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Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2012
Mar. 28, 2013
Jun. 30, 2012
Document and Entity Information
Entity Registrant Name INTRUSION INC
Entity Central Index Key 0000736012
Document Type 10-K
Document Period End Date Dec 31, 2012
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 $ 5,401,000
Entity Common Stock, Shares Outstanding 12,172,017
Document Fiscal Year Focus 2012
Document Fiscal Period Focus FY
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CONSOLIDATED BALANCE SHEETS (USD $)
Dec. 31, 2012
Dec. 31, 2011
Current Assets:
Cash and cash equivalents $ 52,000 $ 308,000
Accounts receivable 946,000 480,000
Inventories, net 5,000 5,000
Prepaid expenses 48,000 90,000
Total current assets 1,051,000 883,000
Property and Equipment:
Equipment 719,000 813,000
Furniture and fixtures 24,000 34,000
Leasehold improvements 42,000 101,000
Total property and equipment, gross 785,000 948,000
Accumulated depreciation and amortization (525,000) (741,000)
Property and equipment, net 260,000 207,000
Other assets 48,000 40,000
TOTAL ASSETS 1,359,000 1,130,000
Current Liabilities:
Accounts payable, trade 159,000 171,000
Accrued expenses 548,000 461,000
Dividends payable 279,000 123,000
Line of credit payable 130,000 80,000
Obligations under capital lease, current portion 96,000 74,000
Deferred revenue 52,000 97,000
Total current liabilities 1,264,000 1,006,000
Loan payable to officer 1,530,000 1,530,000
Obligations under capital lease, noncurrent portion 116,000 53,000
Commitments and Contingencies      
Stockholders' Deficit:
Common stock, $0.01 par value: Authorized shares - 80,000 Issued shares - 12,182 in 2012 and 11,952 in 2011 Outstanding shares - 12,172 in 2012 and 11,942 in 2011 122,000 119,000
Common stock held in treasury, at cost-10 shares (362,000) (362,000)
Additional paid-in-capital 55,837,000 55,686,000
Accumulated deficit (59,047,000) (58,801,000)
Accumulated other comprehensive loss (107,000) (107,000)
Total stockholders' deficit (1,551,000) (1,459,000)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT 1,359,000 1,130,000
Series 1
Stockholders' Deficit:
Preferred stock 778,000 778,000
Series 2
Stockholders' Deficit:
Preferred stock 724,000 724,000
Series 3
Stockholders' Deficit:
Preferred stock $ 504,000 $ 504,000
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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Dec. 31, 2012
Dec. 31, 2011
Preferred stock, par value (in dollars per share) $ 0.01 $ 0.01
Preferred stock, Authorized shares 5,000,000 5,000,000
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, Authorized shares 80,000,000 80,000,000
Common stock, Issued shares 12,182,000 11,952,000
Common stock, Outstanding shares 12,172,000 11,942,000
Common stock held in treasury, shares 10,000 10,000
Series 1
Preferred stock, shares issued 220,000
Preferred stock, shares outstanding 220,000
Preferred stock, Liquidation preference (in dollars per share) $ 1,197
Series 2
Preferred stock, shares issued 460,000
Preferred stock, shares outstanding 460,000
Preferred stock, Liquidation preference (in dollars per share) $ 1,256
Series 3
Preferred stock, shares issued 354,000
Preferred stock, shares outstanding 354,056
Preferred stock, Liquidation preference (in dollars per share) $ 843
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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
CONSOLIDATED STATEMENTS OF OPERATIONS
Net product revenue $ 6,569 $ 5,192
Net customer support and maintenance revenue 128 156
Total revenue 6,697 5,348
Cost of product revenue 2,685 2,036
Cost of customer support and maintenance revenue 22 21
Total cost of revenue 2,707 2,057
Gross profit 3,990 3,291
Operating expenses:
Sales and marketing 1,317 1,383
Research and development 1,660 1,555
General and administrative 1,143 1,102
Operating loss (130) (749)
Other expense (118)
Interest expense, net (116) (66)
Loss from operations before income taxes (246) (933)
Income tax provision 0
Net loss (246) (933)
Preferred stock dividends accrued (152) (151)
Net loss attributable to common stockholders (398) (1,084)
Net loss per share attributable to common stockholders, basic and diluted (in dollars per share) $ (0.03) $ (0.09)
Weighted average common shares outstanding:
Basic (in shares) 12,035 11,877
Diluted (in shares) 12,035 11,877
Other comprehensive income (loss):
Foreign currency translation adjustment 119
Comprehensive loss $ (398) $ (965)
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (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, 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
Exercise of warrants 25
Exercise of warrants (in shares) 64
Exercise of stock options 19
Exercise of stock options (in shares) 60 60
Preferred stock dividends declared, net of waived penalties by shareholders (151) (148)
Exercise of stock options and warrants 1
Net loss (933) (933)
Extinguishment of Malaysia 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
Increase (decrease) in stockholders' equity
Stock-based compensation 213
Exercise of warrants (in shares) 100
Exercise of stock options 73
Exercise of stock options (in shares) 230 130
Preferred stock dividends declared, net of waived penalties by shareholders (152) (135)
Exercise of stock options and warrants 3
Net loss (246) (246)
Balance at Dec. 31, 2012 $ (1,551) $ 2,006 $ 122 $ (362) $ 55,837 $ (59,047) $ (107)
Balance (in shares) at Dec. 31, 2012 1,034 12,182
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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Operating Activities:
Net loss $ (246) $ (933)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 155 109
Stock-based compensation 213 220
Extinguishment of Malaysia subsidiary cumulative translation adjustment 119
Changes in operating assets and liabilities:
Accounts receivable (466) (258)
Inventories 56
Prepaid expenses and other assets 34 (68)
Accounts payable, accrued expenses and other current liabilities 78 102
Deferred revenue (44) (886)
Net cash used in operating activities (276) (1,539)
Investing Activities:
Purchases of property and equipment (21) (29)
Financing Activities:
Borrowings from officer 1,300
Proceeds from line of credit 994 80
Payments on line of credit (944)
Dividends paid on preferred stock (51)
Penalties and waived penalties on dividends 16 4
Principal payments on capital lease equipment (101) (42)
Proceeds from stock options exercised 76 20
Proceeds from warrants exercised 25
Net cash provided by financing activities 41 1,336
Net decrease in cash and cash equivalents (256) (232)
Cash and cash equivalents at beginning of year 308 540
Cash and cash equivalents at end of year 52 308
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on leased assets 19 8
Income taxes paid 0
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES:
Preferred stock dividends accrued 152 151
Purchase of equipment through capital lease $ 187 $ 170
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Description of Business
12 Months Ended
Dec. 31, 2012
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, 2012, we had cash and cash equivalents of approximately $52,000, down from approximately $308,000 as of December 31, 2011.  We generated net loss of $246,000 for the year ended December 31, 2012 compared to a net loss of $933,000 for the year ended December 31, 2011.  As of December 31, 2012, in addition to cash and cash equivalents of $52,000, we had $456,000 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.

