Quarterly Report for Quarter Ending June 30, 2026 (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.

On June 29, 2026, we entered into an Agreement to acquire 100% of the membership interests of VigilAigent over two distinct closings. At the first closing, effective June 29, 2026, we acquired 60% of VigilAigent's membership interests for a purchase price of $2.0 million, paid through $0.4 million of cash and the issuance of $1.6 million of unregistered shares of the Company's common stock, par value $0.01 per share, at a contractually defined share price of $0.67 per share. At the second closing, subject to specified closing conditions, including obtaining required Company stockholder and Nasdaq Stock Market or other regulatory approvals, we agreed to acquire the remaining 40% of VigilAigent's membership interests for a cash payment of $1.3 million. The obligations of the parties to consummate the second closing are subject to satisfaction, or waiver, on or before August 30, 2026 or such later date as may be agreed upon by the Seller and Company, of the identified closing conditions.

The financial statements fully consolidate the financial position and operations of VigilAigent as of the three and six months ended June 30, 2026, however, the statement of operations and results of operations reflects virtually none of its historical performance. For the three and six months ended June 30, 2026, VigilAigent contributed revenue of $17 thousand and a net loss of $14 thousand to the consolidated operating results of the Company.

Results of Operations

Comparison of the Periods Ended June 30, 2026, and June 30, 2025

		Three Months Ended June 30,																Six Months Ended June 30,
(Dollars in thousands)		2026				2025				Change								2026				2025				Change
Revenue		$	1,453			$	1,873			$	(420	)			-22%			$	2,341			$	3,648			$	(1,307	)			-36%
Cost of revenue			488				442				46				10%				717				874				(157	)			-18%
Gross profit			965				1,431				(466	)			-33%				1,624				2,774				(1,150	)			-41%
Gross profit percentage			66.4%				76.4%												69.4%				76.0%
Operating expenses:
Sales and marketing			1,365				1,207				158				13%				2,995				2,391				604				25%
Research and development			1,145				1,332				(187	)			-14%				2,596				2,550				46				2%
General and administrative			948				978				(30	)			-3%				2,098				2,012				86				4%
Total operating expenses			3,458				3,517				(59	)			-2%				7,689				6,953				736				11%
Operating loss			(2,493	)			(2,086	)			(407	)			20%				(6,065	)			(4,179	)			(1,886	)			45%
Interest expense			(110	)			(21	)			(89	)			424%				(121	)			(50	)			(71	)			142%
Other income, net			7				65				(58	)			-89%				27				89				(62	)			-70%
Net loss			(2,596	)			(2,042	)			(554	)			27%				(6,159	)			(4,140	)			(2,019	)			49%
Less net loss attributable to noncontrolling interests			(6	)			-				(6	)			-100%				(6	)			-				(6	)			-100%
Net loss attributable to Intrusion, Inc.		$	(2,590	)		$	(2,042	)		$	(548	)			27%			$	(6,153	)		$	(4,140	)		$	(2,013	)			49%

Revenues. Revenue for the three and six months ended June 30, 2026, was $1.5 million and $2.3 million compared to $1.9 million and $3.6 million for the same periods in 2025. Revenue from consulting services totaled $1.3 million and $2.1 million for the three and six months ended June 30, 2026, respectively, compared to $1.4 million and $2.7 million for the same periods in 2025. INTRUSION Shield revenues were $0.1 million and $0.2 million for the three and six months ended June 30, 2026 as compared to $0.5 million and $0.9 million for the three and six month periods ended June 30, 2025. The continued delay in the contract extension of the U.S. Department of War contract due to timing variability of federal funding and procurement processes resulted in a decline in both consulting revenues and INTRUSION Shield revenues. The June 2026 quarter consulting revenues included revenue from the $3.9 million contract signed in May 2026 to provide cybersecurity and critical infrastructure protection services for a state agency.

Concentration of Revenues. Revenues from sales to various U.S. government entities totaled $1.3 million and $2.1 million, or 94% and 91% of revenues, for the three and six months ended June 30, 2026, respectively, compared to $1.8 million and $3.4 million, or 96% and 94% of revenues, for the same period in 2025. 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 contracts with government customers will be renegotiated or cancelled, the loss of government orders could have a material adverse effect on our financial results. We had three customers account for 91% and 93% of total revenue for the six months ended June 30, 2026 and 2025, respectively. Our similar product and service offerings are not viewed as individual segments, as our management analyzes the business as a whole and expenses are not allocated to each product offering.

