EDGAR 10-K Filing

Company CIK: 736012
Filing Year: 2021
Filename: 736012_10-K_2021_0001683168-21-000836.json

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ITEM 1. BUSINESS
Item 1. Description of Business.
Our Corporate Information
We were organized in Texas in September 1983 and reincorporated in Delaware in October 1995. Our principal executive offices are located at 101 East Park Boulevard, Suite 1300, Plano, Texas 75074, 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..
Our Business
We develop, sell and support products that protect any-sized company or government organization by fusing advanced threat intelligence with real-time artificial intelligence to neutralize cyberattacks as they occur - including Zero-Day attacks. We market and distribute our solutions through a direct sales force and value-added resellers. Our end-user customers include U.S. federal government entities, state and local government entities, and companies ranging in size from mid-market to large enterprises.
Our Solutions
INTRUSION Shield tm
INTRUSION Shield, our cornerstone cybersecurity solution is a comprehensive, real-time AI-based Security-as-a-Service that inspects and kills all dangerous network connections before they can do damage. What makes our approach unique is that it inspects every packet of inbound and outbound traffic and analyzes the reputation of the IP addresses (source and destination), the domain and ports it is communicating on, along with many other fields in the packet to neutralize malicious connections.
Most breaches today are caused by malware free compromises that trigger no alarms in a firewall or endpoint solution. The common denominator is network , which Shield monitors and analyses, allowing Shield to identify and stop all attacks, even malware-free attacks. Shield’s capabilities continuously evolve based on constant machine learning and neural networking technology. Unlike traditional industry approaches that rely heavily on human mitigation and defensive approaches, which malicious actors and nation states have learned to bypass. Shield’s proprietary architecture isolates and neutralizes malicious traffic and network flows that existing solutions cannot identify before they harm a corporation or government organization.
Shield is designed as a next generation Network Detection and Response solution. After 30 years of providing research, analysis, tools and services to the federal government and enterprise corporations, Intrusion possesses a comprehensive and proprietary data set of petabytes of Internet traffic, including information about the activities of malicious online actors. Shield integrates this rich TraceCop data set with artificial intelligence (AI) and Savant real-time process flow technology to provide our customers with a unique and affordable tool to detect, identify, and neutralize cyberattacks. In particular, the Shield AI has been specifically trained to identify and stop Zero-Day attacks and ransomware, the most prolific and crippling forms of malware today.
INTRUSION TraceCop TM
INTRUSION TraceCop is our big data tool with extensive IP intelligence canvassing the entire Internet. It contains largest repository of reputation information on known good and known bad active IP addresses (both IPv4 and IPv6). TraceCop contains an inventory of network selectors and enrichments useful to support forensic investigations. The data contains a history of IPv4 and IPv6 block allocations and transfers, historical mappings of IP addresses to Autonomous Systems (ASNs) as observed through BGP, and approximately one billion historically registered domain names and registration context. TraceCop contains tens of billions of historic DNS resolutions of Fully Qualified Domain Names (FQDNs or hostnames) on each of these domains. Together, this shows relationships, hosting, and attribution for Internet resources. TraceCop also contains web server content surveys of content, such as natural language and topic of the content on hundreds of millions of websites and servers and OS fingerprints of services showing applications running on an IP. This context allows Shield to assess the use and purpose of an Internet resource. TraceCop also contains a history of threat and reputation for each hostname and IP address over time. All this makes it a very effective network forensics and cybersecurity analysis tool to inform Shield.
INTRUSION Savant TM
INTRUSION Savant is a network monitoring solution that leverages the rich data available in TraceCop to identify suspicious traffic in real-time. Savant uses several original patents to uniquely characterize and record all network flows. Savant is a network reconnaissance and attack analysis tool used by forensic analysts in the DoD, Federal Government and corporations with in-house threat research teams. For example, Savant users can create various automated rules to inspect packets matching (or not) certain criteria such as creating a rule to ensure the Source MAC address field in the Ethernet header and Source IP address from the IP header are always the same, failing which could indicate MAC or IP Spoofing in progress. Similarly, threat investigators can create rules using regular expressions by combining multiple fields in the packet headers. Ultimately, the rich capabilities of Savant provides the real-time analysis that Shield uses to make decisions on whether or not a packet is malicious.
Our Intellectual Property and Licenses
Our success and our ability to compete are dependent, in part, upon our proprietary technology. We principally rely on a combination of contractual rights, trade secrets and copyright laws to establish and protect our proprietary rights in our solutions. In addition, we have received two patents, and we are in the process of applying for patents for our Shield family of solutions. We have also entered into non-disclosure agreements with our suppliers, resellers, and certain customers to limit access to and disclosure of proprietary information. There can be no assurance that the steps taken by us to protect our intellectual property will be adequate to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology, although it would be extremely difficult to replicate the proprietary and comprehensive internet databases we have developed over the past 24 years.
We have entered into software and solution license agreements with various suppliers. These license agreements provide us with additional software and hardware components that add value to our cybersecurity solutions. These license agreements do not provide proprietary rights that are unique or exclusive to us and are generally available to other parties on the same or similar terms and conditions, subject to payment of applicable license fees and royalties. We do not consider any of the solution license, software or supplier agreements to be material to our business, but rather complementary to our business and offerings.
Our Competition
The market for network and data protection security solutions is intensely competitive and subject to frequent introductions of new technologies, and potentially improved price and performance characteristics. Industry suppliers compete in areas such as conformity to existing and emerging industry standards, interoperability with networking and other cybersecurity solutions, management and security capabilities, performance, price, ease of use, scalability, reliability, flexibility, features and technical support. The market for identity identification and data mining is highly fragmented and thus allows more opportunities for companies to compete.
There are numerous companies competing in various segments of the data security markets. At this time, we have little or no competitors for TraceCop; however, we expect competitors could emerge in the future. These competitors currently perform only a portion of the functions that we are able to perform with TraceCop. We have been continuously collecting the TraceCop data for more than twenty years, and we believe that none of our current or future competitors will have the ability to provide and reference this extremely valuable historical data. In our newest market segment, data mining and advanced persistent threat detection, we compete with several companies including Niksun, NetScout, FireEye, and Darktrace.
