borrowings from the Company’s CEO, and possibly additional investments of private equity and debt, which, if we are able to obtain, will have the effect of diluting our existing common stockholders, perhaps significantly. Any equity or debt financings, if available at all,

may

be on terms which are

not

favorable to us and, in the case of equity financings,

may

result in dilution to our stockholders. If our operations do

not

generate positive cash flow in the upcoming year, or if we are

not

able to obtain additional debt or equity financing on terms and conditions acceptable to us, if at all, we

may

be unable to implement our business plan, fund our liquidity needs or even continue our operations.

XML

Note 2 - Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2017

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 consolida

tion.

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 in diversified industries worldwide and periodically have rec

eivables from customers, primarily in North America, Europe and Asia. 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

T

rade 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,

2017

and

2016

.

Inventories

Inventories are stated at the

lower of cost or net realizable value. We value our inventories using average cost, which approximates actual cost on a

first

-in,

first

-out basis. Our management estimates the allowance required to state inventory at the lower of cost or net realizable value. There is a risk that we will forecast demand for our products and market conditions incorrectly and maintain excess inventories. Therefore, there can be

no

assurance that we will

not

maintain excess inventory and incur inventory lower of cost or net realizable value charges in the future. All inventory on hand at

December 

31,

2017

and

2016

is finished goods inventory.

Property and Equipment

Equipment and furniture and fixtures are stated at cost less accumulated depreciation and depreciated on a stra

ight-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

$206

,000

and

$291,000

for the years ended

December 

31,

2017

and

2016,

respectively.

Long-Lived Assets

We review long-lived assets, including property and equipment for impairment whe

never 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,

2017

and

2016,

there was

no

impairment of long-lived assets.

Foreign Currency

A

ll 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 Codif

ication (“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 recog

nized in the statements of operations for the years ended

2017

and

2016

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 y

ears ended

December 

31,

2017

and

2016,

respectively:

	201 7			2016
Weighted average grant date fair value	$	0.26		$	0.28
Weighted average assumptions used:
Expected dividend yield		0.00	%		0.00	%
Risk-free interest rate		1.77	%		1.64	%
Expected volatility		75.46	%		110.24	%
Expected life (in years)		5.00			5.00

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 historica

l 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 n

et 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,

2017

and

2016

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 at

December 

31,

2017

and

2016

totaled

2,941,861

and

3,509,241,

respectively.

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 upo n 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.

Research and Deve

lopment 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 comp

rised 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 amount

s 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 loans 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 re

turns in the United States federal jurisdiction. At

December 

31,

2017,

tax returns related to fiscal years ended

December 

31,

2014

through

December 

31,

2016

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,

2017

and

2016

.   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

Revenue Recognition

In

May

 

2014,

the FASB issued Accounting Standards Update

No.

 

2014

-

09,

Revenue from Contracts with Customers (ASU

2014

-

09

), which supersedes most current revenue recognition guidance under U.S. GAAP. The core principle of ASU

2014

-

09

is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU

2014

-

09

defines a

five

step process to achieve this core principle and, in doing so, more judgment and estimates

may

be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for us beginning

2018.

We will be using the following transition method:  a modified retrospective approach with the cumulative effect of initially adopting ASU

2014

-

09

recognized at the date of adoption (which includes additional footnote disclosures). We do

not

believe the adoption of this guidance will have a material impact on our financial statements.

In

February 2016,

the FASB issued Accounting Stand

ards Update

No.

2016

-

02,

Leases (Topic

842

)

(ASU

2016

-

02

), which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. This guidance will be effective for us in the

first

quarter of

2019

on a modified retrospective basis and early adoption is permitted. We do

not

believe the adoption of this guidance will have a material impact on our consolidated financial statements and related disclosures.

XML

Note 3 - Balance Sheet Detail (in Thousands)

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Supplemental Balance Sheet Disclosures [Text Block]

3.

Balance Sheet Detail

(in thousands)

Accrued Expenses

	December  31,
	201 7		201 6
Accrued payroll	$	131	$	134
Accrued vacation		284		279
Rent payable		139		13
Accrued interest, related party		348		184
Other		86		81
	$	988	$	691

XML

Note 4 - Commitments and Contingencies

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

4.

