Intrusion Inc Q4 FY2025 Earnings Call

Welcome to Intrusion Inc.'s Fourth Quarter and Full Year 2025 Earnings Conference Call and Webcast. Please note this conference call is being recorded. An audio replay of the conference call will be available on the company's website within a few hours after this call. I would now like to turn the call over to Josh Carroll with Investor Relations.

Thank you, and welcome. Joining me today are Tony Scott, President and Chief Executive Officer; and Kimberly Pinson, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before I turn the call over to Tony, I'd like to remind everyone that the statements made during this conference call related to the company's expected future performance, future business prospects, future events or plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Please refer to our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's conference call. Any forward-looking statements that we make on this call are based upon information that we believe as of today, and we undertake no obligation to update these statements as a result of new information or future events. In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. During the call, we may use non-GAAP measures if we believe it is useful to investors, or if we believe it will help investors better understand our performance or business trends. With that, let me now turn the call over to Tony for a few opening remarks.

Well, thank you, Josh, and good afternoon, and thank you all for joining us today. Fiscal year 2025 was a year that had an unexpected beginning and an unexpected ending along with a number of significant product milestones along the way. At the beginning of the year, we improved our balance sheet by fully eliminating our then outstanding debt and Series A preferred stock. At midyear, we rolled out production of our critical infrastructure solution to help safeguard essential assets like water, power and telecom facilities. In the third and fourth quarter, we expanded our access to our Shield Cloud solution by making two variations of the product available on the AWS marketplace. Towards the end of the year, we announced our partnership with PortNexus to provide secure network protection for their MyFlare safety technology, which is being deployed at schools in several states. In conjunction with PortNexus, we also launched the P.O.S.S.E program, which will give sheriffs and other law enforcement agencies critical network protection for their public safety networks. Our pilot experience with the P.O.S.S.E program is encouraging, with a high adoption rate so far. Finally, we ended the year with an unexpected delay in the extension of the earlier mentioned critical infrastructure contract with the Department of War. Our fourth quarter revenues decreased by 12% compared to the prior year period as a result of the delayed timing of an expected contract extension for our critical infrastructure technology. If it were not for this delay, we had expected to show quarter-on-quarter increases in revenue as well as a greater year-over-year increase in overall revenue. To be clear, the cost of providing services for this critical infrastructure solution are included in our operating expenses, but the expected revenue is not and will show up in later periods when the contract is extended. The timing of this contract extension was and remains affected by the operational and administrative constraints associated with the U.S. government shutdown, which limited agencies' ability to initiate and process contract actions during that period. The situation is further impacted by the events related to the war in Iran unfolding currently. This delay in funding reflects a broader trend affecting companies with U.S. government contracts, particularly those operating within the defense sector. While we're disappointed by this delay, we believe that we will be able to recognize this revenue during the first half of 2026 once procurement activity normalizes. We're proud of our partnership with the U.S. Department of War and the critical role we play in protecting national security through our advanced cyber capabilities. We continue to view the critical infrastructure solution that we have rolled out with the Department of War as one of the key drivers of future growth, especially as cyber threats become more frequent and sophisticated. To convert this opportunity into future growth, we've taken targeted steps to enhance our sales efforts and go-to-market strategy designed to expand our customer base across the private sector as well as federal, state, and local government markets. During the quarter, we announced the launch of our Shield Cloud offering on the AWS marketplace, expanding the opportunity for customers to access our Shield technology. Additionally, we've launched our Shield Cloud offering on Microsoft's Azure platform and it's now live. With availability across both leading cloud marketplaces, we've meaningfully expanded our sales reach, which will help enhance our customer pipeline and drive revenue growth. On top of this customer access expansion effort, we've also continued to strategically invest in R&D to provide enhanced offerings to our customers. This is evident by the recent launch of Shield Stratus, a cloud-native packet filtering solution that inspects every connection and blocks known threats immediately without the complexity or re-architecture required by traditional firewalls. Shield Stratus integrates seamlessly with AWS gateway load balancer and is a great addition to our Shield ecosystem. We began a partnership with PortNexus in 2025 who chose to embed our Shield endpoint solution into their MyFlare solution that helps provide enhanced security for education and law enforcement customer endpoints. In February, we expanded our partnership with PortNexus by launching the P.O.S.S.E program that utilizes our Shield On-Premise technology to help protect law enforcement from cyber threats. The program achieved high levels of adoption during the initial pilot. In the pilot program, Intrusion Shield technology identified and stopped dozens of active threats. The program is now scaling across Texas, Missouri, Oklahoma, and Iowa through our partnership with PortNexus. This partnership provides distribution access to hundreds of sheriffs' departments, schools, and government facilities, so it is an exciting development. We look forward to working closely with PortNexus to help expand this program and increase the adoption of our technology. We also recently took steps to expand our business development efforts with the hiring of Valencia Reaves as our Public Sector Vice President of Sales, and Patrick Duggan is our Director of Channel Sales & Partnerships. These two additions to our team will help strengthen our U.S. business development efforts across the government sector and our channel partners. Total revenues for 2025 were $7.1 million, up 23% year-over-year. This top line growth was largely driven by the contract expansion with the U.S. Department of War that I touched on earlier. Fourth quarter revenue was $1.5 million, a decrease of 25% sequentially, which was the result of the delay in the incremental funding of the Department of War contract that I previously referred to. Our operating expenses also saw a slight increase during both the quarter and the year. This increase in our expenses reflects deliberate strategic investments to strengthen our business and position us to achieve our goal of creating sustainable growth and long-term profitability as well as the costs associated with the critical infrastructure deployment and operation I mentioned before. We've made meaningful progress against our goals, and we believe we're on track to breakeven operations. Before I turn the call over to Kim, I'd like to wrap up by addressing some of the recent AI trends that we are seeing in the cybersecurity space. As I'm sure many of you are aware, the recent emergence of cloud code security has caused a bit of a shakeup in the cybersecurity space as some fear this tool will change the industry by eliminating defects in software. I do not view this development as a threat to cybersecurity companies like Intrusion but more as a promising tailwind for the industry. While improved code quality is welcome, it is only one aspect of the landscape of cybersecurity vulnerabilities. The rapid adoption of AI has materially increased cybersecurity risk as it has significantly reduced the cost, technical expertise, and time required to develop and execute highly sophisticated and scalable attacks. As a result, this is only going to increase the need for cybersecurity solutions, such as the ones that we provide to our customers, that help catch these malicious actors before they can cause harm. With that, I'd like to turn the call over to Kim for a more detailed review of our fourth quarter and full year financial results.