We expect that our Shield solution, as well as the complementary offerings in the Shield family, will be novel and unique in our industry because of its plug-n-play installation, proprietary threat-enriched big data cloud, real-time AI and monthly contract, will complement our customer’s existing cybersecurity processes and third-party solutions. When Shield receives widespread acceptance in our market, we anticipate that other businesses will seek to compete with Shield; however, we believe our existing, mature, and proprietary database which are integral to the operation of Shield will be difficult, if not impossible, for other companies in our industry to replicate and will be a significant barrier to entry of competitors in the near- and long-term future of cyber security solutions.
Our Customers: Government Sales
Sales to U.S. government customers accounted for 86.3% of our revenues for the year ended December 31, 2020, compared to 87.4% of our revenue in 2019. Adverse effects from the proliferation of the COVID-19 virus have resulted in decreased demand by some of our customers for our current product offerings and cybersecurity solutions, negatively affecting our 2020 revenue levels. We expect to continue to derive a substantial portion of our revenues from sales to governmental entities in the future as we continue to market our entity identification products and data mining products to the government. Sales to the government present risks in addition to those involved in sales to commercial customers that could adversely affect our revenues, including potential disruption due to irregularities in or interruptions to appropriation and spending patterns, delays in approving a federal budget and the government’s reservation of the right to cancel contracts and purchase orders for its convenience.
Generally, we make our sales under purchase orders and contracts. Our customers, including government customers, may cancel their orders or contracts with little or no prior notice and without penalty. Although we transact business with various government entities, we believe that the cancellation of any particular order in itself could have a material adverse effect on our financial results. Because we derive and expect to continue to derive a substantial portion of our revenue from sales to government entities, a large number of cancelled or renegotiated government orders or contracts could have a material adverse effect on our financial results. Currently, we are not aware of any proposed cancellation or renegotiation of any of our existing arrangements with government entities.
Third-Party Products
We currently resell standard commercially available computers and servers from various vendors which we integrate with our different software products for implementation into our customer networks. We do not consider any of these third party relationships to be material to the Company’s business or results of operations.
Customer Services
Our solution sales may include installation and threat data interpretation.
Manufacturing and Supplies
Our internal manufacturing operations consist primarily of software, packaging, testing and quality control of finished units. The hardware we sell are standard off-the-shelf solutions.
Sales, Marketing and Customers
Field Sales Force. Our direct sales organization focuses on major account sales, channel partners including distributors, value added resellers (VARs) and integrators; promotes our solutions to current and potential customers; and monitors evolving customer requirements. The field sales and technical support force provides training and technical support to our resellers and end users and assists our customers in designing cyber secure data networking solutions. We currently conduct sales and marketing efforts from our principal office in Plano (Dallas), Texas. In addition, we have sales personnel, sales engineers or sales representatives located in several other states.
Resellers. Resellers such as domestic and international system integrators and VARs sell our solutions as stand-alone solutions to end users and integrate our solutions with products sold by other vendors into network security systems that are sold to end users. Our field sales force and technical support organization provide support to these resellers. Our agreements with resellers are non- exclusive, and our resellers generally sell other products and solutions that may compete with our solutions. Resellers may place higher priority on products or solutions of other suppliers who are larger and have more name recognition, and there can be no assurance that resellers will continue to sell and support our solutions.
Foreign Sales. Export sales did not account for any revenue in 2020 and 2019.
Marketing. We have implemented several methods to market our solutions, including participation in trade shows and seminars, distribution of sales literature and solution specifications and ongoing communication with our resellers and installed base of end-user customers.
Customers. Our end-user customers include U.S. federal government, state and local government entities, large and diversified conglomerates and manufacturing entities. Sales to certain customers and groups of customers can be impacted by seasonal capital expenditure approval cycles, and sales to customers within certain geographic regions can be subject to seasonal fluctuations in demand.
In 2020, 86.3 % of our revenue was derived from a variety of U.S. government entities through direct sales and indirectly through system integrators and resellers. These sales are attributable to five U.S. Government customers through direct and indirect channels; three exceeded 10% of total revenue individually in 2020. Comparatively, sales to the U.S. Government through direct and indirect channels totaled 87.4% of total revenues for 2019. Those sales were attributable to ten U.S. Government customers through direct and indirect channels; three exceeded 10% of total revenue individually in 2019. A reduction in our sales to U.S. government entities could have a material adverse effect on our business and operating results if not replaced.
Backlog. We believe that only a small portion of our order backlog is non-cancelable, and that the dollar amount associated with the non-cancelable portion is immaterial. We purchase, or contract for the purchase of, our inventory based upon our forecast of customer demand, and we maintain inventories in advance of receiving firm orders from customers. Commercial orders are generally fulfilled within two days to two weeks following receipt of an order. Certain orders may be scheduled over several months, generally not exceeding one year.
Customer Support, Service and Warranty. We service, repair, and provide technical support for our solutions. Our field sales and technical support force works closely with resellers and end-user customers on-site and by telephone to assist with pre- and post- sales support services such as network security design, system installation and technical consulting. By working closely with our customers, our employees increase their understanding of end-user requirements and are then able to provide specific input in our solution development process.
We warrant all of our solutions against defects in materials and workmanship for periods ranging from 90 days to 36 months. Before and after expiration of the solution warranty period, we offer both on-site and factory-based support, parts replacement, and repair services. Extended warranty services are separately invoiced on a time and materials basis or under an annual maintenance contract.
Employees
As of December 31, 2020, we employed a total of 63 full time persons, including 23 in sales, marketing and technical support, 32 in research, development, analysis and engineering, and 8 in administration and finance.
None of our employees are represented by a labor organization, and we are not a party to any collective bargaining agreement. We have not experienced any work stoppages and consider our relations with our employees to be good.
