MIME-Version: 1.0 X-Document-Type: Workbook Content-Type: multipart/related; boundary="----=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa" This document is a Single File Web Page, also known as a Web Archive file. If you are seeing this message, your browser or editor doesn't support Web Archive files. Please download a browser that supports Web Archive, such as Microsoft Internet Explorer. ------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Workbook.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"

This page should be opened with Microsoft Excel XP or newer.

------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet01.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2011
Mar. 30, 2012
Jun. 30, 2011
Document and Entity Information
Entity Registrant Name INTRUSION INC
Entity Central Index Key 0000736012
Document Type 10-K
Document Period End Date Dec 31, 2011
Amendment Flag false
Current Fiscal Year End Date --12-31
Entity Well-known Seasoned Issuer No
Entity Voluntary Filers No
Entity Current Reporting Status Yes
Entity Filer Category Smaller Reporting Company
Entity Public Float $ 3,330,000
Entity Common Stock, Shares Outstanding 11,972,017
Document Fiscal Year Focus 2011
Document Fiscal Period Focus FY
------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet02.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2011
Dec. 31, 2010
Current Assets:
Cash and cash equivalents $ 308 $ 540
Accounts receivable 480 222
Inventories, net 5 61
Prepaid expenses 90 23
Total current assets 883 846
Property and Equipment:
Equipment 813 614
Furniture and fixtures 34 34
Leasehold improvements 101 101
Total property and equipment, gross 948 749
Accumulated depreciation and amortization (741) (632)
Total property and equipment, net 207 117
Other assets 40 39
TOTAL ASSETS 1,130 1,002
Current Liabilities:
Accounts payable, trade 171 167
Accrued expenses 461 362
Dividends payable 123 22
Line of credit payable 80
Obligations under capital lease, current portion 74
Deferred revenue 97 983
Total current liabilities 1,006 1,534
Loan payable to officer 1,530 230
Obligations under capital lease, noncurrent portion 53
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 119 118
Common stock held in treasury, at cost-10 shares (362) (362)
Additional paid-in-capital 55,686 55,570
Accumulated deficit (58,801) (57,868)
Accumulated other comprehensive loss (107) (226)
Total stockholders' deficit (1,459) (762)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT 1,130 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
------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet03.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Dec. 31, 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) $ 1,141
Series 2
Preferred stock, shares issued 460
Preferred stock, shares outstanding 460
Preferred stock, Liquidation preference (in dollars per share) $ 1,198
Series 3
Preferred stock, shares issued 354
Preferred stock, shares outstanding 354
Preferred stock, Liquidation preference (in dollars per share) $ 804
------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet04.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Net product revenue $ 5,192 $ 5,383
Net customer support and maintenance revenue 156 205
Total revenue 5,348 5,588
Cost of product revenue 2,036 2,040
Cost of customer support and maintenance revenue 21 20
Total cost of revenue 2,057 2,060
Gross profit 3,291 3,528
Operating expenses:
Sales and marketing 1,383 921
Research and development 1,555 1,395
General and administrative 1,102 992
Operating income (loss) (749) 220
Other income (expense) (118) 47
Interest expense, net (66) (41)
Income (loss) from operations before income taxes (933) 226
Income tax provision 0
Net income (loss) (933) 226
Preferred stock dividends accrued (151) (136)
Net income (loss) attributable to common stockholders $ (1,084) $ 90
Net income (loss) per share attributable to common stockholders, basic and diluted (in dollars per share) $ (0.09) $ 0
Weighted average common shares outstanding:
Basic (in shares) 11,877 11,745
Diluted (in shares) 11,877 13,937
------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet05.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT EQUITY (USD $)
In Thousands, unless otherwise specified
Total
PREFERRED STOCK
COMMON STOCK
TREASURY SHARES
ADDITIONAL PAID-IN-CAPITAL
ACCUMULATED DEFICIT
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at Dec. 31, 2009 $ (967) $ 2,006 $ 117 $ (362) $ 55,545 $ (58,094) $ (179)
Balance (in shares) at Dec. 31, 2009 1,034 11,714
Increase (decrease) in stockholders' equity
Stock-based compensation 160 160
Exercise of warrants (1) (1)
Exercise of warrants (in shares) 110
Exercise of stock options 2 2
Exercise of stock options (in shares) 4
Preferred stock dividends declared, net of waived penalties by shareholders (136) (136)
Exercise of stock options and warrants 1 1
Net income (loss) 226 226
Extinguishment of Malaysia (2011) and France (2010) subsidiary cumulative translation adjustment (47) (47)
Balance at Dec. 31, 2010 (762) 2,006 118 (362) 55,570 (57,868) (226)
Balance (in shares) at Dec. 31, 2010 1,034 11,828
Increase (decrease) in stockholders' equity
Stock-based compensation 220 220
Exercise of warrants 25 25
Exercise of warrants (in shares) 64
Exercise of stock options 19 19
Exercise of stock options (in shares) 60
Preferred stock dividends declared, net of waived penalties by shareholders (151) (148)
Exercise of stock options and warrants 1 1
Net income (loss) (933) (933)
Extinguishment of Malaysia (2011) and France (2010) subsidiary cumulative translation adjustment 119 119
Balance at Dec. 31, 2011 $ (1,459) $ 2,006 $ 119 $ (362) $ 55,686 $ (58,801) $ (107)
Balance (in shares) at Dec. 31, 2011 1,034 11,952
------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet06.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Operating Activities:
Net income (loss) $ (933,000) $ 226,000
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization 109,000 76,000
Stock-based compensation 220,000 160,000
Extinguishment of Malaysia (2011) & France (2010) subsidiary cumulative translation adjustment 119,000 (47,000)
Changes in operating assets and liabilities:
Accounts receivable (258,000) 129,000
Inventories 56,000 (54,000)
Prepaid expenses and other assets (68,000) 45,000
Accounts payable, accrued expenses and other current liabilities 102,000 (155,000)
Deferred revenue (886,000) 890,000
Net cash provided by (used in) operating activities (1,539,000) 1,270,000
Investing Activities:
Purchases of property and equipment (29,000) (48,000)
Financing Activities:
Borrowings from officer 1,300,000 260,000
Borrowing from line of credit 80,000
Payments on loans from officer (1,000,000)
Dividends paid on preferred stock (51,000) (462,000)
Penalties and waived penalties on dividends 4,000
Principal payments on capital lease equipment (42,000)
Proceeds from stock options exercised 20,000
Proceeds from warrants exercised 25,000 1,000
Net cash provided by (used in) financing activities 1,336,000 (1,201,000)
Net increase (decrease) in cash and cash equivalents (232,000) 21,000
Cash and cash equivalents at beginning of year 540,000 519,000
Cash and cash equivalents at end of year 308,000 540,000
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid 8,000 79,000
Income taxes paid 0
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES:
Preferred stock dividends accrued 151,000 136,000
Purchase of equipment through capital lease $ 170,000
------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet07.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Description of Business
12 Months Ended
Dec. 31, 2011
Description of Business
Description of Business

