10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
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 May 1, 2020 was 13,778,030.

1

INTRUSION INC.

INDEX

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements	3
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019	3
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019	4
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2020 and 2019	5
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019	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	15
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	16
Item 1A. Risk Factors	16
Item 6. Exhibits	19
Signature Page	20

2

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

INTRUSION INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

	March 31, 2020			December 31, 2019
ASSETS
Current Assets:
Cash and cash equivalents	$	3,217		$	3,334
Accounts receivable		1,032			1,566
Prepaid expenses		169			152
Total current assets		4,418			5,052
Noncurrent Assets:
Property and equipment, net		333			335
Finance leases, right-of-use assets, net		52			62
Operating leases, right-of-use assets, net		1,285			1,348
Other assets		38			38
Total noncurrent assets		1,708			1,783
TOTAL ASSETS	$	6,126		$	6,835
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses	$	1,051		$	1,080
Dividends payable		53			20
Finance leases liability, current portion		43			43
Operating leases liability, current portion		288			284
Deferred revenue		284			516
Total current liabilities		1,719			1,943
Noncurrent Liabilities:
Operating leases liability, noncurrent portion		1,244			1,315
Finance leases liability, noncurrent portion		11			21
Total noncurrent liabilities		1,255			1,336
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value: Authorized shares – 5,000
Series 1 shares issued and outstanding — 200 Liquidation preference of $1,025 in 2020 and $1,013 in 2019		707			707
Series 2 shares issued and outstanding — 420 in 2020 and 460 in 2019 Liquidation preference of $1,068 in 2020 and $1,155 in 2019		661			724
Series 3 shares issued and outstanding — 266 in 2020 and 289 in 2019 Liquidation preference of $590 in 2020 and $634 in 2019		379			412
Common stock, $0.01 par value:
Authorized shares — 80,000
Issued shares — 13,788 in 2020 and 13,552 in 2019 Outstanding shares — 13,778 in 2020 and 13,542 in 2019		138			136
Common stock held in treasury, at cost – 10 shares		(362	)		(362	)
Additional paid-in capital		56,914			56,759
Accumulated deficit		(55,242	)		(54,777	)
Accumulated other comprehensive loss		(43	)		(43	)
Total stockholders’ equity		3,152			3,556
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,126		$	6,835

See accompanying notes.

3

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

	Three Months Ended
	March 31, 2020			March 31, 2019
Revenue	$	1,795		$	3,191
Cost of revenue		747			1,284
Gross profit		1,048			1,907
Operating expenses:
Sales and marketing		510			412
Research and development		753			182
General and administrative		256			331
Operating income (loss)		(471	)		982
Interest expense		(1	)		(35	)
Interest income		7			—
Net Income (loss)	$	(465	)	$	947
Preferred stock dividend accrued		(33	)		(34	)
Net income (loss) attributable to common stockholders	$	(498	)	$	913
Net income (loss) per share attributable to common stockholders:
Basic	$	(0.04	)	$	0.07
Diluted	$	(0.04	)	$	0.06
Weighted average common shares outstanding:
Basic		13,703			13,408
Diluted		13,703			15,323

See accompanying notes.

4

INTRUSION INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

	Three Months Ended
	March 31, 2020			March 31, 2019
NUMBER OF PREFERRED SHARES—ISSUED AND OUTSTANDING
Balance, beginning of quarter		949			949
Conversion of preferred stock to common		(63	)		—
Balance, end of quarter		886			949
PREFERRED STOCK
Balance, beginning of quarter	$	1,843		$	1,843
Conversion of preferred stock to common		(96	)		—
Balance, end of quarter		1,747			1,843
NUMBER OF COMMON SHARES—ISSUED
Balance, beginning of quarter		13,552			13,259
Conversion of preferred stock to common		63			—
Exercise of stock options		173			266
Balance, end of quarter		13,788			13,525
COMMON STOCK
Balance, beginning of quarter	$	136		$	133
Conversion of preferred stock to common		1			—
Exercise of stock options		1			2
Balance, end of quarter	$	138		$	135
TREASURY SHARES
Balance, beginning of quarter and end of quarter	$	(362	)	$	(362	)
ADDITIONAL PAID-IN-CAPITAL
Balance, beginning of quarter	$	56,759		$	56,609
Conversion of preferred stock to common		95			—
Stock-based compensation		19			4
Exercise of stock options		74			218
Preferred stock dividends declared, net of waived penalties by shareholders		(33	)		(28	)
Balance, end of quarter	$	56,914		$	56,803
ACCUMULATED DEFICIT
Balance, beginning of quarter	$	(54,777	)	$	(59,242	)
Net income (loss)		(465	)		947
Balance, end of quarter	$	(55,242	)	$	(58,295	)
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of quarter and end of quarter	$	(43	)	$	(43	)
TOTAL STOCKHOLDERS’ EQUITY	$	3,152		$	81

See accompanying notes.

5

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

	Three Months Ended
	March 31, 2020			March 31, 2019
Operating Activities:
Net income (loss)	$	(465	)	$	947
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		52			39
Stock-based compensation		19			4
Penalties on dividends		—			6
Noncash lease costs		63			246
Changes in operating assets and liabilities:
Accounts receivable		534			475
Prepaid expenses and other assets		(17	)		(94	)
Accounts payable and accrued expenses		(96	)		(307	)
Deferred revenue		(232	)		(529	)
Net cash provided by (used in) operating activities		(142	)		787
Investing Activities:
Purchases of property and equipment		(40	)		(96	)
Financing Activities:
Payments on loan from officer		—			(1,000	)
Proceeds from stock options exercised		75			220
Payments of dividends		—			(597	)
Reduction of finance lease liability		(10	)		(15	)
Net cash provided by (used in) financing activities		65			(1,392	)
Net decrease in cash and cash equivalents		(117	)		(701	)
Cash and cash equivalents at beginning of period		3,334			1,652
Cash and cash equivalents at end of period	$	3,217		$	951
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES:
Preferred stock dividends accrued	$	33		$	34
Conversion of preferred stock to common	$	96		$	—

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 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, 2019 balance sheet was derived from audited financial statements, but does not include all the disclosures required by accounting principles generally accepted in the United States. However, we believe that the disclosures are adequate to make the information presented not misleading. In our opinion, all the adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. The results of operations for the three month period ended March 31, 2020 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, 2019, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 27, 2020.

