INTRUSION INC

Previous wording

Intrusion 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 ourINTRUSIONTraceCop andSavant solutions exclusively to government entities, we released our first commercial product in 2021, theINTRUSIONShield.INTRUSIONShield 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.

Current wording

We offer businesses of all sizes and industries products and services that leverage our exclusive threat intelligence database of over 8.5 billion IP addresses and domain names. After many years of gathering intelligence and providing ourINTRUSIONTraceCop andSavant solutions exclusively to government entities, we released our first commercial product in 2021, theINTRUSIONShield.INTRUSIONShield 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.

Previous wording

Revenues. Revenue for the three and nine month periods ended September 30, 2024, was $1.5 and $4.1 million compared to $1.5 and $4.2 million for the same periods in 2023. Revenue from consulting totaled $1.1 and $2.9 million for the three and nine month periods ended September 30, 2024, compared to $1.0 and $3.1 million for the three and nine month periods ended September 30, 2023. The continuing resolution and delay in the approval of a federal budget for the 2024 year which did not occur until March 22, 2024, impacted the timing of renewals and task orders received for long-standing contracts which resulted in a decline in consulting revenues for the nine month period ended September 30, 2024.INTRUSIONShield revenues were $0.4 and $1.2 million for the three and nine month periods ended September 30, 2024, which is flat when compared to the prior year periods but represents a 49% increase over the June 2024 quarter. Shield revenues for the June 2024 quarter had declined as a result of the loss of a large earlyINTRUSIONShield customer that had implemented a highly customized and non-standard configuration of the product. The loss of revenues from this customer has been fully offset by revenues from new customers signed in recent quarters. We believe the revenues from these new customers and several transactions that we anticipate will close in the fourth quarter will driveINTRUSIONShield revenue growth into 2025.

Current wording

Revenues. Revenue for the three month period ended March 31, 2025, was $1.8 million compared to $1.1 million for the same period in 2024. Revenue from consulting services totaled $1.4 million for the three month period ended March 31, 2025, compared to $0.7 million for the three month period ended March 31, 2024. The continuing resolution and delay in the approval of a federal budget for the 2024 year impacted renewals and task orders received for long-standing contracts which resulted in a decline in consulting revenues.INTRUSIONShield revenues were $0.4 million for both the three month period ended March 31, 2025 and 2024. On March 31, 2024, we lost a largeINTRUSIONShield customer that was utilizing a highly customized and non-standard configuration of the product. The loss of revenues from this customer, which represented 78% ofINTRUSIONShield revenues, has been fully backfilled with the addition of new customers, inclusive of the Department of Defense contract awarded in the second half of 2024.

Previous wording

Concentration of Revenues. For the three and nine month periods ended and September 30, 2024, revenues from sales to various U.S. government entities totaled $1.3 and $3.3 million, or 86% and 80% of revenues compared to $0.6 and $1.9 million, or 43% and 46% of revenues, for the same periods in 2023. Although we expect our concentration of revenues to vary among customers in future periods depending upon the timing of certain sales, we anticipate that sales to government customers will continue to account for a significant portion of our revenues in future periods. Sales to the government present risks in addition to those involved in sales to commercial customers which could adversely affect our revenues, including, without limitation, potential disruption to appropriation and spending patterns and the government’s reservation of the right to cancel contracts and purchase orders for its convenience. Although we do not anticipate that any of our revenues from government customers will be renegotiated, any cancelled or renegotiated government orders could have a material adverse effect on our financial results. As a result of sales to U.S. government entities representing a higher percentage of our revenues in 2024, no commercial customer individually represented more than 10% of our total revenues as compared to two commercial customers in the 2023 period. Our similar product and service offerings are not viewed as individual segments, as management analyzes the business as a whole and expenses are not allocated to each product offering.

Current wording

**Concentration of Revenues.**Revenues from sales to various U.S. government entities totaled $1.6 million, or 91.6% of revenues, for the quarter ended March 31, 2025, compared to $0.7 million, or 58.6% of revenues, for the same period in 2024. The change in revenue mix primarily resulted from the loss of the large INTRUSIONShield customer mentioned above, and the addition of the Department of Defense contract award in the second half of 2024. Although we expect our concentration of revenues to vary among customers in future periods depending upon the timing of certain sales, we anticipate that sales to government customers will continue to account for a significant portion of our revenues in future periods. Sales to the government present risks in addition to those involved in sales to commercial customers which could adversely affect our revenues, including, without limitation, potential disruption to appropriation and spending patterns and the government’s reservation of the right to cancel contracts and purchase orders for its convenience. Although we do not anticipate contracts with government customers will be renegotiated or cancelled, the loss of government orders could have a material adverse effect on our financial results. We had three customers accounting for 91.4% of total revenue for the three months ended March 31, 2025. We had three customers in the first quarter of 2024 that accounted for 85.2% of total revenue. Our similar product and service offerings are not viewed as individual segments, as our management analyzes the business as a whole and expenses are not allocated to each product offering.