1. Description of Business

 

We develop, market, and support a family of entity identification, data mining, regulated information compliance, data privacy protection and network intrusion prevention/detection products.  Our product families include:  TraceCop for identity identification, Savant for data mining, Compliance Commander for regulated information and data privacy protection, and SecureNet for network intrusion prevention and detection.  Intrusion’s products help protect critical information assets by quickly detecting, protecting, analyzing and reporting attacks or misuse of classified, private and regulated information for government and enterprise networks.

 

We market and distribute our products through a direct sales force to end-users, distributors and numerous system integrators, managed service providers and value-added resellers.  Our end-user customers include banks, credit unions, other financial institutions, U.S. federal government entities, foreign government entities, hospitals and other healthcare providers. Essentially, our end-users can be defined as end-users requiring network security solutions for protecting their mission critical data.

 

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 sold, or otherwise disposed 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 the “Company”, “we”, “us”, “our”, “Intrusion” or “Intrusion Inc.” refer to Intrusion Inc. and its subsidiaries.  Compliance Commander™, SecureNet™ and TraceCop™ are registered trademarks of Intrusion Inc.

 

As of December 31, 2011, we had cash and cash equivalents of approximately $308,000, down from approximately $540,000 as of December 31, 2010.  We generated a net loss of $933,000 for the year ended December 31, 2011 compared to net income of $226,000 for the year ended December 31, 2010.  As of December 31, 2011, in addition to cash and cash equivalents of $308,000, we had $115,000 in funding available under our $0.625 million line of credit at Silicon Valley Bank (“SVB”) and $0.67 million funding available from a promissory note to borrow up to $2.2 million from G. Ward Paxton, the Company’s Chief Executive Officer.   We are obligated to make payments of accrued dividends on all our outstanding shares of preferred stock that 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 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.

------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet08.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2011
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

Our consolidated financial statements include our accounts and those of our wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

 

Cash and Cash Equivalents

 

Cash and all highly liquid investments purchased with an original maturity of less than three months are considered to be cash and cash equivalents.

 

Risk Concentration

 

Financial instruments, which potentially subject us to concentrations of credit risk, are primarily cash and cash equivalents, investments and accounts receivable.  Cash and cash equivalent deposits are at risk to the extent that they exceed Federal Deposit Insurance Corporation insured amounts.  To minimize risk, we place our investments in U.S. government obligations, corporate securities and money market funds.  Substantially all of our cash, cash equivalents and investments are maintained with two major U.S. financial institutions.  We do not believe that we are subject to any unusual financial risk with our banking arrangements.  We have not experienced any significant losses on our cash and cash equivalents.

 

We sell our products to customers in diversified industries worldwide and periodically have receivables from customers, primarily in North America, Europe and Asia. Fluctuations in currency exchange rates and adverse economic developments in foreign countries could adversely affect the Company’s operating results.  We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral.  We maintain reserves for potential credit losses, and such losses, in the aggregate, have historically been minimal and have not exceeded management’s expectations.

