Annual Report for Fiscal Year Ending DECEMBER 31, 2025 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

General

The following discussion and analysis include information management believes is relevant to understanding and assessing our consolidated financial condition and results of operations. This section should be read in conjunction with our Consolidated Financial Statements, accompanying notes and the risk factors contained in this report.

Overview

Intrusion Inc. offers businesses of all sizes and industries products and services that leverage the Company's 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 Years ended December 31, 2025, and December 31, 2024

		Year Ended December 31,								Change
(in thousands)		2025				2024				$				%
Revenue		$	7,095			$	5,771				1,324				22.9%
Cost of Revenue			1,715				1,341				374				27.9%
Gross Profit			5,380				4,430				950				21.4%
Operating Expenses:
Sales and marketing			5,266				4,736				530				11.2%
Research and development			5,172				4,435				737				16.6%
General and administrative			4,106				3,705				401				10.8%
Operating Loss			(9,164	)			(8,446	)			(718	)			8.5%
Interest expense			(81	)			(328	)			247				-75.3%
Interest accretion and amortization of debt issuance costs, net			-				990				(990	)			-100.0%
Other income (expense), net			186				(6	)			192				-3200.0%
Net Loss		$	(9,059	)		$	(7,790	)			(1,269	)			16.3%

Revenues

Revenue for the year ended December 31, 2025, totaled $7.1 million, representing an increase of $1.3 million or 22.9% from $5.8 million in 2024. Revenue growth in 2025 was primarily driven by work performed for the U.S. Department of Defense for the development and implementation of the Shield OT Defender in the Asia Pacific region which contributed to increases in both Shield and consulting revenues. Consulting revenues totaled $5.3 million in 2025 compared to $4.2 million in 2024. Shield revenues totaled $1.8 million, compared to $1.6 million in 2024.

We anticipate that the sale of our OT Defender solution to other departments of the U.S. government, as well as commercially, will continue to contribute to future growth. Additionally, during 2025, we partnered with Port Nexus to integrate our Shield technology into its My Flare Alert school safety solution. Although sales to Port Nexus did not materially impact 2025 revenues, the expanded pipeline for this offering is expected to support future Shield revenue growth.

Revenue in the fourth quarter of fiscal 2025 decreased 25% compared to the prior quarter and 12% compared to the prior year period, primarily reflecting the delayed timing of incremental funding under a major U.S. government contract. The timing of this funding was impacted by operational and administrative constraints associated with the U.S. government shutdown and continuing resolution, which limited agencies' ability to initiate and process contract actions during the period. As a company that derives a significant portion of its revenue from U.S. government customers, our operating results are dependent on the timing of government funding authorizations, contract awards, and program execution. While we believe the impact of this delay is primarily timing-related, changes in federal budget priorities, including those related to defense and national security, may continue to influence the timing and allocation of future funding, which could affect our revenue and operating results in future periods.

Concentration of Revenues.

Revenues from sales to various U.S. government entities totaled $6.7 million, or 94.6% of revenues, for the year ended December 31, 2025, compared to $4.8 million, or 83.8% of revenues, for the same period in 2024. In both 2025 and 2024 three government entities each individually accounted for over 10% of our revenues.

Sales to commercial customers totaled $0.4 million or 5.4% of total revenue for the year ended December 31, 2025, compared to $0.9 million or 16.2% of total revenue for the same period in 2024.

During 2025, we expanded the number of Shield resellers and referral partners. We anticipate our concentration of revenues will vary among customers in future periods depending upon the timing of certain sales. We anticipate that sales to government customers, while comprising a significant portion of our revenues in future periods, will represent a lower percentage of our revenue base as we gain traction selling our Shield products into commercial markets.

The Company's similar product and service offerings are not viewed as individual segments, as its management analyzes the business as a whole and expenses are not allocated to each product offering.

Gross Profit

Gross profit for the 12-months ended December 31, 2025 and 2024 totaled $5.4 million or 75.8% and $4.4 million or 76.8%, respectively. The gross profit margin remained relatively flat year-over-year as Shield revenues represented 25% and 26% of revenues in each of 2025 and 2024, respectively. To the extent Shield revenues become a larger percentage of revenues, we anticipate we will see favorable growth in gross profit margins.

Operating Expenses

Operating expenses for the year ended December 31, 2025, totaled $14.5 million, an increase of 13.0% when compared to $12.9 million for the year ended December 31, 2024. Factors contributing to the increase most notably related to one-time savings realized in 2024 from the negotiation or cancellation of existing contracts which contributed $0.5 million in savings in 2024, increased share-based compensation of $0.7 million from equity grants made in the first quarter of 2025 and cost of living and merit increases of $0.3 million.