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.

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 month periods ended March 31, 2020 and 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. Under the terms of the CEO Note, the Company had the ability to borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $3,700,000 at any given time through March 2020.

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

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

4. Accounting for Stock-Based Compensation

During the three month periods ended March 31, 2020 and 2019, the Company did not grant any stock options to employees or directors. The Company recognized $19,000 and $4,000, respectively, in stock-based compensation expense for the three month periods ended March 31, 2020 and 2019.

During the three month period ended March 31, 2020, 172,600 options were exercised under the 2005 Plan compared to 266,000 in the previous year comparative quarter.

Valuation Assumptions

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

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

5. Revenue Recognition

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

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

i) identify the contract with a customer;

ii) identify the performance obligations in the contract;

iii) determine the transaction price;

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

v) recognize revenue upon satisfaction of a performance obligation.

Data updates are typically done monthly and revenue will be matched accordingly. Product sales may include maintenance and customer support allocated revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy using the relative selling price method. All of our product offering and service offering market values are readily determined based on current and prior stand-alone sales. We may defer and recognize maintenance, updates and support revenue over the term of the contract period, which is generally one year.

8

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

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

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

Contract assets represent contract billings for sales per contracts with customers and are classified as current. Our contract assets include our accounts receivables. At March 31, 2020, the Company had contract assets balance of $1,032,000. At December 31, 2019, the Company had contract assets balance of $1,566,000.

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 March 31, 2020, the Company had contract liabilities balance of $284,000. At December 31, 2019, the Company had contract liabilities balance of $516,000.

6. Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders for the period by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of common shares and dilutive common stock equivalents outstanding for the period. Our common stock equivalents include all common stock issuable upon conversion of preferred stock and the exercise of outstanding options and warrants. The aggregate number of common stock equivalents excluded from the diluted income (loss) per share calculation for the three month periods ending March 31, 2020 and 2019 are 1,876,352 and 0, 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 71.4% of total revenues for the first quarter of 2020 compared to 86.4% of total revenues for the first quarter of 2019. During the first quarter of 2020, approximately 70.0% of total revenues were attributable to three government customers compared to approximately 64.2% of total revenues attributable to three government customers in the first quarter of 2019. There was one individual commercial customer in the first quarter of 2020 attributable for 22.0% of total revenue compared to 11.1% of total revenue to one individual commercial customer for the same period in 2019. 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 March 31, 2020, we accrued $13,000 in dividends payable to the holders of our 5% Preferred Stock, $13,000 in dividends payable to the holders of our Series 2 5% Preferred Stock and $7,000 in dividends payable to the holders of our Series 3 5% Preferred Stock. As of March 31, 2020, we have $33,000 in accrued and unpaid dividends.

9

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 late CEO, our Interim CEO and current 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 March 31, 2020, the aggregate redemption price we would owe would be $1.7 million.

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 four years and eight months as of March 31, 2020. The San Marcos operating lease liability has a life of twelve months as of March 31, 2020. The adoption of the lease accounting standard resulted in the recognition of an operating ROU asset of $1,553 thousand and a related lease liability of $1,744 thousand during the first quarter of 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.

Supplemental cash flow information includes operating cash flows related to operating leases. For the three months ended March 31, 2020 and 2019, the Company had $88 thousand and $0, respectively, in operating cash flows related to operating leases.

Schedule of Items Appearing on the Statement of Operations:

	Three Months Ended
	March 31, 2020		March 31, 2019
Operating expense:
Amortization Expense – Finance ROU		10		16
Lease expense – Operating ROU		83		79
Other expense:
Interest Expense – Finance ROU		1		1

Future minimum lease obligations consisted of the following at March 31, 2020 (in thousands):

	Operating			Finance
Period ending March 31,	ROU Leases			ROU Leases			Total
2020	$	365		$	45		$	410
2021		360			11			371
2022		372			—			372
2023		383			—			383
2024		256			—			256
Thereafter		—			—			—
	$	1,736		$	56		$	1,792
Less Interest*		(204	)		(2	)
	$	1,532		$	54

*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.

10

11. Coronavirus Outbreak in the United States

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

On March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which includes provision for a Paycheck Protection Program (“PPP”) administered by the U.S. Small Business Administration (“SBA”). The PPP allows qualifying businesses to borrow up to $10 million calculated based on qualifying payroll costs. PPP loans bear a fixed interest rate of 1% over a two-year term, are guaranteed by the federal government, and do not require collateral. The loans may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company has applied for a PPP loan in the amount of $629 thousand, which was approved by the SBA on April 30, 2020. The Company expects to use the full proceeds of the PPP loan in accordance with the provisions of the CARES Act.