 

While we believe that many of the materials used in the production of our products are generally readily available from a variety of sources, certain components may be available from one or a limited number of suppliers.  The inability of any supplier or manufacturer to fulfill supply requirements of the Company could impact future results.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Trade accounts receivable are stated at the amount we expect to collect.  We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.  Management considers the following factors when determining the collectability of specific customer accounts:  customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms.  If the financial condition of our customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.  Based on management’s assessment, we provide for estimated uncollectible amounts through a charge to earnings and an increase to a valuation allowance.  Balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance.

 

Inventories

 

Inventories are stated at the lower of cost or market. We value our inventories using average cost, which approximates actual cost on a first-in, first-out basis. Our management estimates the allowance required to state inventory at the lower of cost or market. There is a risk that we will forecast demand for our products and market conditions incorrectly and maintain excess inventories. Therefore, there can be no assurance that we will not maintain excess inventory and incur inventory lower of cost or market charges in the future.

 

Property and Equipment

 

Equipment and furniture and fixtures are stated at cost less accumulated depreciation and depreciated on a straight-line basis over the estimated useful lives of the assets.  Such lives vary from 1 to 5 years.  Leasehold improvements are stated at cost less accumulated amortization and are amortized on a straight-line basis over the shorter of estimated useful lives of the assets or the remaining terms of the leases.   Such lives vary from 2 to 5 years.  Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized.  Repair and maintenance costs are expensed as incurred. Depreciation and amortization expense totaled approximately $109,000 and $76,000 for the years ended December 31, 2011 and 2010, respectively.

 

Long-Lived Assets

 

We review long-lived assets, including property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows to be generated by the asset.  If the carrying value exceeds the future undiscounted cash flows, the assets are written down to fair value.  During the years ended December 31, 2011 and 2010, there was no impairment of long-lived assets.

 

Foreign Currency

 

All assets and liabilities in the balance sheets of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at year-end exchange rates.  All revenues and expenses in the statement of operations, of these foreign subsidiaries, are translated at average exchange rates for the year.  Translation gains and losses are not included in determining net income but are shown in accumulated other comprehensive loss in the stockholders’ deficit section of the consolidated balance sheet.  Foreign currency transaction gains and losses are included in determining net income (loss) and were not significant.

 

Accounting for Stock Options

 

We account for stock options using the guidance in Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 718.  FASB ASC Topic 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.

 

Stock-based compensation expense recognized in the statements of operations for the years ended 2011 and 2010 is based on awards ultimately expected to vest, reduced by estimated forfeitures.  FASB ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

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 fiscal years ended December 31, 2011 and 2010, respectively:

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Weighted average grant date fair value

 

$0.67

 

$0.40

 

Weighted average assumptions used:

 

 

 

 

 

Expected dividend yield

 

0.00

%

0.00

%

Risk-free interest rate

 

2.07

%

2.21

%

Expected volatility

 

202.07

%

199.91

%

Expected life (in years)

 

4.90

 

4.89

 

 

Expected volatility is based on historical volatility and in part on implied volatility.  The expected term 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.

 

Net Income Per Share

 

We report two separate net income per share numbers, basic and diluted.  Basic net income attributable to common stockholders per share is computed by dividing net income attributable to common stockholders for the year by the weighted average number of common shares outstanding for the year.  Diluted net income attributable to common stockholders per share is computed by dividing the net income attributable to common stockholders for the year by the weighted average number of common shares and dilutive common stock equivalents outstanding for the year.  Our common stock equivalents include all common stock issuable upon conversion of convertible preferred stock and the exercise of outstanding options and warrants.  Common stock equivalents are included in the diluted income per share for the years ended December 31, 2011 and 2010 except in cases where the issuance would be anti-dilutive.  The aggregate number of common stock equivalents excluded from the diluted income per share calculation at December 31, 2011 and 2010 totaled 3,872,944 and 1,000,794, respectively.

 

Revenue Recognition

 

We generally recognize product revenue upon shipment.  These products include both hardware and perpetual software licenses, as we do not currently offer software on a subscription basis.  We accrue for estimated warranty costs and sales returns at the time of shipment based on our experience.  There is a risk that technical issues on new products could result in unexpected warranty costs and returns.  To the extent that our warranty costs exceed our expectations, we will increase our warranty reserve to compensate for the additional expense expected to be incurred.  We review these estimates periodically and determine the appropriate reserve percentage.  However, to date, warranty costs and sales returns have not been material.  The customer may return a product only under very limited circumstances during the first thirty days from delivery for a replacement if the product is damaged or for a full refund if the product does not perform as intended.  Historically, most or our sales returns were related to hardware-based products.  As we continue to migrate away from such hardware-based products, these returns have declined.