Commitments

and Contingencies

Leases

We lease office space for our corporate headquarters in Richardson, Texas under an operating lease, the base term of which expires in

April

 

2021.

We lease office space in San Diego and San Marcos, California for a portion of our security software research and development staff under

two

separate operating leases. The California leases normally renew for

one

to

two

year terms.

The Company

’s lease for the headquarters facility contains escalation provisions. The Company records rent expense on facility leases on a straight-line basis. Rent expense totaled approximately

$350,000

and

$415,000

for the years ended

December 

31,

2017

and

2016,

respectively.

Future minimum rental payments under these leases as of

December

 

31,

2017

are as follows (in thousands):

Year ending December  31,	Minimum Lease Payments
201 8	$	321
201 9		305
2020		311
20 21 and thereafter		104
	$	1,041

We have other capital lease obligations that consist primaril

y of computer equipment.

Future minimum payments under these leases as of

December

 

31,

2017

are as follows (in thousands):

Year  ending December 31,	Capital  Lease Obligations
201 8	$	45
201 9		17
20 20		—
20 21 and thereafter		—
		62
Less am ounts representing interest		(1	)
	$	61

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 co

nsolidated 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,

2017

.

XML

Note 5 - Employee Benefit Plan

12 Months Ended

Dec. 31, 2017

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, lim

ited 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

$3

0,000

and

$32,000,

respectively, for the years ended

December 

31,

2017

and

2016

.

XML

Note 6 - Line of Credit

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Debt Disclosure [Text Block]

6.

Line of Credit

On

March 29, 2006,

we entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”) to establish a

$1.0

million line of credit (the

“2006

Credit Line”).

The Loan was renewed annually until

2016.

On

June 21, 2016,

the Loan Agreement terminated.

Due to increasing fees associated with the Line of Credit, we chose

not

to renew the loan agreement on the termination date. We replaced the line with an increased commitment under the CEO Note (Note

7

below) as needed.

XML

Note 7 - Borrowings From Officer

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

7.

Borrowings from Officer

On

February

9,

2017,

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

$3,400,000

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

may

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

$3,400,000

at any given time through

March 2019.

On

March 2, 2017,

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

$3,700,000

at any given time through

March 2019.

On

February 8, 2018,

the Company renewed the CEO Note on the same terms, with the Company being able to borrow, repay and reborrow on the CEO Note as needed up to an outstanding principal balance due of

$3,700,000

at any given time through

March 2020.

Amounts borrowed under the CEO Note officer accrue interest at a floating rate per annum equal to Silicon Valley Bank

’s (“SVB”) prime rate plus

1%

(

5.5%

at

December 31, 2017).

All outstanding borrowings and accrued but unpaid interest is due on

March 31, 2020.

As of

December 31, 2017,

the borrowings outstanding totaled

$2,865,000

and accrued interest totaled

$348,000.

XML

Note 8 - Income Taxes

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Income Tax Disclosure [Text Block]

8.

Income Taxes

Def

erred 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,

2017

and

2016

are as follows (in thousands):

	December  31
	201 7			201 6
Net operating loss carryforwards	$	21,175		$	32,644
Net operating loss carryforwards of foreign subsidiaries		374			374
Book over tax depreciation		(14	)		(48	)
Stock-based compensation expense		25			38
Other		94			124
Deferred tax assets		21,654			33,132
Valuation allowance for deferred tax assets		(21,654	)		(33,132	)
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 depe

ndent 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

2017

and

2016

.

The differences between the provision for

income taxes and income taxes computed using the federal statutory rate for the years ended

December 

31,

2017

and

2016

are as follows (in thousands):

	201 7			201 6
Reconciliation of income tax benefit to statutory rate:
Income benefit at sta tutory rate	$	(10	)	$	(528	)
State income taxes (benefit), net of federal income tax benefit		1			(40	)
RTP (ISO expense)		—			38
Permanent differences		11			28
Change in valuation allowance		(11,478	)		890
Remeasurment of Deferreds		11,476			—
Change in state tax rate		—			(345	)
Other		—			(43	)
	$	—		$	—

At

December

 

31,

2017,

we had federal net operating loss carryforwards of approximately

$87

.9

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.

We had approximately

$6

million of state net operating loss carryforwards beginning to expire in

2017.

