10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to
Commission File Number 0-20191

INTRUSION INC.

(Exact name of registrant as specified in its charter)

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

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

(Address of principal executive offices)

(Zip Code)

(972) 234-6400

(Registrant’s telephone number, including area code)

Not Applicable

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

* * * * * * * * * *

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

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

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

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

The number of shares outstanding of the Registrant’s Common Stock, $0.01 par value, on August 1, 2019 was 13,529,236.

1

INTRUSION INC.

INDEX

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	3
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018	4
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the six months ended June 30, 2019 and 2018	5
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018	6
Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 4. Controls and Procedures	14
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	15
Item 1A. Risk Factors	15
Item 6. Exhibits	17
Signature Page	18

2

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

INTRUSION INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

	June 30, 2019			December 31, 2018
ASSETS
Current Assets:
Cash and cash equivalents	$	1,477		$	1,652
Accounts receivable		2,705			1,967
Prepaid expenses		325			91
Total current assets		4,507			3,710
Noncurrent Assets:
Property and equipment, net		314			200
Finance leases, right-of-use assets, net		89			121
Operating lease, right-of-use asset, net		1,467			—
Other assets		38			38
Total noncurrent assets		1,908			359
TOTAL ASSETS	$	6,415		$	4,069
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued expenses	$	1,568		$	1,596
Dividends payable		20			594
Finance leases liability, current portion		48			58
Operating lease liability, current portion		271			—
Deferred revenue		1,183			1,004
Total current liabilities		3,090			3,252
Noncurrent Liabilities:
Loan payable to officer		—			1,815
Finance leases liability, noncurrent portion		43			64
Operating lease liability, noncurrent portion		1,460			—
Total noncurrent liabilities		1,503			1,879
Commitments and contingencies
Stockholders’ equity (deficit):
Preferred stock, $0.01 par value: Authorized shares – 5,000
Series 1 shares issued and outstanding — 200 Liquidation preference of $1,012 in 2019 and $1,213 in 2018		707			707
Series 2 shares issued and outstanding — 460 Liquidation preference of $1,155 in 2019 and $1,385 in 2018		724			724
Series 3 shares issued and outstanding — 289 Liquidation preference of $633 in 2019 and $760 in 2018		412			412
Common stock, $0.01 par value:
Authorized shares — 80,000
Issued shares — 13,539 in 2019 and 13,259 in 2018 Outstanding shares — 13,529 in 2019 and 13,249 in 2018		135			133
Common stock held in treasury, at cost – 10 shares		(362	)		(362	)
Additional paid-in capital		56,785			56,609
Accumulated deficit		(56,536	)		(59,242	)
Accumulated other comprehensive loss		(43	)		(43	)
Total stockholders’ equity (deficit)		1,822			(1,062	)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	6,415		$	4,069

See accompanying notes.

3

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

	Three Months Ended						Six Months Ended
	June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Revenue	$	4,020		$	2,369		$	7,211		$	4,632
Cost of revenue		1,590			926			2,874			1,778
Gross profit		2,430			1,443			4,337			2,854
Operating expenses:
Sales and marketing		46			431			458			845
Research and development		296			200			477			503
General and administrative		321			290			652			585
Operating income		1,767			522			2,750			921
Interest expense, net		(9	)		(48	)		(44	)		(101	)
Net income	$	1,758		$	474		$	2,706		$	820
Preferred stock dividends accrued		(35	)		(35	)		(69	)		(69	)
Net income attributable to common stockholders	$	1,723		$	439		$	2,637		$	751
Net income per share attributable to common stockholders:
Basic	$	0.13		$	0.03		$	0.20		$	0.06
Diluted	$	0.11		$	0.03		$	0.17		$	0.05
Weighted average common shares outstanding:
Basic		13,523			13,017			13,466			12,982
Diluted		15,371			14,791			15,314			14,756

See accompanying notes.

4

INTRUSION INC. AND SUBSIDIARIES

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

(In thousands)

	Six Months Ended
	June 30, 2019			June 30, 2018
NUMBER OF PREFERRED SHARES—ISSUED AND OUTSTANDING
Balance, beginning of year and end of six month period		949			949
PREFERRED STOCK
Balance, beginning of year and end of six month period	$	1,843		$	1,843
NUMBER OF COMMON SHARES—ISSUED
Balance, beginning of year		13,259			12,808
Exercise of stock options		280			219
Balance, end of six month period		13,539			13,027
COMMON STOCK
Balance, beginning of year	$	133		$	128
Exercise of stock options		2			2
Balance, end of six month period	$	135		$	130
TREASURY SHARES
Balance, beginning of year and end of six month period	$	(362	)	$	(362	)
ADDITIONAL PAID-IN-CAPITAL
Balance, beginning of year	$	56,609		$	56,518
Stock-based compensation		14			11
Exercise of stock options		224			69
Preferred stock dividends declared, net of waived penalties by shareholders		(62	)		(47	)
Balance, end of six month period	$	56,785		$	56,551
ACCUMULATED DEFICIT
Balance, beginning of year	$	(59,242	)	$	(61,529	)
Net income		2,706			820
Balance, end of six month period	$	(56,536	)	$	(60,709	)
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of year and end of six month period	$	(43	)	$	(107	)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)	$	1,822		$	(2,654	)

See accompanying notes.

5

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

	Six Months Ended
	June 30, 2019			June 30, 2018
Operating Activities:
Net income	$	2,706		$	820
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		86			65
Stock-based compensation		14			11
Penalties on dividends		6			22
Changes in operating assets and liabilities:
Accounts receivable		(738	)		(106	)
Inventories		—			15
Prepaid expenses and other assets		(234	)		(329	)
Operating lease, right-of-use asset		304			—
Accounts payable and accrued expenses		(66	)		201
Deferred revenue		179			541
Net cash provided by operating activities		2,257			1,240
Investing Activities:
Purchases of property and equipment		(168	)		(75	)
Financing Activities:
Borrowings on loan from officer		—			150
Payments on loan from officer		(1,815	)		(1,200	)
Proceeds from stock options exercised		226			71
Payments of dividends		(644	)		—
Reduction of finance lease liability		(31	)		(34	)
Net cash used in financing activities		(2,264	)		(1,013	)
Net increase (decrease) in cash and cash equivalents		(175	)		152
Cash and cash equivalents at beginning of period		1,652			224
Cash and cash equivalents at end of period	$	1,477		$	376
SUPPLEMENTAL DISCLOSURE OF NON CASH OPERATING AND FINANCING ACTIVITIES:
Preferred stock dividends accrued	$	68		$	69
Purchase of leased equipment per right-of-use finance lease	$	—		$	89
Initial recognition of operating lease, right-of-use asset	$	1,771		$	—

See accompanying notes.

6

INTRUSION INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

We develop, market and support a family of entity identification, high speed data mining and cybersecurity solutions. Our products help detect, report and mitigate cybercrimes and advanced persistent threats.

Our product families include:

● TraceCop for entity identification, cybercrime detection and disclosure, and;

● Savant for high speed data mining. analytics, detection, reporting and mitigation of cybersecurity threats.

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

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

● end-users, and

● value-added resellers.

Our end-user customers include:

● U.S. federal government entities,

● state and local government entities,

● large and diverse conglomerates,

● manufacturing entities, and

● other customers.

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

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Item 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The December 31, 2018 balance sheet was derived from audited financial statements, but does not include all the disclosures required by accounting principles generally accepted in the United States. However, we believe that the disclosures are adequate to make the information presented not misleading. In our opinion, all the adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. The results of operations for the three and six month periods ended June 30, 2019 are not necessarily indicative of the results that may be achieved for the full fiscal year or for any future period. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2018, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 28, 2019.

