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CONDENSED CONSOLIDATED BALANCE SHEETS (USD  $)
In Thousands
Sep. 30, 2011
Dec. 31, 2010
Current Assets:
Cash and cash equivalents  $ 322  $ 540
Accounts receivable 483 222
Inventories, net 37 61
Prepaid expenses 31 23
Total current assets 873 846
Property and equipment, net 188 117
Other assets 41 39
TOTAL ASSETS 1,102 1,002
Current Liabilities:
Accounts payable and accrued expenses 747 529
Dividends payable 84 22
Deferred revenue 62 983
Obligations under capital lease, current portion 56
Loan payable to officer 1,530
Total current liabilities 2,479 1,534
Loan payable to officer 230
Obligations under capital lease, noncurrent portion 38
Commitments and contingencies    
Stockholders' Deficit:
Common stock,  $0.01 par value: Authorized shares - 80,000 Issued shares - 11,952 in 2011 and 11,828 in 2010 Outstanding shares - 11,942 in 2011 and 11,818 in 2010 120 118
Common stock held in treasury, at cost - 10 shares (362) (362)
Additional paid-in capital 55,670 55,570
Accumulated deficit (58,623) (57,868)
Accumulated other comprehensive loss (226) (226)
Total stockholders' deficit (1,415) (762)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT 1,102 1,002
Series 1
Stockholders' Deficit:
Preferred stock 778 778
Series 2
Stockholders' Deficit:
Preferred stock 724 724
Series 3
Stockholders' Deficit:
Preferred stock  $ 504  $ 504
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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD  $)
In Thousands, except Per Share data
Sep. 30, 2011
Dec. 31, 2010
Preferred stock, par value (in dollars per share)  $ 0.01  $ 0.01
Preferred stock, Authorized shares 5,000 5,000
Common stock, par value (in dollars per share)  $ 0.01  $ 0.01
Common stock, Authorized shares 80,000 80,000
Common stock, Issued shares 11,952 11,828
Common stock, Outstanding shares 11,942 11,818
Common stock held in treasury, shares 10 10
Series 1
Preferred stock, shares issued 220
Preferred stock, shares outstanding 220
Preferred stock, Liquidation preference (in dollars per share)  $ 1,128
Series 2
Preferred stock, shares issued 460
Preferred stock, shares outstanding 460
Preferred stock, Liquidation preference (in dollars per share)  $ 1,184
Series 3
Preferred stock, shares issued 354
Preferred stock, shares outstanding 354
Preferred stock, Liquidation preference (in dollars per share)  $ 794
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD  $)
In Thousands, except Per Share data
3 Months Ended 9 Months Ended
Sep. 30, 2011
Sep. 30, 2010
Sep. 30, 2011
Sep. 30, 2010
Net product revenue  $ 1,759  $ 1,522  $ 3,782  $ 4,492
Net customer support and maintenance revenue 33 55 120 158
Total revenue 1,792 1,577 3,902 4,650
Cost of product revenue 695 589 1,490 1,681
Cost of customer support and maintenance revenue 6 5 16 15
Total cost of revenue 701 594 1,506 1,696
Gross profit 1,091 983 2,396 2,954
Operating expenses:
Sales and marketing 365 179 1,092 639
Research and development 313 379 1,149 1,024
General and administrative 268 262 869 778
Operating income (loss) 145 163 (714) 513
Other income 47 47
Interest expense, net (24) (7) (41) (32)
Income (loss) before income tax provision 121 203 (755) 528
Income tax provision 0 0
Net income (loss) 121 203 (755) 528
Preferred stock dividends accrued (38) (38) (113) (113)
Net income (loss) attributable to common stockholders  $ 83  $ 165  $ (868)  $ 415
Net income (loss) per share attributable to common stockholders:
Basic (in dollars per share)  $ 0.01  $ 0.01  $ (0.07)  $ 0.04
Diluted (in dollars per share)  $ 0.01  $ 0.01  $ (0.07)  $ 0.03
Weighted average common shares outstanding:
Basic (in shares) 11,902 11,744 11,855 11,728
Diluted (in shares) 13,608 14,126 11,855 13,898
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD  $)
In Thousands
9 Months Ended
Sep. 30, 2011
Sep. 30, 2010
Operating Activities:
Net income (loss)  $ (755)  $ 528
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization 74 56
Stock-based compensation 168 130
Extinguishment of France subsidiary cumulative translation adjustment (47)
Changes in operating assets and liabilities:
Accounts receivable (261) (115)
Inventories 25 (22)
Prepaid expenses and other assets (11) 36
Accounts payable and accrued expenses 217 (47)
Deferred revenue (921) 15
Net cash provided by (used in) operating activities (1,464) 534
Investing Activities:
Purchases of property and equipment (29) (46)
Financing Activities:
Dividends paid on preferred stock (51) (410)
Penalties and waived penalties on dividends 1
Borrowings on loan from officer 1,300 200
Payments on loan from officer (500)
Principal payments on capital lease equipment (21)
Proceeds from stock options exercised 20 1
Proceeds from warrants exercised 26
Net cash provided by (used in) financing activities 1,275 (709)
Net decrease in cash and cash equivalents (218) (221)
Cash and cash equivalents at beginning of period 540 519
Cash and cash equivalents at end of period 322 298
Cash paid during the year for interest 63
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES:
Preferred stock dividends accrued 113 113
Purchase of leased equipment under capital lease  $ 114
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Description of Business
9 Months Ended
Sep. 30, 2011
Description of Business
Description of Business