Competition in the recruiting of personnel in the networking and data security industry is intense. We believe that our future success will depend in part on our continued ability to hire, motivate and retain qualified management, sales, marketing, and technical personnel. To date, we have not experienced significant difficulties in attracting or retaining qualified employees.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
We had a net loss of $6.5 million for the year ended December 31, 2020, and we have an accumulated deficit of $61.3 million as of December 31, 2020. To improve our financial performance, we must increase revenue levels.
For the year ended December 31, 2020, we had a net loss of $6.5 million and had an accumulated deficit of approximately $61.3 million as of December 31, 2020, compared to a net income of $4.5 million for the year ended December 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 solutions if we are to regain profitability. If we are unable to increase 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.
We may be unable to successfully market, promote, and sell our new commercial solution, INTRUSION Shield, and market it through new sales channels to a new set of prospective customers.
We anticipate significant resources will be required in order to succeed in launching our new Shield solution, including the time, attention, and focus of our senior management and our research and development team, coordination of new marketing strategies highlighting this new offering and promoting it through new and expanded sales channels to a wider audience of prospective customers than we have historically marketed and sold our solutions and services. In addition, significant financial resources will be required to successfully manage the implementation of this new solution. This could result in diversion of those resources from critical areas of our company operations and a potential strain on our liquidity and ability to meet our current and these anticipated increases in our cash-flow needs.
We could experience damage to our reputation in the cybersecurity industry in the event that our Shield solution fails to meet our customers’ needs or to achieve market acceptance.
Our reputation in the industry as a provider of entity identification, data mining, and advanced persistent threat detection solutions may be harmed, perhaps significantly, in the event that Shield fails to perform as we expect it to. If Shield does not perform as we expect, if we experience delivery delays, or if our customers do not perceive the benefits of purchasing and using Shield as part of their comprehensive cybersecurity solution, our position as a leader in this technology space may be damaged and could affect the willingness of our customers, as well as potential customers, to purchase our other solutions that function separately from Shield. Any reputational damage could result in a decrease in orders for all of our solutions, the loss of current customers, and a decrease in our overall revenues which could in turn have a material adverse effect on our results of operation.
The effect of the coronavirus, particularly in the diversion of time and resources of the federal, state, and local governmental entities which make up a significant concentration of our customer base, have and may continue to cause material adverse effects on our operations and our financial results.
A significant concentration of our federal, state, and local governmental customers have been forced to allocate scarce and competing resources and balance budgetary demands placed upon them as a result of the effects of the coronavirus, mandatory quarantines, decreased travel, interruptions in workforce populations, scarcity of commodities, and similar economic and operational effects of the virus upon their own constituencies. Considerable uncertainties continue with respect to the spread and containment of the pandemic, including, without limitation, the effects of mutations in the virus and the efficacy of vaccination efforts throughout the country and the world. These adverse effects have resulted in decreased demand by some of our customers for our current product offerings and cybersecurity solutions, negatively affecting historic revenue levels for the Company. In turn, we are continuing to adapt our operations and the efficiency of our own staff, employees, and strategic partners, including increased reliance on remote workplace solutions during 2020 and continuing indefinitely into 2021. A continued decrease in orders for our solutions by our government customers and losses of efficiency or diversions of resources in our own operations may continue to cause material adverse effect on our operations and financial results, which may not be offset even with the successful introduction of Shield solution into the marketplace.
We must expend time and resources addressing potential cybersecurity 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 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.
Fluctuations in our quarterly revenues may cause the price of our common stock to decline.
Our operating results have varied significantly from quarter to quarter in the past, and we expect our operating results to vary from quarter to quarter in the future due to a variety of factors, many of which are outside of our control. Therefore, if revenues are below our expectations, this shortfall is likely to adversely and disproportionately affect our operating results. Accordingly, we may not attain positive operating margins in future quarters. Any of these factors could cause our operating results to be below the expectations of securities analysts and investors, which likely would negatively affect the price of our common stock.
A large percentage of our current revenues are received from U.S. government entities, and the loss of these customers or our failure to widen the scope of our customer base to include general commercial enterprises could negatively affect our revenues.
A large percentage of our current revenues result from sales to U.S. government entities. If we were to lose one or more of these customers, our revenues could decline and our business and prospects may be materially harmed. Further, sales to the government present risks in addition to those involved in sales to commercial customers, including potential disruption due to appropriation and spending patterns, delays in approving a federal budget and the government’s right to cancel contracts and purchase orders for its convenience. While we expect that developing relationships with non-governmental customers will mitigate or eliminate this dependence on, and risk from, serving governmental entities, we can offer no assurances that we will be able to sufficiently diversify our customer portfolio in a time and manner to adequately mitigate this risk.
Almost all of our existing revenues are currently from one family of solutions with a limited number of customers, and the decrease of revenue from sales of this family of solutions could materially harm our business and prospects. Timeliness of orders from customers may cause volatility in growth.
Almost all of our existing revenues result from sales of one cybersecurity solution. TraceCop revenues were $6.2 million for the year ended December 31, 2020, compared to $13.4 million for the year ended December 31, 2019. While we anticipate the introduction of our new Shield solution will reduce our dependence on this single solution, we can offer no assurances as such, and in the absence of a shift in solution mix, we may continue to face risks in the event that sales of this key solution to these limited customers were to decrease.
We are highly dependent on sales of our current solutions through indirect channels, the loss of which would materially adversely affect our operations.
For the years ended December 31, 2019 and 2020, we derived 70.3% and 49.3% of our revenues from sales through indirect sales channels, such as distributors, value-added resellers, system integrators, original equipment manufacturers and managed service providers. We must expand sales of our current solutions as well as any new solutions, such as Shield, through these indirect channels in order to increase our revenues. We cannot assure you that our current solutions or future solutions 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 and solutions through these indirect sales channels, which could result in lower prices and reduced profit margins for sales of our solutions.
You will experience substantial dilution upon the exercise of certain stock options currently outstanding.
On February 12, 2021, we had 17,538,779 shares of common stock outstanding. Upon the exercising of current options exercisable at or below the exercise price of $4.75, we would have approximately 18,014,116 shares of common stock outstanding, a 2.71% increase in the number of shares of our common stock outstanding.
