stbernard_10k-123109.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2009
OR
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o
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the
Transition Period From ____________ to ____________
Commission
File Number 0-50813
St.
Bernard Software, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
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Delaware
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20-0996152
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(State
or other Jurisdiction of incorporation)
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(I.R.S.
Employer Identification No.)
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15015 Avenue of Science,
San Diego,
California
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92128
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(Address
of Principal Executive Office)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (858) 676-2277
Securities
registered under Section 12(b) of the Act: None
Securities
registered under Section 12(g) of the Act:
Common
Stock, $0.01 Par Value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES o NO ý
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES o NO ý
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES ý NO o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period
that registrant was required to submit and post such files). YES o NO o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See the definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check one):
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
(Do
not check if a smaller reporting company)
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Smaller
reporting company ý
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES o NO ý
The
aggregate market value of the Registrant’s voting stock held by non-affiliates
of the Registrant as of June 30, 2009 was $3,264,567, based on the last reported
sale of $0.22 per share on June 30, 2009.
As of
March 25, 2010, a total of 13,391,439 shares of Common Stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Refer to
Exhibits set forth in Item 15 of this Form 10-K. Refer to Items 10,
11, 12, 13, and 14 of this Form 10-K for information incorporated by reference
to the registrant’s proxy statement for its 2010 annual stockholders’
meeting.
ST.
BERNARD SOFTWARE, INC.
ANNUAL
REPORT ON FORM 10-K FOR
THE
FISCAL YEAR ENDED DECEMBER 31, 2009
TABLE
OF CONTENTS
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30
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Report
of Independent Registered Public Accounting Firm
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F-2
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Consolidated
Balance Sheets as of December 31, 2009 and 2008
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F-3
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Consolidated
Statements of Operations for the Years Ended December 31, 2009 and
2008
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F-4
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Consolidated
Statements of Stockholders’ Deficit for the Years Ended December 31, 2009
and 2008
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F-5
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Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009 and
2008
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F-6
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Notes
to Consolidated Financial Statements
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F-7
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Signatures
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33
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St. Bernard Software, Inc., a
Delaware corporation (“we,” “us,” “our,” the “Company,” or “St.
Bernard”) is a software development company that designs, develops, and markets
Secure Web Gateway (“SWG”) appliances and services that help IT professionals to
effectively manage their enterprise’s Internet-based resources. Incorporated in
1986, the Company has evolved to become a well recognized leader in the SWG
market with its iPrism Web Filter. With millions of end users worldwide in
approximately 6,000 enterprises, educational institutions, small and medium
businesses and government agencies, the Company strives to deliver simple, high
performance solutions that offer excellent value to our customers.
Customers
can purchase our solutions directly from us, through our 1-tier and 2-tier
reseller network, and through original equipment manufacturers (“OEMs”).
Appliance purchases typically consist of an initial hardware purchase and
maintenance subscription. Our primary customers are IT managers, directors, and
administrators.
Our
iPrism Secure Web Gateway solutions allow organizations to:
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enforce
Internet acceptable use and security
policies
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mitigate
the risks of legal liability, security breaches, erosion of network
resources and productivity
loss
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manage
the use of non-Web Internet traffic, such as peer-to-peer communications
and instant messaging
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prevent
Internet-based threats such as malware and
spyware
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comply
with industry regulations
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Our
corporate headquarters is located at 15015 Avenue of Science, San Diego,
California, 92128.
Products
iPrism
– Dedicated Web Content Filtering Appliance
iPrism,
our flagship product, is a dedicated and optimized network appliance that
enables organizations to enforce their acceptable internet use policies by
providing multi-protocol web filtering and access control. The
appliance, first under development in 1997, is a specialized firewall that
packages the operating system, application software, and user interface, thereby
delivering a cohesive, simple to install and maintain
solution.
The
Company’s URL database, known as iGuard, is one-hundred percent human-reviewed.
This means that, in our opinion, each site rated by iGuard has a higher degree
of accuracy when compared to heuristic analysis or blended classification
technologies, resulting in better enforcement of an organization’s acceptable
use policy and increased ability to mitigate risks
The Company derives the majority of its
revenue from our Secure Web Gateway offerings and expects that a majority of our
revenues will continue to come from these products for several
years.
iPrism is
offered in five different models which vary by technical specification thereby
delivering incremental degrees of performance, storage, throughput, and
component redundancy. All models run the same software, both
application and operating system, and receive common iGuard data updates. Models
offer different hardware features by design. Each appliance offers support for
faster Internet speeds and more features as one progresses up the product line.
The 10h is our entry-level iPrism appliance and supports 10 Mbps throughput. Our
20h appliance supports 20 Mbps plus offers a failover capability. Our 30h
appliance support 30 Mbps, offers a full 1U chassis with RAID array storage and
dual power. Our 50h supports Internet speeds of 50 Mbps in addition to the
features of the 30h. Finally, our 100h supports speeds in excess of 100 Mbps and
offers more storage capacity. Our h-series has replaced our older M-Series
appliances which continue to be supported and can accept the latest software
releases. As the iPrism appliances are designed to work together, concurrent box
deployments enable scaling in larger networks and can also be deployed in a
redundant fashion. All boxes can be centrally, remotely, or locally
managed.
To
support dynamic deployments of large enterprises and diverse locales, St.
Bernard offers consolidation of reporting data in an appliance solution. This
appliance is the iPrism Enterprise Reporting Server (“ERS”). The ERS is a
non-filtering appliance that enables organizations to aggregate user activity
reporting and archiving across multiple iPrism appliance deployments in one
centrally managed reporting solution. In a typical deployment, a customer will
deploy two or more iPrism filtering appliances in one or more locations and use
the ERS to aggregate filtering activity data into an enterprise-wide
view.
The OEM
Software Development Kit (“SDK”) allows OEM partners the ability to leverage the
Web filtering database, iGuard, by integrating the iGuard OEM SDK into their
solutions. The SDK provides these partners a way to categorize Web content so
that they can offer to their customer acceptable Internet use policy
enforcement. These partners (like iPrism customers) receive regular updates of
the iGuard database for use by the SDK. These updates are delivered via the
Internet by way of St. Bernard data centers.
ePrism
– Dedicated Email Filtering Appliance
ePrism,
licensed through an OEM agreement, is a dedicated email filtering and content
inspection appliance that protects against spam, viruses and other unwanted
email content and protects against outbound data leakage through message content
and attachment inspection and policy enforcement. ePrism is offered
in three different models which vary by technical specification thereby
delivering varying degrees of performance, storage, throughput, and component
redundancy. The M1000 is a mini-1U rack mounted appliance targeted for smaller
or lower email volume environments. The M2000 is a 1U rack mounted
appliance targeted for use in mid-sized or medium email volume
environments. And the M3000 is targeted for use in larger
installations. Multiple appliances can be deployed in a stateful
failover configuration.
Marketing,
Sales and Distribution
St.
Bernard sells and markets its products and related services both directly to
end-users and through a variety of indirect sales channels, which include
value-added resellers (“VARs”), distributors, system integrators (“SIs”) and
OEMs.
Direct Sales to End-Users, and
VARs. St. Bernard’s direct sales team sells products and
software subscription services primarily in North America. Many of St. Bernard’s
products involve a consultative, solution-oriented telesales model that uses the
collaboration of technical and sales personnel to demonstrate how our solutions
fit specific customer requirements. St. Bernard focuses its initial sales effort
on network administrators and IT department personnel who are responsible for a
customer’s IT initiatives and data center management. St. Bernard complements
its direct sales efforts with indirect sales channels such as resellers, VARs
and distributors. The Company will continue to invest in programs that train and
enable its channel partners to market its technologies. St. Bernard provides its
products to its channel partners and customers under non-exclusive reseller
license agreements, including shrink-wrap or click-wrap licenses for some
products, without transferring title of its software products.
SIs and Managed Services
Providers. St. Bernard collaborates with SIs, who may refer
its customers to St. Bernard, utilize St. Bernard as a subcontractor in some
situations, build standard and customized solutions with their products, or use
products to deliver hosted services as well as outsourced services. SIs use St.
Bernard’s products and services in conjunction with optimizing their client’s
investment in transactional applications and related hardware. Some
SIs are authorized resellers of our products and some use St. Bernard products
and services to deliver consultative services or managed services to their
customers. Under these arrangements, SIs and managed services providers are not
obligated to use or sell St. Bernard’s products or services. In general, St.
Bernard receives a fee for each sublicense of its products granted by its
partners. In some cases, we grant rights to distribute promotional versions of
our products, which have limited functionality or limited use periods, on a
non-fee basis. St. Bernard enters into both object-code only licenses and, when
appropriate, source-code licenses of its products. St. Bernard does not transfer
title of software products to its customers or to SIs.
OEMs. Another
important element of our sales and marketing strategy involves strategic
relationships with OEM partners. These OEM partners may incorporate St.
Bernard’s products into their products, bundle our products with their products,
endorse St. Bernard’s products in the marketplace or serve as authorized
resellers of our products. In general, the OEM partners are not obligated to
sell St. Bernard’s products or services under these arrangements and are not
obligated to continue to include its products in future versions of their
products.
Marketing. Our
marketing initiatives are designed to increase recognition of St. Bernard as a
leading provider of Secure Web Gateway solutions; increase awareness of the
potential risks associated with unmanaged use of corporate computing resources;
and to generate qualified sales leads for our direct sales team and channel
partners. Marketing efforts are created through multiple media and
venues. Typical efforts include public and analyst relations, online
search, online and print advertising, third party promotions, email campaigns,
events and tradeshows. Paid media are selected which target technical
business buyers with little reliance on broader non-trade media.
Software
as a Service (“SaaS”) and Deferred Revenue
A typical
sale of a St. Bernard product consists of a software license or an appliance
accompanied by a subscription component. The subscription component includes
traditional maintenance support (telephone support and product upgrades) as well
as database updates, as frequent as hourly. The subscription component
percentage of the original sale varies from 25% to 100% depending on the product
line. The subscriptions are generally available for one to four years.
Renewal of the subscriptions is an important and growing part of
St. Bernard’s business. St. Bernard currently enjoys renewal
rates of 75% to 85%, depending on the product line, which results in recurring
revenues. Even though the full payment for a subscription or renewal, as the
case may be, is generally received at the time of renewal, the revenue is
recognized over the subscription or renewal period resulting in deferred revenue
on the balance sheet. Deferred revenue was approximately $17.9 million and $17.6
million at December 31, 2009 and 2008, respectively. Deferred revenue represents
subscription and product maintenance orders for St. Bernard’s software products
that have been billed to and paid by its customers and for which revenue will
generally be earned within the next few years. Deferred revenue also includes
subscription and maintenance orders that have not been paid by St. Bernard’s
customers, which are included in accounts receivable, and that do not otherwise
satisfy its revenue recognition criteria.
Subscription
and product maintenance revenue recognized was approximately $14.6 million and
$13.9 million for the years ended December 31, 2009 and 2008, respectively.
Subscription and maintenance are generally recognized over the subscription and
maintenance period of twelve to forty-eight months.
Maintenance
and Technical Support
St.
Bernard believes that providing a high level of customer service and technical
support is critical to customer satisfaction and its success in increasing the
adoption rate of its solutions. All customers have maintenance and technical
support agreements with St. Bernard that provide for fixed fee, renewable annual
maintenance and technical support consisting of technical and emergency support,
and product upgrades. St. Bernard offers telephone support, as well as e-mail
customer support. Some of the value-added resellers, system integrators and OEMs
that offer St. Bernard’s products also provide customer technical support for
its products through a Tier1/Tier2 arrangement whereby the partner handles the
initial customer contact, (Tier 1), and St. Bernard provides secondary support
and engineering assistance, (Tier 2).
Seasonality
As is
typical for many software companies, St. Bernard’s business is seasonal. Product
sales are generally higher in its fourth fiscal quarter and lower in its first
fiscal quarter. In addition, St. Bernard generally receives a higher volume of
sales orders in the last month of a quarter, with orders concentrated in the
later part of that month. St. Bernard believes that this seasonality primarily
reflects customer spending patterns and budget cycles. Product revenue generally
reflects similar seasonal patterns but to a lesser extent than sales orders
because product revenue is not recognized until an order is shipped and other
revenue recognition criteria are met.
Customers
St.
Bernard’s products and services are used by a diverse range of customers
including large corporations, small and medium-sized businesses, governmental
entities, and educational institutions. As of December 31, 2009, St.
Bernard had approximately 6,000 customers. For the years ended December 31, 2009
and 2008, no single end-user customer or distributor accounted for more than 10%
of St. Bernard’s net revenue.
Competition
Our
current primary competitors can be divided into two categories and
include:
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Web
filtering/secure content management appliances and software – Websense,
Bluecoat, McAfee, Inc., Symantec Corporation, Fortinet, Sonicwall, Trend
Micro, Cisco Systems, Barracuda Networks, and
M86
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Secure
content management services (SCMs) – Symantec, McAfee and MX
Logic
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We
also face current and potential competition in Web filtering from vendors of
Internet servers, operating systems and networking hardware, many of which now,
or may in the future, develop and/or bundle Web filtering, Web security or other
competitive products with their offerings. We compete against and expect
increased competition from anti-virus software developers, traditional network
management software developers and Web management service
providers.
We
believe that we compete effectively against our competitors in our target
markets. However, many of our current and potential competitors, such as
Symantec Corporation, McAfee, Inc., Trend Micro, Cisco Systems and Websense
have longer operating histories and significantly greater financial, technical,
marketing or other resources. They have significantly greater name recognition,
established marketing and channel relationships both in the United States and
internationally, and access to a larger installed base of customers. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
functionality of their products to address customer needs. Accordingly, new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
Material
Supplier
St.
Bernard’s iPrism products have historically been sold with computer hardware
appliances designed and manufactured by one vendor, located in the United
States. This vendor represented 84.0% and 88.5%, respectively, of our appliance
cost of sales in 2009 and 2008. This vendor accounted for
approximately $4.0 million (35.2%) and $4.7 million (37.1%) of the
Company’s total purchases during 2009 and 2008, respectively. At
December 31, 2009 and 2008, the amount payable to this vendor was
approximately $73,000 and $118,000, respectively. If this vendor unexpectedly
stopped supplying the appliances, St. Bernard could experience an interruption
in its ability to supply customers with the iPrism product.
Research
and Development
St.
Bernard’s research and development efforts have been directed toward new feature
enhancements in parallel to continual improvement of its secure web gateway
appliances. During 2009, the company’s development efforts were primarily
focused on delivering additional security features for core product lines while
employing a cost-reduction strategy. St. Bernard’s recent major research and
development initiatives include a new iPrism release. St.
Bernard has successfully launched major product versions and upgrades in
2009. The product releases include new features (such as support for Cisco’s
WCCP 2.0 and Microsoft’s Active Directory 2008) and a new iPrism User
Interface.
Intellectual
Property
Protective
Measures
St.
Bernard regards some of the features of its internal operations, software and
documentation as proprietary and relies on copyright, trademark and trade secret
laws, confidentiality procedures, contractual and other measures to protect its
proprietary information. St. Bernard’s intellectual property is an important and
valuable asset that helps enable us to gain recognition for its products,
services and technology and enhance its competitive position. St. Bernard’s
intellectual property is further protected by using encryption security and
product activation keys.
As part
of St. Bernard’s confidentiality procedures, it generally enters into
non-disclosure agreements with its employees, distributors and corporate
partners and license agreements with respect to software, documentation and
other proprietary information. These license agreements are generally
non-transferable without St. Bernard’s consent and have a perpetual term. St.
Bernard also employs measures to protect its facilities, equipment and
networks.
Trademarks
and Copyrights
St.
Bernard and the St. Bernard logo are trademarks or registered trademarks in the
United States and other countries. In addition to “St. Bernard” and the St.
Bernard logo, the Company has used, registered and/or applied to register other
specific trademarks and service marks to help distinguish its products,
technologies and services from those of its competitors in the U.S. and foreign
countries and jurisdictions. St. Bernard enforces its trademark, service mark
and trade name rights in the U.S. and abroad. The duration of St. Bernard’s
trademark registrations varies from country to country and in the U.S. St.
Bernard generally is able to maintain its trademark rights and renew any
trademark registrations for as long as the trademarks are in use.
St.
Bernard’s products are protected under U.S. and international copyright laws and
laws related to the protection of intellectual property and proprietary
information. St. Bernard generally takes measures to label such products with
the appropriate proprietary rights notices and is actively enforcing such rights
in the U.S. and abroad. However, these measures may not provide sufficient
protection, and St. Bernard’s intellectual property rights may not be of
commercial benefit to St. Bernard or the validity of these rights may be
challenged. While St. Bernard believes that its ability to maintain and protect
its intellectual property rights is important to its success, it also believes
that its business as a whole is not materially dependent on any particular
patent, trademark, license or other intellectual property right.
St.
Bernard has the right to use certain intellectual property licensed from a
vendor under an agreement that provides for payments only for products sold
using such intellectual property. St. Bernard uses such intellectual property in
its ePrism product. St. Bernard believes that if it were unable to use the
intellectual property licensed from the vendor it could find a substitute on
terms reasonable to St. Bernard.
Employees
As of
December 31, 2009, St. Bernard had 81 employees, including 30 employees in
technical operations, 32 in sales and marketing, and 19 in general and
administrative services. St. Bernard has not entered into any collective
bargaining agreements with its employees and believes that relations with its
employees are good. St. Bernard believes that its future success will depend in
part upon the continued service of its key employees and on its continued
ability to hire and retain qualified personnel.
Because
we derive a majority of our revenues from sales of a few product lines, any
decline in demand for these products could severely harm our ability to generate
revenue and our results of operations.
We derive
a majority of our revenues from a small number of software products, which
includes iPrism and
related subscription and maintenance services. In particular, our future success
depends in part on achieving substantial revenue from customer renewals for
subscriptions. Our customers have no obligation to renew their subscriptions
upon expiration. If our products fail to meet the needs of our existing and
target customers, or if they do not compare favorably in price and performance
to competing products, our growth will be limited. Subscriptions typically have
durations of 12 to 48 months. As a result, a majority of the revenue we report
in each quarter is the recognition of previously deferred revenue from
subscription agreements entered into and paid for during previous quarters.
Because of this financial model, the revenue we report in any quarter or series
of quarters may mask significant downturns in sales and the market acceptance of
our products. We are particularly vulnerable to fluctuations in demand for these
products, whether as a result of competition, product obsolescence,
technological change, budget constraints of our potential customers, or other
factors. If revenue derived from these software products were to decline
significantly, including customers not renewing subscriptions, our business and
operating results would be adversely affected.
General
economic conditions and a continued slowdown in the U.S. economy could adversely
affect the spending for our products.
If
general economic conditions in the U.S. economy continue to slow, customers may
reduce spending for our products. This reduced spending by our
consumers could result in reductions in sales of our products, longer sales
cycles, and an increased concentration on price competitiveness. As a result, we
may experience a delay in the payment of our customers’ obligations to us, which
would increase our credit risk exposure and cause a decrease in operating cash
flows. Also, if our resellers experience excessive financial difficulties and/or
insolvency, and we are unable to successfully transition end users to purchase
our product from other resellers or directly from us, our sales could decline
significantly. Any of the events listed above could have a material adverse
effect on the Company's business, financial condition and results of
operations
We
have a history of losses and there can be no assurances that we will become
profitable or maintain positive cash flow, and we may need additional sources of
funding.
We have a
history of losses and have not been able to achieve profitability. Our
cumulative net loss was approximately $ 49.7 million and $49.5 million as of
December 31, 2009 and 2008, respectively. As a result of significant
changes to the cost structure of our business and focusing our marketing
strategy around our core business, we generated positive cash flows for the year
ended December 31, 2009. If we are not able to achieve profitability
and maintain positive cash flows, we may be required to look for additional
sources of financing.
If
we fail to manage our direct sales and OEM distribution channels effectively our
sales could decline.
We market
our products and related services both directly to end-users and through a
variety of indirect sales channels, which include VARs, distributors, system
integrators and OEMs.