Thanks, Tony, and good afternoon, everyone. Fourth quarter results totaled $1.5 million in revenue, a decrease of 25% compared to the prior quarter, and 12% when compared to the prior year period, as noted earlier on the call. This was due to the delayed incremental funding of a major U.S. government contract. The timing of this award was affected by funding and procurement constraints associated with the U.S. government shutdown and ongoing resolution, which affected agencies' ability to approve and initiate new contract actions during the period. We believe the delay in this contract award is primarily timing-related and anticipate that a substantial portion of the delayed revenue associated with this contract will be recognized in future periods. Consulting revenues totaled $1.1 million in the fourth quarter, compared to $1.5 million in the prior quarter and $1.3 million in the prior year quarter. Shield revenues totaled $0.4 million in the fourth quarter, compared to $0.5 million in the prior quarter and $0.3 million in the fourth quarter of 2024. We anticipate that the sale of our OT Defender solution and other departments of the U.S. government as well as commercially will contribute to future growth. Additionally, during 2025, we partnered with PortNexus to integrate our Shield technology into its MyFlare Alert School Safety solution. Although sales to PortNexus did not significantly impact 2025 revenues, the expanded pipeline for this offering is expected to support future Shield revenue growth. The fourth quarter gross profit margin was 74%, which was slightly down from the prior year period. For the full year, gross profit margin was 76%, down approximately 93 basis points versus 2024. Operating expenses in the fourth quarter of 2025 totaled $4 million, an increase of $0.3 million sequentially and $0.8 million year-over-year. The fourth quarter increase both sequentially and compared to the prior year was primarily driven by higher sales and marketing expenses reflecting increased participation in trade shows and expanded brand awareness and product marketing programs. For the full year, operating expenses totaled $14.5 million, an increase of $1.7 million compared to 2024. In addition to the increased sales and marketing expense, the full year increase primarily 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 $0.8 million from equity grants made in the first quarter of 2025 and cost of living and merit increases of $0.3 million. Net loss for the fourth quarter of 2025 was $2.8 million or $0.14 per share, compared to a net loss of $2 million for the fourth quarter of 2024. The increased fourth quarter net loss is the result of the reduction in revenues resulting from the delay in the incremental funding of the government contract and increased operating expense. The net loss for the full year was $9.1 million or $0.46 per share, a $1.3 million increase from the prior year. From a liquidity perspective, on December 31, 2025, we had cash and cash equivalents of $3.6 million. Looking ahead, we plan to seek a small debt financing in the near term to help further support our growth initiatives. We have already begun to have some initial discussions and will provide an additional update on the debt financing during our first quarter earnings call. With that, I'd like to turn the call back over to Tony for a few closing comments.