We resemble a developmental stage company and our business strategy may not be successful.
We depend exclusively on revenues generated from the sale of our current network security/advanced persistent threat detection solution (Savant), which has received limited market acceptance, and our entity identification, data mining and analytic solution (TraceCop). We can provide no assurances that these solutions or our newly developed Shield solution will ever achieve widespread market acceptance or that an adequate market for these solutions will ever emerge. Consequently, we resemble a developmental stage company and will face the following inherent risks and uncertainties:
· the need for our current and in-development solutions to achieve market acceptance and produce a sustainable revenue stream;
· our ability to manage costs and expenses;
· our dependence on key personnel;
· our ability to obtain financing on acceptable terms; and
· our ability to offer greater value than our competitors.
Our business strategy may not successfully address these risks. If we fail to recognize significant revenues from the sales of our current and in-development solutions, our business, financial condition and operating results would be materially adversely affected.
If we fail to respond to rapid technological changes in the network security industry, we may lose customers or our solutions may become obsolete.
The network security industry is characterized by frequent product and service introductions, rapidly changing technology and continued evolution of new industry standards. We have and must continue to introduce upgrades to our current solutions rapidly in response to customer needs such as new computer viruses or other novel external attacks on computer networks. Further, our new Shield solution represents our efforts to continue to provide state-of-the art first-in-time innovation for our customer’s cybersecurity solutions. As a result, our success depends upon our ability to develop and introduce timely upgrades, enhancements, and new solutions to meet evolving customer requirements and industry standards. The development of technologically advanced network security products and solutions is a complex and uncertain process requiring high levels of innovation, rapid response, and accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced solutions successfully in a timely manner. Further, we or our competitors may introduce new solutions or enhancements that shorten the life cycle of our existing solutions or cause our existing solutions to become obsolete.
We face intense competition from both start-up and established companies that may have significant advantages over us and our solutions.
The market for our solutions is intensely competitive. There are numerous companies competing with us in various segments of the data security markets, and their products or solutions may have advantages over our solutions in areas such as conformity to existing and emerging industry standards, interoperability with networking and other cybersecurity products, management and security capabilities, performance, price, ease of use, scalability, reliability, flexibility, features, and technical support.
Our principal competitors in the data mining and advanced persistent threat market include Niksun, NetScout, FireEye, and Darktrace. Our current and potential competitors may have one or more of the following significant advantages over us:
· greater financial, technical and marketing resources;
· better name recognition;
· more comprehensive security solutions;
· better or more extensive cooperative relationships; and
· larger customer base.
We cannot assure you that we will be able to compete successfully with our existing or new competitors. Some of our competitors may have, in relation to us, one or more of the following:
· longer operating histories;
· longer-standing relationships with OEM and end-user customers; and
· greater customer service, public relations and other resources.
As a result, these competitors may be able to more quickly develop or adapt to new or emerging technologies and changes in customer requirements, or devote greater resources to the development, promotion and sale of their products or solutions. Additionally, it is likely that new competitors or alliances among existing competitors could emerge and rapidly acquire significant market share.
Our management and larger stockholders currently exercise significant control over our Company and such influence may be in conflict to your interests.
As of February 12, 2021, our executive officers and directors beneficially own approximately 8.7% of our voting power. In addition, other related affiliate parties control approximately 47.5% of voting power. As a result, these stockholders have been able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Although we follow our policies regarding related party transactions, we cannot entirely eliminate the influence of these stockholders as long as they hold such a concentration of the voting power of our common stock.
Our solutions are highly technical and if they contain undetected errors, our business could be adversely affected and we might have to defend lawsuits or pay damages in connection with any alleged or actual failure of our solutions and services.
Our solutions are highly technical and complex, are critical to the operation of many networks and, in the case of ours, provide and monitor network security and may protect valuable information. Our solutions have contained and may contain one or more undetected errors, defects or security vulnerabilities. Some errors in our solutions may only be discovered after a solution has been installed and used by end customers. Any errors or security vulnerabilities discovered in our solutions after commercial release could result in loss of revenues or delay in revenue recognition, loss of customers and increased service and warranty cost, any of which could adversely affect our business and results of operations. In addition, we could face claims for product liability, tort, or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention. In addition, if our business liability insurance coverage is inadequate or future coverage is unavailable on acceptable terms or at all, our financial condition could be harmed.
A breach of network security could harm public perception of our cybersecurity solutions, which could cause us to lose revenues.
If an actual or perceived breach of network security occurs in the network of a customer of our cybersecurity solutions, regardless of whether the breach is attributable to our solutions, the market perception of the effectiveness of our solutions could be harmed. This could cause us to lose current and potential end customers or cause us to lose current and potential value-added resellers and distributors. Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques.
If our solutions do not interoperate with our customers’ networks, installations will be delayed or cancelled and could harm our business.
Our solutions are designed to interface with our customers’ existing networks, each of which have different specifications and utilize multiple protocol standards and products or solutions from other vendors. Many of our customers’ networks contain multiple generations of products that have been added over time as these networks have grown and evolved. Our solutions will be required to interoperate with many products and solutions within these networks as well as future products or solutions in order to meet our customers’ requirements. If we find errors in the existing software or defects in the hardware used in our customers’ networks, we may have to modify our software or hardware to fix or overcome these errors so that our solutions will interoperate and scale with the existing software and hardware, which could be costly and negatively impact our operating results. In addition, if our solutions do not interoperate with those of our customers’ networks, demand for our solutions could be adversely affected, orders for our solutions could be cancelled, or our solutions could be returned. This could hurt our operating results, damage our reputation and seriously harm our business and prospects.
We must adequately protect our intellectual property in order to prevent loss of valuable proprietary information.
We rely primarily on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures, and non-disclosure agreements to protect our proprietary technology. However, unauthorized parties may attempt to copy or reverse- engineer aspects of our solutions or to obtain and use information that we regard as proprietary. Policing unauthorized use of our solutions is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our intellectual property. This is particularly true in foreign countries whose laws may not protect proprietary rights to the same extent as the laws of the United States and may not provide us with an effective remedy against unauthorized use. If protection of our intellectual property proves to be inadequate or unenforceable, others may be able to use our proprietary developments without compensation to us, resulting in potential cost advantages to our competitors.