The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different from the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued expenses, and dividends payable approximate their carrying amounts due to the relatively short maturity of these instruments. Loans payable to officer are with a related party and as a result do not bear market rates of interest.  Management believes based on its current financial position that it could not obtain comparable amounts of third party financing, and as such cannot estimate the fair value of the loans payable to officer. None of these instruments are held for trading purposes.

On January 1, 2018 we adopted ASU No. 2014-09, Revenue from Contracts with Customers, as amended, using the modified retrospective approach. At the date of adoption there was no impact on the balance sheet or statement of operations. ASU No. 2014-09 did not have a material effect on the Company’s financial position, results of operations or cash flows for the three and six month periods ended June 30, 2019 and 2018.

7

On January 1, 2019 we adopted ASU No. 2016-02, Leases (topic 842). At the date of adoption there was no impact on the statement of operations, while the balance sheet reflects recording both assets and liabilities applicable to the operating right-of-use asset lease identified. ASU No. 2016-02 did not have a material effect on the Company’s results of operations or cash flows for the three and six month periods ended June 30, 2019.

3. Loan Payable to Officer

On February 8, 2018, the Company entered into an unsecured revolving promissory note to borrow up to $3,700,000 from G. Ward Paxton, the Company’s 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 $3,700,000 at any given time through March 2020.

On February 7, 2019, the Company amended the unsecured revolving promissory note to borrow up to $2,700,000 from G. Ward Paxton, the Company’s 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 $2,700,000 at any given time through March 2021.

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%. All outstanding borrowings and accrued but unpaid interest is due on March 31, 2021. As of June 30, 2019, there were no borrowings outstanding and accrued interest totaled $513,000. All past due interest was paid in full on July 16, 2019.

4. Accounting for Stock-Based Compensation

During the three month periods ended June 30, 2019 and 2018, the Company granted 24,000 and 24,000, respectively, of stock options to employees or directors. The Company recognized $10,000 and $6,000, respectively, of stock-based compensation expense for the three month periods ended June 30, 2019 and 2018. During the six month periods ended June 30, 2019 and 2018, the Company granted 24,000 and 24,000, respectively, of stock options to employees and directors. The Company recognized $14,000 and $11,000, respectively, of stock-based compensation expense for the six month periods ended June 30, 2019 and 2018.

During the three month periods ended June 30, 2019 and 2018, 14,000 and 5,000 were exercised under the 2005 Plan, respectively. During the six month periods ended June 30, 2019 and 2018, 280,500 and 219,000 were exercised under the 2005 Plan, respectively.

Valuation Assumptions

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

	For Three Months Ended June 30, 2019			For Three Months Ended June 30, 2018			For Six Months Ended June 30, 2019			For Six Months Ended June 30, 2018
Weighted average grant date fair value	$	3.61		$	0.99		$	3.61		$	0.99
Weighted average assumptions used:
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Risk-free interest rate		2.19	%		2.93	%		2.19	%		2.93	%
Expected volatility		127.52	%		131.0	%		127.52	%		131.0	%
Expected life (in years)		5.0			5.0			5.0			5.0

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

8

5. Contract Assets and Contract Liabilities

Contract assets represent contract billings for sales per contracts with customers and are classified as current. Our contract assets include our accounts receivables. At June 30, 2019, the Company had contract assets balance of $2,705,000. At June 30, 2018, the Company had contract assets balance of $1,068,000.

Contract liabilities consist of cash payments in advance of the Company satisfying performance obligations and recognizing revenue. The Company currently classifies deferred revenue as a contract liability. At June 30, 2019, the Company had contract liabilities balance of $1,183,000. At June 30, 2018, the Company had contract liabilities balance of $947,000.

6. Net Income Per Share

Basic net income per share is computed by dividing net income attributable to common stockholders for the period by the weighted average number of common shares outstanding for the period. Diluted net income per share is computed by dividing the net income attributable to common stockholders by the weighted average number of common shares and dilutive common stock equivalents outstanding for the period. Our common stock equivalents include all common stock issuable upon conversion of preferred stock and the exercise of outstanding options. The aggregate number of common stock equivalents excluded from the diluted income per share calculation for the three month periods ended June 30, 2019 and 2018 are 12,132 and 291,868, respectively. The aggregate number of common stock equivalents excluded from the diluted income per share calculation for the six month periods ended June 30, 2019 and 2018 are 6,066 and 285,967, respectively.

7. Concentrations

Our operations are concentrated in one area—security software/entity identification. Sales to the U.S. Government through direct and indirect channels totaled 91.3% of total revenues for the second quarter of 2019 compared to 88.4% of total revenues for the second quarter of 2018. During the second quarter of 2019, approximately 73.2% of total revenues were attributable to three government customers compared to approximately 73.7% of total revenues attributable to four government customers in the second quarter of 2018. In the second quarter of 2019, no individual commercial customer had revenues over 10.0% of total revenue compared to one individual commercial customer attributable for 10.2% of total revenue for the same period in 2018. Our similar product and service offerings are not viewed as individual segments, as our management analyzes the business as a whole and expenses are not allocated to each product offering.

8. Commitments and Contingencies

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

9. Dividends Payable

During the quarter ended June 30, 2019, we accrued $13,000 in dividends payable to the holders of our 5% Preferred Stock, $14,000 in dividends payable to the holders of our Series 2 5% Preferred Stock and $8,000 in dividends payable to the holders of our Series 3 5% Preferred Stock. As of June 30, 2019, we have $20,000 in accrued and unpaid dividends.

Delaware law provides that we may only pay dividends out of our capital surplus or, if no surplus is available, out of our net profits for the fiscal year the dividend is declared and/or the preceding fiscal year. These dividends continue to accrue on all our outstanding shares of preferred stock, regardless of whether we are legally able to pay them. If we are unable to pay dividends on our preferred stock, we will be required to accrue an additional late fee penalty of 18% per annum on the unpaid dividends for the Series 2 Preferred Stock and Series 3 Preferred Stock. Our CEO, CFO and one outside board member who are holders of our Series 2 and Series 3 Preferred Stock have waived any possible late fee penalties. In addition to this late penalty, the holders of our Series 2 Preferred Stock and Series 3 Preferred Stock could elect to present us with written notice of our failure to pay dividends as scheduled, in which case we would have 45 days to cure such a breach. In the event that we failed to cure the breach, the holders of these shares of preferred stock would then have the right to require us to redeem their shares of preferred stock for a cash amount calculated in accordance with their respective certificates of designation. If we were required to redeem all shares of Series 2 Preferred Stock and Series 3 Preferred Stock as of June 30, 2019, the aggregate redemption price we would owe would be $1.8 million.

9

10. Right-of-use Asset and Leasing Liabilities

Under the new lease accounting standard, we have determined that we have leases for right-of-use (ROU) assets. We have both finance right-of-use assets and operating right-of-use assets with a related lease liability. Our finance lease right-of-use assets consist of computer hardware and a copying machine. Our operating lease right-of-use assets include our rental agreements for our offices in Richardson and San Marcos, CA. Both types of lease liabilities are determined by the net present value of total payments and are amortized over the life of the lease. Both types of lease obligations are designed to terminate with the last scheduled payment. All of the finance lease right-of-use assets have a three year life and are in various stages of completion. The Richardson operating lease liability has a life of five years and five months as of June 30, 2019. The San Marcos operating lease liability has a life of twenty one months as of June 30, 2019.

