The Registrantregistrant hereby amends this Registration Statementregistration statement on such date or dates as may be necessary to delay its effective date until the Registrantregistrant shall file a further amendment which specifically states that this Registration Statementregistration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 as amended, or until this Registration Statementthe registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information contained in this preliminary prospectus is not complete and may be changed. Neither we nor the selling stockholdersThese securities may sell these securitiesnot be sold until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and neither we nor the selling stockholders areis not soliciting offersan offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion, dated October 5, 2020SUBJECT TO COMPLETION DATED AUGUST 11, 2023

Preliminary Prospectus

3,100,000 shares

of Common Stock

Intrusion Inc.

Intrusion Inc. isUp to 8,173,076 Units, each consisting of

One Share of Common Stock or One Pre-Funded

Warrant to Purchase One Share of Common Stock and

One Warrant to Purchase One Share of Common Stock

Placement Agent Warrants to Purchase up to 817,307 Shares of Common Stock

Up to 17,163,460 Shares of Common Stock Underlying the Warrants,

Pre-Funded Warrants, and Placement Agent Warrants

We are offering 2,000,000 sharesup to 8,173,076 units (“Units”), each Unit consisting of our(i) one share of common stock, par value $0.01 per share, and (ii) one warrant with a five-year term to purchase one share of common stock at an exercise price of $1.144 per share (110% of the selling stockholdersoffering price per Unit) (“Warrant”) on a best-efforts basis. We are offering 1,100,000 shares of our common stock ineach Unit at an underwrittenassumed public offering (the “Underwritten Shares”). Under the terms and subjectprice of $1.04 per Unit, equal to the conditions in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom B. Riley Securities, Inc. is acting as representative, have severally agreed to purchase, and we and the selling stockholders have agreed to sell to them, severally, 3,100,000 shares of common stock.

Our common stock currently trades on the OTCQB, where it is listed under the symbol “INTZ.” As of October 2, 2020, the last saleclosing price of our common stock as reported on OTCQB was $14.32the Nasdaq Capital Market on August 9, 2023. Each Warrant will be immediately exercisable for one share of common stock at an assumed exercise price of $1.144 per share. There is a limited public trading market for our common stock. We have assumed ashare (not less than 110% of the public offering price of $14.32, which representseach Unit sold in this offering). The actual public offering price per Unit will be determined between us, Joseph Gunnar & Co., LLC (“Joseph Gunnar” or the last reported bid“Placement Agent”) and the investors in the offering, and may be at a discount to the current market price of our common stock as reported on the OTCQB on October 2, 2020. The final public offering price will be determined through negotiation between us and the underwriters in the offering andstock. Therefore, the assumed public offering price used throughout this prospectus may not be indicative of the actualfinal offering price.

We have appliedare also offering to listeach purchaser of Units that would otherwise result in the purchaser’s beneficial ownership exceeding 4.99% of our outstanding common stock onimmediately following the Nasdaq Capital Market, underconsummation of this offering, the symbol “INTZ”. We believe that upon completionopportunity to purchase Units consisting of one pre-funded warrant to purchase one share of common stock (“Pre-Funded Warrant”) (in lieu of one share of common stock) and one Warrant. Subject to limited exceptions, a holder of Pre-Funded Warrants will not have the right to exercise any portion of its Pre-Funded Warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% (or, at the election of the offering contemplated by this prospectus, we will meetholder, such limit may be increased to up to 9.99%) of the standards for listing on the Nasdaq Capital Market. We cannot guarantee that wenumber of common stock outstanding immediately after giving effect to such exercise. Each Pre-Funded Warrant will be successful in listing our common stock on the Nasdaq Capital Market.

The Company has granted the underwriters an optionexercisable for a period of 30 days to purchase up to an additional 465,000 sharesone share of common stock.

Certain The purchase price of our directors and executive officers may purchase shareseach Unit including a Pre-Funded Warrant will be equal to the price per Unit including one share of common stock, in this offering.

Investing in our common stock involves a high degreeminus $0.001, and the remaining exercise price of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock in “Risk factors” beginning on page 8 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representationeach Pre-Funded Warrant will equal $0.001 per share. The Pre-Funded Warrants will be immediately exercisable (subject to the contrary isbeneficial ownership cap) and may be exercised at any time until all of the Pre-Funded Warrants are exercised in full. For each Unit including a criminal offense.

The underwriters expectPre-Funded Warrant we sell (without regard to deliverany limitation on exercise set forth therein), the sharesnumber of Units including a share of common stock we are offering will be decreased on a one-for-one basis. The common stock and Pre-Funded Warrants, if any, can each be purchased in this offering only with the accompanying Warrant as part of a Unit, but the components of the Units will immediately separate upon issuance. We are also registering the common stock issuable from time to investors on or about            , 2020.

B. RILEY SECURITIES

The datetime upon exercise of this prospectus is  , 2020

Neither we, nor the selling stockholders, norPre-Funded Warrants and the underwriters have authorized anyone to provide you with information other than that containedWarrants included in the Units offered hereby. See “Description of Securities — Description of Securities We Are Offering” in this prospectus or any free writing prospectus prepared by or on behalf of us or to which we have referred you. The underwriters, selling stockholders, and we take no responsibility for and can provide no assurance as to the reliability of, any other information that others may give you. This is an offer to sell only in jurisdictions where it is lawful to do so. The information contained in this prospectus or any free writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.more information.

This offering will terminate on ____________, 2023, unless we decide to terminate the offering (which we may do at any time in our discretion) prior to that date. We will have one closing for all the securities purchased in this offering. The public offering price per Unit will be fixed for the duration of this offering.

Our common stock is listed on the Nasdaq Capital Market (“Nasdaq”) under the symbol “INTZ”. On August 9, 2023, the closing sale price of our common stock was $1.04 per share, as reported by Nasdaq.