Direct Sales. A significant
portion of our revenue is derived from sales by our direct sales force to
end-users. This sales channel involves a number of special risks,
including:
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longer
sales cycles associated with direct sales
efforts;
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difficulty
in hiring, training, retaining and motivating a direct sales force;
and
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the
requirement of a substantial amount of training for sales representatives
to become productive, and training that must be updated to cover new and
revised products.
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If
we are unable to maintain and expand, or enter into new, indirect sales channels
relationships our operating results would decline.
Our
indirect sales channels accounted for approximately 42.4% and 38.0% of our
revenue in 2009 and 2008, respectively. We intend to continue to rely on our
indirect sales channels for a significant portion of our revenue. We depend on
our indirect sales channels, including value-added resellers, distributors, and
providers of managed Internet services, to offer our products to a larger
customer base than can be reached through a direct sales effort. None of these
parties is obligated to continue selling our products or to make any purchases
from us. If they are unsuccessful in their efforts or are unwilling or unable to
market and sell our new product offerings, our operating results will suffer. We
cannot control the level of effort these parties expend or the extent to which
any of them will be successful in marketing and selling our products. Some of
our indirect sales channels also market and sell products that compete with our
products or may decide to do so in the future. We may not be able to prevent
these parties from devoting greater resources to support our competitors’
products and/or eliminating their efforts to sell our products.
The
market for our products continues to emerge, and if we are not successful in
promoting awareness of the need for our products and of our brand, our growth
may be limited.
Based on
our experience with potential customers, we believe that many corporations do
not recognize or acknowledge the existence or scope of problems caused by misuse
or abuse of the Internet or of network computers, creating significant barriers
to sales. In addition, there may be a time-limited opportunity to achieve and
maintain a significant share of the market for web filtering and email filtering
and our other products due in part to the emerging nature of these markets and
the substantial resources available to our existing and potential competitors.
If companies do not recognize or acknowledge these problems, the market for our
products may develop more slowly than expected, which could adversely affect our
operating results. Developing and maintaining awareness of our brand is critical
to achieving widespread acceptance of our existing and future products.
Furthermore, we believe that the importance of brand recognition will increase
as competition in our market develops. Successful promotion of our brand will
depend largely on the effectiveness of our marketing efforts and on our ability
to develop reliable and useful products at competitive prices. If we fail to
successfully promote our brand, or if our expenses to promote and maintain our
brand are greater than anticipated, our results of operations and financial
condition could suffer.
If
we are not able to develop new and enhanced products that achieve widespread
market acceptance, we may be unable to recover product development costs, and
our earnings and revenue may decline.
Our
future success depends on our ability to address the rapidly changing needs of
our customers by developing, acquiring and introducing new products, product
updates and services on a timely basis. We must also extend the operation of our
products to new platforms and keep pace with technological developments and
emerging industry standards. We intend to commit substantial resources to
developing new software products and services, including software products and
services for the secure content management SME market. Products being developed
are new and unproven, and industry standards for these markets are evolving and
changing. They also may require development of new sales channels. If these
markets do not develop as anticipated, or if demand for our products and
services in these markets does not materialize or occurs more slowly than we
expect, we will have expended substantial resources and capital without
realizing sufficient revenue, and our business and operating results could be
adversely affected.
If
economic or other factors negatively affect the small and medium-sized business
sector, our customers may become unwilling or unable to purchase our products
and services, which could cause our revenue to decline.
Our
existing and target customers are small, medium, and enterprise businesses.
These businesses are more likely to be significantly affected by economic
downturns than larger, more established businesses. Additionally, these
customers often have limited discretionary funds, which they may choose to spend
on items other than our security software products and services. If small,
medium, and enterprise businesses experience economic hardship, they may be
unwilling or unable to expend resources to develop or improve their IT security,
which would negatively affect the overall demand for our products and services,
and could cause our revenue to decline.
We
have secured additional funding through debt financing which includes numerous
covenants and debt-related obligations that may adversely affect our business
and potentially reduce our revenues and affect the value of our common
stock.
On May
15, 2007, the Company entered into a Loan and Security Agreement with Silicon
Valley Bank (“SVB”) (the “SVB Loan Agreement”) which provides for a credit
facility not to exceed $2.0 million, subject to a borrowing base formula. The
SVB Loan Agreement was amended on February 27, 2009 (the “SVB Loan Amendment”).
Pursuant to the terms of the SVB Loan Amendment, among other things, SVB
(i) decreased the interest rate on the revolving line of credit to the
greater of 3.50% over the prime rate or 7.5% (from the greater of 3% over the
prime rate or 10.5%), (ii) modified the tangible net worth covenant to no
less than negative seventeen million dollars ($17,000,000) at all times,
increasing quarterly by fifty percent (50%) of net income and monthly by fifty
percent (50%) of issuances of equity after January 31, 2009 and the principal
amount of subordinated debt received after January 31, 2009, (iii) modified
the borrowing base to seventy percent (70%) of eligible accounts and the lesser
of sixty percent (60%) of advanced billing accounts or six hundred thousand
dollars ($600,000) as determined by SVB; provided, however, that SVB may, with
notice to the Company, decrease the foregoing percentage in its good faith
business judgment based on events, conditions, contingencies, or risks which, as
determined by SVB, may adversely affect collateral, and (iv) extended the
revolving line maturity date to May 15, 2010.
In March
2010, the SVB Loan Agreement was amended. Pursuant to the terms of the SVB Loan
Amendment, among other things, SVB (i) increased the revolving line balance to
$2.3 million (from $2.0 million), (ii) decreased the interest rate on the
revolving line of credit to 2.0% (from 3.5%) over the greater of the SVB prime
rate or 6.0% (from 7.5%), (iii) modified the tangible net worth covenant to
no less than negative eighteen million dollars ($18,000,000) at all times,
increasing quarterly by fifty percent (50%) of net income and monthly by fifty
percent (50%) of issuances of equity after January 31, 2010 and the principal
amount of subordinated debt received after January 31, 2010, (iv) modified
the borrowing base to eighty percent (80%) of eligible accounts, and (v)
extended the revolving line maturity date to May 15, 2011. At
December 31, 2009, total availability under the SVB Loan Agreement was $2.0
million, of which $1.5 million was outstanding, and the applicable interest rate
was 7.5% at December 31, 2009. The Company was in compliance with the above
stated covenants and restrictions. The obligations under the SVB Loan Agreement
are secured by substantially all of St. Bernard’s assets.
In
addition, the Loan Amendment provides for two additional term loan facilities
totaling $500,000 that can only be used to repay indebtedness owing from the
Company to Partners for Growth. Term Loan A, in the amount of
$300,000, accrues interest at a floating per annum rate equal to the greater of
two percentage points (2.00%) above the SVB prime rate or six percent
(6.00%). Term Loan B, in the amount of $200,000, accrues interest at
a floating per annum rate equal to the greater of three and one half percentage
points (3.50%) above the SVB prime rate or seven and one half percent
(7.50%).
On July
21, 2008, the Company entered into a Loan Agreement with Partners for Growth, LP
(“PFG”) which became effective on July 23, 2008 and which provides for a credit
facility not to exceed $1.5 million, subject to a borrowing base formula (the
“PFG Loan Agreement”). The PFG Loan Agreement was subsequently amended on
February 27, 2009. The annual interest rate on the PFG Loan is set at
the Prime Rate, quoted by SVB as its Prime Rate, plus 3% (the “Applicable
Rate”). At December 31, 2009, the effective interest rate was 7%. The
PFG Loan Agreement will terminate on July 20, 2010, on which date all principal,
interest and other outstanding monetary obligations must be repaid to PFG. The
obligations under the PFG Loan Agreement are secured by a security interest in
collateral comprised of substantially all of St. Bernard’s assets, subordinated
to the SVB Loan Agreement.
The PFG
Loan Agreement contains affirmative, negative and financial covenants customary
for credit facilities of this type, including, among other things, limitations
on indebtedness, liens, sales of assets, mergers, investments, and
dividends. The PFG Loan Agreement also requires that St. Bernard
maintain a Modified Net Income (as defined in the PFG Loan Agreement) greater
than zero. PFG eliminated the Modified Net Income covenant for the reporting
periods ending February 28, 2009 and March 31, 2009. The PFG Loan Agreement
contains events of default customary for credit facilities of this type (with
customary grace or cure periods, as applicable) and provides that upon the
occurrence and during the continuance of an event of default, among other
things, the interest rate on all borrowings will be increased, the payment of
all borrowings may be accelerated, PFG’s commitments may be terminated and PFG
shall be entitled to exercise all of its rights and remedies, including remedies
against collateral. At December 31, 2009, the Company was in
compliance with the above stated covenants.
Our
failure to comply with our debt-related obligations could result in an event of
default which, if not cured or waived, could result in an acceleration of our
indebtedness, including our loans with SVB and PFG. This in turn could have a
material adverse effect on our operations, our revenues and thus our common
stock value. In the event we were unable to restructure or refinance our loans
or secure other financing to repay this debt, our lenders could foreclose upon
the collateral securing that debt.
Our
future capital requirements and potentially limited access to financing may harm
our ability to develop products and fund our operations.
We expect
to continue spending substantial resources on research and development efforts
to improve our SWG appliances. To the extent our revenues and borrowing
arrangements with SVB and PFG are insufficient to fund our ongoing research and
development efforts, we may need to raise additional funding. Other than SVB and
PFG, we do not have committed external sources of funding and may not be able to
obtain any additional funding, especially if volatile market conditions persist
for technology companies. Any additional funding we seek would likely be
accomplished through equity or debt financings which would require the consent
of SVB and PFG. We may not be able to obtain additional financing on terms that
are favorable to us or at all. If we acquire funds by issuing securities,
dilution to existing stockholders will result. Our failure to obtain additional
funding may require us to delay, reduce the scope of, or eliminate one or more
of our current research and development projects.
We
incur considerable expenses to develop products for operating systems that are
either owned by others or that are part of the Open Source Community. If we do
not receive cooperation in our development efforts from others and access to
operating system technologies, we may face higher expenses or fail to expand our
product lines and revenues.
Many of
our products operate primarily on the Linux, UNIX and Windows computer operating
systems. As part of our efforts to develop products for operating systems that
are part of the Open Source Community, we may have to license portions of our
products on a royalty free basis or may have to expose our source code. Open
Source describes general practices in production and development which promote
access to the end product’s sources. The Open Source Community emphasizes
collaborative development and requires licensing that allows modifications and
enhancements of registered open source code be made available to whoever would
like to use it. Developers who use open source code in proprietary products risk
exposing the intellectual property developed in conjunction with the open source
code to the public. We continue to develop new products for these operating
systems. We may not accomplish our development efforts quickly or
cost-effectively, and it is not clear what the relative growth rates of these
operating systems will be. Our development efforts require substantial capital
investment, the devotion of substantial employee resources and the cooperation
of the owners of the operating systems to or for which the products are being
ported or developed. If the market for a particular operating system does not
develop as anticipated, or demand for our products and services in such market
does not materialize or occurs more slowly than we expect, we may have expended
substantial resources and capital without realizing sufficient revenue, and our
business and operating results could be adversely affected.
In
addition, for some operating systems, we must obtain from the owner of the
operating system a source code license to portions of the operating system
software to port some of our products to or develop products for the operating
system. Operating system owners have no obligation to assist in these porting or
development efforts. If they do not grant us a license or if they do not renew
our license, we may not be able to expand our product lines into other
areas.
We
face increasing competition, which places pressure on our pricing and which
could prevent us from increasing revenue or maintaining profitability. In
addition, we may face competition from better-established companies that have
significantly greater resources.
The
market for our products is intensely competitive and is likely to become even
more so in the future. Our current principal competitors frequently offer their
products at a significantly lower price than our products, which has resulted in
pricing pressures on sales of our products. We also face increasing competition
from security solutions providers who may add security modules or features to
their product offerings. In addition, pricing pressures and increased
competition generally could result in reduced sales, reduced margins or the
failure of our products to achieve or maintain more widespread market
acceptance, any of which could have a material adverse effect on our business,
results of operations and financial condition.
We also
face current and potential competition from vendors of operating systems and
networking hardware, many of which now, or may in the future, develop and/or
bundle security, file backup, patch management or other competitive products
with their products. We compete against, and expect increased competition from,
anti-virus software developers, traditional network management software
developers and Web management service providers. If security or file backup
functions become standard features of internet-related hardware or software, the
demand for our products will decrease. Furthermore, even if our products provide
greater functionality and are more effective than certain other competitive
products, potential customers might accept limited functionality as part of an
unbundled solution in lieu of purchasing separate products which require more
administration. In addition, our own indirect sales channels may decide to
develop or sell competing products instead of our products. Many of our
potential competitors have substantial competitive advantages, such
as:
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●
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greater
name recognition and larger marketing budgets and
resources;
|
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●
|
established
marketing relationships and access to larger customer bases;
and
|
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●
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substantially
greater financial, technical and other
resources.
|
As a
result, they may be able to respond more quickly and effectively than we can to
new or changing opportunities, technologies, standards or customer requirements.
For all of the foregoing reasons, we may not be able to compete successfully
against our current and future competitors, and our results of operations could
be adversely affected.
Our
database categories and our process for classifying websites and software
applications within those categories are subjective and may not be able to
categorize websites and software applications in accordance with our customers’
expectations.
We may
not succeed in accurately categorizing Internet and application content to meet
our customers’ expectations. We rely upon a combination of automated filtering
technology and human review to categorize websites and software applications in
our proprietary databases. Our customers may not agree with our determinations
that particular websites and software applications should be included or not
included in specific categories of our databases. In addition, it is possible
that the filtering processes may place objectionable material in categories that
are generally unrestricted by our users’ Internet and computer access policies,
which could result in employees having access to such material in the workplace.
Any miscategorization could result in customer dissatisfaction and harm our
reputation. Furthermore, we select our categories based on content we believe
employers want to manage. We may not now, or in the future, succeed in properly
identifying the categories of content that employers want to manage. Any failure
to effectively categorize and filter websites and software applications
according to our customers’ expectations will impair the growth of our business
and our efforts to increase brand acceptance.
If
our databases fail to keep pace with the rapid growth and technological change
of the Internet, the market acceptance of our products could be
impaired.
The
success of our products depends, in part, on the breadth and accuracy of our
databases. Although our databases currently catalog more than 10 million
websites, they contain only a portion of such material that exists. In addition,
the total number of websites is growing rapidly, and we expect this rapid growth
rate to continue in the future. Our databases and database technologies may not
be able to keep pace with the growth in the number of websites and software
applications, especially the growing amount of content utilizing foreign
languages. Further, the ongoing evolution of the Internet and computing
environments will require us to continually improve the functionality, features
and reliability of our databases. Because our products primarily manage access
to websites included in our databases, if our databases do not contain a
meaningful portion of relevant content, the effectiveness of iPrism will be
significantly diminished. Any failure of our databases to keep pace with the
rapid growth and technological change of the Internet will impair the market
acceptance of our products, which in turn will harm our business, results of
operations and financial condition.
Our
management is required to devote substantial time and incur additional expense
to comply with public company regulations.
The
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules
subsequently implemented by the SEC, impose various requirements on public
companies, including with respect to corporate governance practices. We have
incurred, and expect to continue incurring, significant legal, accounting and
other expenses to comply with these requirements. In addition, our management
and other personnel will need to devote a substantial amount of time to these
requirements. If management fails to comply with such regulations, the Company
may be subject to public investigations, fines, enforcement actions and other
sanctions by regulatory agencies and authorities and, as a result, our stock
price could decline in value.
Our
products may contain significant errors and failures, which may subject us to
liability for damages suffered by end-users.
Software
products frequently contain errors or failures, especially when first introduced
or when new versions are released. Our end-user customers use our products in
applications that are critical to their businesses, including for data
protection and recovery, and may have a greater sensitivity to defects in our
products than to defects in other, less critical software products. If a
customer loses critical data as a result of an error in or failure of our
software products or as a result of the customer’s misuse of our software
products, the customer could suffer significant damages and seek to recover
those damages from us. Although our products generally contain protective
provisions limiting our liability, a court could rule that these provisions are
unenforceable. If a customer is successful in proving its damages and a court
does not enforce our protective provisions, we could be liable for the damages
suffered by our customers and other related expenses, which could adversely
affect our operating results.
Product
errors or failures could cause delays in new product releases or product
upgrades, or our products might not work in combination with other hardware or
software, which could adversely affect market acceptance of our products. If our
customers were dissatisfied with product functionality or performance, or if we
were to experience significant delays in the release of new products or new
versions of products, we could lose competitive position and revenue and our
business and operating results could be adversely affected.
Failure
to protect our intellectual property rights could impair our ability to protect
our proprietary technology and establish our brand.
Intellectual
property is critical to our success, and we rely upon trademark, copyright and
trade secret laws in the United States and other jurisdictions as well as
confidentiality procedures and contractual provisions to protect our proprietary
technology and our brand. Any of our trademarks may be challenged by others or
invalidated through administrative process or litigation. Furthermore, legal
standards relating to the validity, enforceability and scope of protection of
intellectual property rights are uncertain. Effective trademark, copyright, and
trade secret protection may not be available to us in every country in which our
products are available. The laws of some foreign countries may not be as
protective of intellectual property rights as U.S. laws, and mechanisms for
enforcement of intellectual property rights may be inadequate. As a result, our
means of protecting our proprietary technology and brands may not be adequate.
Furthermore, despite our efforts, we may be unable to prevent third parties from
infringing upon or misappropriating our intellectual property, including the
misappropriation or misuse of the content of our proprietary database of
websites. Any such infringement or misappropriation could have a material
adverse effect on our business, results of operations and financial
condition.
If
we are sued by third parties for alleged infringement of their proprietary
rights, the cost to litigate or settle such litigation could be material and
there can be no assurance that we would be successful in any such
suit.
The
software and Internet industries are characterized by the existence of a large
number of patents, trademarks and copyrights and by frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. As the number of entrants into our market increases, the possibility of
an intellectual property claim against us grows. Our technologies and products
may not be able to withstand any third-party claims or rights against their use.
Any intellectual property claims, with or without merit, could be time-consuming
and expensive to litigate or settle, and could divert management attention from
executing our business plan. There can be no assurance that we would be
successful in any such suit.
On July
9, 2009, an action was filed in the United States District Court for the
Southern District of California by Southwest Technology Innovations LLC (the
“Plaintiff”) against the Company and Espion International, Inc., Workgroup
Solutions, Inc., SonicWall, Inc., Mirapoint Software, Inc., and Proofpoint,
Inc., (collectively the “Defendants”). In this matter, the Plaintiff's
claim against the Company is that the ePrism e-mail filter products, which are
manufactured by an unrelated third party and sold by the Company, allegedly
infringe upon U.S. Patent No. 6,952,719 entitled “Spam Detector Defeating
System” which was issued on October 4, 2005. The Plaintiff is seeking a judgment
in Plaintiff's favor, injunctive relief, and an award of unspecified
damages. The Company is vigorously defending its interests in this
matter.
Our
systems may be vulnerable to security risks or service disruptions that could
harm our business.
Although
we have taken measures to secure our systems against security risks and other
causes of disruption of electronic services, our servers are vulnerable to
physical or electronic break-ins and service disruptions, which could lead to
interruptions, delays, loss of data or the inability to process customer
requests. Such events could be very expensive to remedy, could damage our
reputation and could discourage existing and potential customers from using our
products.
Evolving
regulation of the Internet may adversely affect us by imposing regulations on
our activities or causing a decline in Internet usage.
As
Internet commerce continues to evolve, increasing regulation by federal, state
or foreign agencies becomes more likely. Such regulation is likely in the areas
of user privacy, pricing, content and quality of products and services. Taxation
of Internet use or other charges imposed by government agencies or by private
organizations for accessing the Internet may also be imposed. Laws and
regulations applying to the solicitation, collection or processing of personal
or consumer information could affect our activities. Furthermore, any regulation
imposing fees for Internet use could result in a decline in the use of the
Internet and the viability of Internet commerce, which could have a material
adverse effect on our business, results of operations and financial
condition.
The
market price of our securities is likely to be highly volatile and subject to
wide fluctuations.