Sales and Marketing

Sales and marketing expenses totaled $5.3 million, an increase of $0.5 million from $4.7 million in 2024. The increased Sales and Marketing spend related primarily to increased participation in trade shows and increased spend to create more brand awareness and concise product messaging which was partially offset by increased allocations out of operating expenses to cost of sales for resources dedicated to increased consulting work in 2025 and one-time negotiated savings included in the 2024 period of approximately $0.2 million. Certain discretionary marketing spends inclusive of participation in trade shows, utilization of third-party contractors for content and product messaging and travel, are likely to vary over time based on savings initiatives that may be necessary.

Research and Development

Research and development expenses totaled $5.2 million for the year ended December 31, 2025, representing an increase of $0.7 million when compared to the prior year. The increase was primarily due to increased depreciation of $0.2 million on infrastructure hardware purchases and internally developed software and increases in compensation related to the addition of a Sales Engineer and Software Engineer, merit increases and equity awards made in the first quarter of 2025. 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 $4.1 million in 2025 compared to $3.7 million in 2024. The $0.4 million increase in 2025 was primarily due to one-time negotiated savings of $0.2 million included in the 2024 period and increased share-based compensation related to equity grants made in the first quarter of 2025.

Interest Expense

Interest expense for the twelve months ended December 31, 2025, was $81 thousand which related primarily to imputed interest on finance leases. Interest expense for the 2024 period totaled $328 thousand consisting principally of interest on finance leases and the stated interest related to the Streeterville Capital, LLC ("Streeterville") and Scott notes, both of which have been fully repaid. Interest expenses will vary in the future based on our cash flow and borrowing needs.

Interest Accretion and Amortization of Debt Issuance Costs, Net

During March 2024, the Company entered into exchange agreements to convert $9.5 million in Streeterville debt to $9.3 million of Series A preferred stock and $0.2 million to common stock and, as a result, the Company 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 included interest income on cash and short-term investments of $0.2 million in 2025. Other income (expense) was negligible in 2024.

Consolidated Statements of Cash Flows

Our cash flows for the years ended December 31, 2025 and 2024 (in thousands) were:

		Year Ended December 31,
		2025				2024
Net cash used in operating activities		$	(6,759	)		$	(6,293	)
Net cash used in investing activities			(2,549	)			(1,809	)
Net cash provided by financing activities			8,081				12,814
Change in cash and cash equivalents		$	(1,227	)		$	4,712

Operating Activities

Net cash used in operations for the year ended December 31, 2025, was ($6.8) million due to a net loss of ($9.1) million, offset by (i) adjustments for non-cash items of $3.2 million which are mostly comprised of depreciation and stock-based compensation, and (ii) ($0.9) million used for working capital.

Net cash used in operations for the year ended December 31, 2024, was ($6.3) million due to a net loss of ($7.8) million, offset by (i) adjustments for non-cash items of $1.7 million which are mostly comprised of depreciation, stock-based compensation, and interest related to Streeterville notes, and (ii) $(0.2) million used for working capital.

Investing Activities

For the year ended December 31, 2025, net cash used in investing activities was ($2.5) million, of which $1.8 million was the capitalization of internally developed software, and $0.8 million was the purchase of equipment.

For the year ended December 31, 2024, net cash used in investing activities was ($1.8) million, of which $1.2 million was the capitalization of internally developed software, $0.5 million was the purchase of equipment and $0.1 million was the deposit on financed equipment.

Financing Activities

For the year ended December 31, 2025, net cash provided by financing activities was $8.1 million, which consisted principally of net proceeds from a registered direct offering of $7.0 million and the receipt of $1.5 million in proceeds from the sale of common stock pursuant to the SEPA, which was recorded as a stock subscription receivable at December 31, 2024, offset partially by principal payments on equipment finance leases of $0.4 million.

For year ended December 31, 2024, net cash provided by financing activities was $12.8 million, which consisted principally of proceeds from sales of common stock using our ATM program of $9.8 million, a private placement in April 2024 of $2.6 million and proceeds from the sale of common stock and warrants pursuant to warrant inducement offerings of $0.8 million, offset partially by principal payments on equipment finance leases of $0.5 million.

