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
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;
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:
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).
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The information required by
this Item 8 begins on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Effectiveness of Disclosure Controls
and Procedures
As of the end of the period
covered by this report, the Company, under the supervision and with the participation of our CEO and our CFO, conducted an evaluation
of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act. Based on this evaluation, the CEO and CFO concluded that, as of the end of the period covered by
this report, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required
to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in the rules and forms of the SEC, and is accumulated and communicated to management, including
the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required
disclosure.
Management’s Report on Internal Control
over Financial Reporting
Management is responsible
for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act. These controls are designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company’s consolidated financial statements in accordance with GAAP.
As of December 31, 2025, and
under the supervision and with the participation of the CEO and CFO, management evaluated the effectiveness of the Company’s internal
control over financial reporting using the criteria set forth in the 2013 Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management’s evaluation
included an assessment of elements such as the design and operating effectiveness of key financial reporting controls, process documentation,
accounting policies, and the Company’s overall control environment. Based on its evaluation, management concluded that the Company’s
internal control over financial reporting was effective as of December 31, 2025, to provide reasonable assurance regarding the reliability
of the Company’s financial reporting and the preparation of Consolidated Financial Statements for external reporting purposes in
accordance with U.S. GAAP. The Company reviewed the results of management’s assessment with the Audit Committee of the Board of
Directors.
This Annual Report does not
include an attestation report of the Company’s registered public accounting firm on internal control over financial reporting. In
accordance with SEC rules applicable to smaller reporting companies, management’s report was not subject to attestation by the Company’s
registered public accounting firm.
This report shall not be deemed
to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section and is not incorporated
by reference into any filing of the Company, whether made before or after the date of this report, regardless of any general incorporation
language in such filing.
Inherent Limitations on Effectiveness of Controls
The Company’s management,
including our CEO and our CFO, does not expect that the Company’s disclosure controls or internal control over financial reporting
will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud
will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to
future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures.
Changes in Internal Control over Financial
Reporting
During the quarter ended December 31,
2025, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
(a) None.
Item 9C. Disclosure Regarding Foreign Jurisdictions
that Prevent Inspections.
Not applicable.
PART III
Item 10. Directors, Executive Officers, and
Corporate Governance.
Our Board of Directors (our
“Board”) currently consists of five directors serving for a term of office expiring at the next Annual Meeting of Stockholders
(“Annual Meeting”) or until their respective successors have been elected and qualified, or until their earlier resignation,
removal, or death. Our executive officers and the members of our Board are identified below, along with their respective ages as of March
24, 2026, and other information.
Name Age Position(s) Date of Initial Appointment/Election
Anthony Scott 73 President, CEO, and Director 2022
T. Joe Head 69 Chief Technical Officer 2003
Anthony J. LeVecchio* (2) 79 Chairman and Director 2020
Katrinka B. McCallum*(1)(3) 58 Director 2021
Gregory K. Wilson*(1)(3) 54 Director 2021
* Independent director as defined by Nasdaq Rule 5605(a)(2).
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating and Governance Committee
Biographies
Below is a brief account of the business experience
of each of our executive officers and directors.
Anthony Scott
was appointed as our President and CEO on November 11, 2021, and as a director in January 2022. Mr. Scott’s prior engagements demonstrate
many years of executive leadership and cybersecurity experience, including for the federal government, as well as for multi-billion corporations,
and private consulting helping organizations implement effective world-class solutions for cybersecurity, IT governance, and crisis management.
Mr. Scott worked as the Global Chief Information Officer for The Walt Disney Company from 2005 through 2008 and as the Chief Information
Officer for Microsoft from February 2008 through May 2013 and Chief Information Officer for VMWare from September 2013 through February
2015. In February 2015, Mr. Scott was appointed by President Obama as the Federal Chief Information Officer for the U.S. Government in
February 2015. In that role, he had oversight, budget and management responsibilities for the more than $85 billion budget that the Federal
Government annually spends on IT. He and his team managed the government-wide response plan after the Office of Program Management cybersecurity
incident, which prompted the Cybersecurity Sprint and Implementation Plan (CSIP) that dramatically improved the information systems security
posture of the Federal Government. He also created the first “State of IT” report at the end of the Obama administration,
collaborating with members of Congress to create several legislative proposals to improve IT funding within the Federal Government. Prior
to his appointment, Mr. Scott had been serving as the founder and CEO of the Tony Scott Group, LLC., a Washington DC and Silicon Valley-based
consulting and venture capital firm focused on early-stage cybersecurity and privacy technologies. Mr. Scott is a renowned expert on providing
public and private sector executive insights concerning matters such as digital transformation, cloud adoption, machine learning, AI,
cybersecurity, governance, open data, and workforce diversity, and he has appeared frequently before Congress as well as at numerous industry
forums. He has also held positions as Chief Technology Officer at General Motors, as well as senior executive positions at Bristol Meyers
Squibb, Price Waterhouse, Sun Microsystems, and Marriott. Mr. Scott holds a Bachelor of Science Degree from the University of San Francisco
in Information Systems Management and a Juris Doctorate (law) degree from Santa Clara University. Mr. Scott’s many years in executive
leadership roles, including serving for governmental agencies, combined with his IT and cybersecurity experience make him uniquely qualified
to serve on our board and as our president and CEO.
