Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including, without limitation, the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (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. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our financial position; our ability to continue our business as a going concern; our business, sales, and marketing strategies and plans; our ability to successfully market, sell, and deliver our INTRUSION Shield commercial product and solutions to an expanding customer base; and our ability to secure additional financing; are forward-looking statements. 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 Quarterly Report on Form 10-Q include, but are not limited to, such statements.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled "Risk Factors" in this Quarterly Report on Form 10-Q and our most recent Annual Report on Form 10-K, as the same may be amended or updated from time to time.

In addition, statements such as "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 the date of this Quarterly Report on Form 10-Q. While we believe that such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements do not 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 Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.

Overview

We offer businesses of all sizes and industries products and services that leverage our exclusive threat intelligence database of over 8.5 billion IP addresses and domain names. After many years of gathering intelligence and providing our INTRUSION TraceCop and Savant solutions exclusively to government entities, we released our first commercial product in 2021, the INTRUSION Shield. INTRUSION Shield was designed to allow businesses to incorporate a Zero Trust, reputation-based security solution into their existing infrastructure to observe traffic flow and instantly block known malicious or unknown connections from both entering or exiting a network, making it an ideal solution for protecting from Zero-Day and ransomware attacks.

Results of Operations

Comparison of the Periods Ended September 30, 2025, and September 30, 2024

		Three Months Ended September 30,																Nine Months Ended September 30,
(Dollars in thousands)		2025				2024				Change								2025				2024				Change
Revenue		$	1,966			$	1,504			$	462				31%			$	5,614			$	4,095			$	1,519				37%
Cost of revenue			461				344				117				34%				1,335				920				415				45%
Gross profit			1,505				1,160				345				30%				4,279				3,175				1,104				35%
Gross profit percentage			76.6%				77.1%												76.2%				77.5%
Operating expenses:
Sales and marketing			1,273				1,207				66				5%				3,664				3,542				122				3%
Research and development			1,329				1,150				179				16%				3,879				3,204				675				21%
General and administrative			1,039				841				198				24%				3,051				2,972				79				3%
Total operating expenses			3,641				3,198				443				14%				10,594				9,718				876				9%
Operating loss			(2,136	)			(2,038	)			(98	)			-5%				(6,315	)			(6,543	)			228				3%
Interest expense			(17	)			(12	)			(5	)			42%				(67	)			(274	)			207				-76%
Interest accretion and amortization of debt issuance costs, net			-				-				-				0%				-				990				(990	)			-100%
Other income (expense), net			59				-				59				0%				148				(6	)			154				-2,567%
Net loss		$	(2,094	)		$	(2,050	)		$	(44	)			-2%			$	(6,234	)		$	(5,833	)		$	(401	)			-7%

Revenue. Revenue for the three and nine months ended September 30, 2025, was $2.0 million and $5.6 million, respectively, compared to $1.5 million and $4.1 million for the same periods in 2024. Consulting revenue totaled $1.5 million and $4.2 million for the three and nine months ended September 30, 2025, up from $1.1 million and $2.9 million for the corresponding periods in 2024. The increase in consulting revenue in 2025 primarily reflects work performed under a Department of Defense contract awarded in the second half of 2024. In contrast, consulting revenue for the nine months ended September 30, 2024, was negatively impacted by a continuing resolution and delays in the approval of the federal budget. The budget was not passed until March 22, 2024, which affected the timing of contract renewals and task orders and led to lower consulting revenues in the first half of 2024. INTRUSION Shield revenue was $0.5 million and $1.4 million for the three and nine months ended September 30, 2025, compared to $0.4 million and $1.2 million for the same periods in 2024. On March 31, 2024, we lost a major INTRUSION Shield customer who used a highly customized product configuration. This customer accounted for 78% of INTRUSION Shield revenues; this loss has been fully offset by new customers inclusive of the Department of Defense contract awarded in late 2024.

Concentration of Revenues. For the three and nine months ended September 30, 2025, revenues from sales to various U.S. government entities totaled $1.9 million and $5.3 million, comprising 96.7% and 94.7% of total revenues, respectively. This compares to $1.3 million and $3.3 million, or 85.9% and 79.5% of total revenues, for the same periods in 2024. The shift in revenue mix was primarily due to the loss of a significant Shield customer, as previously noted, and the addition of a Department of Defense contract in the second half of 2024.

