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EX-23.1 - CYBERDEFENDER CORP | v163097_ex23-1.htm |
EX-5.1 - CYBERDEFENDER CORP | v163097_ex5-1.htm |
As filed with the Securities and Exchange Commission
on October 19, 2009
Registration Statement No.
333-161790
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT NO. 1
TO
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
CyberDefender
Corporation
(Exact
name of registrant as specified in its charter)
California
|
7372
|
65-1205833
|
||
(State or other jurisdiction
of incorporation or organization)
|
(Primary Standard Industrial
Classification Code Number)
|
(I.R.S. Employer
Identification No.)
|
617 West
7th Street, Suite 401
Los
Angeles, California 90017
(213)
689-8631
(Address,
including zip code, and telephone number, including area code,
of
registrant’s principal executive offices)
Gary
Guseinov
Chief
Executive Officer
CyberDefender
Corporation
617 West
7th Street, Suite 401
Los
Angeles, California 90017
(213)
689-8631
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copy
to:
Kevin
Friedmann, Esq.
RICHARDSON
& PATEL LLP
152 W.
57th
St., 4th
Floor
New York,
New York 10019
(212)
561-5559
Approximate
date of commencement of proposed sale to the public: From time to time after the
effective date of this Registration Statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
CALCULATION
OF REGISTRATION FEE
Title of each class of securities to
be registered
|
Amount to be
Registered
|
Proposed maximum offering
price per share
|
Proposed maximum
aggregate offering price
|
Amount of registration
fee(1)
|
||||||||||||
Common
Stock, no par value per share, to be issued upon exercise of
warrants
|
5,896,755
|
$
|
2.20
|
$
|
12,972,861.00
|
$
|
723.89
|
|||||||||
Common
Stock, no par value per share
|
3,829,312
|
$
|
2.20
|
$
|
8,424,486.40
|
$
|
470.09
|
|||||||||
Total
|
9,726,067
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$
|
2.20
|
$
|
21,397,347.40
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$
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1,193.98
|
(1)
Calculated in accordance with Rule 457(c) of Regulation C promulgated under the
Securities Act of 1933 as of August 31, 2009.
THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION
8(A), MAY DETERMINE.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
Subject to Completion, dated October 19,
2009
Prospectus
9,726,067
Shares of Common Stock
This
prospectus covers the resale by the selling shareholders named on page
53 of up to 9,726,067 shares of our common stock which
include:
|
·
|
1,975,360 shares
of common stock sold pursuant to Securities Purchase Agreements dated June
3, 2009 through July 21,
2009;
|
·
|
4,621,221 shares of common stock
underlying common stock purchase warrants issued to two consultants for
services provided to the Company and for the payment of interest on money
advanced;
|
·
|
15,000 shares of common stock
issued pursuant to the cash exercise of common stock purchase warrants
issued to a consultant for services provided to the
Company;
|
·
|
148,000 shares of common stock
underlying common stock purchase warrants issued pursuant to various
Securities Purchase Agreements dated from November 13, 2008 to January 28,
2009;
|
·
|
1,838,952 shares of common stock
issued pursuant to the cash exercise of common stock purchase warrants
pursuant to a warrant tender offer that terminated on August 17, 2009;
and
|
·
|
1,127,534 shares of common stock underlying
amended common stock purchase warrants issued pursuant to a warrant tender
offer that terminated on August 17,
2009.
|
This offering is not being
underwritten. Our common stock is quoted by the Over-the-Counter
Bulletin Board under the symbol “CYDE.” On October 9, 2009, the price
per share of our common stock was $2.88.
We will
not receive any of the proceeds from the sale of these
shares. However, we may receive up to $7,183,728 to the extent the
warrants are exercised for cash. If some or all of the warrants are
exercised for cash, the money we receive will be used for general corporate
purposes, including working capital requirements. We will pay all
expenses incurred in connection with the offering described in this prospectus,
with the exception of the brokerage expenses, fees, discounts and commissions
which will all be paid by the selling shareholders. Our common stock
and warrants are more fully described in the section of this prospectus titled
“Description of Securities.”
AN
INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE “RISK
FACTORS” BEGINNING AT PAGE 6.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
You
should rely only on the information contained in this prospectus to make your
investment decision. We have not authorized anyone to provide you
with different information. This prospectus may be used only where it
is legal to sell these securities. You should not assume that the
information in this prospectus is accurate as of any date other than the date on
the front page of this prospectus.
The
following table of contents has been designed to help you find important
information contained in this prospectus. We encourage you to read the entire
prospectus carefully.
The date
of this prospectus is ___________, 2009
Table
of Contents
Prospectus
Summary
|
1
|
|
Risk
Factors
|
6
|
|
Special
Note Regarding Forward-Looking Statements
|
12
|
|
Use
of Proceeds
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13
|
|
Market
for Common Equity and Related Shareholder Matters
|
13
|
|
Management’s
Discussion and Analysis or Plan of Operation
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14
|
|
Description
of Business
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30
|
|
Directors,
Executive Officers, Promoters and Control Persons
|
40
|
|
Executive
Compensation
|
42
|
|
Certain
Relationships and Related Transactions
|
49
|
|
Selling
Shareholders
|
52
|
|
Plan
of Distribution
|
58
|
|
Security
Ownership of Certain Beneficial Owners and Management
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60
|
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Description
of Securities
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61
|
|
Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
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65
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Where
You Can Find More Information
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67
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Experts
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67
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|
Legal
Matters and Interests of Named Experts
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68
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|
Financial
Information
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F-1
|
1
Prospectus
Summary
This
summary highlights material information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, including the section titled
“Risk Factors” and our consolidated financial statements and the related
notes.
Our
Company
Networks
such as the Internet can enable rapid communication of information between
computers. Unfortunately, the capability of computers to communicate
is often used to victimize computer systems and their users. A
variety of known threats, such as computer viruses, spam and phishing schemes,
are spread using the Internet.
We are a
California corporation that provides Internet security through our proprietary
Web 2.0 Collaborative Internet Security Platform called the CyberDefender
earlyNETWORK™.
Our
product line of Internet security products includes CyberDefender Early
Detection Center, CyberDefenderFREE 2.0, CyberDefenderULTIMATE, CyberDefender
Registry Cleaner, MyIdentityDefender and Identity Protection
Services. CyberDefender Early Detection Center is a complete Internet
security suite that protects computer users against spyware, viruses and
identity theft. The CyberDefender Early Detection Center is available
in various versions including CyberDefenderFREE 2.0, which is a free security
suite supported by advertising, CyberDefender FamilyPak, which supports up to
five computer users, and CyberDefenderULTIMATE, which comes with year round live
technical support for any personal computer problem. The annual
licensing fees range from $12.99 to $299.99, depending on the version of the
product being licensed and the marketing and distribution channels that we use.
CyberDefender Registry Cleaner eliminates clutter and junk that builds up within
a computer's registry due to the installation and removal of programs, deletion
and creation of files and cached records from Web surfing. The annual
subscription rate ranges from $19.99 to $39.98, depending on the marketing or
distribution channels we use. The Company’s Identity Protection Services monitor
a customer’s name, social security number, credit cards and address for
fraud. The customer can also include credit monitoring for an
additional fee. The monthly subscription rate ranges from $14.95 to $19.95,
depending on the marketing or distribution channels used by the
Company.
We also
offer the MyIdentityDefender security toolbar, which is an Internet browser
plug-in that protects Internet users against identity theft. The
MyIdentityDefender security toolbar allows users to rate sites that they visit,
see security and user ratings of search results before visiting a site and get
access to trusted sites on the web. The MyIdentityDefender security
toolbar generates revenue through search advertising, as our search ad networks
pay us a commission for every qualified visitor that clicks on the search
ads.
The
CyberDefender earlyNETWORK uses a secure peer-to-peer network to provide
protection from on-line threats. Each user of our software is a
“node” on the network. The node senses potential threats and
automatically alerts our threat analysis system, which is referred to in this
prospectus as the Early Alert Center (“EAC”). At the heart of the EAC
is a proprietary system that automatically tests and grades all potential
threats (with some human help for quality assurance). The EAC relays
the threat signature of every proven threat to the Alert Server, a proprietary
software application that we developed to deliver threat signature updates and
software updates to users of our software.
Unlike
conventional security update networks, the Alert Server does not wait to send
out a batch of updates to all computers that are a part of our software network,
but instead sends out the update without delay. We can provide
immediate updates because we are not broadcasting to all computers at our
expense, but instead we are posting the update to be relayed from computer to
computer on a secure basis, which makes use of local user
bandwidth. We have applied for patent protection for this technology
with the U.S. Patent and Trademark Office.
1
Risks
Related to Our Business
Our
business is subject to a number of risks. You should be aware of
these risks before making an investment decision. These risks are
discussed more fully in the section of this prospectus titled “Risk
Factors.”
Information
Regarding our Capitalization
As of October 9, 2009, we had 23,596,842 shares of
common stock issued and outstanding. We are also committed to
issue the following:
·
|
171,429 shares of common stock
underlying 10% Convertible Promissory Notes issued pursuant to various
Securities Purchase Agreements dated from May 1, 2009 to May 7,
2009;
|
·
|
960,000 shares of common stock
underlying 10% Convertible Promissory Notes issued pursuant to Securities
Purchase Agreements dated from November 13, 2008 to January 28,
2009;
|
·
|
8,118,359 shares of common stock upon the
exercise of warrants having an exercise price of $1.25 per
share;
|
·
|
324,875 shares of common stock
upon the exercise of warrants having an exercise price of $1.20 per
share;
|
·
|
706,341 shares of common stock
upon the exercise of warrants having an exercise price of $1.01 per
share;
|
·
|
2,566,298 shares of common stock
upon the exercise of warrants having an exercise price of $1.00 per
share;
|
·
|
2,500 shares of common stock upon
the exercise of warrants having an exercise price of $1.80 per
share;
|
·
|
125,000 shares of common stock upon the exercise
of warrants having an exercise price of $1.83 per
share;
|
·
|
15,000 shares of common stock upon the exercise
of warrants having an exercise price of $2.25 per
share;
|
·
|
434,000 shares of common stock
upon the exercise of 217,000 outstanding unit purchase options having an
exercise price of $1.00 per unit, with each unit consisting of one share
of common stock and a warrant to purchase one share of common stock for
$1.00 per share;
|
·
|
148,357 shares of common stock
underlying 10% Convertible Debentures issued as payment of interest
accrued on the 10% Secured Convertible Debentures issued pursuant to the
Securities Purchase Agreement dated September 12, 2006, and payment of
liquidated damages accrued under the Registration Rights Agreement dated
September 12, 2006;
|
·
|
371,671 shares of common stock
underlying 10% Secured Convertible Debentures issued pursuant to
Securities Purchase Agreements dated September 12,
2006;
|
·
|
2,627,082 shares of common stock included in
our Amended and Restated 2006 Equity Incentive Plan, from which options
for the purchase of 1,094,227 shares of common stock have been granted;
and
|
·
|
753,609 shares of common stock
included in our 2005 Equity Incentive Plan (sometimes referred to as our
2005 Stock Option Plan), from which an option for the purchase of 732,607
shares of common stock has been
granted.
|
The
Offering
We are
registering 9,726,067 shares of our common stock for sale by the selling
shareholders identified in the section of this prospectus titled “Selling
Shareholders.” The shares included in the table identifying the selling
shareholders consist of:
2
·
|
1,975,360 shares of common stock
sold pursuant to Securities Purchase Agreements dated June 3, 2009
through July 21,
2009;
|
·
|
4,621,221 shares of common stock
underlying common stock purchase warrants issued to two consultants for
interest and services provided to the
Company;
|
·
|
15,000 shares of common stock
issued pursuant to the cash exercise of common stock purchase warrants
issued to a consultant for services provided to the
Company;
|
·
|
148,000 shares of common stock
underlying common stock purchase warrants issued pursuant to various
Securities Purchase Agreements dated from November 13, 2008 to January 28,
2009;
|
·
|
1,838,952 shares of common stock
issued as a result of the exercise of common stock purchase warrants
pursuant to a warrant tender offer that terminated on August 17, 2009;
and
|
·
|
1,127,534 shares of common stock
underlying amended common stock purchase warrants issued pursuant to a
warrant tender offer that terminated on August 17,
2009.
|
Common
Shares
On June
4, 2009, we completed the sale of 1,142,860 shares of common stock to GR Match,
LLC (“GRM”) for an aggregate purchase price of $2,000,005, of which $400,000
must be used for the creation and production by Guthy-Renker of television
commercials advertising the Company’s products and services, and the balance of
which we will use for general working capital (the “GR
Transaction”). Pursuant to the terms of the Securities
Purchase Agreement documenting the GR Transaction, GRM has demand and piggyback
registration rights with respect to the shares.
On June
10, 2009, we completed the sale of 632,500 shares of common stock to Shimski,
L.P. for an aggregate purchase price of $1,106,875, the proceeds of which we
will use for general working capital (the “Shimski Transaction”). Pursuant
to the terms of the Securities Purchase Agreement documenting the Shimski
Transaction, Shimski has demand and piggyback registration rights with respect
to the shares.
On July
21, 2009, we completed the sale of 200,000 shares of common stock to 28
accredited investors for an aggregate purchase price of $500,000, the proceeds
of which we will use for general working capital.
There
were no underwriting discounts or other commissions paid in conjunction with the
aforementioned transactions.
Warrants
issued to consultants
On October 30, 2008, we executed a letter of intent
with GRM to create, market and distribute direct response advertisements to sell
our products. GRM is responsible for creating, financing, producing,
testing and evaluating a radio commercial to market our products in exchange for
$50,000 and a fully vested warrant to purchase 1,000,000 shares of common stock
at a price of $1.25 per share, which we issued in November 2008. The letter also
allows the parties the option to elect to have GRM create television commercials
to market our products in exchange for an additional warrant to purchase
1,000,000 shares of common stock at a price of $1.25 per
share. On March 24, 2009, we entered into a definitive Media
and Marketing Services Agreement with GRM. Pursuant to the agreement,
GRM will provide direct response media campaigns, including radio and television
direct response commercials, to promote our products and services and will
purchase media time on our behalf. As compensation for GRM’s services, we
issued: (i) an amended and restated fully vested five year warrant to purchase
1,000,000 shares of our common stock at an exercise price of $1.25 per share,
having both cash and cashless exercise provisions, which superseded and replaced
the warrant issued to GRM in November 2008 and (ii) a fully vested five year
warrant to purchase 1,000,000 shares of our common stock at an exercise price of
$1.25 per share, which may be exercised for cash only. We also issued to GRM a
five year warrant to purchase 8,000,000 shares of our common stock at an
exercise price of $1.25 per share, to compensate them for providing media
placement costs on 45 days terms with us, which may be exercised for cash only,
subject to the following vesting condition: for each $2 of media
placement costs advanced by GRM on our behalf, GRM will have the right to
purchase one share of our common stock under this warrant. As of the
date of filing this prospectus, 835,295 warrant shares have vested under this
last described warrant and, of this amount, 386,221 shares are included in the
registration statement of which this prospectus is a part. If GRM terminates the
agreement due to a breach by us in our performance or as a result of the
Company’s discontinuance, dissolution, liquidation, winding up or insolvency, or
if we terminate the agreement for any reason other than as a result of a breach
by GRM or our discontinuance, dissolution, liquidation, winding up or
insolvency, then, any unexpired and unvested rights of GRM to purchase shares of
our common stock pursuant to this last described warrant will immediately vest.
We are including the shares underlying the two vested warrants and the vested
portion of the last described warrant in the registration statement of which
this prospectus is a part.
3
On
November 11, 2008, we entered into a consulting agreement with Newview
Consulting L.L.C. (“Newview”). Pursuant to this agreement, Newview provided
investor relations services for a period of 6 months in exchange for a warrant
to purchase 2,250,000 shares of common stock at an exercise price of $1.25 per
share, exercisable for cash only. The right to purchase 900,000 shares vested
immediately and the right to purchase 270,000 shares vested on the 1st of each
month beginning December 1, 2008 and ending April 1, 2009. At January
1, 2009, the parties amended the vesting schedule in the Newview warrant to vest
the remaining 1,080,000 warrant shares on the first of each month from January
1, 2009 to June 1, 2009 at the rate of 180,000 warrant shares per
month. As of June 1, 2009, the right to purchase all of the warrant
shares had vested. Newview assigned warrants to purchase 390,000 shares to four
individuals. One of those individuals exercised his warrant to
purchase 15,000 shares of common stock. We are including the 15,000 shares
issued and the 2,235,000 shares underlying the warrant in the registration
statement of which this prospectus is a part.