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:

● the transition of responsibilities from our co-founder, G. Ward Paxton, and the appointment of our current CFO, Michael L. Paxton, as a Director, Chairman of the Board, as well as Interim President and Interim CEO, may cause disruptions in the Company’s operations, take a significant portion of our management’s time and attention, and may cause our suppliers, vendors, and customers to be concerned about this transition;

● the uncertain ramifications related to the coronavirus outbreak;

● 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;

● our unavailability to make future borrowings under the CEO Note;

● our ability to replace all or a portion of the borrowing capacity available to the Company under the CEO Note and whether any such terms would be available on terms acceptable to the Company, if at all;

● 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;

11

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

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

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

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

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

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

Results of Operations

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

	Three Months Ended
	March 31, 2020			March 31, 2019
Total revenue		100.0	%		100.0	%
Total cost of revenue		41.6			40.2
Gross profit		58.4			59.8
Operating expenses:
Sales and marketing		28.4			12.9
Research and development		41.9			5.7
General and administrative		14.3			10.4
Operating income (loss)		(26.2	)		30.8
Interest income		0.4			—
Interest expense		(0.1	)		(1.1	)
Income (loss) before income tax provision		(25.9	)		29.7
Income tax provision		—			—
Net income (loss)		(25.9	)%		29.7	%
Preferred stock dividends accrued		(1.8	)		(1.1	)
Net income (loss) attributable to common stockholders		(27.7	)%		28.6	%

	Three Months Ended
	March 31, 2020			March 31, 2019
Domestic revenues		100.0	%		100.0	%
Export revenues		—			—
Net revenues		100.0	%		100.0	%

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Net Revenues. Product revenues decreased for the quarter ended March 31, 2020 to $1.8 million, compared to $3.2 million for the quarter ended March 31, 2019. TraceCop revenues decreased to $1.7 million for the quarter ended March 31, 2020, compared to $3.1 million for the quarter ended March 31, 2019. Savant revenues remained constant at $0.1 million for the quarter ended March 31, 2020 and 2019. Substantially all of our revenue for the quarters ended March 31, 2020 and 2019 were derived from TraceCop/Savant sales.

Concentration of Revenues. Revenues from sales to various U.S. government entities totaled $1.3 million, or 71.4% of revenues, for the quarter ended March 31, 2020, compared to $2.8 million, or 86.4% of revenues, for the same period in 2019. Although we expect our concentration of revenues to vary among customers in future periods depending upon the timing of certain sales, we anticipate that sales to government customers will continue to account for a significant portion of our revenues in future periods. Sales to the government present risks in addition to those involved in sales to commercial customers which could adversely affect our revenues, including, without limitation, potential disruption to appropriation and spending patterns and the government’s reservation of the right to cancel contracts and purchase orders for its convenience. Although we do not anticipate that any of our revenues with government customers will be renegotiated, a large number of cancelled or renegotiated government orders could have a material adverse effect on our financial results. Currently, we are not aware of any proposed cancellation or renegotiation of any of our existing arrangements with government entities and, historically, government entities have not cancelled or renegotiated orders which had a material adverse effect on our business. There was one individual commercial customer in the first quarter of 2020 attributable for 22.0% of total revenue compared to 11.1% of total revenue to one individual commercial customer for the same period in 2019.

Gross Profit. Gross profit was $1.0 million or 58.4% of net revenues for the quarter ended March 31, 2020, compared to $1.9 million or 59.8% of net revenues for the quarter ended March 31, 2019. Gross profit on product revenues for the quarter ended March 31, 2020 was 58.4% compared to 59.8% for the quarter ended March 31, 2019, mainly due to TraceCop/Savant product mix. Gross profit as a percentage of net revenues is impacted by several factors, including shifts in product mix, changes in channels of distribution, revenue volume, pricing strategies, and fluctuations in revenues of integrated third-party products.

Sales and Marketing. Sales and marketing expenses increased to $0.5 million for the quarter ended March 31, 2020, compared to $0.4 million for the quarter ended March 31, 2019. Sales and marketing expenses may vary in the future. Sales and marketing expenses increased compared to the comparable quarter due to increases in labor and expenses. We believe that these costs may increase through the end of 2020 if we achieve anticipated increases in revenue.

Research and Development. Research and development expenses increased to $0.8 million for the quarter ended March 31, 2020, compared to $0.2 million for the quarter ended March 31, 2019. The increase in research and development expense was due to an increase in labor expense due to less direct labor required on existing projects. Research and development costs are expensed in the period in which they are incurred. Research and development expenses may vary in the future; mainly dependent on levels of research and development labor expense charged to direct labor.

General and Administrative. General and administrative expenses remained constant at $0.3 million for the quarters ended March 31, 2020 and 2019. It is expected that general and administrative expenses will remain relatively constant throughout the remainder of 2020, although expenses may be increased if we achieve anticipated increases in revenue.

Interest Expense. Interest expense decreased to $1 thousand for the quarter ended March 31, 2020, compared to $35 thousand for the same period in 2019. Interest expense decreased due to decreased amount of Loan Payable to Officer culminating in our repayment of the balance in May 2019. Interest expense will vary in the future based on our cash flow and borrowing needs.

Interest Income. Interest income earned on bank deposits was $7 thousand for the quarter ended March 31, 2020 compared to none for the same period in 2019.

Liquidity and Capital Resources

Our principal source of liquidity at March 31, 2020, was approximately $3.2 million of cash and cash equivalents. At March 31, 2020, we had working capital of $2.7 million compared to $0.6 million at March 31, 2019.

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Net cash used by operations for the three months ended March 31, 2020 was $142 thousand due primarily to a net loss of $465 thousand and the following uses of cash: a $232 thousand decrease in deferred revenue, a $96 thousand decrease in accounts payable and accrued expenses, and a $17 thousand increase in prepaid expenses and other assets. This was partially offset by the following provisions of cash and non-cash items: a $534 thousand decrease in accounts receivable, $63 thousand in noncash lease costs, $52 thousand in depreciation expense, and $19 thousand in stock-based compensation. Net cash provided by operations for the three months ended March 31, 2019 was $787 thousand due primarily to a net income of $947 thousand and the following sources of cash and non-cash items: a $475 thousand decrease in accounts receivable, $246 thousand in noncash lease costs, $39 thousand in depreciation expense, $6 thousand in penalties and waived penalties on dividends, and $4 thousand in stock-based compensation. This was partially offset by a $529 thousand decrease in deferred revenue, a $307 thousand decrease in accounts payable and accrued expenses, and a $94 thousand increase in prepaid expenses and other assets. Future fluctuations in 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.