1.              Description of Business

 

We develop, market and support a family of entity identification, high speed data mining, regulated information compliance, data privacy protection and network intrusion prevention/detection products.  Our product families include:

 

·                                      TraceCop™ for identity discovery and disclosure,

·                                      Savant™ for network data mining,

·                                      Compliance Commander™ for regulated information and data privacy protection, and

·                                      SecureNet™ for network intrusion prevention and detection.

 

We market and distribute our products through a direct sales force to:

 

·                                      end-users,

·                                      value-added resellers,

·                                      system integrators,

·                                      managed service providers, and

·                                      distributors.

 

Our end-user customers include:

 

·                                      U.S. federal government entities,

·                                      foreign government entities,

·                                      local government entities,

·                                      banks,

·                                      credit unions,

·                                      other financial institutions,

·                                      hospitals and other healthcare providers, and

·                                      other customers.

 

We were organized in Texas in September 1983 and reincorporated in Delaware in October 1995. For more than 15 years, we provided local area networking equipment and were known as Optical Data Systems or ODS Networks. On April 17, 2000, we announced plans to sell, or otherwise dispose of, our networking divisions, which included our Essential Communications division and our local area networking assets. On June 1, 2000, we changed our name from ODS Networks, Inc. to Intrusion.com, Inc., and our ticker symbol from ODSI to INTZ to reflect our focus on intrusion prevention and detection solutions, along with information compliance and data privacy protection products. On November 1, 2001, we changed our name from Intrusion.com, Inc. to Intrusion Inc.

 

Our principal executive offices are located at 1101 East Arapaho Road, Suite 200, Richardson, Texas 75081, and our telephone number is (972) 234-6400.  Our website URL is www.intrusion.com.  References to “we”, “us”, “our” or “Intrusion Inc.” refer to Intrusion Inc. and its subsidiaries.  Compliance Commander™, SecureNet™ and TraceCop™ are trademarks of Intrusion Inc.

 

As of September 30, 2011, we had cash and cash equivalents of approximately  $322,000, down from approximately  $540,000 as of December 31, 2010.  We generated a net loss of  $755,000 in the first nine months of 2011 compared to net income of  $528,000 for the first nine months of 2010.  As of September 30, 2011, in addition to cash and cash equivalents of  $322,000, we had  $64 thousand in funding available under our  $0.625 million line of credit at Silicon Valley Bank (“SVB”) and  $0.67 million funding available from a written commitment to loan up to  $2.2 million from G. Ward Paxton.  Future payments of accrued dividends on all our outstanding shares of preferred stock will reduce our available cash resources.  Based on projections of growth in revenue and net income in the coming quarters, and the borrowings available previously mentioned, we believe that we will have sufficient cash resources to finance our operations and expected capital expenditures for the next twelve months.  We expect to fund our operations through Company profits, our line of credit, borrowings from the Company’s CEO, and possibly additional investments of private equity and debt, which, if we are able to obtain, will have the effect of diluting our existing common stockholders, perhaps significantly.  Any equity or debt financings, if available at all, may be on terms which are not favorable to us and, in the case of equity financings, may result in dilution to our stockholders. If our operations do not generate significant positive cash flow in the upcoming year, or if we are not able to obtain additional debt or equity financing on terms and conditions acceptable to us, if at all, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations.