The
market price of our securities has been and likely will continue to be highly
volatile and could be subject to wide fluctuations in response to a number of
factors that are beyond our control, including:
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announcements
of technological innovations or new products or services by our
competitors;
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demand
for our products, including fluctuations in subscription
renewals;
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fluctuations
in revenue from indirect sales
channels;
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changes
in the pricing policies of our competitors;
and
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●
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changes
in government regulations.
|
In
addition, the market price of our securities could be subject to wide
fluctuations in response to a number of factors, including:
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announcements
of technological innovations or new products or services by
us;
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changes
in our pricing policies;
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quarterly
variations in our revenues and operating expenses;
and
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our
technological capabilities to accommodate the future growth in our
operations or our customers.
|
Further,
the stock market has experienced significant price and volume fluctuations that
have particularly affected the market price of the stock of many software and
internet-related companies. In some cases, the market price of the stock has
been unrelated or disproportionate to the operating performance of these
companies. A number of publicly traded software and internet-related companies
have current market prices below their initial public offering prices. Market
fluctuations such as these may seriously harm the market price of our
securities. In the past, securities class action suits have been filed following
periods of market volatility in the price of a company’s securities. If such an
action were instituted, we would incur substantial costs and a diversion of
management attention and resources, which would seriously harm our business,
results of operations and financial condition.
The
amount of stock held by our executive officers, directors and other affiliates
may limit the ability to influence the outcome of director elections and other
matters requiring stockholder approval.
Our
executive officers, directors and affiliates own approximately 32.6% of our
voting stock as of December 31, 2009. These stockholders can have a substantial
influence on all matters requiring approval by stockholders, including the
election of directors and the approval of mergers or other business combination
transactions. This concentration of ownership could have the effect of delaying
or preventing a change in control or discouraging a potential acquirer from
attempting to obtain control of the Company, which in turn could have a material
adverse effect on the market price of our common stock or prevent stockholders
from realizing a premium over the market price for their shares.
We
may not be able to attract and retain the highly skilled employees we need to
support our planned growth.
We may
not be successful in attracting and retaining qualified personnel. In order to
attract and retain personnel in a competitive marketplace, we believe that we
must provide a competitive compensation package, including cash and equity based
compensation. The volatility of our stock price and quarterly variations in our
revenues and operating expenses may adversely affect our ability to recruit or
retain qualified employees. If we fail to attract new personnel or retain and
motivate our current personnel, our business and future growth prospects could
be severely harmed.
We
could encounter difficulties managing our growth, which could adversely affect
our results of operations.
We will
need to effectively manage our organization, operations, and facilities in order
to successfully sell our services and appliances to reach profitability. Our
need to effectively manage our operations and grow our business requires that we
continue to improve our operational, financial and management controls,
reporting systems, and procedures. We may not be able to maintain these
improvements, which will not allow us to reach our strategic objectives and
become profitable.
Available
Information
Our
internet address is www.stbernard.com. On this website we make available, free
of charge, our Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and any amendments to those reports, as soon as
reasonably practical after electronically filing such material with or
furnishing it to the Securities and Exchange Commission (SEC). Our SEC reports
can be accessed through the Company/Investor Relations section of our website
under “SEC Filings”. All of our filings with the SEC may also be obtained at the
SEC’s Public Reference Room at Room 1580, 100 F Street NE, Washington, DC 20549,
as well on the SEC website at www.sec.gov. For information regarding the
operation of the SEC’s Public Reference Room, please contact the SEC at
1-800-SEC-0330. Additionally, the SEC maintains an internet site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC at www.sec.gov.
|
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Unresolved
Staff Comments
|
Not
applicable.
St.
Bernard’s corporate headquarters is located in San Diego, California. It
consists of a leased office facility for sales, research and development, and
administrative personnel, which measures approximately 56,000 square feet. St.
Bernard’s facility is occupied under a lease that expires on December 31,
2010.
|
Location
|
|
Approximate
Square Feet
|
|
Date
Current Lease Expires
|
|
Monthly
Rent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,000 |
|
|
|
$ |
141,000 |
* |
*
Includes a common area maintenance charge of approximately $38,000 per
month
We
believe that our existing facility is well maintained and in good operating
condition. During September 2008 through September 2009, we subleased
approximately 30,000 square feet of our unused office space to a company. The
proceeds from the sublease were used to offset our monthly facilities rent
expense. The Company is exploring opportunities for additional
subtenants or alternate office space.
In the
normal course of business, the Company is occasionally named as a defendant in
various lawsuits. On March 14, 2007, a stockholder filed an action
against the Company seeking money damages in the San Diego Superior Court for
the County of San Diego, asserting claims of intentional misrepresentation,
negligent misrepresentation, fraudulent concealment, and negligence.
Effective March 31, 2009, the Company and the stockholder entered into a
Settlement Agreement, pursuant to which the parties released and forever
discharged each other from any and all claims and causes of action, in
connection with the Claim. There was no cash outlay by the Company as part
of the settlement and the settlement was not material to the Company’s financial
condition or operating results.
On July
9, 2009, an action was filed in the United States District Court for the
Southern District of California by Southwest Technology Innovations LLC (the
“Plaintiff”) against the Company and Espion International, Inc., Workgroup
Solutions, Inc., SonicWall, Inc., Mirapoint Software, Inc., and Proofpoint,
Inc., (collectively the “Defendants”). In this matter, the Plaintiff's
claim against the Company is that the ePrism e-mail filter products, which are
manufactured by an unrelated third party and sold by the Company, allegedly
infringe upon U.S. Patent No. 6,952,719 entitled “Spam Detector Defeating
System” which was issued on October 4, 2005. The Plaintiff is seeking a judgment
in Plaintiff's favor, injunctive relief, and an award of unspecified
damages. The Company is vigorously defending its interests in this
matter.
|
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Since
February 17, 2005 our Common Stock has been traded on the Over-the-Counter
Bulletin Board. The table below sets forth, for the calendar quarters
indicated, the high and low bid prices of the St. Bernard Software common stock
as reported on the Over-the-Counter Bulletin Board. The over-the-counter
market quotations reported below reflect inter-dealer prices, without markup,
markdown or commissions and may not represent actual transactions.
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|
|
|
|
|
|
|
|
| |
|
|
$ |
0.30 |
|
|
$ |
0.16 |
|
|
| |
|
|
$ |
0.45 |
|
|
$ |
0.16 |
|
|
| |
|
|
$ |
0.22 |
|
|
$ |
0.12 |
|
|
| |
|
|
$ |
0.25 |
|
|
$ |
0.13 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
$ |
0.55 |
|
|
$ |
0.15 |
|
|
| |
|
|
$ |
0.53 |
|
|
$ |
0.36 |
|
|
| |
|
|
$ |
0.60 |
|
|
$ |
0.36 |
|
|
| |
|
|
$ |
0.60 |
|
|
$ |
0.50 |
|
|
As of
December 31, 2009 and 2008, there were approximately 137 holders and 141 holders
of our Common Stock, respectively.
No cash
dividends have been paid on our Common Stock during our two most recent fiscal
years, and St. Bernard does not intend to pay cash dividends on its Common Stock
in the immediate future.
Recent
Sales of Unregistered Securities
There
have not been any recent sales of unregistered securities during the fiscal
quarter and year ended December 31, 2009.
Repurchase
of Equity Securities
During
the fiscal quarter and year ended December 31, 2009, we did not repurchase
any shares of our common stock.
Securities
Authorized for Issuance under Equity Compensation Plans
The
information required by this item is incorporated by reference to the
information set forth in Item 12 of this Annual Report on Form
10-K.
As a
Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in
item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
obligations and therefore are not required to provide the information requested
by this Item.
|
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes that appear elsewhere in this Annual Report on Form
10-K. In addition to historical consolidated financial information, the
following discussion contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or
contribute to these differences include those discussed below and elsewhere in
this Annual Report on Form 10-K.
Our
Business
We
design, develop, and market SWG appliances and services that help IT
professionals effectively manage their enterprise’s Internet-based resources.
Incorporated in 1986, the Company has evolved to become a well recognized leader
in the SWG market with its iPrism Web Filter. With millions of end users
worldwide in approximately 6,000 enterprises, educational institutions, small
and medium businesses, and government agencies, the Company strives to deliver
simple, high performance solutions that offer excellent value to our
customers.
Our
customers include approximately 6,000 enterprises, educational institutions,
SMBs, and government agencies. Customers can purchase our solutions directly
from us, through our 1-tier and 2-tier reseller network, and through OEMs.
Appliance purchases typically consist of an initial hardware purchase and
maintenance subscription. Our primary customers are IT managers, directors, and
administrators.
Our
Financial Results
We
reported revenues of $18.4 million for the year ended December 31, 2009,
compared to $18.0 million in the same period in 2008, an increase of 2.1%; a net
loss for the year ended December 31, 2009 of $273,000, compared to a net loss of
$2.3 million in the same period in 2008; and net basic and diluted loss per
share for the year ended December 31, 2009 of $0.02, compared to a net basic and
diluted loss per share of $0.16 reported in the same period in 2008. The
decrease in the basic and diluted loss per share was primarily attributable to a
decrease in operating expenses of approximately $2.1 million for the year ended
December 31, 2009 compared to the same period in 2008.
Cash
provided by operations was $839,000 and cash used by operations was $494,000 for
the years ended December 31, 2009 and 2008, respectively. The net decrease in
use of cash was due primarily to lower operating losses and substantial
improvements to the cost structure of our business.
In
March 2010, we amended our line of credit agreement with SVB which
was established on May 15, 2007. See section below titled “Credit Facilities”
for the terms of the original and amended agreement with SVB. The outstanding
balance on the line of credit with SVB was $1.5 million as of December 31,
2009.
We also
amended our Loan Agreement with PFG on February 27, 2009, which was established
on July 23, 2008. See section below titled “Credit Facilities” for the terms of
the original and amended agreement with PFG. The outstanding balance on the line
of credit with PFG was $0.8 million as of December 31, 2009.
During
the year ended December 31, 2009, we continued to invest in product development.
Our efforts have been directed toward new feature enhancements as well as the
continual improvement of our SWG appliances. Our development efforts were
primarily focused on delivering additional security features for our product
lines while employing a cost-reduction strategy.
Critical
Accounting Policies and Estimates
There are
several accounting policies that are critical to understanding our historical
and future performance because these policies affect the reported amounts of
revenue and other significant areas in our reported financial statements and
involve management’s judgments and estimates. These critical accounting policies
and estimates include:
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allowance
for doubtful accounts;
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●
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impairment
of goodwill and long-lived
assets;
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●
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accounting
for income taxes;
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●
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warranty
obligation; and
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●
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accounting
for stock options.
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These
policies and estimates and our procedures related to these policies and
estimates are described in detail below and under specific areas within the
discussion and analysis of our financial condition and results of operations.
Please refer to Note 1, “Summary of Significant Accounting Policies” in the
Notes to the Consolidated Financial Statements of St. Bernard for the year ended
December 31, 2009 included herein for further discussion of our accounting
policies and estimates.
Revenue
Recognition
We make
significant judgments related to revenue recognition. For each arrangement, we
make significant judgments regarding the fair value of multiple elements
contained in our arrangements, judgments regarding whether our fees are fixed or
determinable and judgments regarding whether collection is probable. We also
make significant judgments when accounting for potential product returns. These
judgments, and their effect on revenue recognition, are discussed
below.
Multiple
Element Arrangements
We
typically enter into arrangements with customers that include database
subscriptions, hardware appliances, maintenance and technical support. We make
judgments regarding the fair value of each element in the arrangement and
generally account for each element separately.
Assuming
all other revenue recognition criteria are met, appliance revenue is recognized
upon delivery in accordance with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 985-605, “Software – Revenue
Recognition – Recognition” (formerly the Statement of Position (“SOP”) 97-2,
“Software Revenue Recognition”, as amended by SOP 98-9, Modification of SOP
97-2, “Software Revenue Recognition with Respect to Certain Transactions”).
Under ASC 985-605-25, we have established vendor specific objective evidence, or
VSOE, on each element of multiple element arrangements using the price charged
when the same element is sold separately. Undelivered elements typically include
subscription, maintenance and technical support and are recognized ratably over
the term.
If we
cannot establish fair value for any undelivered element, we would be required to
recognize revenue for the whole arrangement at the time revenue recognition
criteria for the undelivered element is met.
The
Fee is Fixed or Determinable
Management
makes judgments, at the outset of an arrangement, regarding whether the fees are
fixed or determinable. Our customary payment terms generally require payment
within 30 days after the invoice date. Arrangements with payment terms extending
beyond 120 days after the effective date of the license agreement are not
considered to be fixed or determinable, in which case revenue is recognized as
the fees become due and payable.
Collection
is Probable
Management
also makes judgments at the outset of an arrangement regarding whether
collection is probable. Probability of collection is assessed on a
customer-by-customer basis. We typically sell to customers with whom we have a
history of successful collections. New customers can be subjected to a credit
review process to evaluate the customer’s financial position and ability to pay.
If it is determined at the outset of an arrangement that collection is not
probable, then revenue is recognized upon receipt of payment.
Indirect
Channel Sales
We
generally recognize revenue from licensing of software products through our
indirect sales channel upon sell-through or when evidence of an end-user exists.
For certain types of customers, such as distributors, we recognize revenue upon
receipt of a point of sales report, which is our evidence that the products have
been sold through to an end-user. For resellers, we recognize revenue when we
obtain evidence that an end-user exists, which is usually when the software is
delivered. For licensing of our software to original equipment manufacturers, or
OEMs, royalty revenue is recognized when the OEM reports the sale of software to
an end-user customer, in some instances, on a quarterly basis.
Product
Returns and Exchanges
Our
subscription arrangements do not typically provide customers a contractual right
of return. Some of our sales programs allow customers limited product exchange
rights. Management estimates potential future product returns and exchanges and
reduces current period product revenue in accordance with FASB ASC 605-15-25,
“Revenue Recognition – Products – Recognition”. The estimate is based
on an analysis of historical returns and exchanges. Actual returns may vary from
estimates if we experience a change in actual sales, returns or exchange
patterns due to unanticipated changes in products, or competitive and economic
conditions.
Allowance
for Doubtful Accounts
The
accounts receivable reserve is evaluated quarterly and estimated based on the
actual write offs as a percent of average net accounts receivable for the
previous six months. The net accounts receivable is comprised of
gross accounts receivable adjusted for advanced billings and any amounts
specifically reserved for. Actual bad debts may vary from estimates if we
experience a change in actual sales, returns or exchange patterns due to
unanticipated changes in products, or competitive and economic
conditions.
Impairment
of Goodwill and Long-Lived Assets
In
accordance with Statement of FASB ASC 350, “Intangibles-Goodwill and Other”,
management tests our goodwill for impairment annually and whenever events or
changes in circumstances suggest that the carrying amount may not be
recoverable.
Based
upon the result of an impairment test performed during the fourth quarter of
2009, management of the Company has concluded there was no impairment of
goodwill at December 31, 2009.
In
accordance with FASB ASC 360-10-35-15, “Impairment or Disposal of Long-Lived
Assets”, management reviews our long-lived asset groups, including property and
equipment and other intangibles, for impairment and whenever events indicate
that their carrying amount may not be recoverable. Some of the events that we
consider as impairment indicators for our long-lived assets, including goodwill,
are:
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our
significant underperformance relative to expected operating
results;
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significant
adverse change in legal factors or in the business
climate;
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an
adverse action or assessment by a
regulator;
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unanticipated
competition;
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a
loss of key personnel;
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significant
decrease in the market value of a long-lived asset;
and
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significant
adverse change in the extent or manner in which a long-lived asset is
being used or its physical
condition.
|
When
management determines that one or more impairment indicators are present for an
asset group, we compare the carrying amount of the asset group to net future
undiscounted cash flows that the asset group is expected to generate. If the
carrying amount of the asset group is greater than the net future undiscounted
cash flows that the asset group is expected to generate, we compare the fair
value to the book value of the asset group. If the fair value is less than the
book value, we would recognize an impairment loss. The impairment loss would be
the excess of the carrying amount of the asset group over its fair value. The
management of the Company has concluded that there were no impairment indicators
relating to long-lived assets as of the end of fiscal years 2009 and
2008.
Significant
assumptions and estimates are made when determining if our goodwill or other
long-lived assets have been impaired or if there are indicators of impairment.
Management bases its estimates on assumptions that it believes to be reasonable,
but actual future results may differ from those estimates as our assumptions are
inherently unpredictable and uncertain. Management’s estimates include estimates
of future market growth and trends, forecasted revenue and costs, expected
periods of asset utilization, appropriate discount rates and other
variables.
Accounting
for Income Taxes
We are
required to estimate our income taxes in each federal, state and international
jurisdiction in which we operate. This process requires that management estimate
the current tax exposure as well as assess temporary differences between the
accounting and tax treatment of assets and liabilities, including items such as
accruals and allowances not currently deductible for tax purposes. The income
tax effects of the differences identified are classified as current or long-term
deferred tax assets and liabilities in our consolidated balance sheets.
Management’s judgments, assumptions and estimates relative to the current
provision for income tax take into account current tax laws, its interpretation
of current tax laws and possible outcomes of current and future audits conducted
by foreign and domestic tax authorities. Changes in tax laws or management’s
interpretation of tax laws, and the resolution of current and future tax audits
could significantly impact the amounts provided for income taxes in our balance
sheet and results of operations. We must also assess the likelihood that
deferred tax assets will be realized from future taxable income and, based on
this assessment, establish a valuation allowance if required. As of
December 31, 2009 and 2008, we fully reserved the deferred tax assets resulting
in a tax expense of $5,000 and $3,000, respectively. The deferred tax assets
include net operating losses and may be subject to significant annual limitation
under certain provisions of the Internal Revenue Code of 1986, as amended.
Management’s determination of valuation allowance is based upon a number of
assumptions, judgments and estimates, including forecasted earnings, future
taxable income and the relative proportion of revenue and income before taxes in
the various domestic and international jurisdictions in which we
operate.
The
Company adopted the provisions codified in FASB ASC 740-10, “Income Taxes –
Overall – Recognition”, during fiscal year 2007. Under ASC 740-10, the impact of
an uncertain income tax position on the income tax return must be recognized at
the largest amount that is more-likely-than-not to be sustained upon audit by
the relevant tax authority. An uncertain income tax position will not be
recognized if it has less than 50% likelihood of being sustained. The Company
did not record any adjustments resulting from the adoption of ASC
740-10.
Warranty
Obligation
The
company prepares a quarterly analysis of the estimated warranty liability.
This is achieved by first obtaining a current listing of all active appliances
in the field, as well as each appliance’s remaining maintenance term.
Then, we calculate an average repair cost as well as an average yearly
replacement percentage per appliance model based on historical failure rates,
for both in and out of warranty appliances. These estimates are then
applied to the remaining maintenance terms outstanding, in order to obtain a
point in time estimate of the future warranty expense for all active
appliances.
Accounting
for Stock Options
Effective
January 1, 2006, the Company adopted the fair value recognition provisions
as codified in FASB ASC 718, “Compensation – Stock Compensation”, using the modified
prospective method. Pursuant to this guidance, stock-based compensation expense
for all stock-based compensation awards granted after January 1, 2006 is
based upon the estimated grant date fair value, as described below.
The
Company has non-qualified and incentive stock option plans (together, the
“Plans”) providing for the issuance of options to employees and others as deemed
appropriate by the Board of Directors. Terms of options issued under the Plans
include an exercise price equal to the estimated fair value (as determined by
the Board of Directors) at the date of grant, vesting periods generally between
three and five years, and expiration dates not to exceed ten years from the date
of grant. The determination of fair value of the Company’s stock is derived
using the stock price at the grant date.
Calculating
stock-based compensation expense requires the input of highly subjective
assumptions, including the expected life of the stock options granted, the
expected stock price volatility factor, and the pre-vesting option forfeiture
rate. The fair value of options granted during the years ended December 31, 2009
and 2008 was calculated using the Black-Scholes option pricing model. The
Company estimates the expected life of stock options granted based upon
management’s consideration of the historical life of the options and the vesting
and contractual period of the options granted. The Company estimates the
expected volatility factor based on the weighted average of the historical
volatility of three publicly traded surrogates of the Company and the Company’s
implied volatility from its common stock price. The Company applies its
risk-free interest rate based on the U.S. Treasury yield in effect at the time
of the grant. The Company has no history or expectation of paying any cash
dividends on its common stock. Forfeitures are estimated based on
historical experience.