Net cash used by investing activities for the three months ended March 31, 2020, was $40 thousand for net purchases of property and equipment, compared to net cash used in investing activities for the three months ended March 31, 2019, was $96 thousand for net purchases of property and equipment.

Net cash provided by financing activities in 2019 was $65 thousand from the proceeds on the exercise of stock options of $75 thousand and offset by the use of cash for payments on principal of finance right-of-use leases of $10 thousand. Net cash used by financing activities in 2019 was $1.4 million with payments to the CEO Note of $1.0 million, payments for preferred stock dividends of $597 thousand, and payment on principal of finance right-of-use leases of $15 thousand. This was directly offset by the following provisions of cash: proceeds from exercise of stock options of $220 thousand.

At March 31, 2020, the Company did not have any material commitments for capital expenditures.

During the three months ended March 31, 2020, the Company funded its operations through the use of cash and cash equivalents.

As of March 31, 2020, we had cash and cash equivalents of approximately $3,217,000, down from approximately $3,334,000 as of December 31, 2019. We had a net loss of $465,000 for the quarter ended March 31, 2020 compared to a net income of $947,000 for the quarter ended March 31, 2019. 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 in the coming quarters, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures for the next twelve months. As of October 24, 2019, our funding available from the CEO Note terminated. Our management will be assessing whether to replace this borrowing capacity and assessing what terms may be available to the Company, including whether any such terms are available on terms acceptable to the Company, if at all (the “Potential Replacement Funding Facility”). We expect to fund our operations through anticipated Company profits, possible additional investments of private equity and debt, and the Potential Replacement Funding Facility. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to our stockholders. If our operations do not generate positive cash flow in the future, 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.

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Item 4. CONTROLS AND PROCEDURES

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

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2020, 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, 2019, and concluded that there have not been any changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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, 2019. 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, 2019 filed on March 27, 2020. 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 be unsuccessful in the transition of responsibilities of our co-founder, G. Ward Paxton upon his unexpected passing on October 24, 2019, which may have a material adverse effect on our results of operations.

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

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

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

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

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

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

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

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

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

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

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

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 March 31, 2020, we had cash and cash equivalents of approximately $3,217,000, down from approximately $3,334,000 as of December 31, 2019. We had a net loss of $465,000 for the quarter ended March 31, 2020 compared to a net income of $947,000 for the quarter ended March 31, 2019. 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 in the coming quarters, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures for the next twelve months. As of October 24, 2019, our funding available from the CEO Note terminated. Our management will be assessing whether to replace this borrowing capacity and assessing what terms may be available to the Company, including whether any such terms are available on terms acceptable to the Company, if at all (the “Potential Replacement Funding Facility”). We expect to fund our operations through anticipated Company profits, possible additional investments of private equity and debt, and the Potential Replacement Funding Facility. Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to our stockholders. If our operations do not generate positive cash flow in the upcoming year, or if we are not able to obtain additional debt or equity financing on terms and conditions acceptable to us, if at all, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations.

We had a net loss of $0.5 million for the quarter ended March 31, 2020, and we have an accumulated deficit of $55.2 million as of March 31, 2020. To continue current financial performance, we must increase revenue levels.

For the quarter ended March 31, 2020, we had a net loss of $0.5 million and had an accumulated deficit of approximately $55.2 million as of March 31, 2020, compared to a net income of $947 thousand for the quarter ended March 31, 2019 and an accumulated deficit of approximately $54.8 million at December 31, 2019. We need to increase current revenue levels from the sales of our products if we are to regain profitability. If we are unable to achieve these revenue levels, losses could continue for the near term and possibly longer, and we may not regain 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 March 31, 2020, sales to U.S. government entities/resellers collectively accounted for 71.4% of our revenues, compared to 86.4% for the comparable period in 2019. 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.

17

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 volatility in growth.

Almost all of our revenues result from sales of one security product line. TraceCop revenues were $1.7 million for the quarter ended March 31, 2020, compared to $3.1 million for the first quarter 2019. Savant revenues remained constant at $0.1 thousand for the quarters ended March 31, 2020 and 2019. There was one individual commercial customer in the first quarter of 2020 attributable for 22.0% of total revenue compared to one individual customer with 11.1% of total revenue for the same period in 2019. 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.

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

We derived 37.3% of revenue in the first quarter of 2020 through indirect channels of mainly government resellers, compared to 67.6% of our revenues in the quarter ended March 31, 2019. 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 May 1, 2020, we had 13,778,030 shares of common stock outstanding. Upon conversion of all outstanding shares of preferred stock, we would have 14,782,278 shares of common stock outstanding, approximately a 7.3% increase in the number of shares of our common stock outstanding.

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

Further, the occurrence of certain events could entitle holders of our Series 2 Preferred Stock and Series 3 Preferred Stock to require us to redeem their shares for a certain number of shares of our common stock. Assuming (i) we have paid all liquidated damages and other amounts to the holders, (ii) paid all outstanding dividends, (iii) a volume weighted average price of $3.17, which was the ten-day volume weighted average closing price of our common stock on May 1, 2020, and (iv) our 13,778,030 shares of common stock outstanding on May 1, 2020, upon exercise of their redemption right by the holders of the Series 3 Preferred Stock and the Series 2 Preferred Stock, we would be obligated to issue approximately 906,550 shares of our common stock. This would represent an increase of approximately 6.6% in the number of shares of our common stock as of May 1, 2020.