We expect our revenue concentration among customers to fluctuate in future periods, depending on the timing of sales; however, we anticipate that sales to government customers will continue to represent a significant portion of our revenues. Sales to government entities involve certain risks beyond those associated with commercial customers, including potential disruptions in appropriations and spending, and the government's right to cancel contracts and purchase orders at its convenience. While we do not currently anticipate renegotiations or cancellations of government contracts, the loss of government orders could materially affect our financial results. Given the increased percentage of sales to U.S. government entities in 2025, no individual commercial customer accounted for more than 10% of total revenues, compared to one such customer in the prior year. Our product and service offerings are not managed as separate segments, as management evaluates the business as a whole and does not allocate expenses by product.

Gross Profit. Gross profit was $1.5 and $4.3 million or 76.6% and 76.2% of revenues for the three and nine month periods ended September 30, 2025, compared to $1.2 and $3.2 million or 77.1% and 77.5% of revenues for the three and nine months ended September 30, 2024. The gross profit margin will vary depending on product mix. INTRUSION Shield revenues represented 25% of revenues for the nine month period ended September 30, 2025 and 30% for the nine month period ended September 30, 2024

Operating Expenses. Operating expenses totaled $3.6 million and $10.6 million for the three and nine month periods ended September 30, 2025, compared to $3.2 million and $9.7 million for the same periods in 2024. The 2024 figures include one-time negotiated contract savings of $0.1 million for the three month period and $0.5 million for the nine month period.

Adjusting for these one-time savings, operating expenses for the three months ended September 30, 2025, increased by $0.3 million, primarily due to higher share-based compensation from equity grants made in the first quarter, timing of merit increases, and increased spend on sales and marketing.

For the nine months ended September 30, 2025, operating expenses, when adjusted for one-time savings, were $0.4 million higher than the comparable period in 2024.

Sales and Marketing. Sales and marketing expenses totaled $1.3 million and $3.7 million for three and nine months ended September 30, 2025, respectively. Both 2024 periods includes approximately $0.1 million in one-time negotiated contract savings. When adjusted for the one-time savings, Sales and marketing expenses for the three and nine months ended September 30, 2025 remained flat. The current year spend included increased participation in trade shows and increased spend to create more brand awareness and concise product messaging which was offset by increased allocations out of operating expenses to cost of sales for resources dedicated to additional consulting work during the quarter.

Research and Development. Research and development expenses totaled $1.3 million and $3.9 million for the three and nine months ended September 30, 2025, representing an increase of $0.2 million and $0.7 million when compared to the same periods in the prior year. The increase was primarily due to increased depreciation of $0.1 million on infrastructure hardware purchases and internally developed software and the addition of a Sales Engineer and Software Engineer. Research and development costs may vary over time as we determine the frequency of new releases, improved functionality and enhancements needed to be competitive with our product offering.

General and Administrative. General and administrative expenses totaled $1.0 and $3.1 million for the three and nine months ended September 30, 2025, compared to $0.8 and $3.0 million for the three and nine months ended September 30, 2024. The increase is primarily due to one-time negotiated savings of $0.1 million included in the 2024 period.

Interest Expense. Interest expense for the three and nine month periods ended September 30, 2025, was $17 and $67 thousand, respectively, consisting principally of imputed interest on finance leases and the stated interest related to the Streeterville note that was fully retired in the first quarter of 2025. Interest expense for the 2024 periods totaled $12 and $274 thousand and consisted principally of the stated interest related to the Streeterville notes, interest associated with the notes payable issued to Anthony Scott, the Company's President and Chief Executive Officer and a member of the Company's Board of Directors, and finance leases.

Interest Accretion and Amortization of Debt Issuance Costs. During the March 2024 quarter, we entered into exchange agreements to convert $9.5 million in Streeterville debt to $9.3 million shares of Series A preferred stock and $0.2 million to common stock and, as a result, we reversed the interest accretion associated with the ability to stock-settle principal redemptions and wrote-off the remaining deferred debt issue costs resulting in a net credit to interest expense of $1.0 million.

Other Income (Expense), Net. Other income and expense in the 2025 periods consist principally of interest income on cash and short-term investments. Other income and expense for both the three and nine months ended September 30, 2024, were nominal.

Net Loss. Net loss for the three and nine month periods ended September 30, 2025, was ($2.1) million and ($6.2) million, respectively compared to ($2.1) million and ($5.8) million for the same periods in the prior year. The increase in net loss for nine months ended September 30, 2025, was primarily a result of a net interest credit of $1.0 million recorded in the 2024 period as discussed above.