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Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2012
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 $155,000 and $109,000 for the years ended December 31, 2012 and 2011, 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, 2012 and 2011, 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 2012 and 2011 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, 2012 and 2011, respectively:

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Weighted average grant date fair value

 

$0.63

 

$0.67

 

Weighted average assumptions used:

 

 

 

 

 

Expected dividend yield

 

0.00

%

0.00

%

Risk-free interest rate

 

0.84

%

2.07

%

Expected volatility

 

213.17

%

202.07

%

Expected life (in years)

 

4.89

 

4.90

 

 

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 (Loss) Per Share

 

We report two separate net income (loss) per share numbers, basic and diluted.  Basic net income (loss) attributable to common stockholders per share is computed by dividing net income (loss) attributable to common stockholders for the year by the weighted average number of common shares outstanding for the year.  Diluted net income (loss) attributable to common stockholders per share is computed by dividing the net income (loss) 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 (loss) per share for the years ended December 31, 2012 and 2011 except in cases where the issuance would be anti-dilutive.  The aggregate number of common stock equivalents excluded from the diluted income (loss) per share calculation at December 31, 2012 and 2011 totaled 4,008,364 and 3,872,944, 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.  The carrying value of the line of credit payable approximates fair value since this instrument bears market interest rates.  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.

 

We file income tax returns in the United States federal jurisdiction.  At December 31, 2012, tax returns related to fiscal years ended December 31, 2009 through December 31, 2012 remain open to possible examination by the tax authorities.  No tax returns are currently under examination by any tax authorities.  We did not incur any penalties or interest during the years ended December 31, 2012 and 2011.

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Balance Sheet Detail (in thousands)
12 Months Ended
Dec. 31, 2012
Balance Sheet Detail (in thousands)
Balance Sheet Detail (in thousands)

3. Balance Sheet Detail (in thousands)

 

Inventories

 

 

 

December 31,

 

 

 

2012

 

2011

 

Finished products

 

$

5

 

$

5

 

 

Accrued Expenses

 

 

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Accrued payroll

 

$

76

 

$

59

 

Accrued vacation

 

271

 

222

 

Accrued warranty expense

 

3

 

3

 

Accrued interest

 

130

 

54

 

Deferred rent

 

 

43

 

Other

 

68

 

80

 

 

 

$

548

 

$

461

 

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Commitments and Contingencies
12 Months Ended
Dec. 31, 2012
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 2017.  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 2014.

 

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 $339,000 and $341,000 for the years ended December 31, 2012 and 2011, 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, 2012 (in thousands):

 

 

 

Operating

 

Capital Lease

 

 

 

Year ending December 31,

 

Leases

 

Obligations

 

Total

 

2013

 

$

403

 

$

112

 

$

515

 

2014

 

398

 

89

 

487

 

2015

 

389

 

28

 

417

 

2016

 

389

 

 

389

 

2017 and thereafter

 

130

 

 

130

 

 

 

$

1,709

 

$

229

 

$

1,938

 

 

 

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, 2012.

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Employee Benefit Plan
12 Months Ended
Dec. 31, 2012
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 $27,000 for the year ended December 31, 2012 and $25,000 for 2011.

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Line of Credit
12 Months Ended
Dec. 31, 2012
Line of Credit
Line of Credit

6. Line of Credit

 

On March 29, 2006, we entered into a Loan and Security Agreement with Silicon Valley Bank (“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 25, 2012, we entered into the Fourth 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 Chairman, President and Chief Executive Officer, has established a Guaranty Agreement with SVB securing 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 24, 2013, 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.