There is no established trading market for the Units, Pre-Funded Warrants, or the Warrants. We intend to apply to list the Warrants (forming part of the Units offered hereby) on the Nasdaq under the symbol “INTZW.” We do not intend to list the Units or Pre-Funded Warrants on any securities exchange or other trading market. We do not expect an active trading market to develop for the Units or Pre-Funded Warrants. Without an active trading market, the liquidity of these securities will be limited.

We are also seeking to register the issuance of Warrants to purchase 817,307 shares of common stock (the “Placement Agent Warrants”) to the Placement Agent (including the common stock forming part of the Units and the common stock underlying the Warrants and Pre-Funded Warrants forming part of the Units) (assuming the Units are only sold to investors introduced by the Placement Agent), as well as 817,307 shares of common stock issuable upon exercise by the Placement Agent of the Placement Agent Warrants at an exercise price of $1.30 per share (125% of public offering price).

There is no minimum number of Units or minimum aggregate amount of proceeds for this offering to close. We expect this offering to be completed not later than two business days following the commencement of this offering and we will deliver all securities to be issued in connection with this offering delivery versus payment (“DVP”)/receipt versus payment (“RVP”)/DWAC upon receipt of investor funds received by the Company. Accordingly, neither we nor the Placement Agent have made any arrangements to place investor funds in an escrow account or trust account since the placement agent will not receive investor funds in connection with the sale of the securities offered hereunder.

We are a “smaller reporting company,” as defined under the U.S. federal securities laws and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

Investing in our securities is speculative and involves a high degree of risk. You should carefully consider the risk factors beginning on page 12 of this prospectus before investing in our securities.

We have engaged the Placement Agent as our exclusive placement agent to use its reasonable best efforts to solicit offers to purchase our securities in this offering. The Placement Agent has no obligation to purchase any of the securities from us or to arrange for the purchase or sale of any specific number or dollar amount of the securities. Because there is no minimum offering amount required as a condition to closing in this offering the actual public amount, placement agent’s fee, and proceeds to us, if any, are not presently determinable and may be substantially less than the total maximum offering amounts set forth above and throughout this prospectus. We have agreed to pay the Placement Agent the placement agent fees set forth in the table above and to provide certain other compensation to the Placement Agent. See “Plan of Distribution” beginning on page 43 of this prospectus for more information regarding these arrangements.

We expect to deliver the shares of common stock and Warrants, or Pre-Funded Warrants and Warrants, constituting the Units against payment in New York, New York on or about         , 2023.

Neither the Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Sole Placement Agent

JOSEPH GUNNAR & CO., LLC

The date of this prospectus is _______________, 2023

TABLE OF CONTENTS

No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this public offering and the distribution of this prospectus applicable to that jurisdiction.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements, which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believe,” “estimate,” “project,” “anticipate,” “expect,” “seek,” “predict,” “continue,” “possible,” “intend,” “may,” “might,” “will,” “could,” would” or “should” or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this prospectus and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our solution candidates, research and development, commercialization objectives, prospects, strategies, the industry in which we operate and potential collaborations. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate indications of when such performance or results will be achieved. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

Forward-looking statements speak only as of the date of this prospectus. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. All forward-looking statements are based upon information available to us on the date of this prospectus.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition, business and prospects may differ materially from those made in or suggested by the forward-looking statements contained in this prospectus. In addition, even if our results of operations, financial condition, business and prospects are consistent with the forward-looking statements contained in this prospectus, those results may not be indicative of results in subsequent periods.

The factors set forth below under “Risk Factors” and other cautionary statements made in this prospectus should be read and understood as being applicable to all related forward-looking statements wherever they appear in this prospectus. The forward-looking statements contained in this prospectus represent our judgment as of the date of this prospectus. We caution readers not to place undue reliance on such statements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained above and throughout this prospectus.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

5550(b)(3) (Net Income Standard).

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATAThe Notice provided that, in accordance with Nasdaq Listing Rule 5810(c)(3)(C) (the “Compliance Period Rule”), the Company has a period of 180 calendar days from the date of the Notice, or until October 25, 2023 (the “Compliance Date”), to regain compliance with the Market Value Standard. During this period, the Company’s common stock will continue to trade on the Nasdaq Capital Market. If at any time before the Compliance Date the Company’s MVLS closes at or above $35 million for a minimum of 10 consecutive business days as required under the Compliance Period Rule, the Staff will provide written confirmation of compliance and will close the matter.

In the event the Company does not regain compliance with the Market Value Standard by the Compliance Date, the Staff will provide a written notification to the Company that its common stock will be subject to delisting. At that time, the Company may appeal the Staff’s delisting determination to a Hearings Panel (the “Panel”). However, there can be no assurance that, if the Company receives a delisting notice and appeals the delisting determination by the Staff to the Panel, such appeal would be successful.

The consolidated statementsCompany intends to monitor its MLVS between now and the Compliance Date, and may, if appropriate, evaluate available options to resolve the deficiency under the Market Value Standard and regain compliance with the Market Value Standard. The Company may also try to comply with another Nasdaq listing criteria, such as the one under Nasdaq Listing Rule 5550(b)(1) (Equity Standard). However, there can be no assurance that the Company will be able to regain or maintain compliance with the Nasdaq listing criteria.

Approval of income data for each2023 Employee Stock Purchase Plan

On April 12, 2023, the board of directors of the years ended December 31, 2017, 2018,Company approved the 2023 Employee Stock Purchase Plan (2023 ESPP) to enable its employees to purchase shares of its common stock through voluntary payroll deductions. As of May 16, 2023, a majority of the stockholders of the Company approved the 2023 ESPP.

Approval of Amendment to 2021 Omnibus Stock Incentive Plan

On March 27, 2023, the board of directors of the Company approved an amendment (the “Amendment”) to the 2021 Omnibus Incentive Plan (the “Plan”), which made the following material changes to the Plan (as amended by the Amendment, the “Amended Plan”): (1) permits the Compensation Committee to recognize the existence of special circumstances with the approval of the Board of Directors; and, 2019(2) under such special circumstances, issue awards not otherwise subject to the attainment of a performance criteria to vest during a period less than one (1) year. As of May 16, 2023, a majority of the stockholders of the Company approved the Amended Plan.