10%
Convertible Promissory Notes and warrants issued from November 13, 2008 to
January 28, 2009
From
November 13, 2008 to January 28, 2009 we entered into Securities Purchase
Agreements with certain of the selling shareholders to purchase our 10%
Convertible Promissory Notes (“2008 Convertible Notes”) in the aggregate
principal amount of $1,200,000, which may be converted at the price of $1.25 per
share into an aggregate of 960,000 shares of common stock. In
conjunction with the sale of the 2008 Convertible Notes, we issued common stock
purchase warrants to purchase an aggregate of 480,000 shares of common stock at
an exercise price of $1.25 per share. Warrants to purchase 132,000
shares of our common stock have been exercised for cash. Warrants to
purchase 200,000 shares of our common stock have been amended pursuant to our
tender offer as more fully described below. Warrants to purchase an aggregate of
148,000 shares remain outstanding. We have included 148,000 shares of common
stock underlying the warrants in the registration statement of which this
prospectus is a part.
Amended
warrants issued pursuant to our tender offer
Pursuant
to our tender offer that terminated on August 17, 2009, we offered to the
holders of warrants issued with “cashless exercise” provisions and/or
“down-round” provisions (collectively the “Released Provisions”) the opportunity
to increase by 10% the number of shares of common stock covered by their
warrants in exchange for eliminating the Released Provisions from the warrants.
In order to take advantage of the offer, the warrant holders must have exercised
a portion of their warrant(s) and purchased for cash no less than 30% of the
shares of common stock covered by their warrant(s), after giving effect to the
increase. A total of 50 warrant holders exercised 86 warrants covering 1,838,952
shares of common stock in accordance with the terms of the offer. We also issued
amended warrants covering 1,127,534 shares of common stock in accordance with
the terms of the offer. We have included 2,966,486 shares of common stock,
representing the shares issued to the warrant holders and the shares underlying
the amended warrants, in the registration statement of which this prospectus is
a part.
Shares
outstanding after this offering
After
this offering, assuming the issuance of all shares of common stock underlying
the warrants described above, we would have 29,469,533 shares of common stock
outstanding. This amount does not include the shares of common stock
that we are committed to issue, as described in the section of this prospectus
titled “Prospectus Summary - Information Regarding our
Capitalization”.
4
Information
about Our Securities
Information
regarding our common stock and outstanding warrants is included in the section
of this prospectus titled “Description of Securities.”
Corporate
Information
We
maintain our principal offices at 617 West 7th Street,
Suite 401, Los Angeles, California 90017. Our telephone number at
that address is (213) 689-8631. Our web address is
www.cyberdefender.com. Information included on our website is not
part of this prospectus.
5
Risk
Factors
You
should carefully consider the risks described below before making an investment
decision. Our business could be harmed by any of these
risks. The trading price of our common stock could decline due to any
of these risks, and you may lose all or part of your investment. In
assessing these risks, you should also refer to the other information contained
in this prospectus, including our financial statements and related
notes.
Risks
Related to Our Business
We
have been in business only since August 2003. Our limited operating
history makes evaluation of our business difficult.
We were
incorporated in the State of California as Network Dynamics in August 2003 and
have limited historical financial data upon which to base planned operating
expenses or to accurately forecast our future operating results. We have a
limited operating history which makes it difficult to evaluate our performance.
You must consider our prospects in light of the risks, expenses and difficulties
we face as an early stage company with a limited operating history. These risks
include uncertainty as to whether we will be able to:
·
|
increase revenues from sales of
our suite of Internet security
products;
|
·
|
successfully protect
our earlyNetwork™ from all security
attacks;
|
·
|
successfully protect personal
computers or networks against all Internet
threats;
|
·
|
respond effectively to
competitive pressures;
|
·
|
protect our intellectual property
rights;
|
·
|
continue to develop and upgrade
our technology; and
|
·
|
continue to renew our customers’
subscriptions to current and future
products.
|
We
incurred net losses for our last three fiscal years and for the first six months
of the 2009 fiscal year. We are not certain that our operations will
ever be profitable.
We
incurred a net loss of $5,507,600 for the fiscal year ended December 31, 2006, a
net loss of $5,866,123 for the fiscal year ended December 31, 2007 and a net
loss of $11,251,772 for the fiscal year ended December 31, 2008. We
had a net loss of $9,632,618 for the six months ended June 30,
2009.
We can
provide no assurance as to when, or if, we will be profitable in the
future. Even if we achieve profitability, we may not be able to
sustain it.
We
may be unable to continue as a going concern.
Our
financial statements have been prepared on a going concern basis which assumes
that we will be able to realize our assets and discharge our liabilities in the
normal course of business for the foreseeable future. We generated a
net loss of $9,632,618 and used cash in operating activities of $4,311,066 for
the six months ended June 30, 2009. At this date, we had negative
working capital of $6,950,306. At June 30, 2009 we had an accumulated
deficit of $34,721,412 and our stockholders’ deficit was
$7,434,939.
Our
ability to continue as a going concern is in substantial doubt as it is
dependent on a number of factors including, but not limited to, the receipt of
continued financial support from our investors, our ability to control and
possibly reduce our expenses, our ability to raise equity or debt financing as
we need it, and whether we will be able to use our securities to meet certain of
our liabilities as they become payable. The outcome of these matters is
dependent on factors outside of our control and cannot be predicted at this
time.
Regulations under
the Securities Exchange Act of 1934 require public companies to maintain
“disclosure controls
and procedures.”
Our disclosure
controls and procedures are not effective at the reasonable assurance level due
to several material weaknesses. Additionally, we have been unable to maintain
effective internal controls over our financial reporting in accordance with
section 404 of the Sarbanes-Oxley Act of 2002. This could have a
material adverse effect on our business and stock
price.
We reported several material weaknesses in our
internal controls and concluded that we did not have effective disclosure
controls and procedures in place and additionally did not have effective
internal control over financial reporting as of December 31, 2008 and June 30,
2009. Implementing any changes to remedy these deficiencies will
likely require specific compliance training of our directors, officers and
employees, entail substantial costs in order to modify our existing accounting
systems (such as recruiting and hiring additional employees to assist with
accounting functions, purchasing, installing and training employees in the use
of special software, paying for the costs of continuing education for our
employees involved with accounting functions, etc.), and take a significant
period of time to complete. If we fail to remediate the material
weaknesses, we will not be able to ensure that we can conclude on an ongoing
basis that we have effective internal controls over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act, as such standards are
modified, supplemented or amended from time to time. Failure to
achieve and maintain an effective internal control environment could have a
material adverse effect on our stock price and could result in our financial
statements being unreliable or loss of investor confidence in our financial
reports. Additionally, failure to maintain effective internal control
over our financial reporting could result in government investigation or
sanctions by regulatory authorities.
6
We
sell our products over the Internet, however such activities may not be secure.
If a breach of security occurred, our reputation could be damaged and our
business and results of operations could be adversely affected.
A
significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. Our
customers authorize us to bill their credit card accounts directly for the
purchase price of our products. We rely on encryption and
authentication technology licensed from third parties to provide the security
and authentication technology to effect secure transmission of confidential
information, including customer credit card numbers. There can be no
assurance that advances in computer capabilities, new discoveries in the field
of cryptography, or other events or developments will not result in a compromise
or breach of the technology used by us to protect customer transaction
data. If any such compromise of our security were to occur, it could
have a material adverse affect on our reputation and, therefore, on our business
and results of operations.
During
the past 18 months our business has grown rapidly. If we do not manage this
growth carefully, our business and results of operations could be adversely
affected.
Since January 1, 2008, our business has grown
rapidly. During the 6 months ended June 30, 2009, our sales increased
41% over our sales during the 12 months ended December 31,
2008. Also, the number of full-time employees and consultants we
employ grew from 35 full-time employees and 3 independent contractors in March
2009 to 61 full-time employees and 14 independent contractors as of the date of
this prospectus. Growth of our business at this pace places a strain
on our management and resources and has required, and may continue to require,
the implementation of new operating systems, procedures and controls and the
expansion of our facilities. Our failure to manage our growth and
expansion could adversely affect our business, results of operations and
financial condition. Failure to implement new systems effectively or
within a reasonable period of time could adversely affect our business and
results of operations.
We
have made a significant investment in personnel and overhead in anticipation
that our growth will continue. If the projections about our growth are
mistaken, our operating results could be adversely affected.
During
the past 18 months we have experienced significant growth and we believe that
our growth will continue for the immediate future. For
that reason we have made significant investments in personnel and
overhead. If our growth does not continue, our operating expenses will
continue to exceed our revenue, significantly affecting our ability to continue
operating. Although we may be able to eliminate or reduce some of the
expenses through a reduction in workforce or a reduction in costs, some costs
such as rent could not be easily reduced. As a result, our operating results
could be adversely affected.
Our
Media and Marketing Services Agreement with GRM could be terminated. The
termination of this agreement could adversely affect our operating
results.
Although
we are not currently generating significant revenue from the Media and Marketing
Services Agreement with GRM, we believe that the services provided to us by GRM
will eventually produce significant revenues. Pursuant to the terms of the
agreement GRM may terminate the agreement if there is a breach or default in
performance of any obligation, unless the breach or default is cured within 15
business days following receipt of written notice from the non-breaching party;
upon the discontinuance, dissolution, liquidation or winding up of the other
party’s business or the insolvency of the other party; or by either party for
any reason by giving the other party written notice of the termination at least
30 days prior to the effective date of termination. Additionally, after May
30, 2009, GRM is entitled to terminate the agreement upon 5 days written notice
to us in the event that the average media placement costs for any 3 consecutive
months during the term are less than $250,000 per month. If we earn
significant revenues from our agreement with GRM, but GRM decides to terminate
the agreement, our operating results could be adversely
affected.
7
We
may be required to pay GRM royalty payments. This could adversely affect our
operating results.
If the
average closing price of our common stock as reported by Bloomberg LP for the 20
trading days preceding January 1, 2010 is not at least $3.00 per share or if our
common stock is not publicly traded on any stock exchange or over-the-counter
market as of December 31, 2009, then we will be required to pay a monthly
royalty to GRM. The royalty will be equal to 20% of gross renewal revenue,
which is defined as the aggregate gross revenue, net of refunds and chargebacks,
earned by us as a result of renewals and/or re-orders of our products by our
customers who both (i) became customers during the period commencing on March 1,
2009 and ending upon the earlier of (A) the termination date of the Media and
Marketing Services Agreement or (B) the date following January 1, 2010 when the
average closing price of our common stock as reported by Bloomberg LP for the 20
trading days preceding that date was at least $5.00 per share and (ii) initially
purchased any of our products from any direct response websites. Our
obligation to pay these royalties will survive the expiration or termination of
the agreement. If we are required to pay this royalty, our expenses may increase
significantly, which could have an adverse affect on our operating
results.
We
face intense competition from other providers of Internet security
software. If we cannot offer consumers a reason to use our software
instead of the software marketed by our competitors, our business and the
results of our operations will be adversely affected.
We have
many competitors in the markets for our products. Our competitors
include software companies that offer products that directly compete with our
products or that bundle their software products with Internet security software
offered by another company. End-user customers may prefer purchasing
Internet security software that is manufactured by the same company that
provides its other software programs because of greater product breadth offered
by the company, perceived advantages in price, technical support, compatibility
or other issues.
Some of
our competitors include WebRoot Software, Kaspersky Labs and Sunbelt Software.
Many of our competitors, such as TrendMicro, McAfee and Norton have greater
brand name recognition and financial, technical, sales, marketing and other
resources than we do and consequently may have an ability to influence customers
to purchase their products rather than ours. Our future and existing competitors
could introduce products with superior features, scalability and functionality
at lower prices than our products and could also bundle existing or new products
with other more established products in order to compete with us. Our
competitors could also gain market share by acquiring or forming strategic
alliances with our other competitors. Finally, because new distribution methods
offered by the Internet and electronic commerce have removed many of the
barriers to entry historically faced by start-up companies in the software
industry, we may face additional sources of competition in the
future.
We
rely on the services of QResolve to provide tech-on-call services. If we were to
lose the services of QResolve, this portion of our business could be
disrupted.
For an
annual fee, CyberDefenderULTIMATE provides year round tech-on-call services for
any software or hardware connected to a subscriber’s computer. These
tech-on-call services are provided by QResolve, a business partner. If we lose
our working relationship with QResolve and are unable to replace it with an
equally competent tech-on-call service provider at competitive pricing, or if
the quality of QResolve’s services deteriorates for any reason, our ability to
service customers may suffer and our revenues from CyberDefenderULTIMATE could
be adversely affected. We would also be required to spend a significant amount
of time and effort to find and train a new service provider, which would take
management’s attention away from the day-to-day operations of our business. We
could also be required to file a legal action to recover money paid in advance
for services that were never provided. This could have a material adverse
effect on our business and results of operations.
8
If
we are unable to develop and maintain new and enhanced Internet security or
identity protection products and services to meet emerging industry standards,
our operating results could be adversely affected.
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. For example, in September 2007, we
launched CyberDefenderULTIMATE™ and CyberDefenderCOMPLETE™. These are enhanced
versions of our Internet security software. In August 2008, we launched our
Identity Protection Services. These services monitor a customer’s
name, social security number, credit cards and address for fraud. The
customer can also include credit monitoring for an additional fee. In November
2008, we released CyberDefender Registry Cleaner™. The CyberDefender
Registry Cleaner™ eliminates clutter and junk that builds up within a computer's
registry due to the installation and removal of programs, deletion and creation
of files and cached records from Web surfing. The success of our
business depends on our ability to keep pace with technological developments and
emerging industry standards. We intend to commit a portion of our resources to
developing new applications for threat research and new security applications
for Web 2.0 and social networking environments. However, if we are unable to
successfully develop such products or if we develop these products but demand
for them does not materialize or occurs more slowly than we expect, we will have
expended resources (such as personnel and equipment) and capital without
realizing sufficient revenue to recover these costs, and our operating results
could be adversely affected.
If
we fail to adapt our technologies to new Internet technologies, we could lose
customers and key technology partners. This would have a material
adverse effect on our revenues, our business and the results of our
operations.
Internet
technology is constantly evolving to make the user's experience easier and more
comprehensive. Our products use Internet technologies. We must constantly
monitor new technologies and adapt our technologies to them as appropriate. If
we fail to keep our products compatible with the latest Internet technologies,
they may not perform adequately and we may lose not only our customers, but
those suppliers and partners whose Internet technologies support our products.
The loss of our customers or our suppliers and partners would have a material
adverse effect on our revenues, our business and the results of our
operations.
Because
of the constant development of new or improved products in the software
industry, we must continually update our products or create new products to keep
pace with the latest advances. While we do our best to test these
products prior to their release, they may nevertheless contain significant
errors and failures, which could adversely affect our operating
results.
With the
constant changes in the software industry as new standards and processes emerge,
we are required to continually update our suite of Internet security
products. While we do our best to test these products prior to their
release, due to the speed with which we are required to release new or updated
products to remain competitive, they could be released with errors or they may
fail altogether. These errors or failures may put the users of our
software at risk because their computers will not be adequately protected
against spyware, viruses, spam or phishing attacks. We try to reduce this risk
by constantly upgrading our software and by working closely with the creators of
the operating platforms, particularly Microsoft, to make sure that our software
works with the operating platform. However, if our existing suite of Internet
security products and our future products fail to perform adequately or fail
entirely, our operating results could be adversely affected.
Loss
of any of our key management personnel, particularly Gary Guseinov, could
negatively impact our business and the value of our common stock.
Our
ability to execute our business strategy will depend on the skills, experience
and performance of key members of our management team. We depend heavily on the
services of Gary Guseinov, our Chief Executive Officer, Igor Barash, our Chief
Information Officer and Secretary and Kevin Harris, our Chief Financial Officer.
We believe that the skills of Mr. Guseinov would be particularly difficult to
replace. We have long-term employment agreements with Gary Guseinov and Kevin
Harris. We have entered into an employment agreement with Mr. Barash, but it is
“at-will” and does not preclude him from leaving us.
9
If we
lose members of our key management personnel, we may be forced to expend
significant time and money in the pursuit of replacements, which could result in
both a delay in the implementation of our business plan and the diversion of
limited working capital. We cannot assure you that we will find satisfactory
replacements for these key management personnel at all, or on terms that are not
unduly expensive or burdensome to our company. We only maintain a key man
insurance policy on the life of Gary Guseinov.
To
date, our business has been developed assuming that laws and regulations that
apply to Internet communications and e-commerce will remain
minimal. Changes in government regulation and industry standards may
adversely affect our business and operating results.
We have
developed our business assuming that the current state of the laws and
regulations that apply to Internet communications, e-commerce and advertising
will remain minimal. At this time, complying with these laws and
regulations is not burdensome. However, as time exposes various
problems created by Internet communications and e-commerce, laws and regulations
may become more prevalent. These regulations may address issues such
as user privacy, spyware, pricing, intellectual property ownership and
infringement, taxation, and quality of products and services. This
legislation could hinder growth in the use of the Internet generally and
decrease the acceptance of the Internet as a communications, commercial and
advertising medium. Changes in current regulations or the addition of
new regulations could affect the costs of communicating on the Internet and
adversely affect the demand for our products or otherwise harm our business,
results of operations and financial condition.