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Borrowings from Officer
12 Months Ended
Dec. 31, 2012
Borrowings from Officer
Borrowings from Officer

7. Borrowings from Officer

 

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.

 

On February 7, 2013, 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 2014.

 

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, 2012).  All outstanding borrowings and accrued but unpaid interest is due on March 31, 2014.  As of December 31, 2012, the borrowings outstanding totaled $1,530,000 and accrued interest totaled $130,000.

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Income Taxes
12 Months Ended
Dec. 31, 2012
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, 2012 and 2011 are as follows (in thousands):

 

 

 

December 31

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net operating loss carryforwards

 

$

29,919

 

30,094

 

Net operating loss carryforwards of foreign subsidiaries

 

374

 

374

 

Book over tax depreciation

 

(41

)

(30

)

Intangible assets

 

 

40

 

Stock-based compensation expense

 

490

 

412

 

Other

 

130

 

121

 

Deferred tax assets

 

30,872

 

31,011

 

Valuation allowance for deferred tax assets

 

(30,872

)

(31,011

)

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 2012 and 2011.

 

The differences between the provision for income taxes and income taxes computed using the federal statutory rate for the years ended December 31, 2012 and 2011 are as follows (in thousands):

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Reconciliation of income tax benefit to statutory rate:

 

 

 

 

 

Income tax benefit at statutory rate

 

$

(84

)

(317

)

State income taxes, net of federal income tax benefit

 

 

2

 

Changes in state net operating loss carryforwards

 

(2

)

10

 

Permanent differences

 

9

 

5

 

True-up prior year NOL

 

213

 

 

Change in valuation allowance

 

(138

)

277

 

Other

 

2

 

23

 

 

 

$

 

$

 

 

At December 31, 2012, we had federal net operating loss carryforwards of approximately $86.0 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.

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Stock Options
12 Months Ended
Dec. 31, 2012
Stock Options
Stock Options

9. Stock Options

At December 31, 2012, 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, 2012, 67,365 employee options have been exercised and employee options to purchase a total of 188,175 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 17,500 shares of common stock were outstanding at December 31, 2012. A total of 62,500 options have been granted to directors pursuant to the 1995 Non-Employee Director Plan, of which, 45,000 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. Finally, on May 17, 2012, the stockholders approved an additional increase of 300,000 shares of common stock that may be issued pursuant to the 2005 Plan for a total of 3,700,000 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 such 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, 2012, 297,001 options had been exercised and options to purchase a total of 2,573,500 shares of common stock were outstanding.  A total of 3,259,500 options had been granted under the 2005 Plan, of which 388,999 have been cancelled and options for 829,499 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 4,772,602 shares at December 31, 2012 as follows, in thousands:

 

(In thousands)

 

Common Shares
Reserved for Future
Issuance

 

 

 

 

 

Preferred Stock

 

1,164

 

1995 Plan

 

188

 

1995 Non-Employee Director Plan

 

18

 

2005 Plan

 

3,403

 

Total

 

4,773

 

 

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, 2012 and 2011 is as follows:

 

 

 

2012

 

2011

 

 

 

Number of
Options (in
thousands)

 

Weighted
Average
Exercise
Price

 

Number of
Options (in
thousands)

 

Weighted
Average
Exercise
Price

 

 

 

 

 

 

 

 

 

 

 

Outstanding at beginning of year

 

2,691

 

$

.77

 

2,380

 

$

.82

 

Granted at price = market value

 

223

 

.65

 

303

 

.69

 

Granted at price > market value

 

105

 

.72

 

120

 

.77

 

Exercised

 

(230

)

.33

 

(60

)

.33

 

Forfeited

 

-

 

-

 

(16

)

.51

 

Expired

 

(10

)

5.21

 

(36

)

3.81

 

 

 

 

 

 

 

 

 

 

 

Outstanding at end of year

 

2,779

 

$

.78

 

2,691

 

$

.77

 

Options exercisable at end of year

 

2,012

 

$

.84

 

1,791

 

$

.89

 

 

Stock Options Outstanding and Exercisable

 

Information related to stock options outstanding at December 31, 2012, is summarized below:

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise Prices

 

Outstanding at
12/31/12 (in
thousands)

 

Weighted
Average
Remaining
Contractual Life

 

Weighted
Average
Exercise
Price

 

Exercisable at
12/31/12 (in
thousands)

 

Weighted
Average
Exercise
Price

 

 

 

 

 

 

 

 

 

 

 

 

 

$ 0.20-$0.50

 

1,625

 

4.82 years

 

$

0.33

 

1,465

 

$

0.32

 

$ 0.51-$1.00

 

773

 

6.93 years

 

$

0.70

 

167

 

$

0.71

 

$ 1.01-$3.00

 

128

 

1.69 years

 

$

2.42

 

128

 

$

2.42

 

$ 3.01-$5.44

 

253

 

2.30 years

 

$

3.12

 

252

 

$

3.12

 

 

 

2,779

 

5.03 years

 

$

0.78

 

2,012

 

$

0.84

 

 

Summarized information about outstanding stock options as of December 31, 2012, 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, 2012

 

 

 

 

Number of outstanding options

 

2,779

 

2,012

Weighted average remaining contractual life

 

5.03

 

4.36

Weighted average exercise price per share

 

$

0.78

 

$

.84

Intrinsic value (in thousands)

 

$

263

 

$

253

 

 

 

 

 

*  Includes effects of expected forfeitures 

 

 

 

 

 

As of December 31, 2012, the total unrecognized compensation cost related to non-vested options not yet recognized in the statement of operations totaled approximately $111 thousand (including expected forfeitures) and the weighted average period over which these awards are expected to vest was .73 years.