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

The holders of the shares of our 5% Preferred Stock may freely convert their shares of preferred stock and sell the underlying shares of common stock pursuant to Rule 144 of the Securities and Exchange Commission. As of May 1, 2020, 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. For the quarter ended March 31, 2020, 40,000 shares of Series 2 5% Preferred Stock was converted to common stock. As of May 1, 2020, 645,200 shares of Series 2 Preferred Stock had converted into 645,200 shares of common stock and 420,000 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. For the quarter ended March 31, 2020, 23,194 shares of Series 3 5% Preferred Stock was converted to common stock. As of May 1, 2020, 298,424 shares of Series 3 Preferred Stock had converted into 298,424 shares of common stock and 266,183 shares of Series 3 5% preferred stock remain outstanding.

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Our common stock is thinly traded, which may negatively affect your ability to sell our shares on the OTCQB Marketplace (the “OTCQB”) as well as adversely affect the price at which you may be able to sell those shares. For the four weeks ended on May 1, 2020, the average daily trading volume of our common stock on the OTCQB was 14,995 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 May 1, 2020, we had 13,778,030shares of common stock outstanding. Upon the exercising of current options exercisable at or below the exercise price of $2.73, we would have approximately 14,523,000 shares of common stock outstanding, a 5.4% increase in the number of shares of our common stock outstanding.

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

As of May 1, 2020, our executive officers, directors and preferred stockholders beneficially own approximately 27% of our voting power. In addition, other related non-affiliate parties control approximately 36% 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 Interim Chief Executive Officer and Chief Financial Officer. Any such issuance will increase the percentage of stock our Interim 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

19

S I G N A T U R E S

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

	INTRUSION INC.
Date: May 14, 2020	/s/ Michael L. Paxton
	Michael L. Paxton
	Director, Chairman of the Board, Interim President & Interim Chief Executive Officer
	(Principal Executive Officer)
Date: May 14, 2020	/s/ Michael L. Paxton
	Michael L. Paxton
	Chief Financial Officer, Treasurer & Secretary
	(Principal Financial & Accounting Officer)

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EX-31.1

EXHIBIT 31.1

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

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

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

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

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

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

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

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

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

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

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

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

Date: May 14, 2020	/s/ Michael L. Paxton
	Michael L. Paxton
	Interim Chief Executive Officer

EX-31.2

EXHIBIT 31.2

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

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

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

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

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

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

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

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

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

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

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

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

Date: May 14, 2020	/s/ Michael L. Paxton
	Michael L. Paxton
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

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

In connection with the Quarterly Report of Intrusion Inc. (the “Company”) on Form 10-Q, for the quarter ended March 31, 2020 (the “Report”) as filed with the Securities and Exchange Commission on the date hereof, each of the undersigned Officers of the Company does hereby certify, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

May 14, 2020	/s/ Michael L. Paxton
	Michael L. Paxton
	Interim Chief Executive Officer

May 14, 2020	/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

Note 5 - Revenue Recognition (Details Textual) - USD ($)	3 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Period of Payment Terms Offered to Customers Distributions and Resellers Domestically (Day)	30 days
Period of Payment Terms Offered to Customers Distributors and Resllers Internationally (Day)	45 days
Contract with Customer, Asset, after Allowance for Credit Loss, Current, Total	$ 1,032,000	$ 1,566,000
Contract with Customer, Liability, Current	$ 284,000	$ 516,000

XML

Note 10 - Right-of-use Asset and Leasing Liabilities (Details Textual) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Lessee, Finance Lease, Term of Contract (Year)	3 years
Operating Lease, Right-of-Use Asset	$ 1,285	$ 1,553	$ 1,348
Operating Lease, Liability, Total	1,532	1,744
Operating Lease, Lease Income, Total	$ 88	$ 0
Richardson Property [Member]
Lessee, Operating Lease, Term of Contract (Year)	4 years 244 days
The San Marcos Property [Member]
Lessee, Operating Lease, Term of Contract (Year)	1 year

XML

Unaudited Condensed Consolidated Balance Sheets - USD ($)	Mar. 31, 2020	Dec. 31, 2019
Current Assets:
Cash and cash equivalents	$ 3,217,000	$ 3,334,000
Accounts receivable	1,032,000	1,566,000
Prepaid expenses	169,000	152,000
Total current assets	4,418,000	5,052,000
Noncurrent Assets:
Property and equipment, net	333,000	335,000
Finance leases, right-of-use assets, net	52,000	62,000
Operating leases, right-of-use assets, net	1,285,000	1,348,000
Other assets	38,000	38,000
Total noncurrent assets	1,708,000	1,783,000
TOTAL ASSETS	6,126,000	6,835,000
Current Liabilities:
Accounts payable and accrued expenses	1,051,000	1,080,000
Dividends payable	53,000	20,000
Finance leases liability, current portion	43,000	43,000
Operating leases liability, current portion	288,000	284,000
Deferred revenue	284,000	516,000
Total current liabilities	1,719,000	1,943,000
Noncurrent Liabilities:
Operating leases liability, noncurrent portion	1,244,000	1,315,000
Finance leases liability, noncurrent portion	11,000	21,000
Total noncurrent liabilities	1,255,000	1,336,000
Commitments and contingencies
Stockholders’ equity:
Issued shares — 13,788 in 2020 and 13,552 in 2019 Outstanding shares — 13,778 in 2020 and 13,542 in 2019	138,000	136,000
Common stock held in treasury, at cost – 10 shares	(362,000)	(362,000)
Additional paid-in capital	56,914,000	56,759,000
Accumulated deficit	(55,242,000)	(54,777,000)
Accumulated other comprehensive loss	(43,000)	(43,000)
Total stockholders’ equity	3,152,000	3,556,000
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	6,126,000	6,835,000
Series 1 Preferred Stock [Member]
Stockholders’ equity:
Preferred stock	707,000	707,000
Series 2 Preferred Stock [Member]
Stockholders’ equity:
Preferred stock	661,000	724,000
Series 3 Preferred Stock [Member]
Stockholders’ equity:
Preferred stock	$ 379,000	$ 412,000