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Basis of Presentation
9 Months Ended
Sep. 30, 2011
Basis of Presentation
Basis of Presentation

2.              Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Item 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  The December 31, 2010 balance sheet was derived from audited financial statements, but does not include all the disclosures required by accounting principles generally accepted in the United States.  However, we believe that the disclosures are adequate to make the information presented not misleading.  In our opinion, all the adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included.  The results of operations for the three and nine month periods ended September 30, 2011 are not necessarily indicative of the results that may be achieved for the full fiscal year or for any future period.  The unaudited condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2010, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 29, 2011.

 

The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different from the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued expenses, and dividends payable approximate their carrying amounts due to the relatively short maturity of these instruments. The carrying value of loans payable to officer also approximates fair value since these instruments bear approximate market rates of interest. None of these instruments are held for trading purposes.

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Inventories
9 Months Ended
Sep. 30, 2011
Inventories
Inventories

3.              Inventories (In thousands)

 

 

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Inventories consist of:

 

 

 

 

 

Finished goods

 

 $

61

 

 $

61

 

Less: Reserve for finished goods

 

(30

)

 

Demo evaluation inventory

 

6

 

 

Net inventory

 

 $

37

 

61

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Loan Payable to Officer
9 Months Ended
Sep. 30, 2011
Loan Payable to Officer
Loan Payable to Officer

4.              Loan Payable to Officer

 

On February 3, 2011, the Company extended a revolving promissory note to borrow up to  $700,000 from G. Ward Paxton, the Company’s Chairman, President and Chief Executive Officer through March 2012.

 

On February 3, 2011, we received a written commitment from our Chief Executive Officer to loan up to an additional  $1,500,000 in the Company until March 2012, should such funding be required by the Company, on terms and conditions similar to the promissory note above.

 

Amounts borrowed from this officer accrue interest at a floating rate per annum equal to SVB’s prime rate plus 1% (5% at September 30, 2011).  All outstanding borrowings and accrued but unpaid interest is due on March 31, 2012.  As of September 30, 2011, the borrowings outstanding totaled  $1,530,000 and accrued interest totaled  $34,000.

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Line of Credit
9 Months Ended
Sep. 30, 2011
Line of Credit
Line of Credit

5.              Line of Credit

 

On March 29, 2006, we entered into a Loan and Security Agreement with SVB to establish a  $1.0 million line of credit (the “2006 Credit Line”).  On June 30, 2008, we entered into an Amended and Restated Loan and Security Agreement with SVB to, among other things, replace the 2006 Credit Line with a  $2.5 million line of credit (the “2008 Credit Line”).  On June 26, 2011, we entered into the Third Amendment to the Amended and Restated Loan and Security Agreement (as amended, the “Loan Agreement”) with SVB to replace our expiring line with a  $0.625 million line of credit (the “Current Line of Credit”).  Our obligations under the Loan Agreement are secured by substantially all of our assets, including all of our intellectual property.  In addition, G. Ward Paxton, the Company’s Chief Executive Officer, has established a Guaranty Agreement with SVB for all outstanding balances under the Current Line of Credit.  Borrowings under the Current Line of Credit are based on advances (each an “Advance”) against certain of our accounts receivable that are approved by SVB (each an “Eligible Account”).  SVB may make an Advance of up to eighty percent (80%) of each Eligible Account, or such other percentage SVB may determine in its sole discretion.  Each Advance is subject to a finance charge calculated as a daily rate that is based on a 360-day annual rate of the greater of the prime rate plus 2.0% or 7.0%.  Finance charges are payable at the same time its related Advance is due.  Each Advance is also subject to a monthly collateral handling fee of 0.5% of all outstanding Advances, depending on certain qualifying financial factors specified in the Loan Agreement.  The collateral handling fee is payable at the same time its related Advance is due.  Each Advance must be repaid at the earliest of (a) the date that the Eligible Account related to the Advance is paid, (b) the date the Eligible Account is no longer eligible under the Loan Agreement, or (c) the date on which any “Adjustment” (as defined in the Loan Agreement) is asserted to the Eligible Account.  On June 25, 2012, the Loan Agreement terminates and all outstanding Advances, accrued but unpaid finance charges, outstanding collateral handing fees, and other amounts become due under the Loan Agreement and related documents.  We have certain non-financial and financial covenants, including a liquidity coverage ratio and a rolling EBITDA computation, as defined in the Loan Agreement.  We had no borrowings outstanding under the Current Line of Credit as of September 30, 2011.

