Item 1A. Risk Factors.
The following are the significant
factors that could materially adversely affect our business, financial condition, or operating results, as well as adversely affect the
value of an investment in our common stock. The risks described below are not the only risks facing our Company. Risks and uncertainties
not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition,
and operating results.
Risks Related to our Financial Position and
Liquidity
The Company’s ability to implement
its current business plan is dependent on our ability to raise additional funds through additional public or private financings, which
raises substantial doubt that the Company may not be able to continue as a going concern.
As of December 31, 2025, we
had cash and cash equivalents of $3.6 million. 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 standby equity
purchase agreement (“SEPA”), recorded as a receivable at December 31, 2024. Our independent registered public accounting firm’s
report on our audited financial statements for 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 financing 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 financing, 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.
We are subject to certain regulatory limitations
that may affect our ability to consummate future financings.
Unless our public float as
measured pursuant to General Instruction I.B.6 to Form S-3 exceeds $75 million, we will be subject to the restrictions set forth in General
Instruction I.B.6 to Form S-3 that limit our ability to conduct primary offerings under a Form S-3 registration statement. Under such
limitations, we may not sell, during any 12-month period, securities on Form S-3 having an aggregate market value of more than one-third
of our public float. As of March 24, 2026, our public float calculated in accordance with General Instruction I.B.6 of Form S-3 was $20.1
million.
We must increase revenue levels in order
to finance our current operations and to implement our business strategies.
For the year ended
December 31, 2025, we had a net loss of $9.1 million and had an accumulated deficit of approximately $127.1 million as of December
31, 2025. We need to increase current revenue levels from the sales of our solutions if we are to regain profitability, and our INTRUSION Shield suite
of products may take time to achieve market penetration, which could negatively impact future revenues and results of operations. If
we are unable to increase revenue levels, losses could continue for the near term and possibly longer, and we may not regain
profitability or be able to implement our business plan, fund our liquidity needs, or continue our operations.
Business and Operational Risks
Most of our current revenues are generated
from one family of solutions with a limited number of customers, and the decrease of revenue from sales of this family of solutions could
materially harm our business and prospects.
Approximately 43.2% of our
existing revenues result from sales of TraceCop, a cybersecurity solution. TraceCop revenues were $3.1 million
for the year ended December 31, 2025, compared to $2.9 million for the year ended December 31, 2024. We can offer no assurances that our
INTRUSION Shield solution will reduce our dependence on this single solution and in the absence of a shift in solution mix,
we may continue to face risks if sales of this key solution to these limited customers were to decrease.
We may not be successful in
our efforts to broaden the marketing and sale of the INTRUSION Shield.
We believe that we must expand
our sales and marketing efforts for INTRUSION Shield to achieve marketplace acceptance and to generate revenue for the Company.
However, these efforts depend, in large part, on the success of our channel partners as they market and sell INTRUSION Shield,
which may not be successful. If we are unsuccessful in our efforts to leverage channel and strategic partners, we may not be able to generate
sufficient revenue from INTRUSION Shield to improve the Company’s financial position, results of operations, and cash
flow position.
The current geo-political climate may add
uncertainty in the dealings of our customers and could cause them to delay indefinitely certain cybersecurity initiatives or to determine
not to introduce or implement any new or innovative cyber-solution products into their information networks.
Continuing events in many
regions around the world have introduced a significant level of uncertainty in the dealings of our current and potential customers that
could cause them to be hesitant to implement new cybersecurity initiatives regardless of the efficacy of our INTRUSION Shield
product. Further, these entities may also determine not to deploy their cash reserves in the face of such uncertainty. These uncertainties
could depress the interest or the ability of companies and governmental entities to test, evaluate, and deploy our INTRUSION Shield
in their network environments.
A large percentage of our current revenues
are received from U.S. government entities, and the loss of these customers or our failure to widen the scope of our customer base to
include general commercial enterprises could negatively affect our revenues.
A
substantial percentage of our current revenues result from sales to U.S. government entities. If we were to lose one or more of these
customers, our revenues could decline, and our business and prospects may be materially harmed. Further, sales to the government present
risks in addition to those involved in sales to commercial customers, including potential disruption due to appropriation and spending
patterns, delays in approving a federal budget and the government’s right to cancel contracts and purchase orders for its convenience.