Our
business is the development and distribution of software. If we do not protect
our proprietary information and prevent third parties from unauthorized use of
our technology, our business could be harmed.
We rely
on a combination of copyright, patent, trademark and trade secret laws,
confidentiality procedures, contractual provisions and other measures to protect
our proprietary information, especially our software codes. All of these
measures afford only limited protection. These measures may be invalidated,
circumvented or challenged, and others may develop technologies or processes
that are similar or superior to our technology. We may not have the proprietary
information controls and procedures in place that we need to protect our
proprietary information adequately. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy our software or
obtain or use information that we regard as proprietary, which could harm our
business.
Third
parties claiming that we infringe their proprietary rights could cause us to
incur significant legal expenses and prevent us from selling our
products.
As the
number of products in the software industry increases and the functionality of
these products further overlap, we believe that we may become increasingly
subject to infringement claims, which could include patent, copyright and
trademark infringement claims. In addition, former employers of our former,
current or future employees may assert claims that such employees have
improperly disclosed to us the confidential or proprietary information of these
former employers. Any such claim, with or without merit, could:
·
|
be time consuming to
defend;
|
·
|
result in costly
litigation;
|
·
|
divert management’s attention
from our core business;
|
·
|
require us to stop selling, delay
providing or redesign our product;
and
|
·
|
require us to pay monetary
amounts as damages or for royalty or licensing
arrangements.
|
Risks
Related to Ownership of Our Securities
Our
common stock began to be quoted on the OTC Bulletin Board on August 2, 2007. We
cannot assure you that an active public trading market for our common stock will
develop or be sustained. Even if an active market develops, it may not be
possible to sell shares of our Common Stock in a timely manner.
10
While our
common stock began to be quoted on the OTC Bulletin Board on August 2, 2007, to
date an active trading market has not developed and we cannot guarantee you that
an active trading market will ever develop. This situation may be attributable
to a number of factors, including the fact that we are a small company that is
relatively unknown to stock analysts, stock brokers, institutional investors and
others in the investment community that generate or influence sales volume, and
that even if we came to the attention of such persons, they tend to be risk
averse and may be reluctant to follow a relatively unproven company such as ours
or purchase or recommend the purchase of our shares until such time as we became
more seasoned and viable. As a consequence, even though our common stock is
quoted on the OTC Bulletin Board, there may be periods of several days or more
when trading activity in our shares is minimal or nonexistent, as compared to a
seasoned issuer that has a large and steady volume of trading activity that will
generally support continuous sales without an adverse effect on share price.
Because an active trading market may not develop, it may not be possible to sell
shares of our common stock in a timely manner.
Our
common stock is considered a “penny stock”. The application of the “penny stock”
rules to our common stock could limit the trading and liquidity of the common
stock, adversely affect the market price of our common stock and increase
transaction costs to sell those shares.
Our
common stock is a “low-priced” security or “penny stock” under rules promulgated
under the Securities Exchange Act of 1934. In accordance with these rules,
broker-dealers participating in transactions in low-priced securities must first
deliver a risk disclosure document which describes the risks associated with
such stocks, the broker-dealer’s duties in selling the stock, the customer’s
rights and remedies and certain market and other information. Furthermore, the
broker-dealer must make a suitability determination approving the customer for
low-priced stock transactions based on the customer’s financial situation,
investment experience and objectives. Broker-dealers must also disclose these
restrictions in writing to the customer, obtain specific written consent from
the customer, and provide monthly account statements to the customer. The effect
of these restrictions will probably decrease the willingness of broker-dealers
to make a market in our common stock, will decrease liquidity of our common
stock and will increase transaction costs for sales and purchases of our common
stock as compared to other securities.
The
stock market in general and the market prices for penny stocks, in particular,
have experienced volatility that often has been unrelated to the operating
performance of such companies. These broad fluctuations may be the result of
unscrupulous practices that may adversely affect the price of our stock,
regardless of our operating performance.
Shareholders
should be aware that, according to SEC Release No. 34-29093 dated April 17,
1991, the market for penny stocks has suffered in recent years from patterns of
fraud and abuse. Such patterns include (1) control of the market for the
security by one or a few broker-dealers that are often related to the promoter
or issuer; (2) manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases; (3) boiler room practices
involving high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (4) excessive and undisclosed bid-ask differential
and markups by selling broker-dealers; and (5) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been manipulated to
a desired level, along with the resulting inevitable collapse of those prices
and with consequent investor losses. The occurrence of these patterns or
practices could increase the volatility of our share price. In the past,
plaintiffs have often initiated securities class action litigation against a
company following periods of volatility in the market price of its securities.
We may in the future be the target of similar litigation. Securities litigation
could result in substantial costs and liabilities and could divert management's
attention and resources.
Our
executive officers and directors, along with their friends and family, own or
control approximately 35% of our issued and outstanding common stock, which
makes it more difficult for our non-management shareholders to determine the
outcome in matters requiring shareholder approval. Additionally, this
concentration of ownership could discourage or prevent a potential takeover that
might otherwise result in our shareholders receiving a premium over the market
price for our common stock.
11
Approximately 35% of the issued and outstanding
shares of our common stock is owned and controlled by a group of insiders,
including current directors and executive officers and their friends and
family. Mr. Gary Guseinov, our Chief Executive Officer and President,
owns approximately 27% of our issued and outstanding common
stock. These insiders may be able to exert significant influence in
matters requiring approval by our shareholders, including the election of
directors, mergers or other business combinations. Such concentrated
ownership may also make it difficult for our shareholders to receive a premium
for their shares of our common stock in the event we merge with a third party or
enter into other transactions that require shareholder
approval. These provisions could also limit the price that investors
might be willing to pay in the future for shares of our common
stock.
We
do not expect to pay dividends for the foreseeable future, and we may never pay
dividends.
We
currently intend to retain any future earnings to support the development of our
business and do not anticipate paying cash dividends in the foreseeable future.
Our payment of any future dividends will be at the discretion of our board of
directors after taking into account various factors, including but not limited
to our financial condition, operating results, cash needs, growth plans and the
terms of any credit agreements that we may be a party to at the time. In
addition, our ability to pay dividends on our common stock may be limited by
California state law. Accordingly, investors must rely on sales of their common
stock after price appreciation, which may never occur, as the only way to
realize a return on their investment. Investors seeking cash dividends should
not purchase our common stock.
Limitations
on director and officer liability and our indemnification of officers and
directors may discourage shareholders from bringing suit against a
director.
Our
articles of incorporation and bylaws provide that the liability of our directors
for monetary damages shall be eliminated to the fullest extent under California
law. These provisions may discourage shareholders from bringing suit against a
director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by shareholders on our behalf against a director.
In addition, our bylaws provide for mandatory indemnification of directors and
officers to the fullest extent permitted by California law. We have also entered
into indemnity agreements with each of our officers and directors which are more
fully described in the section of this prospectus titled “Certain Relationships
and Related Transactions”.
Future
sales of our common stock could put downward selling pressure on our shares, and
adversely affect the stock price. There is a risk that this downward pressure
may make it impossible for an investor to sell his shares at any reasonable
price, if at all.
Future
sales of substantial amounts of our common stock in the public market, or the
perception that such sales could occur, could put downward selling pressure on
our shares, and adversely affect the market price of our common
stock.
Special
Note Regarding Forward-Looking Statements
This
prospectus, including the sections titled “Prospectus Summary,” “Risk Factors,”
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Description of Business,” contains forward-looking statements.
These are statements regarding financial and operating performance and results
and other statements that are not historical facts. The words “expect,”
“project,” “estimate,” “believe,” “anticipate,” “intend,” “plan,” “forecast,”
and similar expressions are intended to identify forward-looking statements.
Certain important risks could cause results to differ materially from those
anticipated by some of the forward-looking statements. Some, but not all, of
these risks include, among other things:
·
|
our lack of capital and whether
or not we will be able to raise capital when we need
it;
|
·
|
changes in local, state or
federal regulations that will adversely affect our
business;
|
·
|
our ability to market and
distribute or sell our
products;
|
·
|
our ability to protect our
intellectual property and operate our business without infringing on the
intellectual property rights of
others;
|
12
·
|
whether we will continue to
receive the services of certain officers and directors;
and
|
·
|
other uncertainties, all of which
are difficult to predict and many of which are beyond our
control.
|
These
statements relate to future events or our future financial performance, and
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking
statements. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. We do not intend to
update any of the forward-looking statements after the date of this prospectus
or to conform these statements to actual results. You should refer to
and carefully review the information in future documents we file with the
Securities and Exchange Commission.
Use
of Proceeds
We will
not receive any proceeds from the sale of the shares by the selling
shareholders. All proceeds from the sale of the shares being offered
will be for the account of the selling shareholders, as described below in the
sections titled “Selling Shareholders” and “Plan of
Distribution.” However, we may receive up to $7,183,728 upon exercise
of warrants for cash, the underlying shares of which are included in the
registration statement of which this prospectus is a part. If
received, these funds will be used for general corporate purposes, including
working capital requirements. With the exception of any brokerage
fees and commissions which are the obligation of the selling shareholders, we
are responsible for the fees, costs and expenses of this offering which are
estimated to be $35,194, inclusive of our legal and accounting fees, printing
costs and filing and other miscellaneous fees and expenses.
Market
for Common Equity and Related Shareholder Matters
On August 2, 2007 our common stock was approved for
quotation on the OTC Bulletin Board under the symbol “CYDE”. As of
October 9, 2009 we had 23,596,842 shares of common stock issued and outstanding.
As of October 9, 2009 we had 167 record holders of our common
stock. This does not include an indeterminate number of shareholders
whose shares are held by brokers in street name.
The
following table sets forth, for the periods indicated, the high and low bid
information per share of our common stock as reported by the OTC Bulletin
Board. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual
transactions
PERIOD
|
HIGH
|
LOW
|
||||||||
Fiscal Year Ended December 31,
2009
|
First Quarter
|
$
|
1.28
|
$
|
0.51
|
|||||
Second Quarter
|
$
|
3.49
|
$
|
1.15
|
||||||
Third Quarter
|
$
|
3.30
|
$
|
1.80
|
||||||
Fourth Quarter through October 9,
2009
|
$
|
3.00
|
$
|
2.10
|
||||||
Fiscal Year Ended December 31,
2008
|
First Quarter
|
$
|
1.06
|
$
|
0.61
|
|||||
Second Quarter
|
$
|
2.00
|
$
|
0.63
|
||||||
Third Quarter
|
$
|
1.77
|
$
|
0.75
|
||||||
Fourth Quarter
|
$
|
1.40
|
$
|
0.70
|
||||||
Fiscal Year Ended December 31,
2007(1)
|
First Quarter
|
$
|
0
|
$
|
0
|
|||||
Second Quarter
|
$
|
0
|
$
|
0
|
||||||
Third Quarter
|
$
|
0.90
|
$
|
0.90
|
||||||
Fourth Quarter
|
$
|
0.48
|
$
|
1.56
|
(1) Our
common stock did not trade during the first and second quarters of the 2007
fiscal year. Our common stock began to trade on August 2, 2007.
13
After this offering, assuming the issuance of all
shares of common stock underlying the warrants described in this prospectus
under the section titled “Prospectus Summary - The Offering”, we would have
29,493,597 shares of common stock outstanding. This amount does not
include a total of 1,651,457 shares of common stock that are underlying our
convertible promissory notes and debentures, 6,395,618 shares of common stock
that would be issued upon the exercise of warrants or unit purchase options and
3,380,691 shares of common stock reserved for issuance under our Amended and
Restated 2006 Equity Incentive Plan and our 2005 Equity Incentive Plan
(sometimes referred to as our 2005 Stock Option Plan). See the
discussion in the section of this prospectus titled, “Prospectus Summary – The
Offering – Shares outstanding after this offering.”
We have outstanding 15,347,920 shares of restricted
common stock, of which 4,130,209 shares may be sold pursuant to Rule 144,
promulgated under the Securities Act of 1933.
Dividends
During
the year ended December 31, 2005, our Board of Directors authorized the payment
of a dividend of $0.05 per share. The total amount of the dividend was
$31,400. The dividend was paid to all of our shareholders, with the
exception of shareholders who were also officers and
directors. However, we anticipate that any future earnings will be
retained for the development of our business and we do not anticipate paying any
dividends on our common stock in the foreseeable future.
Sections
500 through 503 of the California Corporations Code place restrictions upon the
ability of California corporations to pay dividends. Pursuant to
these sections, in general, a California corporation may not make any
distribution to the corporation’s shareholders (i) unless the amount of the
retained earnings of the corporation immediately prior to the distribution
equals or exceeds the amount of the proposed distribution; (ii) if the
corporation is, or as a result of the distribution would be, likely to be unable
to meet its liabilities as they mature; (iii) if, after giving effect to the
distribution, the excess of the corporation’s assets over its liabilities would
be less than the liquidation preference of all shares having a preference on
liquidation over the class or series to which the distribution is made; or (iv)
unless the amount of the retained earnings of the corporation immediately prior
to the distribution equals or exceeds the amount of the proposed distribution
plus the aggregate amount of the cumulative dividends in arrears on all shares
having a preference with respect to payment of dividends over the class or
series to which the distribution is made.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion of our financial condition and results of operations should
be read in conjunction with our financial statements and the notes to those
statements included elsewhere in this prospectus. In addition to the
historical financial information, the following discussion and analysis contains
forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under “Risk Factors” and elsewhere in this prospectus.
Overview
We have
developed a Collaborative Internet Security Network, which we refer to as the
“CISN” or the “earlyNETWORK”, which is based on certain technology principles
commonly found in a peer-to-peer network infrastructure. A
peer-to-peer network does not have the notion of clients or servers, but only
equal peer nodes that simultaneously function as both “clients” and “servers” to
the other nodes on the network. This means that when a threat is
detected from a computer that is part of the earlyNETWORK, the threat is relayed
to our Early Alert Center. The Early Alert Center tests, grades and
ranks the threat, automatically generates definition and signature files based
on the threat, and relays this information to the Alert Server, in some cases
after a human verification step. The Alert Server will relay the
information it receives from the Early Alert Center to other machines in the
earlyNETWORK, and each machine that receives the information will, in turn,
relay it to other machines that are part of the earlyNETWORK. This
protocol allows us to rapidly distribute alerts and updates regarding
potentially damaging viruses, e-mails and other threats to members of the
earlyNETWORK, without regard for the cost of the bandwidth
involved. Because cost is not a factor, updates can be continuous,
making our approach significantly faster than the client/server protocols used
by traditional Internet security companies that provide manual broadcast-updated
threat management systems. Computer users join the earlyNETWORK
simply by downloading and installing our software.
14
Historically,
our revenues were derived from the sales of, and ongoing subscriptions for, a
single product, CyberDefender Anti-Spyware 2006. The product was sold at a price
of $39.99, which included the initial download and one year of
updates. The license to use the software was renewed annually, also
at $39.99, with incentives for early renewals. On November 20, 2006
we stopped licensing this product to new subscribers (although we continue to
support and upgrade it for existing users). We now offer a full line
of Internet security products, which includes CyberDefender Early Detection
Center V2.0 and CyberDefender Free V2.0, as well as upgrades to these
products. CyberDefender Early Detection Center V2.0 and CyberDefender
Free V2.0 are complete Internet security suites that protect home computer users
against spam, spyware, viruses and scams. The software programs are
identical but are distributed in one of two ways. If the subscriber
chooses the free version (CyberDefender Free V2.0), he will receive the software
with advertising banners in it. If the subscriber does not wish to
receive the advertising, he may pay to purchase a license for CyberDefender
Early Detection Center V2.0. The annual licensing fee can be as low
as $12.99 or as high as $49.99, depending on the marketing and distribution
channels that we use.
Additionally
on September 27, 2007, we announced the launch of CyberDefenderULTIMATE and
CyberDefenderCOMPLETE. These are enhanced versions of our security
software. For an annual fee, CyberDefenderULTIMATE provides year
round support for any software or hardware connected to a subscriber’s computer
while CyberDefenderCOMPLETE provides year-round unlimited anti-malware support
for a subscriber’s computer with a one time live technical support
call. These new security suites also include 2 gigabytes of online
backup. These products are sold for $99.99 to $299.99 per
year. We also offer a free Internet security toolbar called
MyIdentityDefender (“MyID”). MyID is free to use and generates
revenue through search advertising. In August 2008, we announced the launch of
our Identity Protection Services. These services monitor a customer’s
name, social security number, credit cards and address for fraud. The
customer can also include credit monitoring for an additional fee. The monthly
subscription rate ranges from $14.95 to $19.95, depending on the marketing or
distribution channels we use. On November 20, 2008, the Company announced the
launch of CyberDefender Registry Cleaner. CyberDefender Registry
Cleaner eliminates clutter and junk that builds up within a computer's registry
due to the installation and removal of programs, deletion and creation of files
and cached records from Web surfing. The annual subscription rate
ranges from $19.99 to $39.98, depending on the marketing or distribution
channels we use.