Previous wording

Research and Development. Research and development expenses totaled $1.2 and $3.2 million for the three and nine months ended September 30, 2024, compared to $1.2 and $4.4 million for the same periods in 2023. The savings for the nine month period is a result of cost reduction measures implemented in late March 2023 which included the reduction of 13 FTEs and the reduced use of contractors. 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.

Current wording

**Research and Development.**Research and development expenses totaled $1.2 million for the quarter ended March 31, 2025, representing an increase of $0.2 million compared to the same period in 2024. The increase is primarily due to increased depreciation of $0.1 million on internally developed software as we continue to invest in adding new features and functionality to the INTRUSIONShieldand higher expense due to the 2024 period including one-time negotiated savings of $0.1 million. 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.

Previous wording

Interest Expense. Interest expense for the three and nine months ended September 30, 2024, was $12 thousand and $274 thousand consisting principally of the stated interest related to the Streeterville and Scott notes, and finance leases. Interest expense for the three and nine months ended September 30, 2023, was $211 thousand and $729 thousand. The decreased interest expense resulted principally from the aggregate exchange of the Streeterville debt to both common and preferred stock. On September 30, 2024, only $520 thousand of the Streeterville Note One remains outstanding. Interest expenses will vary in the future based on our cash flow and borrowing needs.

Current wording

**Interest Expense.**Interest expense for the period March 31, 2025, was $29 thousand and consisting principally of the stated interest related to the Streeterville note and imputed interest on finance leases. Interest expense for the 2024 period totaled $228 thousand and consisted principally of the stated interest related to the Streeterville notes, interest associated with the note’s payable issued to Scott and finance leases.

Previous wording

Interest Accretion and Amortization of Debt Issuance Costs. During the quarter ended March 31, 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. For the three and nine months ended September 30, 2023, the interest accretion and amortization of debt issuance costs totaled $0.3 and $0.7 million.

Current wording

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

Previous wording

Other (Expense) Income, Net. Other income and expenses were nominal amounts for the three and nine months ended September 30, 2024, and 2023.

Current wording

**Other Income (Expense), Net.**Other income and expense were nominal amounts for both the periods ended March 31, 2025, and 2024.

Previous wording

In March 2024, we entered into an agreement with Streeterville to exchange $0.2 million in principal for 52.2 thousand shares of common stock. Also in March 2024, we exchanged $9.3 million in Streeterville debt for 9,275 shares of our newly created Series A Preferred. The issuance of both common and preferred shares was made pursuant to the exemption from the registration requirements afforded by the Securities Act, as amended. The designations for the Series A Preferred preclude the Company from repaying any indebtedness for so long as any Series A Preferred shares are outstanding. The Series A Preferred shares have a stated value of $1,100 per share and are subject to preferences and designations as more fully described in our Amended and Restated Articles of Incorporation filed on March 15, 2024. Following the exchanges noted herein, the remaining balance on Note One was $0.5 million on September 30, 2024. The maturity date for Note One is September 2024 which conflicts with the Series A Preferred designation prohibiting repayment of any indebtedness. We are in discussions with Streeterville to modify the terms of the Note One agreement.

Current wording

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

Previous wording

Condensed Consolidated Statements of Cash Flows

Current wording

Unaudited Condensed Consolidated Statements of Cash Flows

Previous wording

Our cash flows for the nine months ended September 30, 2024, and 2023 were:

Current wording

Our cash flows for the three months ended March 31, 2025 and 2024 were:

Previous wording

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

Current wording

Net cash used in operations for the quarter ended March 31, 2025, was ($1.7) million due primarily to a net loss of ($2.1) million partially offset by 1) adjustments for non-cash items of $0.8 million which are mostly comprised of depreciation and stock-based compensation, and 2) changes in working capital of (0.4) million.

Previous wording

For the nine months ended September 30, 2024, net cash used in investing activities was ($1.1) million, which was comprised of capitalization of internally developed software and hardware purchases. Net cash used by investing activities, for the nine months ended September 30, 2023, was ($1.0) million principally for capitalization of internally developed software.

Current wording

For the three months ended March 31, 2025, net cash used in investing activities was ($0.8) million, which was comprised of capitalization of internally developed software and hardware purchases. Net cash used by investing activities for the three months ended March 31, 2024, was ($0.4) million principally for capitalization of internally developed software.

Previous wording

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

Current wording

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

Previous wording

We believe the critical accounting policies and estimates discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on April 1, 2024, reflect our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements. There have been no significant changes to our critical accounting policies and estimates as filed in such report.

Current wording

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