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Accounting for Stock-Based Compensation
9 Months Ended
Sep. 30, 2011
Accounting for Stock-Based Compensation
Accounting for Stock-Based Compensation

6.              Accounting for Stock-Based Compensation

 

During the three month periods ended September 30, 2011 and 2010, the Company granted 6,000 and 0 stock options, respectively, to employees and directors.  The Company recognized  $60,000 and  $47,000, respectively, in stock-based compensation expense for the three month periods ended September 30, 2011 and 2010.  During the nine month periods ended September 30, 2011 and 2010, the Company granted 423,000 and 495,000, respectively, stock options to employees and directors.  The Company recognized  $168,000 and  $130,000, respectively, stock-based compensation expense for the nine month period ended September 30, 2011 and 2010.

 

During the three month period ended September 30, 2011 and 2010, 60,000 and 4,000 options were exercised under the 2005 Plan, respectively.   During the nine month periods ended September 30, 2011 and 2010, 60,000 and 4,000 options were exercised under the 2005 Plan, respectively.

 

Valuation Assumptions

 

The fair values of option awards were estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:

 

 

 

For Three Months
Ended
September 30, 2011

 

For Three Months
Ended
September 30, 2010

 

For Nine
Months Ended
September 30, 2011

 

For Nine
Months Ended
September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

Weighted average grant date fair value

 

 $

0.39

 

 

 $

0.67

 

 $

0.40

 

Weighted average assumptions used:

 

 

 

 

 

 

 

 

 

Expected dividend yield

 

0.0

%

 

0.0

%

0.0

%

Risk-free interest rate

 

1.1

%

 

2.1

%

2.2

%

Expected volatility

 

207.0

%

 

202.0

%

200.0

%

Expected life (in years)

 

5.0

 

 

4.9

 

4.9

 

 

Expected volatility is based on historical volatility and in part on implied volatility.  The expected life considers the contractual term of the option as well as historical exercise and forfeiture behavior.  The risk-free interest rate is based on the rates in effect on the grant date for U.S. Treasury instruments with maturities matching the relevant expected term of the award. Options granted to non-employees are valued using the fair market value on each measurement date of the option.

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Net Income (Loss) Per Share
9 Months Ended
Sep. 30, 2011
Net Income (Loss) Per Share
Net Income (Loss) Per Share

7.              Net Income (Loss) Per Share

 

Basic net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders for the period by the weighted average number of common shares outstanding for the period.  Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of common shares and dilutive common stock equivalents outstanding for the period.  Our common stock equivalents include all common stock issuable upon conversion of preferred stock and the exercise of outstanding options and warrants.  The aggregate number of common stock equivalents excluded from the diluted income per share calculation for the three month periods ended September 30, 2011 and 2010 are 1,332,823 and 1,043,284, respectively, as they are antidilutive. In addition, for the nine month periods ended September 30, 2011 and 2010 3,888,467 and 1,161,547, respectively, common stock equivalents are not included in the diluted income (loss) per share as they are antidilutive.