 

We recognize software revenue from the licensing of our software products in accordance with FASB ASC Topic 605 whereby revenue from the licensing of our products is not recognized until all four of the following have been met: i) execution of a written agreement; ii) delivery of the product has occurred; iii) the fee is fixed and determinable; and iv) collectability is probable. Bundled hardware and software product revenue is recognized at time of delivery, as our licenses are not sold on a subscription basis.  Product sales which include maintenance and customer support allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy using the relative selling price method.  All of our product offering and service offering market values are readily determined based on current and prior stand-alone sales.  We defer and recognize maintenance and support revenue over the term of the contract period, which is generally one year.

 

Service revenue, primarily including maintenance, training and installation are recognized upon delivery of the service and typically are unrelated to product sales.  To date, training and installation revenue has not been material.  These revenues are included in net customer support and maintenance revenues in the statement of operations.

 

Our normal payment terms offered to customers, distributors and resellers are net 30 days domestically and net 45 days internationally.  We do not offer payment terms that extend beyond one year and rarely do we extend payment terms beyond our normal terms.  If certain customers do not meet our credit standards, we do require payment in advance to limit our credit exposure.

 

Shipping and handling costs are billed to the customer and included in product revenue.  Our costs of shipping and handling are included in cost of product revenue.

 

Research and Development Costs

 

We incur research and development costs that relate primarily to the development of new security software, appliances and integrated solutions, and major enhancements to existing services and products. Research and development costs are comprised primarily of salaries and related benefits expenses, contract labor and prototype and other related expenses.

 

Software development costs are included in research and development and are expensed as incurred. FASB ASC Topic 350 requires that software development costs incurred subsequent to reaching technological feasibility be capitalized, if material. If the process of developing a new product or major enhancement does not include a detailed program design, technological feasibility is determined only after completion of a working model. To date, the period between achieving technological feasibility and the general availability of such software has been short, and the software development costs qualifying for capitalization have been insignificant.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates are used for, but not limited to, the accounting for doubtful accounts, sales discounts, sales returns, revenue recognition, warranty costs, inventory obsolescence, depreciation and income taxes. Actual results could differ from these estimates.

 

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, and dividends payable approximate their carrying amounts due to the relatively short maturity of these instruments.  Loans payable to officer are with a related party and as a result do not bear market rates of interest.  Management believes based on its current financial position that it could not obtain comparable amounts of third party financing, and as such cannot estimate the fair value of the loans payable to officer.  None of these instruments are held for trading purposes.

 

Income Taxes

 

Deferred income taxes are determined using the liability method in accordance with FASB ASC 740, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

 

FASB ASC 740 creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FASB ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. There are no unrecognized tax benefits to disclose in the notes to the consolidated financial statements.

------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet09.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Balance Sheet Detail
12 Months Ended
Dec. 31, 2011
Balance Sheet Detail
Balance Sheet Detail

3. Balance Sheet Detail (in thousands)

 

Inventories

 

 

 

December 31,

 

 

 

2011

 

2010

 

Finished products

 

$

5

 

$

61

 

 

Accrued Expenses

 

 

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Accrued payroll

 

$

59

 

$

52

 

Accrued vacation

 

222

 

215

 

Accrued warranty expense

 

3

 

3

 

Accrued interest

 

54

 

 

Deferred rent

 

43

 

73

 

Other

 

80

 

19

 

 

 

$

461

 

$

362

------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet10.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Commitments and Contingencies
12 Months Ended
Dec. 31, 2011
Commitments and Contingencies
Commitments and Contingencies

4. Commitments and Contingencies

 

Leases

 

We lease office space for our corporate headquarters in Richardson, Texas under an operating lease, the base term of which expires in December 2012.  We lease office space in San Diego, California for a portion of our security software research and development staff under two separate operating leases that expire in March 2012. 

 

The Company’s lease for the headquarters facility contains escalation provisions.  The Company records rent expense on facility leases on a straight-line basis.  Rent expense totaled approximately $341,000 and $340,000 for the years ended December 31, 2011 and 2010, respectively.

 

We have other capital lease obligations that consist primarily of obligations to purchase goods that are enforceable and legally binding.  Our obligations primarily relate to software licensing and computer equipment.

 

Future minimum lease obligations consisted of the following at December 31, 2011 (in thousands):

 

 

 

Operating

 

Capital Lease

 

 

 

Year ending December 31,

 

Leases

 

Obligations

 

Total

 

2012

 

  $

377

 

  $

84

 

  $

461

 

2013

 

 

40

 

40

 

2014

 

 

17

 

17

 

2015 and thereafter

 

 

 

 

 

 

  $

377

 

  $

141

 

  $

518

 

 

Legal Proceedings

 

We are subject to legal proceedings and claims that arise in the ordinary course of business. We do not believe that the outcome of those matters will have a material adverse affect on our consolidated financial position, operating results or cash flows. However, there can be no assurance such legal proceedings will not have a material impact.

 

We are not aware of any material claims outstanding or pending against Intrusion Inc. at December 31, 2011.