We may incur substantial expenses defending ourselves against claims of infringement.
There are numerous patents held by many companies relating to the design and manufacture of network security systems. Third parties may claim that our solutions infringe on their intellectual property rights. Any claim, with or without merit, could consume our management’s time, result in costly litigation, cause delays in sales or implementations of our solutions or require us to enter into royalty or licensing agreements. Royalty and licensing agreements, if required and available, may be on terms unacceptable to us or detrimental to our business. Moreover, a successful claim of product infringement against us or our failure or inability to license the infringed or similar technology on commercially reasonable terms could seriously harm our business.
The price of our common stock has been volatile in the past and may continue to be volatile in the future due to factors outside of our control.
The market price of our common stock has been highly volatile in the past and may continue to be volatile in the future. Our common stock was traded on the OTCQB until October 9, 2020, when it began trading on the Nasdaq Capital Market. For the twelve months ended December 31, 2020, the market price of our common stock fluctuated between $2.70 and $19.09. The market value of our common stock may fluctuate significantly in the future in response to a number of factors, some of which are outside our control, including:
· variations in our quarterly operating results;
· changes in estimates of our financial performance by securities analysts;
· changes in market valuations of our competitors;
· thinly traded common stock;
· our ability to successfully produce, market, and sell our new Shield solution through new and broader sales channels to an expanded potential client market;
· announcements by us or our competitors of new products or solutions, significant contracts, acquisitions, strategic relationships, joint ventures or capital commitments;
· product or design flaws, product recalls or similar occurrences;
· additions or departures of key personnel;
· sales of common stock in the future; and
· fluctuations in stock market prices and volume, which are relatively typical for high technology companies.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

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ITEM 2. PROPERTIES
Item 2. Properties
Our corporate headquarters are currently located in 8,331 square feet of space at 101 East Park Blvd, Suite 1300, Plano Texas. This facility houses our corporate administration, sales and marketing. The lease for this facility extends until September 2023. The Company vacated its previous space in Richardson, Texas beginning in the fourth quarter of 2020. The lease for this 23,000 square foot facility extends through November 2024 and is the subject of a lawsuit the Company filed against the landlord on February 16, 2021. We have charged this landlord with breach of contract, constructive eviction, and we have requested a declaratory judgment relieving us of any further payment obligations under this lease.
For a variety of reasons, the Company encouraged its Texas based engineers and analysts to work remotely beginning in fourth quarter 2020. Approximately 13 percent of our security software research and development and engineering staff are currently working remotely from home offices in California. We have one small facility in San Marcos, California under a lease and expiring in March 2021. We have one engineer working from home in New Mexico.
We believe that the existing facilities will be adequate to meet our operational requirements through 2021, although we periodically review our leased space to in order to ensure such space is secure and suitable for our current and future needs. We believe that all such facilities are adequately covered by appropriate property insurance. See Note 4 to our Consolidated Financial Statements for additional information regarding our obligations under leases.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
On February 16, 2021, Intrusion Inc. instituted legal proceedings in the District Court of Dallas County, Texas, 14th Judicial District against Purple Plaza LLC, the landlord for the facilities we previously occupied in Richardson, Texas. This lawsuit claims damages for breach of contract for, among other things, failure to maintain and repair the leased facilities and to provide adequate heating, air conditioning, and ventilation on the premises, resulting in a constructive eviction. Intrusion is seeking damages in excess of $1,000,000 together with a declaratory judgment that any of Intrusion’s remaining obligations under the lease have terminated. The landlord filed a general denial on March 5, 2021.
In addition to this pending litigation, we are subject to various other legal proceedings and claims that may arise in the ordinary course of business. We do not believe that any claims exist where the outcome of such matters would have a material adverse effect on our consolidated financial position, operating results or cash flows. However, there can be no assurance such legal proceedings will not have a material impact on future results.
PART II

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ITEM 4. MINE SAFETY DISCLOSURE

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Common Equity and Related Stockholder Matters and Business Issuer Purchases of Equity Securities. - Intrusion Equity Accounting
Our common stock trades on the Nasdaq Capital Market, where it is currently listed under the symbol “INTZ.” As of February 12, 2021, there were approximately 105 registered holders of record of our common stock. Quotations on the OTCQB reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
All stock option plans under which our common stock is reserved for issuance have previously been approved by our stockholders. The following table provides summary information as of December 31, 2020 for all of our equity compensation plans (in thousands, except per share data). See Note 9 to our consolidated financial statements for additional discussion.
Number of shares of
common stock to be
issued upon exercise
of outstanding
options Weighted average
exercise price of
outstanding options No. of shares of
common stock
remaining available
for future issuance
under equity
compensation plans
Equity compensation plans approved by security holders 1 1,035 2.87
Equity compensation plans not approved by security holders - - -
Total 1,035 2.87
__________________
(1) Included in the outstanding options are 526,000 from the 2005 Stock Incentive Plan and 509,000 from the 2015 Stock Option Plan.

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ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our Business
We develop, sell and support products that protect any-sized company or government organization by fusing advanced threat intelligence with real-time artificial intelligence to neutralize cyberattacks as they occur - including Zero-Day attacks. We market and distribute our solutions through a direct sales force and value-added resellers. Our end-user customers include U.S. federal government entities, state and local government entities, and companies ranging in size from mid-market to large enterprises.
Our Solutions
INTRUSION Shield
INTRUSION Shield, our cornerstone cybersecurity solution is a comprehensive, real-time AI-based Security-as-a-Service that inspects and kills all dangerous network connections before they can do damage. What makes our approach unique is that it inspects every packet of inbound and outbound traffic and analyzes the reputation of the IP addresses (source and destination), the domain and ports it is communicating on, along with many other fields in the packet to neutralize malicious connections.