XML

Unaudited Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Operating Activities:
Net income (loss)	$ (465)	$ 947
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	52	39
Stock-based compensation	19	4
Penalties on dividends		6
Noncash lease costs	63	246
Changes in operating assets and liabilities:
Accounts receivable	534	475
Prepaid expenses and other assets	(17)	(94)
Accounts payable and accrued expenses	(96)	(307)
Deferred revenue	(232)	(529)
Net cash provided by (used in) operating activities	(142)	787
Investing Activities:
Purchases of property and equipment	(40)	(96)
Financing Activities:
Payments on loan from officer		(1,000)
Proceeds from stock options exercised	75	220
Payments of dividends		(597)
Reduction of finance lease liability	(10)	(15)
Net cash provided by (used in) financing activities	65	(1,392)
Net decrease in cash and cash equivalents	(117)	(701)
Cash and cash equivalents at beginning of period	3,334	1,652
Cash and cash equivalents at end of period	3,217	951
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES:
Preferred stock dividends accrued	33	34
Conversion of preferred stock to common	$ 96

XML

Note 7 - Concentrations

3 Months Ended

Mar. 31, 2020

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

71.4%

of total revenues for the

first

quarter of

2020

compared to

86.4%

of total revenues for the

first

quarter of

2019.

During the

first

quarter of

2020,

approximately

70.0%

of total revenues were attributable to

three

government customers compared to approximately

64.2%

of total revenues attributable to

three

government customers in the

first

quarter of

2019.

There was

one

individual commercial customer in the

first

quarter of

2020

attributable for

22.0%

of total revenue compared to

11.1%

of total revenue to

one

individual commercial customer for the same period in

2019.

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 11 - Coronavirus Outbreak in the United States

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Contingencies Disclosure [Text Block]

11

. Coronavirus Outbreak in the United States

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

19

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

may

require additional cost and effort should our employees

not

be able to be physically on-premises.

On

March 27, 2020,

the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which includes provision for a Paycheck Protection Program (“PPP”) administered by the U.S. Small Business Administration (“SBA”). The PPP allows qualifying businesses to borrow up to

$10

million calculated based on qualifying payroll costs. PPP loans bear a fixed interest rate of

1%

over a

two

-year term, are guaranteed by the federal government, and do

not

require collateral. The loans

may

be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company has applied for a PPP loan in the amount of

$629

thousand, which was approved by the SBA on

April 30, 2020.

The Company expects to use the full proceeds of the PPP loan in accordance with the provisions of the CARES Act.

XML

Unaudited Condensed Consolidated Balance Sheets (Parentheticals) - $ / shares shares in Thousands	Mar. 31, 2020	Dec. 31, 2019
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized (in shares)	5,000	5,000
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	80,000	80,000
Common stock, shares issued (in shares)	13,788	13,552
Common stock, shares outstanding (in shares)	13,778	13,542
Common stock held in treasury, at cost, shares (in shares)	10	10
Series 1 Preferred Stock [Member]
Preferred stock, shares issued (in shares)	200	200
Preferred stock, shares outstanding (in shares)	200	200
Preferred stock, liquidation preference (in dollars per share)	$ 1,025	$ 1,013
Series 2 Preferred Stock [Member]
Preferred stock, shares issued (in shares)	420	460
Preferred stock, shares outstanding (in shares)	420	460
Preferred stock, liquidation preference (in dollars per share)	$ 1,068	$ 1,155
Series 3 Preferred Stock [Member]
Preferred stock, shares issued (in shares)	266	289
Preferred stock, shares outstanding (in shares)	266	289
Preferred stock, liquidation preference (in dollars per share)	$ 590	$ 634

XML

Note 1 - Description of Business

3 Months Ended

Mar. 31, 2020

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 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 6 - Net Income (Loss) Per Share

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Earnings Per Share [Text Block]

6. Net Income (Loss) Per Share

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

three

month periods ending

March 31, 2020

and

2019

are

1,876,352

and

0,

respectively.

XML

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

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Operating and Finance Leases Of Lessee Disclosure [Text Block]

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

four

years and

eight

months as of

March 31, 2020.

The San Marcos operating lease liability has a life of

twelve

months as of

March 31, 2020.

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

$1,553

thousand and a related lease liability of

$1,744

thousand during the

first

quarter of

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.

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

three

months ended

March 31, 2020

and

2019,

the Company had

$88

thousand and

$0,

respectively, in operating cash flows related to operating leases.

