UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
FORM
10-K
(Mark
One)
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x ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31,
2008
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OR
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o TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the Transition Period From ____________
to ____________
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Commission
File Number 0-50813
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St.
Bernard Software, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
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Delaware
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20-0996152
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(State
or other Jurisdiction of incorporation)
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(I.R.S.
Employer Identification No.)
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15015 Avenue of Science,
San Diego,
California
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92128
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(Address
of Principal Executive Office)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (858) 676-2277
Securities
registered under Section 12(b) of the Act: None
Securities
registered under Section 12(g) of the Act:
Common
Stock, $0.01 Par Value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES o NO ý
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES o NO ý
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES ý NO o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See the definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check one):
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
(Do
not check if a smaller reporting company)
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Smaller
reporting company ý
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES o NO ý
The
aggregate market value of the Registrant’s voting stock held by non-affiliates
of the Registrant as of June 30, 2008 was $7,533,907, based on the last reported
sale of $0.51 per share on June 30, 2008.
As
of March 10, 2009, a total of 14,838,940 shares of Common Stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Refer to
Exhibits set forth in Item 15 of this Form 10-K. Refer to Items 10,
11, 12, 13, and 14 of this Form 10-K for information incorporated by reference
to the registrant’s proxy statement for its 2009 annual stockholders’
meeting.
ST.
BERNARD SOFTWARE, INC.
ANNUAL
REPORT ON FORM 10-K FOR
THE
FISCAL YEAR ENDED DECEMBER 31, 2008
TABLE
OF CONTENTS
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Report
of Independent Registered Public Accounting Firm
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F-2
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Consolidated
Balance Sheets as of December 31, 2008 and 2007
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F-3
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Consolidated
Statements of Operations for the Years Ended December 31, 2008 and
2007
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F-4
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Consolidated
Statements of Stockholders’ Deficit for the Years Ended December 31, 2008
and 2007
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F-5
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Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008 and
2007
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F-6
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Notes
to Consolidated Financial Statements
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F-7
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Signatures
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33
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St. Bernard Software, Inc.
(the “Company”, “St. Bernard”, “Us”, “Our”, or “We”), a Delaware corporation
incorporated in 1986, develops and markets Internet security appliances and
services to small, medium and enterprise class customers (SMEs). These solutions
enable our customers to manage their employee usage policy across multiple
messaging protocols, which include Internet access, e-mail, and Instant
Messaging (IM). 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 original equipment manufacturers (OEMs). Appliance purchases typically
consist of an initial hardware purchase and maintenance subscription. Our
primary customers are IT managers, directors, and administrators.
Our
corporate headquarters is located at 15015 Avenue of Science, San Diego,
California, 92128.
Products
iPrism
– Dedicated Web Content Filtering Appliance
iPrism,
our flagship product, is a dedicated and optimized network appliance that
enables organizations to enforce their acceptable internet use policies by
providing multi-protocol web filtering and access control. The
appliance, first under development in 1997, is a specialized firewall that
packages the operating system, application software, and user interface, thereby
delivering a cohesive, simple to install and maintain solution. At
the core of iPrism is our industry-exclusive, 100% human-reviewed URL database,
iGuard. Updates to the iGuard database are automatically delivered to
iPrism customers as frequently as hourly.
iPrism is
offered in five different models which vary by technical specification thereby
delivering degrees of performance, storage, throughput, and component
redundancy. All models run the same software, both application and
operating system. All models receive common iGuard data updates.
Models offer different hardware features by design. Each appliance offers
support for faster Internet speeds and more features as one progresses up the
product line. The 10h is the entry-level appliance and supports 10 Mbs
throughput. The 20h appliance supports 20 Mbs plus offers a failover capability.
The 30h appliance support 30 Mbs, offers a full 1U chassis with RAID array
storage and dual power. The 50h supports Internet speeds of 50 Mbs in addition
to the features of the 30h. Finally, the 100h supports speeds in excess of 100
Mbs and offers more storage capacity. Today, the M-Series appliances from the
last five years continue to be supported and can accept the latest software
releases. As the iPrism appliances are designed to work together, concurrent box
deployments enable scaling in larger networks and can also be deployed in a
redundant fashion. All boxes can be centrally, remotely, or locally
managed.
To
support dynamic deployments of large enterprises and diverse locales, St.
Bernard offers consolidation of reporting data in an appliance solution. This
appliance is the iPrism Enterprise Reporting Server (ERS). The ERS is a
non-filtering appliance that enables organizations to aggregate user activity
reporting and archiving across multiple iPrism appliance deployments in one
centrally managed reporting solution. In a typical deployment, a customer will
deploy 2 or more iPrism filtering appliances in one or more locations and use
the ERS to aggregate filtering activity data into an enterprise-wide
view.
Version
6.5 of iPrism is scheduled to be released in the summer of 2009. This release
will offer existing and new customers enhancements to the Web filtering
technology.
The OEM
Software Development Kit (SDK) allows the OEM partners the ability to leverage
the Web filtering database, iGuard, by integrating the iGuard OEM SDK into their
solutions. The SDK provides these partners a way to categorize Web content so
that they can offer to their customer acceptable Internet use policy
enforcement. These partners (like iPrism customers) receive regular updates of
the iGuard database for use by the SDK. These updates are delivered via the
Internet by way of St. Bernard data centers.
ePrism,
licensed through an OEM agreement, is a dedicated email filtering and content
inspection appliance that protects against spam, viruses and other unwanted
email content and protects against outbound data leakage through message content
and attachment inspection and policy enforcement. ePrism is offered
in three different models which vary by technical specification thereby
delivering varying degrees of performance, storage, throughput, and component
redundancy. The M1000 is a mini-1U rack mounted appliance targeted for smaller
or lower email volume environments. The M2000 is a 1U rack mounted
appliance targeted for use in mid-sized or medium email volume
environments. And the M3000 is targeted for use in larger
installations. Multiple appliances can be deployed in a stateful
failover configuration.
Marketing,
Sales and Distribution
St.
Bernard sells and markets its products and related services both directly to
end-users and through a variety of indirect sales channels, which include
value-added resellers (VARs), distributors, system integrators (SIs) and
original equipment manufacturers (OEMs).
Direct Sales to End-Users, and
VARs. St. Bernard’s direct sales team sells products and software
subscription services primarily in North America. Many of St. Bernard’s products
involve a consultative, solution-oriented telesales model that uses the
collaboration of technical and sales personnel to demonstrate how our solutions
fit specific customer requirements. St. Bernard focuses its initial sales effort
on network administrators and IT department personnel who are responsible for a
customer’s IT initiatives and data center management. St. Bernard complements
its direct sales efforts with indirect sales channels such as resellers, VARs
and distributors. St. Bernard will continue to invest in programs that train and
enable its channel partners to market its technologies. St. Bernard provides its
products to its channel partners and customers under non-exclusive reseller
license agreements, including shrink-wrap or click-wrap licenses for some
products, without transferring title of its software products.
System Integrators (SIs) and Managed
Services Providers. St. Bernard collaborates with SIs, who may refer its
customers to St. Bernard, utilize St. Bernard as a subcontractor in some
situations, build standard and customized solutions with their products, or use
products to deliver hosted services as well as outsourced services. SIs use St.
Bernard’s products and services in conjunction with optimizing their client’s
investment in transactional applications and related hardware. Some
SIs are authorized resellers of our products and some use St. Bernard products
and services to deliver consultative services or managed services to their
customers. Under these arrangements, SIs and managed services providers are not
obligated to use or sell St. Bernard’s products or services. In general, St.
Bernard receives a fee for each sublicense of its products granted by its
partners. In some cases, St. Bernard grants rights to distribute promotional
versions of its products, which have limited functionality or limited use
periods, on a non-fee basis. St. Bernard enters into both object-code only
licenses and, when appropriate, source-code licenses of its products. St.
Bernard does not transfer title of software products to its customers or to
SIs.
Original Equipment Manufacturers
(OEMs). Another important element of our sales and marketing strategy
involves strategic relationships with OEM partners. These OEM partners may
incorporate St. Bernard’s products into their products, bundle our products with
their products, endorse St. Bernard’s products in the marketplace or serve as
authorized resellers of our products. In general, the OEM partners are not
obligated to sell St. Bernard’s products or services under these arrangements
and are not obligated to continue to include its products in future versions of
their products.
Marketing
efforts are primarily focused on end-user awareness and demand generation
through multiple media and venues. Typical efforts include public and
analyst relations, online search, online and print advertising, third party
promotions, email campaigns, events and tradeshows. Paid media are
selected, which target technical business buyers with little reliance on broader
non-trade media.
Software
as a Service (SaaS) and Deferred Revenue
A typical
sale of a St. Bernard product consists of a software license or an appliance
accompanied by a subscription component. The subscription component includes
traditional maintenance support (telephone support and product upgrades) as well
as database updates, as frequent as hourly. The subscription component
percentage of the original sale varies from 25% to 100% depending on the product
line. The subscriptions are generally available for one to four years.
Renewal of the subscriptions is an important and growing part of
St. Bernard’s business. Due to historically high customer satisfaction and
product value, St. Bernard currently enjoys renewal rates of 75% to 95%,
depending on the product line, which results in recurring revenues. Even though
the full payment for a subscription or renewal, as the case may be, is generally
received at the time of renewal, the revenue is recognized over the subscription
or renewal period resulting in deferred revenue on the balance sheet. Deferred
revenue was approximately $17.6 million and $15.5 million at December 31, 2008
and 2007, respectively. Deferred revenue represents subscription and product
maintenance orders for St. Bernard’s software products that have been billed to
and paid by its customers and for which revenue will generally be earned within
the next few years. Deferred revenue also includes subscription and maintenance
orders that have not been paid by St. Bernard’s customers, which are included in
accounts receivable, and that do not otherwise satisfy its revenue recognition
criteria.
Subscription
and product maintenance revenue recognized was approximately $13.9 million and
$14.2 million for the years ended December 31, 2008 and 2007, respectively.
Subscription and maintenance are generally recognized over the subscription and
maintenance period of twelve to forty-eight months.
Maintenance
and Technical Support
St.
Bernard believes that providing a high level of customer service and technical
support is critical to customer satisfaction and its success in increasing the
adoption rate of its solutions. All customers have maintenance and technical
support agreements with St. Bernard that provide for fixed fee, renewable annual
maintenance and technical support consisting of technical and emergency support,
and product upgrades. St. Bernard offers telephone support, as well as e-mail
customer support. Some of the value-added resellers, system integrators and OEMs
that offer St. Bernard’s products also provide customer technical support for
its products through a Tier1/Tier2 arrangement whereby the partner handles the
initial customer contact, (Tier 1), and St. Bernard provides secondary support
and engineering assistance, (Tier 2).
Seasonality
As is
typical for many software companies, St. Bernard’s business is seasonal. Product
sales are generally higher in its fourth fiscal quarter and lower in its first
fiscal quarter. In addition, St. Bernard generally receives a higher volume of
sales orders in the last month of a quarter, with orders concentrated in the
later part of that month. St. Bernard believes that this seasonality primarily
reflects customer spending patterns and budget cycles. Product revenue generally
reflects similar seasonal patterns but to a lesser extent than sales orders
because product revenue is not recognized until an order is shipped and other
revenue recognition criteria are met.
Customers
St.
Bernard’s products and services are used by a diverse range of customers
including large corporations, small and medium-sized businesses, governmental
entities, and educational institutions. As of December 31, 2008, St.
Bernard had over 5,000 customers. For the years ended December 31, 2008 and
2007, no end-user customer or distributor accounted for more than 10% of St.
Bernard’s net revenue.
Competition
The IT
security market and the general IT technology market are continuing to
consolidate. This consolidation appears in new technology
(functionality) combinations and also at the corporate level through
acquisitions. The result of this consolidation has broadened the
number of competitors that we see in the market place. Our current
primary competitors can be divided into two categories and include:
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Web
filtering/secure content management appliances and software – WebSense,
Blue Coat, McAfee, Inc., Symantec Corporation, Fortinet, Sonicwall, Trend
Micro, Cisco Systems, Barracuda Networks, and Marshal8e6
Technologies
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Secure
content management services (SCMs) – Symantec and MX
Logic
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We also
face current and potential competition in Web filtering from vendors of Internet
servers, operating systems and networking hardware, many of which now, or may in
the future, develop and/or bundle Web filtering, Web security or other
competitive products with their offerings. We compete against and expect
increased competition from anti-virus software developers, traditional network
management software developers and Web management service
providers.
We
believe that we compete effectively against our competitors in our target
markets. However, many of our current and potential competitors, such as
Symantec Corporation, McAfee, Inc., Trend Micro, Cisco Systems and WebSense
have longer operating histories and significantly greater financial, technical,
marketing or other resources. They have significantly greater name recognition,
established marketing and channel relationships both in the United States and
internationally, and access to a larger installed base of customers. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
functionality of their products to address customer needs. Accordingly, new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
Material
Supplier
St.
Bernard’s iPrism products have historically been sold with computer hardware
appliances designed and manufactured by one vendor, located in the United
States. This vendor represented 88.5% of the appliance cost of sales in 2008. If
this vendor unexpectedly stopped supplying the appliances, St. Bernard could
experience an interruption in its ability to supply customers with the iPrism
product.
Prior to
2008, St. Bernard’s hardware appliances were designed and manufactured by
another vendor. This vendor represented 71.9% of the appliance cost of sales in
2007.
Research
and Development
St.
Bernard’s research and development efforts have been directed toward new feature
enhancements in parallel to continual improvement of its secure content
management appliances and system protection products. During 2008, the company’s
development efforts were primarily focused on delivering additional security
features for core product lines while employing a cost-reduction strategy. St.
Bernard’s recent major research and development initiatives include, but are not
limited to:
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New iPrism
Release. St. Bernard has successfully launched major product
versions and upgrades in 2008. The product releases include new security
features such as antivirus and malware protection and website anonymizer
defense. The iPrism User Interface also received
significant improvements.
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New iPrism ‘h-Series’
Platform. St. Bernard successfully released and upgraded a
significant number of its customer base to the high performance iPrism
‘h-Series’ Appliances. It is St. Bernard’s solution to customers’ demand
on bandwidth and processing time.
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Subscription Database
Expansion. St. Bernard’s products are driven by data. St. Bernard
engineers keep these databases up to date. Presently, the databases keep
track of over 10 million web sites worldwide. Customers pay an
annual subscription fee for access to the latest data. The quality and
quantity of this data is a key differentiator for St. Bernard’s
products.
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SBS launched an OEM
Program for iGuard database. Customers pay to use the entire
database or a subset in their applications. St. Bernard has successfully
released the SDK to the licensees for quick product release
cycle.
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St.
Bernard had research and development expenses of approximately $2.9 million and
$6.0 million in 2008 and 2007, respectively. This equates to 16.1% and 31.4% of
net revenues over those same periods. St. Bernard believes that technical
leadership is essential to its success and expects to continue to commit
substantial resources to its research and development efforts.
Intellectual
Property
Protective
Measures
St.
Bernard regards some of the features of its internal operations, software and
documentation as proprietary and relies on copyright, patent, trademark and
trade secret laws, confidentiality procedures, contractual and other measures to
protect its proprietary information. St. Bernard’s intellectual property is an
important and valuable asset that helps enable us to gain recognition for its
products, services and technology and enhance its competitive position. St.
Bernard’s intellectual property is further protected by using encryption
security and product activation keys.
As part
of St. Bernard’s confidentiality procedures, it generally enters into
non-disclosure agreements with its employees, distributors and corporate
partners and license agreements with respect to software, documentation and
other proprietary information. These license agreements are generally
non-transferable without St. Bernard’s consent and have a perpetual term. St.
Bernard also employs measures to protect its facilities, equipment and
networks.
Trademarks
and Copyrights
St.
Bernard and the St. Bernard logo are trademarks or registered trademarks in the
United States and other countries. In addition to “St. Bernard” and the St.
Bernard logo, the Company has used, registered and/or applied to register other
specific trademarks and service marks to help distinguish its products,
technologies and services from those of its competitors in the U.S. and foreign
countries and jurisdictions. St. Bernard enforces its trademark, service mark
and trade name rights in the U.S. and abroad. The duration of St. Bernard’s
trademark registrations varies from country to country and in the U.S. St.
Bernard generally is able to maintain its trademark rights and renew any
trademark registrations for as long as the trademarks are in use.
St.
Bernard’s products are protected under U.S. and international copyright laws and
laws related to the protection of intellectual property and proprietary
information. St. Bernard generally takes measures to label such products with
the appropriate proprietary rights notices and is actively enforcing such rights
in the U.S. and abroad. However, these measures may not provide sufficient
protection, and St. Bernard’s intellectual property rights may not be of
commercial benefit to St. Bernard or the validity of these rights may be
challenged. While St. Bernard believes that its ability to maintain and protect
its intellectual property rights is important to its success, it also believes
that its business as a whole is not materially dependent on any particular
patent, trademark, license or other intellectual property
right.
St.
Bernard has the right to use certain intellectual property licensed from a
vendor under an agreement that provides for payments only for products sold
using such intellectual property. St. Bernard uses such intellectual property in
its ePrism product. St. Bernard believes that if it were unable to use the
intellectual property licensed from the vendor it could find a substitute on
terms reasonable to St. Bernard.
Employees
As of
December 31, 2008, St. Bernard had 90 employees, including 34 employees in
technical operations, 35 in sales and marketing, and 21 in general and
administrative services. St. Bernard has not entered into any collective
bargaining agreements with its employees and believes that relations with its
employees are good. St. Bernard believes that its future success will depend in
part upon the continued service of its key employees and on its continued
ability to hire and retain qualified personnel.
Because
we derive a majority of our license revenue from sales of a few product lines,
any decline in demand for these products could severely harm our ability to
generate revenue and our results of operations.
We derive
a majority of our revenue from a small number of software products, which
includes iPrism and
related subscription and maintenance services. In particular, our future success
depends in part on achieving substantial revenue from customer renewals for
subscriptions. Our customers have no obligation to renew their subscriptions
upon expiration. If our products fail to meet the needs of our existing and
target customers, or if they do not compare favorably in price and performance
to competing products, our growth will be limited. Subscriptions typically have
durations of 12 to 48 months. As a result, a majority of the revenue we report
in each quarter is deferred revenue from subscription agreements entered into
and paid for during previous quarters. Because of this financial model, the
revenue we report in any quarter or series of quarters may mask significant
downturns in sales and the market acceptance of our products. In addition, our
products are concentrated on the small, medium, and enterprise class, or SME,
environment. We are particularly vulnerable to fluctuations in demand for these
products, whether as a result of competition, product obsolescence,
technological change, budget constraints of our potential customers, or other
factors. If revenue derived from these software products were to decline
significantly, including customers not renewing subscriptions, our business and
operating results would be adversely affected.
General
economic conditions and a slowdown in the U.S. economy could adversely affect
the spending for our products.
If
general economic conditions in the U.S. economy continue to slow, customers may
reduce spending for our products. This reduced spending by our
consumers could result in reductions in sales of our products, longer sales
cycles, and an increased concentration on price competitiveness. As a result, we
may experience a delay in the payment of our customers’ obligations to us, which
would increase our credit risk exposure and cause a decrease in operating cash
flows. Also, if our resellers experience excessive financial difficulties and/or
insolvency, and we are unable to successfully transition end users to purchase
our product from other resellers or directly from us, our sales could decline
significantly. Any of the events listed above could have a material adverse
effect on the Company's business, financial condition and results of
operations
We
have a history of losses and negative cash flow and there can be no assurances
that we will become profitable or achieve positive cash flow, and we may need
additional sources of funding.
We have a
history of losses and have not been able to achieve profitability. Our
cumulative net loss was approximately $ 49.5 million and $47.2 million as of
December 31, 2008 and 2007, respectively. As a result of significant
changes to the cost structure of our business during the fourth quarter of 2007
and into the second quarter of 2008, including the closure of sales and
marketing offices in Europe and Australia, reducing headcount to be in line with
the current size of our business, renegotiating vendor contracts, and focusing
our marketing strategy around our core business, we generated positive cash
flows during the third and fourth quarter of 2008. If we are not able
to maintain positive cash flows, we may be required to look for additional
sources of financing.