In the
past, we acquired new users primarily with an online direct purchase
offer. The offer, to scan a computer for spyware and then pay for
removal of the spyware found, was broadcast in e-mails, banners and search
ads. We are now partnering with other online businesses, such as
those providing search engine marketing services and distribution services, as
well as pursing other advertising channels such as television, radio and retail,
for the purpose of generating new users of our software. These new
partnerships will offer additional avenues for distribution of our products and
are mainly revenue sharing partnerships, whereby our partner retains a portion
of the revenue for every item sold. This allows us to incrementally
increase revenue while not incurring additional marketing and advertising
expenses.
The
following table summarizes our revenue for the sale of our products during each
quarter of the two most recently completed fiscal years as well as the first two
quarters of 2009. Sales include renewals of our CyberDefender
Anti-Spyware 2006 product, as well as sales of our CyberDefender Early Detection
Center V2.0, CyberDefenderULTIMATE™, CyberDefenderCOMPLETE™ and CyberDefender
Registry Cleaner™ products and advertising revenue derived from our
CyberDefender FREE V2.0 product and the MyID toolbar.
15
Quarter Ended
|
Sales
|
|||
31-Mar-07
|
$
|
666,136
|
||
30-Jun-07
|
$
|
628,443
|
||
30-Sep-07
|
$
|
544,956
|
||
31-Dec-07
|
$
|
380,619
|
||
Fiscal
Year 2007 Totals
|
$
|
2,220,154
|
||
31-Mar-08
|
$
|
475,046
|
||
30-Jun-08
|
$
|
742,862
|
||
30-Sep-08
|
$
|
1,202,715
|
||
31-Dec-08
|
$
|
2,467,136
|
||
Fiscal
Year 2008 Totals
|
$
|
4,887,759
|
||
31-Mar-09
|
$
|
3,191,630
|
||
30-Jun-09
|
$
|
3,686,644
|
||
Fiscal
Year 2009 Totals
|
$
|
6,878,274
|
CyberDefender
Early Detection Center V2.0 is typically offered to consumers on a trial basis.
The consumer downloads a limited version of the software from the
Internet. Using the trial version, the consumer scans his computer
for threats and then has the option to upgrade to a fully featured version of
the software for a fee. Typically, the trial version is limited to a
simple security scan. Once upgraded, users are able to remove the threats from
their PCs.
CyberDefenderFREE
is offered to consumers at no cost. CyberDefenderFREE generates
revenue through banner advertisements and upgrades. There is no trial
period for using the CyberDefender FREE V2.0 software. Once a
subscriber downloads the software, it is his to keep and we receive payment from
the advertisers.
By
providing the software with and without advertising, we generate revenues from
either the advertiser or the subscriber. This business model allows
any computer user to obtain protection against Internet threats, regardless of
his ability to pay. We made this change because we believe that the
advertising revenue we may receive, in conjunction with the licensing fees we
receive, could be substantial. We obtain the ads from ad networks,
which are plentiful. Ad networks provide advertising for a website
and share advertiser revenue each time the website visitors click on the
ads. During the month that the ads are displayed on a subscriber’s
computer, revenues will be earned from the ad networks each time an ad is shown
(per impression) or when an ad is clicked (per click) or for each action taken
by the subscriber after he clicks on the ad and visits the advertiser’s website
(per action).
While we
were developing CyberDefender Early Detection Center/CyberDefender FREE 2.0, we
slowed down our efforts in marketing our CyberDefender Anti-Spyware 2006
software so that we could devote more of our financial resources to the
development of our new product. The expense of turning our business
from a marketer of a single software product into a developer of a suite of
Internet security products exceeded our revenues. During this period,
our new user marketing was restricted to experimental
activities. Therefore, as and when we needed cash, we sold our
securities. To date, we have received $5,775,000 from the sale of our
convertible debt securities, $800,000 from the sale of our 7.41% Original Issue
Discount Notes, $160,000 from the issuance of a note payable to a shareholder,
$4,916,880 from the sale of our common stock and units consisting of our common
stock and warrants and $2,081,016 from the exercise of warrants in connection
with a warrant tender offer.
We are
continuing to roll-out our CyberDefender Early Detection Center
V2.0/CyberDefender FREE V2.0, CyberDefenderULTIMATE, CyberDefender Identity
Protections Services, MyIdentityDefender and CyberDefender Registry Cleaner
products and, to date, revenues we receive from advertising or from those who
license the products have not been adequate to support our
operations. We stopped selling CyberDefenderCOMPLETE, which we
launched in September 2007 and which provided a one-time fix and year-round
unlimited anti-malware support for a subscriber’s computer, in July 2009. We
expect that our expenses will continue to exceed our revenues for at least the
next two to three months. We currently believe that we have enough
cash to fund our operations through June 2010. In order to fund our
operations beyond that date, we will be required to borrow money or to find
other sources of financing. We do not have any commitments for
financing at this time and we cannot guarantee that we will be able to find
financing when we need it. If we are unable to find financing when we
need it we may be required to curtail, or even to cease, our
operations.
16
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations is
based on our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses for each period. The following represents a summary of our
critical accounting policies, defined as those policies that we believe are the
most important to the portrayal of our financial condition and results of
operations and that require management’s most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effects of
matters that are inherently uncertain.
Revenue
recognition. We recognize revenue from the sale of software
licenses under the guidance of SOP No. 97-2, “Software Revenue Recognition,” as
amended by SOP No. 98-9, “Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions” and SEC Staff Accounting
Bulletin (SAB) 104.
Specifically,
we recognize revenues from our CyberDefender Anti-Spyware 2006, CyberDefender
Early Detection Center, CyberDefenderULTIMATE and CyberDefenderCOMPLETE products
when all of the following conditions for revenue recognition are
met:
·
|
persuasive evidence of an
arrangement exists,
|
·
|
the product or service has been
delivered,
|
·
|
the fee is fixed or determinable,
and
|
·
|
collection of the resulting
receivable is reasonably
assured.
|
We
currently sell four products, CyberDefender Early Detection Center (“EDC”), an
antivirus and anti spyware software, CyberDefender Registry Cleaner,
CyberDefenderULTIMATE and Identity Protection Services, over the Internet. We
also offer a backup CD-ROM of the EDC software for an additional
fee. CyberDefenderCOMPLETE offered customers one-time technical
support and a license for EDC, while CyberDefenderULTIMATE offers customers
unlimited technical support for a specified period and a license for
EDC. Customers order the product and simultaneously provide their
credit card information to us. Upon receipt of authorization from the
credit card issuer, we provide technical support if the customer purchased
CyberDefenderULTIMATE or CyberDefenderCOMPLETE and a license allowing the
customer to download EDC over the Internet. As part of the sales
price, we provide renewable product support and content updates, which are
separate components of product licenses and sales. Term licenses
allow customers to use our products and receive product support coverage and
content updates for a specified period, generally twelve months. We
invoice for product support, content updates and term licenses at the beginning
of the term. These revenues contain multiple element arrangements
where “vendor specific objective evidence” (“VSOE”) may not exist for one or
more of the elements. EDC and CyberDefenderULTIMATE are in substance
a subscription and the entire fee is deferred and is recognized ratably over the
term of the arrangement according to the guidance in SOP 97-2 paragraph
49. Revenue is recognized immediately for the sale of the backup
CD-ROM and CyberDefender Registry Cleaner as we believe that all of the elements
necessary for revenue recognition have occurred. We stopped selling
CyberDefenderCOMPLETE in July 2009. We recognized the portion
of the sale of CyberDefenderCOMPLETE that related to the one-time technical
support immediately upon the sale of the product.
We also
use third parties to sell our software and therefore we evaluate the criteria of
Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force Issue
No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent”, in
determining whether it is appropriate to record the gross amount of revenue and
related costs or the net amount earned as commissions. We are the
primary obligor, are subject to inventory risk, have latitude in establishing
prices and selecting suppliers, establish product specifications, and have the
risk of loss as it relates to cargo losses. Accordingly, our revenue
is recorded on a gross basis.
17
We also
offer two products which are free to the subscriber, CyberDefender FREE 2.0 and
MyIdentityDefender Toolbar. Revenues are earned from advertising networks which
pay the Company to display advertisements inside the software or through the
toolbar search. Under the guidance of SAB 104, we recognize revenue from the
advertising networks monthly based on a rate determined either by the quantity
of the ads displayed or the performance of the ads based on the amount of times
the ads are clicked by the user. Furthermore, advertising revenue is recognized
provided that no significant obligations remain at the end of a period and
collection of the resulting receivable is probable. Our obligations do not
include guarantees of a minimum number of impressions.
Deferred charges. We use a
third party service provider for the technical support services provided as part
of our CyberDefenderCOMPLETE and CyberDefenderULTIMATE products. The
costs associated with this service are deferred and expensed over the same
period as the related revenue.
We use
third parties to process a portion of our product renewal sales. We
pay a direct acquisition fee to the processors for each completed
sale. These direct acquisition fees are deferred and recognized
ratably over the term of the arrangement of the associated sale in accordance
with FASB Technical Bulletin 90-1, “Accounting for Separately Priced Extended
Warranty and Product Maintenance Contracts”. The third party
processors refund any direct acquisition cost paid to it on any credit card
chargeback or on any product that is returned. The refunds are matched against
the associated chargebacks and product returns.
Reserves for product returns.
The Company’s policy with respect to product returns is defined in its End User
License Agreement (“EULA”), which states “...products purchased that are
downloadable are refundable within the first 30 days after the date of
purchase.” Product returns are generally received within 30 days of the original
sale and are charged against the associated sale upon receipt of the
return. A chargeback occurs when a customer contacts their issuing credit
card company directly to request a refund instead of contacting the
Company. The Company’s third party processor is usually notified within 30
days of any chargebacks by the issuing credit card company. The third
party processor reduces the amounts due to the Company as a result of any
chargeback during the preceding 30 day period. As a result, a majority of
chargebacks occur within 30 days of the sale event and are recorded prior to
closing the previous month’s accounting records. The Company may
voluntarily accept returns from a customer after 30 days of purchase. The
returns are charged against revenues upon receipt. As of June 30, 2009 and 2008,
the Company had $0 accrued for customer returns and chargebacks, based on
historical returns.
Software Development
Costs. We account for software development costs in accordance
with SFAS No. 86, “Computer Software to Be Sold, Leased, or Otherwise
Marketed”. Such costs are expensed prior to achievement of
technological feasibility and thereafter are capitalized. We have had
very limited software development costs incurred between the time the software
and its related enhancements have reached technological feasibility and its
general release to customers. As a result, all software development
costs have been charged to product development.
Stock Based Compensation and Fair
Value of our Shares. We adopted SFAS No. 123 (Revised 2004),
“Share Based Payment” (“SFAS No. 123R”), under the modified-prospective
transition method on January 1, 2006. SFAS No. 123R requires
companies to measure and recognize the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair
value. Share-based compensation recognized under the
modified-prospective transition method of SFAS No. 123R includes share-based
compensation based on the grant date fair value determined in accordance with
the original provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation”, for all share-based payments granted prior to and not yet vested
as of January 1, 2006 and share-based compensation based on the grant-date
fair-value determined in accordance with SFAS No. 123R for all share-based
payments granted after January 1, 2006.
Derivative Instruments.
Effective January 1, 2009, the Company adopted the provisions of EITF 07-5,
"Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF
07-5”). EITF 07-5 applies to any freestanding financial instruments or embedded
features that have the characteristics of a derivative, as defined by SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities,”
and to any freestanding financial instruments that are potentially settled in an
entity’s own common stock. As a result of adopting EITF 07-5, as of January 1,
2009, 7,134,036 of the Company’s issued and outstanding common stock purchase
warrants previously treated as equity pursuant to the derivative treatment
exemption were no longer afforded equity treatment. In addition, amounts related
to the embedded conversion feature of convertible notes issued previous to
January 1, 2009 and treated as equity pursuant to the derivative treatment
exemption were also no longer afforded equity treatment. As such, effective
January 1, 2009, the Company reclassified the fair value of these common stock
purchase warrants and the fair value of the embedded conversion features, which
both have exercise price reset features, from equity to liability status as if
these warrants and embedded conversion features were treated as a derivative
liability since the earliest date of issue in September 2006. On
January 1, 2009, the Company reclassified from additional paid-in capital,
as a cumulative effect adjustment, $7,065,940 to beginning additional paid
in capital, $723,930 to opening retained earnings and $6,342,010 to a long-term
derivative liability to recognize the fair value of such warrants and embedded
conversion features on such date.
18
During
the three and six months ended June 30, 2009, the Company issued 0 and 1,192,000
common stock purchase warrants that contained features that required the Company
to record their fair value as a derivative liability. In addition,
the value related to the embedded conversion feature of convertible notes issued
during the three and six months ended June 30, 2009 were also recorded as a
derivative liability. The fair value of these common stock purchase warrants and
the embedded conversion feature on their respective value date for the three and
six months ended June 30, 2009 was $0 and $906,805. We recognized a
gain of $0 and $109,058 from the change in fair value of the outstanding
warrants and embedded conversion feature for the three and six months ended June
30, 2009.
Subsequent
to June 30, 2009, the Company obtained waivers from the majority of warrant and
note holders as defined in their respective agreements, pursuant to which the
warrant and note holders forever waived, as of and after April 1, 2009, any and
all conversion or exercise price adjustments that would otherwise occur, or
would have otherwise occurred on or after April 1, 2009, as a result of the
price reset provisions included in the warrants and notes. As a result of
obtaining the waivers, the warrants and notes are now afforded equity treatment
under EITF 07-5, resulting in the elimination of the derivative liabilities of
$7,139,757 and a corresponding increase in additional
paid-in-capital.
Fair Value Measurements In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes a framework
for measuring fair value in GAAP, and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value measurements, but
provides guidance on how to measure fair value by providing a fair value
hierarchy used to classify the source of the information. In February 2008,
the FASB deferred the effective date of SFAS 157 by one year for certain
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). On January 1, 2008, the Company adopted the
provisions of SFAS 157, except as it applies to those nonfinancial assets and
nonfinancial liabilities for which the effective date has been delayed by one
year, which we adopted on January 1, 2009. The adoption of SFAS 157 did not
have a material effect on the Company’s financial position or results of
operations. The book values of cash, accounts receivable and accounts payable
approximate their respective fair values due to the short-term nature of these
instruments.
The fair
value hierarchy distinguishes between assumptions based on market data
(observable inputs) and an entity’s own assumptions (unobservable inputs). The
hierarchy consists of three levels:
|
•
|
Level one — Quoted market prices
in active markets for identical assets or
liabilities;
|
|
•
|
Level two — Inputs other than
level one inputs that are either directly or indirectly observable;
and
|
|
•
|
Level three — Unobservable inputs
developed using estimates and assumptions, which are developed by the
reporting entity and reflect those assumptions that a market participant
would use.
|
Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter. The Company has no assets or liabilities that are measured at fair
value on a recurring basis. There were no assets or liabilities measured at fair
value on a non-recurring basis during the six months ended June 30,
2009.
19
Contractual
Obligations
We are
committed under the following contractual obligations as of June 30,
2009:
Contractual Obligations
|
Payments Due By Period
|
|||||||||||||||||||
|
Total
|
Less than 1 year
|
1 to 3 Years
|
3 to 5 Years
|
Over 5 Years
|
|||||||||||||||
Long-term
debt obligations
|
$
|
2,034,259
|
$
|
2,034,259
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Capital
lease obligations
|
$
|
35,854
|
$
|
19,533
|
$
|
13,507
|
$
|
2,814
|
$
|
-
|
||||||||||
Operating
lease obligations
|
$
|
626,494
|
$
|
164,381
|
$
|
326,484
|
$
|
135,629
|
$
|
-
|
Off-Balance
Sheet Arrangements
We do not
have off-balance sheet arrangements. As part of our ongoing business,
we do not participate in transactions that generate relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, often established
for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.
Indemnities
During
the normal course of business, we have agreed to certain
indemnifications. In the future, we may be required to make payments
in relation to these commitments. These indemnities include
agreements with our officers and directors which may require us to indemnify
these individuals for liabilities arising by reason of the fact that they were
or are officers or directors. The duration of these indemnities
varies and, in certain cases, is indefinite. There is no limit on the
maximum potential future payments we could be obligated to make pursuant to
these indemnities. We hedge some of the risk associated with these
potential obligations by carrying general liability
insurance. Historically, we have not been obligated to make any
payments for these obligations and no liabilities have been recorded for these
indemnities in our financial statements.