Gross Profit. Gross profit was $1.0 million and $1.6 million, or 66.4% and 69.4% of total revenues, for the three and six months ended June 30, 2026, compared to $1.4 million and $2.8 million, or 76.4% and 76.0% of total revenues, for the prior year comparative periods. Gross margin fluctuations are primarily driven by changes in product mix. Specifically, INTRUSION Shield revenues decreased as a percentage of total revenue to 6.8% and 9.0% for the three and six months ended June 30, 2026, down from 26.0% and 24.7% for the three and six months ended June 30, 2025, respectively. Additionally, gross margins in the 2026 periods were negatively impacted by lower-margin work performed under a new cybersecurity and critical infrastructure protection contract with a state agency.

Operating Expenses. Operating expenses were $3.5 million and $7.7 million for the three and six months ended June 30, 2026, respectively, compared to $3.5 million and $7.0 million for the corresponding periods in 2025.

Operating expenses for the three-month period remained relatively consistent with the prior-year period. Higher sales and marketing investments to support continued brand awareness initiatives, together with merit and cost-of-living salary increases implemented during the second half of 2025, were substantially offset by lower share-based compensation expense resulting from equity awards that became fully vested.

The $0.7 million increase in operating expenses for the six-month period was primarily attributable to increased sales and marketing investments to support the Company's growth initiatives, as well as the full-period impact of merit and cost-of-living salary increases implemented during the second half of 2025. The increase was also driven by lower allocations of personnel costs from operating expenses to cost of sales resulting from the underutilization of service delivery resources associated with the delayed funding and commencement of work under a significant U.S. Department of War contract.

Sales and Marketing. Sales and marketing expenses totaled $1.4 million and $3.0 million for the three and six months ended June 30, 2026, representing an increase of $0.2 million and $0.6 million when compared to the same periods in the prior year. The increase is primarily due increased investment in sales and sales support personnel and increased participation in trade shows and associated marketing spend to continue to create more brand awareness and growth in our pipeline as well as an underutilization of our government sales team due to the delayed U.S. Department of War contract. 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 marketing and savings initiatives that may be necessary.

Research and Development. Research and development expenses totaled $1.1 million for the three months ended June 30, 2026 compared to $1.3 million for the 2025 period. The decrease is primarily related to lower share-based compensation as well as increased capitalized software development costs. Research and development expenses for the six month period ended June 30, 2026 compared to the same period in 2025 remained flat at $2.6 million.

General and Administrative. General and administrative expenses for the three month period ended June 30, 2026 remained flat at $0.9 million when compared to the same prior year period. For the six months ended June 30, 2026, general and administrative expenses increased by approximately $0.1 million compared with the same period in the prior year. The increase was primarily attributable to legal fees incurred in connection with the acquisition of O.W. Cyber LLC, higher operating lease costs related to our Plano office space, and increased recruiting expenses. These increases were partially offset by lower share-based compensation expense and the timing of financial audit fees.

Interest Expense. Interest expense for the three and six months ended June 30, 2026, was $0.1 million and $0.1 million, consisting principally of the stated interest and amortization of OID and transaction costs on the Streeterville note and imputed interest on finance leases. Interest expense for the three and six month periods ended June 30, 2025, was $21 and $50 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.

Other Income (Expense), Net. Other income and expense were nominal amounts for both the three and six month periods ended June 30, 2026, and 2025.

Noncontrolling interest. Noncontrolling interest were nominal amounts for both the three and six month periods ended June 30, 2026 and 2025 as the acquisition of VigilAigent closed on June 29, 2026.

Net Loss Attributable to Intrusion, Inc.. Net loss for the three and six month periods ended June 30, 2026 was $(2.6) million and $(6.2) million, respectively compared to $(2.0) million and $(4.1) million for the same periods in the prior year. The increase in net loss for the 2026 periods was primarily a result of the decrease in revenues for the 2026 period as discussed above.