Additional qualitative and quantitative disclosures regarding the Company's leasing arrangements are also required. The Company adopted ASC 842 prospectively and elected the package of transition practical expedients that does not require reassessment of: (1) whether any existing or expired contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition, the Company has elected other available practical expedients to not separate lease and non-lease components, which consist principally of common area maintenance charges, for all classes of underlying assets and to exclude leases with an initial term of 12 months or less.

As the implicit rate is not readily determinable for the Company's lease agreement, the Company uses an estimated incremental borrowing rate to determine the initial present value of lease payments. This discount rate for the lease approximates SVB's prime rate. See the following tables for more information.

Schedule of Items Appearing on the Statement of Operations:

	Three Months Ended				Six Months Ended
	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
Operating expense:
Amortization expense – Finance ROU		16		16		32		33
Lease expense – Operating ROU		83		66		162		132
Other expense:
Interest expense – Finance ROU		1		—		2		1

Future minimum lease obligations consisted of the following at June 30, 2019 (in thousands):

	Operating			Finance
Period ending June 30,	ROU Leases			ROU Leases			Total
2020	$	356		$	51		$	407
2021		363			39			402
2022		363			5			368
2023		375			—			375
2024		384			—			384
Thereafter		160			—			160
	$	2,001		$	95		$	2,096
Less Interest*		(270	)		(4	)
	$	1,731		$	91

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

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

Forward Looking Statements

This Quarterly Report on Form 10-Q, including, without limitation, the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements are generally accompanied by words such as “estimate,” “expect,” “believe,” “should,” “would,” “could,” “anticipate,” “may” or other words that convey uncertainty of future events or outcomes. These statements relate to future events or to our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations, which we describe in more detail elsewhere in this Quarterly Report on Form 10-Q, as well as in our 2018 Annual Report on Form 10-K, filed March 28, 2019, in Item 1A “Risk Factors” include, but are not limited to:

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

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

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

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

● our dependence on sales made through indirect channels;

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

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

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

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

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

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

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

11

Results of Operations

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

	Three Months Ended						Six Months Ended
	June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Total revenue		100.0	%		100.0	%		100.0	%		100.0	%
Total cost of revenue		39.6			39.1			39.9			38.4
Gross profit		60.4			60.9			60.1			61.6
Operating expenses:
Sales and marketing		1.1			18.2			6.3			18.2
Research and development		7.4			8.5			6.7			10.9
General and administrative		8.0			12.2			9.0			12.6
Operating income		43.9			22.0			38.1			19.9
Interest expense, net		(0.2	)		(2.0	)		(0.6	)		(2.2	)
Income before income tax provision		43.7			20.0			37.5			17.7
Income tax provision		—			—			—			—
Net income		43.7	%		20.0	%		37.5	%		17.7	%
Preferred stock dividends accrued		(0.8	)		(1.5	)		(0.9	)		(1.5	)
Net income attributable to common stockholders		42.9	%		18.5	%		36.6	%		16.2	%

	Three Months Ended						Six Months Ended
	June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Domestic revenues		100.0	%		100.0	%		100.0	%		100.0	%
Export revenues		—			—			—			—
Net revenues		100.0	%		100.0	%		100.0	%		100.0	%

Net Revenues. Net revenues for the quarter and six months ended June 30, 2019 were $4.0 million and $7.2 million, respectively, compared to $2.4 million and $4.6 million for the same periods in 2018. Product revenues increased $1.6 million for the quarter ended June 30, 2019, and $2.6 million for the six months ended June 30, 2019 compared to the same periods in 2018. Increased product revenues were primarily due to an increase in sales of our TraceCop product line. TraceCop sales for the quarters ended June 30, 2019 and 2018 were $4.0 million and $2.4 million, respectively. Savant sales were $29 thousand for the quarter ended June 30, 2019 and were $29 thousand for the quarter ended June 30, 2018.

Concentration of Revenues. Revenues from sales to various U.S. government entities totaled $3.9 million, or 91.3% of revenues, for the quarter ended June 30, 2019 compared to $2.1 million, or 88.4% of revenues, for the same period in 2018. Revenues from sales to various U.S. government entities totaled $6.4 million, or 89.2% of revenues, for the six months ended June 30, 2019 compared to $3.9 million, or 84.1% of revenues, for the same period in 2018. Sales to commercial customers totaled 8.7% of total revenue for the second quarter of 2019 compared to 11.6% of total revenue for the second quarter of 2018. During the second quarter of 2019, no individual commercial customer had revenues over 10.0% of total revenue compared to one commercial customer attributable for 10.2% of total revenue in the second quarter of 2018. Although we expect our concentration of revenues to vary among customers in future periods depending upon the timing of certain sales, we anticipate that sales to government customers will continue to account for a significant portion of our revenues in future periods. Sales to the government present risks in addition to those involved in sales to commercial customers which could adversely affect our revenues, including, without limitation, potential disruption to appropriation and spending patterns and the government’s reservation of the right to cancel contracts and purchase orders for its convenience. Although we do not anticipate that any of our revenues with government customers will be renegotiated, a large number of cancelled or renegotiated government orders could have a material adverse effect on our financial results. Currently, we are not aware of any proposed cancellation or renegotiation of any of our existing arrangements with government entities and, historically, government entities have not cancelled or renegotiated orders which had a material adverse effect on our business.

12

Gross Profit. Gross profit was $2.4 million or 60.4% of net revenues for the quarter ended June 30, 2019, compared to $1.4 million or 60.9% of net revenues for the quarter ended June 30, 2018. Gross profit was $4.3 million or 60.1% of net revenues for the six months ended June 30, 2019 compared to $2.9 million or 61.6% of net revenues for the six months ended June 30, 2018. Gross profit for the quarter and six months ended June 30, 2018 trended from 60.9% and 61.6%, respectively, in 2018 to 60.4% and 60.1%, respectively, in 2019 mainly due to a change in product mix. Gross profit increases can mainly be attributed to sales volume increases. Gross profit as a percentage of net revenues is impacted by several factors, including shifts in product mix, changes in channels of distribution, revenue volume, pricing strategies, and fluctuations in revenues of integrated third-party products.

Sales and Marketing. Sales and marketing expenses decreased to $46 thousand for the quarter ended June 30, 2019 compared to $0.4 million for the same period in 2018. Sales and marketing expenses decreased to $0.5 million for the six months ended June 30, 2019 compared $0.8 million for the same period in 2018. Sales and marketing expenses may vary in the future. Sales and marketing expenses decreased due to shifting expense to cost of sales for various projects during the second quarter 2019, the Company was able to collect payment of $200 thousand from a customer related expense that occurred during the year 2018. Sales and marketing expenses also benefitted from delayed sales from one customer into the second quarter 2019. This delay benefitted sales in the quarter and required corresponding shifts of expenses into cost of sales from sales and marketing. It is expected that sales and marketing expense will return to more traditional levels in the third quarter 2019.

Research and Development. Research and development expenses increased to $0.3 million for the quarter ended June 30, 2019 compared to $0.2 million for the same period in 2018. Research and development remained constant at $0.5 million for the six months ended June 30, 2019 and 2018.   Increases in research and development costs during the second quarter 2019 were due to increased labor expense. Research and development costs are expensed in the period incurred. Research and development expenses may vary in the future; however, we believe that these costs will remain relatively constant through the end of 2019, although expenses may be increased relative to increases in revenue.