Liquidity and Capital Resources

As of December 31, 2025, we had cash and cash equivalents of $3.6 million and $2.4 million in working capital. Our primary source of cash for funding operations in 2025 has come from net proceeds received from a registered direct offering of $7.0 million and $1.5 million in proceeds from the sale of common stock pursuant to a SEPA, recorded as a receivable at December 31, 2024. Our independent registered public accounting firm's report on our audited financial statements for the fiscal year ended December 31, 2025 includes an explanatory paragraph stating that our historically recurring losses from operations, negative cash flows from operations, and dependence on equity and debt financings raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to raise additional funds through public or private financings, including the utilization of our ATM program. We can provide no assurances that we will be able to raise additional funds through any future equity or debt financings, and the terms of those financings, if available at all, may be on terms, which are not favorable to us and, in the case of equity financings, will result in dilution to our stockholders. The inclusion of a going concern explanatory paragraph may also make it more difficult for us to secure additional financing or enter into strategic partnerships, as it signals a high degree of financial risk to potential investors and creditors. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our principal sources of cash for funding operations in 2024 were net proceeds received from sales of common stock using our ATM program of $9.8 million, a private placement offering completed in April 2024 of $2.6 million, and $0.8 million from the exercise of warrants.

ATM Program

In June 2025, we terminated our At Market Sales Agreement with B. Riley Securities, Inc ("B. Riley") and entered into a new ATM Offering Agreement with H.C. Wainwright & Co., LLC ("Wainwright") to potentially sell up to $50.0 million of our common stock using a shelf registration statement on Form S-3/A (File No. 333-281565) which was filed in January 2025 and became effective in February 2025. Under the Sales Agreement, Wainwright may sell shares of our common stock by any method permitted by law deemed to be an "ATM offering" as defined in Rule 415(a)(4). We pay Wainwright a commission of up to 3.0% of the gross sales price of any shares sold through Wainwright under the Sales Agreement.

We filed a replacement shelf registration on Form S-3 in January 2025, with an effective date of February 2025, pursuant to which we can sell up to $50.0 million of our common stock. As of February 25, 2025, our public float calculated in accordance with General Instruction I.B.1 of Form S-3, was $112.9 million based on 19,342,776 shares of common stock outstanding of which 17,861,513 shares are held by non-affiliates, and a per share price of $6.32 based on the average of the bid and asked prices of our common stock on the Nasdaq on December 30, 2024.

SEPA

In July 2024, we entered into a $10 million SEPA with Streeterville pursuant to which the Company has the right, during the 24-month term of the agreement and subject to certain limitations and conditions to direct Streeterville to purchase shares of our common stock.

Shares of common stock issued pursuant to SEPA will be purchased at a price equal to 95% of the lowest daily volume-weighted average price of our common on the Nasdaq Stock Market during the three consecutive trading days during regular trading hours, as reported by Bloomberg L.P. beginning on the date we deliver an advance notice. We are required to use 10% of the proceeds from each advance to redeem outstanding shares of Series A Preferred Stock held by Streeterville.

During 2024, pursuant to the SEPA, Streeterville purchased 1.2 million shares of common stock resulting in aggregate net proceeds of $1.8 million of which $0.1 million was received in 2024 and the remaining proceeds of $1.7 million were received in January 2025. No draws on the SEPA were made in 2025.

Notes Payable

In March 2022 we entered into a securities purchase agreement ("SPA") with Streeterville pursuant to which Streeterville purchased two $5.4 million promissory notes for $9.3 net proceeds. Principal payments totaled $1.9 million through 2023. In the fourth quarter of 2023 and the first quarter 2024, we exchanged $0.8 million of principal for 146 thousand shares of common stock. In March 2024, the remaining $9.3 million principal was exchanged for 9,275 shares of Services A Preferred Stock (See Note 8). Following these transactions, $0.5 million principal remained on the first note. During 2024, no principal payments were made on the Streeterville notes following the first quarter debt-for equity-exchanges. In March 2025, we fully retired the remaining $0.5 million Streeterville note through issuance of 553 thousand shares of common stock pursuant to Section 3(a)(9) of the Securities Act. This transaction eliminated all the Streeterville debt with no material cash outflow during 2024 or 2025.

In September 2024, we entered into a note purchase agreement with Streeterville where Streeterville purchased a note payable in the principal amount of $0.6 million in exchange for $0.5 million in cash after redemption of $0.1 million of Series A preferred stock. The note called for weekly payments of $25 thousand until the maturity in November 2024. In the event the note was not repaid on the maturity date, weekly payments would increase to $50 thousand. The note bore no interest. This note was repaid in full in November 2024.