Trends,
Events and Uncertainties
As
described above in the discussion of revenue recognition, we receive payment
upon the sale of our products and defer the revenue over the life of the license
agreement, which is generally one year. We have disclosed in the
table below the total number of licenses sold (net of returns and chargebacks),
gross dollar sales (net of returns and chargebacks) before deferral for the most
recent eighteen months and the percentage change of each compared to the
preceding month.
|
Total # of
Licenses
|
% Change
|
Gross Sales $
|
% Change
|
Avg. $ Sale
|
% Change
|
||||||||||||||||||
January
2008
|
1,043
|
-
|
$
|
38,791
|
-
|
$
|
37.19
|
-
|
||||||||||||||||
February
2008
|
1,695
|
62.5
|
%
|
$
|
67,040
|
72.8
|
%
|
$
|
39.55
|
6.3
|
%
|
|||||||||||||
March
2008
|
2,761
|
62.9
|
%
|
$
|
110,190
|
64.4
|
%
|
$
|
39.91
|
0.9
|
%
|
|||||||||||||
April
2008
|
4,811
|
74.2
|
%
|
$
|
225,306
|
104.5
|
%
|
$
|
46.83
|
17.3
|
%
|
|||||||||||||
May
2008
|
7,503
|
56.0
|
%
|
$
|
352,269
|
56.4
|
%
|
$
|
46.95
|
0.3
|
%
|
|||||||||||||
June
2008
|
8,634
|
15.1
|
%
|
$
|
403,970
|
14.7
|
%
|
$
|
46.79
|
-0.3
|
%
|
|||||||||||||
July
2008
|
14,207
|
64.5
|
%
|
$
|
711,236
|
76.1
|
%
|
$
|
50.06
|
7.0
|
%
|
|||||||||||||
August
2008
|
18,458
|
29.9
|
%
|
$
|
928,789
|
30.6
|
%
|
$
|
50.32
|
0.5
|
%
|
|||||||||||||
September
2008
|
17,358
|
-6.0
|
%
|
$
|
866,509
|
-6.7
|
%
|
$
|
49.92
|
-0.8
|
%
|
|||||||||||||
October
2008
|
18,908
|
8.9
|
%
|
$
|
992,526
|
14.5
|
%
|
$
|
52.49
|
5.2
|
%
|
|||||||||||||
November
2008
|
28,663
|
51.6
|
%
|
$
|
1,342,556
|
35.3
|
%
|
$
|
46.84
|
-10.8
|
%
|
|||||||||||||
December
2008
|
25,086
|
-12.5
|
%
|
$
|
1,265,459
|
-5.7
|
%
|
$
|
50.44
|
7.7
|
%
|
|||||||||||||
January
2009
|
33,754
|
34.6
|
%
|
$
|
1,829,638
|
44.6
|
%
|
$
|
54.21
|
7.5
|
%
|
|||||||||||||
February
2009
|
30,169
|
-10.6
|
%
|
$
|
1,764,773
|
-3.5
|
%
|
$
|
58.50
|
7.9
|
%
|
|||||||||||||
March
2009
|
35,881
|
18.9
|
%
|
$
|
1,947,074
|
10.3
|
%
|
$
|
54.26
|
-7.2
|
%
|
|||||||||||||
April
2009
|
37,192
|
3.7
|
%
|
$
|
2,174,006
|
11.7
|
%
|
$
|
58.45
|
7.7
|
%
|
|||||||||||||
May
2009
|
29,126
|
-21.7
|
%
|
$
|
1,696,597
|
-22.0
|
%
|
$
|
58.25
|
-0.3
|
%
|
|||||||||||||
June
2009
|
31,033
|
6.5
|
%
|
$
|
1,706,008
|
0.6
|
%
|
$
|
54.97
|
-5.6
|
%
|
20
The table
above indicates an overall upward trend in the number of licenses sold as well
as the average dollar sale. The general upward trend is a result of
our focus on promoting our new products that were released in late 2007 and an
increase in the amount of money spent on advertising, as discussed
below. Any fluctuation from month to month is the result of our
efforts to optimize profits while continuing to increase revenues. We cannot
guarantee that this upward trend will continue, even with increased spending on
advertising, or that the margins will remain beneficial to us. The
table above does not include advertising revenue.
We have
disclosed in the table below total renewable sales by month and the
corresponding year in which those sales will be renewed. Management
currently believes, based on historical trends, that approximately 50% of these
initial sales will be renewed at the end of the initial license
term. The Company currently licenses its products and services over
one, two and three years.
|
Renewable in year
|
|||||||||||||||
Month of initial sale
|
2009
|
2010
|
2011
|
2012
|
||||||||||||
January
2008
|
$
|
37,101
|
120
|
-
|
-
|
|||||||||||
February
2008
|
$
|
64,360
|
-
|
-
|
-
|
|||||||||||
March
2008
|
$
|
105,978
|
1,164
|
768
|
-
|
|||||||||||
April
2008
|
$
|
196,740
|
13,400
|
9,316
|
-
|
|||||||||||
May
2008
|
$
|
303,376
|
26,144
|
15,449
|
-
|
|||||||||||
June
2008
|
$
|
347,341
|
29,366
|
20,912
|
-
|
|||||||||||
July
2008
|
$
|
580,488
|
71,284
|
45,834
|
-
|
|||||||||||
August
2008
|
$
|
750,081
|
107,022
|
58,106
|
-
|
|||||||||||
September
2008
|
$
|
723,378
|
87,587
|
44,904
|
-
|
|||||||||||
October
2008
|
$
|
780,717
|
132,116
|
50,783
|
-
|
|||||||||||
November
2008
|
$
|
1,042,528
|
142,115
|
96,733
|
-
|
|||||||||||
December
2008
|
$
|
904,841
|
188,291
|
106,177
|
-
|
|||||||||||
January
2009
|
$
|
-
|
1,121,165
|
361,205
|
164,306
|
|||||||||||
February
2009
|
$
|
-
|
1,023,496
|
374,661
|
193,947
|
|||||||||||
March
2009
|
$
|
-
|
1,173,228
|
282,057
|
137,566
|
|||||||||||
April
2009
|
$
|
-
|
1,288,926
|
594,005
|
114,183
|
|||||||||||
May
2009
|
$
|
-
|
1,056,095
|
458,069
|
81,527
|
|||||||||||
June
2009
|
$
|
-
|
1,008,550
|
425,461
|
82,471
|
|||||||||||
Total
|
$
|
5,836,929
|
7,470,069
|
2,944,440
|
774,000
|
|||||||||||
Approx
Renewal %
|
50
|
%
|
50
|
%
|
50
|
%
|
50
|
%
|
||||||||
Expected
Renewal Sales
|
$
|
2,918,465
|
3,735,035
|
1,472,220
|
387,000
|
Other
trends, events and uncertainties that may impact our liquidity are included in
the discussion below.
21
RESULTS
OF OPERATIONS
Revenue
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||||
|
Change in
|
Change in
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
||||||||||||||||||||||||
Net
sales
|
$
|
3,686,644
|
$
|
742,862
|
$
|
2,943,782
|
396
|
%
|
$
|
6,878,274
|
$
|
1,217,908
|
$
|
5,660,366
|
465
|
%
|
This
increase in net revenue was due primarily to the increase in new product sales
that have resulted from our expanded product offerings as well as an increase in
advertising costs associated with customer acquisition.
Cost
of Sales
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||||
|
Change in
|
Change in
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
||||||||||||||||||||||||
Cost
of Sales
|
$
|
753,324
|
$
|
193,240
|
$
|
560,084
|
290
|
%
|
$
|
1,433,028
|
$
|
267,225
|
$
|
1,165,803
|
436
|
%
|
This
increase is due primarily to the increase in sales of our technical support
service products which are serviced by a third party, an increase in sales of
the CD-ROMs that backup our EDC software and sales of third party products that
require a per sale royalty.
Operating
Expenses
Advertising
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||||
|
Change in
|
Change in
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
||||||||||||||||||||||||
Advertising
|
$
|
3,408,307
|
$
|
1,001,505
|
$
|
2,406,802
|
240
|
%
|
$
|
7,152,001
|
$
|
1,281,891
|
$
|
5,870,110
|
458
|
%
|
Advertising
costs are comprised primarily of media and channel fees, including online and
offline advertising and related functional resources. Media and channel fees
fluctuate by channel and are higher for the direct online consumer market than
for the OEM, reseller and SMB markets. This increase was primarily
due to the launch of our new products, expanding our advertising channels to
include traditional media, such as radio and television, and our decision to use
advertising as a customer acquisition strategy. Advertising purchased from four
vendors accounted for 67% and 78% of the Company’s total advertising expense for
the three and six months ended June 30, 2009, respectively. Advertising
purchased from three vendors accounted for 92% of the Company’s total
advertising expense for the three and six months ended June 30,
2008.
Product
Development
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||||
|
Change in
|
Change in
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
||||||||||||||||||||||||
Product
Development
|
$
|
365,497
|
$
|
93,893
|
$
|
271,604
|
289
|
%
|
$
|
665,234
|
$
|
203,861
|
$
|
461,373
|
226
|
%
|
22
Product
development expenses are primarily comprised of research and development costs
associated with the continued development of our products. This increase is
primarily due to the ongoing support and improvement of our existing
products.
Selling,
General and Administrative
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||||
|
Change in
|
Change in
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
||||||||||||||||||||||||
S,G
& A
|
$
|
1,565,995
|
$
|
737,176
|
$
|
828,819
|
112
|
%
|
$
|
2,817,552
|
$
|
1,363,106
|
$
|
1,454,446
|
107
|
%
|
Selling,
general and administrative expenses are primarily comprised of executive
management salaries, customer service salaries and wages, third party credit
card processing fees, legal and professional fees, rent and salaries of our
support staff.
The
increase was primarily attributable to two factors. The first is an
increase in third party credit card processing fees due to the increase in
sales. The second is an increase in customer service salaries and wages due to
the increase in staffing required as a result of the increase in
sales. Additionally, there was an overall increase in all areas due
to the increased sales activities in the current period. These
expenses have decreased as a percentage of net sales to 41% from 112% for the
six months ended June 30, 2009 as compared to the six months ended June 30,
2008. We expect to continue to incur professional fees for audit, legal and
investor relations services, and for insurance costs as a result of being a
public company. We believe that these costs will remain consistent with costs
incurred during the current period.
Investor
Relations and Other Related Consulting
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||||
|
Change in
|
Change in
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
||||||||||||||||||||||||
Investor
relations and other related consulting
|
$
|
1,346,207
|
$
|
-0-
|
$
|
1,346,207
|
100
|
%
|
$
|
2,566,209
|
$
|
200,000
|
$
|
2,366,209
|
1,183
|
%
|
The
increase was primarily attributable to the value of warrants issued to various
consultants for investor relation services and creative services during the
period as more fully described in the notes to the condensed financial
statements.
Other
Income/(Expense)
Change
in the value of derivative liabilities
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||||
|
Change in
|
Change in
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
||||||||||||||||||||||||
Change
in the value of derivative liabilities
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
0
|
%
|
$
|
109,058
|
$
|
-0-
|
$
|
109,058
|
100
|
%
|
23
As more
fully described in the notes to the condensed financial statements, on
January 1, 2009 we adopted the provisions of EITF 07-5. EITF 07-5 applies
to any freestanding financial instruments or embedded features that have the
characteristics of a derivative, as defined by SFAS No. 133. As
such, we were required to reclassify certain amounts from the equity section of
the balance sheet to the liabilities section. In addition, the value
of these instruments must be reassessed by us as of each balance sheet
date. Subsequent to June 30, 2009, the Company obtained waivers from
the warrant and note holders that forever waive, as of and after April 1, 2009,
any and all conversion or exercise price adjustments that would otherwise occur,
or would have otherwise occurred on or after April 1, 2009, as a result of
certain anti-dilution provisions included in the warrants and notes. As a result
of obtaining the waivers, the warrants and notes are now afforded equity
treatment under EITF 07-5. The change in the value of these instruments for the
six months ended June 30, 2009 resulted in a gain.
Interest
expense
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||||
|
Change in
|
Change in
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
||||||||||||||||||||||||
Interest
expense
|
$
|
1,052,932
|
$
|
524,913
|
$
|
528,019
|
101
|
%
|
$
|
1,965,441
|
$
|
1,175,697
|
$
|
789,744
|
67
|
%
|
The
increased interest expense was mainly due to an acceleration in the amortization
of debt discount and deferred financing costs related to the conversion of
approximately $1.9 million of our convertible debt plus the issuance of
additional warrants as part of the warrant tender offer offset by the decrease
in the interest and amortization expense related to the 7.41% Original Issue
Discount Notes that were converted in late 2008.
Loss
From Operations
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||||
|
Change in
|
Change in
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
||||||||||||||||||||||||
Loss
from operations
|
$
|
3,762,446
|
$
|
1,292,780
|
$
|
2,469,666
|
191
|
%
|
$
|
7,775,846
|
$
|
2,117,831
|
$
|
5,658,015
|
267
|
%
|
Loss from
operations increased during the three and six months ended June 30, 2009 due
primarily to significant increases in advertising, selling, general and
administrative costs and the value of warrants granted for investor relations
and consulting services, as more fully described above.
Net
Loss
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||||||||||||||||||
|
Change in
|
Change in
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
||||||||||||||||||||||||
Net
loss
|
$
|
4,815,567
|
$
|
2,034,433
|
$
|
2,781,134
|
137
|
%
|
$
|
9,632,618
|
$
|
3,510,468
|
$
|
6,122,150
|
174
|
%
|
24
Net
loss increased during the three and six months ended June 30, 2009 due primarily
to significant increases in advertising, selling, general and administrative
costs, investor relations and consulting expenses and interest expense, as more
fully described above.
Liquidity
and Capital Resources
In
November 2006 we changed our operating strategy by deciding to introduce a suite
of security products instead of just a single product. We also
changed the way in which our core product was offered to
consumers. Rather than just licensing the product and collecting a
license fee, we offered consumers a choice. They could download a
free version of the product that included advertising by third parties or they
could purchase a license for the product and the product would be free of
advertising. Our advertising revenues are earned each time an ad is
shown (per impression) or when an ad is clicked (per click) or for each action
taken by the consumer after he clicks on the ad and visits the advertiser’s
website (per action). This change in our business resulted in a
significant decrease in our revenues from 2006 to 2007 since we stopped selling
our CyberDefender AntiSpyware 2006 product while we developed and rolled-out our
new products. We launched two of our new products in late 2007 and
subsequently our revenues have been increasing on a quarterly basis since
January 2008, however, our expenses still exceed our revenues.
To
help with our cash flow, we occasionally sell our debt or equity
securities. During the six months ended June 30, 2009, the Company
received proceeds of $3,106,880 from the sale of its common stock, $1,899,420,
net of offering costs of $68,891, from the exercise of warrants in connection
with a warrant tender offer and $288,000, net of offering costs of $12,000, from
the sale of our 10% Convertible Promissory Notes. As of June 30, 2009, we had
outstanding $2,034,259 in principal amount of debt securities. Of
this amount, $534,259 represents the outstanding principal amount of our 10%
Secured Convertible Debentures and 10% Convertible Debentures and $1,500,000
represents the outstanding principal amount of our 10% Convertible Promissory
Notes. As of the date of this prospectus there was $69,982 in
interest that is accrued and unpaid under these obligations. As of
June 30, 2009, there was $110,212 in interest that is accrued and unpaid under
these obligations. As of the date of this prospectus there was
$69,982 in interest that is accrued and unpaid under these obligations. From
June 30, 2009 until the date of this prospectus, holders of our 10% Secured
Convertible Debentures have converted principal in the amount of $25,000 into
25,000 shares of our common stock and holders of our 10% Convertible Debentures
have converted $11,486 of principal into 13,513 shares of our common stock. As
of the date of this prospectus, we have also received additional conversion
notices from (i) holders of our 10% Secured Convertible Debentures to convert
principal in the amount of $371,671 into 371,671 shares of our common stock,(ii)
holders of our 10% Convertible Debentures to convert $126,102 of principal into
148,357 shares of our common stock and (iii) holders of our 10% Convertible
Promissory Notes to convert $1,500,000 of principal into 1,131,429 shares of our
common stock.
At June
30, 2009, we had cash and cash equivalents totaling $2,159,478. In the six
months ended June 30, 2009, we generated positive cash flows of
$1,380,407. Cash activity during the six months ended June 30, 2009
included:
Operating
Activities
Net cash
used in operating activities during the six months ended June 30, 2009 was
primarily the result of our net loss of $9,632,618. Net loss for the six months
ended June 30, 2009 was adjusted for non-cash items such as amortization
of debt discount and deferred financing costs, depreciation and
amortization, shares issued for penalties, interest and services, compensation
expense from the issuance of stock options, warrants issued in connection with a
warrant tender offer and the change in the value of derivative liabilities.