XML

Note 9 - Stock Options

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

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

9.

Stock Options

At

December

 

31,

2017,

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,

2017,

818,835

had been exercised and options to purchase a total of

1,652,500

 shares of common stock were outstanding. A total of

3,892,000

options had been granted under the

2005

Plan, of which

1,420,665

have been cancelled. The

2005

Plan expired on

December 

31,

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 Auto

matic 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,

2017,

no

options had been exercised and options to purchase a total of

93,000

shares of common stock were outstanding. A total of

96,000

options had been granted under the

2015

Plan,

3,000

shares have been cancelled, and options for

507,000

 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

3,319,943

shares at

December 

31,

2017

as follows, in thousands:

(In  thousands)	Common  Shares Reserved for Future Issuance
Pr eferred Stock		1,067
2015 Plan		600
2005 Plan		1,653
Total		3,320

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, nu

mber 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,

2017

and

2016

is as follows:

	2017					2016
	Number  of Options (in thousands)			Weighted Average Exercise Price		Number  of Options (in thousands)			Weighted Average Exercise Price
Outstanding at beginning of year		2,254		$	0.64		2,598		$	0.63
Granted at price = market value		24			0.42		69			0.36
Granted at price > market value		—			—		—			—
Exercised		(50	)		0.22		(136	)		0.73
Forfeited		—			—		(18	)		1.80
Expired		(482	)		0.55		(259	)		0.35
Outstanding at end of year		1,746		$	0.68		2,254		$	0.64
Options exercisable at end of year		1,662		$	0.68		2,079		$	0.59

Stock Options Outstanding and Exercisable

Information related to stock options outstanding at

December

 

31,

2017,

is summarized below:

			Options  Outstanding						Options  Exercisable
Range  of Exercise Prices			Outstanding  at 12/31/17 (in thousands)		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Exercisable  at 12/31/17 (in thousands)		Weighted Average Exercise Price
$  0.20	-	$0.50		985		2.52	$	0.34		914	$	0.34
$  0.51	-	$1.00		481		2.98	$	0.65		481	$	0.65
$  1.01	-	$2.73		280		4.94	$	1.92		267	$	1.90
				1,746		3.03	$	0.68		1,662	$	0.68

Summarized information about outstanding stock options as of

December

 

31,

2017,

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, 2017
Number of outs tanding options (in thousands)		1,738		1,662
Weighted average remaining contractual life		3.01		2.75
Weighted average exercise price per share	$	0.68	$	0.68
Intrinsic value (in thousands)	$	1,178	$	1,123

* Includes ef

fects of expected forfeitures

As of

December

 

31,

2017,

the total unrecognized compensation cost related to non-vested options

not

yet recognized in the statement of operations totaled approximately

$12

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

1.11

years.

XML

Note 10 - Preferred Stock

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Preferred Stock [Text Block]

10.

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 CEO and

60,000

shares purchased by a director of the Company.

The

5%

dividends related to the

5%

preferred stock are paid s

emi-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 stock holders 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,

2017,

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 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 stock holders 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 stock holders 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,

2017

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 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 stock holders 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,

2017

there were

289,377

shares of Series 

3

Preferred Stock outstanding, representing

289,377

shares of common stock upon conversion.

Dividends Payable

During the fiscal year ended

December

 

31,

2017,

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,

2017

and

2016,

we had

$447

,000

and

$303

,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.

If we continue to be unable to pay dividends on our preferred stock, we will be required to accrue an additional late fee penalty of

18%

per annum on the unpaid dividends for the Series

2

Preferred Stock and Series

3

Preferred Stock. Our CEO, CFO and

one

outside board member who are invested in Series

2

and Series

3

Preferred Stock have waived any possible late fee penalties.

XML

Note 11 - Concentrations

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Concentration Risk Disclosure [Text Block]

11.

  Concentrations

Our operations are conc

entrated in

one

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

81.6%

of total revenues for

2017

and

69.3%

of total revenues for

2016.

During

2017

approximately

58.8%

of total revenues were attributable to

three

government customers. During

2016

approximately

49.7%

of total revenues are attributable to

three

government customers.

No

individual commercial customer in

2017

or

2016

exceeded

30%

of total revenues for the year.