If
we fail to manage our direct sales and OEM distribution channels effectively our
sales could decline.
We market
our products and related services both directly to end-users and through a
variety of indirect sales channels, which include VARs, distributors, system
integrators and OEMs.
Direct Sales. A significant
portion of our revenue is derived from sales by our direct sales force to
end-users. This sales channel involves a number of special risks,
including:
· longer
sales cycles associated with direct sales efforts;
· difficulty
in hiring, training, retaining and motivating a direct sales force;
and
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the
requirement of a substantial amount of training for sales representatives
to become productive, and training that must be updated to cover new and
revised products.
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OEMs. A portion of our
revenue is derived from sales through our OEM partners that incorporate our
products into their products. Our reliance on this sales channel involves a
number of special risks, including:
· our
lack of control over the shipping dates or volume of systems
shipped;
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our
OEM partners are not subject to minimum sales requirements or any
obligation to market our products to their
customers;
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our
OEM partners may terminate or renegotiate their arrangements with us and
new terms may be less favorable in recognition of our increasingly
competitive relationship with certain
partners;
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the
development work that we must generally undertake with respect to our
agreements with our OEM partners may require us to invest significant
resources and incur significant costs with little or no associated
revenue;
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the
time and expense required for the sales and marketing organizations of our
OEM partners to become familiar with our products may make it more
difficult to introduce those products to the
market;
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our
OEM partners may develop, market and distribute their own products and
market and distribute products of our competitors, which could reduce our
sales; and
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if
we fail to manage our distribution channels successfully, our distribution
channels may conflict with one another or otherwise fail to perform as we
anticipate, which could reduce our sales and increase our expenses, as
well as weaken our competitive
position.
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If
we are unable to maintain and expand, or enter into new, indirect sales channels
relationships our operating results would decline.
Our
indirect sales channels accounted for approximately 38.0% and 40.4% of our
revenue in 2008 and 2007, respectively. We intend to continue to rely on our
indirect sales channels for a significant portion of our revenue. We depend on
our indirect sales channels, including value-added resellers, distributors, and
providers of managed Internet services, to offer our products to a larger
customer base than can be reached through a direct sales effort. None of these
parties is obligated to continue selling our products or to make any purchases
from us. If they are unsuccessful in their efforts or are unwilling or unable to
market and sell our new product offerings, our operating results will suffer. We
cannot control the level of effort these parties expend or the extent to which
any of them will be successful in marketing and selling our products. Some of
our indirect sales channels also market and sell products that compete with our
products or may decide to do so in the future. We may not be able to prevent
these parties from devoting greater resources to support our competitors’
products and/or eliminating their efforts to sell our products.
The
market for our products continues to emerge, and if we are not successful in
promoting awareness of the need for our products and of our brand, our growth
may be limited.
Based on
our experience with potential customers, we believe that many corporations do
not recognize or acknowledge the existence or scope of problems caused by misuse
or abuse of the Internet or of network computers, creating significant barriers
to sales. In addition, there may be a time-limited opportunity to achieve and
maintain a significant share of the market for web filtering and email filtering
and our other products due in part to the emerging nature of these markets and
the substantial resources available to our existing and potential competitors.
If companies do not recognize or acknowledge these problems, the market for our
products may develop more slowly than expected, which could adversely affect our
operating results. Developing and maintaining awareness of our brand is critical
to achieving widespread acceptance of our existing and future products.
Furthermore, we believe that the importance of brand recognition will increase
as competition in our market develops. Successful promotion of our brand will
depend largely on the effectiveness of our marketing efforts and on our ability
to develop reliable and useful products at competitive prices. If we fail to
successfully promote our brand, or if our expenses to promote and maintain our
brand are greater than anticipated, our results of operations and financial
condition could suffer.
If
we are not able to develop new and enhanced products that achieve widespread
market acceptance, we may be unable to recover product development costs, and
our earnings and revenue may decline.
Our
future success depends on our ability to address the rapidly changing needs of
our customers by developing, acquiring and introducing new products, product
updates and services on a timely basis. We must also extend the operation of our
products to new platforms and keep pace with technological developments and
emerging industry standards. We intend to commit substantial resources to
developing new software products and services, including software products and
services for the secure content management SME market. Products being developed
are new and unproven, and industry standards for these markets are evolving and
changing. They also may require development of new sales channels. If these
markets do not develop as anticipated, or if demand for our products and
services in these markets does not materialize or occurs more slowly than we
expect, we will have expended substantial resources and capital without
realizing sufficient revenue, and our business and operating results could be
adversely affected.
If
economic or other factors negatively affect the small and medium-sized business
sector, our customers may become unwilling or unable to purchase our products
and services, which could cause our revenue to decline.
Our
existing and target customers are small, medium, and enterprise businesses.
These businesses are more likely to be significantly affected by economic
downturns than larger, more established businesses. Additionally, these
customers often have limited discretionary funds, which they may choose to spend
on items other than our security software products and services. If small,
medium, and enterprise businesses experience economic hardship, they may be
unwilling or unable to expend resources to develop or improve their IT security,
which would negatively affect the overall demand for our products and services,
and could cause our revenue to decline.
We
have secured additional funding through debt financing which includes numerous
covenants and debt-related obligations that may adversely affect our business
and potentially reduce our revenues and affect the value of our common
stock.
On May
15, 2007, the Company entered into a Loan and Security Agreement with Silicon
Valley Bank, a California corporation (“SVB”) which was subsequently amended on
February 27, 2009. 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% (from 3%) over the greater of the prime rate or 7.5% (from
10.5%), (ii) modified the tangible net worth covenant to no less that
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.
On July
21, 2008, the Company entered into a Loan Agreement with Partners for Growth II,
LP ("PFG") (the “PFG Loan Agreement”), which became effective on July 23, 2008
and was subsequently amended on February 27, 2009. Pursuant to the terms of the
Loan Amendment, PFG has eliminated the Modified Net Income covenant for the
reporting periods ending February 28, 2009 and March 31, 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”). St.
Bernard is required to maintain a minimum borrowing amount of at least $750,000
(the “Minimum Borrowing Amount”) or pay PFG a minimum interest amount (the
“Minimum Interest Amount”) equal to $750,000, multiplied by the Applicable Rate,
and further multiplied by the number of days (based on a 360-day year) from the
date of such failure to maintain the Minimum Borrowing Amount to the Maturity
Date (as defined in the PFG Loan Agreement). Pursuant to the terms of
the PFG Loan Agreement, St. Bernard paid PFG a one-time commitment fee of
$30,000 and a $5,000 amendment fee and agreed to reimburse PFG for PFG’s
reasonable attorneys’ fees in connection with the negotiation of the PFG 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. 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.
Our
failure to comply with our debt-related obligations could result in an event of
default which, if not cured or waived, could result in an acceleration of our
indebtedness, including our loans with SVB and PFG. This in turn could have a
material adverse effect on our operations, our revenues and thus our common
stock value. In the event we were unable to restructure or refinance our loans
or secure other financing to repay this debt, our lenders could foreclose upon
the collateral securing that debt.
Our
future capital requirements and potentially limited access to financing may harm
our ability to develop products and fund our operations.
We expect
to continue spending substantial resources on research and development efforts
to improve our secure content management appliances and system protection
products. To the extent our revenues and borrowing arrangements with SVB and PFG
are insufficient to fund our ongoing research and development efforts, we may
need to raise additional funding. Other than SVB and PFG, we do not have
committed external sources of funding and may not be able to obtain any
additional funding, especially if volatile market conditions persist for
technology companies. Any additional funding we seek would likely be
accomplished through equity or debt financings which would require the consent
of SVB and PFG. We may not be able to obtain additional financing on terms that
are favorable to us or at all. If we acquire funds by issuing securities,
dilution to existing stockholders will result. Our failure to obtain additional
funding may require us to delay, reduce the scope of, or eliminate one or more
of our current research and development projects.
We
incur considerable expenses to develop products for operating systems that are
either owned by others or that are part of the Open Source Community. If we do
not receive cooperation in our development efforts from others and access to
operating system technologies, we may face higher expenses or fail to expand our
product lines and revenues.
Many of
our products operate primarily on the Linux, UNIX and Windows computer operating
systems. As part of our efforts to develop products for operating systems that
are part of the Open Source Community, we may have to license portions of our
products on a royalty free basis or may have to expose our source code. Open
Source describes general practices in production and development which promote
access to the end product’s sources. The Open Source Community emphasizes
collaborative development and requires licensing that allows modifications and
enhancements of registered open source code be made available to whoever would
like to use it. Developers who use open source code in proprietary products risk
exposing the intellectual property developed in conjunction with the open source
code to the public. We continue to develop new products for these operating
systems. We may not accomplish our development efforts quickly or
cost-effectively, and it is not clear what the relative growth rates of these
operating systems will be. Our development efforts require substantial capital
investment, the devotion of substantial employee resources and the cooperation
of the owners of the operating systems to or for which the products are being
ported or developed. If the market for a particular operating system does not
develop as anticipated, or demand for our products and services in such market
does not materialize or occurs more slowly than we expect, we may have expended
substantial resources and capital without realizing sufficient revenue, and our
business and operating results could be adversely affected.
In
addition, for some operating systems, we must obtain from the owner of the
operating system a source code license to portions of the operating system
software to port some of our products to or develop products for the operating
system. Operating system owners have no obligation to assist in these porting or
development efforts. If they do not grant us a license or if they do not renew
our license, we may not be able to expand our product lines into other
areas.
We
face increasing competition, which places pressure on our pricing and which
could prevent us from increasing revenue or maintaining profitability. In
addition, we may face competition from better-established companies that have
significantly greater resources.
The
market for our products is intensely competitive and is likely to become even
more so in the future. Our current principal competitors frequently offer their
products at a significantly lower price than our products, which has resulted in
pricing pressures on sales of our products. We also face increasing competition
from security solutions providers who may add security modules or features to
their product offerings. In addition, pricing pressures and increased
competition generally could result in reduced sales, reduced margins or the
failure of our products to achieve or maintain more widespread market
acceptance, any of which could have a material adverse effect on our business,
results of operations and financial condition.
We also
face current and potential competition from vendors of operating systems and
networking hardware, many of which now, or may in the future, develop and/or
bundle security, file backup, patch management or other competitive products
with their products. We compete against, and expect increased competition from,
anti-virus software developers, traditional network management software
developers and Web management service providers. If security or file backup
functions become standard features of internet-related hardware or software, the
demand for our products will decrease. Furthermore, even if our products provide
greater functionality and are more effective than certain other competitive
products, potential customers might accept limited functionality as part of an
unbundled solution in lieu of purchasing separate products which require more
administration. In addition, our own indirect sales channels may decide to
develop or sell competing products instead of our products. Many of our
potential competitors have substantial competitive advantages, such
as:
· greater
name recognition and larger marketing budgets and resources;
· established
marketing relationships and access to larger customer bases; and
· substantially
greater financial, technical and other resources.
As a
result, they may be able to respond more quickly and effectively than we can to
new or changing opportunities, technologies, standards or customer requirements.
For all of the foregoing reasons, we may not be able to compete successfully
against our current and future competitors, and our results of operations could
be adversely affected.
Our
database categories and our process for classifying websites and software
applications within those categories are subjective and may not be able to
categorize websites and software applications in accordance with our customers’
expectations.
We may
not succeed in accurately categorizing Internet and application content to meet
our customers’ expectations. We rely upon a combination of automated filtering
technology and human review to categorize websites and software applications in
our proprietary databases. Our customers may not agree with our determinations
that particular websites and software applications should be included or not
included in specific categories of our databases. In addition, it is possible
that the filtering processes may place objectionable material in categories that
are generally unrestricted by our users’ Internet and computer access policies,
which could result in employees having access to such material in the workplace.
Any miscategorization could result in customer dissatisfaction and harm our
reputation. Furthermore, we select our categories based on content we believe
employers want to manage. We may not now, or in the future, succeed in properly
identifying the categories of content that employers want to manage. Any failure
to effectively categorize and filter websites and software applications
according to our customers’ expectations will impair the growth of our business
and our efforts to increase brand acceptance.
If
our databases fail to keep pace with the rapid growth and technological change
of the Internet, the market acceptance of our products could be
impaired.
The
success of our products depends, in part, on the breadth and accuracy of our
databases. Although our databases currently catalog more than 10 million
websites, they contain only a portion of such material that exists. In addition,
the total number of websites is growing rapidly, and we expect this rapid growth
rate to continue in the future. Our databases and database technologies may not
be able to keep pace with the growth in the number of websites and software
applications, especially the growing amount of content utilizing foreign
languages. Further, the ongoing evolution of the Internet and computing
environments will require us to continually improve the functionality, features
and reliability of our databases. Because our products primarily manage access
to websites included in our databases, if our databases do not contain a
meaningful portion of relevant content, the effectiveness of iPrism will be
significantly diminished. Any failure of our databases to keep pace with the
rapid growth and technological change of the Internet will impair the market
acceptance of our products, which in turn will harm our business, results of
operations and financial condition.
Our
management is required to devote substantial time and incur additional expense
to comply with public company regulations. Our failure to comply with such
regulations could subject us to public investigations, fines, enforcement
actions and other sanctions by regulatory agencies and authorities and, as a
result, our stock price could decline in value.
The
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules
subsequently implemented by the SEC, impose various requirements on public
companies, including with respect to corporate governance practices. We have
incurred, and expect to continue incurring, significant legal, accounting and
other expenses to comply with these requirements. In addition, our management
and other personnel will need to devote a substantial amount of time to these
requirements.
Failure
to protect our intellectual property rights could impair our ability to protect
our proprietary technology and establish our brand.
Intellectual
property is critical to our success, and we rely upon trademark, copyright and
trade secret laws in the United States and other jurisdictions as well as
confidentiality procedures and contractual provisions to protect our proprietary
technology and our brand. Any of our trademarks may be challenged by others or
invalidated through administrative process or litigation. Furthermore, legal
standards relating to the validity, enforceability and scope of protection of
intellectual property rights are uncertain. Effective trademark, copyright, and
trade secret protection may not be available to us in every country in which our
products are available. The laws of some foreign countries may not be as
protective of intellectual property rights as U.S. laws, and mechanisms for
enforcement of intellectual property rights may be inadequate. As a result, our
means of protecting our proprietary technology and brands may not be adequate.
Furthermore, despite our efforts, we may be unable to prevent third parties from
infringing upon or misappropriating our intellectual property, including the
misappropriation or misuse of the content of our proprietary database of
websites. Any such infringement or misappropriation could have a material
adverse effect on our business, results of operations and financial
condition.
If
we are sued by third parties for alleged infringement of their proprietary
rights, the cost to litigate or settle such litigation could be material and
there can be no assurance that we would be successful in any such
suit.
The
software and Internet industries are characterized by the existence of a large
number of patents, trademarks and copyrights and by frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. As the number of entrants into our market increases, the possibility of
an intellectual property claim against us grows. Our technologies and products
may not be able to withstand any third-party claims or rights against their use.
Any intellectual property claims, with or without merit, could be time-consuming
and expensive to litigate or settle, and could divert management attention from
executing our business plan. There can be no assurance that we would be
successful in any such suit.
Our
systems may be vulnerable to security risks or service disruptions that could
harm our business.
Although
we have taken measures to secure our systems against security risks and other
causes of disruption of electronic services, our servers are vulnerable to
physical or electronic break-ins and service disruptions, which could lead to
interruptions, delays, loss of data or the inability to process customer
requests. Such events could be very expensive to remedy, could damage our
reputation and could discourage existing and potential customers from using our
products.
Evolving
regulation of the Internet may adversely affect us by imposing regulations on
our activities or causing a decline in Internet usage.
As
Internet commerce continues to evolve, increasing regulation by federal, state
or foreign agencies becomes more likely. Such regulation is likely in the areas
of user privacy, pricing, content and quality of products and services. Taxation
of Internet use or other charges imposed by government agencies or by private
organizations for accessing the Internet may also be imposed. Laws and
regulations applying to the solicitation, collection or processing of personal
or consumer information could affect our activities. Furthermore, any regulation
imposing fees for Internet use could result in a decline in the use of the
Internet and the viability of Internet commerce, which could have a material
adverse effect on our business, results of operations and financial
condition.
The
market price of our securities is likely to be highly volatile and subject to
wide fluctuations.
The
market price of our securities has been and likely will continue to be highly
volatile and could be subject to wide fluctuations in response to a number of
factors that are beyond our control, including:
· announcements
of technological innovations or new products or services by our
competitors;
· demand
for our products, including fluctuations in subscription renewals;
· fluctuations
in revenue from indirect sales channels;
· changes
in the pricing policies of our competitors; and
· changes
in government regulations.
In
addition, the market price of our securities could be subject to wide
fluctuations in response to a number of factors, including:
· announcements
of technological innovations or new products or services by us;
· changes
in our pricing policies;
· quarterly
variations in our revenues and operating expenses; and
|
|
·
|
our
technological capabilities to accommodate the future growth in our
operations or our customers.
|
Further,
the stock market has experienced significant price and volume fluctuations that
have particularly affected the market price of the stock of many
Internet-related companies. In some cases, the market price of the stock has
been unrelated or disproportionate to the operating performance of these
companies. A number of publicly traded Internet-related companies have current
market prices below their initial public offering prices. Market fluctuations
such as these may seriously harm the market price of our securities. In the
past, securities class action suits have been filed following periods of market
volatility in the price of a company’s securities. If such an action were
instituted, we would incur substantial costs and a diversion of management
attention and resources, which would seriously harm our business, results of
operations and financial condition.
The
amount of stock held by our executive officers, directors and other affiliates
may limit the ability to influence the outcome of director elections and other
matters requiring stockholder approval.
Our
executive officers, directors and affiliates own approximately 41.2% of our
voting stock as of December 31, 2008. These stockholders can have a substantial
influence on all matters requiring approval by stockholders, including the
election of directors and the approval of mergers or other business combination
transactions. This concentration of ownership could have the effect of delaying
or preventing a change in control or discouraging a potential acquirer from
attempting to obtain control of the Company, which in turn could have a material
adverse effect on the market price of our common stock or prevent stockholders
from realizing a premium over the market price for their shares.
We
may not be able to attract and retain the highly skilled employees we need to
support our planned growth.
We may
not be successful in attracting and retaining qualified personnel. In order to
attract and retain personnel in a competitive marketplace, we believe that we
must provide a competitive compensation package, including cash and equity based
compensation. The volatility of our stock price and quarterly variations in our
revenues and operating expenses may adversely affect our ability to recruit or
retain qualified employees. If we fail to attract new personnel or retain and
motivate our current personnel, our business and future growth prospects could
be severely harmed.
We
rely on a relatively new and limited management team to grow our
business.
Several
of our executive officers and key management personnel have terminated their
employment relationship with the Company. Our success and future growth depends
to a significant degree on the skills and continued services of Louis E. Ryan,
our Chief Executive Officer and Chief Financial Officer, who was hired in
January 2009. We may experience difficulty assimilating our recently hired and
promoted managers, and we may not be able to successfully locate, hire,
assimilate, and retain other executive officers and qualified key management
personnel.
Our
employment agreements with our executive officers are “at-will” and they can
terminate their employment relationship with us at any time.
We
could encounter difficulties managing our growth, which could adversely affect
our results of operations.
We will
need to effectively manage our organization, operations, and facilities in order
to successfully sell our services and appliances to reach profitability. We
decreased the number of our employees from 99 as of December 31, 2007 to 90 as
of December 31, 2008. Our need to effectively manage our operations and grow our
business requires that we continue to improve our operational, financial and
management controls, reporting systems, and procedures. We may not be able to
maintain these improvements, which will not allow us to reach our strategic
objectives and become profitable.