Other changes in working capital accounts include an increase in restricted
cash, decreases in accounts receivables, prepaid expenses and accounts payable,
and increases in deferred charges and deferred revenue as a result of an
increase in the sales of our new products. Net cash used in operating activities
during the six months ended June 30, 2008 was primarily the result of our net
loss of $3,510,468.
25
Historically,
our primary source of operating cash flow is the collection of license fee
revenues from our customers and the timing of payments to our vendors and
service providers. During the six months ended June 30, 2009, we did not make
any significant changes to our payment terms for our customers, which are
generally credit card based.
Our
operating cash flows, including changes in accounts payable and accrued
liabilities, are impacted by the timing of payments to our vendors for accounts
payable. We typically pay our vendors and service providers in
accordance with invoice terms and conditions. The timing of cash
payments in future periods will be impacted by the nature of accounts payable
arrangements. In the six months ended June 30, 2009 and 2008, we did
not make any significant changes to the timing of payments to our vendors,
although our financing activities caused an increase in this
category.
Our
working capital deficit at June 30, 2009, defined as current assets minus
current liabilities, was $(7.0) million as compared to a working capital deficit
of $(7.8) million at December 31, 2008. The increase in working
capital of approximately $0.8 million from December 31, 2008 to June 30, 2009
was attributable to an increase in current assets of approximately $2.6 million
which was mainly due to an increase in cash from our financing activities and an
increase in the current portion of deferred charges offset by an increase in
current liabilities of $1.7 million primarily associated with an increase in the
current portion of deferred revenue offset by decreases in accounts payable and
the current portion of convertible notes payable.
Investing
Activities
Net cash
used in investing activities during the six months ended June 30, 2009 was
approximately $6,500, which was used for property and equipment purchases. We
anticipate that we will continue to purchase property and equipment necessary in
the normal course of our business. The amount and timing of these purchases and
the related cash outflows in future periods is difficult to predict and is
dependent on a number of factors, including but not limited to our hiring of
employees and the rate of change in computer hardware and software used in our
business. No cash was used in investing activities during the six months ended
June 30, 2008.
Financing
Activities
Net cash
provided by financing activities during the six months ended June 30, 2009 was
provided to us primarily from the proceeds that we received from the sale of our
common stock of approximately $3.1 million, proceeds from the exercise of
warrants to purchase our common stock, net of offering costs, of approximately
$1.9 million and proceeds of approximately $0.6 million from the issuance of
convertible notes payable, net of offering costs. Net cash provided by financing
activities during the six months ended June 30, 2008 was primarily from the
issuance of a note payable in the amount of $160,000 and the sale of stock in
the amount of $529,000, offset by principal payments on notes payable of
$189,000.
We
expect to meet our obligations through at least December 2010. However, we
cannot predict whether our current growth as a developer of a suite of Internet
security products will continue or what the effect on our business might be from
the competitive environment in which we operate. We anticipate substantial
operating cash flows related to renewal receipts from prior year sales of our
licensable and renewable products in the fourth quarter of 2009. However, we
continue to manage our operating costs and expect to continue to grow so long as
we have the working capital and management and support personnel to sustain our
growth. To the extent it becomes necessary to raise additional cash in the
future, we will seek to raise it through the sale of debt or equity securities,
the conversion of outstanding dilutive securities for cash, funding from
joint-venture or strategic partners, debt financing or short-term loans, or a
combination of the foregoing. We may also seek to satisfy indebtedness without
any cash outlay through the private issuance of debt or equity securities. In
July 2009, we raised $500,000 from the sale of our common stock. We currently do
not have any binding commitments for, or readily available sources of,
additional financing. We cannot provide any assurances that we will be able to
secure the additional cash or working capital we may require to continue our
operations, either now or in the future. If we are unable to secure financing,
we may be required to severely curtail, or even to cease, our
operations.
26
Our June
30, 2009 interim financial statements have been presented on the basis that we
are a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. We incurred net
losses of $9,632,618 and $3,510,468 during the six months ended June 30, 2009
and 2008, respectively however, as reflected on the Statements of Cash Flows,
our cash used in operations was $4,311,066 and $403,552 during the six months
ended June 30, 2009 and 2008, respectively. In addition, at June 30, 2009, we
had negative working capital of $7.0 million, of which a large portion relates
to deferred revenue, and an accumulated deficit of $35 million, of which a large
portion relates to non-cash charges for the value of equity issued over the
years. These items raise substantial doubt about our ability to continue as a
going concern. We are confident that the recent increases in sales volume, as
evidenced by sales receipts in 2009 of more than $10 million, will provide us
with a significant renewable revenue stream related to the ongoing license
renewals of thousands of customers that we are acquiring every month. However,
until these renewals along with new sales of the products provide us with the
revenue we need to attain profitability, we intend to continue to raise money
for operating capital through sales of our securities or by borrowing money.
From inception through the date of this prospectus, we have raised $6,735,000
from debt financing, $4,916,880 from equity financing and $2,081,016 from the
exercise of warrants in connection with our warrant tender offer to develop
software and to build out a management team capable of delivering our products
to market. Our ability to continue as a going concern is dependent upon our
ability to develop additional sources of capital. Management cannot assure that
any future financing arrangements will be available in amounts or on terms
acceptable us. If additional future financing is not available or is not
available on acceptable terms, we may be unable to continue our operations. The
June 30, 2009 interim financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
Fiscal
Year Ended December 31, 2008 Compared to the Fiscal Year Ended December 31,
2007
Revenue
Total
revenue was $4,887,759 for the fiscal year ended December 31, 2008 as compared
to total revenue of $2,220,154 for the fiscal year ended December 31, 2007, an
increase of $2,667,605 or approximately 120%. This increase in total
revenue was due primarily to the increase in new product sales. There was a
corresponding increase in advertising, as described below.
Cost
of Sales
Total
cost of sales increased by $587,326, or approximately 327%, to $767,115 during
the fiscal year ended December 31, 2008, as compared to $179,789 incurred during
the fiscal year ended December 31, 2007. This increase is due primarily to the
increase in sales of our technical support service products and to the increase
in sales of the CD-ROMs that backup our EDC software.
Operating
Expenses
Total
operating expenses increased by $8,217,229, or approximately 185%, to
$12,668,742 during the fiscal year ended December 31, 2008, as compared to
$4,451,513 in operating expenses incurred during the fiscal year ended December
31, 2007. Operating expenses include advertising, product
development, selling, general and administrative expense, the value of equity
issued for consulting services, and depreciation and amortization. A
detailed explanation of the increase in operating expenses is provided in the
discussion below.
Advertising
Advertising
costs are comprised primarily of media and channel fees, including online
advertising and related functional resources. Media and channel fees
fluctuate by channel and are higher for the direct online consumer market than
for the OEM, reseller and SMB markets. Advertising expenses increased
by $6,491,598, or approximately 1,056%, from $614,857 during the fiscal year
ended December 31, 2007 to $7,106,455 during the fiscal year ended December 31,
2008. This increase was primarily due to the launch of our new
products and our decision to use advertising as a customer acquisition strategy.
During the fiscal year ended December 31, 2008 and 2007, four vendors accounted
for approximately 92% and 47% of our advertising expenses,
respectively.
27
Product
Development
Product
development expenses are primarily comprised of research and development costs
associated with the continued development of our products. Product
development expenses decreased by $7,548, from $537,558 during the fiscal year
ended December 31, 2007 to $530,010 during the fiscal year ended December 31,
2008.
Selling,
General and Administrative
Selling,
general and administrative expenses are primarily comprised of salaries,
commissions, rent, stock based compensation and professional fees.
Selling,
general and administrative expenses increased by $529,180, from $3,198,073
during the fiscal year ended December 31, 2007 to $3,727,253 during the fiscal
year ended December 31, 2008. The increase is primarily attributable
to an increase in outside services of approximately $296,000, mainly public
relations and investor relations, an increase in legal expenses of approximately
$85,000 relating to the preparation of public filings and the consents and
waivers that were signed by holders of our 10% Secured Convertible Debentures,
and an increase of approximately $287,000 in credit card fees due to the
increase in sales. These increases were partially offset by a
decrease in salaries of approximately $139,000 due to outsourcing.
Investor
relations and other related consulting
Investor
relations and other related consulting increased by $788,545 from $477,071
during the fiscal year ended December 31, 2007 to $1,265,616 during the fiscal
year ended December 31, 2008. The increase is primarily related to an increased
amount paid for investor relations services in the 2008 fiscal
year.
Interest
expense
Interest
expense decreased by $401,493, from $2,887,827 in the fiscal year ended December
31, 2007 to $2,486,334 in the fiscal year ended December 31,
2008. The decrease in interest expense was primarily due to a
decrease of approximately $252,000 in the amortization of deferred financing
costs and a decrease of approximately $149,000 in interest associated with our
debt which decreased in the 2008 fiscal year.
Public
company costs
We expect
to incur increased professional fees for audit, legal and investor relations
services, and for insurance costs as a result of being a public
company. We also anticipate that we may be required to hire
additional accounting personnel as a public company.
Liquidity
and Capital Resources
In
November 2006 we changed our operating strategy by deciding to introduce a suite
of security products instead of just a single product. Eventually, we
also changed the way in which our core product was offered to
consumers. Rather than licensing the product and collecting a license
fee, we offered consumers a choice. They could download the product
for free, so long as advertising by third parties was included in the
product. Alternatively, consumers could purchase a license for the
product and the product would be free of advertising. Our advertising
revenues are earned each time an ad is shown (per impression) or when an ad is
clicked (per click) or for each action taken by the consumer after he clicks on
the ad and visits to the advertiser’s website (per action). This
change in our business resulted in a significant decrease in our revenues from
2006 to 2007 since we stopped selling our CyberDefender AntiSpyware 2006 product
while we developed and rolled-out our new products. We launched two
of our new products in late 2007 and subsequently our revenues have been
increasing on a quarterly basis since January 2008, however our expenses still
exceed our revenues.
28
To
help with our cash flow, we occasionally sell our debt or equity
securities. As of December 31, 2008 we had outstanding $3,287,754 in
principal amount of debt securities. Of this amount, $2,001,970
represents the outstanding principal amount of our 10% Secured Convertible
Debentures and $440,784 represents the outstanding principal amount of our 10%
Convertible Debentures. As of the date of this prospectus, we have
received conversion notices for all of the principal amount remaining under the
10% Secured Convertible Debentures and the 10% Convertible
Debentures. As of the date of this prospectus there was $69,982 in
interest that is accrued and unpaid under these obligations. We also
sold a total of $845,000 in principal amount of 10% Convertible Promissory Notes
from November 2008 to December 2008. As of the date of this
prospectus, we have received conversion notices from the holders of the 10%
Convertible Promissory Notes that will result in the conversion of all of the
outstanding principal amount into shares of our common stock.
At
December 31, 2008, we had cash and cash equivalents totaling
$779,071. In the fiscal year ended December 31, 2008, we generated
positive cash flows of $542,077. Cash provided/(used) during the
fiscal year ended December 31, 2008 included:
Operating
Activities
Net cash
used in operating activities during the fiscal year ended December 31, 2008 was
primarily the result of our net loss of $11,251,772. Net loss for the
fiscal year ended December 31, 2008 was adjusted for non-cash items such as
amortization of debt discount of $1,322,379, a loss on registration rights
agreement for the effect of partial liquidated damages of $216,540, compensation
expense for vested stock options of $252,943 amortization of deferred financing
fees of $702,061, shares issued for penalties and interest of $253,081, shares
and warrants issued for services of $2,266,783 and depreciation and amortization
of $39,408. Other changes in working capital accounts included an increase in
prepaid and other assets of $667,593, an increase in deferred charges of
$1,010,965, an increase in accounts payable and accrued expenses of $3,059,002
and an increase of $3,923,511 in deferred revenue resulting from higher new
customer and renewal sales.
Historically,
our primary source of operating cash flow is the collection of license fee
revenues from our customers and the timing of payments to our vendors and
service providers. In 2008 and 2007, we did not make any significant
changes to our payment terms for our customers, which are generally credit card
based.
The
increase in cash related to accounts payable, accrued taxes and other
liabilities was $3,059,002. Our operating cash flows, including
changes in accounts payable and accrued liabilities, are impacted by the timing
of payments to our vendors for accounts payable. We typically pay our
vendors and service providers in accordance with invoice terms and
conditions. The timing of cash payments in future periods will be
impacted by the nature of accounts payable arrangements. In the
fiscal years ended December 31, 2008 and 2007, we did not make any significant
changes to the timing of payments to our vendors, although our financing
activities caused an increase in this category.
Our
working capital deficit at December 31, 2008, defined as current assets minus
current liabilities, was $(7.8) million as compared to a working capital deficit
of $(1.9) million at December 31, 2007. The decrease in working
capital of approximately $5.9 million from December 31, 2007 to December 31,
2008 was primarily attributable to an increase in accounts payable and accrued
expenses of approximately $2,750,000, an increase in deferred revenue of
approximately $3,396,000 as a result of increased sales, an increase in the
current portion of notes payable of approximately $1,716,000, an increase in
cash of approximately $542,000, an increase in accounts receivable of
approximately $185,000, an increase in prepaid expenses and other assets of
approximately $667,000, an increase in deferred charges of approximately
$771,000 and a decrease in deferred financing costs of approximately
$273,000.
Investing
Activities
Net cash
used in investing activities during the fiscal year ended December 31, 2008 was
approximately $2,000, which was used for property and equipment
purchases. We expect to continue to purchase property and equipment
in the normal course of our business. The amount and timing of these
purchases and the related cash outflows in future periods is difficult to
predict and is dependent on a number of factors, including but not limited to
any increase in the number of our employees and changes in computer hardware and
software used in our business. Net cash used in investing activities
during the fiscal year ended December 31, 2007 was approximately $5,000 and also
related to the purchase of property and equipment.
29
Financing
Activities
Cash
provided by financing activities during the fiscal year ended December 31, 2008
was primarily the result of issuances of notes payable totaling $954,300 and the
sale of stock net of offering costs totaling $1,042,743. Cash used in
financing activities was primarily used for payment of notes payable totaling
$349,000 and payments on capital lease obligations. Cash provided by
financing activities during the fiscal year ended December 31, 2007 was the
result of issuing notes payable totaling $800,000 and the sale of stock totaling
$654,500. Cash used in financing activities was primarily used for payments on
capital lease obligations.
Description
of Business
We were
incorporated as Network Dynamics in California on August 29, 2003, and changed
our name to CyberDefender Corporation on October 21, 2005. We are a
provider of secure content management (“SCM”) software. Our mission
is to bring to market advanced solutions to protect computer users against
identity theft, Internet viruses, spyware and related security
threats. Individuals who use personal computers make up our
subscriber base, therefore we are not dependent on any single customer or on a
few major customers. While our product is available for downloading
from our website, which makes it available to anyone in the world, we do not
have a significant customer base outside of the United States.
Our
business was originally built around the sale of a single product, our
CyberDefender Anti-spyware. During the period from our founding
through 2004, our primary focus was on marketing and selling this
product. In 2005, we acquired certain assets from Unionway
International, LLC, an entity controlled by Mr. Bing Liu, one of our former
directors and an advisor. Among these assets was software that formed
the basis for our proprietary Collaborative Internet Security Network, which we
refer to as the “CISN” or the “earlyNETWORK™”.
On
November 20, 2006, we stopped engaging in new sales of our product,
CyberDefender Anti-Spyware 2006 (although we still continue to support the
product and will continue upgrading it), and we launched the first of our
current product line, a new Internet security suite called CyberDefender Early
Detection Center V2.0, which is also provided as CyberDefender FREE
V2.0.
We offer
CyberDefender FREE V2.0 as a free download in an ad-supported version and
CyberDefender Early Detection Center V2.0, without ads, in exchange for the
payment of a licensing fee. There is no trial period and no monthly
or annual fee to pay for using CyberDefender FREE V2.0. Instead, we
receive payment from the advertisers, typically at the end of each
month. Subscribers who choose CyberDefender Early Detection Center
pay for the license fees via credit card. The annual subscription
rate for this version of the security suite ranges from $12.99 to $49.99,
depending on the number of licenses bundled, the term of the license and the
marketing and distribution channels that we use. In addition to these
products, we market CyberDefender Registry Cleaner V1.0, CyberDefenderULTIMATE,
CyberDefender Identity Protection Service and MyIdentityDefender browser
toolbar. We distribute our software via the Internet and on computer
disk. Prior to July 2009, we also marketed
CyberDefenderCOMPLETE.