Commitments
and Contingencies
In the
normal course of business, the Company is occasionally named as a defendant in
various lawsuits. On March 14, 2007, a stockholder filed an action
against the Company seeking money damages in the San Diego Superior Court for
the County of San Diego, asserting claims of intentional misrepresentation,
negligent misrepresentation, fraudulent concealment, and negligence.
Effective March 31, 2009, the Company and the stockholder entered into a
Settlement Agreement, pursuant to which the parties released and forever
discharged each other from any and all claims and causes of action, in
connection with the Claim. There was no cash outlay by the Company as part
of the settlement and the settlement was not material to the Company’s financial
condition or operating results.
On July
9, 2009, an action was filed in the United States District Court for the
Southern District of California by Southwest Technology Innovations LLC (the
“Plaintiff”) against the Company and Espion International, Inc., Workgroup
Solutions, Inc., SonicWall, Inc., Mirapoint Software, Inc., and Proofpoint,
Inc., (collectively the “Defendants”). In this matter, the Plaintiff's
claim against the Company is that the ePrism e-mail filter products, which are
manufactured by an unrelated third party and sold by the Company, allegedly
infringe upon U.S. Patent No. 6,952,719 entitled “Spam Detector Defeating
System” which was issued on October 4, 2005. The Plaintiff is seeking a judgment
in Plaintiff's favor, injunctive relief, and an award of unspecified
damages. The Company is vigorously defending its interests in this
matter.
Results
of Operations of St. Bernard
Comparison
of Fiscals Years Ended December 31, 2009 and 2008 (in millions, except
percentages)
Revenues
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|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
increased $376,000 for the year ended December 31, 2009, compared to the same
period in 2008 predominantly as a result of an increase of approximately
$643,000 in subscription revenues, offset by a decrease of 261,000 in appliance
revenues.
See the
discussion of changes in subscription and appliance revenues below.
Subscription
Revenues
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|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
year ended December 31, 2009, our subscription revenues increased approximately
$643,000 compared to the same period in 2008 due to increases in our customer
base, as well as an increase in the average sales price of our typical customer
resulting in a greater subscription component. The subscription renewal rates
for our products range from 75% to 85%.
Appliance
Revenues
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|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
year ended December 31, 2009, appliance revenues decreased approximately
$261,000 compared with the respective period in 2008. Total units shipped for
the year ended December 31, 2009 were 2,506 compared with 2,555 for the same
period in 2008.
Cost
of Revenues
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|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenues consist primarily of the cost of contract manufactured hardware,
royalties paid to third parties under technology licensing agreements, packaging
costs, fee-based technical support costs and freight. Cost of revenues decreased
$105,000 for the year ended December 31, 2009 compared to the same period in
2008. See the discussion of changes in the cost of subscription and appliance
revenues below.
Cost
of Subscription Revenues
| |
|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Total
cost of subscription revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
The cost
of subscription revenues includes the technical operations group that maintains
the various databases and the technical support group.
Cost
of Appliance Revenues
| |
|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Total
cost of appliance revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
The cost
of appliance revenues, which includes contract manufactured equipment, packaging
and freight, decreased $144,000 for the year ended December 31, 2009 compared to
the same period in 2008. Gross margin decreased slightly for the period
mentioned above as the Company experienced a shift in customer demand towards
the higher-end models as a result of our marketing and sales efforts during the
year ended December 31, 2009.
Sales
and Marketing
| |
|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Total
sales and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and
marketing expense consists primarily of salaries, related benefits, commissions,
consultant fees, advertising, lead generation and other costs associated with
our sales and marketing efforts. For the year ended December 31, 2009, sales and
marketing expense decreased 15.4%, or approximately $1.2 million, over the same
period in 2008 mainly attributable to our successful cost reduction
efforts.
Research
and Development
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|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Total
research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expense consists primarily of salaries, related benefits,
third-party consultant fees and other engineering related costs. The increase of
$298,000 for the year ended December 31, 2009 compared to the same period in
2008 was primarily the result of a net increase in compensation
costs. During 2009, the Company modified its consulting agreement
with Softworks Group Pty Ltd. As a result, the majority of research
and development was moved in-house to Company headquarters during the latter
half of 2009, eventually leading to the transitioning of 100% of the research
and development expenses in-house during 2010. Management believes that a
significant investment in research and development is required to remain
competitive and we expect to continue to invest in research and development
activities.
We
anticipate research and development expenses to increase in 2010 compared to
2009, as we continue to extend the core functionality and features within our
core products.
General
and Administrative
| |
|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Total
general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses, which consist primarily of salaries and related
benefits, and fees for professional services, such as legal and accounting
services, decreased approximately $1.8 million for the year ended December 31,
2009, compared to the same period in 2008, mainly due to our extensive cost
cutting efforts. The most significant decreases during the year ended December
31, 2009 included decreases in compensation and consulting expenses of
approximately $1.0 million, stock-based compensation expenses of $305,000, Board
of Director expenses of $134,000, and legal expense of $112,000. The decrease in
stock-based compensation expenses was mainly attributable to the cancellation of
stock options to the Company's former CEO.
Write-off
of Capitalized Software
| |
|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Total
write-off of capitalized software
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Between
September 2008 and June 2009, the Company capitalized internal software
development costs, which included certain payroll and payroll related costs for
employees and contracting costs for software contractors who were directly
associated with the development phase of certain internal-use
software. In June 2009, a decision to suspend further development of
this software was made by management. On October 5, 2009, management determined
that given certain personnel changes, the estimated costs to complete
development and maintain this new software far outweighed the potential benefit
that would be received, and the project was scrapped. As such, the
Company has written off previously capitalized software costs related to the
development of this software of approximately $473,000 during the quarter ended
September 30, 2009.
Interest
and Other Income, Net
| |
|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Total
interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income, net, includes interest expense, interest income, and other
income.
Gain
on Sale of Assets
| |
|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
The gain
for the year ended December 31, 2008 consisted of excess renewal fees and the
release of indemnification funds in connection with the sale of certain product
lines in 2007. There were no similar revenues recognized during
2009.
Non-GAAP
Financial Measures
Non-GAAP
net income is defined as net income (loss) less non-recurring expenses recorded
in connection with the write-off of previously capitalized
software. Non-GAAP net income for the year ended December 31, 2009
was $200,000 excluding non-recurring expenses of $473,000. Management
believes this Non-GAAP financial measure provides a more meaningful reflection
of the operating results of the Company.
Recent
Accounting Pronouncements
In
January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06,
“Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value
Measurements” (“ASU 2010-06”). ASU 2010-06 provides amendments that require new
disclosures as follows: (1) Transfers in and out of Level 1 and 2. A reporting
entity should disclose separately the amounts of significant transfers in and
out of Level 1 and Level 2 fair value measurements and describe reasons for the
transfers and (2) Activity in Level 3 fair value measurements. In the
reconciliation for fair value measurements using significant unobservable inputs
(Level 3), a reporting entity should present separately information about
purchases, sales, issuances, and settlements (that is, on a gross basis rather
than as one net number). In addition, this Update provides
clarification to existing disclosures as follows: (1) Level of disaggregation. A
reporting entity should provide fair value measurement disclosures for each
class of assets and liabilities. A class is often a subset of assets or
liabilities within a line item in the statement of financial position. A
reporting entity needs to use judgment in determining he appropriate classes of
assets and liabilities and (2) Disclosures about inputs and valuation
techniques. A reporting entity should provide disclosures about the valuation
techniques and inputs used to measure fair value for both recurring and
nonrecurring fair value measurements. Those disclosures are required for fair
value measurements that fall in either Level 2 or Level 3. The amendments for
ASU 2010-06 are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. We are
currently evaluating the impact, if any, the adoption of ASU 2010-06 will have
on our consolidated financial statements.
In
October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue
Arrangements That Include Software Elements” (“ASU 2009-14”). ASU
2009-14 changes the accounting model for revenue arrangements that include both
tangible products and software elements that are “essential to the
functionality,” and scopes these products out of current software revenue
guidance. The new guidance will include factors to help companies determine what
software elements are considered “essential to the functionality.” The
amendments will now subject software-enabled products to other revenue guidance
and disclosure requirements, such as guidance surrounding revenue arrangements
with multiple-deliverables. The amendments ASU 2009-14 are effective
prospectively for revenue arrangements entered into or materially modified in
the fiscal years beginning on or after June 15, 2010. Early application is
permitted. We are currently evaluating the impact, if any, the adoption of ASU
2009-14 will have on our consolidated financial statements.
In
October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable
Revenue Arrangements” (“ASU 2009-13”). ASU 2009-13 establishes the
accounting and reporting guidance for arrangements including multiple
revenue-generating activities. This ASU provides amendments to the criteria for
separating deliverables, measuring and allocating arrangement consideration to
one or more units of accounting. The amendments in this ASU also establish a
selling price hierarchy for determining the selling price of a deliverable.
Significantly enhanced disclosures are also required to provide information
about a vendor’s multiple-deliverable revenue arrangements, including
information about the nature and terms, significant deliverables, and its
performance within arrangements. The amendments also require providing
information about the significant judgments made and changes to those judgments
and about how the application of the relative selling-price method affects the
timing or amount of revenue recognition. The amendments in ASU 2009-13 are
effective prospectively for revenue arrangements entered into or materially
modified in the fiscal years beginning on or after June 15, 2010. We are
currently evaluating the impact, if any, the adoption of ASU 2009-13 will have
on our consolidated financial statements.
Other
accounting standards that have been issued by the FASB or other
standards-setting bodies are not expected to have a material impact on the
Company’s consolidated financial statements.
Liquidity
and Capital Resources
Cash
Flows
Our
largest source of operating cash flows is cash collections from our customers
for purchases of subscriptions and appliances. Our standard payment terms for
both subscription and support invoices are net 30 days from the date of invoice.
The recurring subscription portion of our business is a mainstay of the cash
flow we generate. Our primary uses of cash for operating activities include
personnel and facilities, related expenditures and technology costs, as well as
costs associated with outside support and services.
Cash
provided by operating activities for year ended December 31, 2009 was $839,000
compared to cash used during the year ended December 31, 2008 of $494,000. The
increase in cash provided by operating activities was due primarily to
significant decreases to our net loss and changes in our operating assets and
liability accounts during 2009.
Cash
flows (used) provided by investing activities for the years ended December 31,
2009 and 2008 was ($101,000) and $494,000, respectively. The cash used by
investing activities during 2009 was for the purchases of fixed assets. The cash
provided by investing activities during 2008 included the $500,000 payment for
the “Holdback Amount” by EVault in satisfaction of the signed agreement between
EVault and the Company for the sale of the Open File Manager product
line.
Cash
flows (used) provided by financing activities for the years ended December 31,
2009 and 2008 was ($335,000) and $754,000, respectively. The decrease in cash
provided by financing activities for the year ended December 31, 2009, compared
to the same period in 2008 was primarily due to the net decrease in short-term
borrowings.
As a
result of the foregoing, the net increase in cash and cash equivalents was
$403,000 for the year ended December 31, 2009 as compared to a net increase in
cash of approximately $754,000 for the comparable period in 2008.
Credit
Facilities
Silicon
Valley Bank (“SVB”)
On May
15, 2007, the Company entered into a Loan and Security Agreement with SVB (the
“SVB Loan Agreement”) which provides for a credit facility not to exceed $2.0
million, subject to a borrowing base formula. The SVB Loan Agreement was amended
on February 27, 2009 (the “SVB Loan Amendment”). Pursuant to the terms of the
SVB Loan Amendment, among other things, SVB (i) decreased the interest rate
on the revolving line of credit to the greater of 3.50% over the prime rate or
7.5% (from the greater of 3% over the prime rate or 10.5%), (ii) modified
the tangible net worth covenant to no less than negative seventeen million
dollars ($17,000,000) at all times, increasing quarterly by fifty percent (50%)
of net income and monthly by fifty percent (50%) of issuances of equity after
January 31, 2009 and the principal amount of subordinated debt received after
January 31, 2009, (iii) modified the borrowing base to seventy percent
(70%) of eligible accounts and the lesser of sixty percent (60%) of advanced
billing accounts or six hundred thousand dollars ($600,000) as determined by
SVB; provided, however, that SVB may, with notice to the Company, decrease the
foregoing percentage in its good faith business judgment based on events,
conditions, contingencies, or risks which, as determined by SVB, may adversely
affect collateral, and (iv) extended the revolving line maturity date to May 15,
2010.
In March
2010, the SVB Loan Agreement was amended. Pursuant to the terms of the SVB Loan
Amendment, among other things, SVB (i)
increased the revolving line balance to $2.3 million (from $2.0 million),
(ii) decreased the interest rate on the revolving line of credit to 2.0%
(from 3.5%) over the greater of the SVB prime rate or 6.0% (from 7.5%),
(iii) modified the tangible net worth covenant to no less than negative
eighteen million dollars ($18,000,000) at all times, increasing quarterly by
fifty percent (50%) of net income and monthly by fifty percent (50%) of
issuances of equity after January 31, 2010 and the principal amount of
subordinated debt received after January 31, 2010, (iv) modified the
borrowing base to eighty percent (80%) of eligible accounts, and (v) extended
the revolving line maturity date to May 15, 2011. At
December 31, 2009, total availability under the SVB Loan Agreement was $2.0
million, of which $1.5 million was outstanding, and the applicable interest rate
was 7.5% at December 31, 2009. The Company was in compliance with the above
stated covenants and restrictions. The obligations under the SVB Loan Agreement
are secured by substantially all of St. Bernard’s assets.
In
addition, the Loan Amendment provides for two additional term loan facilities
totaling $500,000 that can only be used to repay indebtedness owing from the
Company to Partners for Growth. Term Loan A, in the amount of
$300,000, accrues interest at a floating per annum rate equal to the greater of
two percentage points (2.00%) above the SVB prime rate or six percent
(6.00%). Term Loan B, in the amount of $200,000, accrues interest at
a floating per annum rate equal to the greater of three and one half percentage
points (3.50%) above the SVB prime rate or seven and one half percent
(7.50%).
In connection with the execution of a previous SVB Loan
Amendment dated January 25, 2008, St. Bernard issued warrants to SVB, which
allows SVB to purchase up to 140,350 shares of St. Bernard common stock at an
exercise price of $0.57 per share. The warrants expire on the seventh
anniversary of their issue date. The Company recorded deferred debt issuance
costs in the amount of $58,000, based on the estimated fair value allocated to
the warrants using the following assumptions; 75.35% volatility, risk free
interest rate of 3.61%, an expected life of seven years and no
dividends. Amortization of the debt issuance costs, including
amounts recorded as a debt discount for warrants previously issued for years
ended December 31, 2009 and 2008, which is being recorded as interest expense,
was approximately $34,000 and $104,000, respectively. Furthermore, St. Bernard
agreed to grant SVB certain piggyback registration rights with respect to the
shares of common stock underlying the warrants.
Partners
for Growth II, LP (“PFG”)
On July
21, 2008, the Company entered into a Loan Agreement with PFG (the “PFG Loan
Agreement”), which became effective on July 23, 2008 and which provides for a
credit facility not to exceed $1.5 million, subject to a borrowing base formula.
The PFG Loan Agreement was subsequently amended on February 27, 2009. The annual
interest rate on the PFG Loan is set at the Prime Rate, quoted by SVB as its
Prime Rate, plus 3% (the “Applicable Rate”). At December 31, 2009,
the effective interest rate was 7%. The PFG Loan Agreement will terminate on
July 20, 2010, on which date all principal, interest and other outstanding
monetary obligations must be repaid to PFG. The obligations under the PFG Loan
Agreement are secured by a security interest in collateral comprised of
substantially all of St. Bernard’s assets, subordinated to the SVB Loan
Agreement.
The PFG
Loan Agreement contains affirmative, negative and financial covenants customary
for credit facilities of this type, including, among other things, limitations
on indebtedness, liens, sales of assets, mergers, investments, and
dividends. The PFG Loan Agreement also requires that St. Bernard
maintain a Modified Net Income (as defined in the PFG Loan Agreement) greater
than zero. PFG eliminated the Modified Net Income covenant for the reporting
periods ending February 28, 2009 and March 31, 2009. The PFG Loan Agreement
contains events of default customary for credit facilities of this type (with
customary grace or cure periods, as applicable) and provides that upon the
occurrence and during the continuance of an event of default, among other
things, the interest rate on all borrowings will be increased, the payment of
all borrowings may be accelerated, PFG’s commitments may be terminated and PFG
shall be entitled to exercise all of its rights and remedies, including remedies
against collateral. At December 31, 2009, the Company was in
compliance with the above stated covenants.
In
connection with the execution of the PFG Loan Agreement, St. Bernard received
approximately $1,000 from PFG, and as a result, issued a warrant to PFG on July
21, 2008 (the “Warrant”), which allows PFG to purchase up to 450,000 shares of
St. Bernard common stock at an exercise price equal to $0.46 per share. The
Warrant expires on July 20, 2013. The Company recorded deferred debt
issuance costs in the amount of $125,000, based on the estimated fair value
allocated to the warrants using the following assumptions; 69.07% volatility,
risk free interest rate of 4.09%, an expected life of five years and no
dividends. Amortization of the debt issuance costs for the years ended December
31, 2009 and 2008, which is being recorded as interest expense, was
approximately $63,000 and $28,000, respectively. As of December 31,
2009, total availability under the PFG Loan Agreement was $1.5 million, of which
$750,000 was outstanding.
Contractual
Commitments
The
following table is a summary of the contractual lease commitments for operating
facilities and certain equipment under non-cancelable operating leases with
various expiration dates through July 2011. Future minimum payments as of
December 31, 2009 are as follows:
During
September 2008 through September 2009, we subleased a portion of our unused
office space to a company. The proceeds from the sublease were used to offset
our monthly facilities rent expense.
Liquidity
As of
December 31, 2009, the Company had approximately $2.5 million in cash and cash
equivalents and a working capital deficit of $9.4
million. Approximately $10.2 million of our current liability balance
at December 31, 2009 consisted of deferred revenues, which represents amounts
that are expected to be amortized into revenue as they are earned in future
periods. For the year ended December 31, 2009, the Company incurred a
net loss of $273,000 and as of December 31, 2009 has incurred a cumulative net
loss of $49.7 million. For the year ended December 31, 2009 cash provided
by operating activities was $839,000.
In an
effort to achieve profitability, the Company has made and continues to make
substantial changes to the cost structure of its business. These changes include
monitoring headcount to be in line with the current size of its business,
renegotiating vendor contracts, and refocusing its marketing strategy around its
core business. During March 2010, the Company also extended to May 15, 2011 the
maturity date of the SVB Loan Agreement with SVB and negotiated a significant
reduction in the interest rate (See Note 13). At December 31, 2009, total
availability under the SVB Loan Agreement was $2.0 million, of which $1.5
million was outstanding, and the applicable interest rate was
7.5%. In addition, the Company has a loan agreement with PFG under
which there is borrowing availability of approximately $750,000 as of December
31, 2009 (See Note 5).
The
Company believes that its existing cash resources, combined with projected
collections on billings, reduced expenditures based on implemented cost
reductions, and borrowing availability under existing credit facilities, will
provide sufficient liquidity for the Company to meet its continuing obligations
for the next twelve months.
Off-Balance
Sheet Arrangements
Except
for the commitments arising from our operating leases arrangements disclosed in
the preceding section, we have no other off-balance sheet arrangements that are
reasonably likely to have a material effect on our financial
statements.
Forward-Looking
Statements
This
Annual Report on Form 10-K and the information incorporated herein by
reference contain forward-looking statements that involve a number of risks and
uncertainties. Although our forward-looking statements reflect the good faith
judgment of our management, these statements can only be based on facts and
factors currently known by us. Consequently, these forward-looking statements
are inherently subject to risks and uncertainties, and actual results and
outcomes may differ materially from results and outcomes discussed in the
forward-looking statements.