Five

individual commercial customers at

December 31, 2017

and

four

at

December 31, 2016

exceeded

10%

of total accounts receivable balance at respective year ends

. 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 12 - Other Income

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Other Nonoperating Income and Expense [Text Block]

12.

  Other Income

On

July 7, 2017,

the Company entered into a sale of certain IP addresses that were

not

currently being used in the Company's business operations and were

not

required for the Company's future business plans. The net proceeds from the sale of these intellectual property assets were in the amount of

$872,000

which the Company received on

August 9, 2017.

In addition,

$56,000

was received on

August 3, 2017

from the sale of an investment. The receipt of these transactions had an immediate positive impact on the Company's liquidity position.

XML

Note 13 - Subsequent Events

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Subsequent Events [Text Block]

1

3

.  Subsequent Events

On

February

 

8,

2018,

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

$3,700,000

from G. Ward Paxton, the Company’s Chief Executive Officer. Under the terms of the note, the Company

may

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

.

XML

Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2017

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 consolida

tion.

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 in diversified industries worldwide and periodically have rec

eivables from customers, primarily in North America, Europe and Asia. 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.

Trade and Other Accounts Receivable, Policy [Policy Text Block]

Accounts Receivable and Allowance for Doubtful Accounts

T

rade 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,

2017

and

2016

.

Inventory, Policy [Policy Text Block]

Inventories

Inventories are stated at the

lower of cost or net realizable value. We value our inventories using average cost, which approximates actual cost on a

first

-in,

first

-out basis. Our management estimates the allowance required to state inventory at the lower of cost or net realizable value. There is a risk that we will forecast demand for our products and market conditions incorrectly and maintain excess inventories. Therefore, there can be

no

assurance that we will

not

maintain excess inventory and incur inventory lower of cost or net realizable value charges in the future. All inventory on hand at

December 

31,

2017

and

2016

is finished goods inventory.

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 stra

ight-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

$206

,000

and

$291,000

for the years ended

December 

31,

2017

and

2016,

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 whe

never 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,

2017

and

2016,

there was

no

impairment of long-lived assets.

Foreign Currency Transactions and Translations Policy [Policy Text Block]

Foreign Currency

A

ll 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 Compensation, Option and Incentive Plans Policy [Policy Text Block]

Accounting for Stock Options

We account for stock options using the guidance in Financial Accounting Standards Board Accounting Standards Codif

ication (“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 recog

nized in the statements of operations for the years ended

2017

and

2016

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 y

ears ended

December 

31,

2017

and

2016,

respectively:

	201 7			2016
Weighted average grant date fair value	$	0.26		$	0.28
Weighted average assumptions used:
Expected dividend yield		0.00	%		0.00	%
Risk-free interest rate		1.77	%		1.64	%
Expected volatility		75.46	%		110.24	%
Expected life (in years)		5.00			5.00

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 historica

l 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 n

et 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,

2017

and

2016

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 at

December 

31,

2017

and

2016

totaled

2,941,861

and

3,509,241,

respectively.

Revenue Recognition, Policy [Policy Text Block]

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 upo n 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.

Research and Development Expense, Policy [Policy Text Block]

Research and Deve

lopment 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 comp

rised 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 amount

s 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 loans 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 re

turns in the United States federal jurisdiction. At

December 

31,

2017,

tax returns related to fiscal years ended

December 

31,

2014

through

December 

31,

2016

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,

2017

and

2016

.   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

Revenue Recognition

In

May

 

2014,

the FASB issued Accounting Standards Update

No.

 

2014

-

09,

Revenue from Contracts with Customers (ASU

2014

-

09

), which supersedes most current revenue recognition guidance under U.S. GAAP. The core principle of ASU

2014

-

09

is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU

2014

-

09

defines a

five

step process to achieve this core principle and, in doing so, more judgment and estimates

may

be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for us beginning

2018.

We will be using the following transition method:  a modified retrospective approach with the cumulative effect of initially adopting ASU

2014

-

09

recognized at the date of adoption (which includes additional footnote disclosures). We do

not

believe the adoption of this guidance will have a material impact on our financial statements.

In

February 2016,

the FASB issued Accounting Stand

ards Update

No.