Kimberly Pinson was
appointed by the Board as our CFO in June 2022. Ms. Pinson brings more than 25 years of experience leading finance and related functions
for global software, technology, medical device, healthcare, and real estate companies. Prior to joining us, Ms. Pinson served as Chief
Financial Officer for NetFortis since 2020 as well as for EndoStim, Inc. from 2016 through 2020. Prior to joining EndoStim, Inc., Ms.
Pinson served as Chief Financial Officer for United Orthopedic Group, as well as in senior finance leadership roles at Quadrem, Xtria,
Novo Networks, and Centex. Ms. Pinson began her career at Grant Thornton in audit, has a BBA from the University of Texas at Dallas, and
was a licensed certified public accountant.
T. Joe Head currently
serves as our Chief Technology Officer, was a co-founder of the Company, and served as one of our directors from 1983 through 2022. Prior
to co-founding the Company, Mr. Head held the positions of Product Marketing Manager and Marketing Engineer of Honeywell Optoelectronics,
from 1980 through 1983. Mr. Head holds a B.S. degree in Electrical Engineering from Texas A&M University.
Anthony J. LeVecchio
was appointed by the Board to serve both as a Director and Board Chair in August 2020 and was appointed to serve as our “Executive
Chairman of the Board” in August 2021. Mr. LeVecchio also serves on our Compensation Committee. Mr. LeVecchio founded The James
Group, Inc. in 1988 and is its current President. The James Group is a general business consulting firm that has advised CEOs across a
wide range of industries in both public and private companies. Prior to forming The James Group, Mr. LeVecchio was the Senior Vice President
and Chief Financial Officer for VHA Southwest, Inc., a regional healthcare system. Before that, Mr. LeVecchio held financial management
positions with Philips Information Systems, Exxon Office Systems and Xerox Corporation. Mr. LeVecchio has served on the board of over
20 private companies ranging from pre-revenue startups to companies with over $100 million in annual revenues. In this capacity, he has
guided companies through all phases of corporate growth including startup operations; achieving profitability; asset, debt, and equity
financing; merger and acquisitions and implementation of corporate governance best practices. His previous board experience includes serving
as Chairman of the Board of Legacy Texas Bank (Nasdaq) and as Co-chairman of the Board for UniPixel, Inc. (Nasdaq). Mr. LeVecchio has
also served on boards for Microtune, Inc., DG FastChannel, Inc., Maxum Health, Inc., Medical Alliance, and ASDS. As a public company director,
he has experience with IPOs; secondary offerings; Sarbanes Oxley preparedness and qualification for 404 accelerated filers; Nasdaq de-listing
and relisting; SEC stock option backdating investigations and class action lawsuit resolution; and Dodd Frank implementation. In addition
to his business activities, Mr. LeVecchio is a lecturing professor in the School of Management at University of Texas, Dallas, and is
a member of the advisory board for The Institute for Excellence in Corporate Governance at UTD. In 2014, he was named as an Outstanding
Public Company Director by the Dallas Business Journal. He has participated as a speaker and panelist on several occasions for Bank Director
and Corporate Board Member. Mr. LeVecchio received a Bachelor of Economics from Rollins College, Winter Park, Florida, and an M.B.A. in
Finance from the same institution where he remains an active alumnus and a former member of their Board of Trustees. Mr. LeVecchio was
selected to serve as our Board Chair and on our Compensation Committee because of his standing as a financial expert and corporate governance
expert.
Katrinka B. McCallum,
NACD.DC was appointed to our Board in February 2021 and serves as Chair of our Audit
Committee and as a member of our Nominating and Corporate Governance Committee. Most recently, until 2020, Ms. McCallum was Vice President
of Customer and Product Experience at Red Hat, a leading provider of enterprise open-source solutions, which was acquired by IBM in 2019.