Most breaches today are caused by malware free compromises that trigger no alarms in a firewall or endpoint solution. The common denominator is network communications, which Shield monitors and analyses, allowing Shield to identify and stop all attacks, even malware-free attacks. Shield’s capabilities continuously evolve based on constant machine learning and neural networking technology. Unlike traditional industry approaches that rely heavily on human mitigation and defensive approaches, which malicious actors and nation states have learned to bypass, Shield’s proprietary architecture isolates and neutralizes malicious traffic and network flows that existing solutions cannot identify before they harm a corporation or government organization.
Shield is designed as a next generation Network Detection and Response solution. After 30 years of providing research, analysis, tools and services to the federal government and enterprise corporations, Intrusion possesses a comprehensive and proprietary data set of petabytes of Internet traffic, including information about the activities of malicious online actors. Shield integrates this rich TraceCop data set with artificial intelligence (AI) and Savant real-time process flow technology to provide our customers with a unique and affordable tool to detect, identify, and neutralize cyberattacks. In particular, the Shield AI has been specifically trained to identify and stop Zero-Day attacks and ransomware, the most prolific and crippling forms of malware today.
INTRUSION TraceCop
INTRUSION TraceCop is our big data tool with extensive IP intelligence canvassing the entire Internet. It contains largest repository of reputation information on known good and known bad active IP addresses (both IPv4 and IPv6). TraceCop contains an inventory of network selectors and enrichments useful to support forensic investigations. The data contains a history of IPv4 and IPv6 block allocations and transfers, historical mappings of IP addresses to Autonomous Systems (ASNs) as observed through BGP, and approximately one billion historically registered domain names and registration context. TraceCop contains tens of billions of historic DNS resolutions of Fully Qualified Domain Names (FQDNs or hostnames) on each of these domains. Together, this shows relationships, hosting, and attribution for Internet resources. TraceCop also contains web server content surveys of content, such as natural language and topic of the content on hundreds of millions of websites and servers and OS fingerprints of services showing applications running on an IP. This context allows Shield to assess the use and purpose of an Internet resource. TraceCop also contains a history of threat and reputation for each hostname and IP address over time. All this makes it a very effective network forensics and cybersecurity analysis tool to inform Shield.
INTRUSION Savant
INTRUSION Savant is a network monitoring solution that leverages the rich data available in TraceCop to identify suspicious traffic in real-time. Savant uses several original patents to uniquely characterize and record all network flows. Savant is a network reconnaissance and attack analysis tool used by forensic analysts in the DoD, Federal Government and corporations with in-house threat research teams. For example, Savant users can create various automated rules to inspect packets matching (or not) certain criteria such as creating a rule to ensure the Source MAC address field in the Ethernet header and Source IP address from the IP header are always the same, failing which could indicate MAC or IP Spoofing in progress. Similarly, threat investigators can create rules using regular expressions by combining multiple fields in the packet headers. Ultimately, the rich capabilities of Savant provides the real-time analysis that Shield uses to make decisions on whether or not a packet is malicious.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, bad debts, inventories, income taxes, warranty obligations, maintenance contracts and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We generally recognize product revenue upon shipment or after meeting certain performance obligations. These products can include hardware, perpetual software licenses and data sets. Data set updates are the majority of sales. We do not currently offer software on a subscription basis. Warranty costs and sales returns for our current products 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:
· identify the contract with a customer;
· identify the performance obligations in the contract;
· determine the transaction price;
· allocate the transaction price to the separate performance obligations; and
· 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 solution offering and service offering market values are readily determined based on current and prior stand-alone sales. We may defer and recognize maintenance, updates and support revenue over the term of the contract period, which is generally one year.
Service revenue, primarily including maintenance, training and installation, are recognized upon delivery of the service and typically are unrelated to product sales. To date, maintenance, training and installation revenue has not been material. Our normal payment terms offered to customers, distributors and resellers are net 30 days domestically and net 45 days internationally. We do not offer payment terms that extend beyond one year and rarely do we extend payment terms beyond our normal terms. If certain customers do not meet our credit standards, we do require payment in advance to limit our credit exposure.
Shipping and handling costs are billed to the customer and included in product revenue. Shipping and handling expenses are included in cost of product revenue.
Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our receivables are uncollateralized, and we expect to continue this policy in the future. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, increased allowances may be required. Historically, our estimates for sales returns and doubtful accounts have not differed materially from actual results.
Fair Value of Financial Instruments
We calculate the fair value of our assets and liabilities which qualify as financial instruments and include additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued expenses, and dividends payable approximate their carrying amounts due to the relatively short maturity of these instruments. Financing leases and PPP loan approximate fair value as they bear market rates of interest.
Results of Operations
The following tables set forth, for the periods indicated, certain financial data as a percentage of net revenue.
Year Ended December 31,
Net product revenue 100.0 % 100.0 %
Total cost of revenue 40.9 39.2
Gross profit 59.1 60.8
Operating expenses:
Sales and marketing 57.7 9.5
Research and development 57.4 9.6
General and administrative 42.5 8.7
Operating income (loss) (98.5 ) 33.0
Interest expense (0.1 ) (0.3 )
Interest income 0.1 -
Income (loss) from operations before income taxes (98.5 ) 32.7
Income tax provision - -
Net income (loss) (98.5 ) 32.7
Preferred stock dividends accrued (1.2 ) (1.0 )
Net income (loss) attributable to common stockholders (99.7 )% 31.7 %
2020 compared with 2019
Net Revenue
Total revenue decreased 51.5% to $6.6 million in 2020 from $13.6 million in 2019. We did not meet sales projections for our TraceCop product line. We expect our product revenues to increase in the future if we can increase sales to existing customers and add new customers.
There were no export sales in 2020 and 2019 primarily due to our focus on domestic revenue sales. Sales of our products internationally may be subject to currency exchange risk, which may cause our products to effectively increase in price, if the exchange rate moves significantly and the dollar gains value over the foreign currency.