Thank you, Kim. 2025 was a year of meaningful progress for Intrusion from a product development standpoint marked by several key improvements, including new products. While this progress was encouraging, we're not satisfied and we realize that we have significant work ahead of us. Looking to the remainder of 2026, we will double down on our sales efforts to expand our customer base and further improve our top line growth. We're confident that we have the right people and products in place to achieve our goal of creating sustainable growth and long-term profitability. I want to extend my gratitude to our employees. The progress we've made this past year is a direct reflection of their dedication and hard work. To our shareholders, we appreciate your patience and steadfast support throughout this journey. Now I'll turn the call over to the operator for Q&A.

Your first question is coming from Scott Buck from H.C. Wainwright.

Tony, I'm curious, can you provide a little more granularity on the unit economics of the P.O.S.S.E program? Like what is the average contract value for a typical sheriffs' department deployment? And what do the sales cycles look like with your partnership with PortNexus?

Sure. Well, the device that they select will depend a lot on the network bandwidth that they need at the sheriffs' department. So those could range from a few thousand dollars up to tens of thousands of dollars depending on the size and bandwidth requirements of the particular sheriff. In the case of the pilots, we use some of our lower-end appliances. So it's a few thousand dollars in terms of unit pricing on those. What I'm encouraged by is that, as we've experienced everywhere else, once we show the network traffic that's getting through the traditional firewalls and other technologies they have in place and also show the outbound traffic that should be blocked but is not currently being blocked, it makes the sale pretty quickly. We're seeing a high adoption rate and we're expanding into these other states as I mentioned on the call. The way it works is we loan them a unit; it goes in for a week to ten days, and then we do a report showing them the traffic that we see and would have blocked if we'd been in place, and they love it. We're doubling down on that. We're increasing the number of proof of concept units, and we'll see where it takes us. So that's the way it works.

That's very helpful. I wanted to clarify something in your prepared remarks. Did you say that had you not had the delay from the government contract during the quarter, we would have seen sequential revenue growth from the third quarter?

Yes. Yes, that is correct. We were expecting to report growth, both quarter-on-quarter and year-on-year above and beyond what we reported.

So it's safe to assume that contract delay cost you at least $0.5 million in the quarter?

Yes.

Perfect. And then, Kim, I wanted to ask about sales and marketing expense. I think it's the highest quarterly level of spend, maybe ever. Is this the new run rate? Or could we expect further investment in sales in 2026?

We will continue to invest in sales and marketing. What we saw in the first quarter approximates the run rate, but we will see some increases from here.

Scott, I'd also add, we're looking for cost efficiencies elsewhere. It's important for us to improve that sales and marketing muscle, and we'll look for other efficiencies as we enhance that capability.

So we may not see as material an increase in total operating expense because some of those dollars will come from other buckets?

Yes, exactly.

Your next question is coming from Ed Woo from Ascendiant Capital.

Did I hear you right that you said for the delayed contract that some of your expenses have already flown through the P&L already?