Employment Separations – Chief Operating Officer and Chief Strategy Officer

On May 19, 2023, the consolidated balance sheets dataCompany and its Chief Operating Officer, Christopher Duzich, mutually agreed to a separation of employment. Mr. Duzich’s separation of employment was not due to a dispute or disagreement with the Company or its management. Mr. Duzich’s employment as Chief Operating Officer ceased as of December 31, 2018the close of business on May 19, 2023. The Company does not intend to fill the Chief Operating Officer role at this time, and 2019 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. You should read this information together with “Management’s Discussion and AnalysisMr. Duzich’s responsibilities will be overseen by other members of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

Company’s management team.

On May 19, 2023, the Company and its Chief Strategy Officer, Ross Mandel, mutually agreed to a separation of employment. Mr. Mandel’s separation of employment was not due to a dispute or disagreement with the Company or its management. Mr. Mandel’s employment as Chief Strategy Officer ceased as of the close of business on May 19, 2023. The Company does not intend to fill the Chief Strategy Officer role at this time, and Mr. Mandel’s responsibilities will be overseen by other members of the Company’s management team.

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risksForbearance and uncertainties described below, together with all of the other information in this prospectus, including our financial statements and related notes included elsewhere in this Standstill – Streeterville Notesprospectus, before making an investment decision. If any of the following risks are realized, our business, financial condition, results of operations and prospects would likely be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment.

DILUTIONBy purchasing Units in this offering, you are bound by the fee-shifting provision contained in the Warrants and Pre-Funded Warrants forming part of the Units, which may discourage you to pursue actions against us and could discourage shareholder lawsuits that might otherwise benefit the Company and its shareholders.

Net tangible book valueSection 5 of the Warrants and Pre-Funded Warrants provides that “[i]f either party shall commence an action, suit or proceeding to enforce any provisions of this Warrant, the prevailing party in such action, suit, or proceeding shall be reimbursed by the other party for their reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation, and prosecution of such action or proceeding.”

NOTWITHSTANDING, THE FEE SHIFTING PROVISION CONTAINED IN THE RESTATED CERTIFICATE OF INCORPORATION, WARRANTS AND PRE-FUNDED WARRANTS WOULD NOT APPLY TO “INTERNAL CORPORATE CLAIMS” AS DEFINED IN SECTION 109(B) OF THE DELAWARE GENERAL CORPORATION LAW.

The phrase “attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding” means the fees and expenses of counsel to the Company and any other parties asserting a claim subject to Section 5 of Warrants and Pre-Funded Warrants, which may include printing, photocopying, duplicating and other expenses, air freight charges, and fees billed for law clerks, paralegals and other persons not admitted to the bar but performing services under the supervision of an attorney, and the costs and fees incurred in connection with the enforcement or collection of any judgment obtained in any such proceeding.

We adopted the fee-shifting provision to eliminate or decrease nuisance and frivolous litigation. We intend to apply the fee-shifting provision broadly to all actions except for claims brought under the Exchange Act and Securities Act.

There is no set level of recovery required to be met by a plaintiff to avoid payment under this provision. Instead, whoever is the prevailing party is entitled to recover the reasonable attorneys’ fees, costs and expenses incurred in connection with the prosecution or defense of such action. Any party who brings an action, and the party against whom such action is brought under Section 5 of Warrants and Pre-Funded Warrants, which could include, but is not limited to former and current shareholders, Company directors, officers, affiliates, legal counsel, expert witnesses and other parties, are subject to this provision. Additionally, any party who brings an action, and the party against whom such action is brought under Section 5 of Warrants and Pre-Funded Warrants, which could include, but is not limited to former and current shareholders, Company directors, officers, affiliates, legal counsel, expert witnesses and other parties, would be able to recover fees under this provision.

In the event you initiate or assert a claim against us, in accordance with the dispute resolution provisions contained in Section 5 of Warrants and Pre-Funded Warrants, and you do not, in a judgment prevail, you will be obligated to reimburse us for all reasonable costs and expenses incurred in connection with such claim, including, but not limited to, reasonable attorney’s fees and expenses and costs of appeal, if any. Additionally, this provision in Section 5 of Warrants and Pre-Funded Warrants could discourage shareholder lawsuits that might otherwise benefit the Company and its shareholders.

THE FEE SHIFTING PROVISION CONTAINED IN SECTION 5 OF WARRANTS AND PRE-FUNDED WARRANTS IS NOT INTENDED TO BE DEEMED A WAIVER BY ANY HOLDER OF COMMON STOCK OF THE COMPANY’S COMPLIANCE WITH THE U.S. FEDERAL SECURITIES LAWS AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. THE FEE SHIFTING PROVISION CONTAINED IN THE RESTATED CERTIFICATE OF INCORPORATION, WARRANTS AND PRE-FUNDED WARRANTS DO NOT APPLY TO CLAIMS BROUGHT UNDER THE EXCHANGE ACT AND SECURITIES ACT.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus and the information incorporated by reference in this prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. Forward-looking statements contained in this prospectus include, but are not limited to, such statements. Factors that may cause actual results to differ materially from current expectations, which we describe in more detail in our Annual Report on Form 10-K for the year ended December 31, 2022 and our subsequently filed Quarterly Reports on Form 10-Q, include, but are not limited to:

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of June 30, 2020,the date of this prospectus. While we believe that such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this prospectus only to events as adjustedof the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect preferred stock conversion, was $2,469,174,events or $0.167 per share based on 14,796,279 sharescircumstances after the date of our common stock outstanding. After giving effectthis prospectus or to ourreflect new information or the occurrence of unanticipated events, except as required by law.

