sbsw_10q-093009.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2009
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from
to
COMMISSION
FILE NUMBER 000-50813
St.
Bernard Software, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
20-0996152
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
15015
Avenue of Science, San Diego, CA 92128
(Address
of principal executive offices)
(858)
676-2277
(Registrant’s
telephone number, including area code)
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.
|
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 the registrant was
required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
|
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
Reporting Company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange
Act).
|
The
registrant had 13,319,991 shares of its common stock, par value $0.01 per
share, outstanding at November 12,
2009.
|
ST.
BERNARD SOFTWARE, INC.
INDEX
TO FORM 10-Q
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28
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PART I – FINANCIAL INFORMATION
Item 1. Consolidated Financial
Statements
St.
Bernard Software, Inc.
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September
30, 2009
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December
31, 2008
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(Unaudited)
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Assets
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Current
Assets
|
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Cash
and cash equivalents
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$ |
1,421,000 |
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$ |
2,051,000 |
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Accounts
receivable - net of allowance for doubtful accounts of $20,000
and $52,000 at September 30, 2009 and December 31, 2008,
respectively
|
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2,707,000 |
|
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|
3,170,000 |
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Inventories
- net
|
|
|
374,000 |
|
|
|
364,000 |
|
Prepaid
expenses and other current assets
|
|
|
337,000 |
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381,000 |
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|
|
|
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Total
current assets
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4,839,000 |
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5,966,000 |
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Fixed
Assets - Net
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622,000 |
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828,000 |
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Other
Assets
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154,000 |
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281,000 |
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Goodwill
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7,568,000 |
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7,568,000 |
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Total
Assets
|
|
$ |
13,183,000 |
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$ |
14,643,000 |
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Liabilities
and Stockholders’ Deficit
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Current
Liabilities
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Short-term
borrowings
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$ |
2,100,000 |
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$ |
2,462,000 |
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Accounts
payable
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894,000 |
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1,270,000 |
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Accrued
compensation expenses
|
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818,000 |
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1,361,000 |
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Accrued
expenses and other current liabilities
|
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576,000 |
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518,000 |
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Warranty
liability
|
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195,000 |
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195,000 |
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Current
portion of capitalized lease obligations
|
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52,000 |
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147,000 |
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Deferred
revenue
|
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10,145,000 |
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10,469,000 |
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Total
current liabilities
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14,780,000 |
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16,422,000 |
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Deferred
Rent
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30,000 |
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118,000 |
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Capitalized
Lease Obligations, Less Current Portion
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- |
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22,000 |
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Deferred
Revenue
|
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7,543,000 |
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7,152,000 |
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Total
liabilities
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22,353,000 |
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23,714,000 |
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Stockholders’
Deficit
|
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Preferred
stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and
outstanding
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- |
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- |
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Common
stock, $0.01 par value; 50,000,000 shares authorized; 13,319,991 and
14,783,090 shares issued and outstanding at September 30, 2009 and
December 31, 2008, respectively
|
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132,000 |
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148,000 |
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Additional
paid-in capital
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40,644,000 |
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40,308,000 |
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Accumulated
deficit
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(49,946,000 |
) |
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(49,527,000 |
) |
Total
stockholders’ deficit
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(9,170,000 |
) |
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(9,071,000 |
) |
Total
Liabilities and Stockholders’ Deficit
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$ |
13,183,000 |
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$ |
14,643,000 |
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The
accompanying notes are an integral part of these consolidated financial
statements.
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St.
Bernard Software, Inc. |
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Unaudited Consolidated Statements of Operations |
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Three
months ended September 30,
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Nine
months ended September 30,
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2009
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2008
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2009
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2008
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Revenues
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Subscription
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$ |
3,615,000 |
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$ |
3,519,000 |
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$ |
10,996,000 |
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$ |
10,250,000 |
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Appliance
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875,000 |
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906,000 |
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2,691,000 |
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2,668,000 |
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License
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3,000 |
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2,000 |
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9,000 |
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18,000 |
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Total
Revenues
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4,493,000 |
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4,427,000 |
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13,696,000 |
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12,936,000 |
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Cost
of Revenues
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Subscription
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552,000 |
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545,000 |
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1,675,000 |
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1,658,000 |
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Appliance
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594,000 |