Once our
CyberDefender Early Detection Center V2.0 or CyberDefender FREE V2.0 suite of
security products is downloaded, the subscriber becomes a part of our
earlyNETWORK™. We believe that the earlyNETWORK™ provides a unique
approach to updating personal computer security. We have developed
the earlyNETWORK™ based on certain technology principles commonly found in a
peer-to-peer network infrastructure. A peer-to-peer network does not
have the notion of clients or servers, but only equal peer nodes that
simultaneously function as both “clients” and “servers” to the other nodes on
the network. Therefore, as system demands increase, so does the
system’s capacity. Our earlyNETWORK™ is designed to reduce the lag
time between the identification of a new security threat by our Early Alert
Center and notification to the personal computers that are part of the
earlyNETWORK™. The peer-to-peer network infrastructure allows
us to provide a fluid, distributed system for alerts and updates, and to
incorporate a universal threat definition system. This approach is
different and, we believe, significantly faster than traditional Internet
security companies that provide manual, broadcast-updated threat management
systems.
30
Our
earlyNETWORK™ is an adaptive network of machines that defends automatically
against a wide spectrum of software attacks and provides users with proprietary
automated processes that rapidly identify and quarantine both known and emerging
threats. Our customers obtain access to the earlyNETWORK™ by
downloading and installing our security suite (CyberDefender Early Detection
Center V2.0 or CyberDefender FREE V2.0) or the MyIdentityDefender toolbar,
discussed below. As additional users are added to well-managed peer
networks, the networks work better. The same is true of our
collaborative security network. With more clients, threats are picked
up faster and updates occur faster as well, because users of our software find
peers more easily than they could an update server. Users of our
software who cannot connect with other users will always be able to fall back on
the CyberDefender Alert Server which is the central source for threat analysis
and notification.
The
nature of current SCMs, which assume a single point of threat capture, a
cumbersome threat analysis system and an intermittent update system, creates a
“coverage gap” which can delay alerts on important new infectious attacks for 12
hours or more. However, our proprietary technology quickly
distributes threat updates to all computers that are part of the
earlyNETWORK™. Other SCMs send updates in a scheduled
batch. For example, our system for generating threat reports, the
Early Alert Center, first reported the Sasser.E virus at 11:52 p.m. on May 7,
2004. This was one to two days before other SCM software vendors
announced their discoveries of the same virus. We believe we are the
first to provide threat updates in this manner.
Using the
earlyNETWORK™ infrastructure instead of relying on expensive bandwidth for mass
updates means that our updates are relayed securely throughout the earlyNETWORK™
using each local user’s bandwidth. There is no need to wait for a
scheduled update – updates are simply sent to the entire network in
approximately one hour as opposed to 12 hours for a conventional
network. The network responds quickly to new threats because it
enlists all the machines in the earlyNETWORK™ to act as listening posts for new
threats. Our solution works well with existing security software and
can operate as an additional layer of security on a desktop.
Industry
Background
Secure
Content Management (SCM) Market
According
to a report issued by BCC Research, which was published in January 2006, the
global Internet security market is expected to rise at an average annual growth
rate of 16.0%, reaching $58 billion by 2010. The high growth rate is
attributed to a higher demand for strong security solutions in market verticals
such as government installations, financial services, and
healthcare. Firewall and content management currently account
for a majority share of the market. However, the increasing need to counter
“zero-day” attacks, that is, viruses or other exploits that take advantage of a
newly discovered vulnerability in a program or operating system before the
software developer becomes aware of the vulnerability or fixes it, along with
the increasing popularity of “defense-in-depth” strategies, wherein coordinated
uses of multiple security countermeasures are used to protect the integrity of
information assets, will bring unified threat management solutions to the
forefront.
Currently,
the U.S. and Europe account for a major portion of the Internet security market.
However, the market for Internet security is expected to grow significantly in
the Asia Pacific regions, especially China and India. Increased
e-commerce in these regions and a simultaneously growing security consciousness
is expected to drive the market in these areas.
Three
specific product areas comprise SCM:
Antivirus software identifies
and/or eliminates harmful software and macros by scanning hard drives, email
attachments, disks, Web pages and other types of electronic traffic, for
example, instant messaging and short message service (“SMS”), for any known or
potential viruses, malicious code, trojans or spyware.
Web filtering software is used
to screen and exclude from access or availability Web pages that are deemed
objectionable or not business related. Web filtering is used by
entities to enforce corporate Internet use policies as well as by schools,
universities and home computer owners for parental controls.
Messaging security software is
used to monitor, filter and/or block messages from different messaging
applications, for example, e-mail, IM, SMS and P2P, containing spam,
confidential information and objectionable content. Messaging
security is also used by certain industries to enforce compliance with privacy
regulations.
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SCM
Growth Drivers
Viruses,
worms and spyware are serious threats facing businesses and consumers today
because these programs can be used to steal personal information, enable
identity theft, damage or destroy information stored on a computer and cause
damage to legitimate software, network performance and productivity. These types
of malicious programs are introduced to computers in a number of ways,
including, but not limited to:
|
·
|
poor browser security as most
browsers today are full of security holes that are exploited by hackers
and criminals;
|
|
·
|
growing use of the Internet and
e-mail as a business tool and preferred communication
channel;
|
|
·
|
increased use of mobile devices
to access key data;
|
|
·
|
continued rapid increases in spam
as the majority of spam sent today originates from zombie machines
remotely controlled by
spammers;
|
|
·
|
explosive growth in spyware
causing theft of confidential information, loss of employee productivity,
consumption of large amounts of bandwidth, damage to desktops and a spike
in help desk calls; and
|
|
·
|
flaws in operating systems that
contribute to the wide range of current Internet security threats,
particularly if users do not update their computers with
patches.
|
As a
result of the foregoing factors, the SCM market developed and continues to
expand in order to respond to the ever-evolving threats presented by malicious
programs.
Current
Product Limitations
Many SCM
software vendors have attempted to solve Internet security problems with a
variety of software applications. Although many products exist today to address
such security issues, these solutions face many limitations, including the
following:
No Real-Time Security - Most
antivirus and antispyware software applications do not protect personal
computers against real-time threats. If new viruses or spyware exist on the
Internet but do not reside in risk definition databases, most personal computers
exposed to the threat will be infected. Typical virus protection software
requires frequent downloads and updates to work properly. If a user does not
download a patch timely, the user’s system may no longer be safe. By the time a
new virus is announced, it may already be too late to take action, and an
infection may have occurred. Also, new patches may take hours to install,
decreasing work productivity.
Inability to Catch all Viruses and
Malicious Content – Current threat analysis systems are not capable of
detecting all malicious codes. With current security networks, software alone
cannot detect unknown attacks – human involvement is required. Not only are
threats not detected, but threats that are detected are resolved untimely due to
intermittent update systems delaying user alerts.
Costly Updating - Most
antispyware and antivirus software providers use a client-server network
infrastructure to distribute new spyware and virus definitions. Such solutions
are expensive to maintain because they rely on intensive data centers and
networks to deliver updates, thereby using a significant amount of bandwidth,
which is expensive to obtain. Also, vendors cannot afford to send threat updates
continuously and therefore are slow to distribute them. In fact, many software
vendors provide updates on a scheduled basis, rather than as the updates are
needed. This may leave the PC vulnerable since threats propagate without a
schedule, and therefore a PC which was updated on Monday may be effectively
infected on Tuesday.
Every
consumer or business using any networked device needs to have some form of
Internet security. We provide consumers and business users with a platform of
products and services designed to protect against various types of security
attacks.
32
CyberDefender
Technology
Conventional
Internet security companies use a cumbersome manual process to identify new
threats, analyze threats in labs, and distribute threat updates to their user
bases. These security companies have to broadcast updates to each personal
computer user individually in the network. Serious drawbacks to conventional
broadcast updates exist, including the following:
|
·
|
The expense related to this
process; the network cannot be updated in real-time, and instead is
updated in batches spaced days
apart.
|
|
·
|
Because broadcasting servers are
a single point of distribution, they are vulnerable to “flooding” attacks
that prevent clients from getting the needed
updates.
|
|
·
|
A threat may block a client
computer’s access to the broadcast server, disabling its ability to
download an update for the
threat.
|
We have
addressed these shortcomings by developing the earlyNETWORKTM to
detect, analyze and quarantine new security threats. The earlyNETWORKTM is not
a conventional peer-to-peer network because the Alert Server is a required
checkpoint for all client activities, thus assuring the integrity of the
network. The earlyNETWORKTM is a
controlled publishing network that leverages the power of distributed bandwidth.
Each client has a controlled role in relaying the threat updates to as many as
20 clients, thus allowing continuous release of threat updates.
Unusual
behavior is detected by a personal computer equipped with our CyberDefender
Internet security software. The potential threat may be anything from spam to a
virus. The program puts the potential threat on standby, and reports it to our
Early Alert Center’s Alert Server™. The Alert Server compares the threat to
existing threat definitions. If the Alert Server does not recognize the threat,
the threat is sent to our AppHunter™ for analysis.
AppHunter
is an automated system that manages the threat analysis process. First,
AppHunter tests the undefined threat on an isolated computer that is
automatically wiped clean after each test. Based on the behavior of the test
computer, AppHunter ranks the threat on a scale from one to ten. Rankings of
five and above are classified as infectious (viruses). Additionally, AppHunter
carries out a confidential set of proprietary verifications to ensure that the
threat itself is not an attempt to deceive or hack the network.
As there
is a wide set of possible attacks that do not qualify as viruses, our AppHunter
is supplemented by a team of human technicians who classify threats that rank
below 5 in severity. Threat definitions are added as quickly as possible to our
definition database, which is then updated to our users via our
earlyNETWORKTM. We
continually make changes to our technology to make sure that we address as many
security concerns as possible.
We
believe that our earlyNETWORKTM may be
the only network today that distributes information securely between the
individual personal computer users who have installed our software, which we
have sometimes referred to as “peers” in this discussion.
Using our
peer-to-peer technology, our CyberDefender Alert Server notifies users of our
software who, in turn, notify up to 20 other users in an ever-widening circle.
This distributed notification process frees up the Alert Server to deal with
incoming alerts from clients that have encountered unexpected behavior, and
makes the network truly responsive and “in tune” with its users. Because the
cost of updating using the earlyNETWORKTM is very
small, Alert Server can send out updates as fast as threats are confirmed,
resulting in better security coverage. In general, from the time the first
client has picked up the new threat to the updating of the network, about an
hour passes. We believe that this process occurs roughly ten times faster than
the updating of any other competitive system.
Proprietary
Technology Overview
The
following is a description of our proprietary technologies:
33
1. Threat
Protection Network V1.0 / V2.0 (“TPN”)
Sophisticated
threat analysis platform which utilizes CyberDefender’s proprietary threat
analysis engine and updating technology.
A patent
application covering this technology, serial number 11/234,531 was filed on
September 22, 2005.
2. Secure
Peer to Peer Network V1.2/V2.0
Dynamic
secure peer to peer network which utilizes cloud computing and various
proprietary security protocols in order to update PCs against new
threats.
A patent
application covering this technology, serial number 11/234,868, was filed on
September 22, 2005.
3.
CyberHunter V1.0
A
proprietary web crawling technology which identitifes and collects malware
information found on the web and reports it to the TPN.
4.
CyberDefender Early Detection Center V2.0
Windows
PC Internet security suite designed to protect consumers and small businesses
against viruses, spyware, spam and phishing attacks.
5. Web
Access Protection – CyberDefender MyIdentityDefender V1.0/V1.5
Proprietary
anti-phishing and web access protection technology designed for Windows Internet
Explorer and Windows FireFox browsers.
6.
CyberDefender Gladiator V1.0
A free
tool designed to remove specific malware files from Windows PCs.
Future
Technology Projects
The
following products are currently in the planning or development stages. We
cannot guarantee that any of the following products will be successfully
developed and marketed.
1.
CyberDefender Real-time World Threat Map
A website
dedicated to informing subscribers about emerging threats worldwide. Threat data
will be provided by TPN. By utilizing Google Maps or other mapping technologies,
this platform will provide real time updates via web or wireless devices.
Targeted users will be ISPs and security professionals.
2.
CyberDefender Real-time Threat Feed
Scheduled
for release in 2010 this service will provide real-time threat data feeds to
other Internet security providers and ISPs.
3.
CyberDefender Reputation Management Platform V1.0
A
business and consumer reputation management system designed to inform and
protect online reputation.
4.
CyberDefender Mobile Security Platform
34
Scheduled
for Alpha release in 2010, this will be a consumer-based all-in-one security
suite for the Apple iPhone, Microsoft Windows mobile, Google Andriod and Nokia
Smartphone platforms which will allow them to utilize the power of TPN2 and
SPN2.
Products
CyberDefender
Early Detection Center V2.0
Early
Detection Center V2.0 is a Windows PC Internet security suite designed to
protect consumers against spyware, viruses, phishing attacks and spam.
CyberDefender Early Detection Center utilizes the earlyNETWORK and retails from
$12.99 to $49.99 per single PC user per year. Early subscription includes
unlimited threat definition updates.
CyberDefender
FREE V2.0
FREE V2.0
has the same technology features as the CyberDefender Early Detection Center
V2.0. This version is offered free to consumers and is supported by impeded
banner advertising. Users can upgrade to the non-ad supported version
(CyberDefender Early Detection Center V2.0) for $12.99 to $49.99. Users will
receive unlimited updates as long as the product is available by
CyberDefender.
CyberDefender
Registry Cleaner V1.0
Registry
Cleaner V1.0 is Windows PC optimization software designed to improve performance
and speed up PC speed. CyberDefender Registry Cleaner V1.0 fixes common Windows
registry errors and is offered to consumers for $19.99 to $39.98 for a 1 year
subscription. Users will receive unlimited updates during the 12 month
subscription period.
CyberDefender
FamilyPak
The
FamilyPak offers the same technology as CyberDefender Early Detection Center
V2.0. Designed for families with multiple PCs or small businesses running
multiple PCs, it is offered at $29.95 to $49.99 per year for a 12 month
subscription.
MyIdentityDefender
V1.0
A free
Windows Internet Explorer browser plug in designed to protect users against
phishing attacks and dangerous websites, this product is offered for free and
generates revenue through an imbedded search engine powered by
InfoSpace.
CyberDefenderULTIMATE
CyberDefenderULTIMATE
provides unlimited live premium tech-on-call service 24 hours per day and 7 days
per week for assistance with the resolution of any technology problem. The
service is offered for $199.99 to $299.99 per user per year.
CyberDefender
Identity Protection Service
This is
an identity protection service offering users basic ID protection features and a
$25,000 identity theft insurance policy. This product is offered at $9.95 to
$14.95 per month.
CyberDefender
Identity Protection Service with Credit Monitoring
This
version of the CyberDefender Identity Protection Services includes credit
monitoring. This product is offered at $19.95 to $29.95 per
month.
35
Growth
Strategy
Our plan
is to continue to grow our business by continuing to purchase effective online
advertising and by recruiting new customers and renewing subscriptions from our
current customers. Approximately 50% of our customers renew their subscriptions
to our products year over year. We believe that this renewal stream will be
compounded over time as we continue to add new customers to a growing customer
base.
By
optimizing price points and adding new products, we believe that we will achieve
a higher revenue per user per year and a higher lifetime value. We will continue
to optimize our advertising spending in order to achieve higher
profitability.
In
addition to the above, we believe that our contract with GR Match LLC (“GRM”), a
subsidiary of Guthy-Renker, (, as detailed below, will help us market our
products effectively by utilizing radio and television advertising. Considering
the size of the audience that TV and radio media reach, we believe that this
relationship with GRM could be very significant to us.
On March
24, 2009, we entered into a Media and Marketing Services Agreement with GRM.
Pursuant to the agreement, GRM will provide direct response media campaigns,
including radio and television direct response commercials, to promote the
Company’s products and services and will purchase media time on the Company’s
behalf. During the term of the agreement, which, after giving effect to an
amendment dated June 4, 2009, is to continue until June 1, 2011, subject to
certain rights of termination, GRM will be the exclusive provider of all media
purchasing and direct response production services. On June 23, 2009, pursuant
to the Company’s obligation under the agreement, the Company appointed a
representative of GRM, Bennet Van De Bunt, to the Company’s board of directors.
This director will continue to serve throughout the term of the agreement and
for so long as GRM owns shares of the Company’s common stock or the right to
purchase shares of the Company’s common stock which constitute at least 5% of
the Company’s issued and outstanding common stock.
We are to
provide a monthly budget to GRM for media placement. GRM will purchase the media
and invoice us for the cost plus 2.5% in overhead expenses incurred in
connection with providing the media placement services. As security for the
payment of the media costs and overhead, we have agreed to grant to GRM a
security interest and lien in any proceeds held in a merchant services account
we have established with Litle Merchant Services. The purpose of the merchant
services account is to collect the proceeds from sales made as a result of the
media campaigns. These sales will be made through websites we will establish
that will be exclusively used to receive and process orders of our products from
customers who respond to the media campaign (“direct response
websites”).