USE OF PROCEEDS

We estimate that the net proceeds from this offering will be approximately $7,509,578 (assuming the sale of newly issued shares of common stock in this offering,all the Units offered hereby at anthe assumed public offering price of $14.32$1.04 per share,Unit, which represents the closing sale price of our Common Stock on Nasdaq on August 9, 2023, and assuming no issuance of Pre-Funded Warrants and no exercise of the Warrants issued in connection with this offering), after deducting cash expenses relating to this offering payable by us estimated at approximately $990,422, including Placement Agent fees (assuming all investors were introduced by the Placement Agent) of approximately $860,000 and offering expenses of $130,422. The following presents our use of proceeds if 100%, 75%, 50% or 25% of the Units are sold.

We intend to use the net proceeds from the offering for working capital and general corporate purposes, which may include research and development expenses, capital expenditures, working capital and general and administrative expenses, and potential acquisitions of or investments in businesses, products and technologies that complement our business, although we have no present commitments or agreements to make any such acquisitions or investments as of the date of this prospectus.

We expect to use the net proceeds from this offering for working capital and general corporate purposes; provided, however, to the extent we receive gross proceeds greater than or equal to $7,500,000, we may use net proceeds to repay up to $1,000,000 of principal and interest on certain notes (Notes #1 and #2) of Streeterville Capital, LLC. As of August 9, 2023, the outstanding principal and accrued interest on Notes #1 and #2 in the amount of $4.5 million and $6.0 million, respectively. Each of Notes #1 and 2 have a 7% interest rate and the maturity date of Note #1 has been extended to September 10, 2024, while the maturity date of Note #2 has been extended to December 29, 2024.

Our management will have broad discretion as to the allocation of the net proceeds from this offering and could use them for purposes other than those contemplated at the time of commencement of this offering.

Each $1.00 increase (decrease) in the assumed public offering price of $1.04 per unit would increase (decrease) the net proceeds to us from this offering by $7.4 million, assuming the number of units offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million in the number of units offered by us our pro forma as adjustedwould increase (decrease) the net tangible book value asproceeds to us from this offering by approximately $10.0 million, assuming the assumed public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We do not expect that a change in the public offering price or the number of June 30, 2020,units by these amounts would have been $28,844,374 or $1.72 per share (assuming noa material effect on our uses of the proceeds from this offering, although it may accelerate the time at which we will need to seek additional capital.

We will not receive any proceeds from the sale of common stock issuable upon exercise of the underwriters’ optionWarrants unless and until such Warrants are exercised for cash. If all of the Warrants sold in this offering were to purchasebe exercised in cash at the exercise price of $1.144 per share of common stock, we would receive additional net proceeds of approximately $9.4 million. We cannot predict when or if these Warrants will be exercised. It is possible that these Warrants may expire and may never be exercised. We expect to use any proceeds we receive from the exercise of Warrants for substantially the same purposes and in substantially the same manner. Pending these uses, we intend to invest the funds in short-term, investment grade, interest-bearing securities. It is possible that, pending their use, we may invest the net proceeds in a way that does not yield a favorable, or any, return for us.

CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2023 on an actual basis. 

You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our condensed consolidated financial statements and related notes appearing in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 and our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which are incorporated by reference in this prospectus.

DETERMINATION OF OFFERING PRICE

The final offering price of the securities we are offering, and the exercise price of the Warrants included in the units that we are offering, will be negotiated among us, the placement agent and the investors in the offering based on the trading of our shares of our newly issued common stock). This represents an immediate and substantial dilution of $12.60 per share to new investors purchasing common stock prior to the offering, among other things. Other factors considered in determining the public offering price of the securities we are offering, as well as the exercise price of the Warrants included in the units that we are offering include:

Therefore, the assumed public offering price used throughout this offering. You will experience additional dilution upon exerciseprospectus may not be indicative of options to purchasethe final offering price.

MARKET PRICE AND DIVIDEND POLICY

Our shares of common stock are currently quoted on The Nasdaq Capital Market under our equity incentive plans, or if we otherwise issue additional sharesthe symbol “INTZ”. We intend to apply to list the Warrants on the Nasdaq under the symbol “INTZW.” On August 9, 2023, the last reported sales price of our common stock on Nasdaq was $1.04.

Holders of Record

As of August 9, 2023, we had approximately 86 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, this number is not indicative of the total number of stockholders represented by these stockholders of record.

Dividends

We have not declared or paid dividends to stockholders since inception and do not plan to pay cash dividends in the foreseeable future. We currently intend to retain earnings, if any, to finance our growth.

Recent Sales of Unregistered Securities

During the three fiscal years and interim period preceding the filing of this registration statement, we have issued the following securities that were not registered under the Securities Act. No underwriters were involved in the sales and the certificates representing the securities sold and issued contain legends restricting transfer of the securities without registration under the Securities Act or an applicable exemption from registration.

On May 24, 2022, the Company issued 75,188 shares of its common stock pursuant to a transaction that qualified under section 4(2) as a transaction exempt from the registration requirements of the Securities Act of 1933, as amended. These shares were issued to Purple Plaza, LLC, as partial consideration for a confidential settlement agreement between the Company and Purple Plaza.

On November 21, 2022, the Company issued 31,746 shares of its common stock to Anthony Scott, our Chief Executive Officer and President, in exchange for $100,000, pursuant to the terms of a Stock Purchase Agreement, dated November 21, 2022, between the Company and Anthony Scott, that qualified under section 4(2) as a transaction exempt from the registration requirements of the Securities Act of 1933, as amended.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the “Summary Historical Consolidated Financial Data” section of this prospectus and our financial statements and the related notes included at the end of this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. As a result of many factors, including those factors set forth in the “Risk factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

General.