Liquidity and Capital Resources

Sources of Liquidity

As of June 30, 2026, we had cash and cash equivalents of $0.2 million. We generated a net loss of $6.2 and $4.1 million for the six months ended June 30, 2026, and 2025, respectively. We continue to incur losses from operations, negative cash flows from operations, as well as having a continued dependence on equity and debt financing. These conditions raise substantial doubt about the Company's ability to continue as a going concern within one year after the date of these financial statements. We plan to finance operations by raising additional funds through public or private financings, including the utilization of the ATM program, however, we can provide no assurances that additional funds will be raised or that the terms of those financings, if available at all, will be on favorable terms or will not result in dilution to stockholders. If our operations do not generate positive cash flow in the upcoming year, or if we are not able to obtain additional debt or equity financing on terms and conditions acceptable to us, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our principal source of cash for funding operations for the six month period ended June 30, 2026 was cash proceeds from the sale of notes payable of $3.3 million. Our principal source of cash for funding operations in the June 2025 was the 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.

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 as of June 30, 2026.

Notes Payable

During the June 2026 quarter we entered into two separate note purchase agreements with Streeterville. On April 6, 2026, Streeterville purchased a note payable in the principal amount of $3.2 million in exchange for $3.0 million in cash (reflecting an original issue discount and legal fees of $0.2 million). The Company also paid transaction costs associated with this Note of $0.2 million. Beginning six months after funding, the Investor may require cash redemptions of up to $0.3 million per calendar month and may require additional limited redemptions if the Company's common stock trades at a price that is at least 10% greater than the Nasdaq minimum price up to amount equal to 5% of the cumulative daily dollar trading volume. The note bears interest at 7% per annum, compounded daily, matures 24 months after issuance, and includes a monitoring fee provision after 90 days (automatically increases the Outstanding Balance by approximately 17.65%), which is expected to be recorded in Q3'26. The agreement includes certain customary and noncustomary trigger events and defaults which, if triggered, could result in an additional 5% or 15% added to the principal balance. The Note is secured by a first-priority security interest in all of the Company's assets and intellectual property. On June 25, 2026, Streeterville purchased a second note payable in the principal amount of $385 thousand in exchange for $350 thousand in cash. The note is non-interest bearing and calls for weekly cash payments of $8 thousand until maturity at August 27, 2026.

In the 2025 period, 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 six months ended June 30, 2026 and 2025 were:

		Six Months Ended June 30,
		2026				2025
Net cash used in operating activities		$	(5,411	)		$	(3,250	)
Net cash used in investing activities			(998	)			(5,150	)
Net cash provided by financing activities			2,967				8,238
Change in cash and cash equivalents		$	(3,442	)		$	(162	)

Operating Activities

Net cash used in operations for the six months ended June 30, 2026, was $(5.4) million due primarily to a net loss of $(6.1) million partially offset by 1) adjustments for non-cash items of $1.3 million which are mostly comprised of depreciation and stock-based compensation, and 2) changes in working capital of ($0.6) million.

Net cash used in operations for the six months ended June 30, 2025, was ($3.3) million due primarily to a net loss of ($4.1) million partially offset by 1) adjustments for non-cash items of $1.5 million which were mostly comprised of depreciation and stock-based compensation, and 2) changes in working capital of ($0.7) million.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2026 was $1.0 million, which was comprised of capitalization of internally developed software ($0.6) million and cash paid for the acquisition of O.W. Cyber LLC, net of cash acquired of ($0.4) million.

For the six months ended June 30, 2025, net cash used in investing activities was ($5.2) million, which included short-term investments in highly liquid, investment-grade fixed income securities of ($3.7) million and capitalization of internally developed software and hardware purchases of ($1.4) million.

Financing Activities

For the six months ended June 30, 2026, net cash provided by financing activities was $3.0 million which was principally comprised net proceeds from issuance of the Streeterville notes $3.3 million offset partially by cash paid on tax withholding for net settled restricted stock units of ($0.1) million. Net proceeds from financing activities for the June 2025 period totaled $8.2 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 ($0.2) million.

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, 2025, filed with the SEC on March 25, 2026 (the "2025 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 2025 Annual Report.