Liquidity and Capital Resources

Sources of Liquidity

As of September 30, 2025, we had cash and cash equivalents of $2.5 million and short-term investments in U.S. treasuries of $2.0 million resulting in $4.5 million available to fund operations compared to $4.9 million as of December 31, 2024. Net working capital at September 30, 2025, totaled $5.1 million compared to $1.9 million at December 31, 2024. On October 1, 2025, we received $3.0 million in cash related to the Department of Defense contract extension.

Our principal sources of cash for funding operations for the nine months ended September 30, 2025 were receipt of $1.5 million in proceeds from the sale of common stock pursuant to the SEPA, recorded as stock subscription receivable at December 31, 2024, and net proceeds of $7.0 million from a registered direct offering that closed on January 6, 2025. Our principal source for funding operations in the September 2024 period was through proceeds received from the issuance of common stock in a series of transactions which include $4.8 million from ATM sales, $2.6 million from a private placement, and $0.6 million from the exercise of warrants.

We generated a net loss of $6.2 million and $5.8 million for the nine months ended September 30, 2025, and 2024, respectively. If our operations do not generate positive cash flow in the upcoming year, or if we are not able to obtain additional debt or equity financing on terms and conditions acceptable to us, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations.

ATM Program

On June 11, 2025, we terminated our At Market Sales Agreement with B. Riley Securities, Inc. The following day, on June 12, 2025, we entered into a new At The Market Offering Agreement (the "Sales Agreement") with H.C. Wainwright & Co., LLC to potentially sell up to $50.0 million of the Company's common stock using a shelf registration statement on Form S-3/A (File No. 333-281565) which was filed on January 31, 2025 and became effective on February 10, 2025. No sales under the new shelf registration have been made to date.

Notes Payable

In March 2025, through three separate exchange agreements we retired the remaining $0.5 million in Streeterville debt through the issuance of 552.3 thousand shares of common stock. The issuance of common stock was made pursuant to the exemption from the registration requirements afforded by the Securities Act.

Unaudited Condensed Consolidated Statements of Cash Flows

Our cash flows for the nine months ended September 30, 2025, and 2024 were (in thousands):

		Nine Months Ended September 30,
		2025				2024
Net cash used in operating activities		$	(6,228	)		$	(6,115	)
Net cash used in investing activities			(4,185	)			(1,051	)
Net cash provided by financing activities			8,089				8,078
Change in cash and cash equivalents		$	(2,324	)		$	912

Operating Activities

Net cash used in operations for the nine months ended September 30, 2025, was ($6.2) million due primarily to a net loss of ($6.2) million partially offset by 1) adjustments for non-cash items of $2.4 million which were mostly comprised of depreciation and stock-based compensation, and 2) changes in working capital of ($2.4) million driven largely by an increase in contract billings.

Net cash used in operations for the nine months ended September 30, 2024, was ($6.1) million primarily resulting from 1) a net loss of ($5.8) million offset by adjustments for non-cash items of $1.0 million which are mostly comprised of depreciation, stock-based compensation and non-cash interest related to the Streeterville notes, and 2) changes in working capital of ($1.3) million resulting principally from increased accounts receivable.

Investing Activities

For the nine months ended September 30, 2025, net cash used in investing activities was ($4.2) million, which included short-term investments in highly liquid, investment-grade fixed income securities of ($2.0) million and capitalization of internally developed software and hardware purchases of ($2.2) million. Net cash used in investing activities for the nine months ended September 30, 2024, was ($1.1) million for capitalization of internally developed software and hardware purchases.

Financing Activities

For the nine months ended September 30, 2025, net cash provided by financing activities was $8.1 million which resulted from the receipt of proceeds from the sale of common stock pursuant to the SEPA of $1.5 million, previously recorded as stock subscription receivable at December 31, 2024, and net proceeds of $7.0 million from a registered direct offering that closed on January 6, 2025, partially offset by payments on financing leases of ($0.4) million. Net proceeds from financing activities for the September 2024 period totaled $8.1 million which resulted from $8.0 million in net proceeds from the sale of common stock through the use our ATM program, a private placement offering, and the exercise of warrants partially offset by finance lease payments.

Critical Accounting Policies and Use of Estimates

Our unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

We believe the critical accounting policies and estimates discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on February 27, 2025 (the "2024 Annual Report"), reflect our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements. There have been no significant changes to our critical accounting policies and estimates as disclosed in the 2024 Annual Report.