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

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

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

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

New Solution: The INTRUSION Shield

We are in the process of developing a new product offering, INTRUSION Shield, which is designed to be a next generation network detection and response solution. After 20 years of providing research, analysis, and tools to the federal government and enterprise corporations, INTRUSION possesses a comprehensive and proprietary threat-enriched Big Data Cloud of Internet activity, including information about the activities of malicious online actors. INTRUSION Shield will combine that comprehensive, proprietary database with artificial intelligence (AI) and real-time process flow technology to provide businesses and government agencies with a unique and affordable tool to detect, identify, and prevent cybercrimes.

Shield is a combination of plug-n-play hardware, software, global data, and AI services to organizations with aggressive protection against unaddressed information security threats and the most robust defense possible against cybercrime. Unlike traditional industry approaches that rely heavily on human resources, which malicious actors have learned how to bypass, INTRUSION Shield uses this combination of our extensive threat-enriched Big Data Cloud with real-time AI technology to prevent illicit behavior. Using advanced metrics, Shield blocks traffic and network flows that other products cannot identify or even characterize. 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, and Shield monitors and analyses all network traffic and communications allowing it to identify and stop malware-free attacks. Shield receives real-time updates as our worldwide installations and big data sources identify new dangers.

Shield does not require the displacement of any existing products but instead provides a new, additional layer of cybersecurity for customers. The U.S. market consists of 34 million businesses of which 70% of this market is the small and medium sized business market. While the company believes that many large enterprises will recognize the need this product addresses and will be incentivized to purchase Shield, the enterprise market has many decision makers for new security product purchases; therefore, the sell-cycle may be longer for this product. We have identified businesses with from 100 to 1,000 users as our initial target market, as we believe this market segment has the most pressing need for the enhanced protection that the INTRUSION Shield will offer. In addition to telesales, we intend to leverage existing and new channel partners, such as value added resellers and systems integrators, to market Shield to this target market.

Shield has experienced positive progress during Alpha testing and we have twelve companies who have been testing the Beta release since early September. The configuration of hardware is a single Dell network appliance installed inline inside of the customer’s firewall. The size of the network appliance will vary depending on the number of seats and the size of the customer’s internet connection be that 1Gb, 10Gb or 100 Gb.

Shield has received very positive feedback from Beta customers who have been surprised and pleased with the ease of installation due to the plug-n-play architecture. Within the first three days of Beta testing, Shield identified and immediately shut down a total of 461,562 threats to three companies, defending them against possible cyber-attacks. Customers went on to say, “It was amazing how many potential threats were blocked in such a short period of time with the Shield solution. We didn’t realize how many connections were being attempted each day,” said the CEO of a defense company that is participating in the Beta testing. A VP of IT at a large manufacturing company commented, “It was easy to install Shield and because of the blocking we have seen we have already installed a second Shield at a subsidiary company and we anticipate purchasing Shield when it is shipping for several of our companies.”

In addition to Shield, we are developing complementary solutions to create a family of Shield offerings, including our first follow on offering, Shield CLOUD, which is targeted for use by businesses with a dedicated or hybrid Cloud network environment. We are in the process of Alpha testing Shield CLOUD, and we are developing additional solutions that will address cybersecurity needs in the areas of lateral traffic, remote employees, WiFi, and mobile devices.

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:

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

Fair Value of Financial Instruments

We calculate the fair value of our assets and liabilities which qualify as financial instruments and include additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued expenses, and dividends payable approximate their carrying amounts due to the relatively short maturity of these instruments. Capital leases approximate fair value as they bear market rates of interest.

Results of operations

Years ended December 31, 2018 and 2019 and the 6 Month periods ended June 30, 2019 and 2020

The following table summarizes our results of operations for the Twelve Months ended December 31, 2018 and 2019 and the six month periods (unaudited) ended June 30, 2019 and 2020:

Comparison of Years ended December 31, 2018 and 2019

Net Revenue

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

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

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

Gross Profit

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

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

Sales and Marketing

Sales and marketing expenses decreased to $1.3 million or 9.5% of net revenue in 2019, compared to $1.6 million or 15.6% of net revenue in 2018. The decrease in sales and marketing expense was mainly due to collecting a payment of $200 thousand from a customer related sales and marketing expense that occurred during the year 2018. Sales and marketing expenses may vary in the future. We expect sales and marketing expenses to increase as we take our INTRUSION Shield solution to market.

Research and Development

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

General and Administrative

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

Interest Expense

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

Interest Income

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

Income Taxes

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

On February 7, 2019,DILUTION

If you invest in our Units (comprised of our common stock or Pre-Funded Warrants and Warrants) in this offering, your interest will be diluted to 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 termsextent of the note,difference between the Company hadassumed public offering price per share of common stock (which forms a part of a Unit) and the ability to borrow, repay and reborrow onpro forma net tangible book value per share of our common stock immediately after this offering. As of March 31, 2023, our net tangible book value was approximately ($8,956,312), or ($0.42) per share. Net tangible book value per share represents our total tangible assets less our total liabilities, divided by the loan as needed up to an outstanding principal balance duenumber of $2,700,000 at any given time through March 2021. We reduced our borrowing under this note to zero asshares of May 2019.common stock.

AsNet tangible book value dilution per share of October 24, 2019, G. Ward Paxton passed away, terminatingcommon stock in each Unit to new investors represents the CEO Note withdifference between the result that future borrowings thereunder will no longer be available toamount per share of common stock in each Unit paid by purchasers in this offering and the Company. Our management will be assessing whether to replacepro forma net tangible book value per share of our common stock immediately after the completion of this borrowing base and assessing what terms may be available to the Company, including whether any such terms are acceptable to the Company, if at all.offering.