Historically, due to the timing of our sales cycle, a significant portion of our monthly sales occurs in the second half of the month. Accordingly, our receivables increase at the end of each month, which causes a higher accounts receivable balance at month end. This monthly trend also causes an inflated comparative relationship between revenue and accounts receivable. We believe that this monthly trend will continue because monthly sales forecast and planning meetings are held in the first week of every month, the middle of the month is focused on sales calls to customers and the latter half of the month on closing sales.
Gross Profit
Gross profit decreased 52.9% to $3.9 million in 2020 from $8.3 million in 2019. As a percentage of net revenue, gross profit decreased from 60.8% in 2019 to 59.1% in 2020. Gross profit as a percentage of revenue, decreased in 2020 compared to 2019 because of higher labor costs related to certain projects.
Gross profit as a percentage of net revenue is impacted by several factors, including shifts in product mix, changes in channels of distribution, sales volume, fluctuations in manufacturing costs, labor costs, pricing strategies, and fluctuations in sales of integrated third-party products.
Sales and Marketing
Sales and marketing expenses increased to $3.8 million or 57.7% of net revenue in 2020, compared to $1.3 million or 9.5% of net revenue in 2019. The increase in sales and marketing expense was primarily two activities: building, training, and preparing a sales department to sell our new commercial product in 2021; and applying a dedicated $1.2 million marketing and promotion budget. Sales and marketing expenses may vary in the future. We expect sales and marketing expenses to increase if net revenue levels increase in 2021.
Research and Development
Research and development expenses increased to $3.8 million or 57.4% of net revenue in 2020 compared to $1.3 million or 9.6% of net revenue in 2019. The increase in research and development expense was due to less labor expense shifted to direct labor costs. Our research and development costs are expensed in the period in which they are incurred. We expect research and development expenses to increase if we are able to increase net revenue levels in 2021. Research and development expense levels may fluctuate due to labor expense shifting to direct labor.
General and Administrative
General and administrative expenses increased to $2.8 million, or 42.5% of net revenue in 2020 compared to $1.2 million or 8.7% of net revenue in 2019. This was primarily a result of a non-cash write off for a $1.1 million abandoned operating lease asset. Other contributing expenses were related to increases in administrative and Human Resources. Excluding the $1.1 million non-cash write off for the abandonment of prior office lease, we expect general and administration expenses to remain constant but increase if net revenue levels increase in 2021.
Interest Expense
Interest expense decreased to $6 thousand in 2020, compared to $46 thousand in 2019. Interest expense decreased due to a combination of a zero balance under an unsecured revolving promissory note to borrow up to $3,700,000 from G. Ward Paxton, the Company’s former Chief Executive Officer (the “CEO Note”) and declining balances in financial leases and remained steady for operating leases. Interest expense will vary in the future based on our cash flow and borrowing needs.
Interest Income
Interest income earned on bank deposits was $11 thousand in 2020 compared to $4 thousand in 2019.
Income Taxes
Our effective income tax rate was 0% in 2020 and 2019 as valuation allowances have been recorded for the entire amount of the net deferred tax assets due to uncertainty of realization. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“the Tax Act”) which significantly changed U.S. tax law. The Tax Act lowered the Company’s statutory federal income tax rate from a maximum of 39% to a rate of 21% effective January 1, 2018.
Liquidity and Capital Resources
Our principal source of liquidity at December 31, 2020 was $16.7 million of cash and cash equivalents. As of December 31, 2020, we did not hold investments with a stated maturity beyond one year. Working capital at December 31, 2020 was $16.2 million, while at December 31, 2019, it was $3.1 million.
Net cash used in operations for the twelve months ended December 31, 2020, was $5.2 million due primarily to a net loss of $6.5 million and the following uses of cash: a $339 thousand decrease in deferred revenue, a $258 thousand increase in prepaid expenses and other assets, and a $334 thousand decrease in accounts payable and accrued expenses. This was partially offset by these sources of cash and non-cash items: a $1.1 million non-cash write-off for an abandoned operating lease asset, a $333 thousand decrease in accounts receivable, $322 thousand in stock-based compensation, $231 thousand in depreciation expense and amortization expense, and $294 thousand in noncash lease costs.
Net cash provided by operations for the twelve months ended December 31, 2019, was $4.3 million due primarily to a net income of $4.5 million and the following sources of cash and non-cash items: $232 thousand in noncash lease costs, a $401 thousand decrease in accounts receivable, $184 thousand in depreciation expense and amortization expense, $47 thousand in stock-based compensation, and $6 thousand in waived penalties on dividends. This was partially offset by a $496 thousand decrease in accounts payable and accrued expenses, a $488 thousand decrease in deferred revenue, and a $61 thousand increase in prepaid expenses and other assets. Future fluctuations in accounts receivable, inventory balances and accounts payable will be dependent upon several factors, including quarterly sales, timely collection of accounts receivable, and the accuracy of our forecasts of product demand and component requirements.
Net cash used in investing activities in 2020 was $320 thousand for purchases of property and equipment. Net cash used in investing activities in 2019 was $260 thousand for purchases of property and equipment.
Net cash provided by financing activities in 2020 was $18.9 million with proceeds of $18.2 million from a stock offering, $629 thousand from a PPP loan, and proceeds from exercise of stock options of $209 thousand. This was directly offset by the following uses of cash: payments for preferred stock dividends of $99 thousand and payment on principal of finance right-of-use leases of $43 thousand. Net cash used in financing activities in 2019 was $2.3 million primarily due to payments on the loan by an officer of $1.8 million, $714 thousand payment of dividends on preferred stock, and $58 thousand payments on principal on financing leases. This was directly offset by a provision of cash of $239 thousand from the exercise of stock options.
At December 31, 2020, we had a commitment of $21 thousand for future finance lease liabilities. Operating lease commitments of $2.6 million are detailed in the Contractual Obligations section below. At December 31, 2019, we had a commitment of $66 thousand for future finance lease liabilities, while operating lease commitments were $1.8 million. During 2020, we funded our operations through the use of available cash and cash equivalents.
As of December 31, 2020, we had cash and cash equivalents of approximately $16.7 million, up from approximately $3.3 million as of December 31, 2019. We generated a net loss of $6.5 million for the year ended December 31, 2020 compared to a net income of $4.5 million for the year ended December 31, 2019.