She joined Red Hat in 2007 as VP of Investor Relations and has served in a variety of Vice President positions within the Products &
Technologies organization during her tenure there. During her career, which spans more than two decades in enterprise software, Ms. McCallum
led business units, sales, and marketing organizations as well as engineering and operations teams. She developed a reputation for driving
strategy into actions that intelligently aligned the operational backbone and accelerated the business. Following her tenure at Red Hat,
Ms. McCallum has been serving on numerous boards, including her current service on the board of ACI Worldwide, Inc. (Nasdaq: ACIW), and
formerly on the board of Rimini Street, Inc. (Nasdaq: RMNI) from February 2021 to August 2024. In addition, she has served on corporate
boards including Micromuse, Inc. (Nasdaq) and Round Pond, a subsidiary board of Red Hat, Inc. Ms. McCallum retired as a member of the
North Carolina Board of Science, Technology & Innovation, where she co-chaired the Data Economy committee. In addition, she was a
member of the executive committee for the North Carolina Technology Association board. Ms. McCallum has an M.B.A. from The Fuqua School
of Business at Duke University, a B.A. in Economics from Wellesley College, and a Certificate in Accounting from Northeastern University.
And though now inactive, Ms. McCallum earned her CPA license while working as an auditor for Deloitte and she is an active member of the
National Association of Corporate Directors. Ms. McCallum’s broad array of business experience and expertise as a strategic high
growth technology leader, financial expert, as well as her general business acumen across a broad range of public, private and non-profit
organizations make her particularly qualified for service on our Board, our Nominating and Governance Committee, and as Chair of our Audit
Committee. Ms. McCallum is NACD Directorship Certified®.
Gregory K. Wilson
was elected to our Board in May 2021 and serves as Chair of our Nominating and Corporate Governance Committee and as a member of our Audit
Committee. Since 2019, Mr. Wilson has been the Chief Information Security Officer at Docupace, a company that provides a suite of digital
solutions to assist broker-dealers, registered investment advisers and other financial professionals. Docupace streamlines and automates
client onboarding, document management, advisor transitions, and other critical workflows while maintaining SEC and FINRA compliance.
Prior to that, Mr. Wilson was Chief Information Security Officer at Pioneer Natural Resources from 2018 through the end of 2020, where
he was responsible for the development and execution of its information security, risk, compliance, and privacy program, which included
risk management, incident response, vendor management, and security governance. From 2014 until his move to Pioneer, Mr. Wilson was Head
of Information Security at 1st Global. Mr. Wilson is an experienced leader with more than 23 years of experience in IT Risk Management,
Information Security, IT Audit, Litigation Support, Privacy, Business Continuity and Disaster Recovery Planning, Training and Awareness
and Compliance Management. Mr. Wilson has expert knowledge in risk assessment and security compliance with the regulatory requirements
of Sarbanes-Oxley (SOX), Payment Card Industry (PCI), Health Insurance Portability and Accountability Act (HIPAA), Gramm Leach-Bliley
Act (GLBA), US Patriot Act and General Data Protection Regulation (GDPR). Mr. Wilson serves as an Advisor to Menlo Ventures, YL and Vation
Ventures and on several corporate Advisory Boards and Dallas Innovation Advisory Council as well as several professional and community
boards. Mr. Wilson received his master’s degree in economics from the University of Oklahoma and his bachelor’s degree in public
administration from the University of Nebraska at Omaha. Mr. Wilson has completed the NACD’s Director Professionalism certification
and has been designated a Qualified Technology Expert by the Digital Director Network. Mr. Wilson holds the CISSP, CISM, CGEIT, CDPSE,
PSM and PMP certifications as well as his Series 7, 24 and 66. Mr. Wilson’s extensive experience serving on private corporate, governmental,
and nonprofit boards as well as his leadership and experience in Information Security strategy, risk governance, enterprise risk management,
digital transformation, regulatory compliance, incident response, mergers and acquisitions, and operations makes him particularly qualified
for service on our Board.