Available
Information
Our
internet address is www.stbernard.com. On this website we make available, free
of charge, our Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and any amendments to those reports, as soon as
reasonably practical after electronically filing such material with or
furnishing it to the Securities and Exchange Commission (SEC). Our SEC reports
can be accessed through the investor relations section of our website under “SEC
Filings”. All of our filings with the SEC may also be obtained at the SEC’s
Public Reference Room at Room 1580, 100 F Street NE, Washington, DC 20549, as
well on the SEC website at www.sec.gov. For information regarding the operation
of the SEC’s Public Reference Room, please contact the SEC at 1-800-SEC-0330.
Additionally, the SEC maintains an internet site that contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the SEC at www.sec.gov.
None.
St.
Bernard’s corporate headquarters is located in San Diego, California. It
consists of a leased office facility for sales, research and development, and
administrative personnel, which measures approximately 56,000 square feet. St.
Bernard’s facility is occupied under a lease that expires on December 31, 2010.
The Company closed its operations and terminated its office space lease in
Camberley, UK and in Chatswood, Australia in November and July 2007,
respectively.
|
Location
|
|
Approximate
Square Feet
|
|
Date
Current Lease Expires
|
|
Monthly
Rent
|
|
15015
Avenue of Science
|
|
|
|
|
|
|
|
San
Diego, CA 92128
|
|
56,000
|
|
December
31, 2010
|
|
$ 93,000
|
We
believe that our existing facility is well maintained, in good operating
condition, suitable for our operations, and is adequate to meet our current
requirements. In September 2008, we subleased a portion of our unused office
space to a company. The proceeds from the sublease will be used to offset our
monthly facilities rent expense.
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. The Company has
successfully appealed the Superior Court's denial of its motion to compel
arbitration and the case has been ordered to arbitration. If plaintiff intends
to pursue the matter further then plaintiff will have to file an arbitration
claim. If the plaintiff does file such an arbitration claim, then the Company
intends to vigorously defend its interests in this matter and expects that the
resolution of this matter will not have a material adverse effect on its
business, financial condition, results of operations, or cash flows. However,
due to the uncertainties in litigation, no assurance can be given as to the
outcome of these proceedings.
There were no matters submitted to a
vote of security holders during the fourth quarter of 2008.
|
(a)
|
Since
February 17, 2005 our Common Stock has been traded on the Over-the-Counter
Bulletin Board. The table below sets forth, for the calendar
quarters indicated, the high and low bid prices of the St. Bernard
Software common stock as reported on the Over-the-Counter Bulletin
Board. The over-the-counter market quotations reported below
reflect inter-dealer prices, without markup, markdown or commissions and
may not represent actual
transactions.
|
|
Fiscal Year
2008
|
High
|
Low
|
|
Fourth
Quarter
|
$0.55
|
$0.15
|
|
Third
Quarter
|
$0.53
|
$0.36
|
|
Second
Quarter
|
$0.60
|
$0.36
|
|
First
Quarter
|
$0.60
|
$0.50
|
|
|
|
|
|
Fiscal Year
2007
|
|
|
|
Fourth
Quarter
|
$0.87
|
$0.59
|
|
Third
Quarter
|
$1.15
|
$0.56
|
|
Second
Quarter
|
$1.76
|
$0.86
|
|
First
Quarter
|
$2.24
|
$1.75
|
|
(b)
|
As
of December 31, 2008 and 2007, there were approximately 141 holders and
210 holders of our Common Stock,
respectively.
|
|
(c)
|
No
cash dividends have been paid on our Common Stock during our two most
recent fiscal years, and St. Bernard does not intend to pay cash dividends
on its Common Stock in the immediate
future.
|
|
(d)
|
We
did not repurchase any shares of our common stock during the year ended
December 31, 2008. See Note 2 of the Notes to Consolidated
Financial Statements for discussion of St. Bernard’s stock
plans.
|
Warrants:
The
following is a summary of our warrants activity as of December 31, 2008 and
changes during fiscal year 2008:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
Per
Share
|
|
|
Average
|
|
|
|
|
of
Shares
|
|
|
Exercise
Price
|
|
|
Exercise
Price
|
|
|
Outstanding
warrants - December 31, 2006
|
|
|
8,650,104
|
|
|
$
|
1.85-5.00
|
|
|
$
|
4.90
|
|
|
Granted
|
|
|
100,000
|
(a)
|
|
|
1.60
|
|
|
|
1.60
|
|
|
Outstanding
warrants - December 31, 2007
|
|
|
8,750,104
|
|
|
|
1.19-5.00
|
|
|
|
4.86
|
|
|
Granted
|
|
|
1,053,850
|
(b),
(c), (d)
|
|
|
0.46-0.57
|
|
|
|
0.52
|
|
|
Expired
and/or cancelled
|
|
|
(430,104
|
)
|
|
|
1.85-2.98
|
|
|
|
1.86
|
|
|
Outstanding
warrants - December 31, 2008
|
|
|
9,373,850
|
|
|
$
|
0.46-5.00
|
|
|
$
|
4.46
|
|
|
Warrants
exercisable - December 31, 2008
|
|
|
9,373,850
|
|
|
$
|
0.46-5.00
|
|
|
$
|
4.46
|
|
|
(a)
|
In
connection with the execution of an SVB Loan Amendment, St. Bernard issued
warrants to SVB which allows SVB to purchase up to 100,000 shares of our
common stock at an exercise price of $1.60 per
share.
|
|
(b)
|
In
connection with the execution of an SVB Loan Amendment, 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.
|
|
(c)
|
In
connection with the execution of the Agility Loan Agreement, St. Bernard
issued warrants to Agility which allows Agility to purchase up to 463,500
shares of our common stock at an exercise price of $0.57 per
share.
|
|
(d)
|
In
connection with the execution of the PFG Loan Amendment, St. Bernard
issued warrants to PFG which allows PFG to purchase up to 450,000 shares
of our common stock at an exercise price of $0.46 per
share.
|
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.
The following discussion and analysis
of our financial condition and results of operations should be read in
conjunction with our consolidated financial statements and related notes that
appear elsewhere in this Annual Report on Form 10-K. In addition to historical
consolidated financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this Annual Report on
Form 10-K.
Our
Business
We
design, develop, and market Internet security appliances and services to SME
class customers. These solutions enable our customers to manage their employee
usage policy across multiple messaging protocols, which include Internet access,
e-mail, and IM. 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, SMBs,
and government agencies. Customers can purchase our solutions directly from us,
through our 1-tier and 2-tier reseller network, and through OEMs. Appliance
purchases typically consist of an initial hardware purchase and maintenance
subscription. Our primary customers are IT managers, directors, and
administrators.
Our
Financial Results
We
reported revenues of $18.0 million for the year ended December 31, 2008,
compared to $19.1 million in the same period in 2007, a decrease of 5.8%; a net
loss for the year ended December 31, 2008 of $2.3 million, compared to a net
loss of $7.5 million in the same period in 2007; and net basic and diluted loss
per share for the year ended December 31, 2008 of $0.16, compared to a net basic
and diluted loss per share of $0.51 reported in the same period in 2007. The
decrease in the basic and diluted loss per share was primarily attributable to a
decrease in operating expenses of $14.7 million, offset by a year over year
decrease in the gain on the sale of assets for the year ended December 31, 2008
of $0.6 million compared to $11.3 million for the same period in
2007. (See section below titled “Gain on Sale of
Assets”.)
Cash used
in operations was $0.5 million and $11.6 million for the years ended December
31, 2008 and 2007, respectively. The net decrease in use of cash was due
primarily to lower operating losses and substantial improvements to the cost
structure of our business.
On
January 25, 2008, we amended our line of credit agreement with SVB which was
established on May 15, 2007. See section below titled, “Credit Facility” for the
terms of the original and amended agreement with SVB. The outstanding balance on
the line of credit with SVB was $1.7 million as of December 31,
2008.
On July
21, 2008, we entered into a Loan Agreement with Partners for Growth II, LP
(“PFG”), which became effective on July 23, 2008. Pursuant to the terms of the
Loan Agreement, PFG provided us with a revolving line of credit in the amount
not to exceed the lesser of (a) $1,500,000 at any one time outstanding or (b)
30% of the amount of St. Bernard’s aggregate Eligible Billings over a rolling
three month period calculated monthly. The line of credit was used to pay off
approximately $562,000, which was the remaining outstanding balance on the
bridge loan with Agility. See Note 6.
During
the year ended December 31, 2008, we continued to invest in product development.
Our efforts have been directed toward new feature enhancements in parallel to
the continual improvement of our secure content management appliances and system
protection products. In addition, our development efforts were primarily focused
on delivering additional security features for our product lines while employing
a cost-reduction strategy.
Critical
Accounting Policies and Estimates
There are
several accounting policies that are critical to understanding our historical
and future performance because these policies affect the reported amounts of
revenue and other significant areas in our reported financial statements and
involve management’s judgments and estimates. These critical accounting policies
and estimates include:
|
·
|
allowance
for doubtful accounts;
|
|
·
|
impairment
of goodwill and long-lived assets;
|
|
·
|
accounting
for income taxes;
|
|
·
|
warranty
obligation; and
|
|
·
|
accounting
for stock options.
|
These
policies and estimates and our procedures related to these policies and
estimates are described in detail below and under specific areas within the
discussion and analysis of our financial condition and results of operations.
Please refer to Note 1, “Summary of Significant Accounting Policies” in the
Notes to the Consolidated Financial Statements of St. Bernard for the year ended
December 31, 2008 included herein for further discussion of our accounting
policies and estimates.
Revenue
Recognition
We make
significant judgments related to revenue recognition. For each arrangement, we
make significant judgments regarding the fair value of multiple elements
contained in our arrangements, judgments regarding whether our fees are fixed or
determinable and judgments regarding whether collection is probable. We also
make significant judgments when accounting for potential product returns. These
judgments, and their effect on revenue recognition, are discussed
below.
Multiple
Element Arrangements
We
typically enter into arrangements with customers that include perpetual software
licenses, database subscriptions, hardware appliances, maintenance and technical
support. Software licenses are on a per copy basis. Per copy licenses give
customers the right to use a single copy of licensed software. We make judgments
regarding the fair value of each element in the arrangement and generally
account for each element separately.
Assuming
all other revenue recognition criteria are met, license and appliance revenue is
recognized upon delivery in accordance with Statement of Position (“SOP”) No.
97-2, “Software Revenue
Recognition” (SOP 97-2). Under SOP 97-2, we have established vendor
specific objective evidence, or VSOE, on each element of multiple element
arrangements using the price charged when the same element is sold separately.
Undelivered elements typically include subscription, maintenance and technical
support and are recognized ratably over the term.
If we
cannot establish fair value for any undelivered element, we would be required to
recognize revenue for the whole arrangement at the time revenue recognition
criteria for the undelivered element is met using SOP No. 98-9, “Modification of SOP No. 97-2
Software Revenue Recognition, with respect to Certain Transactions” (SOP
98-9).
The
Fee is Fixed or Determinable
Management
makes judgments, at the outset of an arrangement, regarding whether the fees are
fixed or determinable. Our customary payment terms generally require payment
within 30 days after the invoice date. Arrangements with payment terms extending
beyond 120 days after the effective date of the license agreement are not
considered to be fixed or determinable, in which case revenue is recognized as
the fees become due and payable.
Collection
is Probable
Management
also makes judgments at the outset of an arrangement regarding whether
collection is probable. Probability of collection is assessed on a
customer-by-customer basis. We typically sell to customers with whom we have a
history of successful collections. New customers can be subjected to a credit
review process to evaluate the customer’s financial position and ability to pay.
If it is determined at the outset of an arrangement that collection is not
probable, then revenue is recognized upon receipt of payment.
Indirect
Channel Sales
We
generally recognize revenue from licensing of software products through our
indirect sales channel upon sell-through or when evidence of an end-user exists.
For certain types of customers, such as distributors, we recognize revenue upon
receipt of a point of sales report, which is our evidence that the products have
been sold through to an end-user. For resellers, we recognize revenue when we
obtain evidence that an end-user exists, which is usually when the software is
delivered. For licensing of our software to original equipment manufacturers, or
OEMs, royalty revenue is recognized when the OEM reports the sale of software to
an end-user customer, in some instances, on a quarterly basis.
Delivery
of Software Products
Our
software may be physically delivered to our customers with title transferred
upon shipment to the customer. We primarily deliver our software electronically,
by making it available for download by our customers or by installation at the
customer site. Delivery is considered complete when the software products have
been shipped and the customer has access to license keys. If an arrangement
includes an acceptance provision, we generally defer the revenue and recognize
it upon the earlier of receipt of written customer acceptance or expiration of
the acceptance period.
Product
Returns and Exchanges
Our
license arrangements do not typically provide customers a contractual right of
return. Some of our sales programs allow customers limited product exchange
rights. Management estimates potential future product returns and exchanges and
reduces current period product revenue in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 48, “Revenue Recognition When Right of
Return Exists”(“SFAS 48”). The estimate is based on an analysis of
historical returns and exchanges. Actual returns may vary from estimates if we
experience a change in actual sales, returns or exchange patterns due to
unanticipated changes in products, or competitive and economic
conditions.
Allowance
for Doubtful Accounts
The
accounts receivable reserve is evaluated quarterly and estimated based on the
actual write offs as a percent of average net accounts receivable for the
previous six months. The net accounts receivable is comprised of
gross accounts receivable adjusted for advanced billings and any amounts
specifically reserved for. Actual bad debts may vary from estimates if we
experience a change in actual sales, returns or exchange patterns due to
unanticipated changes in products, or competitive and economic
conditions.
Impairment
of Goodwill and Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No.
142, “Goodwill and Other
Intangible Assets” (“SFAS 142”),
management tests our goodwill for impairment annually and whenever events or
changes in circumstances suggest that the carrying amount may not be
recoverable.
Based
upon the result of an impairment test performed during the fourth quarter of
2008, management of the Company has concluded there was no impairment of
goodwill at December 31, 2008.
In
accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (“SFAS 144”), management reviews our
long-lived asset groups, including property and equipment and other intangibles,
for impairment and whenever events indicate that their carrying amount may not
be recoverable. Some of the events that we consider as impairment indicators for
our long-lived assets, including goodwill, are:
|
|
•
|
our
significant underperformance relative to expected operating
results;
|
|
|
•
|
significant
adverse change in legal factors or in the business
climate;
|
|
|
•
|
an
adverse action or assessment by a
regulator;
|
|
|
•
|
unanticipated
competition;
|
|
|
•
|
a
loss of key personnel;
|
|
|
•
|
significant
decrease in the market value of a long-lived asset;
and
|
|
|
•
|
significant adverse change in the
extent or manner in which a long-lived asset is being used or its physical
condition.
|
When
management determines that one or more impairment indicators are present for an
asset group, we compare the carrying amount of the asset group to net future
undiscounted cash flows that the asset group is expected to generate. If the
carrying amount of the asset group is greater than the net future undiscounted
cash flows that the asset group is expected to generate, we compare the fair
value to the book value of the asset group. If the fair value is less than the
book value, we would recognize an impairment loss. The impairment loss would be
the excess of the carrying amount of the asset group over its fair value. As a
result of our significant underperformance relative to the expected operating
results and current-period operating and cash flow losses coupled with the
operating history of such losses, the Company tested its intangible assets for
impairment during the year ended December 31, 2007. Based upon the results of
the test, management has concluded that the intangible assets related to the
acquisition of AgaveOne were impaired during 2007. Per the analysis, the Company
has determined that the carrying value of the long-lived intangible assets
exceeded the sum of the undiscounted cash flow, over a five year projection
period, expected to result from the use and eventual disposition of the asset
group. As a result, an impairment charge of $3.3 million was recorded during
2007 to write-down the intangible asset to zero. See Note 4 in the
Notes to the Consolidated Financial Statements of St. Bernard for the year ended
December 31, 2007 included herein.
Significant
assumptions and estimates are made when determining if our goodwill or other
long-lived assets have been impaired or if there are indicators of impairment.
Management bases its estimates on assumptions that it believes to be reasonable,
but actual future results may differ from those estimates as our assumptions are
inherently unpredictable and uncertain. Management’s estimates include estimates
of future market growth and trends, forecasted revenue and costs, expected
periods of asset utilization, appropriate discount rates and other
variables.
Accounting
for Income Taxes
We are
required to estimate our income taxes in each federal, state and international
jurisdiction in which we operate. This process requires that management estimate
the current tax exposure as well as assess temporary differences between the
accounting and tax treatment of assets and liabilities, including items such as
accruals and allowances not currently deductible for tax purposes. The income
tax effects of the differences identified are classified as current or long-term
deferred tax assets and liabilities in our consolidated balance sheets.
Management’s judgments, assumptions and estimates relative to the current
provision for income tax take into account current tax laws, its interpretation
of current tax laws and possible outcomes of current and future audits conducted
by foreign and domestic tax authorities. Changes in tax laws or management’s
interpretation of tax laws, and the resolution of current and future tax audits
could significantly impact the amounts provided for income taxes in our balance
sheet and results of operations. We must also assess the likelihood that
deferred tax assets will be realized from future taxable income and, based on
this assessment, establish a valuation allowance if required. As of
December 31, 2008 and 2007, we fully reserved the deferred tax assets resulting
in a tax expense of $3,000 and $42,000, respectively. The deferred tax assets
include net operating losses and may be subject to significant annual limitation
under certain provisions of the Internal Revenue Code of 1986, as amended.
Management’s determination of valuation allowance is based upon a number of
assumptions, judgments and estimates, including forecasted earnings, future
taxable income and the relative proportion of revenue and income before taxes in
the various domestic and international jurisdictions in which we
operate.
The
Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
FASB Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of
FASB Statement No. 109. during fiscal year 2007. Under FIN 48, the
impact of an uncertain income tax position on the income tax return must be
recognized at the largest amount that is more-likely-than-not to be sustained
upon audit by the relevant tax authority. An uncertain income tax position will
not be recognized if it has less than 50% likelihood of being sustained. The
Company did not record any adjustments resulting from the adoption of
Interpretation 48.
Warranty
Obligation
The
company prepares a quarterly analysis of the estimated warranty liability.
This is achieved by first obtaining a current listing of all active appliances
in the field, as well as each appliance’s remaining maintenance term.
Then, we calculate an average repair cost as well as an average yearly
replacement percentage per appliance model based on historical failure rates,
for both in and out of warranty appliances. These estimates are then
applied to the remaining maintenance terms outstanding, in order to obtain a
point in time estimate of the future warranty expense for all active
appliances.
Accounting
for Stock Options
Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of SFAS No. 123R (revised
2004), “Share-based Payment” (“SFAS 123R”), using the modified
prospective method. Under this transition method, stock-based compensation
expense for fiscal year 2006 includes compensation expense for all stock-based
compensation awards granted prior to, but not yet vested as of January 1,
2006, based upon the grant date fair value. Stock-based compensation expense for
all stock-based compensation awards granted after January 1, 2006 are based
upon the grant date fair value estimated in accordance with SFAS 123R. Prior to
the adoption of SFAS 123R on January 1, 2006, the Company recognized
stock-based compensation expense in accordance with Accounting Principles Board
(“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”), and provided pro
forma disclosure amounts in accordance with SFAS No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure”(“SFAS 148”), as if the fair value
method defined by SFAS 123 had been applied to its stock-based
compensation.
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 (the “Board”). Terms of options issued
under the Plans include an exercise price equal to the estimated fair value (as
determined by the Board) at the date of grant, vesting periods generally between
three to five years, and expiration dates not to exceed ten years from date of
grant. The determination of fair value of the Company’s stock is derived using
the value of the stock price at the grant date.
Calculating
stock-based compensation expense requires the input of highly subjective
assumptions, including the expected term of the stock-based compensation,
expected stock price volatility factor, and the pre-vesting option forfeiture
rate. The weighted average fair value of options granted during the year ended
December 31, 2008 and 2007, was calculated using the Black-Scholes option
pricing model with the following 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, the vesting
period of the options granted, and the contractual period options granted. The
Company estimates the expected volatility factor of its common stock based on
the weighted average of the historical volatility of 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 were
estimated based on historical experience.