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612,000 |
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1,826,000 |
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1,848,000 |
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License
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9,000 |
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- |
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11,000 |
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5,000 |
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Total
Cost of Revenues
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1,155,000 |
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1,157,000 |
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3,512,000 |
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3,511,000 |
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Gross
Profit
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3,338,000 |
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3,270,000 |
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10,184,000 |
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9,425,000 |
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Operating
Expenses
|
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Sales
and marketing
|
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1,474,000 |
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1,828,000 |
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4,715,000 |
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5,709,000 |
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Research
and development
|
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724,000 |
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629,000 |
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2,629,000 |
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2,128,000 |
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General
and administrative
|
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462,000 |
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1,322,000 |
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2,709,000 |
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|
3,897,000 |
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Write-off
of capitalized software
|
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|
473,000 |
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- |
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|
473,000 |
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|
- |
|
Total
Operating Expenses
|
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3,133,000 |
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|
3,779,000 |
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10,526,000 |
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11,734,000 |
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Income
(Loss) from Operations
|
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205,000 |
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(509,000 |
) |
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(342,000 |
) |
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(2,309,000 |
) |
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Other
Income
|
|
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|
|
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|
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Interest
expense - net
|
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79,000 |
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|
230,000 |
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|
250,000 |
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|
530,000 |
|
Gain
on sale of assets
|
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|
- |
|
|
|
(244,000 |
) |
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|
- |
|
|
|
(564,000 |
) |
Other
expense (income)
|
|
|
9,000 |
|
|
|
9,000 |
|
|
|
(29,000 |
) |
|
|
(435,000 |
) |
Total
Other Expense (Income)
|
|
|
88,000 |
|
|
|
(5,000 |
) |
|
|
221,000 |
|
|
|
(469,000 |
) |
Income
(Loss) Before Income Taxes
|
|
|
117,000 |
|
|
|
(504,000 |
) |
|
|
(563,000 |
) |
|
|
(1,840,000 |
) |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
- |
|
|
|
- |
|
|
|
(5,000 |
) |
|
|
(3,000 |
) |
Net
Income (Loss)
|
|
$ |
117,000 |
|
|
$ |
(504,000 |
) |
|
$ |
(568,000 |
) |
|
$ |
(1,843,000 |
) |
Income
(Loss) Per Common Share - Basic
|
|
$ |
0.01 |
|
|
$ |
(0.03 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.12 |
) |
Income
(Loss) Per Common Share - Diluted
|
|
$ |
0.01 |
|
|
$ |
(0.03 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.12 |
) |
Weighted
Average Shares Outstanding - Basic
|
|
|
13,720,371 |
|
|
|
14,783,090 |
|
|
|
14,467,141 |
|
|
|
14,775,832 |
|
Weighted
Average Shares Outstanding - Diluted
|
|
|
13,873,815 |
|
|
|
14,783,090 |
|
|
|
14,467,141 |
|
|
|
14,775,832 |
|
|
|
|
|
|
|
|
|
|
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|
|
|
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The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
St. Bernard Software,
Inc. |
|
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|
Unaudited
Consolidated Statement of Stockholders' Deficit |
|
|
|
|
|
|
|
|
|
|
Additional |
|
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|
|
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|
Common Stock
|
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|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
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
|
|
|
- |
|
|
|
- |
|
|
|
(190,000 |
) |
|
|
149,000 |
|
|
|
(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
|
|
|
- |
|
|
|
- |
|
|
|
486,000 |
|
|
|
- |
|
|
|
486,000 |
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(568,000 |
) |
|
|
(568,000 |
) |
Balance
at September 30, 2009
|
|
|
13,319,991 |
|
|
$ |
132,000 |
|
|
$ |
40,644,000 |
|
|
$ |
(49,946,000 |
) |
|
$ |
(9,170,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
St.
Bernard Software, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
Nine
months ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(568,000 |
) |
|
$ |
(1,843,000 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
281,000 |
|
|
|
455,000 |
|
Allowance
for doubtful accounts
|
|
|
(32,000 |
) |
|
|
24,000 |
|
Gain
on sale of assets
|
|
|
- |
|
|
|
(563,000 |
) |
Write-off
of capitalized software
|
|
|
473,000 |
|
|
|
- |
|
Gain
on change in fair value of warrant derivative
liability
|
|
|
8,000 |
|
|
|
- |
|
Stock-based
compensation expense
|
|
|
486,000 |
|
|
|
668,000 |
|
Noncash
interest expense
|
|
|
116,000 |
|
|
|
246,000 |
|
Increase
(decrease) in cash resulting from changes in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
495,000 |
|
|
|
(349,000 |
) |
Inventories
|
|
|
(10,000 |
) |
|
|
(226,000 |
) |
Prepaid
expenses and other assets
|
|
|
(418,000 |
) |
|
|
(64,000 |
) |
Accounts
payable
|
|
|
(376,000 |
) |
|
|
(1,461,000 |
) |
Accrued
expenses and other current liabilities
|
|
|
(565,000 |
) |
|
|
(299,000 |
) |
Deferred
rent
|
|
|
(57,000 |
) |
|
|
- |
|
Warranty
liability
|
|
|
- |
|
|
|
(45,000 |
) |
Deferred
revenue
|
|
|
67,000 |
|
|
|
1,526,000 |
|
Net
cash used in operating activities
|
|
|
(100,000 |
) |
|
|
(1,931,000 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchases
of fixed assets
|
|
|
(75,000 |
) |
|
|
(7,000 |
) |
Proceeds
from the sale of assets
|
|
|
- |
|
|
|
570,000 |
|
Net
cash (used) provided by investing activities
|
|
|
(75,000 |
) |
|
|
563,000 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from the sales of stock under the employee stock purchase
plan
|
|
|
24,000 |
|
|
|
11,000 |
|
Principal
payments on capitalized lease obligations
|
|
|
(117,000 |
) |
|
|
(114,000 |
) |
Net
(decrease) increase in short-term borrowings
|
|
|
(362,000 |
) |
|
|
896,000 |
|
Net
cash (used) provided by financing activities
|
|
|
(455,000 |
) |
|
|
793,000 |
|
Net
Decrease in Cash and Cash Equivalents
|
|
|
(630,000 |
) |
|
|
(575,000 |
) |
Cash
and Cash Equivalents at Beginning of Period
|
|
|
2,051,000 |
|
|
|
1,297,000 |
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
1,421,000 |
|
|
$ |
722,000 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
101,000 |
|
|
$ |
265,000 |
|
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 4.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
4.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
January 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 Note 4.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
St.
Bernard Software, Inc.
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 Content Management (“SCM”) 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
consolidated balance sheet as of September 30, 2009, the consolidated statements
of operations for the three and nine months ended September 30, 2009 and 2008,
the consolidated statement of stockholders’ deficit for the nine months ended
September 30, 2009, and the consolidated statements of cash flows for the nine
months ended September 30, 2009 and 2008, are unaudited and have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and the instructions to Form 10-Q
and Article 8 of Regulation S-X. The interim financial statements
reflect all adjustments which are, in the opinion of management, necessary to
make the financial statements not misleading. The consolidated balance sheet as
of December 31, 2008 was derived from the Company’s audited financial
statements. Operating results for the interim periods presented are not
necessarily indicative of results to be expected for the fiscal year ending
December 31, 2009. These consolidated financial statements should be read in
conjunction with the Company’s December 31, 2008 consolidated financial
statements and notes thereto included in the Company’s Annual Report filed on
Form 10-K with the Securities and Exchange Commission on March 11,
2009.