That's correct. We've taken all the expenses associated with that. We just are not able to recognize the revenue at this point.

Okay. So that would be a 100% margin when it comes through?

Pretty nearly, yes.

Okay. What about the sales cycle pipeline for commercial customers? Have you seen any delays, lengthening of the sales cycle? Any concerns that you're hearing from Chief Information Officers out there?

Beyond the government sector, no real change. The one concern that we hear all the time is that the dwell time for threats is getting shorter and shorter and shorter, which means you have to react faster than ever once suspicious activity is noted. This bodes well for Intrusion's technology because we don't rely on the presence of malware or other known signatures, we're heavily focused on reputation, which means that we can stop things in real-time versus waiting for something bad to happen, then having to react to it and remediating. We're currently having some discussions with managed security service providers who are attracted to that kind of capability because it helps get out in front of these attacks versus waiting for an actual attack.

Your next question is coming from Howard Brous from Wellington Shield.

A couple of questions. Tony, critical infrastructure customers that you have, can you give us a general sense of what kind of customer it is? And is he happy with the work? Is this basically expandable for that particular customer?

Yes. This solution is protecting critical water infrastructure in the Asia-Pacific region, and the customer is very happy with the solution. It's working as designed, and we continue to support it. I believe there's tremendous opportunities for this to expand beyond the region where it is now. We're doing one island right now in Asia-Pacific, but as you know, there are many islands that the Department of War has interest in, in that particular region. The revenue opportunity that comes from this is multiplied by the number of islands that still need this kind of protection. This doesn't mention the domestic facilities, which generally fall under Homeland Security jurisdiction. With our new sales capability that I mentioned on the call, we're targeting those places as well, and we have great customer references from this initial deployment. We're excited about the revenue opportunity in '26 and beyond. There is a lot of critical infrastructure around, whether it's water, telecom, or electrical grid, and our solution is tailorable to each of those environments.

So let me digress for a moment and talk about school children. You install this in a school, and my understanding is it's in every school room, every classroom and can be activated by a teacher if there is a potential event happening, where somebody is coming into the school with a weapon. Is that a fair comment?

Correct. Yes, that's the PortNexus solution that we're partners with.

Right. So you've got thousands of school districts throughout the country; why isn't everyone adopting this? It protects our children. There's nothing more important than that. How are you going about marketing this?

With PortNexus, we're attending events where school administrators look for technology. We're also marketing to the sheriffs' department or whoever the local law enforcement agency is associated with a particular school district. It takes the combination of them to really adopt the solution. The good news is it's very inexpensive. I've mentioned it could be funded by the local PTA even if the school couldn't afford it. Once you see the demo of this capability and the situational awareness it brings to the law enforcement within seconds of an event occurring, it raises the question of why wouldn’t we want to have this capability? We're looking forward to 2026 to expand this across many U.S. markets.

How has the reception been so far?

It's been outstanding. Once you see it, you realize why would anyone want to be without this kind of tool. It can also apply to other public venues, not only schools but anywhere people gather where disruptions may occur, whether it's active shooter situations or fire or any kind of disruptive event. It's essential for law enforcement to get situational awareness as quickly as possible. The PortNexus solution allows for rapid situational awareness and alerts authorities quickly when an event arises. It shaves minutes off the critical early moments of a potential disaster, and I have not encountered anyone who has seen it that does not think this is valuable.

Can you talk about the kind of cost? Is it per student, per classroom, or per school?

It's per classroom. The PortNexus solution would go into the classroom and become part of the smart whiteboard. School resource officers, teachers, and anyone else who should be registered to that location can activate it. In an emergency, the panic button sends a text to all registered cell phones, activates the camera and microphone, and shares location information with law enforcement authorities along with video from existing school cameras. This way, law enforcement receives valuable situational awareness and locational data from multiple viewpoints which is invaluable. We license the network protection aspect to PortNexus, and our revenue comes from the number of classrooms and schools within each district.

And the margins on this are high margins?

Yes, very high margins for us. We don't do any installation; we simply license our software. PortNexus's team is responsible for installations and first-level support. This makes it almost pure profit for us.