Commitments
and Contingencies
Effective
October 1, 2006, we adopted the provisions of the FASB Staff Position
(“FSP”) Emerging Issue Task
Force (“EITF”) 00-19-2, “Accounting for Registration Payment
Arrangements”(“EITF 00-19-2”). As a result we changed the manner in which
we account for the warrants that were issued subject to a registration payment
arrangement by Sand Hill during 2004. Pursuant to this FSP, we now account
for the registration rights contained in the warrants separately and measure the
liability under SFAS No. 5, “Accounting for
Contingencies”(“SFAS 5”) and FASB Interpretation (“FIN”) No. 14, “Reasonable Estimation of the
Amount of a Loss”(“FIN 14”). Pursuant to SFAS No. 5, a loss
contingency is to be accrued only if it is probable and can be reasonably
estimated. We have determined that a loss contingency related to the
registration requirements in the warrants is not probable.
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. The Company has
successfully appealed the Superior Court's denial of its motion to compel
arbitration and the case has been ordered to arbitration. If plaintiff intends
to pursue the matter further then plaintiff will have to file an arbitration
claim. If the plaintiff does file such an arbitration claim, then the Company
intends to vigorously defend its interests in this matter and expects that the
resolution of this matter will not have a material adverse effect on its
business, financial condition, results of operations, or cash flows. However,
due to the uncertainties in litigation, no assurance can be given as to the
outcome of these proceedings. However, due to the uncertainties in litigation,
no assurance can be given as to the outcome of these
proceedings.
Results
of Operations of St. Bernard
Comparison
of Fiscals Years Ended December 31, 2008 and 2007 (In millions, except
percentages)
Revenues
For
the Years Ended
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
Total
revenues
|
|
$ |
18.0 |
|
|
$ |
19.1 |
|
|
|
(5.8 |
)% |
Revenues
decreased $1.1 million for the year ended December 31, 2008, compared to the
same period in 2007 primarily due to an increase of $2.5 million in our core
product line revenue, which includes iPrism, offset by a decrease of $3.5
million in our UpdateEXPERT and Open File Manager revenues. We sold the
UpdateEXPERT product line to Shavlik in January 2007, and we sold the Open File
Manager product line to EVault in August 2007. See discussion of changes in
subscription revenues, appliance revenues, and license revenues
below.
Subscription
Revenues
For the Years
Ended
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
$
Change
|
|
|
Subscription
revenues
|
|
$ |
13.9 |
|
|
$ |
14.2 |
|
|
|
(2.1 |
)% |
|
As
a percentage of revenues
|
|
|
77.2 |
% |
|
|
74.3 |
% |
|
|
|
|
For the
year ended December 31, 2008, our subscription revenues decreased $0.3 million
compared to the same period in 2007 primarily due to an increase of $1.7 million
in our core product line revenue, which includes iPrism, offset by a decrease of
$2.0 million in revenue resulting from the sale in January 2007 and August 2007,
respectively, of our UpdateEXPERT and Open File Manager product lines. We expect
our subscription revenues to increase in future periods through increases to the
customer base of our core product lines. The subscription renewal rates for our
products traditionally range from 75% to 95%.
Appliance
Revenues
For
the Years
Ended
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
Appliance
revenues
|
|
$ |
4.1 |
|
|
$ |
3.2 |
|
|
|
28.1 |
% |
|
As
a percentage of revenues
|
|
|
22.8 |
% |
|
|
16.8 |
% |
|
|
|
|
For the
year ended December 31, 2008, appliance revenues increased approximately $0.9
million compared to the same period in 2007. The increase in revenue
is attributed to the higher selling price of our h-series appliances. We have
seen a noticeable shift in customer demand toward the higher-end models during
2008. 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.
License
Revenues
For
the Years
Ended
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
License
revenues
|
|
$ |
0.0 |
|
|
$ |
1.7 |
|
|
|
(100.0 |
)% |
|
As
a percentage of revenues
|
|
|
0.0 |
% |
|
|
8.9 |
% |
|
|
|
|
For the
year ended December 31, 2008 our net license revenues were $31,000 decreasing
approximately $1.7 million compared to the same period in 2007. This
decrease was due primarily to the loss of UpdateEXPERT and Open File Manager
license revenues resulting from the sale of these product lines in 2007. We do
not anticipate significant license revenue in future periods.
Cost
of Revenues
For
the Years
Ended
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
Total
cost of revenues
|
|
$ |
4.9 |
|
|
$ |
7.2 |
|
|
|
(31.9 |
)% |
|
Gross
margin percent
|
|
|
72.8 |
% |
|
|
62.3 |
% |
|
|
|
|
Cost of
revenues consist primarily of the cost of contract manufactured hardware,
royalties paid to third parties under technology licensing agreements, packaging
costs, fee-based technical support costs and freight. Cost of revenues decreased
$2.3 million for the year ended December 31, 2008 compared to the same period in
2007. Gross margin increased 10.5% for the year ended December 31, 2008 compared
to the same period in 2007, primarily due to a decrease in the costs associated
with subscription revenues, which includes direct subscription costs and payroll
costs for the technical operations group that maintains the various databases
and the technical support group, coupled by a decrease in the costs of appliance
revenues. See the discussion of changes in the cost of subscription and
appliance revenues below.
Cost
of Subscription Revenues
For
the Years
Ended
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
Total
cost of subscription revenues
|
|
$ |
2.2 |
|
|
$ |
3.9 |
|
|
|
(43.6 |
)% |
|
Gross
margin percent
|
|
|
84.2 |
% |
|
|
72.5 |
% |
|
|
|
|
The cost
of subscription revenues includes the technical operations group that maintains
the various databases and the technical support group. Due to the sale of
UpdateEXPERT and Open File Manager in January and August 2007, respectively,
costs related to these two product lines were non-existent for the year ended
December 31, 2008. In addition, payroll and other direct expenses related to our
core product line, which includes iPrism, decreased in the year ended December
31, 2008 compared to the same period in 2007 due primarily to a reduction in
workforce.
Cost
of Appliance Revenues
For
the Years
Ended
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
Total
cost of appliance revenues
|
|
$ |
2.7 |
|
|
$ |
3.2 |
|
|
|
(15.6 |
)% |
|
Gross
margin percent
|
|
|
34.1 |
% |
|
|
0.0 |
% |
|
|
|
|
The cost
of appliance revenues, which includes contract manufactured equipment, packaging
and freight, decreased $0.5 million for the year ended December 31,
2008 compared to the same period in 2007, which lead to an increase of 34.1% in
our gross margin percentage on these same appliances. The decrease in costs and
the increase in gross margin percentage for year ended December 31, 2008
compared to the same period in 2007 can be mainly attributed to the write-down
of obsolete inventory and the booking of a warranty reserve for returns during
2007.
Sales
and Marketing
For
the Years
Ended
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
Total
sales and marketing
|
|
$ |
7.6 |
|
|
$ |
13.4 |
|
|
|
(43.3 |
)% |
|
As
a percentage of revenues
|
|
|
42.2 |
% |
|
|
70.2 |
% |
|
|
|
|
Sales and
marketing expenses consist primarily of salaries, related benefits, commissions,
consultant fees, advertising, lead generation and other costs associated with
our sales and marketing efforts. For the year ended December 31, 2008, the sales
and marketing expenses decreased 43.3%, or $5.8 million, over the same period in
2007. The decrease was attributable to our successful cost reduction efforts and
the closure of our sales offices in Europe and Australia during the fourth
quarter of 2007. The most significant decreases include compensation and
consulting expenses of $3.7 million and advertising expenses of $1.8
million.
Research
and Development
For
the Years
Ended
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
Total
research and development
|
|
$ |
2.9 |
|
|
$ |
6.0 |
|
|
|
(51.7 |
)% |
|
As
a percentage of revenues
|
|
|
16.1 |
% |
|
|
31.4 |
% |
|
|
|
|
Research
and development expense consists primarily of salaries, related benefits,
third-party consultant fees and other engineering related costs. The decrease of
$3.1 million for the year ended December 31, 2008 compared to the same period in
2007 was primarily the result of a decrease in compensation expenses related to
layoffs and the sale of UpdateExpert and Open File
Manager. Management believes that a significant investment in
research and development is required to remain competitive and we expect to
continue to invest in research and development activities.
We
anticipate research and development expenses to increase in 2009 compared to
2008, as we extend the core functionality and features within our core
products.
General
and Administrative
For
the Years
Ended
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
Total
general and administrative
|
|
$ |
5.3 |
|
|
$ |
7.9 |
|
|
|
(32.9 |
)% |
|
As
a percentage of revenues
|
|
|
29.4 |
% |
|
|
41.4 |
% |
|
|
|
|
General
and administrative expenses, which consist primarily of salaries and related
benefits, and fees for professional services, such as legal and accounting
services, decreased $2.6 million for the year ended December 31, 2008, compared
to the same period in 2007, mainly due to our extensive cost cutting efforts.
The most significant decreases in 2008 included decreases
in accounting, legal, and insurance costs of $0.8 million,
compensation and consulting expenses of $0.7 million, lease and rent expenses of
$0.4 million, and utilities expense of $0.2 million.
Impairment
For
the Years
Ended
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
Total
impairment
|
|
$ |
0.0 |
|
|
$ |
3.3 |
|
|
|
(100.0 |
)% |
|
As
a percentage of revenues
|
|
|
0.0 |
% |
|
|
17.3 |
% |
|
|
|
|
An
impairment charge of $3.3 million was recorded at September 30, 2007 to
write-down the intangible assets related to the acquisition of AgaveOne to
zero. No such write-downs occurred during the year ended December 31,
2008.
Interest
and Other Income, Net
For
the Years
Ended
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
Total
interest and other income, net
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
|
0.0 |
% |
|
As
a percentage of revenues
|
|
|
1.1 |
% |
|
|
1.0 |
% |
|
|
|
|
Interest
and other income, net, includes interest expense, interest income, and other
income. The increase for the year ended December 31, 2008 over the same period
in 2007 was due to the gain on the settlement of trade payables, offset by an
increase in interest expense due to the increase in short-term
borrowings.
Gain
on Sale of Assets
For
the Years
Ended
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
Gain
on sale of assets
|
|
$ |
0.6 |
|
|
$ |
11.3 |
|
|
|
(94.7 |
)% |
|
As
a percentage of revenues
|
|
|
3.3 |
% |
|
|
59.2 |
% |
|
|
|
|
The gain
on the sale of assets for year ended December 31, 2008 was $0.6 million as
compared to approximately $11.3 million for the same period in 2007. During the
first and third quarter of fiscal year 2007, we sold our UpdateExpert product
line to Shavlik and our Open File Manager product line to EVault recognizing a
gain of approximately $ 3.5 million and $7.8 million, respectively. The gain for
the year ended December 31, 2008 consisted primarily of funds released from an
indemnification escrow as a result of the sale of the Open File Manager
product.
Recent
Accounting Pronouncements
In
December 2008, FASB issued FSP FAS 140-4 and FIN 46-(R)-8, “Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities,” (“FSP FAS 140-4 and
FIN 46(R)-8”). FSP FAS 140-4 and FIN 46(R)-8
amends FASB 140,“Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities” (“SFAS 140”), to require public entities to provide
additional disclosures about transfers of financial assets. It also
amends FASB Interpretation No. 46(R), to require public enterprises,
including sponsors that have a variable interest in a VIE, to provide additional
disclosures about their involvement with VIEs. FSP FAS 140-4 and
FIN 46(R)-8 is related to disclosure only and will not have an impact on
our consolidated financial position or results of operations.
In
October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active” (“FSP
FAS 157-3”). FSP FAS 157-3 clarifies the application of SFAS 157 in a
market that is not active. FSP FAS 157-3 became effective upon issuance,
including prior periods for which financial statements have not been issued. Our
adoption of FSP FAS 157-3 did not have a material impact on our financial
position, cash flows, or results of operations.
In June
2008, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-5,
“Determining whether an
Instrument (or Embedded Feature) is indexed to an Entity's Own Stock”
(“EITF 07-5”). EITF 07-5 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133 -
specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company's own stock and (b) classified
in stockholders' equity in the statement of financial position would not be
considered a derivative financial instrument. EITF 07-5 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
SFAS No. 133 paragraph 11(a) scope exception. The Company has outstanding
warrants to purchase common stock that have been preliminarily evaluated as
ineligible for equity classification under EITF 07-5 because of certain
provisions that may result in an adjustment to the exercise price of the
warrants. Accordingly, the adjustment feature may cause the warrant to fail to
be indexed solely to the Company’s stock. The warrants would therefore be
classified as liabilities and re-measured at fair value with changes in the fair
value recognized in operating results. The Company has not completed our
analysis of these instruments nor determined the effects of pending adoption, if
any, on our consolidated financial statements.
In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”
(“FSP EITF 03-6-1”). Under FSP EITF 03-6-1, unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method. FSP EITF 03-6-1 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those years and requires retrospective application. We are currently evaluating
the impact, if any, of adopting FSP EITF 03-6-1 on our earnings per
share.
In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principle” (“SFAS 162”). SFAS 162 will provide
framework for selecting accounting principles to be used in preparing financial
statements that are presented in conformity with U.S. GAAP for nongovernmental
entities. SFAS 162 will be effective 60 days following the Securities
and Exchange Commission's approval of the Public Company Accounting Oversight
Board (PCAOB) amendments to AU Section 411. The adoption of SFAS 162 did not
have a material impact on its financial position, cash flows, or results of
operations.
In April
2008, the FASB issued FSP FAS 142-3, “Determination of Useful Life of
Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors
that should be considered in developing the renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FAS
142, “Goodwill and Other
Intangible Assets.” FSP FAS 142-3 also requires expanded disclosure
related to the determination of intangible asset useful lives. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008. Earlier adoption
is not permitted. The Company does not expect FSP FAS 142-3 to have a material
impact on its financial statements.
On
February 15, 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). SFAS No. 159 permits
all entities to choose, at specified election dates, to measure eligible items
at fair value (the “fair value option”). A business entity shall report
unrealized gains and losses on items for which the fair value option has been
elected in earnings (or another performance indicator if the business entity
does not report earnings) at each subsequent reporting date. Upfront costs and
fees related to items for which the fair value option is elected shall be
recognized in earnings as incurred and not deferred. The Company adopted SFAS
159 on January 1, 2008. The adoption of SFAS 159 did not have a
material impact on its financial position, cash flows, or results of
operations.
In
September 2006, FASB issued SFAS No. 157,
“Fair Value Measurements”
(“SFAS 157”). This Statement defines fair value, establishes a framework
for measuring fair value in U.S. GAAP, and expands disclosures about fair value
measurements. This statement applies in those instances where other
accounting pronouncements require or permit fair value measurements and the
Board has previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this statement does
not require any new fair value measurements. However, for some entities, the
application of this Statement will change the current practice. In February
2008, the FASB issued FSP FAS 157-2 which defers the effective date of SFAS 157
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
SFAS 157 for its financial assets and liabilities on January 1, 2008 did not
have a material impact on the Company’s financial position, cash flows, or
results of operations. The Company is currently reviewing the
adoption requirements related to our non-financial assets and liabilities and
has not yet determined the impact, if any, this will have on our financial
position, cash flows, or results of operations.
Liquidity
and Capital Resources
Cash
Flows
Our
largest source of operating cash flows is cash collections from our customers
for 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. The recurring revenue subscription portion of our
business is a mainstay of the cash flow we generate. Our primary uses of cash
for operating activities include personnel and facilities, related expenditures
and technology costs, as well as costs associated with outside support and
services.
Cash used
in operations for year ended December 31, 2008 was $0.5 million compared to cash
used during the year ended December 31, 2007 of $11.6 million. The net decrease
in use of cash was due primarily to lower operating losses and substantial
improvements to the cost structure of our business.
Cash
flows provided by investing activities for the years ended December 31, 2008 and
2007 was $0.5 million and $6.9 million, respectively. The cash provided by
investing activities as of December 31, 2008 included the $500,000 payment for
the “Holdback Amount” by EVault in satisfaction of the signed agreement between
EVault and the Company for the sale of the Open File Manager product
line.
Cash
flows provided by financing activities for the years ended December 31, 2008 and
2007 was $0.8 million and $1.2 million, respectively. The decrease in cash
provided by financing activities for the year ended December 31, 2008, compared
to the same period in 2007 was primarily due to the net decrease in short-term
borrowings.
As a
result of the foregoing, the net increase in cash and cash equivalents was $0.8
million for the year ended December 31, 2008 as compared to a net decrease in
cash of approximately $3.5 million for the comparable period in
2007.
Credit
Facilities
Silicon
Valley Bank
On May
15, 2007, the Company entered into a Loan and Security Agreement with Silicon
Valley Bank, a California corporation (“SVB”) which was subsequently amended on
February 27, 2009. 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% (from 3%) over the greater of the prime rate or 7.5% (from 10.5%),
(ii) modified the tangible net worth covenant to no less that 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 December 31, 2008, the
effective interest rate was 10.5% and the balance on the line of credit with SVB
was $1.7 million. The Company was in compliance with the above stated covenants
and restrictions. The obligations under the SVB Loan and Security Agreement were
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 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 years ended December 31, 2008 and 2007, which is being
recorded as interest expense, was approximately $104,000 and $11,000,
respectively. Furthermore, St. Bernard agreed to grant SVB certain piggyback
registration rights with respect to the shares of common stock underlying the
warrants.
Agility
Capital / Partners for Growth II, LP
On
January 25, 2008, St. Bernard Software, Inc. entered into a Loan Agreement (the
"Agility Loan Agreement") with Agility Capital, LLC ("Agility"). Pursuant to the
terms of the Agility Loan Agreement, Agility provided St. Bernard with a
non-revolving term loan in the amount of $750,000, at a 15% fixed interest rate
(the “Agility Loan”). Beginning March 1, 2008, and on the first day of each
month thereafter until July 1, 2008, St. Bernard was required to pay to Agility
$25,000 plus accrued but unpaid interest. Beginning July 1, 2008, and on the
first day of each month thereafter, St. Bernard was required to pay Agility
$50,000 plus accrued interest.
In July
2008, the entire outstanding balance on the Agility Loan, approximately
$562,000, was paid using the proceeds from a new loan from PFG.
In
connection with the execution of the Agility Loan Agreement, St. Bernard issued
warrants to Agility (the "Agility Warrants"), which allows Agility to purchase
up to 463,500 shares of St. Bernard common stock at an exercise price equal to
$0.57 per share. The Agility Warrants expire on the seventh anniversary of their
issue date. The Company estimated the fair value of the warrants to be $190,000
using the following assumptions; 75.35% volatility, risk free interest rate of
3.61%, an expected life of seven years and no dividends. In
accordance with Accounting Principles Board Opinion No. 14, the relative fair
value of the warrants, estimated to be approximately $151,000, was recorded as
debt discount. Amortization of the debt discount for the year
ended December 31, 2008, which was being recorded as interest expense, was
approximately $151,000. The Agility Warrants contains anti-dilution protection
in the event of a debt or equity financing, with respect to the exercise price
and number of shares. Furthermore, St. Bernard granted Agility piggyback
registration rights with respect to the shares of common stock underlying the
Agility Warrants. In July 2008, the remaining unamortized balance of
the previously recorded debt discount was amortized to interest expense in
connection with the full repayment of the Agility Loan.
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 was subsequently
amended on February 27, 2009. Pursuant to the terms of the Loan Amendment, PFG
has eliminated the Modified Net Income covenant for the reporting periods ending
February 28, 2009 and March 31, 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
December 31, 2008, the effective interest rate was 7%. St. Bernard is required
to maintain a minimum borrowing amount of at least $750,000 (the “Minimum
Borrowing Amount”) or pay PFG a minimum interest amount (the “Minimum Interest
Amount”) equal to $750,000, multiplied by the Applicable Rate, and further
multiplied by the number of days (based on a 360-day year) from the date of such
failure to maintain the Minimum Borrowing Amount to the Maturity Date (as
defined in the PFG Loan Agreement). Pursuant to the terms of the PFG
Loan Agreement, St. Bernard paid PFG a one-time commitment fee of $30,000 and a
$5,000 amendment fee and agreed to reimburse PFG for PFG’s reasonable attorneys’
fees in connection with the negotiation of the PFG Loan Agreement.