------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet11.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Employee Benefit Plan
12 Months Ended
Dec. 31, 2011
Employee Benefit Plan
Employee Benefit Plan

5. Employee Benefit Plan

 

Employee 401(k) Plan

 

We have a plan known as the Intrusion Inc. 401(k) Savings Plan (the “Plan”) to provide retirement and incidental benefits for our employees.  The Plan covers substantially all employees who meet minimum age and service requirements.  As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax deferred salary deductions for eligible employees.

 

Employees may contribute from 1% to 25% of their annual compensation to the Plan, limited to a maximum amount as set by the Internal Revenue Service.  Participants who are over the age of 50 may contribute an additional amount of their salary per year, as defined annually by the Internal Revenue Service.  We match employee contributions at the rate of $0.25 per each $1.00 of contribution on the first 4% of compensation.  Matching contributions to the Plan were approximately $25,000 for the year ended December 31, 2011 and $23,000 for 2010.

------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet12.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Line of Credit
12 Months Ended
Dec. 31, 2011
Line of Credit
Line of Credit

6. 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 securing 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.

------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet13.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Borrowings from Officer
12 Months Ended
Dec. 31, 2011
Borrowings from Officer
Borrowings from Officer

7. Borrowings from Officer

 

On January 30, 2008, and extended on October 24, 2008, March 19, 2009, February 4, 2010 and February 3, 2011, the Company entered into an unsecured revolving promissory note to borrow up to $700,000 from G. Ward Paxton, the Company’s Chairman, President and Chief Executive Officer.  Under the terms of the note, the Company may borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $700,000 at any given time.

 

On March 20, 2008 and extended on November 7, 2008, February 4, 2010 and 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 identical to those described above on the $700,000 note.

 

On February 9, 2012, the Company entered into an unsecured revolving promissory note to borrow up to $2,200,000 from G. Ward Paxton, the Company’s Chief Executive Officer.  Under the terms of the note, the Company may borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $2,200,000 at any given time through March 2013.

 

Amounts borrowed from this officer accrue interest at a floating rate per annum equal to SVB’s prime rate plus 1% (5% at December 31, 2011).  All outstanding borrowings and accrued but unpaid interest is due on March 31, 2013.  As of December 31, 2011 the borrowings outstanding totaled $1,530,000 and accrued interest totaled $54,000.  The Company paid no interest during 2011 and paid $68,000 during 2010.

------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet14.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Income Taxes
12 Months Ended
Dec. 31, 2011
Income Taxes
Income Taxes

8. Income Taxes

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  Significant components of our deferred tax assets (liabilities) as of December 31, 2011 and 2010 are as follows (in thousands):

 

 

 

December 31

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Net operating loss carryforwards

 

$

30,094

 

$

29,632

 

Net operating loss carryforwards of foreign subsidiaries

 

374

 

374

 

Book over tax depreciation

 

(30

)

11

 

Intangible assets

 

40

 

220

 

Stock-based compensation expense

 

412

 

331

 

Other

 

121

 

162

 

Deferred tax assets

 

31,011

 

30,730

 

Valuation allowance for deferred tax assets

 

(31,011

)

(30,730

)

Deferred tax assets, net of allowance

 

$

 

$

 

 

Deferred tax assets are required to be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Realization of the future benefits related to the deferred tax assets is dependent on many factors, including the Company’s ability to generate taxable income within the near to medium term.  Management has considered these factors in determining the valuation allowance for 2011 and 2010.

 

The differences between the provision for income taxes and income taxes computed using the federal statutory rate for the years ended December 31, 2011 and 2010 are as follows (in thousands):

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Reconciliation of income tax benefit to statutory rate:

 

 

 

 

 

Income tax benefit at statutory rate

 

$

(317

)

$

77

 

State income taxes, net of federal income tax benefit

 

2

 

5

 

Changes in state net operating loss carryforwards

 

10

 

9

 

Permanent differences

 

5

 

3

 

Change in valuation allowance

 

277

 

(99

)

Other

 

23

 

5

 

 

 

$

 

$

 

 

At December 31, 2011, we had federal net operating loss carryforwards of approximately $87.0 million for income tax purposes that begin to expire in 2021 and are subject to the ownership change limitations under Internal Revenue Code Section 382. We also had approximately $6 million of state net operating loss carryforwards that begin to expire in 2017.

------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet15.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Stock Options
12 Months Ended
Dec. 31, 2011
Stock Options
Stock Options

9. Stock Options

 

At December 31, 2011, we had three stock-based compensation plans, which are described below. These plans were developed to retain and attract key employees and directors.

 

In 1995, we adopted our 1995 Stock Option Plan (the “1995 Plan”), which provides for the issuance of up to 400,000 shares of common stock upon exercise of options granted pursuant to the 1995 Plan. In 2000 and 2001, our stockholders approved to increase the overall number of shares available for issuance pursuant to the plan to a total of 825,000 shares of common stock. The 1995 Plan provides for the issuance of both non-qualified and incentive stock options to our employees, officers, and employee-directors. The 1995 Plan expired by its terms on March 21, 2005 and no options were available for future issuance after the expiration.  At December 31, 2011, 67,365 employee options have been exercised and employee options to purchase a total of 193,000 shares of common stock were outstanding. 