General and Administrative. General and administrative expenses remained constant at $0.3 million for the quarters ended June 30, 2019 and 2018. General and administrative expenses increased to $0.7 million for the six months ended June 30, 2019 compared to $0.6 million for the same period in 2018. It is expected that general and administrative expenses will remain relatively constant throughout the remainder of 2019, although expenses may be increased relative to increases in revenue.

Interest. Net interest expense decreased to $9 thousand for the quarter ended June 30, 2019 compared to $48 thousand for the same period in 2018. Net interest expense decreased to $44 thousand for the six months ended June 30, 2019 compared to $101 thousand for the same period in 2018. The decrease in interest expense was primarily due to paying down the loan payable to an officer. Net interest expense may vary in the future based on our level of borrowing, which will be affected by our cash flow, operating income and capital expenditures.

Liquidity and Capital Resources

Our principal source of liquidity at June 30, 2019, was approximately $1.5 million of cash and cash equivalents. At June 30, 2019, we had working capital of $1.4 million compared to a $1.0 million deficiency at June 30, 2018.

Net cash provided by operations for the six months ended June 30, 2019 was $2.3 million due primarily to a net income of $2.7 million and the following sources of cash and non-cash items: a $304 thousand decrease in operating lease right-of-use assets, a $179 thousand increase in deferred revenue, $86 thousand in depreciation and amortization expense, $14 thousand in stock-based compensation, and $6 thousand in penalties and waived penalties on dividends. This was partially offset by a $738 thousand increase in accounts receivable, a $234 thousand increase in prepaid expenses and other assets, and a $66 thousand decrease in accounts payable and accrued expenses. Net cash provided by operations for the six months ended June 30, 2018 was $1.2 million due primarily to a net income of $820 thousand and to the following sources of cash and non-cash items: $541 thousand increase in deferred revenue, $201 thousand increase in accounts payable and accrued expenses, $15 thousand decrease in Inventories, $22 thousand in penalties and waived penalties on dividends, $33 thousand in amortization expense of capital leases, $32 thousand in depreciation expense, and $11 thousand in stock-based compensation. This was partially offset by a $329 thousand increase in prepaid expenses and other assets and a $106 thousand increase in accounts receivable. Future fluctuations in inventory balances, accounts receivable and accounts payable will be dependent upon several factors, including, but not limited to, quarterly sales volumes and timing of invoicing, and the accuracy of our forecasts of product demand and component requirements.

13

Net cash used in investing activities for the six months ended June 30, 2019, was $168 thousand for net purchases of property and equipment, compared to net cash used in investing activities for the six months ended June 30, 2018, was $75 thousand for net purchases of property and equipment.

Net cash used in financing activities in 2019 was $2.3 million with payments on the loan from an officer of $1.8 million, payments for preferred stock dividends of $644 thousand, and payment on principal of finance right-of-use leases of $31 thousand. This was directly offset by the following provisions of cash: proceeds from exercise of stock options of $226 thousand. Net cash used in financing activities in 2018 was $1.0 million due to payments to the officer loan of $1.2 million and $34 thousand payment on principal on finance right-of-use leases. This was directly offset by the following provisions of cash: proceeds from a loan by an officer of $150 thousand and $71 thousand from the exercise of stock options.

At June 30, 2019, the Company did not have any material commitments for capital expenditures.

During the six months ended June 30, 2019, the Company funded its operations through the use of cash and cash equivalents.

As of June 30, 2019, we had cash and cash equivalents of approximately $1,477,000, down from approximately $1,652,000 as of December 31, 2018. We generated net income of $1,758,000 for the quarter ended June 30, 2019 compared to a net income of $474,000 for the quarter ended June 30, 2018. As of June 30, 2019, in addition to cash and cash equivalents of $1,477,000, we had $2.7 million of funding available from a promissory note to borrow up to $2.7 million from G. Ward Paxton, the Company’s Chief Executive Officer. We are obligated to make payments of accrued dividends on all our outstanding shares of preferred stock that will reduce our available cash resources. Based on projections of growth in revenue and net income in the coming quarters, and the borrowings available previously mentioned, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures for the next twelve months. We expect to fund our operations through anticipated Company profits and borrowings from the Company’s CEO, and possibly additional investments of private equity and debt, which, if we are able to obtain, will have the effect of diluting our existing common stockholders, perhaps significantly. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to our stockholders. If our operations do not generate positive cash flow in the upcoming year, or if we are not able to obtain additional debt or equity financing on terms and conditions acceptable to us, if at all, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations.

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

Item 4. CONTROLS AND PROCEDURES

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

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2019, and concluded that the disclosure controls and procedures were effective.

Our management, with the participation of our principal executive officer and principal financial officer, evaluated our “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) as of December 31, 2018, and concluded that there have not been any changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

14

PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

Item 1A. RISK FACTORS

Factors That May Affect Future Results of Operations

We are providing the following information regarding changes that have occurred to previously disclosed risk factors from our Annual Report on Form 10-K for the year ended December 31, 2018. In addition to the other information set forth below and elsewhere in this report, you should consider the factors discussed under the heading “Risk Factors” in our Form 10-K for the year ended December 31, 2018 filed on March 28, 2019. The risks described in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

As of June 30, 2019, we had cash and cash equivalents of approximately $1,477,000, down from approximately $1,652,000 as of December 31, 2018. We generated net income of $1,758,000 for the quarter ended June 30, 2019 compared to a net income of $474,000 for the quarter ended June 30, 2018. As of June 30, 2019, in addition to cash and cash equivalents of $1,477,000, we had $2.7 million of funding available from a promissory note to borrow up to $2.7 million from G. Ward Paxton, the Company’s Chief Executive Officer. We are obligated to make payments of accrued dividends on all our outstanding shares of preferred stock that will reduce our available cash resources. Based on projections of growth in revenue and net income in the coming quarters, and the borrowings available previously mentioned, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures for the next twelve months. We expect to fund our operations through anticipated Company profits and borrowings from the Company’s CEO, and possibly additional investments of private equity and debt, which, if we are able to obtain, will have the effect of diluting our existing common stockholders, perhaps significantly. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to our stockholders. If our operations do not generate positive cash flow in the upcoming year, or if we are not able to obtain additional debt or equity financing on terms and conditions acceptable to us, if at all, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations.

We had a net income of $1.8 million for the quarter ended June 30, 2019, and we have an accumulated deficit of $56.5 million as of June 30, 2019. To continue current financial performance, we must sustain or increase revenue levels.

For the quarter ended June 30, 2019, we generated a net income of $1.8 million and had an accumulated deficit of approximately $56.5 million as of June 30, 2019, compared to a net income of $474 thousand for the quarter ended June 30, 2018 and an accumulated deficit of approximately $60.7 million at June 30, 2018. We need to maintain current revenue levels from the sales of our products if we are to continue profitability. If we are unable to achieve these revenue levels, losses could happen for the near term and possibly longer, and we may not maintain profitability or generate positive cash flow from operations in the future.

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

A large percentage of our revenues result from sales to U.S. government entities/resellers. If we were to lose one or more of these key relationships, our revenues could decline and our business and prospects may be materially harmed. We expect that even if we are successful in developing relationships with non-governmental customers, our revenues will continue to be concentrated among government entities. For the quarter ended June 30, 2019, sales to U.S. government entities/resellers collectively accounted for 91.3% of our revenues, compared to 88.4% for the comparable period in 2018. 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.

Almost all of our revenues are from one product line with a limited number of customers, and the decrease of revenue from sales of this product line could materially harm our business and prospects. Timeliness of orders from customers may cause disruption in growth.