Subject
to the requirement to maintain the Minimum Borrowing Amount or pay the Minimum
Interest Amount, St. Bernard may borrow, repay and reborrow from time to time
until the Maturity Date. Proceeds of the initial loan amount were used to pay
all indebtedness owing to Agility, with the remaining amount to be used for
working capital.
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
by 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. The PFG Loan Agreement contains events of default customary for
credit facilities of this type (with customary grace or cure periods, as
applicable) and provides that upon the occurrence and during the continuance of
an event of default, among other things, the interest rate on all borrowings
will be increased, the payment of all borrowings may be accelerated, PFG’s
commitments may be terminated and PFG shall be entitled to exercise all of its
rights and remedies, including remedies against collateral. At
December 31, 2008, 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 year ended December
31, 2008, which is being recorded as interest expense, was approximately
$28,000. As of December 31, 2008, the balance on the PFG Loan Agreement was
$750,000.
Contractual
Commitments
The
following table is a summary of the contractual lease commitments for operating
facilities and certain equipment under non-cancelable operating leases with
various expiration dates through July 2011. Future minimum payments as of
December 31, 2008 are as follows:
|
|
|
|
|
|
Year
Ending December 31,
|
|
|
|
|
2009
|
|
$ |
1,203,000 |
|
|
2010
|
|
|
1,243,000 |
|
|
2011
|
|
|
4,000 |
|
|
Total
|
|
$ |
2,450,000 |
|
In
September 2008, we subleased a portion of our unused office space to a company.
The proceeds from the sublease will be used to offset our monthly facilities
rent expense.
Losses
from Operations – Liquidity
As of
December 31, 2008, the Company had approximately $2.1 million of cash and cash
equivalents and a working capital deficit of $10.5
million. Approximately $10.5 million of our current liability balance
at December 31, 2008 consists of deferred revenues, which represents amounts
that will be amortized into revenue as they are earned in future periods. The
Company also had a stockholders’ deficit of approximately $9.1 million at
December 31, 2008.
The
Company has a history of losses and has not yet been able to achieve
profitability. For the years ended December 31, 2008 and 2007, the Company
incurred net losses of $2.3 million and $7.5 million, respectively. The
cumulative net loss was approximately $49.5 million and $47.2 million as of
December 31, 2008 and 2007, respectively. During the fourth quarter of 2007
and through the second quarter of 2008, the Company made substantial changes to
the cost structure of its business. These changes included 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. In addition to these
changes, the Company entered into a Loan and Security Agreement (the “PFG Loan
Agreement”) with Partners for Growth II, L.P. (“PFG”) in July 2008 for the
amount of $1.5 million. See Note 6.
The
Company believes that its existing cash resources, combined with cash expected
to be received from existing accounts receivable and projected billings and
borrowing availability under existing credit facilities, will provide sufficient
liquidity for the Company to meet its continuing obligations for the next twelve
months. However, there can be no assurances that projected billings and related
cash receipts will be realized or that anticipated continued 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. Whereas
management believes it will have access to these financing sources if necessary,
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 leases arrangements disclosed in
the preceding section, we have no other off-balance sheet arrangements that are
reasonably likely to have a material effect on our financial
statements.
Forward-Looking
Statements
This
Annual Report on Form 10-K and the information incorporated herein by
reference contain forward-looking statements that involve a number of risks and
uncertainties. Although our forward-looking statements reflect the good faith
judgment of our management, these statements can only be based on facts and
factors currently known by us. Consequently, these forward-looking statements
are inherently subject to risks and uncertainties, and actual results and
outcomes may differ materially from results and outcomes discussed in the
forward-looking statements.
Forward-looking
statements can be identified by the use of forward-looking words such as
“believes,” “expects,” “hopes,” “may,” “will,” “plan,” “intends,” “estimates,”
“could,” “should,” “would,” “continue,” “seeks,” “pro forma,” or “anticipates,”
or other similar words (including their use in the negative), or by discussions
of future matters such as the development of new products, technology
enhancements, possible changes in legislation and other statements that are not
historical. These statements include but are not limited to statements under the
captions “Risk Factors,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Business” as well as other sections in
this report.
The
cautionary statements made in this report are intended to be applicable to all
related forward-looking statements wherever they may appear in this report. We
urge you not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. Except as required by law, we assume
no obligation to update our forward-looking statements, even if new information
becomes available in the future.
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.
The
information required by this Item is incorporated by reference from the
consolidated financial statements for the fiscal years ended December 31, 2008
and 2007 listed in Item 15 of Part IV of this report, beginning on page
F-3.
None.
Evaluation
of Disclosure Controls
Under the
supervision of and with the participation of our management, including our Chief
Executive Officer / Chief Financial Officer, at December 31, 2008, the Company
carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange
Act”). These disclosure controls and procedures are designed to provide
reasonable assurance that the information required to be disclosed by the
Company in its periodic reports with the SEC is recorded, processed, summarized
and reported within the time periods specified by the SEC’s rules and forms, and
that the information is accumulated and communicated to the Company’s
management, including our Chief Executive Officer / Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. The design
of any disclosure controls and procedures is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.
During
the course of our evaluation, our Chief Executive Officer / Chief Financial
Officer has concluded that our disclosure controls and procedures were effective
at the reasonable assurance level as of December 31, 2008.
Management’s
Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
our financial reporting, as defined in Rule 13a-15(f) under the Exchange
Act. Under the supervision and with the participation of our management,
including our Chief Executive Officer / Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial
reporting. Management has used the framework set forth in the report entitled,
Internal Control—Integrated
Framework, published by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) to evaluate the effectiveness of our internal control
over financial reporting.
Based on
its evaluation, management has concluded that our internal control over
financial reporting was effective as of December 31, 2008, the end of our most
recent fiscal year.
This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation requirements by the Company’s
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only management’s
report in this Annual Report.
Changes
in Internal Control over Financial Reporting
There
have been no changes in the Company’s internal control over financial reporting,
during the fourth quarter of the fiscal year ended December 31, 2008 that have
materially affected or are reasonably likely to affect, the Company’s internal
control over financial reporting.
None.
The
information required by Item 10 of Form 10-K is incorporated by reference to the
information under the captions “Election of Directors” and “Affiliate
Transactions and Relationships” in our Proxy Statement, which will be filed with
the SEC within 120 days after the end of our fiscal year ended December 31,
2008.
The
information required by Item 11 of Form 10-K is incorporated by reference to the
information under the caption “Executive Compensation” in our Proxy Statement,
which will be filed with the SEC within 120 days after the end of our fiscal
year ended December 31, 2008.
The
information required by Item 12 of Form 10-K is incorporated by reference to the
information under the caption “Security Ownership of Certain Beneficial Owners
and Management” in our Proxy Statement, which will be filed with the SEC within
120 days after the end of our fiscal year ended December 31,
2008.
The
information required by Item 13 of Form 10-K is incorporated by reference to the
information under the caption “Certain Relationships and Related Transactions”
in our Proxy Statement, which will be filed with the SEC within 120 days after
the end of our fiscal year ended December 31, 2008.
The
information required by Item 14 of Form 10-K is incorporated by reference to the
information under the caption “Audit Fees” in our Proxy Statement, which we will
file with the SEC within 120 days after the end of our fiscal year ended
December 31, 2008.
Consolidated
Financial Statements and Schedules:
The
following consolidated financial statements are filed as part of this report as
required by “Item 8. Financial Statements and Supplementary Data.”
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
F-3
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2008 and
2007
|
F-4
|
|
Consolidated
Statements of Stockholders’ Deficit for the Years Ended December 31, 2008
and 2007
|
F-5
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008 and
2007
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
Exhibits:
|
2.1
|
|
Asset
Sale and License Agreement dated as of January 4, 2007, by and between St.
Bernard Software, Inc. and Shavlik Technologies, LLC (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 9,
2007).
|
|
|
|
|
3.1
|
|
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).
|
|
|
|
|
3.2
|
|
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)
|
|
|
|
|
4.1
|
|
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).
|
|
|
|
|
4.2
|
|
Specimen
Common Stock Certificate of St. Bernard Software, Inc. (formerly known as
Sand Hill IT Security Acquisition Corp.)
|
|
|
|
|
4.3
|
|
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).
|
|
|
|
|
4.4
|
|
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).
|
|
|
|
|
4.5
|
|
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).
|
|
|
|
|
4.6
|
|
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).
|
|
|
|
|
4.7
|
|
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).
|
|
|
|
|
4.8
|
|
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).
|
|
|
|
|
|
4.9
|
|
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).
|
|
|
|
|
|
4.10
|
|
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).
|
|
|
|
|
|
4.11
|
|
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).
|
|
|
|
|
4.12
|
|
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).
|
|
|
|
|
|
4.13
|
|
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).
|
|
|
|
|
|
4.14
|
|
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.)
|
|
|
|
|
4.15*
|
|
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).
|
|
|
|
|
4.16*
|
|
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).
|
|
|
|
|
4.17*
|
|
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).
|
|
10.1
|
|
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).
|
|
|
|
|
|
10.2
|
|
Asset
Purchase Agreement between St. Bernard Software, Inc. and EVault, Inc.
dated August 13, 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 August 17, 2007).
|
|
|
|
|
|
10.3
|
|
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)
|
|
|
|
|
|
10.4
|
|
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).
|
|
|
|
|
|
10.5
|
|
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).
|
|
|
|
|
|
10.6
|
|
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).
|
|
|
|
|
|
10.7
|
|
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).
|
|
|
|
|
|
10.8
|
|
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).
|
|
|
|
|
|
10.9
|
|
Employment
Agreement between St. Bernard Software, Inc. and Steve Yin executed
September 22, 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 September 24, 2008).
|
|
|
|
|
10.10
|
|
Separation
Agreement and Release between St. Bernard Software, Inc. and Vince Rossi
executed December 2, 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 December 5, 2008).
|
|
|
|
|
10.11
|
|
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).
|
|
|
|
|
14.1
|
|
Code
of Business Conduct and Ethics adopted September 7,
2006
|
|
|
|
|
21.1
|
|
Subsidiaries
of St. Bernard Software, Inc.
|
|
|
|
|
23.1(i)
|
|
Consent
of Squar, Milner, Peterson, Miranda & Williamson,
LLP
|
|
|
|
|
23.1(ii)
|
Consent
of Mayer Hoffman McCann P.C.
|
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
___________________
|
*
|
Management
contract or compensatory plan or
arrangement
|
ST.
BERNARD SOFTWARE, INC.
INDEX
TO FINANCIAL STATEMENTS
|
|
|
Page
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
F-3
|
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2008 and
2007
|
F-4
|
|
|
Consolidated
Statements of Stockholders’ Deficit for the Years Ended December 31, 2008
and 2007
|
F-5
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008 and
2007
|
F-6
|
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the
Board of Directors
St.
Bernard Software, Inc
San
Diego, CA
We have
audited the accompanying consolidated balance sheets of St. Bernard Software,
Inc. and its subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ deficit and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company was not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
were appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of St. Bernard Software, Inc.
as of December 31, 2008 and 2007, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/
Squar, Milner, Peterson, Miranda & Williamson, LLP
San
Diego, California
March 10,
2009
St.
Bernard Software, Inc.
Consolidated
Balance Sheets
|
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,051,000 |
|
|
$ |
1,297,000 |
|
|
Accounts
receivable - net of allowance for doubtful accounts of $52,000 and $59,000
in 2008 and 2007, respectively
|
|
|
3,170,000 |
|
|
|
3,255,000 |
|
|
Inventories
- net
|
|
|
364,000 |
|
|
|
158,000 |
|
|
Prepaid
expenses and other current assets
|
|
|
381,000 |
|
|
|
440,000 |
|
|
Total
current assets
|
|
|
5,966,000 |
|
|
|
5,150,000 |
|
| |
|
|
|
|
|
|
|
|
|
Fixed
Assets - Net
|
|
|
828,000 |
|
|
|
1,301,000 |
|
| |
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
281,000 |
|
|
|
215,000 |
|
| |
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
7,568,000 |
|
|
|
7,568,000 |
|
|
Total
Assets
|
|
$ |
14,643,000 |
|
|
$ |
14,234,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$ |
2,462,000 |
|
|
$ |
1,566,000 |
|
|
Accounts
payable
|
|
|
1,270,000 |
|
|
|
3,026,000 |
|
|
Accrued
compensation expenses
|
|
|
1,361,000 |
|
|
|
1,188,000 |
|
|
Accrued
expenses and other current liabilities
|
|
|
518,000 |
|
|
|
92,000 |
|
|
Warranty
liability
|
|
|
195,000 |
|
|
|
314,000 |
|
|
Current
portion of capitalized lease obligations
|
|
|
147,000 |
|
|
|
153,000 |
|
|
Deferred
revenue
|
|
|
10,469,000 |
|
|
|
9,589,000 |
|
|
Total
current liabilities
|
|
|
16,422,000 |
|
|
|
15,928,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Rent
|
|
|
118,000 |
|
|
|
232,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
Lease Obligations, Less Current Portion
|
|
|
22,000 |
|
|
|
170,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Revenue
|
|
|
7,152,000 |
|
|
|
5,860,000 |
|
|
Total
liabilities
|
|
|
23,714,000 |
|
|
|
22,190,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Deficit
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and
outstanding
|
|
|
- |
|
|
|
- |
|
|
Common
stock, $0.01 par value; 50,000,000 shares authorized; 14,783,090 and
14,760,052 shares issued and outstanding in 2008 and 2007,
respectively
|
|
|
148,000 |
|
|
|
148,000 |
|
|
Additional
paid-in capital
|
|
|
40,308,000 |
|
|
|
39,079,000 |
|
|
Accumulated
deficit
|
|
|
(49,527,000 |
) |
|
|
(47,183,000 |
) |
|
Total
stockholders’ deficit
|
|
|
(9,071,000 |
) |
|
|
(7,956,000 |
) |
|
Total
Liabilities and Stockholders’ Deficit
|
|
$ |
14,643,000 |
|
|
$ |
14,234,000 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
St.
Bernard Software, Inc.
Consolidated
Statements of Operations
|
|
|
Years
ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Revenues
|
|
|
|
|
|
|
|
Subscription
|
|
$ |
13,916,000 |
|
|
$ |
14,205,000 |
|
|
Appliance
|
|
|
4,051,000 |
|
|
|
3,160,000 |
|
|
License
|
|
|
31,000 |
|
|
|
1,711,000 |
|
|
Total
Revenues
|
|
|
17,998,000 |
|
|
|
19,076,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription
|
|
|
2,194,000 |
|
|
|
3,918,000 |
|
|
Appliance
|
|
|
2,715,000 |
|
|
|
3,194,000 |
|
|
License
|
|
|
11,000 |
|
|
|
70,000 |
|
|
Total
Cost of Revenues
|
|
|
4,920,000 |
|
|
|
7,182,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
13,078,000 |
|
|
|
11,894,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing expenses
|
|
|
7,577,000 |
|
|
|
13,387,000 |
|
|
Research
and development expenses
|
|
|
2,943,000 |
|
|
|
5,976,000 |
|
|
General
and administrative expenses
|
|
|
5,280,000 |
|
|
|
7,858,000 |
|
|
Impairment
expense
|
|
|
- |
|
|
|
3,262,000 |
|
|
Total
Operating Expenses
|
|
|
15,800,000 |
|
|
|
30,483,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(2,722,000 |
) |
|
|
(18,589,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other
Income
|
|
|
|
|
|
|
|
|
|
Interest
expense - net
|
|
|
625,000 |
|
|
|
196,000 |
|
|
Gain
on sale of assets
|
|
|
(563,000 |
) |
|
|
(11,284,000 |
) |
|
Other
income
|
|
|
(443,000 |
) |
|
|
(26,000 |
) |
|
Total
Other Income
|
|
|
(381,000 |
) |
|
|
(11,114,000 |
) |
|
Loss
Before Income Taxes
|
|
|
(2,341,000 |
) |
|
|
(7,475,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(3,000 |
) |
|
|
(42,000 |
) |
|
Net
Loss
|
|
$ |
(2,344,000 |
) |
|
$ |
(7,517,000 |
) |
|
Loss
Per Common Share - Basic and Diluted
|
|
$ |
(0.16 |
) |
|
$ |
(0.51 |
) |
|
Weighted
Average Shares Outstanding
|
|
|
14,777,656 |
|
|
|
14,769,567 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
St.
Bernard Software, Inc.
Consolidated
Statement of Stockholders' Deficit
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
14,764,251 |
|
|
$ |
148,000 |
|
|
$ |
38,305,000 |
|
|
$ |
(39,666,000 |
) |
|
$ |
(1,213,000 |
) |
|
Common
stock issued for exercise of employee options
|
|
|
44,950 |
|
|
|
- |
|
|
|
30,000 |
|
|
|
- |
|
|
|
30,000 |
|
|
Common
stock issued under the employee stock purchase plan
|
|
|
17,518 |
|
|
|
- |
|
|
|
14,000 |
|
|
|
- |
|
|
|
14,000 |
|
|
Stock-based
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
888,000 |
|
|
|
- |
|
|
|
888,000 |
|
|
Common
stock cancelled as a result of an indemnification claim
|
|
|
(66,667 |
) |
|
|
- |
|
|
|
(250,000 |
) |
|
|
- |
|
|
|
(250,000 |
) |
|
Value
of warrants issued
|
|
|
- |
|
|
|
- |
|
|
|
92,000 |
|
|
|
- |
|
|
|
92,000 |
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(7,517,000 |
) |
|
|
(7,517,000 |
) |
|
Balance
at December 31, 2007
|
|
|
14,760,052 |
|
|
$ |
148,000 |
|
|
$ |
39,079,000 |
|
|
$ |
(47,183,000 |
) |
|
$ |
(7,956,000 |
) |
|
Common
stock issued under the employee stock purchase plan
|
|
|
23,038 |
|
|
|
- |
|
|
|
11,000 |
|
|
|
- |
|
|
|
11,000 |
|
|
Stock-based
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
882,000 |
|
|
|
- |
|
|
|
882,000 |
|
|
Value
of warrants issued
|
|
|
- |
|
|
|
- |
|
|
|
336,000 |
|
|
|
- |
|
|
|
336,000 |
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,344,000 |
) |
|
|
(2,344,000 |
) |
|
Balance
at December 31, 2008
|
|
|
14,783,090 |
|
|
$ |
148,000 |
|
|
$ |
40,308,000 |
|
|
$ |
(49,527,000 |
) |
|
$ |
(9,071,000 |
) |
The
accompanying notes are an integral part of these consolidated financial
statements.
St.
Bernard Software, Inc.