Use
of estimates
The
preparation of the consolidated financial statements in conformity with U.S
generally accepted accounting principles 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
September 30, 2009, the Company had approximately $1.4 million in cash and cash
equivalents and a working capital deficit of $9.9
million. Approximately $10.1 million of our current liability balance
at September 30, 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 three and nine months ended September 30, 2009, the
Company achieved net income of $117,000 and incurred net loss of $568,000,
respectively, and through September 30, 2009 recorded a cumulative net loss of
$49.9 million. For the nine months ended September 30, 2009 cash used
in operating activities was $100,000.
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
the closure of its sales and marketing offices in Europe and Australia, reducing
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 February 2009, the Company also extended to May 15, 2010 the
maturity date of the Loan and Security Agreement (the “SVB Loan Agreement”) with
Silicon Valley Bank (“SVB”) and also negotiated a significant reduction in the
interest rate. At September 30, 2009, total availability under the SVB Loan
Agreement was $1.5 million, of which $1.4 million was outstanding, and the
applicable interest rate was 7.5%. In addition, the Company has a
loan agreement with Partners for Growth (“PFG”) under which there is borrowing
availability of approximately $600,000 as of September 30, 2009 (See Note
4).
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
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. However, there can be no assurances that projected
revenue will be achieved or the improvement in operating results will occur. In
the event cash flow from operations 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 earnings (loss) per common share
Basic
earnings (loss) per common share is calculated by dividing the net income (loss)
for the period by the weighted average number of shares of common stock
outstanding during the period. Diluted income (loss) per common share
includes the components of basic income (loss) per common share and also gives
effect to dilutive potential commons shares. The Company computes diluted
earnings (loss) per common share by dividing the net income (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. A dilutive effect was calculated for
the three months ended September 30, 2009 as the Company reported a net income.
Conversely, there was no dilutive effect calculated for the three months ended
September 30, 2008 and for the nine months ended September 30, 2009 and 2008, as
the Company reported a net loss in each period.
The
following is a reconciliation of the number of shares used in the calculation of
basic earnings (loss) per share and diluted earnings (loss) per share for the
three and nine months ended September 30, 2009 and 2008:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
117,000 |
|
|
$ |
(504,000 |
) |
|
$ |
(568,000 |
) |
|
$ |
(1,843,000 |
) |
Weighted
average common shares outstanding (basic)
|
|
|
13,720,371 |
|
|
|
14,783,090 |
|
|
|
14,467,141 |
|
|
|
14,775,832 |
|
Basic
income (loss) per common share
|
|
$ |
0.01 |
|
|
$ |
(0.03 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
117,000 |
|
|
$ |
(504,000 |
) |
|
$ |
(568,000 |
) |
|
$ |
(1,843,000 |
) |
Weighted
average common shares outstanding (basic)
|
|
|
13,720,371 |
|
|
|
14,783,090 |
|
|
|
14,467,141 |
|
|
|
14,775,832 |
|
Incremental
shares
|
|
|
153,444 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common
and potential common shares
|
|
|
13,873,815 |
|
|
|
14,783,090 |
|
|
|
14,467,141 |
|
|
|
14,775,832 |
|
Diluted
income (loss) per common share
|
|
$ |
0.01 |
|
|
$ |
(0.03 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.12 |
) |
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
The
following securities were not included in the computation of diluted net
earnings (loss) per share as their effect would have been
antidilutive:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Options
to purchase common shares
|
|
|
6,000 |
|
|
|
2,561,767 |
|
|
|
1,948,179 |
|
|
|
2,561,767 |
|
Warrants
to purchase common shares
|
|
|
1,153,850 |
|
|
|
9,803,954 |
|
|
|
1,153,850 |
|
|
|
9,803,954 |
|
|
|
|
1,159,850 |
|
|
|
12,365,721 |
|
|
|
3,102,029 |
|
|
|
12,365,721 |
|
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
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.
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. Our adoption of this
guidance during the quarter ended June 30, 2009 did not have any impact on the
Company’s financial statements.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
In April
2009, the FASB issued updated guidance, as codified in ASC 820-10-65, “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 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, and 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 three and nine months ended September 30, 2009
(See Note 7).
In April
2009, the FASB issued updated guidance, as codified in ASC 825-10-65, “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 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 financial statements.
New
accounting standards
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, of adopting ASU
2009-14 will have on our consolidated financial statements.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
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, of adopting ASU 2009-13 will have on
our consolidated financial statements.
Reclassifications
Certain
prior year reclassifications have been made for consistent presentation. These
reclassifications have no effect on previously reported net income.
2.
Stock-based Compensation Expense
Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of ASC 718 (formerly SFAS No. 123R (revised 2004)), “Share-based Payment”, 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.
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 quarters ended September 30,
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.
|
|
Nine
Months Ended
September 30,
2009
|
|
|
Nine
Months Ended
September 30, 2008
|
|
Average
expected life (years)
|
|
|
6.5 |
|
|
|
6.5 |
|
Average
expected volatility factor
|
|
|
50.6
|
% |
|
|
71.5
|
% |
Average
risk-free interest rate
|
|
|
3.6
|
% |
|
|
3.8
|
% |
Average
expected dividend yield
|
|
|
0 |
|
|
|
0 |
|
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
For the
three months ended September 30, 2009, the Company recorded a credit to
stock-based compensation expense of $183,000, and for the three months ended
September 30, 2008, the Company recorded stock-based compensation expense of
$334,000. For the nine months ended September 30, 2009 and 2008, the
Company recorded stock-based compensation expense of $486,000 and $668,000,
respectively. The credit recorded during the three months ended
September 30, 2009 resulted primarily from an adjustment to previously recorded
stock-based compensation expense based on the reconciliation of cumulative
expense recorded based on estimated vesting and expense that should have been
recorded based on the number of options that actually vested during the
requisite service period.