As of December 31, 2019, we had cash and cash equivalents of approximately $3,334,000, up from approximately $1,652,000 as of December 31, 2018. We generated a net income of $4,465,000 for the year ended December 31, 2019 compared to a net income of $2,287,000 for the year ended December 31, 2018. Based on the current forecast for the year 2020, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures throughinitial offering price of $1.04 per one share of common stock in a Unit, on an as adjusted basis as of March 31, 2021. As of October 24, 2019, our funding available from the CEO Note terminated. Our management will be assessing whether to replace this borrowing base and assessing what terms may be available2023, after giving effect to the Company, including whether any such terms available are acceptable tooffering of shares of common stock and the Company, if at all (the “Potential Replacement Facility”). Any equityapplication of the related net proceeds, our net tangible book value would be:

(i) ($1,446,734), or debt financings, if available at all, may be on terms which are not favorable to us and,($0.05) per share of common stock, assuming the sale of 100% of the shares offered (8,173,076 shares of common stock underlying units) with net proceeds in the caseamount of equity financings, may result in dilution to our stockholders. We expect to fund our operations through anticipated Company profits, possibly additional investments$7,509,578 after deducting estimated broker commissions of private equity$860,000 and debt, which, if we are able to obtain, will haveestimated offering expenses of $130,422;

(ii) ($3,380,484), or ($0.12) per share of common stock, assuming the effectsale of diluting our existing75% of the units offered (6,129,807 shares of common stockholders, perhaps significantly, and a possible Potential Replacement Facility. If our operations do not generate positive cash flowstock underlying units) with net proceeds in the upcoming year, or if we are not able to obtain additional debt or equity financing on termsamount of $5,575,828 after deducting estimated broker commissions of $668,750 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.estimated offering expenses of $130,422;

Contractual Obligations(iii) ($5,314,234), or ($0.21) per share per share of common stock, assuming the sale of 50% of the shares offered (4,086,538 shares of common stock underlying units) with net proceeds in the amount of $3,642,078 after deducting estimated broker commissions of $477,500 and estimated offering expenses of $130,422; and

(iv) ($7,247,984), or ($0.31) per share of common stock, assuming the sale of 25% of the shares offered (2,043,269 shares of common stock underlying units) with net proceeds in the amount of $1,708,328 after deducting estimated broker commissions of $286,250 and estimated offering expenses of $130,422.

Purchasers of units (comprised of our common stock or Pre-Funded Warrants and Warrants) will experience immediate and substantial dilution in net tangible book value per share for financial accounting purposes, as illustrated in the following table on an approximate dollar per share basis, depending upon whether we sell 100%, 75%, 50%, or 25% of the units being offered in this offering:

The following table sets forth certain information concerningforegoing illustration also does not reflect the future contractual obligations under our leases at December 31, 2019. We had no other significant contractual obligations at December 31, 2019.

Future minimum lease obligations consisteddilution that would result from the exercise of any of the following at December 31, 2019 (in thousands):

*Interest is imputed for operating ROU leases and classified as lease expense and is included in operating expensesPre-Funded Warrants or Warrants sold in the accompanying condensed consolidated statement of operations.

offering.

Off-Balance Sheet ArrangementsThe following tables sets forth depending upon whether we sell 100%, 75%, 50%, or 25% of the shares being offered in this offering, as of March 31, 2023, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors purchasing units (of which shares of common stock form a part) in this offering at the offering price of $1.04 per unit, together with the total consideration paid an average price per share paid by each of these groups, before deducting placement agent’s commission and estimated offering expenses.

A $1.00 increase in the assumed public offering price of $1.04 per Unit (the closing sale price of our common stock on the Nasdaq Capital Market on August 9, 2023), would increase our as adjusted net tangible book value after giving effect to this offering by approximately $7.4 million and increase the dilution per share to new investors in this offering by $0.75 per share, after deducting placement agent fees and estimated offering expenses payable by us, and assuming the sale of 8,173,076 Units set forth on the cover page of this prospectus remains the same and no sale of any Pre-Funded Warrants in this offering.

AsThe foregoing discussion and tables above (i) reflect and assume no sale of December 31, 2019,Pre-Funded Warrants in this offering, which, if sold, would reduce the number of common stock that we didare offering on a one-one basis, (ii) no exercise of Warrants in this offering, and (iii) do not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K.

Recent Accounting Pronouncements

On January 1, 2019 we adopted ASU No. 2016-02, Leases (topic 842). At the date of adoption there was no impact on the statement of operations, while the balance sheet reflects recording both assets and liabilities applicablegive effect to the operating right-of-use asset lease identified. ASU No. 2016-02 did not have a material effect ondilution that would result from (a) 1,212,593 shares of common stock issuable upon the Company’s resultsexercise of operations or cash flowsoutstanding warrants at weighted average exercise price of $5.22 per share, (b) 1,108,225 shares of common stock issuable upon the exercise of outstanding stock options at weighted average exercise price of $3.24 per share, (c) 1,762,105 shares of common stock in aggregate reserved for issuance under our 2015 Stock Incentive Plan and 2021 Omnibus Incentive Plan, (d) 157,597 shares of common stock underlying restricted stock awards outstanding, and (e) 817,307 shares of common stock underlying the year ended December 31, 2019.

Comparison of Six Months Ended June 30, 2019 and 2020.

Net Revenues

Net revenues for the quarter and six months ended June 30, 2020 were $1.7 million and $3.5 million, respectively, comparedwarrants to $4.0 million and $7.2 million for the same periods in 2019. Product revenues decreased $2.3 million for the quarter ended June 30, 2020, and $3.7 million for the six months ended June 30, 2020 comparedbe issued to the same periodsPlacement Agent in 2019. Decreased product revenues were primarily due to a decrease in sales of our TraceCop product line. TraceCop sales for the quarters ended June 30, 2020 and 2019 were $1.6 million and $4.0 million, respectively. Savant sales were $106 thousand for the quarter ended June 30, 2020 and were $29 thousand for the quarter ended June 30, 2019.

Concentration of Revenues

Revenues from sales to various U.S. government entities totaled $1.5 million, or 91.0% of revenues, for the quarter ended June 30, 2020 compared to $3.9 million, or 91.3% of revenues, for the same period in 2019. Revenues from sales to various U.S. government entities totaled $2.8 million, or 80.8% of revenues, for the six months ended June 30, 2020 compared to $6.4 million, or 89.2% of revenues, for the same period in 2019. Sales to commercial customers totaled 9.0% of total revenue for the second quarter of 2020 compared to 8.7% of total revenue for the second quarter of 2019. During the second quarter of 2020 and 2019, no individual commercial customer had revenues over 10.0% of total revenue. 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 revenuesconnection 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.