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Concentrations
9 Months Ended
Sep. 30, 2011
Concentrations
Concentrations

8.              Concentrations

 

Our operations are concentrated in one area—security software/entity identification.  Sales to the U.S. Government through direct and indirect channels totaled 38.0% of total revenues for the third quarter of 2011 compared to 31.5% of total revenues for the third quarter of 2010.  During the third quarter of 2011, approximately 33.5% of total revenues were attributable to two government customers compared to approximately 31.4% of total revenues attributable to two government customers in the third quarter of 2010.  There was one individual commercial customer in the third quarter of 2011 compared to one individual commercial customer for the same period in 2010 that exceeded 10% of total revenues for that quarter.  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.

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Commitments and Contingencies
9 Months Ended
Sep. 30, 2011
Commitments and Contingencies.
Commitments and Contingencies

9.              Commitments and Contingencies

 

We are subject from time to time to various legal proceedings and claims that arise during the ordinary course of our business.  We do not believe that the outcome of those “routine” legal matters should have a material adverse affect on our consolidated financial position, operating results or cash flows; however, we can provide no assurances that legal claims that may arise will not have such a material impact in the future.

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Dividends Payable
9 Months Ended
Sep. 30, 2011
Dividends Payable
Dividends Payable

10.       Dividends Payable

 

During the quarter ended September 30, 2011, we accrued  $13,900 in dividends payable to the holders of our 5% Preferred Stock,  $14,500 in dividends payable to the holders of our Series 2 5% Preferred Stock and  $9,700 in dividends payable to the holders of our Series 3 5% Preferred Stock.  As of September 30, 2011, we have  $84,000 in accrued and unpaid dividends included in current liabilities.

 

Delaware law provides that we may only pay dividends out of our capital surplus or, if no surplus is available, out of our net profits for the fiscal year the dividend is declared and/or the preceding fiscal year.  These dividends continue to accrue on all our outstanding shares of preferred stock, regardless of whether we are legally able to pay them.  If we are unable to pay dividends on our preferred stock, we will be required to accrue an additional late fee penalty of 18% per annum on the unpaid dividends for the Series 2 Preferred Stock and Series 3 Preferred Stock.  Our CEO, CFO and one outside board member who are holders of our Series 2 and Series 3 Preferred Stock have waived any possible late fee penalties.  In addition to this late penalty, the holders of our Series 2 Preferred Stock and Series 3 Preferred Stock could elect to present us with written notice of our failure to pay dividends as scheduled, in which case we would have 45 days to cure such a breach.  In the event that we failed to cure the breach, the holders of these shares of preferred stock would then have the right to require us to redeem their shares of preferred stock for a cash amount calculated in accordance with their respective certificates of designation.  If we were required to redeem all shares of Series 2 Preferred Stock and Series 3 Preferred Stock as of October 31, 2011, the aggregate redemption price we would owe would be  $2.0 million.

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Recent Accounting Pronouncements
9 Months Ended
Sep. 30, 2011
Recent Accounting Pronouncements
Recent Accounting Pronouncements

11.       Recent Accounting Pronouncements

 

In October 2009, the FASB issued Topic 605—Revenue Recognition (EITF 08-1, Multiple-Deliverable Revenue Arrangements, (amendments to FASB Topic 605, Revenue Recognition)) and Topic 985—Software (EITF 09-3, Certain Arrangements That Include Software Elements, (amendments to FASB Topic 985, Software)). Topic 605—Revenue Recognition requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. Topic 985—Software removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. Topic 605—Revenue Recognition and Topic 985—Software should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company adopted these Topics on January 1, 2011, with no material impact on the overall financial statements.

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Document and Entity Information
9 Months Ended
Sep. 30, 2011
Oct. 31, 2011
Document and Entity Information
Entity Registrant Name INTRUSION INC
Entity Central Index Key 0000736012
Document Type 10-Q
Document Period End Date Sep 30, 2011
Amendment Flag false
Current Fiscal Year End Date --12-31
Entity Current Reporting Status Yes
Entity Filer Category Smaller Reporting Company
Entity Common Stock, Shares Outstanding 11,942,017
Document Fiscal Year Focus 2011
Document Fiscal Period Focus Q3
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