Almost all of our revenues result from sales of one security product line. TraceCop revenues were $4.0 million for the quarter ended June 30, 2019, compared to $2.4 million for the second quarter 2018. Savant revenues remained constant at $29 thousand for the quarters ended June 30, 2019 and 2018. No individual commercial customer in the second quarter of 2019 had over 10.0% of total revenue compared to one individual customer with 10.2% of total revenue for the same period in 2018. If sales of this key product line and individual customer were to decrease, our revenues could decline and our business and prospects may be materially harmed. Revenue in the second quarter 2019 benefitted from delayed sales from one customer in the two preceding quarters into the second quarter 2019. This delay benefitted revenues in the quarter and required corresponding shifts of expenses into cost of sales from sales and marketing. In order to remain at current revenue levels, new customer orders will be required.

15

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

We derived 91.3% of revenue in the second quarter of 2019 through indirect channels of mainly government resellers, compared to 88.4% of our revenues in the quarter ended June 30, 2018. We must continue to expand our sales through these indirect channels in order to increase our revenues. We cannot assure you that our products will gain market acceptance in these indirect sales channels or that sales through these indirect sales channels will increase our revenues. Further, many of our competitors are also trying to sell their products through these indirect sales channels, which could result in lower prices and reduced profit margins for sales of our products.

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

On August 2, 2019, we had 13,529,236 shares of common stock outstanding. Upon conversion of all outstanding shares of preferred stock, we would have 14,596,678 shares of common stock outstanding, approximately a 7.9% 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 $4.69, which was the ten-day volume weighted average closing price of our common stock on August 1, 2019, and (iv) our 13,529,236 shares of common stock outstanding on August 1, 2019, 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 94,000 shares of our common stock. This would represent an increase of approximately 0.7% in the number of shares of our common stock as of August 1, 2019.

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 August 1, 2019, 800,000 shares of our 5% Preferred Stock had converted into 1,272,263 shares of common stock and 200,000 shares of our 5% preferred stock, convertible into 318,065 shares of common stock, remain outstanding.

The holders of the shares of Series 2 5% Preferred Stock may freely convert their shares of preferred stock and sell the underlying shares of common stock pursuant to Rule 144 of the Securities and Exchange Commission. As of August 1, 2019, 605,200 shares of Series 2 Preferred Stock had converted into 605,200 shares of common stock and 460,000 shares of Series 2 5% preferred stock remain outstanding.

The holders of the shares of Series 3 5% Preferred Stock may freely convert their shares of Series 3 Preferred Stock and sell the underlying shares of common stock pursuant to Rule 144 of the Securities and Exchange Commission. As of August 1, 2019, 275,230 shares of Series 3 Preferred Stock had converted into 275,230 shares of common stock and 289,377 shares of Series 3 5% preferred stock remain outstanding.

For the four weeks ended on August 2, 2019, the average daily trading volume of our common stock on the OTCQB was 6,700 shares. Consequently, if holders of preferred stock elect to convert their remaining shares and sell a material amount of their underlying shares of common stock on the open market, the increase in selling activity could cause a decline in the market price of our common stock. Furthermore, these sales, or the potential for these sales, could encourage short sales, causing additional downward pressure on the market price of our common stock.

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

On August 1, 2019, we had 13,529,236 shares of common stock outstanding. Upon the exercising of current options exercisable at or below the exercise price of $2.73, we would have approximately 14,400,000 shares of common stock outstanding, a 6.6% increase in the number of shares of our common stock outstanding.

16

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

As of August 1, 2019, our executive officers, directors and preferred stockholders beneficially own approximately 36% of our voting power. In addition, other related parties control approximately 26% of voting power. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could delay or prevent someone from acquiring or merging with us. These stockholders may use their influence to approve or take actions that may be adverse to the interests of holders of our Common Stock. Further, we contemplate the possible issuance of shares of our Common Stock or of securities exercisable or convertible into shares of our Common Stock in the future to our Chief Executive Officer and Chief Financial Officer. Any such issuance will increase the percentage of stock our Chief Executive Officer, Chief Financial Officer and our management group beneficially holds.

Item 6. Exhibits

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

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
32.1	Certification Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

17

S I G N A T U R E S

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

	INTRUSION INC.
Date: August 13, 2019	/s/ G. Ward Paxton
	G. Ward Paxton
	Chairman, President & Chief Executive Officer
	(Principal Executive Officer)
Date: August 13, 2019	/s/ Michael L. Paxton
	Michael L. Paxton
	Vice President, Chief Financial Officer, Treasurer & Secretary
	(Principal Financial & Accounting Officer)

18

EX-31.1

EXHIBIT 31.1

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

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

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

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

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

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

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

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

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

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

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

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

Date: August 13, 2019	/s/ G. Ward Paxton
	G. Ward Paxton
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

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

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

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

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

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

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

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

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

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

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

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

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

Date: August 13, 2019	/s/ Michael L. Paxton
	Michael L. Paxton
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

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

In connection with the Quarterly Report of Intrusion Inc. (the “Company”) on Form 10-Q, for the quarter ended June 30, 2019 (the “Report”) as filed with the Securities and Exchange Commission on the date hereof, each of the undersigned Officers of the Company does hereby certify, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

August 13, 2019	/s/ G. Ward Paxton
	G. Ward Paxton
	Chief Executive Officer

August 13, 2019	/s/ Michael L. Paxton
	Michael L. Paxton
	Chief Financial Officer

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

XML

Document And Entity Information - shares	6 Months Ended
	Jun. 30, 2019	Aug. 01, 2019
Document Information [Line Items]
Entity Registrant Name	Intrusion Inc
Entity Central Index Key	0000736012
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Common Stock, Shares Outstanding (in shares)		13,529,236
Entity Shell Company	false
Document Type	10-Q
Document Period End Date	Jun. 30, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q2
Amendment Flag	false

XML

Unaudited Condensed Consolidated Balance Sheets - USD ($)	Jun. 30, 2019	Dec. 31, 2018
Current Assets:
Cash and cash equivalents	$ 1,477,000	$ 1,652,000
Accounts receivable	2,705,000	1,967,000
Prepaid expenses	325,000	91,000
Total current assets	4,507,000	3,710,000
Noncurrent Assets:
Property and equipment, net	314,000	200,000
Finance leases, right-of-use assets, net	89,000	121,000
Operating lease, right-of-use asset, net	1,467,000
Other assets	38,000	38,000
Total noncurrent assets	1,908,000	359,000
TOTAL ASSETS	6,415,000	4,069,000
Current Liabilities:
Accounts payable and accrued expenses	1,568,000	1,596,000
Dividends payable	20,000	594,000
Finance leases liability, current portion	48,000	58,000
Operating lease liability, current portion	271,000
Deferred revenue	1,183,000	1,004,000
Total current liabilities	3,090,000	3,252,000
Noncurrent Liabilities:
Loan payable to officer		1,815,000
Finance leases liability, noncurrent portion	43,000	64,000
Operating lease liability, noncurrent portion	1,460,000
Total noncurrent liabilities	1,503,000	1,879,000
Commitments and contingencies
Stockholders’ equity (deficit):
Common stock, $0.01 par value: Authorized shares - 80,000 Issued shares — 13,539 in 2019 and 13,259 in 2018 Outstanding shares — 13,529 in 2019 and 13,249 in 2018	135	133
Common stock held in treasury, at cost – 10 shares	(362,000)	(362,000)
Additional paid-in capital	56,785,000	56,609,000
Accumulated deficit	(56,536,000)	(59,242,000)
Accumulated other comprehensive loss	(43,000)	(43,000)
Total stockholders’ equity (deficit)	1,822,000	(1,062,000)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	6,415,000	4,069,000
Series 1 Preferred Stock [Member]
Stockholders’ equity (deficit):
Preferred stock	707,000	707,000
Series 2 Preferred Stock [Member]
Stockholders’ equity (deficit):
Preferred stock	724,000	724,000
Series 3 Preferred Stock [Member]
Stockholders’ equity (deficit):
Preferred stock	$ 412,000	$ 412,000