The
stock-based compensation expenses were charged to operating expenses. The effect
on income (loss) per share as a result of the stock based compensation income
(expense) was approximately $0.01 and ($0.02) for the three month ended
September 30, 2009 and 2008, respectively, and ($0.03) and ($0.5) for the nine
months ended September 30, 2009 and 2008, respectively. The tax effect was
immaterial.
The
following is a summary of stock option activity under the Plans as of
December 31, 2008 and changes during the nine months ended September 30,
2009:
|
|
Number
of
Shares
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2008
|
|
|
2,562,976 |
|
|
$ |
1.29 |
|
Granted
|
|
|
480,500 |
|
|
$ |
0.18 |
|
Exercised
|
|
|
— |
|
|
$ |
— |
|
Forfeited
|
|
|
(1,095,297
|
) |
|
$ |
1.32 |
|
Options
outstanding at September 30, 2009
|
|
|
1,948,179 |
|
|
$ |
0.23 |
|
Options
vested and expected to vest at September 30, 2009
|
|
|
1,682,216 |
|
|
$ |
0.24 |
|
Options
exercisable at September 30, 2009
|
|
|
948,938 |
|
|
$ |
0.25 |
|
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, will be recognized over
the remaining vesting period of the grant.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
Additional
information regarding options outstanding as of September 30, 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
|
|
|
$0.15
|
|
|
|
192,000
|
|
9.50
|
|
$
|
0.15
|
|
22,916
|
|
$
|
0.15
|
|
|
$0.18
|
|
|
|
1,500
|
|
9.63
|
|
$
|
0.18
|
|
—
|
|
$
|
—
|
|
|
$0.19
|
|
|
|
6,500
|
|
9.27
|
|
$
|
0.19
|
|
—
|
|
$
|
—
|
|
|
$0.20
|
|
|
|
269,500
|
|
9.78
|
|
$
|
0.20
|
|
13,886
|
|
$
|
0.20
|
|
|
$0.25
|
|
|
|
1,472,679
|
|
7.58
|
|
$
|
0.25
|
|
912,136
|
|
$
|
0.25
|
|
|
$0.26
|
|
|
|
6,000
|
|
9.98
|
|
$
|
0.26
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
1,948,179
|
|
8.08
|
|
$
|
0.23
|
|
948,938
|
|
$
|
0.25
|
|
The
aggregate intrinsic value of options outstanding and options exercisable at
September 30, 2009 was approximately $53,000 and $12,000, respectively. The
aggregate intrinsic value of options outstanding and options exercisable at
September 30, 2008 was approximately $78,000 and $0, respectively. The aggregate
intrinsic value represents the total intrinsic value based upon the stock price
of $0.26 at September 30, 2009.
As of
September 30, 2009, there was approximately $706,000 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 2.09 years.
3.
Other Assets
Other
assets consisted of the following:
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
Security
deposits
|
|
$ |
154,000 |
|
|
$ |
167,000 |
|
Capitalized
software costs, net of amortization
|
|
|
— |
|
|
|
114,000 |
|
Total
other assets
|
|
$ |
154,000 |
|
|
$ |
281,000 |
|
In
accordance with ASC 350-40-25-2, “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.
4.
Credit Facilities
Silicon
Valley Bank
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, as described below. 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 3.50% over the greater of the prime rate or 7.5% (from 3% over the
greater of 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. At September
30, 2009, total availability under the SVB Loan Agreement was $1.5 million, of
which $1.4 million was outstanding, and the applicable interest rate was 7.5% at
September 30, 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.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
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 the three and nine months ended September 30, 2009, which
is being recorded as interest expense, was approximately $23,000 and $68,000,
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
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 from time to time, plus 3% (the “Applicable Rate”). At
September 30, 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 September 30, 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 three and nine months
ended September 30, 2009, which is being recorded as interest expense, was
approximately $16,000 and $47,000, respectively. As of September 30, 2009, total
availability under the PFG Loan Agreement was $1.3 million, of which $750,000
was outstanding.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
5.
Common Stock
Reduction
of outstanding common shares
In
connection with the merger agreement entered into in October 2005 between the
Company and Sand Hill IT Security Acquisition Corp (“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 redeemed 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.
6.
Warrants
As of
September 30, 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. There were
no warrants granted or exercised during the nine months ended September 30,
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 in connection with the loan agreements described in Note 3
above and 430,104 warrants expired at December 31, 2008.
7. 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 815-10-15. 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 $149,000 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 September 30, 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 $33,000. The change in the estimated fair
value of the warrant derivative liability for the three and nine months ended
September 30, 2009 of $8,000 and ($8,000), respectively is included in other
expense (income) in the accompanying statement of
operations.
8. Fair
Value Measurements
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.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
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 September 30, 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 $33,000. The warrants are valued
using Level 3 inputs because there are significant unobservable inputs
associated with them.
The following table reconciles the warrant
derivative liability measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the nine
months ended September 30,
2009:
Balance
at January 1, 2009
|
|
$ |
41,000
|
|
Gain
on change in fair value included in other expense (income)
|
|
|
(8,000
|
)
|
Balance
at September 30, 2009
|
|
$ |
33,000
|
|
Fair
Value of Other 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 values of the Company’s obligations
under its credit facility and capital lease agreements approximate their
respective carrying values as the stated interest rates of these instruments
reflect rates which are otherwise currently available to the
Company.