2016

-

02,

Leases (Topic

842

)

(ASU

2016

-

02

), which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. This guidance will be effective for us in the

first

quarter of

2019

on a modified retrospective basis and early adoption is permitted. We do

not

believe the adoption of this guidance will have a material impact on our consolidated financial statements and related disclosures.

XML

Note 2 - Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

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

	201 7			2016
Weighted average grant date fair value	$	0.26		$	0.28
Weighted average assumptions used:
Expected dividend yield		0.00	%		0.00	%
Risk-free interest rate		1.77	%		1.64	%
Expected volatility		75.46	%		110.24	%
Expected life (in years)		5.00			5.00

XML

Note 3 - Balance Sheet Detail (in Thousands) (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Accrued Liabilities [Table Text Block]

	December  31,
	201 7		201 6
Accrued payroll	$	131	$	134
Accrued vacation		284		279
Rent payable		139		13
Accrued interest, related party		348		184
Other		86		81
	$	988	$	691

XML

Note 4 - Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block]

Year ending December  31,	Minimum Lease Payments
201 8	$	321
201 9		305
2020		311
20 21 and thereafter		104
	$	1,041

Schedule of Future Minimum Lease Payments for Capital Leases [Table Text Block]

Year  ending December 31,	Capital  Lease Obligations
201 8	$	45
201 9		17
20 20		—
20 21 and thereafter		—
		62
Less am ounts representing interest		(1	)
	$	61

XML

Note 8 - Income Taxes (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

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

	December  31
	201 7			201 6
Net operating loss carryforwards	$	21,175		$	32,644
Net operating loss carryforwards of foreign subsidiaries		374			374
Book over tax depreciation		(14	)		(48	)
Stock-based compensation expense		25			38
Other		94			124
Deferred tax assets		21,654			33,132
Valuation allowance for deferred tax assets		(21,654	)		(33,132	)
Deferred tax assets, net of allowance	$	—		$	—

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

	201 7			201 6
Reconciliation of income tax benefit to statutory rate:
Income benefit at sta tutory rate	$	(10	)	$	(528	)
State income taxes (benefit), net of federal income tax benefit		1			(40	)
RTP (ISO expense)		—			38
Permanent differences		11			28
Change in valuation allowance		(11,478	)		890
Remeasurment of Deferreds		11,476			—
Change in state tax rate		—			(345	)
Other		—			(43	)
	$	—		$	—

XML

Note 9 - Stock Options (Tables)

12 Months Ended

Dec. 31, 2017

Notes Tables

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

(In  thousands)	Common  Shares Reserved for Future Issuance
Pr eferred Stock		1,067
2015 Plan		600
2005 Plan		1,653
Total		3,320

Share-based Compensation, Stock Options, Activity [Table Text Block]

	2017					2016
	Number  of Options (in thousands)			Weighted Average Exercise Price		Number  of Options (in thousands)			Weighted Average Exercise Price
Outstanding at beginning of year		2,254		$	0.64		2,598		$	0.63
Granted at price = market value		24			0.42		69			0.36
Granted at price > market value		—			—		—			—
Exercised		(50	)		0.22		(136	)		0.73
Forfeited		—			—		(18	)		1.80
Expired		(482	)		0.55		(259	)		0.35
Outstanding at end of year		1,746		$	0.68		2,254		$	0.64
Options exercisable at end of year		1,662		$	0.68		2,079		$	0.59

Schedule of Share-based Compensation, Shares Authorized under Stock Option Plans, by Exercise Price Range [Table Text Block]

			Options  Outstanding						Options  Exercisable
Range  of Exercise Prices			Outstanding  at 12/31/17 (in thousands)		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Exercisable  at 12/31/17 (in thousands)		Weighted Average Exercise Price
$  0.20	-	$0.50		985		2.52	$	0.34		914	$	0.34
$  0.51	-	$1.00		481		2.98	$	0.65		481	$	0.65
$  1.01	-	$2.73		280		4.94	$	1.92		267	$	1.90
				1,746		3.03	$	0.68		1,662	$	0.68

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, 2017
Number of outs tanding options (in thousands)		1,738		1,662
Weighted average remaining contractual life		3.01		2.75
Weighted average exercise price per share	$	0.68	$	0.68
Intrinsic value (in thousands)	$	1,178	$	1,123