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Preferred Stock
12 Months Ended
Dec. 31, 2012
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, 2012 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, 2012 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, 2012 there are 354,056 shares of Series 3 5% preferred stock outstanding.

 

Dividends Payable

 

During the fiscal year ended December 31, 2012, we accrued $55,000 in dividends to the holders of our 5% Preferred Stock, $57,000 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, 2012, we have $279,000 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.

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Concentrations
12 Months Ended
Dec. 31, 2012
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 40.5% of total revenues for 2012 and 38.4% of total revenues for 2011.  During 2012 approximately 38.2% of total revenues are attributable to four government customers.  During 2011 approximately 34.2% of total revenues are attributable to three government customers.  One individual commercial customer in 2012 exceeded 57% of total revenues for the year; while 2011 had one individual commercial customer that exceeded 58% 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.

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Subsequent Events
12 Months Ended
Dec. 31, 2012
Subsequent Events
Subsequent Events

12.  Subsequent Events

 

On February 7, 2013, 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 2014.

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Summary of Significant Accounting Policies (Policies)
12 Months Ended
Dec. 31, 2012
Summary of Significant Accounting Policies
Principles of Consolidation

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 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

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

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

 

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

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 $155,000 and $109,000 for the years ended December 31, 2012 and 2011, respectively.

Long-Lived Assets

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, 2012 and 2011, there was no impairment of long-lived assets.

Foreign Currency

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

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 2012 and 2011 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, 2012 and 2011, respectively:

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Weighted average grant date fair value

 

$0.63

 

$0.67

 

Weighted average assumptions used:

 

 

 

 

 

Expected dividend yield

 

0.00

%

0.00

%

Risk-free interest rate

 

0.84

%

2.07

%

Expected volatility

 

213.17

%

202.07

%

Expected life (in years)

 

4.89

 

4.90

 

 

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

Net Income (Loss) Per Share

 

We report two separate net income (loss) per share numbers, basic and diluted.  Basic net income (loss) attributable to common stockholders per share is computed by dividing net income (loss) attributable to common stockholders for the year by the weighted average number of common shares outstanding for the year.  Diluted net income (loss) attributable to common stockholders per share is computed by dividing the net income (loss) 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 (loss) per share for the years ended December 31, 2012 and 2011 except in cases where the issuance would be anti-dilutive.  The aggregate number of common stock equivalents excluded from the diluted income (loss) per share calculation at December 31, 2012 and 2011 totaled 4,008,364 and 3,872,944, respectively.

Revenue Recognition

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

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

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

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.  The carrying value of the line of credit payable approximates fair value since this instrument bears market interest rates.  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

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.

 

We file income tax returns in the United States federal jurisdiction.  At December 31, 2012, tax returns related to fiscal years ended December 31, 2009 through December 31, 2012 remain open to possible examination by the tax authorities.  No tax returns are currently under examination by any tax authorities.  We did not incur any penalties or interest during the years ended December 31, 2012 and 2011.

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Summary of Significant Accounting Policies (Tables)
12 Months Ended
Dec. 31, 2012
Summary of Significant Accounting Policies
Schedule of assumptions used to estimate the fair values of options awards at the date of grant using a Black-Scholes option-pricing model

 

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Weighted average grant date fair value

 

$0.63

 

$0.67

 

Weighted average assumptions used:

 

 

 

 

 

Expected dividend yield

 

0.00

%

0.00

%

Risk-free interest rate

 

0.84

%

2.07

%

Expected volatility

 

213.17

%

202.07

%

Expected life (in years)

 

4.89

 

4.90

 

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Balance Sheet Detail (in thousands) (Tables)
12 Months Ended
Dec. 31, 2012
Balance Sheet Detail (in thousands)
Schedule of inventories

 

 

 

 

December 31,

 

 

 

2012

 

2011

 

Finished products

 

$

5

 

$

5

 

Schedule of accrued expenses

 

 

 

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Accrued payroll

 

$

76

 

$

59

 

Accrued vacation

 

271

 

222

 

Accrued warranty expense

 

3

 

3

 

Accrued interest

 

130

 

54

 

Deferred rent

 

 

43

 

Other

 

68

 

80

 

 

 

$

548

 

$

461

 

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Commitments and Contingencies (Tables)
12 Months Ended
Dec. 31, 2012
Commitments and Contingencies
Schedule of future minimum lease obligations

 

 

Future minimum lease obligations consisted of the following at December 31, 2012 (in thousands):

 

 

 

Operating

 

Capital Lease

 

 

 

Year ending December 31,

 

Leases

 

Obligations

 

Total

 

2013

 

$

403

 

$

112

 

$

515

 

2014

 