Forward-looking
statements can be identified by the use of forward-looking words such as
“believes,” “expects,” “hopes,” “may,” “will,” “plan,” “intends,” “estimates,”
“could,” “should,” “would,” “continue,” “seeks,” “pro forma,” or “anticipates,”
or other similar words (including their use in the negative), or by discussions
of future matters such as the development of new products, technology
enhancements, possible changes in legislation and other statements that are not
historical. These statements include but are not limited to statements under the
captions “Risk Factors,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Business” as well as other sections in
this report.
The
cautionary statements made in this report are intended to be applicable to all
related forward-looking statements wherever they may appear in this report. We
urge you not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. Except as required by law, we assume
no obligation to update our forward-looking statements, even if new information
becomes available in the future.
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Quantitative
and Qualitative Disclosures about Market
Risk
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As a
Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in
item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
obligations and therefore are not required to provide the information requested
by this Item.
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Financial
Statements and Supplementary Data
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The
information required by this Item is incorporated by reference from the
consolidated financial statements for the fiscal years ended December 31, 2009
and 2008 listed in Item 15 of Part IV of this report, beginning on page
F-3.
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Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
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None.
Evaluation
of Disclosure Controls
Under the
supervision of and with the participation of our management, including our Chief
Executive Officer and VP of Finance, at December 31, 2009, the Company carried
out an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange
Act”). These disclosure controls and procedures are designed to provide
reasonable assurance that the information required to be disclosed by the
Company in its periodic reports with the SEC is recorded, processed, summarized
and reported within the time periods specified by the SEC’s rules and forms, and
that the information is accumulated and communicated to the Company’s
management, including our Chief Executive Officer and VP of Finance, as
appropriate to allow timely decisions regarding required disclosure. The design
of any disclosure controls and procedures is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.
During
the course of our evaluation, our Chief Executive Officer and VP of Finance have
concluded that our disclosure controls and procedures were effective at the
reasonable assurance level as of December 31, 2009.
Management’s
Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
our financial reporting, as defined in Rule 13a-15(f) under the Exchange
Act. Under the supervision and with the participation of our management,
including our Chief Executive Officer and VP of Finance, we conducted an
evaluation of the effectiveness of our internal control over financial
reporting. Management has used the framework set forth in the report entitled,
Internal Control—Integrated
Framework, published by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) to evaluate the effectiveness of our internal control
over financial reporting.
Based on
its evaluation, management has concluded that our internal control over
financial reporting was effective as of December 31, 2009, the end of our most
recent fiscal year.
This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation requirements by the Company’s
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only management’s
report in this Annual Report.
Changes
in Internal Control over Financial Reporting
During
the fourth quarter of 2009, there were no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
None.
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Directors,
Executive Officers of the Registrant and Corporate
Governance
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The
information required by Item 10 of Form 10-K is incorporated by reference to the
information under the captions “Election of Directors” and “Affiliate
Transactions and Relationships” in our Proxy Statement, which will be filed with
the SEC within 120 days after the end of our fiscal year ended December 31,
2009.
The
information required by Item 11 of Form 10-K is incorporated by reference to the
information under the caption “Executive Compensation” in our Proxy Statement,
which will be filed with the SEC within 120 days after the end of our fiscal
year ended December 31, 2009.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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The
information required by Item 12 of Form 10-K is incorporated by reference to the
information under the caption “Security Ownership of Certain Beneficial Owners
and Management” in our Proxy Statement, which will be filed with the SEC within
120 days after the end of our fiscal year ended December 31,
2009.
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Certain
Relationships and Related Transactions, and Director
Independence
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The
information required by Item 13 of Form 10-K is incorporated by reference to the
information under the caption “Certain Relationships and Related Transactions”
in our Proxy Statement, which will be filed with the SEC within 120 days after
the end of our fiscal year ended December 31, 2009.
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Principal
Accountant Fees and Services
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The
information required by Item 14 of Form 10-K is incorporated by reference to the
information under the caption “Audit Fees” in our Proxy Statement, which we will
file with the SEC within 120 days after the end of our fiscal year ended
December 31, 2009.
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Exhibits,
Financial Statement Schedules
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Consolidated
Financial Statements and Schedules:
The
following consolidated financial statements are filed as part of this report as
required by “Item 8. Financial Statements and Supplementary Data.”
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Report
of Independent Registered Public Accounting Firm
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F-2
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Consolidated
Balance Sheets as of December 31, 2009 and 2008
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F-3
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Consolidated
Statements of Operations for the Years Ended December 31, 2009 and
2008
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F-4
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Consolidated
Statements of Stockholders’ Deficit for the Years Ended December 31, 2009
and 2008
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F-5
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Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009 and
2008
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F-6
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Notes
to Consolidated Financial Statements
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F-7
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Exhibits:
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3.1
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Amended
and Restated Certificate of Incorporation of St. Bernard Software, Inc.
(formerly known as Sand Hill IT Security Acquisition Corp.) (incorporated
herein by reference to Exhibit 3.1.1 to the Company’s Registration
Statement on Form S-4 initially filed with the Securities and Exchange
Commission on December 16, 2005).
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3.2
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Amended
and Restated Bylaws of St. Bernard Software, Inc. (formerly known as Sand
Hill IT Security Acquisition Corp.) (incorporated herein by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8-K initially filed
with the Securities and Exchange Commission on April 5,
2007).
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4.1
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Specimen
Unit Certificate of St. Bernard Software, Inc. (formerly known as Sand
Hill IT Security Acquisition Corp.) (incorporated herein by reference to
Exhibit 4.1 to the Company’s Amendment No. 2 to the Registration
Statement on Form S-1 (File No. 333-114861) filed with the Securities and
Exchange Commission on June 23, 2004).
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4.2
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Specimen
Common Stock Certificate of St. Bernard Software, Inc. (formerly known as
Sand Hill IT Security Acquisition Corp.) (incorporated herein by reference
to Exhibit 4.2 to the Company’s Amendment No. 2 to the Registration
Statement on Form S-1 (File No. 333-114861) filed with the Securities and
Exchange Commission on June 23, 2004).
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4.3
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Specimen
Warrant Certificate of St. Bernard Software, Inc. (formerly known as Sand
Hill IT Security Acquisition Corp.) (incorporated herein by reference to
Exhibit 4.3 to the Company’s Amendment No. 2 to the Registration Statement
on Form S-1 (File No. 333-114861) filed with the Securities and Exchange
Commission on June 23, 2004).
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4.4
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Unit
Purchase Option No. UPO-2 dated July 30, 2004, granted to Newbridge
Securities Corporation (incorporated herein by reference to Exhibit 4.4.1
to the Company’s Annual Report on Form 10-KSB filed with the Securities
and Exchange Commission on March 31, 2005).
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4.5
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Unit
Purchase Option No. UPO-3 dated July 30, 2004, granted to James E.
Hosch (incorporated herein by reference to Exhibit 4.4.2 to the Company’s
Annual Report on Form 10-KSB filed with the Securities and Exchange
Commission on March 31, 2005).
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4.6
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Unit
Purchase Option No. UPO-4 dated July 30, 2004, granted to Maxim Group, LLC
(incorporated herein by reference to Exhibit 4.4.3 to the Company’s Annual
Report on Form 10-KSB filed with the Securities and Exchange Commission on
March 31, 2005).
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4.7
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Unit
Purchase Option No. UPO-5 dated July 30, 2004, granted to Broadband
Capital Management, LLC (incorporated herein by reference to Exhibit 4.4.4
to the Company’s Annual Report on Form 10-KSB filed with the Securities
and Exchange Commission on March 31, 2005).
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4.8
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Unit
Purchase Option No. UPO-6 dated July 30, 2004, granted to I-Bankers
Securities Incorporated (incorporated herein by reference to Exhibit 4.4.5
to the Company’s Annual Report on Form 10-KSB filed with the Securities
and Exchange Commission on March 31, 2005).
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4.9
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Warrant
issued by St. Bernard Software, Inc. on May 16, 2007 to Silicon Valley
Bank (incorporated herein by reference to Exhibit 4.1 to the Company’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 23, 2007).
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4.10
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Warrant
issued by St. Bernard Software, Inc. on January 25, 2008 to Agility
Capital, LLC (incorporated herein by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 31, 2008).
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4.11
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Warrant
issued by St. Bernard Software, Inc. on January 25, 2008 to Silicon Valley
Bank (incorporated herein by reference to Exhibit 4.2 to the Company’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on January 31, 2008).
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4.12
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Warrant
issued by St. Bernard Software, Inc. on July 21, 2008 to Partners for
Growth II, L.P. (incorporated herein by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 28, 2008).
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4.13
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Warrant
Purchase Agreement between St. Bernard Software, Inc. and Partners for
Growth II, L.P. dated July 21, 2008 (incorporated herein by reference to
Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 28, 2008).
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4.14
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Warrant
Purchase Agreement among Humphrey P. Polanen and Newbridge Securities
Corporation and I-Bankers Securities Incorporated (incorporated herein by
reference to Exhibit 10.13 to the Company’s Registration Statement on Form
S-1 (File No. 333-114861) filed with the Securities and Exchange
Commission on April 26, 2004.)
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4.15*
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St.
Bernard Software, Inc. Amended and Restated 2005 Stock Option Plan
(incorporated herein by reference to Exhibit 99.1 to the Company’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on
January 4, 2008).
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4.16*
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AgaveOne,
Inc. (dba Singlefin) 2005 Stock Incentive Plan (incorporated herein by
reference to Exhibit 4.4 to the Company’s Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on December 28,
2006).
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4.17*
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St.
Bernard Software, Inc. 2006 Employee Stock Purchase Plan (incorporated
herein by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on
December 22, 2006).
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10.1
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Loan
and Security Agreement between St. Bernard Software, Inc. and Silicon
Valley Bank dated May 11, 2007 (incorporated herein by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 23, 2007).
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10.2
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Third
Amendment to Loan and Security Agreement between St. Bernard Software,
Inc. and Silicon Valley Bank dated January 25, 2008 (incorporated herein
by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 31,
2008).
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10.3
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Intellectual
Property Security Agreement between St. Bernard Software, Inc. and Silicon
Valley Bank dated January 25, 2008 (incorporated herein by reference to
Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 31,
2008).
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10.4
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St.
Bernard Software, Inc. 2008 Variable (Bonus) Compensation Plan
(incorporated herein by reference to the Company’s Current Report on Form
8-K filed with the Securities and Exchange Commission on April 28,
2008).
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10.5*
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Employment
Agreement between St. Bernard Software, Inc. and Louis E. Ryan executed
February 10, 2009 (incorporated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 11, 2009).
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10.6
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|
Fifth
Amendment to Loan and Security Agreement between St. Bernard Software,
Inc. and Silicon Valley Bank dated February 27, 2009 (incorporated herein
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on March 6,
2009).
|
|
|
|
|
|
10.7
|
|
First
Amendment to Loan Agreement between St. Bernard Software, Inc. and
Partners for Growth II, L.P. dated February 27, 2009 (incorporated herein
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on March 6,
2009).
|
|
|
|
|
|
10.8*
|
|
Amendment
to the pricing of stock options grants under the 2005 Stock Option Plan
(incorporated herein by reference to the Company’s Current Report on Form
8-K filed with the Securities and Exchange Commission on February 11,
2009).
|
|
10.9*
|
|
Amended
Employment Agreement between St. Bernard Software, Inc. and Steve Yin
executed April 2, 2009 (incorporated herein by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 7, 2009).
|
|
|
|
|
|
10.10*
|
|
Consulting
Agreement between St. Bernard Software, Inc. and Softworks Group Pty Ltd
executed January 7, 2009 (incorporated herein by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 15, 2009).
|
|
|
|
|
|
10.11*
|
|
Employment
agreement between St. Bernard Software, Inc. and Thalia Gietzen executed
June 15, 2009 (incorporated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on July 13, 2009).
|
|
|
|
|
|
10.12*
|
|
Consulting
Agreement between St. Bernard Software, Inc. and Softworks Group Pty Ltd
executed August 11, 2009 (incorporated herein by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 21, 2009).
|
| |
|
|
|
10.13
|
|
Sixth
Amendment to Loan and Security Agreement between St. Bernard Software,
Inc. and Silicon Valley Bank dated March 23, 2010 (incorporated herein by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on March 25,
2010).
|
|
|
|
|
|
14.1
|
|
Amended
Code of Business Conduct and Ethics adopted April 1, 2009 (incorporated
herein by reference to Exhibit 14.1 to the Company’s Annual Report on Form
10-KSB filed with the Securities and Exchange Commission on March 20,
2008).
|
|
|
|
|
17.1
|
|
Resignation
letter to the management of St. Bernard Software, Inc. and Scott
Broomfield executed June 23, 2009 (incorporated herein by reference to
Exhibit 17.1 to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 30, 2009).
|
|
|
|
|
|
23.1
|
|
Consent
of Squar, Milner, Peterson, Miranda & Williamson,
LLP
|
|
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
___________________
|
*
|
Management
contract or compensatory plan or
arrangement
|
ST.
BERNARD SOFTWARE, INC.
INDEX
TO FINANCIAL STATEMENTS
|
|
|
Page
|
|
|
|
|
| Report
of Independent Registered Public Accounting Firm |
F-2
|
| Consolidated
Balance Sheets as of December 31, 2009 and 2008 |
F-3
|
| Consolidated
Statements of Operations for the Years Ended December 31, 2009 and
2008 |
F-4
|
| Consolidated
Statements of Stockholders’ Deficit for the Years Ended December 31, 2009
and 2008 |
F-5
|
| Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009 and
2008 |
F-6
|
| Notes
to Consolidated Financial Statements |
F-7
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the
Board of Directors
St.
Bernard Software, Inc
San
Diego, CA
We have
audited the accompanying consolidated balance sheets of St. Bernard Software,
Inc. and its subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders’ deficit and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company was not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
were appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of St. Bernard Software, Inc.
as of December 31, 2009 and 2008, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/
Squar, Milner, Peterson, Miranda & Williamson, LLP
San
Diego, California
March 26,
2010
|
St.
Bernard Software, Inc.
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,454,000 |
|
|
$ |
2,051,000 |
|
Accounts
receivable - net of allowance for doubtful accounts of $13,000 and
$52,000 in 2009 and 2008, respectively
|
|
|
2,534,000 |
|
|
|
3,170,000 |
|
|
Inventories
- net
|
|
|
242,000 |
|
|
|
364,000 |
|
|
Prepaid
expenses and other current assets
|
|
|
335,000 |
|
|
|
381,000 |
|
|
Total
current assets
|
|
|
5,565,000 |
|
|
|
5,966,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Assets - Net
|
|
|
564,000 |
|
|
|
828,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
148,000 |
|
|
|
281,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
7,568,000 |
|
|
|
7,568,000 |
|
|
Total
Assets
|
|
$ |
13,845,000 |
|
|
$ |
14,643,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$ |
2,250,000 |
|
|
$ |
2,462,000 |
|
|
Accounts
payable
|
|
|
817,000 |
|
|
|
1,270,000 |
|
|
Accrued
compensation expenses
|
|
|
834,000 |
|
|
|
1,361,000 |
|
|
Accrued
expenses and other current liabilities
|
|
|
597,000 |
|
|
|
518,000 |
|
|
Warranty
liability
|
|
|
192,000 |
|
|
|
195,000 |
|
|
Current
portion of capitalized lease obligations
|
|
|
22,000 |
|
|
|
147,000 |
|
|
Deferred
revenue
|
|
|
10,209,000 |
|
|
|
10,469,000 |
|
|
Total
current liabilities
|
|
|
14,921,000 |
|
|
|
16,422,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Rent
|
|
|
- |
|
|
|
118,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
Lease Obligations, Less Current Portion
|
|
|
- |
|
|
|
22,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Revenue
|
|
|
7,708,000 |
|
|
|
7,152,000 |
|
|
Total
liabilities
|
|
|
22,629,000 |
|
|
|
23,714,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Deficit
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; 5,000,000 shares authorized; no shares
issued and outstanding
|
|
|
- |
|
|
|
- |
|
Common
stock, $0.01 par value; 50,000,000 shares authorized; 13,319,991
and 14,783,090 shares issued and outstanding in 2009 and 2008,
respectively
|
|
|
132,000 |
|
|
|
148,000 |
|
|
Additional
paid-in capital
|
|
|
40,774,000 |
|
|
|
40,308,000 |
|
|
Accumulated
deficit
|
|
|
(49,690,000 |
) |
|
|
(49,527,000 |
) |
|
Total
stockholders’ deficit
|
|
|
(8,784,000 |
) |
|
|
(9,071,000 |
) |
|
Total
Liabilities and Stockholders’ Deficit
|
|
$ |
13,845,000 |
|
|
$ |
14,643,000 |
|
See
accompanying notes to the consolidated financial statements.
|
|
|
St.
Bernard Software, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Subscription
|
|
$ |
14,559,000 |
|
|
$ |
13,916,000 |
|
|
Appliance
|
|
|
3,790,000 |
|
|
|
4,051,000 |
|
|
License
|
|
|
25,000 |
|
|
|
31,000 |
|
|
Total
Revenues
|
|
|
18,374,000 |
|
|
|
17,998,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription
|
|
|
2,229,000 |
|
|
|
2,194,000 |
|
|
Appliance
|
|
|
2,571,000 |
|
|
|
2,715,000 |
|
|
License
|
|
|
15,000 |
|
|
|
11,000 |
|
|
Total
Cost of Revenues
|
|
|
4,815,000 |
|
|
|
4,920,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
13,559,000 |
|
|
|
13,078,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing expenses
|
|
|
6,412,000 |
|
|
|
7,577,000 |
|
|
Research
and development expenses
|
|
|
3,241,000 |
|
|
|
2,943,000 |
|
|
General
and administrative expenses
|
|
|
3,484,000 |
|
|
|
5,280,000 |
|
|
Write-off
of capitalized software
|
|
|
473,000 |
|
|
|
- |
|
|
Total
Operating Expenses
|
|
|
13,610,000 |
|
|
|
15,800,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(51,000 |
) |
|
|
(2,722,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other
Expense (Income)
|
|
|
|
|
|
|
|
|
|
Interest
expense - net
|
|
|
260,000 |
|
|
|
625,000 |
|
|
Gain
on sale of assets
|
|
|
- |
|
|
|
(563,000 |
) |
|
Other
income - net
|
|
|
(43,000 |
) |
|
|
(443,000 |
) |
|
Total
Other Expense (Income)
|
|
|
217,000 |
|
|
|
(381,000 |
) |
|
Loss
Before Income Taxes
|
|
|
(268,000 |
) |
|
|
(2,341,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(5,000 |
) |
|
|
(3,000 |
) |
|
Net
Loss
|
|
$ |
(273,000 |
) |
|
$ |
(2,344,000 |
) |
|
Loss
Per Common Share - Basic and Diluted
|
|
$ |
(0.02 |
) |
|
$ |
(0.16 |
) |
|
Weighted
Average Shares Outstanding - Basic and Diluted
|
|
|
14,177,996 |
|
|
|
14,777,656 |
|
See
accompanying notes to the consolidated financial statements.
|
St.
Bernard Software, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statement of Stockholders' Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
14,760,052 |
|
|
$ |
148,000 |
|
|
$ |
39,079,000 |
|
|
$ |
(47,183,000 |
) |
|
$ |
(7,956,000 |
) |
|
Common
stock issued under the employee stock purchase plan
|
|
|
23,038 |
|
|
|
- |
|
|
|
11,000 |
|
|
|
- |
|
|
|
11,000 |
|
|
Stock-based
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
882,000 |
|
|
|
- |
|
|
|
882,000 |
|
|
Value
of warrants issued
|
|
|
- |
|
|
|
- |
|
|
|
336,000 |
|
|
|
- |
|
|
|
336,000 |
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,344,000 |
) |
|
|
(2,344,000 |
) |
|
Balance
at December 31, 2008
|
|
|
14,783,090 |
|
|
$ |
148,000 |
|
|
$ |
40,308,000 |
|
|
$ |
(49,527,000 |
) |
|
$ |
(9,071,000 |
) |
|
Cumulative
effect of change in accounting principle
|
|
|
- |
|
|
|
- |
|
|
|
(151,000 |
) |
|
|
110,000 |
|
|
|
(41,000 |
) |
|
Common
stock issued under the employee stock purchase plan
|
|
|
150,900 |
|
|
|
- |
|
|
|
24,000 |
|
|
|
- |
|
|
|
24,000 |
|
|
Common
stock returned to the Company
|
|
|
(1,613,999 |
) |
|
|
(16,000 |
) |
|
|
16,000 |
|
|
|
- |
|
|
|
- |
|
|
Stock-based
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
577,000 |
|
|
|
- |
|
|
|
577,000 |
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(273,000 |
) |
|
|
(273,000 |
) |
|
Balance
at December 31, 2009
|
|
|
13,319,991 |
|
|
$ |
132,000 |
|
|
$ |
40,774,000 |
|
|
$ |
(49,690,000 |
) |
|
$ |
(8,784,000 |
) |
See
accompanying notes to the consolidated financial statements.
|
St.