XML

Note 1 - Description of Business (Details Textual) - USD ($)			12 Months Ended
	Aug. 09, 2017	Aug. 03, 2017	Dec. 31, 2017	Dec. 31, 2016	Feb. 28, 2018	Feb. 08, 2018	Mar. 02, 2017	Feb. 09, 2017	Dec. 31, 2015
Cash and Cash Equivalents, at Carrying Value			$ 224,000	$ 64,000					$ 102,000
Net Income (Loss) Attributable to Parent			(30,000)	(1,552,000)
Other Nonoperating Income			928,000
Proceeds from Sale of Short-term Investments		$ 56,000	56,000
Revolving Credit Facility [Member] | Chief Executive Officer [Member]
Line of Credit Facility, Maximum Borrowing Capacity							$ 3,700,000	$ 3,400,000
Revolving Credit Facility [Member] | Chief Executive Officer [Member] | Subsequent Event [Member]
Line of Credit Facility, Current Borrowing Capacity					$ 835,000
Line of Credit Facility, Maximum Borrowing Capacity					$ 3,700,000	$ 3,700,000
IP Addresses [Member]
Proceeds from Sale of Intangible Assets	$ 872,000		$ 872,000

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Note 2 - Summary of Significant Accounting Policies (Details Textual)	12 Months Ended
	Dec. 31, 2017 USD ($) shares	Dec. 31, 2016 USD ($) shares
Number of Major United States Financial Institutions	2
Allowance for Doubtful Accounts Receivable	$ 0	$ 0
Depreciation, Depletion and Amortization	206,000	291,000
Impairment of Long-Lived Assets Held-for-use	$ 0	$ 0
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount | shares	2,941,861	3,509,241
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	$ 0	$ 0
Income Tax Examination, Penalties and Interest Accrued	$ 0	$ 0
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

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Note 2 - Summary of Significant Accounting Policies - Valuation Assumptions (Details) - $ / shares	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Weighted average grant date fair value (in dollars per share)	$ 0.26	$ 0.28
Expected dividend yield	0.00%	0.00%
Risk-free interest rate	1.77%	1.64%
Expected volatility	75.46%	110.24%
Expected life (in years) (Year)	5 years	5 years

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Note 3 - Balance Sheet Detail (in Thousands) - Accrued Expenses (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Accrued payroll	$ 131	$ 134
Accrued vacation	284	279
Rent payable	139	13
Accrued interest, related party	348	184
Other	86	81
Total accrued expenses	$ 988	$ 691

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Note 4 - Commitments and Contingencies (Details Textual)	12 Months Ended
	Dec. 31, 2017 USD ($)	Dec. 31, 2016 USD ($)
Number of Operating Leases	2
Operating Leases, Rent Expense, Net	$ 350,000	$ 415,000
Minimum [Member]
Lessor, Operating Lease, Renewal Term	1 year
Maximum [Member]
Lessor, Operating Lease, Renewal Term	2 years

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Note 4 - Commitments and Contingencies - Future Minimum Payments for Operating Leases (Details) $ in Thousands	Dec. 31, 2017 USD ($)
2018	$ 321
2019	305
2020	311
2021 and thereafter	104
Future minimum operating lease obligations	$ 1,041

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Note 4 - Commitments and Contingencies - Future Minimum Payments for Capital Leases (Details) $ in Thousands	Dec. 31, 2017 USD ($)
2018	$ 45
2019	17
2020
2021 and thereafter
Capital lease obligations, total	62
Less amounts representing interest	(1)
Future minimum capital lease obligations	$ 61

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Note 5 - Employee Benefit Plan (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
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	$ 30,000	$ 32,000
Minimum [Member]
Define Contribution Plan, Percentage of Contribution by Employees	1.00%
Maximum [Member]
Define Contribution Plan, Percentage of Contribution by Employees	25.00%

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Note 6 - Line of Credit (Details Textual) $ in Millions	Mar. 29, 2006 USD ($)
Credit Line, 2006 [Member] | Silicon Valley Bank [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 1