398

 

89

 

487

 

2015

 

389

 

28

 

417

 

2016

 

389

 

 

389

 

2017 and thereafter

 

130

 

 

130

 

 

 

$

1,709

 

$

229

 

$

1,938

 

 

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Income Taxes (Tables)
12 Months Ended
Dec. 31, 2012
Income Taxes
Schedule of significant components of deferred tax assets (liabilities)

Significant components of our deferred tax assets (liabilities) as of December 31, 2012 and 2011 are as follows (in thousands):

 

 

 

December 31

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net operating loss carryforwards

 

$

29,919

 

30,094

 

Net operating loss carryforwards of foreign subsidiaries

 

374

 

374

 

Book over tax depreciation

 

(41

)

(30

)

Intangible assets

 

 

40

 

Stock-based compensation expense

 

490

 

412

 

Other

 

130

 

121

 

Deferred tax assets

 

30,872

 

31,011

 

Valuation allowance for deferred tax assets

 

(30,872

)

(31,011

)

Deferred tax assets, net of allowance

 

$

 

 

Schedule of differences between the provision for income taxes and income taxes computed using the federal statutory rate

The differences between the provision for income taxes and income taxes computed using the federal statutory rate for the years ended December 31, 2012 and 2011 are as follows (in thousands):

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Reconciliation of income tax benefit to statutory rate:

 

 

 

 

 

Income tax benefit at statutory rate

 

$

(84

)

(317

)

State income taxes, net of federal income tax benefit

 

 

2

 

Changes in state net operating loss carryforwards

 

(2

)

10

 

Permanent differences

 

9

 

5

 

True-up prior year NOL

 

213

 

 

Change in valuation allowance

 

(138

)

277

 

Other

 

2

 

23

 

 

 

$

 

$

 

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Stock Options (Tables)
12 Months Ended
Dec. 31, 2012
Stock Options
Schedule of 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

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 4,772,602 shares at December 31, 2012 as follows, in thousands:

 

(In thousands)

 

Common Shares
Reserved for Future
Issuance

 

 

 

 

 

Preferred Stock

 

1,164

 

1995 Plan

 

188

 

1995 Non-Employee Director Plan

 

18

 

2005 Plan

 

3,403

 

Total

 

4,773

 

Summary of stock option activity

 

 

 

 

2012

 

2011

 

 

 

Number of
Options (in
thousands)

 

Weighted
Average
Exercise
Price

 

Number of
Options (in
thousands)

 

Weighted
Average
Exercise
Price

 

 

 

 

 

 

 

 

 

 

 

Outstanding at beginning of year

 

2,691

 

$

.77

 

2,380

 

$

.82

 

Granted at price = market value

 

223

 

.65

 

303

 

.69

 

Granted at price > market value

 

105

 

.72

 

120

 

.77

 

Exercised

 

(230

)

.33

 

(60

)

.33

 

Forfeited

 

-

 

-

 

(16

)

.51

 

Expired

 

(10

)

5.21

 

(36

)

3.81

 

 

 

 

 

 

 

 

 

 

 

Outstanding at end of year

 

2,779

 

$

.78

 

2,691

 

$

.77

 

Options exercisable at end of year

 

2,012

 

$

.84

 

1,791

 

$

.89

 

Schedule of information related to stock options outstanding and exercisable, by exercise price range

 

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise Prices

 

Outstanding at
12/31/12 (in
thousands)

 

Weighted
Average
Remaining
Contractual Life

 

Weighted
Average
Exercise
Price

 

Exercisable at
12/31/12 (in
thousands)

 

Weighted
Average
Exercise
Price

 

 

 

 

 

 

 

 

 

 

 

 

 

$ 0.20-$0.50

 

1,625

 

4.82 years

 

$

0.33

 

1,465

 

$

0.32

 

$ 0.51-$1.00

 

773

 

6.93 years

 

$

0.70

 

167

 

$

0.71

 

$ 1.01-$3.00

 

128

 

1.69 years

 

$

2.42

 

128

 

$

2.42

 

$ 3.01-$5.44

 

253

 

2.30 years

 

$

3.12

 

252

 

$

3.12

 

 

 

2,779

 

5.03 years

 

$

0.78

 

2,012

 

$

0.84

 

Summary of information about outstanding stock options fully vested and expected to vest in the future as well as stock options fully vested and currently exercisable

 

 

 

 

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

 

Options that are
Exercisable

As of December 31, 2012

 

 

 

 

Number of outstanding options

 

2,779

 

2,012

Weighted average remaining contractual life

 

5.03

 

4.36

Weighted average exercise price per share

 

$

0.78

 

$

.84

Intrinsic value (in thousands)

 

$

263

 

$

253

 

 

 

 

 

*  Includes effects of expected forfeitures 

 

 

 

 