Bernard Software, Inc.
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(273,000 |
) |
|
$ |
(2,344,000 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
365,000 |
|
|
|
580,000 |
|
|
Allowance
for doubtful accounts
|
|
|
(39,000 |
) |
|
|
(7,000 |
) |
|
Gain
on change in fair value of warrant derivative
liability
|
|
|
(22,000 |
) |
|
|
- |
|
|
Gain
on sale of assets
|
|
|
- |
|
|
|
(563,000 |
) |
|
Write-off
of capitalized software
|
|
|
473,000 |
|
|
|
- |
|
|
Stock-based
compensation expense
|
|
|
577,000 |
|
|
|
882,000 |
|
|
Noncash
interest expense
|
|
|
98,000 |
|
|
|
284,000 |
|
|
Increase
(decrease) in cash resulting from changes in:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
675,000 |
|
|
|
93,000 |
|
|
Inventories
|
|
|
122,000 |
|
|
|
(206,000 |
) |
|
Prepaid
expenses and other assets
|
|
|
(392,000 |
) |
|
|
(46,000 |
) |
|
Accounts
payable
|
|
|
(453,000 |
) |
|
|
(1,756,000 |
) |
|
Accrued
expenses and other current liabilities
|
|
|
(508,000 |
) |
|
|
595,000 |
|
|
Warranty
liability
|
|
|
(3,000 |
) |
|
|
(143,000 |
) |
|
Deferred
rent
|
|
|
(77,000 |
) |
|
|
(36,000 |
) |
|
Deferred
revenue
|
|
|
296,000 |
|
|
|
2,173,000 |
|
|
Net
cash provided (used) by operating activities
|
|
|
839,000 |
|
|
|
(494,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
Purchases
of fixed assets
|
|
|
(101,000 |
) |
|
|
(76,000 |
) |
|
Proceeds
from the sale of assets
|
|
|
- |
|
|
|
570,000 |
|
|
Net
cash (used) provided by investing activities
|
|
|
(101,000 |
) |
|
|
494,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
Proceeds
from warrant options purchase
|
|
|
- |
|
|
|
1,000 |
|
|
Proceeds
from the sales of stock under the employee stock purchase
plan
|
|
|
24,000 |
|
|
|
11,000 |
|
|
Principal
payments on capitalized lease obligations
|
|
|
(147,000 |
) |
|
|
(154,000 |
) |
|
Net
(decrease) increase in short-term borrowings
|
|
|
(212,000 |
) |
|
|
896,000 |
|
|
Net
cash (used) provided by financing activities
|
|
|
(335,000 |
) |
|
|
754,000 |
|
|
Net
Increase in Cash and Cash Equivalents
|
|
|
403,000 |
|
|
|
754,000 |
|
|
Cash
and Cash Equivalents at Beginning of Period
|
|
|
2,051,000 |
|
|
|
1,297,000 |
|
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
2,454,000 |
|
|
$ |
2,051,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
122,000 |
|
|
$ |
307,000 |
|
|
Income
taxes
|
|
$ |
3,000 |
|
|
$ |
- |
|
Non
Cash Investing and Financing Activities:
In
January 2009, the Company reclassified 463,500 warrants with an estimated
fair
value of $41,000 from equity to warrant derivative liability.
In July
2008, the Company issued warrants to purchase up to 450,000 shares of the
Company's common stock in connection with a loan agreement. Deferred
debt
issuance costs of $125,000 were recorded based on the estimated fair value of
the
warrants. See Note 5.
In
January 2008, the Company issued warrants to purchase up to 140,350 shares
of the
Company's common stock in connection with the amendment of a loan
agreement. Deferred
debt issuance costs of $58,000 were recorded based on the estimated fair
value of the warrants. See Note 5.
In
January and July 2008, the Company issued warrants to purchase up to 463,500
shares of the
Company's common stock in connection with a loan agreement. Debt discount
of $151,000
was recorded based on the estimated relative fair value of the
warrants.
See
accompanying notes to the consolidated financial statements.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements
|
1.
|
Summary
of Significant Accounting Policies
|
St. Bernard Software, Inc., a
Delaware corporation (“we,” “us,” “our,” the “Company,” or “St.
Bernard”) is a software development company that designs, develops, and markets
Secure Web Gateway (“SWG”) appliances and policy compliance solutions to
small, medium, and enterprise class customers. The Company sells its products
through distributors, dealers, and original equipment manufacturers (“OEMs”),
and directly to network managers and administrators worldwide.
Basis of
presentation
The
accompanying consolidated financial statements include the accounts of St.
Bernard Software, Inc. and those of our inactive wholly-owned European and
Australian subsidiaries which were closed in 2007. All
inter-company balances and transactions have been eliminated in
consolidation.
Cumulative
Effect of Changes in Accounting Principles
On
January 1, 2009, the Company adopted the provisions of Financial Accounting
Standards Board (“FASB”) ASC 815-40, Derivatives and Hedging – Contracts
in Entity’s Own Equity (“ASC 815-40”). In accordance with ASC 815-40, the
cumulative effect of the change in accounting principle recorded by the Company
in connection with certain warrants to acquire shares of the Company’s common
stock (see Note 8) has been reflected as an adjustment of the previously
reported December 31, 2008 balances of accumulated deficit, additional paid-in
capital and warrant liability based on the difference between the amounts
recognized in the statement of financial position before and after the initial
application of this guidance. The impact of such adjustment on the December 31,
2008 balances of the aforementioned accounts was not material.
Use
of estimates
The
preparation of the consolidated financial statements in conformity with U.S
generally accepted accounting principles (“U.S. GAAP”) requires management to
make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
Significant estimates used in preparing the consolidated financial statements
include those assumed in computing revenue recognition, the allowance for
doubtful accounts, warranty liability, the valuation allowance on deferred tax
assets, testing goodwill for impairment, and stock-based
compensation.
Liquidity
As of
December 31, 2009, the Company had approximately $2.5 million in cash and cash
equivalents and a working capital deficit of $9.4
million. Approximately $10.2 million of our current liability balance
at December 31, 2009 consisted of deferred revenues, which represents amounts
that are expected to be amortized into revenue as they are earned in future
periods. For the year ended December 31, 2009, the Company incurred a
net loss of $273,000, and through December 31, 2009 has recorded a cumulative
net loss of $49.7 million. For the year ended December 31, 2009 cash
provided by operating activities was $839,000.
In an
effort to achieve profitability, the Company has made and continues to make
substantial changes to the cost structure of its business. These changes include
monitoring headcount to be in line with the current size of its business,
renegotiating vendor contracts, and refocusing its marketing strategy around its
core business. These efforts contributed to a significant reduction in the
Company’s net loss and the positive cash flow from operating activities in
2009. As described at Note 5, the Company has existing credit
facilities with Silicon Valley Bank (“SVB”) and Partners for Growth, LP (“PFG”),
under which there is borrowing availability of $500,000 and $750,000,
respectively, as of December 31, 2009.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
During
March 2010, the Company and SVB entered into an amendment to the credit facility
which, among other things, SVB (i) increased the revolving line balance to $2.3
million (from $2.0 million), (ii) decreased the interest rate on the
revolving line of credit to 2.0% (from 3.5%) over the greater of the SVB prime
rate or 6.0% (from 7.5%), (iii) modified the tangible net worth covenant to
no less than negative eighteen million dollars ($18,000,000) at all times,
increasing quarterly by fifty percent (50%) of net income and monthly by fifty
percent (50%) of issuances of equity after January 31, 2010 and the principal
amount of subordinated debt received after January 31, 2010, (iv) modified
the borrowing base to eighty percent (80%) of eligible accounts, and (v)
extended the revolving line maturity date to May 15, 2011. In
addition, the Loan Amendment provides for two additional term loan facilities
totaling $500,000 that can only be used to repay indebtedness owing from the
Company to Partners for Growth. Term Loan A, in the amount of
$300,000, accrues interest at a floating per annum rate equal to the greater of
two percentage points (2.00%) above the SVB prime rate or six percent
(6.00%). Term Loan B, in the amount of $200,000, accrues interest at
a floating per annum rate equal to the greater of three and one half percentage
points (3.50%) above the SVB prime rate or seven and one half percent (7.50%)
(See Note 13).
The
Company believes that its existing cash resources, combined with projected
collections on billings, and borrowing availability under existing credit
facilities, will provide sufficient liquidity for the Company to meet its
continuing obligations for the next twelve months. However, there can be no
assurances that projected collections will be achieved or the improvement in
operating results or cash flows from operating activities will continue. In the
event cash flow from operating activities is not sufficient, the Company may
require additional sources of financing in order to maintain its current
operations. These additional sources of financing may include public or private
offerings of equity or debt securities. In the current capital environment, no
assurance can be given that additional sources of financing will be available on
acceptable terms, on a timely basis, or at all.
Basic
and diluted loss per common share
Basic
loss per common share is calculated by dividing the net loss for the period by
the weighted average number of shares of common stock outstanding during the
period. Diluted loss per common share includes the components of
basic loss per common share and also gives effect to dilutive potential commons
shares. The Company computes diluted loss per common share by dividing the net
loss for the period by the weighted average number of common and dilutive
potential common shares outstanding during the period. Dilutive potential common
shares consist of dilutive stock options and warrants. Dilutive stock options
and dilutive warrants are calculated based on the average share price for each
fiscal period using the treasury stock method. There was no dilutive
effect calculated for years ended December 31, 2009 and 2008 as the Company
reported a net loss in each period and the effect would have been anti-dilutive.
Potentially dilutive common stock equivalents include stock options and warrants
(See Notes 2 and 8).
Segment
Information
The
Company presents its business as one reportable segment due to the similarity in
nature of products provided, financial performance measures (revenue growth and
gross margin), methods of distribution (direct and indirect) and customer
markets (each product is sold by the same personnel to government and commercial
customers, domestically and internationally). The Company’s chief operating
decision making officer reviews financial information on its products on a
consolidated basis.
Fair
value of financial instruments
The
Company’s financial instruments consist of cash and cash equivalents, accounts
receivable, accounts payable, accrued expenses, credit facility agreements,
capital lease agreements and warrant liability. The fair values of
cash and cash equivalent, accounts receivables, accounts payable and accrued
expenses approximate their respective carrying values due to short-term
maturities of these instruments. The fair value of the Company’s obligations
under its line of credit and capital leases approximates their carrying
value as the stated interest rates of these instruments reflect rates which are
otherwise currently available to the Company. The fair value of warrant
instruments classified as liabilities is measured at each reporting period, and
the corresponding change in fair value is recorded in current earnings (See
Notes 8 and 9).
Cash
and cash equivalents
The
Company considers all highly liquid investments with original maturities of
90 days or less at the time of purchase to be cash
equivalents.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
Accounts
receivable
The
Company has established an allowance for doubtful accounts for potential credit
losses that are expected to be incurred, based on historical information,
customer concentrations, customer solvency, current economic and geographical
trends, and changes in customer payment terms and practices. Any changes are
adjusted through revenue/deferred revenue. Management has estimated that an
allowance of approximately $13,000 and $52,000 for the years ended
December 31, 2009 and 2008, respectively, was adequate to cover the
potential credit losses.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out) or market, and consist
primarily of computer hardware. At December 31, 2009 and 2008, the Company
has provided a reserve for obsolete inventory of approximately $31,000 and
$72,000, respectively.
Research
and development and capitalized software costs
The
Company’s research and development expenses include payroll, employee benefits,
stock-based compensation, offshore development and other head-count related
costs associated with product development and are expensed as incurred. Research
and development costs totaled approximately $3.2 million and $2.9 million in
2009 and 2008, respectively.
In
accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 985-20, “Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed,” capitalization of costs begins when
technological feasibility has been established and ends when the product is
available for general release to customers. The Company has determined that
technological feasibility for its products is reached after beta testing which
is shortly before the products are released to manufacturing/operations. Costs
incurred after technological feasibility is established are not material, and
accordingly, the Company expenses all research and development costs when
incurred. The technological feasibility of significant intellectual property
that is purchased has been established prior to the acquisition and therefore
the cost is capitalized. Amortization is computed on an individual-product basis
using the straight-line method over a useful life ranging from three to six
years. Amortization expense related to capitalized software was
approximately $0 and $38,000 for 2009 and 2008,
respectively. All previously capitalized software was fully amortized
at December 31, 2008.
In
accordance with ASC 350-40, “Intangibles-Goodwill and Other – Internal Use
Software”(formerly Statement of Position 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use”), the Company capitalized
internal software development costs, which included certain payroll and payroll
related costs for employees and contracting costs for software contractors who
were directly associated with the development phase of the internal use software
from September 2008 through June 2009. In June 2009, a decision to
suspend further development of this software was made by management. On October
5, 2009, management determined that given certain personnel changes, the
estimated costs to complete development and maintain this new software far
outweighed the potential benefit that would be received, and the project was
scrapped. As such, the Company has written off previously capitalized
software costs related to the development of this software of approximately
$473,000 during the quarter ended September 30, 2009.
Fixed
assets and depreciation
Property
and equipment are carried at cost. Expenditures that extend the life of the
asset are capitalized and depreciated. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets or, in the case of leasehold improvements, over the lesser of the
useful life of the related asset or the lease term. Estimated useful lives of
fixed assets range from three to eight years. Depreciation includes amortization
expense for assets capitalized under capital leases.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
Goodwill
The
Company accounts for goodwill in accordance with ASC 350-20,
“Intangibles-Goodwill and Other - Goodwill”. The Company
subjects the goodwill to an annual impairment test or when events indicate that
impairment has occurred. The impairment test consists of a two-step process. The
first step of the goodwill impairment test is used to identify potential
impairment by comparing the fair value of the reporting unit with its carrying
amount, including goodwill. The estimate of fair value of the reporting unit is
determined using various valuation techniques with the primary technique being a
discounted cash flow analysis. A discounted cash flow analysis requires one to
make various judgmental assumptions including assumptions about future cash
flows, growth rates, and discount rates. The assumptions about future cash flows
and growth rates are based on the Company’s budget and long-term plans. Discount
rate assumptions are based on an assessment of the risk inherent in the
reporting unit. If the fair value of the reporting unit exceeds its carrying
amount, goodwill of the reporting unit is considered not impaired and the second
step of the impairment test is unnecessary. If the carrying amount of the
reporting unit exceeds its fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the implied fair value
of the reporting unit’s goodwill with the carrying amount of that goodwill. If
the carrying amount of the reporting unit’s goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to
that excess. The implied fair value of goodwill is determined in the same manner
as the amount of goodwill recognized in a business combination. That is, the
fair value of the reporting unit is allocated to all of the assets and
liabilities of that unit (including any unrecognized intangible assets) as if
the reporting unit had been acquired in a business combination and the fair
value of the reporting unit was the purchase price paid to acquire the reporting
unit. Based upon the result of impairment tests performed as of the end of
fiscal years 2009 and 2008, management of the Company has concluded there was no
impairment of goodwill.
Impairment
of long-lived assets
The
Company accounts for impairment of long-lived assets in accordance with ASC
360-10, “Impairment or Disposal of Long-Lived Assets”. Pursuant to
ASC 360-10-35-15, long-lived assets and identifiable intangibles held for use
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of undiscounted
expected future cash flows is less than the carrying amount of the asset or if
changes in facts and circumstances indicate, an impairment loss is recognized
and measured using the asset’s fair value. As of December 31, 2009 and 2008,
management of the Company concluded there was no impairment of long-lived
assets.
Revenue
and cost recognition
The
Company recognizes revenue in accordance with ASC 985-605 “Software – Revenue
Recognition - Recognition”.
The
Company generates revenue primarily through software subscriptions to its
customers. The Company’s software arrangements typically include a
subscription arrangement that provides for technical support and product
updates, generally over renewable twelve to forty-eight month
periods.
In
accordance with the aforementioned guidance, the Company recognizes revenue when
the following criteria are met: (i) persuasive evidence of the customer
arrangements exists, (ii) fees are fixed and determinable,
(iii) acceptance has occurred, and (iv) collectability is deemed
probable. The Company determines the fair value of each element in the
arrangement based on vendor-specific objective evidence (“VSOE”) of fair value.
VSOE of fair value is based upon the normal pricing and discounting practices
for those products and services when sold separately.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
Sales to
the Company’s customers include multi-element arrangements that include a
delivered element (an appliance unit) and undelivered elements (such as
subscription and support). In these instances, the Company determines if these
elements can be separated into multiple units of accounting. The entire fee from
the arrangement is allocated to each respective element based on its relative
fair value. Revenue for each element is then recognized when revenue recognition
criteria for that element is met. If the Company cannot establish fair value for
any undelivered element, the Company would be required to recognize revenue for
the whole arrangement at the time revenue recognition criteria for the
undelivered element is met. Fair value for the delivered software element is
based on the value received in transactions in which the software is sold on a
stand-alone basis. Fair value for subscription is based on substantive renewal
rates. Discounts applied to multiple-element sales are allocated to the elements
based upon their respective VSOE of fair value (i.e. the price charged when the
same element is sold separately.) If VSOE cannot be established for one element,
discounts are applied to the revenue related to the delivered elements. The
Company records shipping costs in both revenue and cost of revenue when it bills
its customers for shipping. The costs incurred for shipping not billed to
customers are reflected in cost of revenue.
The
Company nets advanced billing receivable amounts for future unearned maintenance
and support renewals against the related amount in deferred revenue until such
time as the legal right to collection of the receivable amount has been
established.
The
Company generally does not grant a right of return to its customers. When a
right of return exists, revenue is deferred until the right of return expires,
at which time revenue is recognized provided that all other revenue recognition
criteria are met.
Probability
of collection is assessed on a customer-by-customer basis. The Company’s
customers are subjected to a credit review process that evaluates the customers’
financial condition and ability to pay for the Company’s products and services.
If it is determined from the outset of an arrangement that collection is not
probable based upon the review process, credit is not granted. The Company
performs ongoing credit evaluations of its customers’ financial condition and
maintains an allowance for doubtful accounts.
Deferred
revenue
Revenues
from subscription agreements are recognized ratably over the term of the
subscription period. The Company has deferred revenue as of December 31, 2009
relating to contracts that extend to 2013, pursuant to which revenues are
expected to be recognized over the following periods:
Income
taxes
Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the combination of the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Advertising
The
Company expenses advertising costs as incurred. Advertising expenses were
approximately $730,000 and $1.0 million for 2009 and 2008,
respectively.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
Indemnification
and warranty obligations
The
Company’s customer agreements generally include certain provisions for
indemnifying such customers against liabilities if the Company’s products
infringe a third party’s intellectual property rights. To date, the Company has
not incurred any material costs as a result of such indemnifications and has not
accrued any liabilities related to such obligations in the accompanying
financial statements.
The
Company accrues for warranty expenses related to hardware and software products
as part of its cost of revenue at the time revenue is recognized and maintains
an accrual for estimated future warranty obligations based upon the relationship
between historical and anticipated warranty costs and revenue volumes. The
warranty reserve was approximately $192,000 and $195,000 for the years
ended December 31, 2009 and 2008, respectively. If actual warranty expenses are
greater than those projected, additional obligations and other charges against
earnings may be required. If actual warranty expenses are less than projected,
prior obligations could be reduced, providing a positive impact on reported
results. The Company generally provides a warranty over the term of the
purchased maintenance period for its products.