9.
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
is claiming patent infringement arising under the patent laws of the United
States. The patent-in-suit is 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 favor of Plaintiff and is seeking an award of unspecified damages.
The Company intends to vigorously defend its interests in this
matter.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
10.
Subsequent Events
Subsequent
event evaluation date
The
Company has evaluated subsequent events through November 12, 2009, which
represents the date the Company’s interim consolidated financial statements were
issued, and except as described below, no other events were subject to
recognition or disclosure.
Write
off of capitalized software
In June
2009, a decision was made by management to suspend further development of the
Company’s internal software project, which had been developed from September
2008 through June 2009. 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 as this is considered to be a recognized subsequent event per guidance in
ASC 855-10, “Subsequent Events” (See Note 3).
Item 2. 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 Quarterly Report on
Form 10-Q. 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 Quarterly Report on Form 10-Q.
OVERVIEW
Our
Business
We
design, develop, and market internet security appliances and services to small,
medium and enterprise class customers (SME’s). These solutions enable our
customers to manage their employee usage policy across multiple messaging
protocols, which include internet access, e-mail, and instant messaging. These
solutions are delivered in a suite of appliances, which scale to meet the needs
of any size organization.
Our
customers include more than 5,000 enterprises, educational institutions, small
and medium businesses (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 $4.5 million for the three months ended September 30, 2009,
compared to $4.4 million in the same period in 2008, an increase of 1.5%
resulting from our marketing efforts and our continued effort to upsell our
current customers. Net income for the three months ended September
30, 2009 was $117,000 compared to a net loss of $504,000 for the same period in
2008. This improvement of $621,000 was despite the write off of
$473,000 of previously capitalized software costs (see note 3 of the
accompanying financial statements). Net basic and diluted income per
share for the three months ended September 30, 2009 was $0.01 compared to a loss
per share of $0.03 for the three months ended September 30, 2009. The
increase was primarily attributable to decreased marketing and general and
administrative expenses, as well as a credit for stock based compensation
expense.
Net cash
used in operations was $0.1 million and $1.9 million for the nine months ended
September 30, 2009 and 2008, respectively. The net decrease in use of cash was
due primarily to significant decreases to our operating expenses and changes in
our operating asset and liability accounts.
On
February 27, 2009, 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 $1.4 million as of September 30,
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 September 30, 2009.
During
the quarter ended September 30, 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 secure content management appliances
and system protection products. 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 involve management’s judgments and estimates
and are critical to understanding our historical and future performance as these
policies and estimates affect the reported amounts of revenue and other
significant areas in our reported financial statements.
|
●
|
revenue
recognition;
|
|
●
|
allowance
for doubtful accounts;
|
|
●
|
impairment
of goodwill and long-lived assets;
|
|
●
|
accounting
for income taxes;
|
|
● |
warranty
obligation; and |
|
● |
accounting
for stock options.
|
Please
refer to the “Management’s Discussion and Analysis of Financial Condition and
Results of Operation” located within our 10-K filed on March 11, 2009 for the
year ended December 31, 2008 for further discussion of our “Summary
of Significant Accounting Policies and Estimates”. There have been no material
changes to these accounting policies during the three months ended September 30,
2009.
Results
of Operations
Comparisons
of the Three Months Ended September 30, 2009 and 2008 (in thousands, except
percentages)
Revenues
|
|
For the |
|
|
|
|
|
|
Three Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Total
revenues |
|
$ |
4,493 |
|
|
$ |
4,427 |
|
|
|
1.5% |
|
Revenues
increased $66,000 for the three months ended September 30, 2009, compared to the
same period in 2008 as a result of an increase of $96,000 in subscription
revenues, offset by a decrease of $31,000 in appliance
revenues.
Subscription
Revenues
|
|
For the |
|
|
|
|
|
|
Three Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Subscription
revenues |
|
$ |
3,615 |
|
|
$ |
3,519 |
|
|
|
2.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
total revenues |
|
|
80.5% |
|
|
|
79.5% |
|
|
|
|
|
For the
third quarter of 2009, our subscription revenues increased approximately $96,000
compared to the third quarter of 2008 due to increases in our customer base. The
subscription renewal rates for our products traditionally range from 75% to
95%.
Appliance
Revenues
|
|
For the |
|
|
|
|
|
|
Three Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Appliance
revenues |
|
$ |
875 |
|
|
$ |
906 |
|
|
|
(3.4)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
total revenues |
|
|
19.5% |
|
|
|
20.5% |
|
|
|
|
|
For the
three months ended September 30, 2009, appliance revenues decreased
approximately $31,000 compared with the respective period in 2008. Total units
shipped for the three months ended September 30, 2009 were 439 compared with 652
for the same period in 2008.
Cost of Revenues
|
|
For the |
|
|
|
|
|
|
Three Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Total cost of
revenues |
|
$ |
1,155 |
|
|
$ |
1,157 |
|
|
|
(0.2)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
percentage |
|
|
74.3% |
|
|
|
73.9% |
|
|
|
|
|
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 was
basically unchanged for the three months ended September 30, 2009 and 2008. See
the discussion of changes in the cost of subscription and appliance revenues
below.
Cost of Subscription
Revenues
|
|
For the |
|
|
|
|
|
|
Three Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Cost of subscription
revenues |
|
$ |
552 |
|
|
$ |
545 |
|
|
|
1.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
percentage |
|
|
84.7% |
|
|
|
84.5% |
|
|
|
|
|
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 |
|
|
|
|
|
|
Three Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Cost of appliance
revenues |
|
$ |
594 |
|
|
$ |
612 |
|
|
|
(2.9)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
percentage |
|
|
32.1% |
|
|
|
32.5% |
|
|
|
|
|
The cost
of appliance revenues, which includes contract manufactured equipment, packaging
and freight, decreased $18,000 for the three months ended September 30, 2009
compared to the same period in 2008. Gross margin remained relatively the same
for the period mentioned above as a result of the higher selling price of our
h-series appliances and a noticeable shift as a result of our marketing and
sales efforts in customer demand toward the higher-end models during the three
months ended September 30, 2009.