Schedule of Items Appearing on the Statement of Operations

:

	Three Months Ended
	March 31, 2020		March 31, 2019
Operating expense:
Amortization Expense – Finance ROU		10		16
Lease expense – Operating ROU		83		79
Other expense:
Interest Expense – Finance ROU		1		1

Future minimum lease obligations consisted of the following at

March

3

1

,

20

20

(in thousands):

	Operating			Finance
Period ending March 31,	ROU Leases			ROU Leases			Total
2020	$	365		$	45		$	410
2021		360			11			371
2022		372			—			372
2023		383			—			383
2024		256			—			256
Thereafter		—			—			—
	$	1,736		$	56		$	1,792
Less Interest*		(204	)		(2	)
	$	1,532		$	54

*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 11 - Coronavirus Outbreak in the United States (Details Textual) $ in Thousands	Apr. 30, 2020 USD ($)
Subsequent Event [Member]
Proceeds from Paycheck Protection Program Under CARES Act	$ 629

XML

Note 4 - Accounting for Stock-based Compensation (Details Textual) - USD ($)	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross (in shares)	0	0
Share-based Payment Arrangement, Expense	$ 19,000	$ 4,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross (in shares)	172,600	266,000

XML

Note 9 - Dividends Payable (Details Textual)	3 Months Ended
	Mar. 31, 2020 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	$ 13,000
Preferred Stock, Dividend Rate, Percentage	5.00%
Series 3 Preferred Stock [Member]
Dividends, Preferred Stock, Total	$ 7,000
Preferred Stock, Dividend Rate, Percentage	5.00%
Series 2 Preferred Stock and Series 3 Preferred Stock [Member]
Dividends, Preferred Stock, Total	$ 33,000
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 (Day)	45 days
Preferred Stock, Redemption Amount	$ 1.70

XML

Document And Entity Information - shares	3 Months Ended
	Mar. 31, 2020	May 01, 2020
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 Interactive Data Current	Yes
Entity Common Stock, Shares Outstanding (in shares)		13,778,030
Entity Shell Company	false
Document Type	10-Q
Document Period End Date	Mar. 31, 2020
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q1
Amendment Flag	false
Title of 12(g) Security	Common Stock, $0.01 par value

XML

Unaudited Condensed Consolidated Statements of Changes In Stockholders' Equity - USD ($) $ in Thousands	Preferred Stock [Member]	Common Stock [Member]	Treasury Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	AOCI Attributable to Parent [Member]	Total
Balance, beginning of quarter and end of quarter (in shares)	949,000	13,259,000
Balance, beginning of quarter (in shares) at Dec. 31, 2018	949,000	13,259,000
Conversion of preferred stock to common (in shares)
Balance, end of quarter (in shares) at Mar. 31, 2019	949,000	13,525,000	(362,000)
Balance, beginning of quarter at Dec. 31, 2018	$ 1,843	$ 133		$ 56,609	$ (59,242)	$ (43)
Conversion of preferred stock to common
Balance, end of quarter at Mar. 31, 2019	$ 1,843	$ 135		56,803	(58,295)		$ 81
Conversion of preferred stock to common (in shares)
Exercise of stock options (in shares)		266,000					266,000
Conversion of preferred stock to common
Exercise of stock options		$ 2		218
Balance, beginning of quarter and end of quarter (in shares)	949,000	13,525,000	(362,000)
Stock-based compensation				4
Preferred stock dividends declared, net of waived penalties by shareholders				(28)
Net income (loss)					947		$ 947
Balance, beginning of quarter and end of quarter (in shares)	949,000	13,525,000	(362,000)
Balance, beginning of quarter and end of quarter (in shares)	949,000	13,552,000
Balance, beginning of quarter (in shares) at Dec. 31, 2019	949,000	13,552,000
Conversion of preferred stock to common (in shares)	(63,000)
Balance, end of quarter (in shares) at Mar. 31, 2020	886,000	13,788,000	(362,000)
Balance, beginning of quarter at Dec. 31, 2019	$ 1,843	$ 136		56,759	(54,777)	$ (43)	3,556
Conversion of preferred stock to common	(96)						(96)
Balance, end of quarter at Mar. 31, 2020	$ 1,747	$ 138		56,914	(55,242)		$ 3,152
Conversion of preferred stock to common (in shares)		63,000
Exercise of stock options (in shares)		173,000					172,600
Conversion of preferred stock to common		$ 1		95
Exercise of stock options		$ 1		74
Balance, beginning of quarter and end of quarter (in shares)	886,000	13,788,000	(362,000)
Stock-based compensation				19
Preferred stock dividends declared, net of waived penalties by shareholders				$ (33)
Net income (loss)					$ (465)		$ (465)
Balance, beginning of quarter and end of quarter (in shares)	886,000	13,788,000	(362,000)

XML

Note 3 - Loan Payable to Officer

3 Months Ended

Mar. 31, 2020

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

$3,700,000

at any given time through

March 2020.

On

February 

7,

2019,

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

$2,700,000

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

1%.

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

$2,700,000

at any given time through

March 

2021.

We reduced our borrowing under this note to

zero

as of

May 2019.

As of

October 24, 2019,

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

no

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

may

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

XML

Note 4 - Accounting for Stock-based Compensation

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Share-based Payment Arrangement [Text Block]

4. Accounting for Stock-Based Compensation

During the

three

month periods ended

March 31, 2020

and

2019,

the Company did

not

grant any stock options to employees or directors. The Company recognized

$19,000

and

$4,000,

respectively, in stock-based compensation expense for the

three

month periods ended

March 31, 2020

and

2019.

During the

three

month period ended

March 31, 2020,

172,600

options were exercised under the

2005

Plan compared to

266,000

in the previous year comparative quarter.