We expect to fund our operations through anticipated Company profits together with the approximately $18 million in net proceeds we received from our Secondary Public Offering, which we believe will be sufficient to finance our operations, the additional expenses of marketing, promoting, and selling our new Shield solution and the development of its follow-on solutions, as well as other expected capital expenditures for the next twelve months.
We may explore the possible acquisitions of businesses, products and technologies that are complementary to our existing business. We are continuing to identify and prioritize additional security technologies, which we may wish to develop, either internally or through the licensing, or acquisition of products from third parties. While we may engage from time to time in discussions with respect to potential acquisitions, there can be no assurances that any such acquisitions will be made or that we will be able to successfully integrate any acquired business. In order to finance such acquisitions and working capital it may be necessary for us to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms, which are not favorable to us and, in the case of equity financings, may result in dilution to our stockholders.
Contractual Obligations
The following table sets forth certain information concerning the future contractual obligations under our leases at December 31, 2020. We had no other significant contractual obligations at December 31, 2020.
Future minimum lease obligations consisted of the following at December 31, 2020 (in thousands):
Operating Finance
Period ending December 31, ROU Leases ROU Leases Total
$ 584 $ 21 $ 605
-
-
-
-
$ 2,584 $ 21 $ 2,605
Less Interest* (230 ) -
$ 2,354 $ 21
*Interest is imputed for operating ROU leases and classified as lease expense and is included in operating expenses in the accompanying condensed consolidated statement of operations.
Off-Balance Sheet Arrangements
As of December 31, 2020, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
Recent Accounting Pronouncements
See Note 2 Consolidated Financial Statements

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements
The information required by this Item 8 begins on page of this Annual Report on Form 10-K.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Effectiveness of Disclosure Controls and Procedures
The Company’s management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
The Company’s management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer , conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on criteria established in 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s evaluation included an assessment of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and the Company’s overall control environment. Based on its evaluation, management concluded that the Company’s internal control over financial reporting was effective as of the year ended December 31, 2020 to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. The Company reviewed the results of management’s assessment with the Audit Committee of the Board of Directors.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report. This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Inherent Limitations on Effectiveness of Controls
The Company’s management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that the Company’s disclosure controls or internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2020, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III
Certain information required by Part III is omitted from this Form 10-K because we will file a definitive Proxy Statement for our 2021 annual meeting of stockholders pursuant to Regulation 14A (the “Proxy Statement”) no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information to be included therein is incorporated herein by reference.

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ITEM 9B. OTHER INFORMATION

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
The information called for by this item is incorporated herein by reference to the Proxy Statement.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
The information called for by this item is incorporated herein by reference to the Proxy Statement.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information called for by this item is incorporated herein by reference to the Proxy Statement.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information called for by this item is incorporated herein by reference to the Proxy Statement.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services.
The information called for by this item is incorporated herein by reference to the Proxy Statement.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules.
(a) 1. Consolidated Financial Statements.
The following consolidated financial statements of Intrusion Inc. and subsidiaries, are submitted as a separate section of this report (See F-pages):
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2020 and 2019
Consolidated Statements of Operations for the years ended December 31, 2020 and 2019
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
Exhibit Number
Description of Exhibit
3.1(3)
Restated Certificate of Incorporation of the Registrant
3.2(5)
Certificate of Amendment to Certificate of Incorporation of Registrant
3.6(2)
Bylaws of the Registrant
4.1(6)
Specimen Common Stock Certificate
10.1(6)
Lease Agreement between CalWest Industrial Holdings Texas, L.P. and Intrusion Inc.
10.2(13)
Fourth Amendment to Lease, executed on September 27, 2019, by and between Intrusion Inc. and JP-CORPORATE PLACE, LP.
10.3(1)
Sublease Agreement between the Registrant and CliftonLarsonAllen LLP dated September 28, 2020
10.4(1)
Lease between the Registrant and JBA Portfolio, LLC, executed as of February 3, 2021
10.5(2)
Amended and Restated 401(k) Savings Plan of the Registrant
10.6(4)
Intrusion Inc. 401(k) Savings Plan Summary of Material Modifications
10.7(7)
Amended 2005 Stock Incentive Plan of the Registrant
10.8(9)
2015 Stock Incentive Plan of the Registrant
10.9(10)
Form of Notice of Grant of Stock Option
10.10(10)
Form of Stock Option Agreement
10.11(10)
Form of Notice of Grant of Non-Employee Director Automatic Stock Option (Initial Grant)
10.12(10)
Form of Notice of Grant of Non-Employee Director Automatic Stock Option (Annual Grant)
10.13(10)
Form of Automatic Stock Option Agreement
21(8)
List of Subsidiaries of Registrant
23.1(1)
Consent of Whitley Penn LLP, Independent Registered Public Accounting Firm
31.1(1)
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act
31.2(1)
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act
32.1(1)
Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2(1)
Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS(1)
XBRL Instance Document.
101.SCH(1)
XBRL Taxonomy Extension Schema Document.
101.CAL(1)
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF(1)
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB(1)
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE(1)
XBRL Taxonomy Extension Presentation Linkbase Document.
(1) Filed herewith
(2) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K, for the fiscal year ended December 31, 2000, which Exhibit is incorporated herein by reference.
(3) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated June 15, 2010, which Exhibit is incorporated herein by reference.
(4) Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, which Exhibit is incorporated herein by reference.
(5) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (as amended), which Exhibit is incorporated herein by reference.
(6) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (as amended), which Exhibit is incorporated herein by reference.
(7) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated June 15, 2005, which Exhibit is incorporated herein by reference.
(8) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (as amended), which Exhibit is incorporated herein by reference.
(9) Filed as an Exhibit to the Registrant’s Definitive Proxy Statement on Schedule 14A in connection with the solicitation of proxies for its Annual Meeting of Stockholders held May 14, 2015, which Exhibit is incorporated herein by reference.
(10) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (as amended), which Exhibit is incorporated herein by reference.