Gross Profit

Gross profit was $1.0 million or 60.7% of net revenues for the quarter ended June 30, 2020, compared to $2.4 million or 60.4% of net revenues for the quarter ended June 30, 2019. Gross profit was $2.1 million or 59.5% of net revenues for the six months ended June 30, 2020 compared to $4.3 million or 60.1% of net revenues for the six months ended June 30, 2019. Gross profit on product revenues was $2.1 million or 59.5% of net revenues for the six months ended June 30, 2020 compared to $4.3 million or 60.1% of net revenues for the six months ended June 30, 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.

this offering.

Sales and Marketing

Sales and marketing expenses increased to $0.5 million for the quarter ended June 30, 2020 compared to $46 thousand for the same period in 2019. Sales and marketing expenses increased to $1.0 million for the six months ended June 30, 2020 compared to $0.5 million for the same period in 2019. Sales and marketing expenses may vary in the future. Sales and marketing expenses increased compared to the comparable periods last year due to increases in labor and expenses and the Company was able to collect payment of $200 thousand from a customer related expense in 2018 that reduced expense in 2019. We believe that these costs will increase through the end of 2020 due to increased marketing expense related to the launch of INTRUSION Shield.

Research and Development.

Research and development expenses increased to $0.9 million for the quarter ended June 30, 2020 compared to $0.3 million for the same period in 2019. Research and development expenses increased to $1.7 million for the six months ended June 30, 2020 compared to $0.5 million for the same period in 2019. The increase in research and development expense was due partly to increased costs related to the development of our INTRUSION Shield solution as well as 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 projects. We expect research and development expenses to increase in 2020.

General and Administrative.

General and administrative expenses remained constant at $0.3 million for the quarters ended June 30, 2020 and 2019. General and administrative expenses decreased to $0.6 million for the six months ended June 30, 2020 compared to $0.7 million for the same period in 2019. It is expected that general and administrative expenses will remain relatively constant throughout the remainder of 2020, although expenses may be increased due to increased expenses related to the launch of INTRUSION Shield .

Interest

Interest expense decreased to $2 thousand for the quarter ended June 30, 2020 compared to $9 thousand for the same period in 2019. Interest expense decreased to $2 thousand for the six months ended June 30, 2020 compared to $44 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 increased to $1 thousand for the quarter ended June 30, 2020 compared to none for the same period in 2019. Interest income increased to $7 thousand for the six months ended June 30, 2020 compared to none for the same period in 2019. This is attributable to investing extra cash in money market accounts and getting better interest rates.

Liquidity and Capital Resources

Our principal source of liquidity at June 30, 2020 was approximately $2.9 million of cash and cash equivalents. At June 30, 2020, we had working capital of $2.4 million compared to $1.4 million at June 30, 2019.

Net cash used in operations for the six months ended June 30, 2020 was $1.0 million due primarily to a net loss of $1.2 million and the following uses of cash: a $352 thousand decrease in deferred revenue, a $234 thousand increase in prepaid expenses and other assets, and a $64 thousand decrease in accounts payable and accrued expenses. This was partially offset by the following provisions of cash and non-cash items: a $499 thousand decrease in accounts receivable, $124 thousand in noncash lease costs, $107 thousand in depreciation and amortization expense, and $74 thousand in stock-based compensation. Net cash provided by operations for the six months ended June 30, 2019 was $2.3 million due primarily to a net income of $2.7 million and the following provisions of cash and non-cash items: $304 thousand in noncash lease costs, a $179 thousand increase in deferred revenue, $86 thousand in depreciation and amortization expense, $14 thousand in stock-based compensation, and $6 thousand in penalties and waived penalties on dividends. This was partially offset by a $738 thousand increase in accounts receivable, a $234 thousand increase in prepaid expenses and other assets, and a $66 thousand decrease in accounts payable and accrued expenses. 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 in investing activities for the six months ended June 30, 2020, was $62 thousand for net purchases of property and equipment, compared to $168 thousand net cash used in investing activities for the six months ended June 30, 2019 for net purchases of property and equipment.

Net cash provided by financing activities in 2020 was $0.6 million primarily by proceeds from a PPP loan of $0.6 million and proceeds from exercise of stock options of $85 thousand. This was directly offset by the following uses of cash: payments for preferred stock dividends of $67 thousand, and payment on principal of finance right-of-use leases of $21 thousand. Net cash used in financing activities in 2019 was $2.3 million with payments on the loan from an officer of $1.8 million, payments for preferred stock dividends of $644 thousand, and payment on principal of finance right-of-use leases of $31 thousand. This was directly offset by the following provisions of cash: proceeds from exercise of stock options of $226 thousand.

At June 30, 2020, the Company did not have any material commitments for capital expenditures.

During the six months ended June 30, 2020, the Company funded its operations through the use of cash and cash equivalents. As of June 30, 2020, we had cash and cash equivalents of approximately $2,872,000, down from approximately $3,334,000 as of December 31, 2019. We had a net loss of $715,000 for the quarter ended June 30, 2020 compared to a net income of $1,758,000 for the quarter ended June 30, 2019. 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.

We expect to fund our operations through anticipated Company profits and this offering. If our operations do not generate positive cash flow in the future, or if we are not able to successfully close on this offering, we may be unable to implement our business plan, to successfully develop, market, and sell our new INTRUSION Shield solution, to fund our ongoing liquidity needs, or even continue our operations.

BUSINESS

Overview

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

The cautionary statements made in this prospectus should be read as being applicable to all related forward-looking statements whenever they appear in this prospectus. Our actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the section captioned “Risk Factors” on page 8 of this prospectus as well as those cautionary statements and other factors set forth elsewhere herein.