This is a big deal. Anything to protect our children is a good thing.

Exactly.

Your next question comes from James Green.

My question concerns potential emerging technologies and the ability for your technology to interface with them. I'm specifically thinking about the rise of humanoid robots and autonomous vehicles, which pose immediate threats if compromised. How does your technology adapt to these changes?

Hello. I think we may have lost you or I couldn't hear the rest of your question. I think the question was, as we see an increase in AI and autonomous systems, how does our technology accommodate those opportunities? Yes, there's more and more software and autonomous systems, whether it's robots or other devices in our life. The rise of AI and the increased software integration does heighten cybersecurity risks greatly. It is our belief that if you aren't monitoring the networks these systems require to operate, you may miss critical issues that could prevent disasters. That's what Intrusion Shield aims to do. We check every packet in near-real-time, deciding whether it's likely harmful or benign. To illustrate, it's like having continuous blood monitoring; you receive blood tests yearly, but potential issues can go undetected until it's too late. Our technology aims to address this by offering constant, real-time monitoring.

James Green, your line is connected and live.

Sorry, I accidentally disconnected, so I missed part of what you said. My question was, based on these emerging technologies, does your current technology interface easily with them or is modification necessary?

Yes. We can connect to networks in any format, whether wired, wireless, in the cloud, or in data centers. To ensure safety, continuous real-time monitoring of all network traffic at multiple points is essential to ensure no unwanted communications are occurring. We have invested heavily in R&D to accommodate the growing bandwidth needs. We are confident in our preparedness for the future in this context.

As we transition into a future with local autonomous elements on private networks that connect to the cloud, how does your technology manage potential internal threats?

Yes. The agentic tools will use the networks, which allows us to monitor corresponding activities. In 2026, I foresee significant incidents caused by unregulated AI leading to lost data or privacy violations. Continuous real-time monitoring will be vital to address this. By identifying malicious activity immediately, we can respond quickly. We believe we are well-positioned as technology progresses.

Your next question is coming from Jerry Yanowitz.

Tony, last quarter you mentioned that you were pleased to report that during the third quarter, you were on your path towards sustainable growth and long-term profitability. Today, you said you're on the path to breakeven operations. In which quarter do you expect to achieve breakeven operations?

Well, can you tell me when we're going to have another government shutdown or continuing resolution?

Assuming no government shutdown and no continuing resolution, what quarter do you expect to achieve breakeven operations?

It depends on new contracts we sign. We believe this critical infrastructure solution has significant potential. Our first contract was approximately $3 million annually, and it wouldn't take many more like that to reach our goal. Timing in 2026 will determine when we achieve this. We're optimistic about landing more contracts in 2026 than in 2025, whether it's two or three, or whatever.

Would you be extremely disappointed if you weren't breakeven in the third quarter of this year?

Yes, that is the answer. I was disappointed that we weren't at breakeven right now, to be honest with you. We thought we were on track to achieve that quicker than we have been, but life happens. I think we're still on the right path, and I'm optimistic that 2026 is our year.

So by the third quarter, we should expect to see that as shareholders?

I would hope so, yes. And I'm a shareholder, so...

Thank you. At this time, there are no other questions in the queue. I'll turn the call back over to our host, Mr. Tony Scott, for any closing remarks.

As I said before, I just want to thank everybody for your interest in Intrusion. As I mentioned at the beginning, it was a year that was unexpected in many respects. I look forward to the progress we can make in 2026 with a little more stability and predictability. We've made what I believe are the right investments in our technology. We've begun the strategic investments in our sales and marketing capabilities that we've lacked for the past couple of years. Looking back, I may have been slow to build that muscle. I'm pleased with the experienced sales and marketing team we have now, showing remarkable capability to reach out to new contacts we hadn't engaged with over the last couple of years. This gives me hope. I appreciate everyone's patience through what has been a long and grueling road. I remain optimistic about what we can achieve together in 2026. Thank you for your time, and I look forward to speaking with you at the next earnings call or possibly sooner.

Thank you. Everyone, this concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.