XML

Unaudited Condensed Consolidated Balance Sheets (Parentheticals) - $ / shares	Jun. 30, 2019	Dec. 31, 2018
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized (in shares)	5,000,000	5,000,000
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	80,000	80,000
Common stock, shares issued (in shares)	13,539	13,259
Common stock, shares outstanding (in shares)	13,529	13,249
Common stock held in treasury, at cost, shares (in shares)	10,000	10,000
Series 1 Preferred Stock [Member]
Preferred stock, shares issued (in shares)	200,000	200,000
Preferred stock, shares outstanding (in shares)	200,000	200,000
Preferred stock, liquidation preference (in dollars per share)	$ 1,012	$ 1,213
Series 2 Preferred Stock [Member]
Preferred stock, shares issued (in shares)	460,000	460,000
Preferred stock, shares outstanding (in shares)	460,000	460,000
Preferred stock, liquidation preference (in dollars per share)	$ 1,155	$ 1,385
Series 3 Preferred Stock [Member]
Preferred stock, shares issued (in shares)	289,000	289,000
Preferred stock, shares outstanding (in shares)	289,000	289,000
Preferred stock, liquidation preference (in dollars per share)	$ 633	$ 760

XML

Unaudited Condensed Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Revenue	$ 4,020	$ 2,369	$ 7,211	$ 4,632
Cost of revenue	1,590	926	2,874	1,778
Gross profit	2,430	1,443	4,337	2,854
Operating expenses:
Sales and marketing	46	431	458	845
Research and development	296	200	477	503
General and administrative	321	290	652	585
Operating income	1,767	522	2,750	921
Interest expense, net	(9)	(48)	(44)	(101)
Net income	1,758	474	2,706	820
Preferred stock dividends accrued	(35)	(35)	(69)	(69)
Net income attributable to common stockholders	$ 1,723	$ 439	$ 2,637	$ 751
Net income per share attributable to common stockholders:
Basic (in dollars per share)	$ 0.13	$ 0.03	$ 0.20	$ 0.06
Diluted (in dollars per share)	$ 0.11	$ 0.03	$ 0.17	$ 0.05
Weighted average common shares outstanding:
Basic (in shares)	13,523	13,017	13,466	12,982
Diluted (in shares)	15,371	14,791	15,314	14,756

XML

Unaudited Condensed Consolidated Statements of Changes In Stockholders' Equity (Deficit) - USD ($)	Total	Preferred Stock [Member]	Common Stock [Member]	Treasury Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	AOCI Attributable to Parent [Member]
Balance, beginning of year and end of six month period (in shares)		(949,000)	(12,808,000)
Balance (in shares) at Dec. 31, 2017		949,000	12,808,000
Balance at Dec. 31, 2017		$ 1,843,000	$ 128,000		$ 56,518,000	$ (61,529,000)	$ (107,000)
Exercise of stock options (in shares)	219,000		219,000
Exercise of stock options			$ 2,000		69,000
Balance, beginning of year and end of six month period (in shares)		(949,000)	(12,808,000)
Stock-based compensation					11,000
Preferred stock dividends declared, net of waived penalties by shareholders					(47,000)
Net income	$ 820,000					820,000
Balance at Jun. 30, 2018	(2,654,000)		$ 130,000		56,551,000	(60,709,000)
Balance, beginning of year and end of six month period (in shares)			(13,027,000)	(362,000)
Balance, beginning of year and end of six month period (in shares)		(949,000)	(13,259,000)
Balance (in shares) at Dec. 31, 2018		949,000	13,259,000
Balance at Dec. 31, 2018	$ (1,062,000)	$ 1,843,000	$ 133,000		56,609,000	(59,242,000)	$ (43,000)
Exercise of stock options (in shares)	280,500		280,000
Exercise of stock options			$ 2,000		224,000
Balance, beginning of year and end of six month period (in shares)		(949,000)	(13,259,000)
Stock-based compensation					14,000
Preferred stock dividends declared, net of waived penalties by shareholders					(62,000)
Net income	$ 2,706,000					2,706,000
Balance at Jun. 30, 2019	$ 1,822,000		$ 135,000		$ 56,785,000	$ (56,536,000)
Balance, beginning of year and end of six month period (in shares)			(13,539,000)	(362,000)

XML

Unaudited Condensed Consolidated Statements of Cash Flows - USD ($)	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018
Operating Activities:
Net income	$ 2,706,000	$ 820,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	86,000	65,000
Stock-based compensation	14,000	11,000
Penalties on dividends	6,000	22,000
Changes in operating assets and liabilities:
Accounts receivable	(738,000)	(106,000)
Inventories		15,000
Prepaid expenses and other assets	(234,000)	(329,000)
Operating lease, right-of-use asset	304,000
Accounts payable and accrued expenses	(66,000)	201,000
Deferred revenue	179,000	541,000
Net cash provided by operating activities	2,257,000	1,240,000
Investing Activities:
Purchases of property and equipment	(168,000)	(75,000)
Financing Activities:
Borrowings on loan from officer		150,000
Payments on loan from officer	(1,815,000)	(1,200,000)
Proceeds from stock options exercised	226,000	71,000
Payments of dividends	(644,000)
Reduction of finance lease liability	(31,000)	(34,000)
Net cash used in financing activities	(2,264,000)	(1,013,000)
Net increase (decrease) in cash and cash equivalents	(175,000)	152,000
Cash and cash equivalents at beginning of period	1,652,000	224,000
Cash and cash equivalents at end of period	1,477,000	376,000
SUPPLEMENTAL DISCLOSURE OF NON CASH OPERATING AND FINANCING ACTIVITIES:
Preferred stock dividends accrued	68,000	69,000
Purchase of leased equipment per right-of-use finance lease		89,000
Initial recognition of operating lease, right-of-use asset	$ 1,771,000

XML

Note 1 - Description of Business

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Nature of Operations [Text Block]

1. Description of Business

We develop, market and support a family of entity identification, high speed data mining and cybersecurity solutions. Our products help detect, report and mitigate cybercrimes and advanced persistent threats.

Our product families include:

● TraceCop for entity identification, cybercrime detection and disclosure, and;

● Savant for high speed data mining. analytics, detection, reporting and mitigation of cybersecurity threats.

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

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

● end-users, and

● value-added resellers.

Our end-user customers include:

● U.S. federal government entities,

● state and local government entities,

● large and diverse conglomerates,

● manufacturing entities, and

● other customers.

We were organized in Texas in

September 1983

and reincorporated in Delaware in

October 1995.

Our principal executive offices are located at

1101

East Arapaho Road, Suite

200,

Richardson, Texas

75081,

and our telephone number is (

972

)

234

-

6400.

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

XML

Note 2 - Basis of Presentation

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Basis of Presentation and Significant Accounting Policies [Text Block]

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form

10

-Q and Item

10

-

01

of Regulation S-

X.

Accordingly, they do

not

include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The

December 31, 2018

balance sheet was derived from audited financial statements, but does

not

include all the disclosures required by accounting principles generally accepted in the United States. However, we believe that the disclosures are adequate to make the information presented

not

misleading. In our opinion, all the adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. The results of operations for the

three

and

six

month periods ended

June 30, 2019

are

not

necessarily indicative of the results that

may

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

10

-K for the year ended

December 

31,

2018,

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

March 28, 2019.