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Description of Business (Details) (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2012
Current Line of Credit
Jun. 25, 2012
Current Line of Credit
Dec. 31, 2012
Promissory note
G. Ward Paxton, chief executive officer
Feb. 09, 2012
Promissory note
G. Ward Paxton, chief executive officer
Description of Business
Minimum number of years for which local area networking equipment was provided 15 years
Cash and cash equivalents $ 52,000 $ 308,000 $ 540,000
Net loss (246,000) (933,000)
Period during which the entity expects to have sufficient cash resources to finance its operations and capital expenditures 12 months
Description of Business
Funding available 456,000 670,000
Maximum borrowing capacity $ 625,000 $ 625,000 $ 2,200,000 $ 2,200,000
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Summary of Significant Accounting Policies (Details) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
item
Dec. 31, 2011
Risk Concentration
Number of major U.S. financial institutions with whom cash, cash equivalents and investments are maintained 2
Number of suppliers from whom certain components may be available 1
Property and equipment
Depreciation and amortization $ 155 $ 109
Equipment and furniture and fixtures | Minimum
Property and equipment
Estimated useful lives 1 year
Equipment and furniture and fixtures | Maximum
Property and equipment
Estimated useful lives 5 years
Leasehold improvements | Minimum
Property and equipment
Estimated useful lives 2 years
Leasehold improvements | Maximum
Property and equipment
Estimated useful lives 5 years
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Summary of Significant Accounting Policies (Details 2) (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Valuation Assumptions
Weighted average grant date fair value (in dollars per share) $ 0.63 $ 0.67
Weighted average assumptions used:
Expected dividend yield (as a percent) 0.00% 0.00%
Risk-free interest rate (as a percent) 0.84% 2.07%
Expected volatility (as a percent) 213.17% 202.07%
Expected life 4 years 10 months 20 days 4 years 10 months 24 days
Net Income Per Share
Number of common stock equivalents excluded from the diluted income per share calculation (in shares) 4,008,364 3,872,944
Revenue Recognition
Number of days available to the customer to return the product from the date of delivery 30 days
Term of the contract period over which maintenance and support revenue is deferred and recognized 1 year
Period of payment terms offered to customers, distributors and resellers domestically 30 days
Period of payment terms offered to customers, distributors and resellers internationally 45 days
Maximum period for which payment terms can be offered 1 year
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Balance Sheet Detail (in thousands) (Details) (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Inventories
Finished products $ 5 $ 5
Accrued Expenses
Accrued payroll 76 59
Accrued vacation 271 222
Accrued warranty expense 3 3
Accrued interest 130 54
Deferred rent 43
Other 68 80
Total Accrued expenses $ 548 $ 461
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Commitments and Contingencies (Details) (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Leases
Rent expense $ 339,000 $ 341,000
Operating Leases
2013 403,000
2014 398,000
2015 389,000
2016 389,000
2017 and thereafter 130,000
Future minimum lease obligations 1,709,000
Capital Lease Obligations
2013 112,000
2014 89,000
2015 28,000
Future minimum lease obligations 229,000
Total
2013 515,000
2014 487,000
2015 417,000
2016 389,000
2017 and thereafter 130,000
Future minimum lease obligations $ 1,938,000
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Employee Benefit Plan (Details) (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Employee 401(k) Plan
Matching contribution by employer per dollar of contribution by participant 25.00%
Maximum contribution by employer (as a percent) 4.00%
Contribution by employer $ 27,000 $ 25,000
Minimum
Employee 401(k) Plan
Contribution by participating employee (as a percent) 1.00%
Maximum
Employee 401(k) Plan
Contribution by participating employee (as a percent) 25.00%
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Line of Credit (Details) (USD $)
Mar. 29, 2006
2006 Credit Line
Jun. 30, 2008
2008 Credit Line
Dec. 31, 2012
Current Line of Credit
Jun. 25, 2012
Current Line of Credit
Dec. 31, 2012
Current Line of Credit
Maximum
Line of Credit
Maximum borrowing capacity $ 1,000,000 $ 2,500,000 $ 625,000 $ 625,000
Contingent advances as a percentage of each Eligible Account 80.00%
Period of annual rate for calculating daily rate of finance charge on each advance 360 days
Finance charge basis prime rate
Percentage points added in daily rate of finance charge 2.00%
Minimum interest rate 7.00%
Monthly collateral handling fee (as a percent) 0.50%
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Borrowings from Officer (Details) (USD $)
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2012
G. Ward Paxton, chief executive officer
Revolving promissory note
Feb. 09, 2012
G. Ward Paxton, chief executive officer
Revolving promissory note
Feb. 07, 2013
G. Ward Paxton, chief executive officer
Revolving promissory note
Subsequent event
Borrowing from Officer
Maximum borrowing capacity $ 2,200,000 $ 2,200,000 $ 2,200,000
Floating rate base prime rate
Percentage points added in interest rate 1.00%
Interest rate (as a percent) 5.00%