Dion Hinchcliffe
was elected to our Board in July 2024. He is an internationally recognized thought leader, IT expert, enterprise architect, bestselling
book author, frequent keynote speaker, analyst, and transformation consultant. Since 2014, he has been the Vice President of CIO Practice
at The Futurum Group and is currently an executive fellow at the SDA Bocconi School of Management. Prior to that, from 2017 through 2024,
he was a VP and Principal Analyst at Constellation Research. Mr. Hinchcliffe works with the leadership teams of Fortune 500 and Global
2000 firms to drive successful changes with emerging digital methods including enterprise AI, employee experience, online community, cloud
computing, data centers, digital business models, Internet ecosystems, workforce collaboration, and the future of work. A veteran of enterprise
IT and several Internet startups, Mr. Hinchcliffe, has been working for two decades with leading-edge methods to bridge the widening gap
between business and technology. He has extensive practical experience with enterprise strategy and operational issues, and he consults,
advises, and writes prolifically on the convergence of business and technology. Mr. Hinchcliffe is particularly well known for his thought
leadership in digital workplace, enterprise IT, AI in the workplace, agile methods, CIO issues, and digital transformation. He is a widely
followed commentator and industry analyst for ZDNet. Mr. Hinchcliffe also works in the trenches with clients in the Fortune 1000, government,
and Internet startup community. He is also a frequent keynote speaker and is co-author of two books on intersection of technology and
business including Web 2.0 Architectures from O’Reilly as well as the bestselling Social Business by Design (John Wiley & Son.)
Director Independence
Our Board has determined that we have four “independent”
members of our Board, as defined in Nasdaq Marketplace Rule 5605(a)(2): Anthony J. LeVecchio, Katrinka B. McCallum, Gregory K. Wilson,
and Dion Hinchcliffe.
Family Relationships
There are no family relationships among our directors
or executive officers.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has
been involved in any of the following events during the past ten years:
CORPORATE GOVERNANCE
Our business affairs are managed
under the direction of the Board. The Board meets on a regularly scheduled basis during the fiscal year to review significant developments
affecting the Company and to act on matters requiring Board approval. It also holds special meetings as required from time to time when
important matters arise requiring Board action between scheduled meetings. The Board or its authorized committees held three regular meetings
and five special meetings during the 2025 fiscal year. During fiscal year 2025, each director participated in at least 75% or more of
the aggregate of (1) the total number of meetings of the Board of Directors (held during the period for which they were a director) and
(2) the total number of meetings of all committees of the Board on which they served (during the period that they served).
Board Role in Risk Oversight and Management
The Board has an active role in the oversight
and management of the Company’s risks and carries out its role directly and through Board committees. The Board’s direct role
in our risk management process includes regular or periodic receipt and discussion of reports from management and our inside and outside
counsel and advisers on areas of material risk to our business, including operational, strategic, financial, legal, and regulatory risks.
While overall enterprise-wide risk management
is ultimately the responsibility of the Board, the Audit Committee is delegated with the authority to oversee the identifying, assessing,
and monitoring of such risks, delegating authority for discrete risk management oversight to the appropriate committees of the Board or
to a Risk Oversight sub-committee of the Audit Committee. The Audit Committee reports regularly to the Board on its activities in risk
oversight, passes along reports from any Committees or sub-committees with oversight authority, and makes recommendations for any changes,
modifications, improvements, or expansions of our risk assessment and management policies and procedures.
The Board also works with our Disclosure Committee,
which consists of senior management, including our CEO and CFO, along with one of our independent directors, Ms. McCallum. The Disclosure
Committee reviews and comments on all press releases, disclosures, and reporting, including as it relates to our earnings and/or financial
position prior to the Audit Committee’s review and approval of the same.
The Board has also addressed risk through the
adoption of corporate policies. The Board has adopted the Code designed to ensure that our directors, officers, and employees are aware
of their legal and ethical responsibilities and conduct our business in a consistently legal and ethical manner.
We have not adopted any practices or policies
regarding the ability of our employees (including officers) or directors, or any of their designees, to purchase financial instruments
(including prepaid variable forward contracts, equity swaps, collars, and exchange funds), or otherwise engage in transactions, that hedge
or offset, or are designed to hedge or offset, any decrease in the market value of our common stock either granted to the employee or
director as part of their compensation; or held, directly or indirectly, by the employee or director.
The Code
All of our directors, officers, and employees
are required to abide by the Code to ensure that our business is conducted in a consistently legal and ethical manner and to avoid instances
of insider trading. The Code covers areas of professional conduct that include conflicts of interest, fair dealing and strict adherence
to all laws and regulations applicable to the conduct of our business. The full text of the Code is published on our website under the
investor relations tab at www.intrusion.com. We intend to disclose future amendments to, or waivers from, certain provisions of the Codes
of Ethics on our website within four business days following the date of such amendment or waiver. Upon the written request of any stockholder,
we will furnish, without charge, a copy of the Code. This request should be directed to our Secretary at 101 East Park Blvd., Suite 1200,
Plano, Texas 75074.