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Note 7 - Borrowings From Officer (Details Textual) - USD ($)	12 Months Ended
	Dec. 31, 2017	Feb. 28, 2018	Feb. 08, 2018	Mar. 02, 2017	Feb. 09, 2017	Dec. 31, 2016
Interest Payable, Current	$ 348,000					$ 184,000
Revolving Credit Facility [Member] | Chief Executive Officer [Member]
Line of Credit Facility, Maximum Borrowing Capacity				$ 3,700,000	$ 3,400,000
Line of Credit Facility, Interest Rate at Period End	5.50%
Long-term Line of Credit	$ 2,865,000
Interest Payable, Current	$ 348,000
Revolving Credit Facility [Member] | Chief Executive Officer [Member] | Prime Rate [Member]
Debt Instrument, Basis Spread on Variable Rate	1.00%
Revolving Credit Facility [Member] | Chief Executive Officer [Member] | Subsequent Event [Member]
Line of Credit Facility, Maximum Borrowing Capacity		$ 3,700,000	$ 3,700,000

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Note 8 - Income Taxes (Details Textual) $ in Millions	Dec. 31, 2017 USD ($)
Domestic Tax Authority [Member]
Operating Loss Carryforwards	$ 87.9
State and Local Jurisdiction [Member]
Operating Loss Carryforwards	$ 6.0

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Note 8 - Income Taxes - Deferred Tax Assets and Liabilities (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Net operating loss carryforwards	$ 21,175	$ 32,644
Net operating loss carryforwards of foreign subsidiaries	374	374
Book over tax depreciation	(14)	(48)
Stock-based compensation expense	25	38
Other	94	124
Deferred tax assets	21,654	33,132
Valuation allowance for deferred tax assets	(21,654)	(33,132)
Deferred tax assets, net of allowance

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Note 8 - Income Taxes - Income Tax Reconciliation (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Reconciliation of income tax benefit to statutory rate:
Income benefit at statutory rate	$ (10)	$ (528)
State income taxes (benefit), net of federal income tax benefit	1	(40)
RTP (ISO expense)		38
Permanent differences	11	28
Change in valuation allowance	(11,478)	890
Remeasurment of Deferreds	11,476
Change in state tax rate		(345)
Other		$ (43)

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Note 9 - 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, 2017 USD ($) shares	Dec. 31, 2016 shares	Dec. 31, 2015 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						1,746,000	2,254,000	2,598,000
Common Stock, Capital Shares Reserved for Future Issuance						3,319,943
Share-based Compensation Arrangement by Share-based Payment Award, Award Exercisable Period 1						1 year
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
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Stock Options | $						$ 12
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition						1 year 40 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						818,835
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number						1,652,500
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						1,420,665
Common Stock, Capital Shares Reserved for Future Issuance						1,653,000
The 2015 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized						507,000			600,000
Aggregate Stock Options Exercised for the Plan						0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number						93,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants Aggregate						96,000
Share-based Compensation Arrangement by Share-based Payment Award, Options Forfeitures Aggregate						3,000
Number of Equity Incentive Programs						3
Stock Issued During Period, Shares, Share-based Compensation, Gross						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

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Note 9 - Stock Options - Common Shares Reserved for Future Issuance (Details)	Dec. 31, 2017 shares
Common shares reserved for future issuance (in shares)	3,319,943
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)	1,653,000
Preferred Stock [Member]
Common shares reserved for future issuance (in shares)	1,067,000

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Note 9 - Stock Options - Number & Weighted Average Exercise Price (Details) - $ / shares shares in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Outstanding at beginning of year (in shares)	2,254	2,598
Outstanding at beginning of year (in dollars per share)	$ 0.64	$ 0.63
Granted at price = market value (in shares)	24	69
Granted at price = market value (in dollars per share)	$ 0.42	$ 0.36
Granted at price > market value (in shares)
Granted at price > market value (in dollars per share)
Exercised (in shares)	(50)	(136)
Exercised (in dollars per share)	$ 0.22	$ 0.73
Forfeited (in shares)		(18)
Forfeited (in dollars per share)		$ 1.80
Expired (in shares)	(482)	(259)
Expired (in dollars per share)	$ 0.55	$ 0.35
Outstanding at end of year (in shares)	1,746	2,254
Outstanding at end of year (in dollars per share)	$ 0.68	$ 0.64
Options exercisable at end of year (in shares)	1,662	2,079
Options exercisable at end of year (in dollars per share)	$ 0.68	$ 0.59