Sales and Marketing
Expense
|
|
For the |
|
|
|
|
|
|
Three Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Sales and marketing
expense |
|
$ |
1,474 |
|
|
$ |
1,828 |
|
|
|
(19.4)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
total revenues |
|
|
32.8% |
|
|
|
41.3% |
|
|
|
|
|
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 three months ended September 30, 2009,
sales and marketing expense decreased 19.4%, or $354,000, over the same period
in 2008 mainly attributable to our successful cost reduction
efforts.
Research and Development
Expense
|
|
For the |
|
|
|
|
|
|
Three Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Research and
development expense |
|
$ |
724 |
|
|
$ |
629 |
|
|
|
15.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
total revenues |
|
|
16.1% |
|
|
|
14.2% |
|
|
|
|
|
Research
and development expense consists primarily of salaries, related benefits,
third-party consultant fees and other engineering related costs. The increase of
$95,000 for the third quarter of 2009 compared to the same period in 2008 was
primarily the result of a net increase in compensation
costs. 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 continue to increase as we
extend the core functionality and features within our products.
General and Administrative
Expense
|
|
For the |
|
|
|
|
|
|
Three Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
General and
administrative expense |
|
$ |
462 |
|
|
$ |
1,322 |
|
|
|
(65.1)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
total revenues |
|
|
10.3% |
|
|
|
29.9% |
|
|
|
|
|
General
and administrative expenses, which consist primarily of salaries and related
benefits, and fees for professional services, such as legal and accounting
services, decreased $860,000 for the quarter ended September 30, 2009, compared
to the same period in 2008. The most significant decreases during the
third quarter of 2009 included decreases in stock based compensation expenses of
$0.5 million and decreases to compensation and consulting expenses of $0.3
million.
Write-off of Capitalized
Software
|
|
For the |
|
|
|
|
|
|
Three Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Write-off of
capitalized software |
|
$ |
473 |
|
|
$ |
0 |
|
|
|
100.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
total revenues |
|
|
10.5% |
|
|
|
0.0% |
|
|
|
|
|
In
accordance with ASC 350-40-25-2, “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.
Interest and Other Income,
Net
|
|
For the |
|
|
|
|
|
|
Three Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Interest and other
income, net |
|
$ |
88 |
|
|
$ |
239 |
|
|
|
(63.2)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
total revenues |
|
|
2.0% |
|
|
|
5.4% |
|
|
|
|
|
Interest
and other income, net, includes interest expense, interest income, and other
income. The decrease for the three months ended September 30, 2009 over the same
period in 2008 was the result of a decrease in interest expense related to
short-term borrowings and a decrease in settlement of trade
payables.
Gain on Sale of
Assets
|
|
For the |
|
|
|
|
|
|
Three Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Gain on sale of
assets |
|
$ |
0.0 |
|
|
$ |
244 |
|
|
|
(100.0)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
total revenues |
|
|
0.0% |
|
|
|
5.5% |
|
|
|
|
|
The gain
for the three months ended September 30, 2008 consisted of a gain from the
excess renewal fees and from the release of the first half of funds from an
indemnification in connection with the sales of certain product line assets in
January 2007.
Comparisons
of the Nine Months Ended September 30, 2009 and 2008 (in thousands, except
percentages)
Revenues
|
|
For the |
|
|
|
|
|
|
Nine Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Total
revenues |
|
$ |
13,696 |
|
|
$ |
12,936 |
|
|
|
5.9% |
|
Revenues
increased $760,000 for the nine months ended September 30, 2009, compared to the
same period in 2008 as a result of increases of $746,000 in subscription
revenues and $23,000 in appliance revenues.
Subscription
Revenues
|
|
For the |
|
|
|
|
|
|
Nine Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Subscription
revenues |
|
$ |
10,996 |
|
|
$ |
10,250 |
|
|
|
7.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
total revenues |
|
|
80.3% |
|
|
|
79.2% |
|
|
|
|
|
For the
nine months ended September 30, 2009, our subscription revenues increased
approximately $746,000 compared to the third quarter of 2008 due to increases to
our customer base. The subscription renewal rates for our products traditionally
range from 75% to 95%.
Appliance
Revenues
|
|
For the |
|
|
|
|
|
|
Nine Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Appliance
revenues |
|
$ |
2,691 |
|
|
$ |
2,668 |
|
|
|
0.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
total revenues |
|
|
19.6% |
|
|
|
20.6% |
|
|
|
|
|
For the
nine months ended September 30, 2009, appliance revenues increased approximately
$23,000 compared with the respective period in 2008. Total units shipped for the
nine months ended September 30, 2009 were 1,681 compared with 1,842 for the same
period in 2008. Though we shipped out fewer appliance units, the increase in
revenue can be attributed to the higher selling price of our h-series appliances
and a noticeable shift in customer demand toward the higher-end models during
2009. We expect appliance revenue to continue to increase in future
periods due to the increased efforts of our sales team to upsell our customers
these appliances, which are designed to enhance the iPrism web filtering
capabilities.
Cost of Revenues
|
|
For the |
|
|
|
|
|
|
Nine Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Total cost of
revenues |
|
$ |
3,512 |
|
|
$ |
3,511 |
|
|
|
0.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
percentage |
|
|
74.4% |
|
|
|
72.9% |
|
|
|
|
|
Cost of
revenues consists 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 was
basically unchanged for the nine months ended September 30, 2009 and 2008. See
the discussion of changes in the cost of subscription and appliance revenues
below.