 

In 1995, we adopted the 1995 Non-Employee Director Stock Option Plan (the “1995 Non-Employee Director Plan”).  The 1995 Non-Employee Director Plan provided for the issuance of non-qualified stock options to non-employee directors. The 1995 Non-Employee Director Plan was amended in April 2002 to increase the number of shares available for issuance to 65,000 from 40,000 shares. The 1995 Non-Employee Director Plan expired by its terms on March 21, 2005 and no options were available for future issuance after the expiration.  No options have been exercised under the 1995 Non-Employee Director Plan.  Non-employee options to purchase a total of 22,500 shares of common stock were outstanding at December 31, 2011. A total of 62,500 options have been granted to directors pursuant to the 1995 Non-Employee Director Plan, of which, 40,000 have been cancelled.

 

On March 17, 2005, the Board approved the 2005 Stock Incentive Plan (the “2005 Plan”), which was approved by the stockholders on June 14, 2005.  The 2005 Plan serves as a replacement for the 1995 Non-Employee Director Plan and the 1995 Plan which expired by their terms on March 21, 2005.  The approval of the 2005 Plan had no effect on the 1995 Plans or any options granted pursuant to either plan.  All options will continue with their existing terms and will be subject to the 1995 Non-Employee Director Plan or the 1995 Plan, as applicable.  Further, the Company will not be able to re-issue any option which is cancelled or terminated under the 1995 Non-Employee Director Plan or the 1995 Plan.  The 2005 Plan provided for the issuance of up to 750,000 shares of common stock upon exercise of options granted pursuant to the 2005 Plan.  On May 30, 2007, the stockholders approved an Amendment to the 2005 Plan that increased this amount by 750,000 for a total of 1,500,000 shares of common stock that may be issued upon the exercise of options granted pursuant to the 2005 Plan. On May 29, 2008 and May 21, 2009, the stockholders approved an increase of 500,000 shares, respectively, of common stock that may be issued pursuant to the 2005 Plan for a total of 2,500,000 shares. On May 20, 2010, the stockholders approved an additional increase of 500,000 shares of common stock that may be issued pursuant to the 2005 Plan for a total of 3,000,000 shares.  On May 19, 2011, the stockholders approved an additional increase of 400,000 shares of common stock that may be issued pursuant to the 2005 Plan for a total of 3,400,000 shares.

 

The 2005 Plan consists of three separate equity incentive programs: the Discretionary Option Grant Program; the Stock Issuance Program; and the Automatic Option Grant Program for non-employee Board members.  Officers and employees, non-employee Board members and independent contractors are eligible to participate in the Discretionary Option Grant and Stock Issuance Programs.  Participation in the Automatic Option Grant Program is limited to non-employee members of the Board.  Each non-employee Board member will receive an option grant for 10,000 shares of common stock upon initial election or appointment to the Board, provided that individual has not previously been employed by the Company in the preceding six (6) months.  In addition, on the date of each annual stockholders meeting, each Board member will automatically be granted an option to purchase 5,000 shares of common stock, provided he or she has served as a non-employee Board member for at least six months.  At December 31, 2011, 67,001 options had been exercised and options to purchase a total of 2,475,500 shares of common stock were outstanding.  A total of 2,931,500 options had been granted under the 2005 Plan, of which 388,999 have been cancelled and options for 857,499 shares remained available for future grant.  No shares have been issued pursuant to the Stock Issuance Program. 

 

Common shares reserved for future issuance, including conversions of preferred stock, outstanding options and options available for future grant under all of the stock option plans totaled 4,712,427 shares at December 31, 2011 as follows, in thousands:

 

(In thousands)

 

Common Shares
Reserved for Future
Issuance

 

 

 

 

 

Preferred Stock

 

1,164

 

1995 Plan

 

193

 

1995 Non-Employee Director Plan

 

22

 

2005 Plan

 

3,333

 

Total

 

4,712

 

 

The Compensation Committee of our Board of Directors determines for all employee options, the term of each option, option exercise price within limits set forth in the plans, number of shares for which each option is granted and the rate at which each option is exercisable (generally ratably over one, three or five years from grant date). However, the exercise price of any incentive stock option may not be less than the fair market value of the shares on the date granted (or less than 110% of the fair market value in the case of optionees holding more than 10% of our voting stock of the Company), and the term cannot exceed ten years (five years for incentive stock options granted to holders of more than 10% of our voting stock).