Valuation Assumptions

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

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

XML

Note 8 - Commitments and Contingencies

3 Months Ended

Mar. 31, 2020

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

3 Months Ended

Mar. 31, 2020

Notes Tables

Lease, Cost [Table Text Block]

	Three Months Ended
	March 31, 2020		March 31, 2019
Operating expense:
Amortization Expense – Finance ROU		10		16
Lease expense – Operating ROU		83		79
Other expense:
Interest Expense – Finance ROU		1		1

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

	Operating			Finance
Period ending March 31,	ROU Leases			ROU Leases			Total
2020	$	365		$	45		$	410
2021		360			11			371
2022		372			—			372
2023		383			—			383
2024		256			—			256
Thereafter		—			—			—
	$	1,736		$	56		$	1,792
Less Interest*		(204	)		(2	)
	$	1,532		$	54

XML

Note 6 - Net Income (Loss) Per Share (Details Textual) - shares	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount (in shares)	1,876,352	0

XML

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
	Mar. 31, 2020	Mar. 31, 2019
Amortization Expense – Finance ROU	$ 10	$ 16
Lease expense – Operating ROU	83	79
Interest Expense – Finance ROU	$ 1	$ 1

XML

Note 7 - Concentrations (Details Textual)	3 Months Ended		12 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2018
Number of Areas in Which Operations are Concentrated	1
Customer Concentration Risk [Member] | Revenue Benchmark [Member] | U.S. Government [Member]
Concentration Risk, Percentage	71.40%	86.40%
Customer Concentration Risk [Member] | Revenue Benchmark [Member] | Three Government Customers [Member]
Concentration Risk, Percentage	70.00%	64.20%
Number of Major Customers	3	3
Customer Concentration Risk [Member] | Revenue Benchmark [Member] | One Commercial Customer [Member]
Concentration Risk, Percentage	22.00%	11.10%
Number of Major Customers			1
Customer Concentration Risk [Member] | Accounts Receivable [Member] | One Commercial Customer [Member]
Number of Major Customers			1

XML

Note 10 - Right-of-use Asset and Leasing Liabilities - Future Minimum Lease Obligations (Details) - USD ($) $ in Thousands		Mar. 31, 2020	Mar. 31, 2019
Operating ROU Leases, 2020		$ 365
Finance ROU Leases, 2020		45
2020		410
Operating ROU Leases, 2021		360
Finance ROU Leases, 2021		11
2021		371
Operating ROU Leases, 2022		372
Finance ROU Leases, 2022
2022		372
Operating ROU Leases, 2023		383
Finance ROU Leases, 2023
2023		383
Operating ROU Leases, 2024		256
Finance ROU Leases, 2024
2024		256
Operating ROU Leases, Thereafter
Finance ROU Leases, Thereafter
Thereafter
Operating ROU Leases Undiscounted Obligation		1,736
Finance ROU Leases Undiscounted Obligation		56
Lessee, Operating and Finance Lease, Liability, Payments, Due		1,792
Operating ROU Leases, Less Interest*	[1]	(204)
Finance ROU Leases, Less Interest*	[1]	(2)
Operating ROU Leases		1,532	$ 1,744
Finance ROU Leases		$ 54

[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.

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Note 2 - Basis of Presentation

3 Months Ended

Mar. 31, 2020

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, 2019

balance sheet was derived from audited financial statements, but does

not

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

not

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

three

month period ended

March 31, 2020

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,

2019,

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

March 27, 2020.

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, 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

month periods ended

March 31, 2020

and

2019.

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Unaudited Condensed Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Revenue	$ 1,795	$ 3,191
Cost of revenue	747	1,284
Gross profit	1,048	1,907
Operating expenses:
Sales and marketing	510	412
Research and development	753	182
General and administrative	256	331
Operating income (loss)	(471)	982
Interest expense	(1)	(35)
Interest income	7
Net Income (loss)	(465)	947
Preferred stock dividend accrued	(33)	(34)
Net income (loss) attributable to common stockholders	$ (498)	$ 913
Net income (loss) per share attributable to common stockholders:
Basic (in dollars per share)	$ (0.04)	$ 0.07
Diluted (in dollars per share)	$ (0.04)	$ 0.06
Weighted average common shares outstanding:
Basic (in shares)	13,703	13,408
Diluted (in shares)	13,703	15,323

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Note 3 - Loan Payable to Officer (Details Textual) - Revolving Credit Facility [Member] - Chief Executive Officer [Member] - USD ($)	3 Months Ended
	Mar. 31, 2020	Oct. 24, 2019	Sep. 30, 2019	Feb. 07, 2019	Feb. 08, 2018
Line of Credit Facility, Maximum Borrowing Capacity		$ 0		$ 2,700,000	$ 3,700,000
Debt Instrument, Basis Spread on Variable Rate	1.00%
Long-term Line of Credit, Total			$ 0

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Note 5 - Revenue Recognition

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

5. Revenue Recognition

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

not

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

not

been material.

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

606

whereby revenue from contracts with customers is

not

recognized until all

five

of the following have been met:

i) identify the contract with a customer;

ii) identify the performance obligations in the contract;

iii) determine the transaction price;

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

v) recognize revenue upon satisfaction of a performance obligation.

Data updates are typically done monthly and revenue will be matched accordingly. Product sales

may

include maintenance and customer support allocated revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy using the relative selling price method. All of our product offering and service offering market values are readily determined based on current and prior stand-alone sales. We

may

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

one

year.

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

not

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

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

30

days domestically and net

45

days internationally. We do

not

offer payment terms that extend beyond

one

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

not

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

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

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

March 31, 2020,

the Company had contract assets balance of

$1,032,000.

At

December 31, 2019,

the Company had contract assets balance of

$1,566,000.

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

March 31, 2020,

the Company had contract liabilities balance of

$284,000.

At

December 31, 2019,

the Company had contract liabilities balance of

$516,000.

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Note 9 - Dividends Payable

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

9. Dividends Payable

During the quarter ended

March 31, 2020,

we accrued

$13,000

in dividends payable to the holders of our

5%

Preferred Stock,

$13,000

in dividends payable to the holders of our Series

2

5%

Preferred Stock and

$7,000

in dividends payable to the holders of our Series

3

5%

Preferred Stock. As of

March 31, 2020,

we have

$33,000

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 late CEO, our Interim CEO and current 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

March 31, 2020,

the aggregate redemption price we would owe would be

$1.7

million.