During 2024, we entered into two separate note purchase agreements with Mr. Scott, our President, CEO and member of our Board. In January 2024, Mr. Scott purchased a note payable in the principal amount of $1.1 million in exchange for $1.0 million in cash. The note called for weekly payments of $40 thousand until maturity in June 2024. Interest accrued on the balance of the note at 7% per annum compounding daily. During the quarter ended March 31, 2024, we made $0.2 million in principal payments. In March 2024, Mr. Scott purchased a second note payable in the principal amount of $0.3 million in exchange for $0.3 million in cash. The note was non-interest bearing and matured in April 2024. In April 2024, we reduced the principal balance due under the note by $0.1 million, which reflected the amount due from Mr. Scott for the exercise of common stock purchase warrants. In April 2024, Mr. Scott entered into a private placement subscription agreement to convert the aggregate remaining outstanding balance of $1.1 million for both notes in exchange for common stock and common stock purchase warrants.

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 U.S. ("GAAP"). 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 credit losses, 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.

Capitalized Software Development

We capitalize internally developed software using the Agile software development methodology which allows us to accurately track, and record costs associated with new software development and enhancements.

Pursuant to the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") Topic 350-40 Internal Use Software Accounting Capitalization, certain development costs related to our products during the application development stage are capitalized as part of property and equipment. Costs incurred in the preliminary stages of development are expensed as incurred. The preliminary stage includes activities such as conceptual formulation of alternatives, evaluation of alternatives, determination of existence of needed technology, and the final selection of alternatives. Once the application development stage is reached, internal and external costs are capitalized until the software is complete and ready for its intended use. Capitalized internal use software is amortized on a straight-line basis over its estimated useful life, which is generally three years.

Revenue Recognition

We recognize product revenue upon shipment or after meeting certain performance obligations. These products can include hardware, software subscriptions, and consulting services. Most of our sales are from consulting services. We also offer software on a subscription basis subject to SaaS. Warranty costs have not been material.

We recognize sales of its consulting services in accordance with the ASC Topic 606 whereby revenue from contracts with customers are recognized once the criteria under the five steps below are met:

	i)	identification of the contract with a customer;
	ii)	identification of the performance obligations in the contract;
	iii)	determination of the transaction price;
	iv)	allocation of the transaction price to the separate performance obligations; and
	v)	recognition of revenue upon satisfaction of a performance obligation.

Consulting services, including reporting are typically performed on a monthly basis, and the related revenue is recognized as the services are rendered to the customer. Product sales may include maintenance and customer support elements, with consideration allocated to each performance obligation based on the estimated selling prices of the delivered goods and services based on a selling price hierarchy using the relative selling price method. All product offering and service offering market values are readily determined based on current and prior stand-alone sales. The Company defers and recognizes maintenance, updates, and support revenue over the term of the contract period, which is generally one year.

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

With our newest product, INTRUSION Shield, we began offering software on a subscription basis. INTRUSION Shield is a hosted arrangement subject to SaaS guidance under ASC Topic 606. SaaS arrangements are accounted for as subscription services not arrangements that transfer a license of intellectual property.

We utilize the five-step process mentioned above, to recognize sales and will follow that directive, also, to define revenue items as individual and distinct. INTRUSION Shield services provided to our customers for a fixed monthly subscription fee include:

	·	access to Intrusion's proprietary software and database to detect and prevent unauthorized access to our clients' information networks;
	·	use of all software, associated media, printed materials, data, files, online documentation, and any equipment that Intrusion provides for customers to access the INTRUSION Shield; and
	·	tech support, post contract customer support ("PCS") includes daily program releases or corrections provided by Intrusion without additional charge.

Our contract provides for no other services, and our customers have no rebates or return rights, nor are any such rights anticipated to be offered as part of this service.

We satisfy our performance obligation when our INTRUSION Shield solution is available to detect and prevent unauthorized access to a client's information networks. Revenue is recognized monthly over the term of the contract. The Company's standard initial contract terms are automatically renewed unless notice is given 30 days before renewal. Upfront payment of fees is deferred and amortized into income over the period covered by the contract.

Allowances for Credit Losses

We maintain allowances for credit losses for estimated losses resulting from the inability of our customers to make the required payments. Our receivables are uncollateralized, and we expect to continue this policy in the future. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, increased allowances may be required. Historically, our estimate for sales returns and credit losses 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 approximate their carrying amounts due to the relatively short maturity of these instruments. Notes payable and financing and operating leases approximate fair value as they bear market rates of interest. None of these instruments are held for trading purposes.

Recent Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements (Part II, Item 8 of this Annual Report on Form 10-K).