 

Stock Incentive Plan Summary

 

A summary of our stock option activity and related information for the years ended December 31, 2011 and 2010 is as follows:

 

 

 

2011

 

2010

 

 

 

Number of
Options (in
thousands)

 

Weighted
Average
Exercise
Price

 

Number of
Options (in
thousands)

 

Weighted
Average
Exercise
Price

 

 

 

 

 

 

 

 

 

 

 

Outstanding at beginning of year

 

2,380

 

$

.82

 

1,913

 

$

1.31

 

Granted at price = market value

 

303

 

.69

 

345

 

.42

 

Granted at price > market value

 

120

 

.77

 

150

 

.44

 

Exercised

 

(60

)

.33

 

(4

)

.22

 

Forfeited

 

(16

)

.51

 

-

 

-

 

Expired

 

(36

)

3.81

 

(24

)

32.78

 

 

 

 

 

 

 

 

 

 

 

Outstanding at end of year

 

2,691

 

$

.77

 

2,380

 

$

.82

 

Options exercisable at end of year

 

1,791

 

$

.89

 

1,419

 

$

1.13

 

 

Stock Options Outstanding and Exercisable

 

Information related to stock options outstanding at December 31, 2011, is summarized below:

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise Prices

 

Outstanding at
12/31/11 (in
thousands)

 

Weighted
Average
Remaining 
Contractual Life

 

Weighted
Average
Exercise
Price

 

Exercisable at
12/31/11 (in
thousands)

 

Weighted
Average
Exercise
Price

 

 

 

 

 

 

 

 

 

 

 

 

 

$ 0.20-$0.50

 

1,856

 

5.28 years

 

$

0.33

 

1,376

 

$

0.31

 

$ 0.51-$1.00

 

445

 

7.49 years

 

$

0.72

 

25

 

$

0.69

 

$ 1.01-$3.00

 

128

 

2.69 years

 

$

2.42

 

128

 

$

2.42

 

$ 3.01-$5.44

 

262

 

3.19 years

 

$

3.20

 

262

 

$

3.20

 

 

 

2,691

 

5.32 years

 

$

0.77

 

1,791

 

$

0.89

 

 

Summarized information about outstanding stock options as of December 31, 2011, that are fully vested and those that are expected to vest in the future as well as stock options that are fully vested and currently exercisable, are as follows:

 

 

 

Outstanding Stock
Options (Fully Vested
and Expected to Vest)*

 

Options that are
Exercisable

As of December 31, 2011

 

 

 

 

Number of outstanding options

 

2,691

 

1,791

Weighted average remaining contractual life

 

5.32

 

4.53

Weighted average exercise price per share

 

$

 .77

 

$

 .89

Intrinsic value (in thousands)

 

$

 804

 

$

 606

 

 

 

 

 

*  Includes effects of expected forfeitures

 

As of December 31, 2011, the total unrecognized compensation cost related to non-vested options not yet recognized in the statement of operations totaled approximately $125 thousand (including expected forfeitures) and the weighted average period over which these awards are expected to vest was .77 years.

------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet16.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Preferred Stock
12 Months Ended
Dec. 31, 2011
Preferred Stock
Preferred Stock

10. Preferred Stock

 

5% Preferred Stock

 

On March 25, 2004, we completed a $5.0 million private placement of our 5% convertible preferred stock and warrants.  In the private placement, we sold 1,000,000 shares of our 5% preferred stock at a price of $5.00 per share for gross proceeds of $5.0 million, less $275,000 of issuance costs.  The 5% preferred shares were initially convertible into 1,590,331 shares of common stock at a conversion price of $3.144 per share.  Holders of the 5% convertible preferred stock include 140,000 shares purchased by our CEO and 60,000 shares purchased by a director of the Company.

 

The 5% dividends related to the 5% preferred stock are paid semi-annually on the last business day in March and September of each year, beginning with September 2004.  Preferred stockholders vote together with common stockholders on an as converted to common stock basis.  Based on the conversion rate of the preferred stock, holders of our 5% preferred stock will receive 1.5903 votes per share rounded to the nearest whole number.  The liquidation preference for the 5% preferred stock is an amount equal to $5.00 per share plus any accrued and unpaid dividends.  Holders of our 5% preferred stock have liquidation preference rights over common stockholders.

 

All warrants previously issued to 5% convertible preferred stock holders have expired.

 

We have the right to redeem any or all of the outstanding 5% preferred stock at a price of $5.00 per share plus accrued dividends at any time if certain conditions are met.

 

At December 31, 2011 there were 220,000 shares of our 5% preferred stock outstanding.

 

Series 2 5% Preferred Stock

 

On March 28, 2005, we completed a $2.7 million private placement of Series 2 5% convertible preferred stock and warrants.  In the private placement, we sold 1,065,200 shares of preferred stock at a price of $2.50 per share for gross proceeds of $2.7 million, less $173,000 of issuance costs.  The shares of Series 2 5% preferred stock are convertible into 1,065,200 shares of common stock at an initial conversion price of $2.50 per share.  Holders of the Series 2 5% preferred stock include 260,000 shares by our CEO,  100,000 shares by our CFO and 60,000 shares by a director of the Company.