General

We develop, market and support a family of entity identification, high speed data mining, cybercrime and advanced persistent threat detection products.

Industry Background

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

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

Products

TraceCop

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

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

Savant

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

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

New Solution Development; General

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

During 2019 and 2018, our research and development expenditures were approximately $1.3 and $1.2 million, respectively. All of our expenditures for research and development have been expensed as incurred. Research and development expenses increased to $0.9 million for the quarter ended June 30, 2020 compared to $0.3 million for the same period in 2019. Research and development expenses increased to $1.7 million for the six months ended June 30, 2020 compared to $0.5 million for the same period in 2019. The increase in research and development expense was due partly to increased costs related to the development of our INTRUSION Shield solution as well as 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. At August 1, 2020, we had 27 employees engaged in research, solution development and engineering. At certain times during the year, research and development labor expense is shifted to direct labor to support ongoing projects. We expect research and development expenses to increase in 2020.

Our Offering: INTRUSION Shield

We are in the process of developing a new offering, INTRUSION Shield , that is designed to be the first in a family of next generation network detection and response solutions we plan to introduce in the coming months. After 20 years of providing research, analysis, and tools to the federal government and enterprise corporations, Intrusion possesses a comprehensive and proprietary threat-enriched Big Data Cloud of Internet activity, including information about the activities of malicious online actors. INTRUSION Shield will combine that comprehensive, proprietary database with artificial intelligence (AI) and real-time process flow technology to provide businesses and government agencies with a unique and affordable tool to detect, identify, and prevent cybercrimes.

Shield is a combination of plug-n-play hardware, software, global data, and AI services to organizations with aggressive protection against unaddressed information security threats and the most robust defense possible against cybercrime. Unlike traditional industry approaches that rely heavily on human resources, which malicious actors have learned how to bypass, INTRUSION Shield uses this combination of our extensive database with real-time AI technology to prevent illicit behavior. Using advanced metrics, Shield blocks traffic and network flows that other products cannot identify or even characterize. 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, and Shield monitors and analyses all network traffic and communications allowing it to identify and stop malware-free attacks. Shield receives real-time updates as our worldwide installations and big data sources identify new dangers.

Shield does not require the displacement of any existing products or solutions but instead provides a new, additional layer of cybersecurity for customers. The U.S. market consists of 34 million businesses of which 70% of this market is the small and medium sized business market. While the company believes that many large enterprises will recognize the need this solution addresses and will be incentivized to purchase Shield, the enterprise market has many decision makers for new cybersecurity purchases; therefore, the sell-cycle may be longer for this solution. We have identified businesses with from 100 to 1,000 users as our initial target market, as we believe this market segment has the most pressing need for the enhanced protection that the INTRUSION Shield will offer. In addition to direct sales and telesales, we intend to leverage existing and new channel partners, such as value added resellers and systems integrators, to market Shield to this target market.

Shield has experienced positive progress during Alpha testing and we have identified twelve companies which have been testing the Beta release since early September. The configuration of hardware is a single Dell network appliance installed inline inside of the customer’s firewall. The size of the network appliance will vary depending on the number of seats and the size of the customer’s internet connection be that 1Gb, 10Gb or 100 Gb.

Shield has received very positive feedback from Beta customers who have been surprised and pleased with the ease of installation due to the plug-n-play architecture. Within the first three days of Beta testing, Shield identified and immediately shut down a total of 461,562 threats to three companies, defending them against possible cyber-attacks. Customers went on to say, “It was amazing how many potential threats were blocked in such a short period of time with the Shield solution. We didn’t realize how many connections were being attempted each day,” said the CEO of a defense company that is participating in the Beta testing. A VP of IT at a large manufacturing company commented, “It was easy to install Shield and because of the blocking we have seen we have already installed a second Shield at a subsidiary company and we anticipate purchasing Shield when it is shipping for several of our companies.”

In addition to Shield, we are developing complementary solutions to create a family of Shield offerings, including our first follow on offering, Shield CLOUD, which is targeted for use by businesses with a dedicated or hybrid Cloud network environment. We are in the process of Alpha testing Shield CLOUD, and we are developing additional solutions that will address cybersecurity needs in the areas of lateral traffic, remote employees, WiFi, and mobile devices.

Our Customers: Government Sales

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

Generally, we make our sales under purchase orders and contracts. Our customers, including government customers, may cancel their orders or contracts with little or no prior notice and without penalty. Although we transact business with various government entities, we believe that the cancellation of any particular order in itself could have a material adverse effect on our financial results. Because we derive and expect to continue to derive a substantial portion of our revenue from sales to government entities, a large number of cancelled or renegotiated government orders or contracts could have a material adverse effect on our financial results. Currently, we are not aware of any proposed cancellation or renegotiation of any of our existing arrangements with government entities.

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.

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 In addition to Shield, we are developing complementary solutions to create a family of Shield offerings, including our first follow on offering, Shield CLOUD, which is targeted for use by businesses with a dedicated or hybrid Cloud network environment. We are in the process of Alpha testing Shield CLOUD, and we are developing additional solutions that will address cybersecurity needs in the areas of lateral traffic, remote employees, WiFi, and mobile devices.

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 our 24 year old proprietary and comprehensive internet databases.

We have entered into software and product license agreements with various suppliers. These license agreements provide us with additional software and hardware components that add value to our security 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 license, software or supplier agreements to be material to our business, but rather complementary to our business and solution offerings.

Sales, Marketing and Customers

Field Sales Force. Our direct sales organization focuses on major account sales, channel partners including distributors, value added resellers (VARs) and integrators; promotes our 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 Richardson (Dallas), Texas. In addition, we have sales personnel, sales engineers or sales representatives located in Virginia and California.

Resellers. Resellers such as domestic and international system integrators and VARs sell our 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 2019 and 2018. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above for a geographic breakdown of our revenue in 2019 and 2018.