The factors that could cause us to lose these U.S. government customers or otherwise materially harm our business, prospects, financial
condition, or results of operations include:
· re-allocation of government resources;
· disruptions in our customers’ ability to access funding from capital markets;
· the adoption of new laws or regulations pertaining to government procurement;
· delays in the payment of our invoices by government payment offices; and
While we expect that developing
relationships with non-governmental customers will mitigate or eliminate this dependence on, and risk from, serving governmental entities,
we can offer no assurances that we will be able to sufficiently diversify our customer portfolio in a time and manner to adequately mitigate
this risk.
A decline in federal,
state, or local government spending would likely negatively affect our product revenues and earnings.
The success of the cybersecurity
solutions we sell depends substantially on the amount of funds budgeted by federal, state, and local government agencies that make up
our current and potential customers. Global credit and financial markets have experienced extreme disruptions in the recent past, including
severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment
rates and uncertainty about economic stability. There can be no assurance that similar disruptions will not occur in the future. Deterioration
in general economic conditions may result in lower tax revenues that could lead to reductions in government spending. Poor economic conditions
could in turn lead to substantial decreases in our net sales or have a material adverse effect on our operating results, financial position,
and cash flows.
We are highly dependent on sales of our
current solutions through indirect channels, the loss of which would materially adversely affect our operations.
For the years ended December
31, 2025 and 2024, we derived 55.0% and 35.4% of our revenues from sales through indirect sales channels, such as distributors, value-added
resellers, system integrators, original equipment manufacturers, and managed service providers. We must expand sales of our current solutions
as well as any new solutions through these indirect channels in order to increase our revenues. We cannot assure you that our current
solutions or future solutions will gain market acceptance in these indirect sales channels or that sales through these indirect sales
channels will increase our revenues. Further, many of our competitors are also trying to sell their products and solutions through these
indirect sales channels, which could result in lower prices and reduced profit margins for the sales of our solutions.
Our business depends on the continued service
of our key management and technical personnel.
Our success depends upon the
continued contributions of our key management, sales, marketing, research and development and operational personnel, including Anthony
Scott, our President, and Chief Executive Officer (“CEO”); T. Joe Head, our Chief Technology Officer; Kimberly Pinson, our
Chief Financial Officer (“CFO”); and other key technical personnel. The loss of the services of one or more of our key employees
in the future could have a material adverse effect on our operating results. We also believe our future success will depend upon our ability
to attract and retain additional highly skilled management, technical, marketing, research and development, and operational personnel
with experience in managing large and rapidly changing companies, as well as training, motivating and supervising employees. The market
for hiring and retaining certain technical personnel, including software engineers, has become more competitive and intense in recent
years. Failure to attract and retain a sufficient number of qualified technical personnel, including software engineers, or retain our
key personnel could have a material adverse effect on our operating results.
We could experience damage to our reputation
in the cybersecurity industry in the event that our INTRUSION Shield solution fails to meet our customers’ needs or to achieve
market acceptance.
Our reputation in the industry
may be harmed if we experience delivery delays, or if our customers do not perceive the benefits of purchasing and using INTRUSION
Shield as part of their comprehensive cybersecurity solution, our position as a leader in this technology space may be damaged
and could affect the willingness of our customers, as well as potential customers, to purchase our other solutions that function separately
from INTRUSION Shield. Any reputational damage could result in a decrease in orders for all our solutions, the loss of current
customers, and a decrease in our overall revenues which could in turn have a material adverse effect on our results of operations.
If we fail to respond to rapid technological
changes in the network security industry, we may lose customers, or our solutions may become obsolete.
The network security industry
is characterized by frequent product and service introductions, rapidly changing technology, and continued evolution of new industry standards.
We have and must continue to introduce upgrades to our current solutions rapidly in response to changing circumstances and customer needs
such as the creation and introduction of new computer viruses or other novel external attacks on computer networks. Further, our INTRUSION
Shield solution represents our efforts to continue to provide state-of-the art first-in-time innovation for our customers’
cybersecurity solutions. As a result, our success depends upon our ability to develop and introduce timely upgrades, enhancements, and
new solutions to meet evolving customer requirements and industry standards. The development of technologically advanced network security
products and solutions is a complex and uncertain process requiring high levels of innovation, rapid response, and accurate anticipation
of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new
or enhanced solutions successfully in a timely manner. Further, we or our competitors may introduce new solutions or enhancements that
shorten the life cycle of our existing solutions or cause our existing solutions to become obsolete.
We must expend time and resources addressing
potential cybersecurity risks, and any breach of our information security safeguards could have a material adverse effect on the Company.