Consolidated
Statements of Cash Flows
|
|
|
Years
ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,344,000 |
) |
|
$ |
(7,517,000 |
) |
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
580,000 |
|
|
|
1,110,000 |
|
|
Allowance
for doubtful accounts
|
|
|
(7,000 |
) |
|
|
(619,000 |
) |
|
Gain
on sale of assets
|
|
|
(563,000 |
) |
|
|
(11,284,000 |
) |
|
Impairment
of intangible assets related to the acquisition of
AgaveOne
|
|
|
- |
|
|
|
3,262,000 |
|
|
Stock-based
compensation expense
|
|
|
882,000 |
|
|
|
888,000 |
|
|
Noncash
interest expense
|
|
|
284,000 |
|
|
|
11,000 |
|
|
Increase
(decrease) in cash resulting from changes in:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
93,000 |
|
|
|
1,328,000 |
|
|
Inventories
|
|
|
(206,000 |
) |
|
|
572,000 |
|
|
Prepaid
expenses and other assets
|
|
|
(46,000 |
) |
|
|
59,000 |
|
|
Accounts
payable
|
|
|
(1,756,000 |
) |
|
|
(1,304,000 |
) |
|
Accrued
expenses and other current liabilities
|
|
|
595,000 |
|
|
|
(430,000 |
) |
|
Warranty
liability
|
|
|
(143,000 |
) |
|
|
293,000 |
|
|
Deferred
rent
|
|
|
(36,000 |
) |
|
|
3,000 |
|
|
Deferred
revenue
|
|
|
2,173,000 |
|
|
|
1,985,000 |
|
|
Net
cash used in operating activities
|
|
|
(494,000 |
) |
|
|
(11,643,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
Additional
costs related to an acquisition
|
|
|
- |
|
|
|
(109,000 |
) |
|
Purchases
of fixed assets
|
|
|
(76,000 |
) |
|
|
(400,000 |
) |
|
Proceeds
from the sale of assets
|
|
|
570,000 |
|
|
|
7,413,000 |
|
|
Net
cash provided by investing activities
|
|
|
494,000 |
|
|
|
6,904,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
Proceeds
from stock option and warrant exercises
|
|
|
- |
|
|
|
30,000 |
|
|
Proceeds
from warrant options purchase
|
|
|
1,000 |
|
|
|
- |
|
|
Proceeds
from the sales of stock under the employee stock purchase
plan
|
|
|
11,000 |
|
|
|
15,000 |
|
|
Principal
payments on capitalized lease obligations
|
|
|
(154,000 |
) |
|
|
(121,000 |
) |
|
Net
increase in short-term borrowings
|
|
|
896,000 |
|
|
|
1,270,000 |
|
|
Net
cash provided by financing activities
|
|
|
754,000 |
|
|
|
1,194,000 |
|
|
Net
Increase (decrease) in Cash and Cash Equivalents
|
|
|
754,000 |
|
|
|
(3,545,000 |
) |
|
Cash
and Cash Equivalents at Beginning of Period
|
|
|
1,297,000 |
|
|
|
4,842,000 |
|
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
2,051,000 |
|
|
$ |
1,297,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
307,000 |
|
|
$ |
245,000 |
|
|
Income
taxes
|
|
$ |
- |
|
|
$ |
2,000 |
|
Non
Cash Investing and Financing Activities:
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 6.
In
January 2008, the Company issued warrants to purchase up to 460,526 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 6.
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
6.
During
2007, the Company entered into capitalized
lease obligations for the purchase of $219,000 in fixed assets.
In April
2007, the shares issued in conjunction with the purchase of AgaveOne were
reduced by 66,667 shares or $250,000 as a result of indemnification
claims.
In May
2007, the Company issued 100,000 warrants in conjunction with a loan agreement
with a bank. See Note 6.
The
accompanying notes are an integral part of these consolidated financial
statements.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements
1.
Summary of Significant Accounting Policies
St. Bernard Software, Inc., a
Delaware corporation (“we,” “us,” “our,” the “Company,” or “St.
Bernard”) is a software development company that designs, develops, and markets
Secure 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 financial statements include our accounts and those of our
subsidiaries which include our operations in the UK and
Australia. The Company closed its European and Australian sales and
marketing offices in November and July 2007, respectively. As such, these
subsidiaries have been dormant since that time. All inter-company balances and
transactions have been eliminated in consolidation.
Use
of estimates
The
preparation of the consolidated financial statements in conformity with U.S
generally accepted accounting principles (“U.S. GAAP”) requires management to
make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
Significant estimates used in preparing the consolidated financial statements
include those assumed in computing revenue recognition, the allowance for
doubtful accounts, warranty liability, the valuation allowance on deferred tax
assets, testing goodwill for impairment, and stock-based
compensation.
Liquidity
As of
December 31, 2008, the Company had approximately $2.1 million of cash and cash
equivalents and a working capital deficit of $10.5
million. Approximately $10.5 million of our current liability balance
at December 31, 2008 consists of deferred revenues, which represents amounts
that will be amortized into revenue as they are earned in future periods. The
Company also had a stockholders’ deficit of approximately $9.1 million at
December 31, 2008.
The
Company has a history of losses and has not yet been able to achieve
profitability. For the years ended December 31, 2008 and 2007, the Company
incurred net losses of $2.3 million and $7.5 million, respectively. The
cumulative net loss was approximately $49.5 million and $47.2 million as of
December 31, 2008 and 2007, respectively. During the fourth quarter of 2007
and through the second quarter of 2008, the Company made substantial changes to
the cost structure of its business. These changes included 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. In addition to these
changes, the Company entered into a Loan and Security Agreement (the “PFG Loan
Agreement”) with Partners for Growth II, L.P. (“PFG”) in July 2008 for the
amount of $1.5 million. As a result of the above changes, the company generated
positive cash flows beginning in the third quarter of 2008 of $346,000 and cash
provided by operations of $1.4 million for the quarter ended December 31, 2008.
See Note 6.
The
Company believes that its existing cash resources, combined with projected
billings, 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. Whereas
management believes it will have access to these financing sources, no assurance
can be given that additional sources of financing will be available on
acceptable terms, on a timely basis, or at all.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
Segment
Information
The
Company presents its business as one reportable segment due to the similarity in
nature of products provided, financial performance measures (revenue growth and
gross margin), methods of distribution (direct and indirect) and customer
markets (each product is sold by the same personnel to government and commercial
customers, domestically and internationally). The Company’s chief operating
decision making officer reviews financial information on its products on a
consolidated basis.
Fair
value of financial instruments
The
Company’s financial instruments whose fair value approximates their carrying
value due to the short-term nature of the instruments consist of cash and cash
equivalents, accounts receivable, accounts payable, and accrued expenses. The
fair value of the Company’s obligations under its line of credit
and capital leases approximates their carrying value as the stated
interest rates of these instruments reflect rates which are otherwise currently
available to the Company.
Cash
and cash equivalents
The
Company considers all highly liquid investments with original maturities of
90 days or less at the time of purchase to be cash
equivalents.
Accounts
receivable
The
Company has established an allowance for doubtful accounts for potential credit
losses that are expected to be incurred, based on historical information,
customer concentrations, customer solvency, current economic and geographical
trends, and changes in customer payment terms and practices, and any changes are
adjusted through revenue/deferred revenue. Management has estimated that an
allowance of approximately $52,000 and $59,000 for the years ended
December 31, 2008 and 2007, respectively, was adequate to cover the
potential credit losses.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out) or market, and consist
primarily of computer hardware. At December 31, 2008 and 2007, the Company
has provided a reserve for obsolete inventory of approximately $72,000 and
$11,000, respectively. During 2007, the Company wrote-off approximately $500,000
of obsolete/used inventory.
Research
and development and capitalized software costs
The
Company’s research and development expenses include payroll, employee benefits,
stock-based compensation, offshore development and other head-count related
costs associated with product development and are expensed as incurred. Research
and development costs totaled approximately $2.9 million and $6.0 million in
2008 and 2007, respectively.
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed,”
capitalization of costs begins when technological feasibility has been
established and ends when the product is available for general release to
customers. The Company has determined that technological feasibility for its
products is reached after beta testing which is shortly before the products are
released to manufacturing/operations. Costs incurred after technological
feasibility is established are not material, and accordingly, the Company
expenses all research and development costs when incurred. The technological
feasibility of significant intellectual property that is purchased has been
established prior to the acquisition and therefore the cost is capitalized.
Amortization is computed on an individual-product basis using the straight-line
method over a useful life ranging from three to six
years. Amortization expense related to capitalized software was
approximately $38,000 and $300,000 for 2008 and 2007,
respectively. The capitalized software was fully amortized at
December 31, 2008.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
The
Company accounts for costs incurred to develop computer software for internal
use in accordance with Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. As required
by SOP 98-1, the Company capitalizes the costs incurred during the application
development stage, which include costs to design the software configuration and
interfaces, coding, installation, and testing. Costs incurred during the
preliminary project along with post-implementation stages of internal use
computer software are expensed as incurred. Capitalized development costs are
amortized over various periods up to three years. Costs incurred to maintain
existing product offerings are expensed as incurred. The capitalization and
ongoing assessment of recoverability of development costs requires considerable
judgment by management with respect to certain external factors, including, but
not limited to, technological feasibility, and estimated economic life. For the
year ended December 31, 2008, the Company capitalized software development costs
of $114,000.
Fixed
assets and depreciation
Property
and equipment are carried at cost. Expenditures that extend the life of the
asset are capitalized and depreciated. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets or, in the case of leasehold improvements, over the lesser of the
useful life of the related asset or the lease term. Estimated useful lives of
fixed assets range from three to eight years. Depreciation includes amortization
expense for assets capitalized under capital leases.
Goodwill
The
Company accounts for goodwill in accordance with the provisions of SFAS No. 142, “Goodwill and other Intangible
Assets” (“SFAS 142”). The Company
subjects the goodwill to an annual impairment test or when events indicate that
impairment has occurred. The impairment test consists of a two-step process. The
first step of the goodwill impairment test is used to identify potential
impairment by comparing the fair value of the reporting unit with its carrying
amount, including goodwill. The estimate of fair value of the reporting unit is
determined using various valuation techniques with the primary technique being a
discounted cash flow analysis. A discounted cash flow analysis requires one to
make various judgmental assumptions including assumptions about future cash
flows, growth rates, and discount rates. The assumptions about future cash flows
and growth rates are based on the Company’s budget and long-term plans. Discount
rate assumptions are based on an assessment of the risk inherent in the
reporting unit. If the fair value of the reporting unit exceeds its carrying
amount, goodwill of the reporting unit is considered not impaired and the second
step of the impairment test is unnecessary. If the carrying amount of the
reporting unit exceeds its fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the implied fair value
of the reporting unit’s goodwill with the carrying amount of that goodwill. If
the carrying amount of the reporting unit’s goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to
that excess. The implied fair value of goodwill is determined in the same manner
as the amount of goodwill recognized in a business combination. That is, the
fair value of the reporting unit is allocated to all of the assets and
liabilities of that unit (including any unrecognized intangible assets) as if
the reporting unit had been acquired in a business combination and the fair
value of the reporting unit was the purchase price paid to acquire the reporting
unit. Based upon the result of an impairment test performed during the fourth
quarter of 2008, management of the Company has concluded there was no impairment
of goodwill at December 31, 2008.
Impairment
of long-lived assets
The
Company accounts for impairment of long-lived assets in accordance with SFAS No.
144, “Accounting for the
Impairment of Disposal of Long-Lived Assets”. Pursuant to SFAS
No. 144, long-lived assets and identifiable intangibles held for use are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of undiscounted
expected future cash flows is less than the carrying amount of the asset or if
changes in facts and circumstances indicate, an impairment loss is recognized
and measured using the asset’s fair value.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
As a
result of our significant underperformance relative to the expected operating
results and current-period operating and cash flow losses coupled with a history
of such losses, the Company tested its intangible assets for impairment during
the year ended December 31, 2007. Based upon the results of the test, management
concluded that the intangible assets related to the acquisition of AgaveOne,
were impaired. Per the analysis, the Company determined that the carrying value
of the long-lived intangible assets exceeded the sum of the undiscounted cash
flow, over a five year projection period, expected to result from the use and
eventual disposition of the asset group. As a result, an impairment charge of
$3.3 million was recorded during fiscal year 2007 to write-down the intangible
asset to zero.
Revenue
and cost recognition
The
Company recognizes revenue in accordance with Statement of Position (“SOP”) 97-2,
“Software Revenue Recognition”, as amended by SOP 98-4 and SOP 98-9, and the
interpretations of Securities and Exchange Commission Staff Accounting Bulletin (“SAB”)
104, “Revenue Recognition”.
The
Company generates revenue primarily by licensing software and providing related
software subscription and support to its customers. The Company’s software
arrangements typically include: (i) an end-user license fee paid in
exchange for the use of its products in perpetuity, generally based on a
specified number of users; and (ii) a subscription or support arrangement
that provides for technical support and product updates, generally over
renewable twelve to thirty-six month periods. The Company does not require
customers to purchase support and maintenance in conjunction with purchasing a
software license.
In
accordance with the aforementioned guidance, the Company recognizes revenue when
the following criteria are met: (i) persuasive evidence of the customer
arrangements exists, (ii) fees are fixed and determinable,
(iii) acceptance has occurred, and (iv) collectability is deemed
probable. The Company determines the fair value of each element in the
arrangement based on vendor-specific objective evidence (“VSOE”) of fair value.
VSOE of fair value is based upon the normal pricing and discounting practices
for those products and services when sold separately.
The
Company recognizes revenue immediately for software licenses at the time of
shipment or delivery of the authorization code, provided that all revenue
recognition criteria set forth in SOP 97-2 are fulfilled. Revenues from support
and subscription agreements are recognized ratably over the term of the support
subscription period.
Sales to
the Company’s customers include multi-element arrangements that include a
delivered element (a software license and an appliance unit) and
undelivered elements (such as subscription and support). In these instances, the
Company determines if these elements can be separated into multiple units of
accounting. The entire fee from the arrangement is allocated to each respective
element based on its relative fair value. Revenue for each element is then
recognized when revenue recognition criteria for that element is met. If the
Company cannot establish fair value for any undelivered element, the Company
would be required to recognize revenue for the whole arrangement at the time
revenue recognition criteria for the undelivered element is met. Fair value for
the delivered software element is based on the value received in transactions in
which the software is sold on a stand-alone basis. Fair value for subscription
is based on substantive renewal rates. Discounts applied to multiple-element
sales are allocated to the elements based upon their respective VSOE of fair
value (i.e. the price charged when the same element is sold separately.) If VSOE
cannot be established for one element, discounts are applied to the revenue
related to the delivered elements. The Company records shipping costs in both
revenue and cost of revenue when it bills its customers for shipping. The costs
incurred for shipping not billed to customers are reflected in cost of
revenue.
The
Company nets advanced billing receivable amounts for future unearned maintenance
and support renewals against the related amount in deferred revenue until such
time as the legal right to collection of the receivable amount has been
established.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
The
Company generally does not grant a right of return to its customers. When a
right of return exists, revenue is deferred until the right of return expires,
at which time revenue is recognized provided that all other revenue recognition
criteria are met.
Probability
of collection is assessed on a customer-by-customer basis. The Company’s
customers are subjected to a credit review process that evaluates the customers’
financial condition and ability to pay for the Company’s products and services.
If it is determined from the outset of an arrangement that collection is not
probable based upon the review process, revenue is not recognized until cash is
received. The Company performs ongoing credit evaluations of its customers’
financial condition and maintains an allowance for doubtful
accounts.
Registration
payment arrangements
The Company adopted the
provisions of Financial Accounting Standards Board (“FASB”) Staff Position (FSP) EITF 00-19-2,
“Accounting for Registration Payment Arrangements” on October 1,
2006. Pursuant to the FSP EITF 00-19-2, the Company accounts for the
registration rights contained for warrants separately and measures the liability
under FASB Statement
No. 5, “Accounting for Contingencies” and FASB Interpretation No. 14,
“Reasonable Estimation of the Amount of a Loss”. Pursuant to FASB
No. 5, a loss contingency is to be accrued only if it is probable and can
be reasonably estimated. The Company is obligated only to use its best
efforts to cause a registration statement to become effective.
Deferred
revenue
Revenues
from support and subscription agreements are recognized ratably over the term of
the support subscription period. The Company has contracts that extend to 2012.
Post contract subscription and support revenues are expected be recognized over
the following periods:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
10,469,000 |
|
|
2010
|
|
|
4,564,000 |
|
|
2011
|
|
|
2,286,000 |
|
|
2012
|
|
|
302,000 |
|
|
Total
|
|
$ |
17,621,000 |
|
Foreign
currency
During
2007, the functional currency of the Company’s foreign operations was the U.S.
dollar. Monetary assets and liabilities of the foreign operations were
translated into U.S. dollars at the exchange rate in effect at the balance sheet
date while nonmonetary items were translated at historical rates. Revenues and
expenses were translated at average exchange rates during the period.
Remeasurement gains or losses were recognized currently in consolidated
operations. In 2007, such gains and losses were insignificant, and in 2008 there
were no foreign operations.
Loss
per common share
Basic
loss per common share is calculated by dividing the net loss for the period by
the weighted average number of shares of common stock outstanding during the
period. Diluted loss per common share includes the components of basic loss per
common share and also gives effect to dilutive common stock equivalents.
Potentially dilutive common stock equivalents include stock options and warrants
(See Notes 2 and 9). No dilutive effect was calculated for the years ended
December 31, 2008 and 2007 as the Company reported a net loss in each period and
the effect would have been anti-dilutive.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
Income
taxes
Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the combination of the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Advertising
The
Company expenses advertising costs as incurred. Advertising expenses were
approximately $1.0 million and $2.5 million for 2008 and 2007,
respectively.
Guarantees
and warranty obligations
The
Company’s customer agreements generally include certain provisions for
indemnifying such customers against liabilities if the Company’s products
infringe a third party’s intellectual property rights. To date, the Company has
not incurred any material costs as a result of such indemnifications and has not
accrued any liabilities related to such obligations in the accompanying
financial statements.
The
Company accrues for warranty expenses related to hardware and software products
as part of its cost of revenue at the time revenue is recognized and maintains
an accrual for estimated future warranty obligations based upon the relationship
between historical and anticipated warranty costs and revenue volumes. The
warranty reserve was approximately $195,000 and $314,000 for the years
ended December 31, 2008 and 2007, respectively. If actual warranty expenses are
greater than those projected, additional obligations and other charges against
earnings may be required. If actual warranty expenses are less than projected,
prior obligations could be reduced, providing a positive impact on reported
results. The Company generally provides a one-year warranty on hardware products
and a 60-day warranty on software products.
The
following table presents the Company's warranty reserve
activities:
|
|
|
December 31,
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
Beginning
balance
|
|
$
|
314,000
|
|
|
$
|
20,000
|
|
|
Provisions,
net of settlements
|
|
|
(119,000
|
)
|
|
|
294,000
|
|
|
Ending
balance
|
|
$
|
195,000
|
|
|
$
|
314,000
|
|
New
accounting standards
In
December 2008, FASB issued FSP FAS 140-4 and FIN 46-(R)-8, “Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities,” (“FSP FAS 140-4 and
FIN 46(R)-8”). FSP FAS 140-4 and FIN 46(R)-8
amends FASB 140,“Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities” (“SFAS 140”), to require public entities to provide
additional disclosures about transfers of financial assets. It also
amends FASB Interpretation No. 46(R), to require public enterprises,
including sponsors that have a variable interest in a VIE, to provide additional
disclosures about their involvement with VIEs. FSP FAS 140-4 and
FIN 46(R)-8 is related to disclosure only and will not have an impact on
our consolidated financial position or results of operations.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
In
October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active” (“FSP
FAS 157-3”). FSP FAS 157-3 clarifies the application of SFAS 157 in a
market that is not active. FSP FAS 157-3 became effective upon issuance,
including prior periods for which financial statements have not been issued. Our
adoption of FSP FAS 157-3 did not have a material impact on our financial
position, cash flows, or results of operations.
In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining whether an Instrument
(or Embedded Feature) is indexed to an Entity's Own Stock” (“EITF 07-5”).
EITF 07-5 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133 -
specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company's own stock and (b) classified
in stockholders' equity in the statement of financial position would not be
considered a derivative financial instrument. EITF 07-5 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
SFAS No. 133 paragraph 11(a) scope exception. The Company has outstanding
warrants to purchase common stock that have been preliminarily evaluated as
ineligible for equity classification under EITF 07-5 because of certain
provisions that may result in an adjustment to the exercise price of the
warrants. Accordingly, the adjustment feature may cause the warrant to fail to
be indexed solely to the Company’s stock. The warrants would therefore be
classified as liabilities and re-measured at fair value with changes in the fair
value recognized in operating results. The Company has not completed our
analysis of these instruments nor determined the effects of pending adoption, if
any, on our consolidated financial statements.
In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”
(“FSP EITF 03-6-1”). Under FSP EITF 03-6-1, unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method. FSP EITF 03-6-1 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those years and requires retrospective application. We are currently evaluating
the impact, if any, of adopting FSP EITF 03-6-1 on our earnings per
share.
In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principle” (“SFAS 162”). SFAS 162 will provide
framework for selecting accounting principles to be used in preparing financial
statements that are presented in conformity with U.S. GAAP for nongovernmental
entities. SFAS 162 will be effective 60 days following the Securities
and Exchange Commission's approval of the Public Company Accounting Oversight
Board (PCAOB) amendments to AU Section 411. The adoption of SFAS 162 did not
have a material impact on its financial position, cash flows, or results of
operations.