Loan payable to officer 1,530,000 1,530,000 1,530,000
Accrued interest $ 130,000 $ 54,000 $ 130,000
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Income Taxes (Details) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Deferred tax assets, net
Net operating loss carryforwards $ 29,919 $ 30,094
Net operating loss carryforwards of foreign subsidiaries 374 374
Book over tax depreciation (41) (30)
Intangible assets 40
Stock-based compensation expense 490 412
Other 130 121
Deferred tax assets 30,872 31,011
Valuation allowance for deferred tax assets (30,872) (31,011)
Deferred tax assets, net of allowance 0
Reconciliation of income tax benefit to statutory rate:
Income tax benefit at statutory rate (84) (317)
State income taxes, net of federal income tax benefit 2
Changes in state net operating loss carryforwards (2) 10
Permanent differences 9 5
True-up prior year NOL 213
Change in valuation allowance (138) 277
Other 2 23
Income tax benefit $ 0
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Income Taxes (Details2) (USD $)
In Millions, unless otherwise specified
Dec. 31, 2012
Federal
Operating loss carryforwards
Net operating loss carryforwards $ 86
State
Operating loss carryforwards
Net operating loss carryforwards $ 6
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Stock Options (Details)
12 Months Ended 12 Months Ended 0 Months Ended 12 Months Ended 12 Months Ended
Dec. 31, 2012
item
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2012
Maximum
Dec. 31, 2012
Minimum
Dec. 31, 2012
Preferred stock
Dec. 31, 2012
1995 Plan
Dec. 31, 2001
1995 Plan
Dec. 31, 1995
1995 Plan
Dec. 31, 2012
1995 Non-Employee Director Plan
Apr. 30, 2002
1995 Non-Employee Director Plan
Dec. 31, 1995
1995 Non-Employee Director Plan
May 17, 2012
2005 Plan
May 19, 2011
2005 Plan
May 20, 2010
2005 Plan
May 21, 2009
2005 Plan
May 29, 2008
2005 Plan
May 30, 2007
2005 Plan
Dec. 31, 2012
2005 Plan
item
Mar. 17, 2005
2005 Plan
Dec. 31, 2012
2005 Plan
Non-employee Board member
Stock Options
Number of stock-based compensation plans 3
Shares available for issuance 825,000 400,000 65,000 40,000 3,700,000 3,400,000 3,000,000 2,500,000 1,500,000 750,000
Options exercised (in shares) 67,365 297,001
Options outstanding (in shares) 2,779,000 2,691,000 2,380,000 188,175 17,500 2,573,500
Options granted (in shares) 62,500 3,259,500
Options cancelled (in shares) 45,000 388,999
Additional increase in number of shares available for issuance 300,000 400,000 500,000 500,000 500,000 750,000
Number of separate equity incentive programs 3
Options that will be granted upon initial election or appointment to the Board (in shares) 10,000
Preceding period within which individual has not previously been employed by the company 6 months
Options that will be granted to purchase shares of common stock on the date of each annual stockholders meeting 5,000
Period for which individual should serve as a non-employee Board member 6 months
Shares available for future grant 829,499
Common Shares Reserved for Future Issuance 4,773,000 1,164,000 188,000 18,000 3,403,000
Option exercisable period one 1 year
Option exercisable period two 3 years
Option exercisable period three 5 years
Exercise price as a percentage of the fair market value of common stock in case of optionees holding more than 10% of voting stock 110.00%
Voting stock percentage to be held by optionees 10.00%
Expiration term 10 years
Expiration term for incentive stock options granted to holders of more than 10% of the entity's voting stock 5 years
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Stock Options (Details 2) (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Number of Options
Outstanding at beginning of year (in shares) 2,691 2,380
Granted at price = market value (in shares) 223 303
Granted at price > market value (in shares) 105 120
Exercised (in shares) (230) (60)
Forfeited (in shares) (16)
Expired (in shares) (10) (36)
Outstanding at end of year (in shares) 2,779 2,691
Options exercisable at end of year (in shares) 2,012 1,791
Weighted Average Exercise Price
Outstanding at beginning of year (in dollars per share) $ 0.77 $ 0.82
Granted at price = market value (in dollars per share) $ 0.65 $ 0.69
Granted at price > market value (in dollars per share) $ 0.72 $ 0.77
Exercised (in dollars per share) $ 0.33 $ 0.33
Forfeited (in dollars per share) $ 0.51
Expired (in dollars per share) $ 5.21 $ 3.81
Outstanding at end of year (in dollars per share) $ 0.78 $ 0.77
Options exercisable at end of year (in dollars per share) $ 0.84 $ 0.89
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Stock Options (Details 3) (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Options Outstanding
Outstanding at the end of the period (in shares) 2,779
Weighted Average Remaining Contractual Life 5 years 11 days
Weighted Average Exercise Price (in dollars per share) $ 0.78
Options Exercisable
Exercisable at the end of the period (in shares) 2,012
Weighted Average Exercise Price (in dollars per share) $ 0.84
$0.20-$0.50
Stock Options Outstanding and Exercisable
Exercise price, low end of range (in dollars per share) $ 0.2
Exercise price, high end of range (in dollars per share) $ 0.5
Options Outstanding
Outstanding at the end of the period (in shares) 1,625
Weighted Average Remaining Contractual Life 4 years 9 months 25 days
Weighted Average Exercise Price (in dollars per share) $ 0.33
Options Exercisable
Exercisable at the end of the period (in shares) 1,465
Weighted Average Exercise Price (in dollars per share) $ 0.32