The threat of cyber-attacks
requires additional time and money to be expended in efforts to prevent any breaches of our information security protocols. However, we
can provide no assurances that we can prevent all such attempts from being successful, which could result in expenses to address and remediate
such breaches as well as potentially losing the confidence of our customers who depend upon our services to prevent and mitigate such
attacks on their respective business. Should a material breach of our information security systems occur, it would likely have a material
adverse impact on our business operations, our customer relations, and our current and future sales prospects, resulting in a significant
loss of revenue.
A breach of network security could harm
public perception of our cybersecurity solutions, which could cause us to lose revenues.
If an actual or perceived
breach of network security occurs in the network of a customer of our cybersecurity solutions, regardless of whether the breach is attributable
to our solutions, the market perception of the effectiveness of our solutions could be harmed. This could cause us to lose current and
potential end customers or cause us to lose current and potential value-added resellers and distributors. Because the techniques used
by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target,
we may be unable to anticipate these techniques.
If our solutions do not interoperate with
our customers’ networks, installations will be delayed or cancelled and could harm our business.
Our solutions are designed
to interface with our customers’ existing networks, each of which has different specifications and utilize multiple protocol standards
and products or solutions from other vendors. Many of our customers’ networks contain multiple generations of products that have
been added over time as these networks have grown and evolved. Our solutions will be required to interoperate with many products and solutions
within these networks as well as future products or solutions to meet our customers’ requirements. If we find errors in the existing
software or defects in the hardware used in our customers’ networks, we may have to modify our software or hardware to fix or overcome
these errors so that our solutions will interoperate and scale with the existing software and hardware, which could be costly and negatively
impact our operating results. In addition, if our solutions do not interoperate with those of our customers’ networks, demand for
our solutions could be adversely affected, orders for our solutions could be cancelled, or our solutions could be returned. This could
hurt our operating results, damage our reputation, and seriously harm our business and prospects.
We face intense competition from both start-up
and established companies that may have significant advantages over us and our solutions.
The market for our solutions
is intensely competitive. There are numerous companies competing with us in various segments of the data security markets, and their products
or solutions may have advantages over our solutions in areas such as conformity to existing and emerging industry standards, interoperability
with networking and other cybersecurity products, management and security capabilities, performance, price, ease of use, scalability,
reliability, flexibility, features, and technical support.
Our principal competitors
in the data mining and advanced persistent threat markets include Darktrace, Trellix, and Recorded Future. Our current and potential competitors
may have one or more of the following significant advantages over us:
· greater financial, technical, and marketing resources;
· better name recognition;
· more comprehensive security solutions;
· better or more extensive cooperative relationships; and
· larger customer base.
We cannot assure you that
we will be able to compete successfully with our existing or new competitors. Some of our competitors may have, in relation to us, one
or more of the following:
· longer operating histories;
· longer-standing relationships with OEM and end-user customers; and
· greater customer service, public relations, and other resources.
As a result, these competitors
may be able to more quickly develop or adapt to new or emerging technologies and changes in customer requirements, or devote greater resources
to the development, promotion and sale of their products or solutions. Additionally, it is likely that new competitors or alliances among
existing competitors could emerge and rapidly acquire significant market share.
If we are unable to implement and maintain
effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our
financial reports, and the market price of our common stock may decline.
As a public company, we are
required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Further,
we are required to report any changes in internal controls on a quarterly basis. In addition, we are required to furnish a report by management
on the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended
(the “Sarbanes-Oxley Act”).
If we identify material weaknesses
in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner,
or if we assert that our internal control over financial reporting is ineffective, investors may lose confidence in the accuracy and completeness
of our financial reports and the market price of the common stock could be negatively affected. We could also become subject to investigations
by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial
and management resources, and could have a material adverse effect on the market price of our common stock.
Scarcity of products and materials in the
supply chain could hinder or prevent the deployment of our INTRUSION Shield for our customers who elect to use the wired version of our
solution.
Should any of the component
parts required for the hardware interface our customers use to access and to utilize the INTRUSION Shield product become
scarce, we may have to delay or cancel our fulfillment of orders that could defer potential revenues or even result in customer cancellations,
which would have a negative effect on our financial position and results of operations.
We incur significantly increased costs because
of operating as a public company, and our management is required to devote substantial time to compliance matters and initiatives.
As a public company with an
obligation to file reports with the SEC under the Exchange Act, we incur significant legal, accounting, and other expenses that we would
not incur as a private company. In addition, the Sarbanes-Oxley Act imposes various requirements on public companies, including requiring
establishment and maintenance of effective disclosure and financial controls. Our management and other personnel devote a substantial
amount of time to these compliance initiatives. We cannot predict or estimate the amount of additional costs we will incur to meet our
additional disclosure obligations under the Exchange Act or the timing of such costs.