The
following table presents the Company's warranty reserve activities:
|
|
|
December 31,
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Provisions,
net of settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adopted
Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement
No. 168, The FASB
Accounting Standards Codification TM and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement No. 162
(the “ASC”). Effective for interim and annual periods ended after
September 15, 2009, the ASC became the source of authoritative U.S.
generally accepted accounting principles (“GAAP”) recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. This statement
does not change existing GAAP, but reorganizes GAAP into Topics. In
circumstances where previous standards require a revision, the FASB will issue
an Accounting Standards Update (“ASU”) on the Topic. Our adoption of
this standard during the quarter ended September 30, 2009 did not have any
impact on the Company’s consolidated financial statements.
In August
2009, the FASB issued ASU 2009-05, "Fair Value Measurements and Disclosures -
Measuring Liabilities at Fair Value" ("ASU 2009-05"). ASU 2009-05 provides
clarification regarding valuation techniques when a quoted price in an active
market for an identical liability is not available in addition to treatment of
the existence of restrictions that prevent the transfer of a liability. ASU
2009-05 also clarifies that both a quoted price in an active market for an
identical liability at the measurement date and the quoted price for an
identical liability when traded as an asset in an active market (when no
adjustments to the quoted price of the asset are required) are Level 1 fair
value measurements. This update is effective for the first reporting period,
including interim periods, beginning after issuance. Adoption of ASU 2009-05 did
not have a material effect on our financial position, operating results, or cash
flows.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
In May
2009, the FASB issued updated guidance, codified as ASC 855-10, “Subsequent
Events” that establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. This guidance modifies the names of
the two types of subsequent events either as recognized subsequent events
(previously referred to in practice as Type I subsequent events) or
non-recognized subsequent events (previously referred to in practice as Type II
subsequent events). In addition, this guidance requires the disclosure of the
date through which subsequent events have been evaluated, which was later
amended by ASU No. 2010-09, “Subsequent Events” (“ASU 2010-09”) in February
2010. ASU 2010-09 eliminates the requirement for public companies to disclose
the date through which subsequent events have been evaluated. ASU 2010-09 is
effective upon issuance. Our adoption of the updated guidance of ASC 855-10 and
ASU 2010-09 during the quarters ended June 30, 2009 and December 31, 2009,
respectively, did not have any impact on the Company’s consolidated financial
statements.
In April
2009, the FASB issued updated guidance, as codified in ASC 820-10, “Fair Value Measurements and
Disclosures”, for estimating fair value when the volume and level of activity
for the asset or liability have significantly decreased in accordance with fair
value accounting. This guidance also includes identifying
circumstances that indicate a transaction is not orderly, and emphasizes that
even if there has been a significant decrease in the volume and level of
activity for the asset or liability and regardless of the valuation technique(s)
used, the objective of a fair value measurement remains the same. Our adoption
of this guidance during the quarter ended June 30, 2009 did not have a material
effect on the Company’s consolidated financial statements.
In June
2008, the FASB ratified the consensus reached on the Emerging Issues Task Force
(“EITF”) abstract titled “Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock”. As codified in ASC
815-40, “Derivatives and Hedging-Contracts in Entity’s Own Equity”), this guidance provides a
new two-step model to be applied in determining whether a financial instrument
or an embedded feature is indexed to an issuer’s own stock and thus able to
qualify for the scope exception under ASC 815-10-15-2. Our adoption of this
guidance, effective January 1, 2009, resulted in the identification of 463,500
warrants that were determined to be ineligible for equity classification because
of certain provisions that may result in an adjustment to their exercise price.
Accordingly, the estimated fair value of the warrants as of January 1, 2009 was
reclassified to a liability and a cumulative effect adjustment was recorded
based on the difference between amounts recognized in the consolidated balance
sheet before and after the initial adoption. In addition, the change
in the estimated fair value of the warrants was recognized in the statement of
operations for the year ended December 31, 2009 (See Note 8).
In April
2009, the FASB issued updated guidance, as codified in ASC 825-10, “Fair Value
Measurements and Disclosures”, which requires increased disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. Our adoption of this
guidance during the quarter ended June 30, 2009 did not have a material effect
on the Company’s consolidated financial statements.
In
February 2008, the FASB issued updated guidance, as codified ASC 820-10, “Fair
Value Measurements and Disclosures” which defers the effective date of
previously issued fair value measurement guidance for all non-financial assets
and liabilities, except those items recognized or disclosed at fair value on an
annual or more frequent recurring basis, until years beginning after November
15, 2008. The Company’s adoption of this guidance for its financial
non-financial assets and liabilities during the first quarter of 2009 did not
have a material impact on the Company’s consolidated financial
statements.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
New
accounting standards
In
January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and
Disclosures: Improving Disclosures about Fair Value Measurements” (“ASU
2010-06”). ASU 2010-06 provides amendments that require new disclosures as
follows: (1) Transfers in and out of Level 1 and 2. A reporting entity should
disclose separately the amounts of significant transfers in and out of Level 1
and Level 2 fair value measurements and describe reasons for the transfers and
(2) Activity in Level 3 fair value measurements. In the reconciliation for fair
value measurements using significant unobservable inputs (Level 3), a reporting
entity should present separately information about purchases, sales, issuances,
and settlements (that is, on a gross basis rather than as one net
number). In addition, this Update provides clarification to existing
disclosures as follows: (1) Level of disaggregation. A reporting entity should
provide fair value measurement disclosures for each class of assets and
liabilities. A class is often a subset of assets or liabilities within a line
item in the statement of financial position. A reporting entity needs to use
judgment in determining he appropriate classes of assets and liabilities and (2)
Disclosures about inputs and valuation techniques. A reporting entity should
provide disclosures about the valuation techniques and inputs used to measure
fair value for both recurring and nonrecurring fair value measurements. Those
disclosures are required for fair value measurements that fall in either Level 2
or Level 3. The amendments for ASU 2010-06 are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements. Those disclosures are effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. We are currently evaluating the impact, if any, the adoption
of ASU 2010-06 will have on our consolidated financial statements.
In
October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue
Arrangements That Include Software Elements” (“ASU 2009-14”). ASU
2009-14 changes the accounting model for revenue arrangements that include both
tangible products and software elements that are “essential to the
functionality,” and scopes these products out of current software revenue
guidance. The new guidance will include factors to help companies determine what
software elements are considered “essential to the functionality.” The
amendments will now subject software-enabled products to other revenue guidance
and disclosure requirements, such as guidance surrounding revenue arrangements
with multiple-deliverables. The amendments for ASU 2009-14 are effective
prospectively for revenue arrangements entered into or materially modified in
the fiscal years beginning on or after June 15, 2010. Early application is
permitted. We are currently evaluating the impact, if any, the adoption of ASU
2009-14 will have on our consolidated financial statements.
In
October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable
Revenue Arrangements” (“ASU 2009-13”). ASU 2009-13 establishes the
accounting and reporting guidance for arrangements including multiple
revenue-generating activities. This ASU provides amendments to the criteria for
separating deliverables, measuring and allocating arrangement consideration to
one or more units of accounting. The amendments in this ASU also establish a
selling price hierarchy for determining the selling price of a deliverable.
Significantly enhanced disclosures are also required to provide information
about a vendor’s multiple-deliverable revenue arrangements, including
information about the nature and terms, significant deliverables, and its
performance within arrangements. The amendments also require providing
information about the significant judgments made and changes to those judgments
and about how the application of the relative selling-price method affects the
timing or amount of revenue recognition. The amendments in ASU 2009-13 are
effective prospectively for revenue arrangements entered into or materially
modified in the fiscal years beginning on or after June 15, 2010. We are
currently evaluating the impact, if any, the adoption of ASU 2009-13 will have
on our consolidated financial statements.
Other
accounting standards that have been issued by the FASB or other
standards-setting bodies are not expected to have a material impact on the
Company’s consolidated financial statements.
Reclassifications
Certain
prior year reclassifications have been made for consistent presentation. These
reclassifications had no effect on previously reported results of operations or
stockholders’ deficit.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
|
2.
|
Stock-Based
Compensation Expense
|
Effective
January 1, 2006, the Company adopted the fair value recognition provisions
as codified in ASC 718 (formerly SFAS No. 123R (revised 2004)),
“Compensation – Stock Compensation”, using the modified prospective method.
Stock-based compensation expense for all stock-based compensation awards granted
after January 1, 2006 are based upon the estimated grant date fair value,
as described below.
The
Company has non-qualified and incentive stock option plans (together, the
“Plans”) providing for the issuance of options to employees and others as deemed
appropriate by the Board of Directors. Terms of options issued under the Plans
include an exercise price equal to the estimated fair value (as determined by
the Board of Directors) at the date of grant, vesting periods generally between
three and five years, and expiration dates not to exceed ten years from the date
of grant. The determination of fair value of the Company’s stock is derived
using the stock price at the grant date.
In 2005,
the Company adopted the St. Bernard Software 2005 Stock Option Plan (the “2005
Plan”). Under the 2005 Plan, the Company has the ability to grant 3,074,215
shares of its common stock to employees and others. The 2005 Plan permits the
grant of incentive stock options and non-qualified stock options. The
exercise price of options granted under the 2005 Plan can generally not be less
than the fair market value of the Company’s common stock on the date of grant.
If any of the granted options expire or terminate for any reason without having
been exercised in full, the unpurchased shares shall again be available for
purposes of this Plan. In 2009 and 2008, no options were exercised and 1,130,677
and 620,885 options were forfeited, respectively. As of December 31,
2009, the Company had 2,455,049 options shares outstanding and 619,166 option
shares available for issuance under the 2005 Plan.
Calculating
stock-based compensation expense requires the input of highly subjective
assumptions, including the expected life of the stock options granted, the
expected stock price volatility factor, and the pre-vesting option forfeiture
rate. The fair value of options granted during the years ended December 31, 2009
and 2008 was calculated using the Black-Scholes option pricing model using the
valuation assumptions in the table below. The Company estimates the expected
life of stock options granted based upon management’s consideration of the
historical life of the options and the vesting and contractual period of the
options granted. The Company estimates the expected volatility factor based on
the weighted average of the historical volatility of three publicly traded
surrogates of the Company and the Company’s implied volatility from its common
stock price. The Company applies its risk-free interest rate based on the U.S.
Treasury yield in effect at the time of the grant. The Company has no history or
expectation of paying any cash dividends on its common
stock. Forfeitures are estimated based on historical
experience.
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
2009
|
|
|
2008
|
|
Average
expected life (years)
|
|
|
|
|
|
|
|
|
Average
expected volatility factor
|
|
|
|
|
|
|
|
|
Average
risk-free interest rate
|
|
|
|
|
|
|
|
|
Average
expected dividend yield
|
|
|
|
|
|
|
|
|
Total
stock-based compensation expense was approximately $577,000 and $882,000 for the
years ended December 31, 2009 and 2008, respectively. The stock-based
compensation expenses were charged to operating expenses. The effect on loss per
share as a result of the stock based compensation expense was approximately
$0.04 and $0.06, respectively, for the years ended December 31, 2009 and 2008,
respectively. The tax effect was immaterial.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
The
following is a summary of stock option activity under the Plans as of
December 31, 2009 and changes during fiscal year 2008 and
2009:
|
|
|
Number
of
Shares
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2009
|
|
|
|
|
|
|
|
|
Options
vested and expected to vest at December 31, 2009
|
|
|
|
|
|
|
|
|
Options
exercisable at December 31, 2009
|
|
|
|
|
|
|
|
|
On
February 9, 2009, the Board of Directors of St. Bernard approved an amendment to
its outstanding non-qualified stock option grants issued by St. Bernard to all
current employees and directors under its 2005 Stock Plan reducing the exercise
price of the unexercised stock options to the fair market price of St. Bernard’s
common stock on the close of business on February 10, 2009 of $0.25 per share.
The intention of St. Bernard’s Board of Directors in approving the amendment was
to reestablish the incentive and retentive value of the stock options for the
affected employees and directors, as all of the relevant options had been left
significantly “out-of-the-money” due to recent declines in the price of St.
Bernard’s common stock. The amendment affected options to purchase a total of up
to 1,787,999 shares with a weighted average price per share of approximately
$1.09 of St. Bernard common stock, including options granted to executive
officers and directors of the Company. The amendment to the options did not
change any other terms of the original option grants. In accordance with the
provisions of SFAS 123R, the reduction of the option exercise price is being
accounted for as a modification of the original award. Accordingly,
incremental compensation cost of approximately $85,000, determined based on the
difference between the fair value of the modified award over the fair value of
the original award immediately before the modification, is being recognized over
the remaining vesting period of the grant.
Additional
information regarding options outstanding as of December 31, 2009 is as
follows:
|
Exercise
Prices
|
|
Number
of
Shares
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life in Years
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value of options outstanding and options exercisable at
December 31, 2009 was approximately $22,000 and $2,000, respectively. The
aggregate intrinsic value represents the total intrinsic value based upon the
stock price of $0.20 at December 31, 2009. There was no aggregate intrinsic
value of options outstanding and options exercisable as of December 31, 2008
based on a stock price of $0.19 at December 31, 2008.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
As of
December 31, 2009, there was approximately $626,000 of total unrecognized
compensation expense related to unvested share-based compensation arrangements
granted under the option plans. The cost is expected to be recognized over a
weighted average period of 2.27 years.
Employee
stock purchase plan
The
Company’s Employee Stock Purchase Plan, or ESPP, was adopted by our board of
directors in December 2006, and approved by our shareholders in June 2007 at the
annual shareholders’ meeting. The ESPP provides a means by which employees of
the Company (and any parent or subsidiary of the Company designated by the Board
of Directors to participate in the Purchase Plan) may be given an opportunity to
purchase Common Stock of the Company at semi-annual intervals through payroll
deductions, to assist the Company in retaining the services of its employees, to
secure and retain the services of new employees, and to provide incentives for
such persons to exert maximum efforts for the success of the Company. The
Company has 400,000 shares that have been initially reserved for issuance
pursuant to purchase rights under the ESPP. A participant may contribute up to
15% of his or her compensation through payroll deductions, and the accumulated
deductions will be applied to the purchase of shares on the purchase date, which
is the last trading day of the offering period. The purchase price per share
will be equal to 85% of the fair market value per share on the start date of the
offering period in which the participant is enrolled or, if lower, 85% of the
fair market value per share on the purchase date. In addition, the number of
shares available for issuance under the Purchase Plan may be increased annually
on the first day of each Company fiscal year, beginning in 2008 and ending in
(and including) 2016, by an amount equal to the least of: (i) the
difference between four hundred thousand (400,000) and the number of shares
remaining authorized for issuance after the last purchase of shares,
(ii) four hundred thousand (400,000) shares of Common Stock, or
(iii) an amount determined by the Board of Directors or a committee of the
Board of Directors appointed to administer the Purchase Plan. If rights granted
under the Purchase Plan expire, lapse or otherwise terminate without being
exercised, the shares of Common Stock not purchased under such rights again
become available for issuance under the Purchase Plan.
For the
years ended December 31, 2009 and 2008, stock purchases of Common stock under
the ESPP were 150,900 shares and 23,038 shares,
respectively. Compensation expense was immaterial.
Shares
available for issuance under the Company’s Employee Stock Purchase Plan are as
follows:
|
|
|
Number of
Shares
|
|
Shares
reserved for issuance at December 31, 2007
|
|
|
|
|
Shares
issued during year ended December 31, 2008
|
|
|
|
|
Shares
reserved for issuance at December 31, 2008
|
|
|
|
|
Shares
issued during year ended December 31, 2009
|
|
|
|
|
Shares
reserved for issuance at December 31, 2009
|
|
|
|
|
Fixed
assets consisted of the following:
|
|
|
December 31,
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
Depreciation
and amortization expense was approximately $365,000 and $542,000 for 2009 and
2008, respectively. During 2009, the Company wrote-off fully depreciated fixed
assets of approximately $1.7 million that had purchase dates of five years or
older or were no longer in service.
Other
assets consisted of the following:
|
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
|
Security
deposits
|
|
$ |
148,000 |
|
|
$ |
167,000 |
|
|
Capitalized
software costs, net of amortization
|
|
|
— |
|
|
|
114,000 |
|
|
Total
other assets
|
|
$ |
148,000 |
|
|
$ |
281,000 |
|
Amortization
for the capitalized software costs are computed on an individual-product basis
using the straight-line method over a useful of three years. Amortization
expense related to capitalized software was approximately $0 and $38,000 for the
years December 31, 2009 and 2008, respectively. Amortization for the customer
related intangible was computed using the straight-line method over a useful
life of five years.
In
accordance with ASC 350-40, “Intangibles-Goodwill and Other – Internal Use
Software”(formerly Statement of Position 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use”), the Company capitalized
internal software development costs, which included certain payroll and payroll
related costs for employees and contracting costs for software contractors who
were directly associated with the development phase of the internal use software
from September 2008 through June 2009. In June 2009, a decision to
suspend further development of this software was made by management. On October
5, 2009, management determined that given certain personnel changes, the
estimated costs to complete development and maintain this new software far
outweighed the potential benefit that would be received, and the project was
scrapped. As such, the Company has written off previously capitalized
software costs related to the development of this software of approximately
$473,000 during the quarter ended September 30, 2009.
Silicon
Valley Bank (“SVB”)
On May
15, 2007, the Company entered into a Loan and Security Agreement with SVB (the
“SVB Loan Agreement”) which provides for a credit facility not to exceed $2.0
million, subject to a borrowing base formula. The SVB Loan Agreement was amended
on February 27, 2009 (the “SVB Loan Amendment”). Pursuant to the terms of the
SVB Loan Amendment, among other things, SVB (i) decreased the interest rate
on the revolving line of credit to the greater of 3.50% over the prime rate or
7.5% (from the greater of 3% over the prime rate or 10.5%), (ii) modified
the tangible net worth covenant to no less than negative seventeen million
dollars ($17,000,000) at all times, increasing quarterly by fifty percent (50%)
of net income and monthly by fifty percent (50%) of issuances of equity after
January 31, 2009 and the principal amount of subordinated debt received after
January 31, 2009, (iii) modified the borrowing base to seventy percent
(70%) of eligible accounts and the lesser of sixty percent (60%) of advanced
billing accounts or six hundred thousand dollars ($600,000) as determined by
SVB; provided, however, that SVB may, with notice to the Company, decrease the
foregoing percentage in its good faith business judgment based on events,
conditions, contingencies, or risks which, as determined by SVB, may adversely
affect collateral, and (iv) extended the revolving line maturity date to May 15,
2010.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
In March
2010, the SVB Loan Agreement was amended. Pursuant
to the terms of the Loan Amendment, among other things, SVB (i) increased the
revolving line balance to $2.3 million (from $2.0 million), (ii) decreased
the interest rate on the revolving line of credit to 2.0% (from 3.5%) over the
greater of the SVB prime rate or 6.0% (from 7.5%), (iii) modified the
tangible net worth covenant to no less than negative eighteen million dollars
($18,000,000) at all times, increasing quarterly by fifty percent (50%) of net
income and monthly by fifty percent (50%) of issuances of equity after January
31, 2010 and the principal amount of subordinated debt received after January
31, 2010, (iv) modified the borrowing base to eighty percent (80%) of
eligible accounts, and (v) extended the revolving line maturity date to May 15,
2011. At
December 31, 2009, total availability under the SVB Loan Agreement was $2.0
million, of which $1.5 million was outstanding, and the applicable interest rate
was 7.5% at December 31, 2009. The Company was in compliance with the above
stated covenants and restrictions. The obligations under the SVB Loan Agreement
are secured by substantially all of St. Bernard’s assets.
In
addition, the Loan Amendment provides for two additional term loan facilities
totaling $500,000 that can only be used to repay indebtedness owing from the
Company to Partners for Growth. Term Loan A, in the amount of
$300,000, accrues interest at a floating per annum rate equal to the greater of
two percentage points (2.00%) above the SVB prime rate or six percent
(6.00%). Term Loan B, in the amount of $200,000, accrues interest at
a floating per annum rate equal to the greater of three and one half percentage
points (3.50%) above the SVB prime rate or seven and one half percent
(7.50%).