In April
2008, the FASB issued FSP FAS 142-3, “Determination of Useful Life of
Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors
that should be considered in developing the renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FAS
142, “Goodwill and Other
Intangible Assets.” FSP FAS 142-3 also requires expanded disclosure
related to the determination of intangible asset useful lives. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008. Earlier adoption
is not permitted. The Company does not expect FSP FAS 142-3 to have a material
impact on its financial statements.
On
February 15, 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). SFAS No. 159 permits
all entities to choose, at specified election dates, to measure eligible items
at fair value (the “fair value option”). A business entity shall report
unrealized gains and losses on items for which the fair value option has been
elected in earnings (or another performance indicator if the business entity
does not report earnings) at each subsequent reporting date. Upfront costs and
fees related to items for which the fair value option is elected shall be
recognized in earnings as incurred and not deferred. The Company adopted SFAS
159 on January 1, 2008. The adoption of SFAS 159 did not have a
material impact on its financial position, cash flows, or results of
operations.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
In
September 2006, FASB issued SFAS No. 157,
“Fair Value Measurements”
(“SFAS 157”). This Statement defines fair value, establishes a framework
for measuring fair value in U.S. GAAP, and expands disclosures about fair value
measurements. This statement applies in those instances where other
accounting pronouncements require or permit fair value measurements and the
board of directors has previously concluded in those accounting pronouncements
that fair value is the relevant measurement attribute. Accordingly, this
statement does not require any new fair value measurements. However, for some
entities, the application of this Statement will change the current practice. In
February 2008, the FASB issued FSP FAS 157-2 which defers the effective date of
SFAS 157 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 SFAS 157 for its financial assets and liabilities on January 1, 2008
did not have a material impact on the Company’s financial position, cash flows,
or results of operations. The Company is currently reviewing the
adoption requirements related to our non-financial assets and liabilities and
has not yet determined the impact, if any, this will have on our financial
position, cash flows, or results of operations.
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 Statement of Financial Accounting Standards, or SFAS, No. 123R (revised
2004), “Share-based Payment”
(“SFAS 123R”) using the modified prospective method. Stock-based
compensation expense for all stock-based compensation awards granted after
January 1, 2006 are based upon the grant date fair value estimated in
accordance with SFAS 123R.
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 value of the stock price at the grant date.
Calculating
stock-based compensation expense requires the input of highly subjective
assumptions, including the expected term of the stock-based compensation, the
expected stock price volatility factor, and the pre-vesting option forfeiture
rate. The weighted average fair value of options granted during the years ended
December 31, 2008 and 2007 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 of its
common stock 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 were estimated based on historical
experience.
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Average
expected life (years)
|
|
|
6.5 |
|
|
|
6.5 |
|
|
Average
expected volatility factor
|
|
|
71.6
|
% |
|
|
75.4
|
% |
|
Average
risk-free interest rate
|
|
|
3.8
|
% |
|
|
4.6
|
% |
|
Average
expected dividend yield
|
|
|
0 |
|
|
|
0 |
|
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
Total
stock-based compensation expense was approximately $882,000 and $888,000 for the
years ended December 31, 2008 and 2007, respectively. The stock-based
compensation expenses were charged to operating expenses. The effect on loss per
share as a result of the stock based compensation expense was approximately
$0.06 for the years ended December 31, 2008 and 2007, 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 fiscal year 2008:
|
|
|
Number
of
Shares
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2006
|
|
|
2,260,643 |
|
|
$ |
3.12 |
|
|
Granted
|
|
|
1,700,464 |
|
|
$ |
1.52 |
|
|
Exercised
|
|
|
(44,950
|
) |
|
$ |
0.67 |
|
|
Forfeited
|
|
|
(1,841,296
|
) |
|
$ |
3.20 |
|
|
Options
outstanding at December 31, 2007
|
|
|
2,074,861 |
|
|
$ |
1.77 |
|
|
Granted
|
|
|
1,109,000 |
|
|
$ |
0.48 |
|
|
Exercised
|
|
|
— |
|
|
$ |
— |
|
|
Forfeited
|
|
|
(620,885
|
) |
|
$ |
1.43 |
|
|
Options
outstanding at December 31, 2008
|
|
|
2,562,976 |
|
|
$ |
1.29 |
|
| Options vested and
expected to vest at December 31, 2008 |
|
|
2,063,374 |
|
|
$ |
1.45 |
|
|
Options
exercisable at December 31, 2008
|
|
|
1,023,854 |
|
|
$ |
1.99 |
|
Additional
information regarding options outstanding as of December 31, 2008 is as
follows:
|
Range of
Exercise
Prices
|
|
Number
of
Shares
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life in Years
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
$0.36
|
to
$0.36
|
|
8,000
|
|
9.52
|
|
$
|
0.36
|
|
—
|
|
$
|
—
|
|
$0.40
|
to
$0.40
|
|
576,000
|
|
9.64
|
|
$
|
0.40
|
|
—
|
|
$
|
—
|
|
$0.41
|
to
$0.54
|
|
97,500
|
|
9.41
|
|
$
|
0.50
|
|
6,600
|
|
$
|
0.52
|
|
$0.57
|
to
$0.57
|
|
375,000
|
|
8.90
|
|
$
|
0.57
|
|
134,218
|
|
$
|
0.57
|
|
$0.59
|
to
$0.59
|
|
296,404
|
|
8.53
|
|
$
|
0.59
|
|
21,404
|
|
$
|
0.59
|
|
$0.60
|
to
$1.80
|
|
169,344
|
|
6.93
|
|
$
|
1.00
|
|
127,441
|
|
$
|
1.02
|
|
$1.90
|
to
$1.90
|
|
275,000
|
|
2.35
|
|
$
|
1.90
|
|
182,875
|
|
$
|
1.90
|
|
$1.95
|
to
$1.95
|
|
547,335
|
|
1.17
|
|
$
|
1.95
|
|
370,612
|
|
$
|
1.95
|
|
$3.71
|
to
$4.75
|
|
210,000
|
|
5.78
|
|
$
|
4.01
|
|
172,311
|
|
$
|
4.07
|
|
$5.20
|
to
$5.20
|
|
8,393
|
|
7.53
|
|
$
|
5.20
|
|
8,393
|
|
$
|
5.20
|
|
$0.36
|
to
$5.20
|
|
2,562,976
|
|
6.30
|
|
$
|
1.29
|
|
1,023,854
|
|
$
|
1.99
|
The
aggregate intrinsic value of options outstanding and options exercisable at
December 31, 2008 was approximately $0. The aggregate intrinsic value of options
outstanding and options exercisable at December 31, 2007 was approximately
$9,000 and $0, respectively. The aggregate intrinsic value represents the total
intrinsic value based upon the stock price of $0.19 at December 31,
2008.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
As of
December 31, 2008, there was approximately $3.7 million 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 1.99 years.
Stock
option plans
In 2005,
the Company adopted the St. Bernard Software 2005 Stock Option Plan (the “2005
Plan”). Under the 2005 Plan, the Company has the ability to grant options to
acquire up to 2,098,061 shares of its common stock to employees and others. In
2007, 44,950 options were exercised for total proceeds of $30,000 and 1,841,296
options were forfeited. There were no options exercised and 620,885 options were
forfeited during 2008.
Amendment
to stock option grants
On
January 3, 2007, the Board of Directors of St. Bernard approved an
amendment to certain stock option grants made by St. Bernard to certain St.
Bernard current and former employees and directors between July 14, 2006
and December 4, 2006, reducing the exercise price of the amended option
grants to the closing fair market price of St. Bernard common stock on
January 11, 2007. The intention of St. Bernard’s Board of Directors in
approving the amendment is to reestablish the incentive and retentive value of
the amended stock options for the affected employees and directors, as the
relevant options had been left significantly “out-of-the-money” due to declines
in the price of St. Bernard common stock. A substantial majority of the options
that were amended were granted to new executives and employees that joined St.
Bernard after the merger with Sand Hill IT Security Acquisition Corp. in July
2006. The reason for delaying the determination of the new grant date for the
amended option grants until January 11, 2007 was to enable the market to
absorb the information before setting the new exercise price. The amendment
affects options to purchase a total of up to 1,055,064 shares of the Company’s
common stock, including options granted to the executive officers and directors
of the Company. The incremental compensation expenses expected to be recognized
over the remaining vesting period in relation to the amended stock option grants
is approximately $283,000. See Note 15.
Employee
stock purchase plan
The
Company’s Employee Stock Purchase Plan, or ESPP, was adopted by our board of
directors in December 2006, and approved by our shareholders in June 2007 at the
annual shareholders’ meeting. The ESPP provides a means by which employees of
the Company (and any parent or subsidiary of the Company designated by the Board
of Directors to participate in the Purchase Plan) may be given an opportunity to
purchase Common Stock of the Company at semi-annual intervals through payroll
deductions, to assist the Company in retaining the services of its employees, to
secure and retain the services of new employees, and to provide incentives for
such persons to exert maximum efforts for the success of the Company. The
Company has 400,000 shares that have been initially reserved for issuance
pursuant to purchase rights under the ESPP. A participant may contribute up to
15% of his or her compensation through payroll deductions, and the accumulated
deductions will be applied to the purchase of shares on the purchase date, which
is the last trading day of the offering period. The purchase price per share
will be equal to 85% of the fair market value per share on the start date of the
offering period in which the participant is enrolled or, if lower, 85% of the
fair market value per share on the purchase date. In addition, the number of
shares available for issuance under the Purchase Plan may be increased annually
on the first day of each Company fiscal year, beginning in 2008 and ending in
(and including) 2016, by an amount equal to the least of: (i) the
difference between four hundred thousand (400,000) and the number of shares
remaining authorized for issuance after the last purchase of shares,
(ii) four hundred thousand (400,000) shares of Common Stock, or
(iii) an amount determined by the Board of Directors or a committee of the
Board of Directors appointed to administer the Purchase Plan. If rights granted
under the Purchase Plan expire, lapse or otherwise terminate without being
exercised, the shares of Common Stock not purchased under such rights again
become available for issuance under the Purchase Plan.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
For the
years ended December 31, 2008 and 2007, stock purchases of Common stock under
the ESPP were 23,038 shares and 17,518 shares,
respectively. Compensation expense was immaterial.
Shares
available for issuance under the Company’s Employee Stock Purchase Plan are as
follows:
|
|
|
Number of
Shares
|
|
|
Shares
reserved for issuance at December 31, 2006
|
|
|
400,000 |
|
|
Shares
issued during year ended December 31, 2007
|
|
|
(17,518
|
) |
|
Shares
reserved for issuance at December 31, 2007
|
|
|
382,482 |
|
|
Shares
issued during year ended December 31, 2008
|
|
|
(23,038
|
) |
|
Shares
reserved for issuance at December 31, 2008
|
|
|
359,444 |
|
3.
Fixed Assets
Fixed
assets consisted of the following:
|
|
|
December 31,
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
Computer
equipment
|
|
$
|
1,519,000
|
|
|
$
|
1,477,000
|
|
|
Computer
software
|
|
|
1,045,000
|
|
|
|
1,045,000
|
|
|
Office
furniture
|
|
|
465,000
|
|
|
|
447,000
|
|
|
Office
equipment
|
|
|
51,000
|
|
|
|
51,000
|
|
|
Leasehold
improvements
|
|
|
102,000
|
|
|
|
95,000
|
|
|
|
|
|
3,182,000
|
|
|
|
3,115,000
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(2,354,000
|
)
|
|
|
(1,814,000
|
)
|
|
|
|
$
|
828,000
|
|
|
$
|
1,301,000
|
|
Depreciation
and amortization expense was approximately $542,000 and $664,000 for 2008 and
2007, respectively. During the year ended December 31, 2007 the Company disposed
of fixed assets and realized a loss of approximately $200,000, which included
the write-off of approximately $2.8 million of fully depreciated fixed assets.
The Company also reclassified $200,000 of net fixed assets during fiscal year
2007.
4.
Other Assets
Other
assets consisted of the following:
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
Capitalized
software costs, net of amortization
|
|
$ |
114,000 |
|
|
$ |
38,000 |
|
|
Security
deposits
|
|
|
167,000 |
|
|
|
177,000 |
|
|
Total
other assets
|
|
$ |
281,000 |
|
|
$ |
215,000 |
|
Amortization
for the capitalized software costs are computed on an individual-product basis
using the straight-line method over a useful of three years. Amortization
expense related to capitalized software was approximately $38,000 and $300,000
for the years December 31, 2008 and 2007, respectively. Amortization for the
customer related intangible was computed using the straight-line method over a
useful life of five years. Amortization expense for the customer related
intangible was approximately $100,000 for the year ended December 31,
2007.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
For the
year ended December 31, 2008, the Company capitalized its “internal use”
software development costs of $114,000 in accordance to SOP 98-1. There was no
amortization related to these software development costs during
2008.
5.
Goodwill
On
October 17, 2006, AgaveOne and St. Bernard entered into a definitive
agreement under which AgaveOne, Inc. became a wholly owned subsidiary of St.
Bernard in a transaction accounted for using the purchase method. The aggregate
purchase price of approximately $8.1 million includes St. Bernard common stock
valued at $1.5 million, assumed stock options with a fair value of approximately
$100,000, and cash payments to stockholders and creditors of $5.8
million.
Under the
terms of the purchase agreement, St. Bernard issued approximately 471,000 shares
of common stock based on an exchange ratio of 0.086224 shares of St. Bernard
common stock for each outstanding share of AgaveOne common stock as of
October 17, 2006. Each AgaveOne, Inc. stockholder that was an accredited
investor had the option of receiving either cash or St. Bernard common stock
(but not both) in exchange for all of their shares of AgaveOne, Inc. stock at
the closing of the merger. As a condition to closing, stockholders representing
at least 50% of the outstanding AgaveOne, Inc. stock must have elected to
receive St. Bernard stock in connection with the merger. At the time of the
closing, options held by a single AgaveOne, Inc. employee were converted into an
option to purchase approximately 47,000 shares of St. Bernard stock. The fair
value of the outstanding options was determined using a Black-Scholes valuation
model with the following weighted average assumptions: volatility of 67.85%;
risk free interest rate of 4.73%; expected life of 4.5 years; and dividend yield
of zero. The debt and other liabilities paid by St. Bernard were paid shortly
after the closing.
The
purchase price and allocation of the purchase price discussed below were subject
to adjustments. During the fiscal year ended December 31, 2007, the shares
issued in conjunction with the purchase were reduced by 66,667 shares, or
approximately $250,000 as a result of indemnification claims. In addition,
during fiscal year 2007, approximately $109,000 of cash was paid to creditors to
cover additional costs related to the acquisition of AgaveOne.
The total purchase price
of the merger was as follows (in thousands):
|
|
|
Amount
|
|
|
Cash
paid to stockholders and creditors
|
|
$ |
5,838,000 |
|
|
Value
of St. Bernard stock issues
|
|
|
1,519,000 |
|
|
Direct
transaction costs
|
|
|
181,000 |
|
|
Employee
acquisition cost
|
|
|
268,000 |
|
|
Cost
of options purchased
|
|
|
231,000 |
|
|
Estimated
fair value of options assumed
|
|
|
110,000 |
|
|
Total
estimated purchase price
|
|
$ |
8,147,000 |
|
Using the
purchase method of accounting, the total purchase price shown in the table above
was allocated to AgaveOne, Inc.’s net tangible and intangible assets based on
their estimated fair values as of the date of the completion of the merger. The
management of St. Bernard and AgaveOne, Inc. has allocated the purchase price
based on a valuation report prepared by a third party valuation specialist. The
allocation of the purchase price is as follows:
|
|
|
Amount
|
|
|
Net
tangible assets and liabilities
|
|
$ |
64,000 |
|
|
Intangibles
|
|
|
3,800,000 |
|
|
Goodwill
|
|
|
4,283,000 |
|
|
|
|
$ |
8,147,000 |
|
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
Approximately $4.3 million of the
purchase price has been allocated to goodwill. Goodwill represents the excess of
the purchase price over the fair value of the net tangible assets. In accordance
with SFAS No. 142, Goodwill and Other
Intangible Assets,
goodwill is not amortized but instead tested for impairment at least annually
(more frequently if certain indicators are present). In the event that
management determines that the value of the goodwill has become impaired, the
company will incur an accounting charge for the amount of the impairment during
the quarter in which the determination is made. During fiscal year 2007, the
Company incurred an impairment charge of $3.3 million to write-down the
intangible assets related to the acquisition of AgaveOne to zero. See Note
4.
During
2002, St. Bernard acquired Internet Products, Inc in which $3.3 million of the
purchase price was allocated to goodwill.
6.
Credit Facilities
Silicon
Valley Bank
On May
15, 2007, the Company entered into a Loan and Security Agreement with Silicon
Valley Bank, a California corporation (“SVB”) which was subsequently amended on
February 27, 2009. 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% (from 3%) over the greater of the prime rate or 7.5% (from
10.5%), (ii) modified the tangible net worth covenant to no less that
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 December 31, 2008, the
effective interest rate was 10.5% and the balance on the line of credit with SVB
was $1.7 million. The Company was in compliance with the above stated covenants
and restrictions. The obligations under the SVB Loan and Security Agreement were
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 years
ended December 31, 2008 and 2007, which is being recorded as interest expense,
was approximately $104,000 and $11,000, respectively. Furthermore, St. Bernard
agreed to grant SVB certain piggyback registration rights with respect to the
shares of common stock underlying the warrants.
Agility
Capital / Partners for Growth II, LP
On
January 25, 2008, St. Bernard Software, Inc. entered into a Loan Agreement (the
"Agility Loan Agreement") with Agility. Pursuant to the terms of the Agility
Loan Agreement, Agility provided St. Bernard with a non-revolving term loan in
the amount of $750,000, at a 15% fixed interest rate (the “Agility Loan”).
Beginning March 1, 2008, and on the first day of each month thereafter until
July 1, 2008, St. Bernard was required to pay to Agility $25,000 plus accrued
but unpaid interest. Beginning July 1, 2008, and on the first day of each month
thereafter, St. Bernard was required to pay Agility $50,000 plus accrued
interest.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
In July
2008, the entire outstanding balance on the Agility Loan was paid using the
proceeds from the new loan with Partners for Growth II, LP, described
below.
In
connection with the execution of the Agility Loan Agreement, St. Bernard issued
warrants to Agility (the "Agility Warrants"), which allows Agility to purchase
up to 463,500 shares of our common stock at an exercise price equal to $0.57 per
share. The Agility Warrants expire on the seventh anniversary of their issue
date. The Company estimated the fair value of the warrants to be $189,000 using
the following assumptions; 75.35% volatility, risk free interest rate of 3.61%,
an expected life of seven years and no dividends. In accordance with
Accounting Principles Board Opinion No. 14, the relative fair value of the
warrants, estimated to be approximately $151,000, was recorded as debt
discount. Amortization of the debt discount for the year ended
December 31, 2008, which was being recorded as interest expense, was
approximately $151,000. The Agility Warrants contains anti-dilution protection
in the event of a debt or equity financing, with respect to the exercise price
and number of shares. Furthermore, St. Bernard granted Agility piggyback
registration rights with respect to the shares of common stock underlying the
Agility Warrants. In July 2008, the remaining unamortized balance of the
previously recorded debt discount was amortized to interest expense in
connection with the full repayment of the Agility Loan.
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 was subsequently
amended on February 27, 2009. Pursuant to the terms of the Loan Amendment, PFG
has eliminated the Modified Net Income covenant for the reporting periods ending
February 28, 2009 and March 31, 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
December 31, 2008, the effective interest rate was 7%. St. Bernard is required
to maintain a minimum borrowing amount of at least $750,000 (the “Minimum
Borrowing Amount”) or pay PFG a minimum interest amount (the “Minimum Interest
Amount”) equal to $750,000, multiplied by the Applicable Rate, and further
multiplied by the number of days (based on a 360-day year) from the date of such
failure to maintain the Minimum Borrowing Amount to the Maturity Date (as
defined in the PFG Loan Agreement). Pursuant to the terms of the PFG
Loan Agreement, St. Bernard paid PFG a one-time commitment fee of $30,000 and a
$5,000 amendment fee and agreed to reimburse PFG for PFG’s reasonable attorneys’
fees in connection with the negotiation of the PFG Loan Agreement.