$0.51-$1.00
Stock Options Outstanding and Exercisable
Exercise price, low end of range (in dollars per share) $ 0.51
Exercise price, high end of range (in dollars per share) $ 1
Options Outstanding
Outstanding at the end of the period (in shares) 773
Weighted Average Remaining Contractual Life 6 years 11 months 5 days
Weighted Average Exercise Price (in dollars per share) $ 0.7
Options Exercisable
Exercisable at the end of the period (in shares) 167
Weighted Average Exercise Price (in dollars per share) $ 0.71
$1.01-$3.00
Stock Options Outstanding and Exercisable
Exercise price, low end of range (in dollars per share) $ 1.01
Exercise price, high end of range (in dollars per share) $ 3
Options Outstanding
Outstanding at the end of the period (in shares) 128
Weighted Average Remaining Contractual Life 1 year 8 months 8 days
Weighted Average Exercise Price (in dollars per share) $ 2.42
Options Exercisable
Exercisable at the end of the period (in shares) 128
Weighted Average Exercise Price (in dollars per share) $ 2.42
$3.01-$5.44
Stock Options Outstanding and Exercisable
Exercise price, low end of range (in dollars per share) $ 3.01
Exercise price, high end of range (in dollars per share) $ 5.44
Options Outstanding
Outstanding at the end of the period (in shares) 253
Weighted Average Remaining Contractual Life 2 years 3 months 18 days
Weighted Average Exercise Price (in dollars per share) $ 3.12
Options Exercisable
Exercisable at the end of the period (in shares) 252
Weighted Average Exercise Price (in dollars per share) $ 3.12
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Stock Options (Details 4) (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Outstanding Stock Options (Fully Vested and Expected to Vest)
Number of outstanding options (in shares) 2,779
Weighted average remaining contractual life 5 years 11 days
Weighted average exercise price per share (in dollars per share) $ 0.78
Intrinsic value (in thousands) $ 263
Options that are Exercisable
Number of outstanding options (in shares) 2,012 1,791
Weighted average remaining contractual life 4 years 4 months 10 days
Weighted average exercise price per share (in dollars per share) $ 0.84 $ 0.89
Intrinsic value (in thousands) 253
Additional disclosures
Total unrecognized compensation cost related to non-vested options $ 111
Weighted average recognition period 8 months 23 days
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Preferred Stock (Details) (USD $)
12 Months Ended 0 Months Ended 12 Months Ended 0 Months Ended 12 Months Ended 0 Months Ended 12 Months Ended 0 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Mar. 25, 2004
5% preferred stock
item
Dec. 31, 2012
5% preferred stock
Mar. 25, 2004
5% preferred stock
CEO
Mar. 25, 2004
5% preferred stock
Director
Mar. 28, 2005
Series 2 5% preferred stock
Dec. 31, 2012
Series 2 5% preferred stock
Mar. 28, 2005
Series 2 5% preferred stock
Minimum
Mar. 28, 2005
Series 2 5% preferred stock
CEO
Mar. 28, 2005
Series 2 5% preferred stock
Director
Mar. 28, 2005
Series 2 5% preferred stock
CFO
Dec. 02, 2005
Series 3 5% preferred stock
Dec. 31, 2012
Series 3 5% preferred stock
Dec. 02, 2005
Series 3 5% preferred stock
Minimum
Dec. 02, 2005
Series 3 5% preferred stock
CEO
Dec. 02, 2005
Series 3 5% preferred stock
Director
Dec. 02, 2005
Series 3 5% preferred stock
CFO
Preferred Stock
Dividend rate (as a percent) 5.00% 5.00% 5.00%
Value of shares issued under private placement $ 5,000,000 $ 2,700,000 $ 1,200,000
Shares issued under private placement 1,000,000 140,000 60,000 1,065,200 260,000 60,000 100,000 564,607 123,853 27,523 68,808
Share issued price (in dollars per share) $ 5 $ 2.5 $ 2.18
Issuance costs incurred for shares issued 275,000 173,000 100,000
Shares of common stock issued upon conversion of preferred stock 1,590,331 1,065,200 564,607
Conversion price per share (in dollars per share) $ 3.144 $ 2.5 $ 2.18
Number of votes per share that holders of preferred stock will receive 1.5903
Liquidation preference value preferred stock price per share $ 5 $ 2.5 $ 2.18
Redemption price per share (in dollars per share) $ 5 $ 3.25 $ 2.834
Shares outstanding 220,000 460,000 354,056
Dividends Payable
Preferred stock dividends accrued during the period 152,000 151,000 55,000 57,000 39,000
Accrued and unpaid dividends $ 279,000 $ 123,000
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Concentrations (Details)
12 Months Ended
Dec. 31, 2012
item
Dec. 31, 2011
item
Concentrations
Number of areas in which operations are concentrated 1
U.S. Government
Concentrations
Number of customers 4
One individual commercial customer
Concentrations
Number of customers 1 1
Three government customers
Concentrations
Number of customers 3
Total revenues | Customer | U.S. Government
Concentrations
Percentage of revenue 40.50% 38.40%
Total revenues | Customer | One individual commercial customer
Concentrations
Percentage of revenue 57.00% 58.00%
Total revenues | Customer | Three government customers
Concentrations
Percentage of revenue 34.20%
Total revenues | Customer | Four government customers
Concentrations
Percentage of revenue 38.20%
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Subsequent Events (Details) (G. Ward Paxton, chief executive officer, Revolving promissory note, USD $)
Dec. 31, 2012
Feb. 09, 2012
Feb. 07, 2013
Subsequent event
Subsequent Events
Maximum borrowing capacity $ 2,200,000 $ 2,200,000 $ 2,200,000
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