The Sarbanes-Oxley Act requires,
among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. We report
on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In addition,
in the first Annual Report on Form 10-K following the date on which we no longer qualify as a smaller reporting company, we will be required
to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting.
Our compliance with Section 404 of the Sarbanes-Oxley Act could require that we incur substantial accounting expenses and expend significant
management efforts including the potential of hiring additional accounting and financial staff with appropriate public company experience
and technical accounting knowledge. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or
our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed
to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC
or other regulatory authorities, which would require additional financial and management resources.
Investment Risks
We experience volatility in the market for
our common stock, particularly with respect to swings in the market price as well as volatility in the trading of our common stock.
We experience significant
shifts in the market value of our common stock as it trades on the Nasdaq Capital Market (“Nasdaq”) as well as volatility in
the trading volume of our shares on that market. For example, the market price of our common stock fluctuated between $5.20 and $0.71
during the year ended December 31, 2025. These fluctuations may result in a hesitancy for investors to purchase and hold shares of our
common stock, continued depression of the market value of our stock, and ultimately negatively affect our ability to raise capital through
the issuance and sale of our common stock, particularly through our At the Market (“ATM”) program or otherwise. Additionally,
a requirement to issue shares at the then-current market prices to fund operations would result in significant dilution to existing shareholders.
Shares eligible for future sale may adversely
affect the market.
Our equity incentive plans
allow us to issue stock options and award shares of our common stock. We may in the future create additional equity incentive plans, which
may at that time require us to file a registration statement under the Securities Act to cover the issuance of shares upon the exercise
or vesting of awards granted or otherwise purchased under those plans. As a result, any shares issued or granted under the plans may be
freely tradable in the public market. If equity securities are issued under the plans, if implemented, and it is perceived that they will
be sold in the public market, then the price of our common stock could decline substantially.
You may experience dilution as a result
of future equity offerings.
In the future, we may issue
additional shares of common stock and/or securities convertible into, or exchangeable for, or that represent the right to receive, shares
of common stock. We may sell shares or other securities at a price per share that is less than the prices per share paid by stockholders,
and stockholders purchasing shares or other securities in the future could have rights superior to existing stockholders. The price per
share at which we sell additional shares of common stock, or securities convertible into, exercisable for, or exchangeable for shares
of common stock, in future transactions may be higher or lower than the prices per share paid by stockholders. Additional equity offerings
may dilute the holdings of existing stockholders or reduce the market price of our common stock, or both. Any of these events may dilute
the ownership interests of current stockholders, reduce earnings per share, or have an adverse effect on our stock price. Further, sales
of substantial amounts of our common stock, or the perception that these sales could occur, could have a material adverse effect on the
price of our common stock.
We have never paid dividends on our common
stock and have no plans to do so in the future.
Holders of shares of our common
stock are entitled to receive such dividends as may be declared by our Board of Directors (our “Board”). To date, we have
paid no cash dividends on our shares of common stock, and we do not expect to pay cash dividends on our common stock in the foreseeable
future. We intend to retain future earnings, if any, to provide funds for the operations of our business. Therefore, any return investors
in our common stock may have will be in the form of appreciation, if any, in the market value of their shares of common stock.
We are a “smaller reporting company,”
and reduced disclosure requirements may make our common stock less attractive.
We qualify, and may qualify for the foreseeable
future, as a “smaller reporting company.” As a result, we may provide reduced public disclosure compared to larger reporting
companies, including fewer years of audited financial statements and scaled executive compensation and other disclosures. Investors may
view our securities as less attractive as a result, which could adversely affect the market price and liquidity of our common stock.
Risks Related to our Intellectual Property
We must adequately protect our intellectual
property to prevent loss of valuable proprietary information.
We rely primarily on a combination
of patent, copyright, trademark and trade secret laws, confidentiality procedures, and non-disclosure agreements to protect our proprietary
technology. However, unauthorized parties may attempt to copy or reverse engineer aspects of our solutions or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our solutions is difficult, and we cannot be certain that the steps we have
taken will prevent misappropriation of our intellectual property. This is particularly true in foreign countries whose laws may not protect
proprietary rights to the same extent as the laws of the U.S. and may not provide us with an effective remedy against unauthorized use.
If protection of our intellectual property proves to be inadequate or unenforceable, others may be able to use our proprietary developments
without compensation to us, resulting in potential cost advantages to our competitors.
We may incur substantial expenses defending
ourselves against claims of infringement.