Cost of Subscription
Revenues
|
|
For the |
|
|
|
|
|
|
Nine Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Cost of subscription
revenues |
|
$ |
1,675 |
|
|
$ |
1,658 |
|
|
|
1.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
percentage |
|
|
84.8% |
|
|
|
83.8% |
|
|
|
|
|
The cost
of subscription revenues which includes the technical operations group that
maintains the various databases and the technical support group basically
remained unchanged for the nine months ended September 30, 2009 compared to the
same period in 2008.
Cost of Appliance
Revenues
|
|
For the |
|
|
|
|
|
|
Nine Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Cost of appliance
revenues |
|
$ |
1,826 |
|
|
$ |
1,848 |
|
|
|
(1.2)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
percentage |
|
|
32.1% |
|
|
|
30.7% |
|
|
|
|
|
The cost
of appliance revenues, which includes contract manufactured equipment, packaging
and freight, decreased $22,000 for the nine months ended September 30, 2009
compared to the same period in 2008. Gross margin increased for the period
mentioned above as a result of the higher selling price of our h-series
appliances and a noticeable shift as a result of our marketing and sales efforts
in customer demand toward the higher-end models during the nine months ended
September 30, 2009.
Sales and Marketing
Expense
|
|
For the |
|
|
|
|
|
|
Nine Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Sales and marketing
expense |
|
$ |
4,715 |
|
|
$ |
5,709 |
|
|
|
(17.4)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
total revenues |
|
|
34.4% |
|
|
|
44.1% |
|
|
|
|
|
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 nine months ended September 30, 2009,
sales and marketing expense decreased 17.4%, or $994,000, over the same period
in 2008 mainly attributable to our successful cost reduction
efforts.
Research and Development
Expense
|
|
For the |
|
|
|
|
|
|
Nine Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Research and
development expense |
|
$ |
2,629 |
|
|
$ |
2,128 |
|
|
|
23.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
total revenues |
|
|
19.2% |
|
|
|
16.5% |
|
|
|
|
|
Research
and development expense consists primarily of salaries, related benefits,
third-party consultant fees and other engineering related costs. The increase of
$501,000 for the nine months ended September 30, 2009 compared to the same
period in 2008 was primarily the result of a net increase in compensation
costs. 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 continue to increase as we
extend the core functionality and features within our products.
General and Administrative
Expense
|
|
For the |
|
|
|
|
|
|
Nine Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
General and
administrative expense |
|
$ |
2,709 |
|
|
$ |
3,897 |
|
|
|
(30.5)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
total revenues |
|
|
19.8% |
|
|
|
30.1% |
|
|
|
|
|
General
and administrative expenses, which consist primarily of salaries and related
benefits, and fees for professional services, such as legal and accounting
services, decreased $1.2 million for the nine months ended September 30, 2009,
compared to the same period in 2008. The most significant decreases during the
nine months ended September 30, 2009 included decreases in compensation and
consulting expenses of $0.7 million, lease and rent expenses of $0.2 million,
and stock based compensation expenses of $0.2 million.
Write-off of Capitalized
Software
|
|
For the |
|
|
|
|
|
|
Nine Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Write-off of
capitalized software |
|
$ |
473 |
|
|
$ |
0 |
|
|
|
100.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
total revenues |
|
|
3.5% |
|
|
|
0.0% |
|
|
|
|
|
In
accordance with ASC 350-40-25-2, “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.
Interest and Other Income,
Net
|
|
For the |
|
|
|
|
|
|
Nine Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Interest and other
income, net |
|
$ |
221 |
|
|
$ |
95 |
|
|
|
132.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
total revenues |
|
|
1.6% |
|
|
|
0.7% |
|
|
|
|
|
Interest
and other income, net, includes interest expense, interest income, and other
income. The decrease for the nine months ended September 30, 2009 over the same
period in 2008 was the result of an increase in interest expense related to
short-term borrowings and a gain on the change in fair value of the warrant
derivative liability offset by a decrease in settlement of trade
payables.
Gain on Sale of
Assets
|
|
For the |
|
|
|
|
|
|
Nine Months
Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Gain on sale of
assets |
|
$ |
0.0 |
|
|
$ |
564 |
|
|
|
(100.0)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of
total revenues |
|
|
0.0% |
|
|
|
4.4% |
|
|
|
|
|
The gain
for the nine months ended September 30, 2008 consisted of a gain from the excess
renewal fees and from the release of the first half of funds from an
indemnification in connection with the sales of certain product line assets in
January 2007.
Recent
Accounting Pronouncements
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, of adopting 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, of adopting ASU 2009-13 will have on
our consolidated financial statements.
Liquidity
and Capital Resources
Cash
Flows
Our
largest source of operating cash flows is cash receipts from our customers from
purchases of products, subscription, maintenance and technical
support. Our standard payment terms for both subscription and support
invoices are net 30 days from the date of invoice but from time to time we enter
into payment terms that are greater then 30 days. The recurring
subscription portion of our business provides predictable cash flow but new
sales fluctuate due to seasonal buying behavior and sales and marketing
effectiveness. Our primary uses of cash for operating activities
include cost associated with appliance sales and appliance warranty, costs to
maintain our subscription services, personnel, facilities, sales and marketing,
research and development, and general and administrative expenses.
Net cash
used in operations was $100,000 and $1.9 million for the nine months ended
September 30, 2009 and 2008, respectively. The net decrease in use of cash was
due primarily to significant decreases to our operating expenses and changes in
our operating asset and liability accounts.
For the
nine months ended September 30, 2009, cash used in investing activities was
$75,000 for purchases of fixed assets. Cash provided by investing
activities for the respective period in 2008 totaled $563,000 and represented
amounts received pursuant to previous sales of two product lines.