 

The 5% dividends accruing on the Series 2 5% preferred stock are required to be paid quarterly on the first business day in March, June, September and December of each year, beginning with June 2005.  The liquidation preference for the preferred stock is an amount equal to $2.50 per share plus any accrued and unpaid dividends.  Holders of our Series 2 5% preferred stock have liquidation preference rights over our 5% preferred stock holders as well as our common stockholders.  The holders of the Series 2 5% preferred stock are not entitled to vote on any matter, except as otherwise required by law or with respect to certain limited matters specified in the certificate of designations.

 

All warrants previously issued to Series 2 5% convertible preferred stock holders have expired.

 

Holders of Series 2 5% preferred stock have the right to require us to redeem any or all of the their shares upon the occurrence of certain events within the Company’s control that are defined in Certificate of Designation at a price equal the sum of (1) the greater of $3.25 and the product of the volume weighted average price of our common stock on the trading day immediately preceding the event multiplied by $2.50 divided by the conversion price then in effect plus (2) any accrued but unpaid dividends on the Series 2 5% preferred stock plus (3) all liquidated damages or other amounts payable to the holders of Series 2 5% preferred stock.

 

At December 31, 2011 there were 460,000 shares of Series 2 5% preferred stock outstanding.

 

Series 3 5% Preferred Stock

 

On December 2, 2005, we completed a $1.2 million private placement of Series 3 5% convertible preferred stock and warrants.  In the private placement, we sold 564,607 shares of preferred stock at a price of $2.18 per share for gross proceeds of $1.2 million, less $100,000 of issuance costs.  The shares of Series 3 5% preferred stock are convertible into 564,607 shares of common stock at an initial conversion price of $2.18 per share.  Holders of the Series 3 5% preferred stock include 123,853 shares by our CEO, 68,808 shares by our CFO and 27,523 shares purchased by a director of the Company.

 

The 5% dividends accruing on the Series 3 5% preferred stock are required to be paid quarterly on the first business day in March, June, September and December of each year, beginning with March 1, 2006.  The liquidation preference for the preferred stock is an amount equal to $2.18 per share plus any accrued and unpaid dividends.  Holders of our Series 3 5% preferred stock have liquidation preference rights over holders of our 5% preferred, Series 2 5% preferred stock and common stock.  The holders of the Series 3 5% preferred stock are not entitled to vote on any matter, except as otherwise required by law or with respect to certain limited matters specified in the certificate of designations.

 

All warrants previously issued to Series 3 5% convertible preferred stock holders have expired.

 

Holders of Series 3 5% preferred stock have the right to require us to redeem any or all of their shares upon the occurrence of certain events within the Company’s control that are defined in the certificate of designation at a price equal the sum of (1) the greater of $2.834 and the product of the volume weighted average price of our common stock on the trading day immediately preceding the event multiplied by $2.18 divided by the conversion price then in effect plus (2) any accrued but unpaid dividends on the Series 3 5% preferred stock plus (3) all liquidated damages or other amounts payable to the holders of Series 3 5% preferred stock.

 

At December 31, 2011 there are 354,056 shares of Series 3 5% preferred stock outstanding.

 

Dividends Payable

 

During the fiscal year ended December 31, 2011, we accrued $55,000 in dividends to the holders of our 5% Preferred Stock, $58,000 in dividends to the holders of our Series 2 5% Preferred Stock and $39,000 in dividends to the holders of our Series 3 5% Preferred Stock.  As of December 31, 2011, we have $123,000 in accrued and unpaid dividends included in other 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.

------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet17.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Concentrations
12 Months Ended
Dec. 31, 2011
Concentrations
Concentrations

11. Concentrations

 

Our operations are concentrated in one area—security software/entity identification.  Sales to the U.S. Government through direct and indirect channels totaled 38.4% of total revenues for 2011 and 60.3% of total revenues for 2010.  During 2011 approximately 34.2% of total revenues are attributable to three government customers.  During 2010 approximately 59.7% of total revenues are attributable to two government customers.  One individual commercial customer in 2011 exceeded 58% of total revenues for the year; while 2010 had one individual commercial customer that exceeded 35% of total revenues for the year.  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.

------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/Sheet18.html Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii"
Subsequent Events
12 Months Ended
Dec. 31, 2011
Subsequent Events
Subsequent Events

12.  Subsequent Events

 

On February 9, 2012, the Company entered into an unsecured revolving promissory note to borrow up to $2,200,000 from G. Ward Paxton, the Company’s Chief Executive Officer.  Under the terms of the note, the Company may borrow, repay and reborrow on the loan as needed up to an outstanding principal balance due of $2,200,000 at any given time through March 2013.

------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa Content-Location: file:///C:/e0907fae_7220_4810_af59_d79001ae21fa/Worksheets/filelist.xml Content-Transfer-Encoding: quoted-printable Content-Type: text/html; charset="us-ascii" ------=_NextPart_e0907fae_7220_4810_af59_d79001ae21fa--