The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different from the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued expenses, and dividends payable approximate their carrying amounts due to the relatively short maturity of these instruments. Loans payable to officer are with a related party and as a result do

not

bear market rates of interest.  Management believes based on its current financial position that it could

not

obtain comparable amounts of

third

party financing, and as such cannot estimate the fair value of the loans payable to officer.

None

of these instruments are held for trading purposes.

On

January 1, 2018

we adopted ASU

No.

2014

-

09,

Revenue from Contracts with Customers

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

no

impact on the balance sheet or statement of operations. ASU

No.

2014

-

09

did

not

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

three

and

six

month periods ended

June 30, 2019

and

2018.

On

January 1, 2019

we adopted ASU

No.

2016

-

02,

Leases (topic

842

)

. At the date of adoption there was

no

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

No.

2016

-

02

did

not

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

three

and

six

month periods ended

June 30, 2019.

XML

Note 3 - Loan Payable to Officer

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

3. Loan Payable to Officer

On

February 8, 2018,

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

$3,700,000

from G. Ward Paxton, the Company’s 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

$3,700,000

at any given time through

March 2020.

On

February 

7,

2019,

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

$2,700,000

from G. Ward Paxton, the Company’s 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

$2,700,000

at any given time through

March 

2021.

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%.

All outstanding borrowings and accrued but unpaid interest is due on

March 31, 2021.

As of

June 30, 2019,

there were

no

borrowings outstanding and accrued interest totaled

$513,000.

All past due interest was paid in full on

July 16, 2019.

XML

Note 4 - Accounting for Stock-based Compensation

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Share-based Payment Arrangement [Text Block]

4. Accounting for Stock-Based Compensation

During the

three

month periods ended

June 30, 2019

and

2018,

the Company granted

24,000

and

24,000,

respectively, of stock options to employees or directors. The Company recognized

$10,000

and

$6,000,

respectively, of stock-based compensation expense for the

three

month periods ended

June 30, 2019

and

2018.

During the

six

month periods ended

June 30, 2019

and

2018,

the Company granted

24,000

and

24,000,

respectively, of stock options to employees and directors. The Company recognized

$14,000

and

$11,000,

respectively, of stock-based compensation expense for the

six

month periods ended

June 30, 2019

and

2018.

During the

three

month periods ended

June 30, 2019

and

2018,

14,000

and

5,000

were exercised under the

2005

Plan, respectively. During the

six

month periods ended

June 30, 2019

and

2018,

280,500

and

219,000

were exercised under the

2005

Plan, respectively.

Valuation Assumptions

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

	For Three Months Ended June 30, 201 9			For Three Months Ended June 30, 2018			For Six Months Ended June 30, 201 9			For Six Months Ended June 30, 201 8
Weighted average grant date fair value	$	3.61		$	0.99		$	3.61		$	0.99
Weighted average assumptions used:
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Risk-free interest rate		2.19	%		2.93	%		2.19	%		2.93	%
Expected volatility		127.52	%		131.0	%		127.52	%		131.0	%
Expected life (in years)		5.0			5.0			5.0			5.0

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

XML

Note 5 - Contract Assets and Contract Liabilities

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

5. Contract Assets and Contract Liabilities

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

June 30, 2019,

the Company had contract assets balance of

$2,705,000.

At

June 30, 2018,

the Company had contract assets balance of

$1,068,000.

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

June 30, 2019,

the Company had contract liabilities balance of

$1,183,000.

At

June 30, 2018,

the Company had contract liabilities balance of

$947,000.

XML

Note 6 - Net Income Per Share

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Earnings Per Share [Text Block]

6. Net Income Per Share

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

three

month periods ended

June 30, 2019

and

2018

are

12,132

and

291,868,

respectively. The aggregate number of common stock equivalents excluded from the diluted income per share calculation for the

six

month periods ended

June 30, 2019

and

2018

are

6,066

and

285,967,

respectively.

XML

Note 7 - Concentrations

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Concentration Risk Disclosure [Text Block]

7. Concentrations

Our operations are concentrated in

one

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

91.3%

of total revenues for the

second

quarter of

2019

compared to

88.4%

of total revenues for the

second

quarter of

2018.

During the

second

quarter of

2019,

approximately

73.2%

of total revenues were attributable to

three

government customers compared to approximately

73.7%

of total revenues attributable to

four

government customers in the

second

quarter of

2018.

In the

second

quarter of

2019,

no

individual commercial customer had revenues over

10.0%

of total revenue compared to

one

individual commercial customer attributable for

10.2%

of total revenue for the same period in

2018.

Our similar product and service offerings are

not

viewed as individual segments, as our management analyzes the business as a whole and expenses are

not

allocated to each product offering.

XML

Note 8 - Commitments and Contingencies

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

8. Commitments and Contingencies

We are subject from time to time to various legal proceedings and claims that arise during the ordinary course of our business. We do

not

believe that the outcome of those "routine" legal matters should have a material adverse effect on our consolidated financial position, operating results or cash flows; however, we can provide

no

assurances that legal claims that

may

arise in the future will

not

have such a material impact on the Company.

XML

Note 9 - Dividends Payable

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

9. Dividends Payable

During the quarter ended

June 30, 2019,

we accrued

$13,000

in dividends payable to the holders of our

5%

Preferred Stock,

$14,000

in dividends payable to the holders of our Series

2

5%

Preferred Stock and

$8,000

in dividends payable to the holders of our Series

3

5%

Preferred Stock. As of

June 30, 2019,

we have

$20,000

in accrued and unpaid dividends.

Delaware law provides that we

may

only pay dividends out of our capital surplus or, if

no

surplus is available, out of our net profits for the fiscal year the dividend is declared and/or the preceding fiscal year. These dividends continue to accrue on all our outstanding shares of preferred stock, regardless of whether we are legally able to pay them. If we are unable to pay dividends on our preferred stock, we will be required to accrue an additional late fee penalty of

18%

per annum on the unpaid dividends for the Series

2

Preferred Stock and Series

3

Preferred Stock. Our CEO, CFO and

one

outside board member who are holders of our Series

2

and Series

3

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

2

Preferred Stock and Series

3

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

45

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

2

Preferred Stock and Series

3

Preferred Stock as of

June 30, 2019,

the aggregate redemption price we would owe would be

$1.8

million.

XML

Note 10 - Right-of-use Asset and Leasing Liabilities

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

OperatingAndFinanceLeasesOfLesseeDisclosureTextBlock

10. Right-of-use Asset and Leasing Liabilities

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

three

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

five

years and

five

months as of

June 30, 2019.

The San Marcos operating lease liability has a life of

twenty one

months as of

June 30, 2019.

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

842

prospectively and elected the package of transition practical expedients that does

not

require reassessment of: (

1

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

2

) lease classification and (

3

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

not

separate lease and non-lease components, which consist principally of common area maintenance charges, for all classes of underlying assets and to exclude leases with an initial term of

12

months or less.

As the implicit rate is

not

readily determinable for the Company's lease agreement, the Company uses an estimated incremental borrowing rate to determine the initial present value of lease payments. This discount rate for the lease approximates SVB's prime rate. See the following tables for more information.