Cash
flows used by financing activities for the three quarters of 2009 was $455,000,
mainly the result of paying down the balance on our line of credit with SVB and
a decrease in the drawing of our line of credit. For the same period
in 2008 financing activities provided cash of $793,000 primarily a result of
drawing on our line of credit. The outstanding balance of short term
borrowings under credit facilities described below was $2.1 million as of
September 30, 2009 compared to $2.5 million as of September 30,
2008. The total amount available under our credit facilities was
$700,000 at September 30, 2009.
As a result of the foregoing, the net
decrease in cash and cash equivalents was $630,000 for the nine months ended
September 30, 2009 as compared to a net decrease of approximately $575,000 for
the comparable period in 2008.
Credit
Facilities
Silicon
Valley Bank
On May
15, 2007, the Company entered into a Loan Agreement with SVB which provides for
a credit facility not to exceed $2.0 million, subject to a borrowing base
formula, as described below. The SVB Loan Agreement was amended on February 27,
2009 (the “Loan Amendment”). Pursuant to the terms
of the Loan Amendment, among other things, SVB (i) decreased the interest
rate on the revolving line of credit to 3.50% over the greater of the prime rate
or 7.5% (from 3% over the greater of 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. At September 30, 2009,
total availability under the SVB Loan Agreement was $1.5 million, of which $1.4
million was outstanding, and the applicable interest rate was 7.5% at September
30, 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
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 the three
and nine months ended September 30, 2009, which is being recorded as interest
expense, was approximately $23,000 and $68,000, 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
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 from time to time, plus 3% (the
“Applicable Rate”). At September 30, 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 September 30, 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 three and nine months
ended September 30, 2009, which is being recorded as interest expense, was
approximately $16,000 and $47,000, respectively. As of September 30,
2009, total availability under the PFG Loan Agreement was $1.3 million, of which
$750,000 was outstanding.
Liquidity
As of
September 30, 2009, the Company had approximately $1.4 million in cash and cash
equivalents and a working capital deficit of $9.9
million. Approximately $10.1 million of our current liability balance
at September 30, 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 three and nine months ended September 30, 2009, the
Company achieved net income of $117,000 and incurred net loss of $568,000,
respectively, and through September 30, 2009 recorded a cumulative net loss of
$49.9 million. For the nine months ended September 30, 2009 cash used
in operating activities was $100,000.
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
the closure of its sales and marketing offices in Europe and Australia, reducing
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 February 2009, the Company also extended to May 15, 2010 the
maturity date of the Loan and Security Agreement (the “SVB Loan Agreement”) with
Silicon Valley Bank (“SVB”) and also negotiated a significant reduction in the
interest rate. At September 30, 2009, total availability under the SVB Loan
Agreement was $1.5 million, of which $1.4 million was outstanding, and the
applicable interest rate was 7.5%. In addition, the Company has a
loan agreement with Partners for Growth (“PFG”) under which there is borrowing
availability of approximately $600,000 as of September 30, 2009 (See Note
4).
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. However, there can be no assurances that projected
revenue will be achieved or the improvement in operating results will occur. In
the event cash flow from operations 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.
Off-Balance
Sheet Arrangements
Except
for the commitments arising from our operating lease arrangements, 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 Quarterly Report on Form 10-Q 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. For a
summary of such risks and uncertainties, please see Risk Factors located in our
Annual Report on Form 10-K for the year ended December 31, 2008 filed with
the Securities and Exchange Commission on March 11, 2009.
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.
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.
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
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.
Evaluation
of Disclosure Controls
We
maintain "disclosure controls and procedures," as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that are designed to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in Securities and Exchange Commission rules and forms, and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognizes that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Additionally, in designing disclosure controls
and procedures, our management was required to apply its judgment in evaluating
the cost-benefit relationship of possible disclosure controls and procedures.
The design of any disclosure controls and procedures is also based in part upon
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.
Based on
his evaluation as of the end of the period covered by this Quarterly Report on
Form 10-Q and subject to the foregoing, our Chief Executive Officer has
concluded that our disclosure controls and procedures were
effective.
Changes
in Internal Control over Financial Reporting
During
the period covered by this report, 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.
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
is claiming patent infringement arising under the patent laws of the United
States. The patent-in-suit is 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 favor of Plaintiff and is seeking an award of unspecified damages.
The Company intends to vigorously defend its interests in this
matter.
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.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior
Securities
None.
Item 4. Submission of Matters to a Vote of
Security Holders
None.
None.
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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Loan
Agreement between St. Bernard Software, Inc. and Agility Capital, LLC
dated January 25, 2008 (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 January 31, 2008).
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10.4
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Intellectual
Property Security Agreement between St. Bernard Software, Inc. and Agility
Capital, LLC dated January 25, 2008 (incorporated herein by reference to
Exhibit 10.2 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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10.5
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Subordination
Agreement between Agility Capital, LLC and Silicon Valley Bank dated
January 25, 2008 (incorporated herein by reference to Exhibit 10.3 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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10.6
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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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10.7
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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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10.8*
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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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10.9
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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).
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10.10
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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).
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10.11*
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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).
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10.12*
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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).
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10.13*
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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).
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10.14*
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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).
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10.15*
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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).
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14.1
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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).
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17.1
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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).
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31.1
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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.
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31.2
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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.
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32.1
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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.
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32.2
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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.
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___________________
*
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Management
contract or compensatory plan or
arrangement
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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.
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ST.
BERNARD SOFTWARE, INC.
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Dated:
November 12, 2009
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By:
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/s/
Louis E. Ryan
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Louis
E. Ryan
Chief
Executive Officer and
Chairman
of the Board of Directors
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30