BOARD COMMITTEES
The Board has established three committees which
consist of the Audit Committee, Compensation Committee, and Nominating and Governance Committee to devote attention to specific subjects
and to assist it in the discharge of its responsibilities. Our Board has adopted and annually reviews the written charters for each of
the aforementioned committees, copies of which are publicly available on our website at www.intrusion.com under the “investor relations”
section. The functions of the Audit Committee, the Compensation Committee, and the Nominating and Governance Committee are described below.
Audit Committee.
The Audit Committee assists the Board in fulfilling
its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control, and legal compliance
functions by approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices
and systems of internal accounting controls. The Audit Committee also oversees the audit efforts of our independent accountants and takes
those actions as it deems necessary to satisfy it that the accountants are independent of management.
Our Audit Committee is composed
of Ms. McCallum (Chair), Mr. Wilson, and Mr. Hinchcliffe, each of whom is independent. Our Board determined that Ms. McCallum is an audit
committee financial expert as defined under the applicable rules of the SEC and has the requisite financial sophistication under the rules
and regulations of Nasdaq. The Audit Committee held four regular meetings during fiscal year 2025.
Compensation Committee.
The Compensation Committee is empowered to advise
management and make recommendations to the Board with respect to the compensation and other employment benefits of executive officers,
key employees, and directors of the Company. The Compensation Committee also administers the Company’s equity incentive plan for
officers, key employees and directors, and the Company’s incentive bonus programs for executive officers and employees. The Compensation
Committee is authorized, among other powers, to determine from time to time the individuals to whom awards shall be granted, the number
of shares to be covered by each award and the time or times at which awards shall be granted pursuant to the equity incentive plan.
Our Compensation Committee is composed of Mr.
LeVecchio (Chair) and Mr. Hinchcliffe, each of whom is an independent director. The Compensation Committee held two meetings during fiscal
year 2025.
Nominating and Governance Committee.
The Nominating and Governance Committee is responsible
for making recommendations to our Board regarding candidates for directorships and the size and composition of our Board.
Our Nominating and Governance Committee is composed
of Mr. Wilson (Chair), Ms. McCallum, and Mr. Dion Hinchcliffe, each of whom was an independent director. The Nominating and Governance
Committee met once during 2025.
NOMINATION OF DIRECTORS
In nominating and evaluating candidates to determine
if they are qualified to become Board members, the Nominating and Governance Committee considers a number of attributes, including:
· strategic planning abilities and experience;
· aptitude in accounting and finance;
· expertise in domestic and international markets;
· experience in the network security or telecommunications industry;
· understanding relevant technologies;
· academic expertise in an area of our operations;
· communications and interpersonal skills; and
· practical and mature business judgment.
The Nominating and Governance Committee also evaluates
Board members’ and nominees’ service on the boards of other public companies.
These directors also evaluate candidates identified
by their personal contacts and other Board members.
The Nominating and Governance Committee will also
consider nominees proposed by stockholders. Although we have no formal policy regarding stockholder nominees, stockholder nominees are
viewed in substantially the same manner as other nominees. The consideration of any candidate for director will be based on the assessment
of the individual’s background, skills, and abilities, and if such characteristics qualify the individual to fulfill the needs of
the Board at that time. To recommend a prospective nominee for consideration, stockholders should timely submit the candidate’s
name and qualifications to our Corporate Secretary in writing at 101 East Park Blvd., Suite 1200, Plano, TX 75074. Our amended and restated
bylaws set forth certain procedures by which stockholders may recommend nominees to the Board, as well. The Nominating and Governance
Committee annually reviews the requisite skills and characteristics of Board members, as well as the composition of the Board as a whole.
This assessment includes a consideration of independence, diversity, skills, experience, and industry backgrounds in the context of our
needs and those of the Board. Directors are expected to exemplify the highest standards of personal and professional integrity and to
constructively challenge management through their active participation and questioning.
Communication with the Board
We do not have formal procedures for stockholder
communication with the Board. Any matter intended for the Board, or for any individual member or members of the Board, should be directed
to our Corporate Secretary at our address indicated above, with a request to forward the same to the intended recipient. In general, all
stockholder communication delivered to our Corporate Secretary for forwarding to the Board or specified Board members will be forwarded
in accordance with the stockholder’s instructions, unless the Secretary believes the question or issue may be addressed adequately
by our investor relations department. However, the Secretary reserves the right to not forward to Board members any abusive, threatening
or otherwise inappropriate materials. The Board believes that more formal procedures are not necessary to permit shareholders adequate
access to its members.
Policy Regarding Board Attendance at Stockholders
Meetings
Although we have no formal policy requiring attendance,
we encourage all directors to attend all meetings of stockholders. All of the serving members of the Board attended the 2025 Annual Meeting
of Stockholders.