Subject
to the requirement to maintain the Minimum Borrowing Amount or pay the Minimum
Interest Amount, St. Bernard may borrow, repay and reborrow from time to time
until the Maturity Date. Proceeds of the initial loan amount were used to pay
all indebtedness owing to Agility, with the remaining amount to be used for
working capital.
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
by 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. The PFG Loan Agreement contains events of default customary for
credit facilities of this type (with customary grace or cure periods, as
applicable) and provides that upon the occurrence and during the continuance of
an event of default, among other things, the interest rate on all borrowings
will be increased, the payment of all borrowings may be accelerated, PFG’s
commitments may be terminated and PFG shall be entitled to exercise all of its
rights and remedies, including remedies against collateral. At
December 31, 2008, the Company was in compliance with the above stated
covenants.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
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 year ended December
31, 2008, which is being recorded as interest expense, was approximately
$28,000. As of December 31, 2008, the balance on the PFG Loan Agreement was
$750,000.
7.
Notes Payable to Related Parties
During
fiscal year 2007, the Company paid off its promissory note in the amount of
$15,000 with its former Chief Executive Officer. The note was unsecured and bore
no interest. There were no promissory notes issued during 2008.
8.
Income Taxes
|
|
|
Year
ended December 31, 2008
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
Federal
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
State
|
|
|
3,000 |
|
|
|
—
|
|
|
|
3,000 |
|
|
Foreign
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
$ |
3,000 |
|
|
$ |
— |
|
|
$ |
3,000 |
|
|
|
|
Year
ended December 31, 2007
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
Federal
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
State
|
|
|
7,000 |
|
|
|
—
|
|
|
|
7,000 |
|
|
Foreign
|
|
|
35,000 |
|
|
|
— |
|
|
|
35,000 |
|
|
|
|
$ |
42,000 |
|
|
$ |
— |
|
|
$ |
42,000 |
|
Deferred
income tax assets and liabilities consist of the following:
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Allowance
for doubtful accounts
|
|
$
|
21,000
|
|
|
$
|
297,000
|
|
|
Inventory
|
|
|
29,000
|
|
|
|
4,000
|
|
|
Fixed
assets
|
|
|
(58,000
|
)
|
|
|
(51,000
|
)
|
|
Accrued
compensation
|
|
|
86,000
|
|
|
|
92,000
|
|
|
Deferred
revenue
|
|
|
2,852,000
|
|
|
|
2,327,000
|
|
|
Stock
options
|
|
|
953,000
|
|
|
|
601,000
|
|
|
Other
|
|
|
259,000
|
|
|
|
343,000
|
|
|
Net
operating loss carryforwards
|
|
|
6,996,000
|
|
|
|
6,611,000
|
|
|
Tax
credits carryforwards
|
|
|
27,000
|
|
|
|
33,000
|
|
|
|
|
|
11,165,000
|
|
|
|
10,257,000
|
|
|
Valuation
allowance
|
|
|
(11,165,000
|
)
|
|
|
(10,257,000
|
)
|
|
Net
deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
A
reconciliation of the actual income tax expense recorded to that based upon
expected federal tax rates are as follows:
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Expected
federal tax benefit
|
|
$
|
795,000
|
|
|
$
|
2,636,000
|
|
|
Expected
state benefit, net of federal tax effect
|
|
|
133,000
|
|
|
|
220,000
|
|
|
Change
in valuation allowance
|
|
|
(908,000
|
)
|
|
|
(1,512,000
|
)
|
|
Impairment
of goodwill
|
|
|
—
|
|
|
|
(1,238,000
|
)
|
|
Tax
credits and other
|
|
|
(9,000
|
)
|
|
|
(4,000
|
)
|
|
Permanent
differences and other
|
|
|
(14,000
|
)
|
|
|
(109,000
|
)
|
|
Foreign
tax
|
|
|
—
|
|
|
|
(35,000
|
)
|
|
|
|
$
|
(3,000
|
)
|
|
$
|
(42,000
|
)
|
SFAS
Statement No. 109
requires that the Company reduce its deferred tax assets by a valuation
allowance if, based on the weight of the available evidence, it is not more
likely than not that all or a portion of a deferred tax asset will be realized.
The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences
are deductible. Management has determined that it is not more likely than not
that the deferred tax asset will be realized. Accordingly as of
December 31, 2008 and 2007, the Company had a valuation allowance of
approximately $11.2 million and $10.3 million, respectively.
At
December 31, 2008 and 2007, the Company had federal net operating loss
carryforwards of approximately $17.4 million and $16.7 million and state net
operating loss carryforwards of approximately $17.2 million and $17.1 million,
respectively. The federal and state tax net operating loss carryforwards will
begin to expire in 2020 and 2015, respectively.
The
future utilization of the Company’s NOL to offset future taxable income may be
subject to a substantial annual limitation as a result of ownership changes that
may have occurred previously or that could occur in the future. The
Company has not yet determined whether such an ownership change has occurred,
however, the Company plans to complete a Section 382 analysis regarding the
limitation of the net operating losses and research and development credits.
Until this analysis has been completed, the Company has removed the deferred tax
assets associated with the NOL carryforwards of approximately $3.0 million from
its deferred tax asset schedule and has recorded a corresponding decrease to
their valuation allowance. When the Section 382 analysis is completed, the
Company plans to update their unrecognized tax benefits under FIN 48. Therefore,
the Company expects that the unrecognized tax benefits may change within 12
months of this reporting date. At this time, the Company cannot estimate
how much the unrecognized tax benefits may change. Any carryforwards that
will expire prior to utilization as a result of such limitations will be removed
from deferred tax assets with a corresponding reduction of the valuation
allowance. Due to the existence of the valuation allowance,
future changes in our unrecognized tax benefits will not impact the
Company’s effective tax rate.
The
Company adopted the provisions of FASB Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of
FASB Statement No. 109. during fiscal year 2007. The Company did not
record any adjustments resulting from the adoption of Interpretation
48.
The
Company recognizes interest and/or penalties related to uncertain tax positions
in income tax expense. To the extent accrued interest and penalties do not
ultimately become payable, amounts accrued will be reduced and reflected as a
reduction of the overall income tax provision in the period that such
determination is made. There was no interest and penalties recorded for the year
ended December 31, 2008.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
9.
Stockholders’ Deficit
Common
stock
In July
2005, the Company obtained approximately $1.0 million through the offering of
200,000 units to an investor. Each unit consisted of three shares of common
stock, as well as a warrant to acquire an additional five shares of common stock
at a per share price of $1.25. The common stock and warrants sold provided
certain anti-dilution rights to the investor. These warrants were subsequently
converted into warrants to purchase 419,613 shares of common stock of the
Company, at a price of $2.98 per share. The warrants expired on December 31,
2008.
Warrants
As of
December 31, 2008 and December 31, 2007, a total of 9,373,850 and 8,750,104
shares of common stock, respectively, were reserved for issuance for the
exercise of warrants at exercise prices ranging from $0.46 to $5.00 per
share. 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 6 above. During 2008, no warrants were exercised and 430,104 warrants
expired.
In
connection with its public offering in 2004 (the “Offering”), an aggregate of
1,050 units were issued to the underwriter. Each Unit consisted of one share of
common stock, $0.01 par value, and two Redeemable common stock Purchase Warrants
(“Redeemable Warrants”). Each Redeemable Warrant entitles the holder to purchase
one share of common stock at an exercise price of $5.00 until July 25,
2009. The Warrants are redeemable by the Company at a price of $0.01 per
Redeemable Warrant upon 30 days’ notice only in the event that the last sale
price of the common stock is at least $8.50 per share for any 20 trading days
within a 30 trading day period ending on the third day prior to the date on
which notice of the redemption is given. In connection with the Offering, an
option for $100 was issued to the underwriters to purchase 270,000 Units at an
exercise price of $7.50 per Unit. The Units issuable upon exercise of this
option are identical to those included in the Offering, except that the exercise
price of the Warrants included in the Units is $6.65 per share.
The
following is a summary of our warrants activity as of December 31, 2008 and
changes during fiscal year 2008:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
Per
Share
|
|
|
Average
|
|
|
|
|
of
Shares
|
|
|
Exercise
Price
|
|
|
Exercise
Price
|
|
|
Outstanding
warrants - December 31, 2006
|
|
|
8,650,104
|
|
|
$
|
1.85-5.00
|
|
|
$
|
4.90
|
|
|
Granted
|
|
|
100,000
|
(a)
|
|
|
1.60
|
|
|
|
1.60
|
|
|
Outstanding
warrants - December 31, 2007
|
|
|
8,750,104
|
|
|
|
1.19-5.00
|
|
|
|
4.86
|
|
|
Granted
|
|
|
1,053,850
|
(b),
(c), (d)
|
|
|
0.46-0.57
|
|
|
|
0.52
|
|
|
Expired
and/or cancelled
|
|
|
(430,104
|
)
|
|
|
1.85-2.98
|
|
|
|
1.86
|
|
|
Outstanding
warrants - December 31, 2008
|
|
|
9,373,850
|
(e)
|
|
$
|
0.46-5.00
|
|
|
$
|
4.46
|
|
|
Warrants
exercisable - December 31, 2008
|
|
|
9,373,850
|
|
|
$
|
0.46-5.00
|
|
|
$
|
4.46
|
|
|
(a)
|
In
connection with the execution of an SVB Loan Amendment, St. Bernard issued
warrants to SVB which allows SVB to purchase up to 100,000 shares of our
common stock at an exercise price of $1.60 per share which expire on
5/16/2012.
|
|
(b)
|
In
connection with the execution of an SVB Loan Amendment, 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 which expire on
1/25/2015.
|
|
(c)
|
In
connection with the execution of the Agility Loan Agreement, St. Bernard
issued warrants to Agility which allows Agility to purchase up to 463,500
shares of our common stock at an exercise price of $0.57 per share which
expire on 1/25/2015.
|
|
(d)
|
In
connection with the execution of the PFG Loan Amendment, St. Bernard
issued warrants to PFG which allows PFG to purchase up to 450,000 shares
of our common stock at an exercise price of $0.46 per share which expire
on 7/20/2013.
|
|
(e)
|
The
remaining warrants expire on 7/25/2009 at an exercise price of $5.00 per
share.
|
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
10.
Employee Benefits
The
Company has a qualified 401(k) profit sharing plan (the “Plan”) covering
substantially all employees. Company contributions are discretionary and are
generally allocated to Plan participants based on contribution levels. Benefits
vest ratably over three years beginning with the employees’ first year of
service, with 100% vesting immediately upon death or disability. Vested benefits
are paid in the form of a lump sum or annuity upon retirement, death, disability
or termination. The Company contributed approximately $300,000, net of
forfeitures, to the Plan in 2007. The Company suspended 401(k) employer matching
on January 1, 2008.
11.
Related Party Transactions
During
2007, a stockholder and former member of the Board of Directors provided legal
services to the Company in the ordinary course of business. Billings for such
services totaled approximately $641,000 for the year ended December 31, 2007.
Amounts due at December 31, 2007 were approximately $400,000. The
Company settled the amounts due with this related party for approximately
$179,000 resulting in a gain of $246,000 during the three months ended March 31,
2008. No such services were rendered in 2008.
The
Company previously occupied office space provided by an affiliate of certain
officers and directors of the Company. The Company paid this affiliate $7,500
per month to lease 2,000 square feet of office space in Amsterdam. The lease was
terminated on February 15, 2008.
12.
Commitment and Contingencies
Operating
leases
The
Company leases its operating facilities and certain equipment under
non-cancelable operating leases with various expiration dates through July 2011.
Future minimum payments under operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
1,203,000 |
|
|
2010
|
|
|
1,243,000 |
|
|
2011
|
|
|
4,000 |
|
|
Total
|
|
$ |
2,450,000 |
|
The
Company closed its operations in the United Kingdom and Australia in November
and July 2007, respectively, and terminated the related office space
leases.
In
September 2008, we subleased a portion of our unused office space to a company.
The proceeds from the sublease will be used to offset our monthly facilities
rent expense.
Facilities
rent expense totaled approximately $1.2 million in 2008 and 2007, respectively.
To the extent the Company’s operating leases provide for escalating rents during
the term of the lease, the Company recognizes rent expense on a straight line
basis based upon the average monthly contractual lease amount.
Included
in other assets at December 31, 2008 and 2007 were security deposits
related to leased assets of approximately $135,000 and $138,000,
respectively.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
Capital
leases
The
Company leases certain equipment under non-cancelable capital leases, which were
included in fixed assets as follows:
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Software
|
|
$
|
61,000
|
|
|
$
|
61,000
|
|
|
Computer
equipment
|
|
|
318,000
|
|
|
|
318,000
|
|
|
|
|
|
379,000
|
|
|
|
379,000
|
|
|
Less
accumulated depreciation
|
|
|
(148,000
|
)
|
|
|
(73,000
|
)
|
|
|
|
$
|
231,000
|
|
|
$
|
306,000
|
|
Depreciation
expense related to these capitalized lease obligations was approximately $76,000
and $80,000 during 2008 and 2007, respectively. During 2007, the
Company wrote-off leased software and computer equipment which were included in
fixed assets that had a net book value of $56,000.
Future
minimum lease payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
160,000
|
|
|
2010
|
|
|
23,000
|
|
|
Total
minimum lease payments
|
|
|
183,000
|
|
|
Less
amount representing interest
|
|
|
(14,000
|
)
|
|
Present
value of minimum lease payments
|
|
|
169,000
|
|
|
Less
current portion
|
|
|
(147,000
|
)
|
|
Long-term
portion
|
|
$
|
22,000
|
|
13.
Sales and Revenue Concentration
Credit
risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and accounts receivable. Credit risk with
respect to accounts receivable is mitigated by the large number of
geographically diverse customers.
The
Company maintains cash balances at financial institutions located in the United
States and secured by the Federal Deposit Insurance Corporation up to $250,000.
At times, balances may exceed federally insured limits. The Company has not
experienced any losses in such accounts. Management believes that the Company is
not exposed to any significant credit risk with respect to its cash and cash
equivalents.
Supplier
During
2008, the Company had a major vendor that accounted for approximately $4.7
million (37.1%) of the Company’s total purchases. In 2007 the Company had a
different major vendor that accounted for approximately $2.3 million
(13.1%) of the Company’s total purchases. At December 31, 2008 and
2007, the amount payable to these vendors was approximately $118,000 and
$27,000, respectively. While the Company believes other suppliers are available
if the vendor unexpectedly stops supplying the product, the Company could
experience an interruption in its ability to supply its
customers.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
Sales
and revenue
The
Company considers itself to operate within one business segment, Secure Content
Management (“SCM”). For the years ended December 31, 2008 and 2007,
approximately 96% and 94%, respectively, of the Company’s revenue was in North
America, the remaining 4% and 6%, respectively, were disbursed over the rest of
the world.
14.
Other Income
Asset
sale/purchase and license agreements
On
January 29, 2007, pursuant to the terms of an Asset Sale and License
Agreement signed and effective as of January 4, 2007, by and between the
Company and Shavlik Technologies, LLC ( “Shavlik”
), St. Bernard assigned and sold to Shavlik St. Bernard’s UpdateEXPERT and
UpdateEXPERT Premium software applications and related customer and end user
license agreements, software, programming interfaces and other intellectual
property rights and contracts for an aggregate purchase price of $1.2 million
plus 45% of any maintenance renewal fees collected by Shavlik in excess of $1.2
million for renewals invoiced by Shavlik between February 1, 2007 and
January 31, 2008 (the “Asset
Sale”). As a result of the sale, the Company realized a gain of $70,000
and $3.6 million during the years ended December 31, 2008 and 2007,
respectively, primarily due to the relief of liabilities assumed by Shavlik,
offset by uncollectible accounts receivable amounts.
On August
14, 2007, pursuant to the terms of a Purchase Agreement signed and effective as
of August 13, 2007 , by and between the Company and EVault, Inc., a wholly owned
subsidiary of Seagate Technology, Inc., (“EVault”),
St. Bernard assigned and sold to EVault St. Bernard’s Open File Manager (the
“Product”)
software applications, which include all of the rights, title, and interest
worldwide of St. Bernard in and to (i) the Product, (ii) the Assumed Contracts,
(iii) the St. Bernard Materials, (iv) all St. Bernard Intellectual Property
Rights, (v) all claims of St. Bernard against third parties relating to the
Purchased Assets, whether choate or inchoate, known or unknown, contingent or
noncontingent, (vi) all data and information that is collected from, or on
behalf of, customers of St. Bernard who are party to the Assumed Contracts (the
“Customer
Base”), the OEM Partners and any Lead, including to the extent that
receipt of such information would not violate any applicable Law, (vii) all
routing and billing information and components used in connection with the
Assumed Contracts, and (viii) all other tangible or intangible assets of St.
Bernard used in the Business and necessary for the operation or use of the
Product for an aggregate purchase price of $6.9 million. As a result
of the sale, the Company realized a gain of $0.5 million and $7.9 million during
the years ended December 31, 2008 and 2007, respectively, primarily due to the
cash received and the relief of liabilities assumed by EVault.
During
the years ended December 31, 2008 and 2007, the Company disposed of fixed assets
and realized a loss of approximately $6,000 and $200,000,
respectively.
Other
income - net
Other
income-net includes a gain on settlement of previously outstanding accounts
payable of approximately $468,000 and $0 for the years ended December 31, 2008
and 2007, respectively.
15.
Subsequent Events
Amendment
to stock option grants
On
February 9, 2009, the Board of Directors of the Company approved an amendment to
all outstanding non-qualified stock option grants issued by St. Bernard to all
its current employees and directors under its 2005 Plan reducing the exercise
price of the unexercised stock options to $0.25 per share, which represents the
market price of the Company’s common stock on the close of business on February
10, 2009.
St.
Bernard Software, Inc.
Notes
to Consolidated Financial Statements (Continued)
Silicon
Valley Loan Amendment
On
February 27, 2009, St. Bernard entered into a Fifth Amendment to the Loan
and Security Agreement (the “Loan Amendment”) with SVB, amending the Loan and
Security Agreement entered into between St. Bernard and SVB on May 11,
2007. Pursuant to the terms of the Loan Amendment, among other things, SVB
(i) decreased the interest rate on the revolving line of credit to 3.50%
(from 3%) over the greater of the prime rate or 7.5% (from 10.5%),
(ii) modified the tangible net worth covenant to no less that 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.
Partners
for Growth II, L.P. Loan Amendment
On
February 27, 2009, St. Bernard entered into a First Amendment to the Loan
and Security Agreement (the “Loan Amendment”) with PFG dated July 21, 2008.
Pursuant to the terms of the Loan Amendment, PFG has eliminated the Modified Net
Income covenant for the reporting periods ending February 28, 2009 and March 31,
2009.
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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|
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|
|
|
|
|
|
|
|
|
|
|
|
ST.
BERNARD SOFTWARE, INC.
|
|
|
|
|
|
|
|
Dated:
March 10, 2009
|
|
|
|
|
|
By:
|
|
/s/
Louis E. Ryan
|
|
|
|
|
|
|
|
|
|
Louis
E. Ryan
Chief
Executive Officer,
Chief
Financial Officer, and
Chairman
of the Board of Directors
|
In
accordance with the Securities Exchange Act of 1934, this report has been signed
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
|
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|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Louis E. Ryan
Louis
E. Ryan
|
|
Chief
Executive Officer, Chief Financial Officer,
and Chairman of the Board
of Directors
|
|
March
10, 2009
|
|
|
|
|
|
|
|
/s/
Humphrey P. Polanen
Humphrey
P. Polanen
|
|
Director
|
|
March
10, 2009
|
|
|
|
|
|
/s/
Scott R. Broomfield
Scott
R. Broomfield
|
|
Director
|
|
March
10, 2009
|
|
|
|
|
|
/s/
Bart A.M. Van Hedel
Bart
A.M. Van Hedel
|
|
Director
|
|
March
10, 2009
|