In
connection with the execution of a previous SVB Loan Amendment dated January 25,
2008, St. Bernard issued warrants to SVB which allows SVB to purchase up to
140,350 shares of our common stock at an exercise price of $0.57 per share. The
warrants expire on the seventh anniversary of their issue date. We recorded
deferred debt issuance costs in the amount of $58,000, based on the estimated
fair value allocated to the warrants using the following assumptions; 75.35%
volatility, risk free interest rate of 3.61%, an expected life of seven years
and no dividends. Amortization of the debt issuance costs, including
amounts recorded as a debt discount for warrants previously issued for years
ended December 31, 2009 and 2008, which is being recorded as interest expense,
was approximately $34,000 and $104,000, respectively. Furthermore, St. Bernard
agreed to grant SVB certain piggyback registration rights with respect to the
shares of common stock underlying the warrants.
Partners
for Growth II, LP (“PFG”)
On July
21, 2008, the Company entered into a Loan Agreement with PFG (the “PFG Loan
Agreement”), which became effective on July 23, 2008 and which provides for a
credit facility not to exceed $1.5 million, subject to a borrowing base formula.
The PFG Loan Agreement was subsequently amended on February 27,
2009. The annual interest rate on the PFG Loan is set at the Prime
Rate, quoted by SVB as its Prime Rate, plus 3% (the “Applicable
Rate”). At December 31, 2009, the effective interest rate was 7%. The
PFG Loan Agreement will terminate on July 20, 2010, on which date all principal,
interest and other outstanding monetary obligations must be repaid to PFG. The
obligations under the PFG Loan Agreement are secured by a security interest in
collateral comprised of substantially all of St. Bernard’s assets, subordinated
to the SVB Loan Agreement.
The PFG
Loan Agreement contains affirmative, negative and financial covenants customary
for credit facilities of this type, including, among other things, limitations
on indebtedness, liens, sales of assets, mergers, investments, and
dividends. The PFG Loan Agreement also requires that St. Bernard
maintain a Modified Net Income (as defined in the PFG Loan Agreement) greater
than zero. PFG eliminated the Modified Net Income covenant for the reporting
periods ending February 28, 2009 and March 31, 2009. The PFG Loan Agreement
contains events of default customary for credit facilities of this type (with
customary grace or cure periods, as applicable) and provides that upon the
occurrence and during the continuance of an event of default, among other
things, the interest rate on all borrowings will be increased, the payment of
all borrowings may be accelerated, PFG’s commitments may be terminated and PFG
shall be entitled to exercise all of its rights and remedies, including remedies
against collateral. At December 31, 2009, the Company was in
compliance with the above stated covenants.
In
connection with the execution of the PFG Loan Agreement, St. Bernard received
approximately $1,000 from PFG, and as a result, issued a warrant to PFG on July
21, 2008 (the “Warrant”), which allows PFG to purchase up to 450,000 shares of
St. Bernard common stock at an exercise price equal to $0.46 per share. The
Warrant expires on July 20, 2013. The Company recorded deferred debt
issuance costs in the amount of $125,000, based on the estimated fair value
allocated to the warrants using the following assumptions; 69.07% volatility,
risk free interest rate of 4.09%, an expected life of five years and no
dividends. Amortization of the debt issuance costs for the years ended December
31, 2009 and 2008, which is being recorded as interest expense, was
approximately $63,000 and $28,000, respectively. As of December 31,
2009, total availability under the PFG Loan Agreement was $1.5 million, of which
$750,000 was outstanding.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
|
|
|
Year
ended December 31, 2009
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2008
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income tax assets and liabilities consist of the following:
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
Allowance
for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net
operating loss carryforwards
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Tax
credits carryforwards
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A
reconciliation of the actual income tax expense recorded to that based upon
expected federal tax rates are as follows:
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December
31,
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2009
|
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2008
|
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Expected
federal tax benefit
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Expected
state benefit, net of federal tax effect
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Change
in valuation allowance
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Permanent
differences and other
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St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
ASC 740,
“Income Taxes”, requires that the Company reduce its deferred tax assets by a
valuation allowance if, based on the weight of the available evidence, it is not
more likely than not that all or a portion of a deferred tax asset will be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences are deductible. Management has determined that it is not more likely
than not that the deferred tax asset will be realized. Accordingly as of
December 31, 2009 and 2008, the Company had a valuation allowance of
approximately $11.4 million and $11.2 million, respectively.
At
December 31, 2009 and 2008, the Company had federal net operating loss
carryforwards of approximately $17.1 and $17.4 million and state net operating
loss carryforwards of approximately $17.4 million and $17.2 million,
respectively. The federal and state tax net operating loss carryforwards will
begin to expire in 2020 and 2015, respectively.
The
future utilization of the Company’s NOL to offset future taxable income may be
subject to a substantial annual limitation as a result of ownership changes that
may have occurred previously or that could occur in the future. The
Company has not yet determined whether such an ownership change has occurred,
however, the Company plans to complete a Section 382 analysis regarding the
limitation of the net operating losses and research and development credits.
Until this analysis has been completed, the Company has removed the net deferred
tax assets associated with the NOL carryforwards before the merger with Sand
Hill IT Security Acquisition Corp. (“Sand Hill”), which occurred in October
2005, of approximately $3.0 million from its deferred tax asset schedule and has
recorded a corresponding decrease to its valuation allowance. When the Section
382 analysis is completed, the Company plans to update its unrecognized tax
benefits under ASC 740-10-25. Therefore, the Company expects that the
unrecognized tax benefits may change within 12 months of this reporting
date. At this time, the Company cannot estimate how much the unrecognized
tax benefits may change. Any carryforwards that will expire prior to
utilization as a result of such limitations will be removed from deferred tax
assets with a corresponding reduction of the valuation allowance.
Due to the existence of the valuation allowance, future changes in our
unrecognized tax benefits will not impact the Company’s effective tax
rate.
The
Company adopted the provisions of ASC 740-10, “Income Taxes – Overall –
Recognition”, during fiscal year
2007. The Company did not record any adjustments resulting from the adoption of
ASC 740-10.
The
Company recognizes interest and/or penalties related to uncertain tax positions
in income tax expense. To the extent accrued interest and penalties do not
ultimately become payable, amounts accrued will be reduced and reflected as a
reduction of the overall income tax provision in the period that such
determination is made. There was no interest and penalties recorded for the year
ended December 31, 2009.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
Common
stock
In July
2005, the Company obtained approximately $1.0 million through the offering of
200,000 units to an investor. Each unit consisted of three shares of common
stock, as well as a warrant to acquire an additional five shares of common stock
at a per share price of $1.25. The common stock and warrants sold provided
certain anti-dilution rights to the investor. These warrants were subsequently
converted into warrants to purchase 419,613 shares of common stock of the
Company, at a price of $2.98 per share. The warrants expired on December 31,
2008.
Reduction
of outstanding common shares
In
connection with the merger agreement entered into in October 2005 between the
Company and Sand Hill, 1,613,999 shares of the Company’s common stock that had
been issued as part of the merger consideration were placed with a stockholders’
representative to be held on behalf of the shareholders as of the closing of the
merger. According to the merger agreement and related amendments,
these shares were to be released after the merger, pro rata, to shareholders as
of the closing of the merger only in the event the closing price of the
Company’s stock was $8.50 or more for a specified number of days by July 25,
2009. In the event that these conditions were not met, these shares
would automatically be returned by Sand Hill at no cost. Thereafter such shares
would not be considered issued and outstanding for any purpose. At
July 25, 2009, the specified conditions were not met and the 1,613,999 shares of
stock were returned to the Company
Warrants
As of
December 31, 2009 and December 31, 2008, a total of 1,153,850 and 9,373,850
shares of common stock, respectively, were reserved for issuance for the
exercise of warrants at exercise prices ranging from $0.46 to $1.60 per
share. On July 25, 2009, a total of 8,220,000 warrants expired, which were
originally connected with its public offering in 2004. There were no warrants
granted, exercised, or cancelled during the year ended December 31, 2009. During
the year ended December 31, 2008, warrants to purchase an aggregate of 1,053,850
shares of common stock at exercise prices of $0.46 to $0.57 per share were
granted and 430,104 warrants expired at December 31, 2008.
The
following is a summary of our warrants activity as of December 31, 2009 and
changes during fiscal year 2009 and 2008:
|
|
|
Number
of
Shares
|
|
Per
Share
Exercise
Price
Range
|
|
Weighted
Average
Exercise
Price
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Outstanding
warrants - December 31, 2007
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Outstanding
warrants - December 31, 2008
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Outstanding
warrants - December 31, 2009
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Warrants
exercisable - December 31, 2009
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St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
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8.
|
Warrant
Derivative Liability
|
Effective
January 1, 2009, as a result of adopting a new accounting guidance as codified
in ASC 815-40 (formerly EITF Issue No. 07-5, “Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity's Own Stock”), the Company
reclassified 463,500 outstanding warrants that were previously classified as
equity to a derivative liability. This reclassification was necessary
as the Company determined that certain terms included in these warrant
agreements provided for a possible future adjustment to the warrant exercise
price, and accordingly, under the provisions of this guidance, these warrants
did not meet the criteria for being considered to be indexed to the Company’s
stock. As such, these warrants no longer qualified for the exception
to derivative liability treatment provided for in ASC 815-10. The
estimated fair value of warrants upon reclassification at January 1, 2009 was
determined to be $41,000. The cumulative effect of the change in accounting
for these warrants of $110,000 was recognized as an adjustment to the opening
balance of accumulated deficit at January 1, 2009 based on the difference
between the amounts recognized in the consolidated balance sheet before the
initial adoption of this guidance and the amounts recognized in the consolidated
balance sheet upon the initial adoption application of this
guidance. The amounts recognized in the consolidated balance sheet as
a result of the initial application of this guidance on January 1, 2009 were
determined based on the amounts that would have been recognized if this guidance
had been applied from the issuance date of the warrants. At December
31, 2009 the estimated fair value of the warrants, which is included in accrued
expenses and other current liabilities in the accompanying balance sheet and
based on a Black-Scholes option pricing model, was determined to be
$19,000. The change in the estimated fair value of the warrant
derivative liability for the year ended December 31, 2009 of $22,000 is included
in other income in the accompanying statement of operations.
|
9.
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Fair
Value Measurements
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Fair
Value Hierarchy
Fair
value is defined in ASC 820 as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Fair value measurements are to
be considered from the perspective of a market participant that holds the assets
or owes the liability. ASC 820 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
The
standard describes three levels of inputs that may be used to measure fair
value:
Level 1:
Quoted prices in active markets for identical or similar assets and
liabilities.
Level
2: Quoted prices for identical or similar assets and liabilities in
markets that are not active or observable inputs other than quoted prices in
active markets for identical or similar assets and liabilities.
Level
3: Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.
Financial
Instruments Measured at Fair Value on a Recurring Basis
ASC 820
requires disclosure of the level within the fair value hierarchy used by the
Company to value financial assets and liabilities that are measured at fair
value on a recurring basis. At December 31, 2009 the Company had outstanding
warrants to purchase common shares of our stock that are classified as warrant
derivative liabilities with a fair value of $19,000. The warrants are
valued using Level 3 inputs because there are significant unobservable inputs
associated with them.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
The
following table reconciles the warrant derivative liability measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) for
the year ended December 31, 2009:
| |
Balance
at January 1, 2009
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$ |
41,000
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| |
Gain
on change in fair value included in other expense (income)
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(22,000
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)
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| |
Balance
at December 31, 2009
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$ |
19,000
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10.
|
Commitments
and Contingencies
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Litigation
In the
normal course of business, the Company is occasionally named as a defendant in
various lawsuits. On March 14, 2007, a stockholder filed an action
against the Company seeking money damages in the San Diego Superior Court for
the County of San Diego, asserting claims of intentional misrepresentation,
negligent misrepresentation, fraudulent concealment, and
negligence. Effective March 31, 2009, the Company and the stockholder
entered into a Settlement Agreement, pursuant to which the parties released and
forever discharged each other from any and all claims and causes of action, in
connection with the Claim. There was no cash outlay by the Company as part
of the settlement and the settlement was not material to the Company’s financial
condition or operating results.
On July
9, 2009, an action was filed in the United States District Court for the
Southern District of California by Southwest Technology Innovations LLC (the
“Plaintiff”) against the Company and Espion International, Inc., Workgroup
Solutions, Inc., SonicWall, Inc., Mirapoint Software, Inc., and Proofpoint,
Inc., (collectively the “Defendants”). In this matter, the Plaintiff's
claim against the Company is that the ePrism e-mail filter products, which are
manufactured by an unrelated third party and sold by the Company, allegedly
infringe upon U.S. Patent No. 6,952,719 entitled “Spam Detector Defeating
System” which was issued on October 4, 2005. The Plaintiff is seeking a judgment
in Plaintiff's favor, injunctive relief, and an award of unspecified
damages. The Company is vigorously defending its interests in this
matter.
Operating
leases
The
Company leases its operating facilities and certain equipment under
non-cancelable operating leases with various expiration dates through July 2011.
Future minimum payments under operating leases are as follows:
During
September 2008 through September 2009, we subleased a portion of our unused
office space to a company. The proceeds from the sublease were used to offset
our monthly facilities rent expense.
Facilities
rent expense totaled approximately $1.2 million (net of sublease) in 2009 and
2008, respectively. To the extent the Company’s operating leases provide for
escalating rents during the term of the lease, the Company recognizes rent
expense on a straight line basis based upon the average monthly contractual
lease amount.
Included
in other assets at December 31, 2009 and 2008 were security deposits
related to leased assets of approximately $130,000 and $135,000,
respectively.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
Capital
leases
The
Company leases certain equipment under non-cancelable capital leases, which were
included in fixed assets as follows:
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December
31,
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2009
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2008
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Less
accumulated depreciation
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Certain
capital leases obligations have been fulfilled during 2009. Depreciation expense
related to all capitalized lease obligations included in fixed assets was
approximately $76,000 during 2009 and 2008, respectively.
Future
minimum lease payments are as follows:
|
Year Ending December
31,
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Total
minimum lease payments
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Less
amount representing interest
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Present
value of minimum lease payments
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11.
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Sales
and Revenue Concentration
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Credit
risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and accounts receivable. Credit risk with
respect to accounts receivable is mitigated by the large number of
geographically diverse customers.
The
Company maintains cash balances at financial institutions located in the United
States and secured by the Federal Deposit Insurance Corporation up to $250,000.
At times, balances may exceed federally insured limits. The Company has not
experienced any losses in such accounts. Management believes that the Company is
not exposed to any significant credit risk with respect to its cash and cash
equivalents.
Supplier
The
Company has a major vendor that accounted for approximately $4.0 million (35.2%)
and $4.7 million (37.1%) of the Company’s total purchases during 2009 and
2008, respectively. At December 31, 2009 and 2008, the amount payable to
this vendor was approximately $73,000 and $118,000, respectively. While the
Company believes other suppliers are available if the vendor unexpectedly stops
supplying the product, the Company could experience an interruption in its
ability to supply its customers.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
Sales
and revenue
The
Company considers itself to operate within one business segment, Secure Content
Management (“SCM”). For the years ended December 31, 2009 and 2008,
approximately 96% of the Company’s revenue was in North America, the remaining
4% were disbursed over the rest of the world. During 2009 and 2008 there were no
individual customers which accounted for more than 10% of the Company’s
revenue.
|
12.
|
Other
Expense (Income)
|
Asset
sale/purchase and license agreements
On
January 29, 2007, pursuant to the terms of an Asset Sale and License
Agreement signed and effective as of January 4, 2007, by and between the
Company and Shavlik Technologies, LLC (“Shavlik”),
St. Bernard assigned and sold to Shavlik St. Bernard’s UpdateEXPERT and
UpdateEXPERT Premium software applications and related customer and end user
license agreements, software, programming interfaces and other intellectual
property rights and contracts for an aggregate purchase price of $1.2 million
plus 45% of any maintenance renewal fees collected by Shavlik in excess of $1.2
million for renewals invoiced by Shavlik between February 1, 2007 and
January 31, 2008 (the “Asset
Sale”). As a result of the sale, the Company realized a gain
of $70,000 in the year ended December 31, 2008, primarily due to the relief of
liabilities assumed by Shavlik, offset by uncollectible accounts receivable
amounts.
On August
14, 2007, pursuant to the terms of a Purchase Agreement signed and effective as
of August 13, 2007 , by and between the Company and EVault, Inc., a wholly owned
subsidiary of Seagate Technology, Inc., (“EVault”),
St. Bernard assigned and sold to EVault St. Bernard’s Open File Manager (the
“Product”)
software applications, which include all of the rights, title, and interest
worldwide of St. Bernard in and to (i) the Product, (ii) the Assumed Contracts,
(iii) the St. Bernard Materials, (iv) all St. Bernard Intellectual Property
Rights, (v) all claims of St. Bernard against third parties relating to the
Purchased Assets, (vi) all data and information that is collected from, or on
behalf of, customers of St. Bernard who are party to the Assumed Contracts (the
“Customer
Base”), the OEM Partners and any Lead, including to the extent that
receipt of such information would not violate any applicable Law, (vii) all
routing and billing information and components used in connection with the
Assumed Contracts, and (viii) all other tangible or intangible assets of St.
Bernard used in the Business and necessary for the operation or use of the
Product for an aggregate purchase price of $6.9 million. As a result
of the sale, the Company realized a gain of approximately $500,000 during the
year ended December 31, 2008.
During
the years ended December 31, 2009 and 2008, the Company disposed of fixed assets
and realized a loss of approximately $0 and $6,000, respectively.
Other
income - net
For the
year ended December 31, 2008, other income-net includes a gain on settlement of
previously outstanding accounts payable of approximately $468,000.
Silicon
Valley Bank Loan Amendment
In
March 2010, St. Bernard entered into a Sixth Amendment to the Loan and
Security Agreement (the “2010 Loan Amendment”) with SVB, amending the Loan and
Security Agreement entered into between St. Bernard and SVB on May 11,
2007. Pursuant to the terms of the Loan Amendment, among other things, SVB (i)
increased the revolving line balance to $2.3 million (from $2.0 million),
(ii) decreased the interest rate on the revolving line of credit to 2.0%
(from 3.5%) over the greater of the SVB prime rate or 6.0% (from 7.5%),
(iii) modified the tangible net worth covenant to no less than negative
eighteen million dollars ($18,000,000) at all times, increasing quarterly by
fifty percent (50%) of net income and monthly by fifty percent (50%) of
issuances of equity after January 31, 2010 and the principal amount of
subordinated debt received after January 31, 2010, (iv) modified the
borrowing base to eighty percent (80%) of eligible accounts, and (v) extended
the revolving line maturity date to May 15, 2011.
In
addition, the Loan Amendment provides for two additional term loan facilities
totaling $500,000 that can only be used to repay indebtedness owing from the
Company to Partners for Growth. Term Loan A, in the amount of
$300,000, accrues interest at a floating per annum rate equal to the greater of
two percentage points (2.00%) above the SVB prime rate or six percent
(6.00%). Term Loan B, in the amount of $200,000, accrues interest at
a floating per annum rate equal to the greater of three and one half percentage
points (3.50%) above the SVB prime rate or seven and one half percent
(7.50%).
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
| |
ST.
BERNARD SOFTWARE, INC. |
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By:
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/s/ Louis
E. Ryan |
|
| |
|
Louis E. Ryan |
|
| |
|
Chief
Executive Officer and
Chairman
of the Board of Directors
|
|
In
accordance with the Securities Exchange Act of 1934, this report has been signed
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
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|
|
|
/s/
Louis E. Ryan
Louis
E. Ryan
|
|
Chief
Executive Officer and Chairman of the
Board
of Directors
|
|
March
26, 2010
|
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|
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/s/
Thalia Gietzen
Thalia
Gietzen
|
|
VP
of Finance
|
|
March
26, 2010
|
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|
|
|
|
|
|
/s/
Humphrey P. Polanen
Humphrey
P. Polanen
|
|
Director
|
|
March
26, 2010
|
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|
/s/
Bart A.M. Van Hedel
Bart
A.M. Van Hedel
|
|
Director
|
|
March
26, 2010
|