There are numerous patents
held by many companies relating to the design and manufacture of network security systems. Third parties may claim that our solutions
infringe on their intellectual property rights. Any claim, with or without merit, could consume our management’s time, result in
costly litigation, cause delays in sales or implementations of our solutions or require us to enter into royalty or licensing agreements.
Royalty and licensing agreements, if required and available, may be on terms unacceptable to us or detrimental to our business. Moreover,
a successful claim of product infringement against us or our failure or inability to license the infringed or similar technology on commercially
reasonable terms could seriously harm our business.
Our solutions are highly technical and if
they contain undetected errors, our business could be adversely affected, and we might have to defend lawsuits or pay damages in connection
with any alleged or actual failure of our solutions and services.
Our solutions are highly technical
and complex, are critical to the operation of many networks and, in the case of ours, provide and monitor network security and may protect
valuable information. Our solutions have contained and may contain one or more undetected errors, defects, or security vulnerabilities.
Some errors in our solutions may only be discovered after a solution has been installed and used by end customers. Any errors or security
vulnerabilities discovered in our solutions after commercial release could result in loss of revenue or delay in revenue recognition,
loss of customers and increased service and warranty cost, any of which could adversely affect our business and results of operations.
In addition, we could face claims for product liability, tort, or breach of warranty. Defending a lawsuit, regardless of its merit, is
costly and may divert management’s attention. In addition, if our business liability insurance coverage is inadequate or future
coverage is unavailable on acceptable terms or at all, our financial condition could be harmed.
Item 1B. Unresolved Staff Comments.
None.
Item 1C. Cybersecurity.
Cybersecurity Risk Management Strategy
We recognize the importance
of securing our data and information systems and have a process for assessing, mitigating, and managing cybersecurity and related risks.
Our Vice President (“VP”)
of Engineering, who reports to the CEO, leads our cybersecurity function and is responsible for managing our cybersecurity risk and the
protection of our networks, systems, and data. The VP of Engineering uses both internal and external resources to execute this process
including our own INTRUSION Shield technology, to help prevent, identify, escalate, investigate, and resolve security incidents
in a timely manner. The Company, with the oversight of the CEO, also requires all employees to complete an annual cybersecurity training
course.
Governance
Our Board is responsible for
overseeing our enterprise risk management activities. The CEO reports to the Board regarding cybersecurity risks, incidents, and mitigation
strategies at least annually.
As of the date of this filing,
we have not experienced any cybersecurity incidents that have materially affected or are reasonably likely to materially affect our company,
including our financial condition and results of operations.
Item 2. Properties.
Our corporate headquarters
is currently located in 10,705 square feet of space at 101 East Park Blvd, Suite 1200, Plano Texas. This facility houses our corporate
administration, engineering, sales, and marketing operations. The lease for this facility expires in April 2035. We also have engineers
and other employees working remotely in Texas as well as several other states.
We believe that the existing
facility will be adequate to meet our operational requirements through the expiration of the lease. We believe that our property insurance
provides adequate coverage for our leased facilities. See Note 5 – ROU Assets and Leasing Liabilities to our Consolidated
Financial Statements for additional information regarding our obligations under leases.
Item 3. Legal Proceedings.
We may be subject to various
claims that arise in the ordinary course of business. We do not believe that any claims exist where the outcome of such matters would
have a material adverse effect on our consolidated financial position, operating results, or cash flows. However, there can be no assurance
such legal proceedings will not have a material impact on our future results.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock trades on
the Nasdaq, where it is currently listed under the symbol “INTZ.” As of March 24, 2026, there were 20,369,066 shares of common
stock outstanding and there were approximately 55 record holders of record of our common stock. The number of record holders does not
include beneficial owners whose shares are held through banks, brokers, nominees, or other fiduciaries. On March 24, 2026, the closing
price of our common stock on Nasdaq was $1.04 per share.
Dividend Policy
The Company does not have
a history of paying dividends on its common stock and has no present intention of declaring any dividends in the foreseeable future.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
Securities Authorized for Issuance under Equity
Compensation Plans
All equity compensation plans
under which our common stock is reserved for issuance have previously been approved by our stockholders. The following table provides
summary information as of December 31, 2025, for all our equity compensation plans (in thousands, except per share data). See Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters—Securities Authorized for Issuance
under Equity Compensation Plans and Note 10 – Stock-Based Compensation to our Consolidated Financial Statements for additional
discussion.
Weighted average exercise price of outstanding options $ 46.28
Number of shares unvested restricted stock units 573
Weighted average grant date fair value $ 2.02
Item 6. [Reserved]
Item 7. 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
Operating Expenses:
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,
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