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Note 9 - Stock Options - Exercise Price (Details) shares in Thousands	12 Months Ended
	Dec. 31, 2017 $ / shares shares
Outstanding at the end of the period (in shares) | shares	1,746
Options outstanding weighted average remaining contractual life (Year)	3 years 10 days
Options outstanding weighted average exercise price (in dollars per share)	$ 0.68
Options exercisable (in shares) | shares	1,662
Options exercisable weighted average exercise price (in dollars per share)	$ 0.68
Range 1 [Member]
Exercise price, low end of range (in dollars per share)	0.20
Exercise price, high end of range (in dollars per share)	$ 0.50
Outstanding at the end of the period (in shares) | shares	985
Options outstanding weighted average remaining contractual life (Year)	2 years 189 days
Options outstanding weighted average exercise price (in dollars per share)	$ 0.34
Options exercisable (in shares) | shares	914
Options exercisable weighted average exercise price (in dollars per share)	$ 0.34
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	481
Options outstanding weighted average remaining contractual life (Year)	2 years 357 days
Options outstanding weighted average exercise price (in dollars per share)	$ 0.65
Options exercisable (in shares) | shares	481
Options exercisable weighted average exercise price (in dollars per share)	$ 0.65
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)	$ 2.73
Outstanding at the end of the period (in shares) | shares	280
Options outstanding weighted average remaining contractual life (Year)	4 years 343 days
Options outstanding weighted average exercise price (in dollars per share)	$ 1.92
Options exercisable (in shares) | shares	267
Options exercisable weighted average exercise price (in dollars per share)	$ 1.90

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Note 9 - Stock Options - Outstanding (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands		12 Months Ended
		Dec. 31, 2017	Dec. 31, 2016
Number of outstanding options (in thousands) (in shares)	[1]	1,738
Number of outstanding options (in thousands) (in shares)		1,662	2,079
Weighted average remaining contractual life (Year)	[1]	3 years 3 days
Weighted average remaining contractual life (Year)		2 years 273 days
Weighted average exercise price per share (in dollars per share)	[1]	$ 0.68
Weighted average exercise price per share (in dollars per share)		$ 0.68	$ 0.59
Intrinsic value (in thousands)	[1]	$ 1,178
Intrinsic value (in thousands)		$ 1,123

[1] Includes effects of expected forfeitures

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Note 10 - 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, 2017 USD ($) shares	Dec. 31, 2016 USD ($)
Preferred Stock Dividends, Income Statement Impact | $				$ 139,000	$ 139,000
Dividends Payable, Current | $				447,000	303,000
Other Current Liabilities [Member]
Dividends Payable, Current | $				$ 447,000	$ 303,000
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				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				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				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%

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Note 11 - Concentrations (Details Textual)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Concentration Risk, Threshold Percentage	30.00%
Customer Concentration Risk [Member] | Sales Revenue, Net [Member] | U.S. Government [Member]
Concentration Risk, Percentage	81.60%	69.30%
Customer Concentration Risk [Member] | Sales Revenue, Net [Member] | Government Customers [Member]
Concentration Risk, Percentage	58.80%	49.70%
Number of Major Customers	3	3
Customer Concentration Risk [Member] | Sales Revenue, Net [Member] | Commercial Customers [Member]
Number of Major Customers	0	0
Customer Concentration Risk [Member] | Accounts Receivable [Member] | Commercial Customers [Member]
Number of Major Customers	5	4

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Note 12 - Other Income (Details Textual) - USD ($)			12 Months Ended
	Aug. 09, 2017	Aug. 03, 2017	Dec. 31, 2017	Dec. 31, 2016
Proceeds from Sale of Short-term Investments		$ 56,000	$ 56,000
IP Addresses [Member]
Proceeds from Sale of Intangible Assets	$ 872,000		$ 872,000

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Note 13 - Subsequent Events (Details Textual) - Revolving Credit Facility [Member] - Chief Executive Officer [Member] - USD ($)	Feb. 28, 2018	Feb. 08, 2018	Mar. 02, 2017	Feb. 09, 2017
Line of Credit Facility, Maximum Borrowing Capacity			$ 3,700,000	$ 3,400,000
Subsequent Event [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 3,700,000	$ 3,700,000