Schedule of Items Appearing on the Statement

of Operations

:

	Three Months Ended				Six Months Ended
	June 30, 201 9		June 30, 201 8		June 30, 201 9		June 30, 201 8
Operating expense:
Amortization expense – Finance ROU		16		16		32		33
Lease expense – Operating ROU		83		66		162		132
Other expense:
Interest expense – Finance ROU		1		—		2		1

Future minimum lease obligations consisted of the following at

June 30

,

2019

(in thousands):

	Operating			Finance
Period ending June 30,	ROU Leases			ROU Leases			Total
2020	$	356		$	51		$	407
2021		363			39			402
2022		363			5			368
2023		375			—			375
2024		384			—			384
Thereafter		160			—			160
	$	2,001		$	95		$	2,096
Less Interest*		(270	)		(4	)
	$	1,731		$	91

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

XML

Note 4 - Accounting for Stock-based Compensation (Tables)

6 Months Ended

Jun. 30, 2019

Notes Tables

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

	For Three Months Ended June 30, 201 9			For Three Months Ended June 30, 2018			For Six Months Ended June 30, 201 9			For Six Months Ended June 30, 201 8
Weighted average grant date fair value	$	3.61		$	0.99		$	3.61		$	0.99
Weighted average assumptions used:
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Risk-free interest rate		2.19	%		2.93	%		2.19	%		2.93	%
Expected volatility		127.52	%		131.0	%		127.52	%		131.0	%
Expected life (in years)		5.0			5.0			5.0			5.0

XML

Note 10 - Right-of-use Asset and Leasing Liabilities (Tables)

6 Months Ended

Jun. 30, 2019

Notes Tables

Lease, Cost [Table Text Block]

	Three Months Ended				Six Months Ended
	June 30, 201 9		June 30, 201 8		June 30, 201 9		June 30, 201 8
Operating expense:
Amortization expense – Finance ROU		16		16		32		33
Lease expense – Operating ROU		83		66		162		132
Other expense:
Interest expense – Finance ROU		1		—		2		1

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

	Operating			Finance
Period ending June 30,	ROU Leases			ROU Leases			Total
2020	$	356		$	51		$	407
2021		363			39			402
2022		363			5			368
2023		375			—			375
2024		384			—			384
Thereafter		160			—			160
	$	2,001		$	95		$	2,096
Less Interest*		(270	)		(4	)
	$	1,731		$	91

XML

Note 3 - Loan Payable to Officer (Details Textual) - Revolving Credit Facility [Member] - Chief Executive Officer [Member] - USD ($)	6 Months Ended
	Jun. 30, 2019	Feb. 07, 2019	Feb. 08, 2018
Line of Credit Facility, Maximum Borrowing Capacity		$ 2,700,000	$ 3,700,000
Debt Instrument, Basis Spread on Variable Rate	1.00%
Long-term Line of Credit, Total	$ 0
Interest Payable, Current	$ 513,000

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Note 4 - Accounting for Stock-based Compensation (Details Textual) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	24,000	24,000	24,000	24,000
Share-based Payment Arrangement, Expense	$ 10,000	$ 6,000	$ 14,000	$ 11,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period	14,000	5,000	280,500	219,000

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Note 4 - Accounting for Stock-based Compensation - Valuation Assumptions (Details) - $ / shares	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Weighted average grant date fair value (in dollars per share)	$ 3.61	$ 0.99	$ 3.61	$ 0.99
Weighted average assumptions used:
Expected dividend yield	0.00%	0.00%	0.00%	0.00%
Risk-free interest rate	2.19%	2.93%	2.19%	2.93%
Expected volatility	127.52%	131.00%	127.52%	131.00%
Expected life (in years) (Year)	5 years	5 years	5 years	5 years

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Note 5 - Contract Assets and Contract Liabilities (Details Textual) - USD ($)	Jun. 30, 2019	Dec. 31, 2018	Jun. 30, 2018
Contract with Customer, Asset, Net, Current, Total	$ 2,705,000		$ 1,068,000
Contract with Customer, Liability, Current	$ 1,183,000	$ 1,004,000	$ 947,000

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Note 6 - Net Income Per Share (Details Textual) - shares	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	12,132	291,868	6,066	285,967

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Note 7 - Concentrations (Details Textual)	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019
Number of Areas in Which Operations are Concentrated			1
Customer Concentration Risk [Member] | Revenue Benchmark [Member] | U.S. Government [Member]
Concentration Risk, Percentage	91.30%	88.40%
Customer Concentration Risk [Member] | Revenue Benchmark [Member] | Three Government Customers [Member]
Concentration Risk, Percentage	73.20%
Number of Major Customers	3
Customer Concentration Risk [Member] | Revenue Benchmark [Member] | One Commercial Customer [Member]
Concentration Risk, Percentage		10.20%
Number of Major Customers		1
Customer Concentration Risk [Member] | Accounts Receivable [Member] | Four Government Customers [Member]
Concentration Risk, Percentage		73.70%
Number of Major Customers		4

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Note 9 - Dividends Payable (Details Textual)	3 Months Ended
	Jun. 30, 2019 USD ($)
Series 1 Preferred Stock [Member]
Dividends, Preferred Stock, Total	$ 13,000
Preferred Stock, Dividend Rate, Percentage	5.00%
Series 2 Preferred Stock [Member]
Dividends, Preferred Stock, Total	$ 14,000
Preferred Stock, Dividend Rate, Percentage	5.00%
Series 3 Preferred Stock [Member]
Dividends, Preferred Stock, Total	$ 8,000
Preferred Stock, Dividend Rate, Percentage	5.00%
Series 2 Preferred Stock and Series 3 Preferred Stock [Member]
Dividends, Preferred Stock, Total	$ 20,000
Preferred Stock Unpaid Dividends Additional Late Fee Penalty Percentage	18.00%
Period From Issuance of Written Notice For Failure to Pay Dividend Within Which Entity Must Cure Breach	45 days
Preferred Stock, Redemption Amount	$ 1,800,000

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Note 10 - Right-of-use Asset and Leasing Liabilities (Details Textual)	Jun. 30, 2019
Lessee, Finance Lease, Term of Contract	3 years
Richardson Property [Member]
Lessee, Operating Lease, Term of Contract	5 years 273 days
The San Marcos Property [Member]
Lessee, Operating Lease, Term of Contract	1 year 270 days

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Note 10 - Right-of-use Asset and Leasing Liabilities - Schedule of Items Appearing on the Statement of Operations (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Amortization expense – Finance ROU	$ 16	$ 16	$ 32	$ 33
Lease expense – Operating ROU	83	66	162	132
Interest expense – Finance ROU	$ 1		$ 2	$ 1

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Note 10 - Right-of-use Asset and Leasing Liabilities - Future Minimum Lease Obligations (Details) $ in Thousands	Jun. 30, 2019 USD ($)
Operating ROU Leases, 2020	$ 356
Finance ROU Leases, 2020	51
2020	407
Operating ROU Leases, 2021	363
Finance ROU Leases, 2021	39
2021	402
Operating ROU Leases, 2022	363
Finance ROU Leases, 2022	5
2022	368
Operating ROU Leases, 2023	375
Finance ROU Leases, 2023
2023	375
Operating ROU Leases, 2024	384
Finance ROU Leases, 2024
2024	384
Operating ROU Leases, Thereafter	160
Finance ROU Leases, Thereafter
Thereafter	160
Operating ROU Leases Undiscounted Obligation	2,001
Finance ROU Leases Undiscounted Obligation	95
	2,096
Operating ROU Leases, Less Interest*	(270)	[1]
Finance ROU Leases, Less Interest*	(4)	[1]
Less Interest*		[1]
Operating ROU Leases	1,731
Finance ROU Leases	91

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