As
compensation for GRM’s services under the Media and Marketing Services
Agreement, we have issued an amended and restated fully vested five year warrant
to purchase 1,000,000 shares of our common stock at an exercise price of $1.25
per share. This warrant has both cash and cashless exercise provisions. This
warrant supersedes and replaces a warrant issued to GRM in November 2008. We
also issued to GRM a second fully vested five year warrant to purchase 1,000,000
shares of our common stock at an exercise price of $1.25 per share. This warrant
may be exercised for cash only. Finally, we issued GRM a five year warrant to
purchase 8,000,000 shares of our common stock at an exercise price of $1.25 per
share, exercisable for cash only. This warrant was issued to compensate GRM for
providing media placement costs on 45 days terms with us and is subject to
vesting as follows: for each $2 of media placement costs advanced by GRM on our
behalf, the right to purchase one share of our common stock will vest. As of
August 31, 2009, the right to purchase 386,221 of the 8,000,000 warrant shares
has vested. If GRM terminates the agreement due to a breach by us in our
performance or as a result of our discontinuance, dissolution, liquidation,
winding up or insolvency, or if we terminate the agreement for any reason other
than a breach by GRM or our discontinuance, dissolution, liquidation, winding up
or insolvency, any unexpired and unvested rights of GRM to purchase shares of
our common stock pursuant to this third warrant will immediately
vest.
36
If the
average closing price of our common stock as reported by Bloomberg LP for the 20
trading days preceding January 1, 2010 is not at least $3.00 per share or if our
common stock is not publicly traded on any stock exchange or over-the-counter
market as of December 31, 2009, then we will be required to pay a monthly
royalty to GRM. The royalty will be equal to 20% of gross renewal revenue, which
is defined as the aggregate gross revenue, net of refunds and chargebacks,
earned by us as a result of renewals and/or re-orders of our products by our
customers who both (i) became customers during the period commencing on March 1,
2009 and ending upon the earlier of (A) the termination date of the Media and
Marketing Services Agreement or (B) the date following January 1, 2010 when the
average closing price of our common stock as reported by Bloomberg LP for the 20
trading days preceding that date was at least $5.00 per share and (ii) initially
purchased any of our products from any direct response websites. Our obligation
to pay these royalties will survive the expiration or termination of the
agreement.
The
agreement may be terminated by either us or GRM in the following
events:
|
·
|
if there is a breach or default
in performance of any obligation, unless the breach or default is cured
with 15 business days following receipt of written notice from the
non-breaching party;
|
|
·
|
upon the discontinuance,
dissolution, liquidation or winding up of the other party’s business or
the insolvency of the other party;
or
|
|
·
|
by either party for any reason by
giving the other party written notice of the termination at least 30 days
prior to the effective date of
termination.
|
After May
30, 2009, GRM may terminate the agreement upon 5 days written notice to us in
the event that the average media placement costs for any 3 consecutive months
during the term are less than $250,000 per month.
If we
breach our payment obligations under the agreement and fail to cure the breach
within 15 days after receiving notice from GRM, then the number of warrant
shares which would otherwise vest during the month of the delinquent payment
will automatically double and GRM will have the right to enforce its security
interest in the merchant services account. If we breach our payment obligation
more than 3 times, we will not be entitled to cure the breach and GRM will be
entitled to enforce its rights and remedies under the agreement.
If the
agreement is terminated by GRM prior to the expiration of the term because of
our breach, our discontinuance, dissolution, liquidation, winding up or
insolvency or because our average media placement costs for any 3 consecutive
months during the term are less than $250,000, or if we terminate the agreement
upon notice, then, if we propose to procure media purchasing services from a
third party which are similar to the services provided by GRM under the
agreement, we will notify GRM of the terms of such engagement. GRM will have a
period of 15 days to elect to provide the services on the same
terms.
Revenue
Model
We earn
revenues from the sale of our products. We license CyberDefender Early Detection
Center software for $12.99 to $49.99 for one year of service. This price
includes technical support related to the basic software installation, software
updates and definition updates. After one year of service, customers have the
option to renew the service. Users are notified when a subscription is due to
expire and what the cost will be to continue the subscription. In September
2007, we launched CyberDefenderULTIMATE and CyberDefenderCOMPLETE (although we
no longer offer CyberDefenderCOMPLETE) which we sell or sold for $99.99 to
$299.99 per year. By promoting our newer products and increasing the amount of
money spent on advertising, the number of licenses sold, gross sales and the
average dollar per sale from January 2008 through June 2009 increased
significantly. In addition, we are also offering CyberDefender Registry Cleaner
and CyberDefender Identity Protection Service to all of the customers who
purchase CyberDefender Early Detection Center. The total number of licenses sold
for all products during the period increased from 1,043 in January 2008 to
31,033 in June 2009, gross sales receipts increased from $38,791 in January 2008
to $1,706,008 in June 2009 and the average dollars per sale increased from
$37.19 in January 2008 to $54.97 in June 2009. We expect this trend to continue,
although we cannot guarantee that it will do so.
We also
generate advertising revenue from CyberDefenderFREE 2.0 and MyIdentityDefender
V1.0. Since November 2006, we began generating revenue from advertising by
showing users of our CyberDefender FREE V2.0 software small banners inside the
user interface, showing text links to third party products and/or getting paid
by search engine companies whenever individuals use our MyIdentityDefender
security toolbar. Our goal is to maximize our advertising revenue by increasing
the number of CyberDefender FREE 2.0 and MyIdentityDefender toolbar users.
Individuals who use these free products also contribute to the
earlyNETWORK since they create additional “nodes” or peers, which allow for
faster threat updates.
37
On
occasion, we also offer to our software users, both paying and non-paying, other
subscription services such as identity theft protection and consumer credit
management.
Retail
Sales
In
September 2008, we signed an agreement with a marketing partner, Allianex
Corporation, which will give us an opportunity to sell our products through over
200,000 retail locations worldwide. We anticipate delivering our products via
this retail channel during the fourth quarter of 2009.
Customers
Our
primary customers are consumers who use home computers that use the Windows
operating systems. Our customers reside primarily in the United States. The
number of our customers fluctuates due to the fact that, while we gain new
customers on a daily basis, existing customers can cancel or may not renew their
subscriptions.
Marketing
and Sales
We market
our products to computer users through the use of Internet marketing and our
e-commerce website, retailers, distributors, direct marketers, Internet-based
resellers, original equipment manufacturers (OEMs), and Internet service
providers. In October 2008, we signed a contract with Maxtek Distributing Inc.
which is currently marketing our products through an online retailer,
NEWEGG.com. In addition, we have an ongoing contract with DDNI Corporation which
is currently in the process of launching our product through Lenovo Computers.
In March 2009, we entered into a Media and Marketing Services Agreement with
GRM. Pursuant to the agreement, GRM will provide direct response media
campaigns, including radio and television direct response commercials, to
promote the Company’s products and services and will purchase media time on the
Company’s behalf. Current and future marketing opportunities include search
engine optimization, international marketing, co-marketing with distributors and
resellers, marketing through the use of a CyberDefender web browser security
toolbar and participation in trade and computer shows and user group
conferences.
Competition
Internet
security markets are competitive and subject to continuous technological
innovation. Our competitiveness depends on our ability to offer products that
meet customers’ needs on a timely basis. The principal competitive factors of
our products are time to market, quality, price, reputation, terms of sales,
customer support and breadth of product line.
Some of
our competitors include WebRoot Software, Sunbelt Software and Kaspersky Labs.
In addition, we may face potential competition from operating system providers
and network equipment and computer hardware manufacturers. These competitors may
provide various security solutions in their current and future products and may
limit our ability to penetrate these markets. These competitors have significant
advantages due to their ability to influence and control computing platforms and
security layers in which our products operate. At this time, we do not represent
a competitive presence in the SCM industry.
Intellectual
Property
Our
software is proprietary and we make every attempt to protect our software
technology by relying on a combination of copyright, patent, trade secret and
trademark laws and restrictions on disclosure.
On
September 22, 2005 we filed two patent applications with the U.S. Patent and
Trademark Office. The application titles and serial numbers are “Threat
Protection Network” – Application No. 11/234,531 and “System for Distributing
Information Using a Secure Peer to Peer Network” – Application No. 11/234,868.
On June 29, 2009, we filed a provisional patent application. The title and
serial number of the provisional application is "System and Method for Operating
an Anti-Malware Network on a Cloud Computing Platform" - Application No.
61/221,477.
38
On
September 21, 2005 we submitted an application to the US Patent and Trademark
Office for the registration of our name, CyberDefender, on the principal
register. The mark was registered on the principal register on March 13, 2007 as
number 3217137. On November 19, 2008 we filed an application with the US Patent
and Trademark Office for registration of the mark CyberDefender Registry
Cleaner, but we have decided to abandon this application. We also own a
registered mark consisting of the @ symbol inside a star.
We may
also license intellectual property from third parties for use in our products
and, in the future, we may license our technology to third parties. We face a
number of risks relating to intellectual property, including unauthorized use
and copying of our software solutions. Litigation may be necessary to enforce
our intellectual property rights or to protect trade secrets.
Employees
We
currently employ 61 full time employees and 14 independent contractors. Our
employees are segmented by the following functions: executive management,
research and development, information technology, marketing and sales, customer
service and call center, and finance and administration.
Government
Regulation and Probability of Affecting Business
The
development of our products is generally not subject to government regulation.
However, laws and regulations that apply to Internet communications, commerce
and advertising are becoming more prevalent. These regulations could affect the
costs of communicating on the Internet and adversely affect the demand for our
products or otherwise harm our business, results of operations and financial
condition. The United States Congress has enacted Internet legislation regarding
children’s privacy, sending of unsolicited commercial email and spyware. Other
laws and regulations may be adopted in the future. This legislation could hinder
growth in the use of the Internet generally and decrease the acceptance of the
Internet as a communications, commercial and advertising medium.
In
addition, the growth and development of the market for Internet commerce may
prompt calls for more stringent consumer protection laws, such as laws against
identity theft, which may impose additional burdens on companies conducting
business over the Internet. While none of the current laws governing Internet
commerce has imposed significant burdens on us to date, in the future our
business, results of operations and financial condition could be materially and
adversely affected by the adoption or modification of laws or regulations
relating to the Internet, or the application of existing laws to the Internet or
Internet-based advertising.
Description
of Property
Our
corporate office is located at 617 West 7th Street, Suite 401, Los Angeles,
California. The monthly rent is $10,669.50, and increases by 3% per year. Aside
from the monthly rent, we are required to pay our share of the “Common Operating
Expenses”, which are all costs and expenses (including property taxes) incurred
by the landlord with respect to the operation, maintenance, protection, repair
and replacement of the building in which the premises are located and the parcel
of land on which the building is located. We occupy approximately 4,742 square
feet of office space, or approximately 2.47% of the building. On June 19, 2009,
the Company entered into a non-binding Letter of Intent with its current
landlord to relocate and to occupy approximately 16,000 square feet in the
building to accommodate growth and the landlord has agreed to abate the rent for
all current office space beginning July 1, 2009 while the parties complete a
formal amendment to the current office lease. It is anticipated that the new
lease will be completed in October 2009 and that the Company will relocate to
its new office space under the terms of this amended lease during the first
quarter of 2010.
Legal
Proceedings
We are
not currently a party to any legal proceedings. Occasionally we are named as a
party in claims and legal proceedings arising out of the normal course of our
business. These claims and legal proceedings may relate to contractual rights
and obligations, employment matters, or to other matters relating to our
business and operations.
39
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The
following table identifies our current executive officers and
directors.
Name
|
Age
|
Position
Held
|
||
Gary
Guseinov
|
39
|
Chief
Executive Officer and Chairman of the Board of
Directors
|
||
Kevin
Harris
|
40
|
Chief
Financial Officer and Director
|
||
Igor
Barash
|
38
|
Chief
Information Officer, Secretary and Director
|
||
Bennet
Van De Bunt
|
|
47
|
|
Director
|
There are
no family relationships between any of our directors or executive officers. Our
directors serve until the next annual meeting of shareholders and until their
successors are elected by our shareholders, or until the earlier of their death,
retirement, resignation or removal. Our executive officers are appointed by our
board of directors and serve at the board’s discretion. Except as described
below, there is no arrangement or understanding between any of our directors or
executive officers and any other person pursuant to which any director or
officer was or is to be selected as a director or officer. Mr. Van De Bunt was
appointed to our board of directors pursuant to our obligation under section 1.5
of the Media and Marketing Services Agreement dated March 24, 2009 between our
company and GRM.
None of
our directors or executive officers has, during the past five
years,
·
|
had any bankruptcy petition filed
by or against any business of which such person was a general partner or
executive officer, either at the time of the bankruptcy or within two
years prior to that time,
|
·
|
been convicted in a criminal
proceeding and none of our directors or executive officers is subject to a
pending criminal proceeding,
|
·
|
been subject to any order,
judgment, or decree, not subsequently reversed, suspended or vacated, of
any court of competent jurisdiction, permanently or temporarily enjoining,
barring, suspending or otherwise limiting his involvement in any type of
business, securities, futures, commodities or banking activities,
or
|
·
|
been found by a court of
competent jurisdiction (in a civil action), the Securities and Exchange
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment has not
been reversed, suspended, or
vacated.
|
Business
Experience
Gary Guseinov is one of our
co-founders and has served as our Chief Executive Officer and as a director
since our inception in August of 2003. Mr. Guseinov has over 12 years of
start-up business experience in the e-commerce sector in addition to direct
marketing expertise. In 1994, Mr. Guseinov rapidly grew Digital Media Concepts,
a web development firm, by establishing business relationships with AT&T and
Pacific Bell. While at Digital Media Concepts, Mr. Guseinov built a client base
of over 475 clients in less than two years. In 1998, Digital Media Concepts
merged with Synergy Ventures Inc., a direct marketing firm focusing on online
marketing and customer acquisition. By 1999, Mr. Guseinov developed the first
Automated Media Planning System (SynergyMPS), allowing media buyers and media
sellers to communicate on a single platform and issue insertion orders. While
building SynergyMPS, Mr. Guseinov developed business relationships with over
2,500 media companies in the U.S., U.K., and Japan. In 2002, Mr. Guseinov
developed one of the largest enterprise email transmission systems capable of
handling over 1 billion email messages per month. While at Synergy, Mr. Guseinov
was responsible for acquiring such clients as Lucent Technologies, Wells Fargo
Bank, Citibank, Chase, New Century Financial, JD Powers and Associates, Sears,
GoToMyPC and many other Fortune 1000 clients. Under Mr. Guseinov’s management,
DirectSynergy was able to generate over $2 billion in revenues for its clients.
Mr. Guseinov earned his B.A. from the California State University at Northridge,
School of Social and Behavioral Sciences.
40
Kevin Harris joined us as a
consultant on October 1, 2008, became interim Chief Financial Officer on
December 1, 2008 and became our Chief Financial Officer on January 1, 2009.
Prior to that date, Mr. Harris was the Chief Operating Officer of Statmon
Technologies Corp., a publicly traded company, from April 2004 through November
2008 and was a financial consultant to the same company from December 2002 until
April 2004 Prior to his employment with Statmon Technologies Corp., from
February 2001 to April 2004, Mr. Harris served as the Senior Vice President of
Finance and Controller for RKO Pictures, LLC, where he oversaw all aspects of
accounting, finance, technology and administration for the company, its
subsidiaries and its not-for-profit ventures. He continued to provide services
as a financial consultant to RKO Pictures, LLC from April 2004 through December
2006. Prior to working for RKO Pictures, LLC, Mr. Harris served as Controller
and Vice President of Finance for POP.com and as the Director of Corporate
Financial Planning for Metro Goldwyn Mayer Studios, Inc. From 1993 to 1995, Mr.
Harris was a senior auditor at KPMG Peat Marwick. Mr. Harris is a licensed CPA.
He graduated with honors from the California State University at San Bernardino
earning his B.S. degree in business administration.
Igor Barash is one of our
co-founders and has served as our Chief Information Officer (and currently
serves as our Chief Product Officer) and as a director since our inception in
August of 2003. Mr. Barash has over 10 years of senior level management
experience with tier one Internet service providers. In 1997, Mr. Barash became
the first employee of Hostpro, a Los Angeles based ISP. With his extensive
knowledge of the Internet-based systems, servers, administration and
development, Hostpro grew to become one of the largest hosting service providers
in the world. After Hostpro’s purchase by Micron PC, Mr. Barash took a key roll
in Micron’s Internet services business, including developing value added
features on enterprise level service models, restructuring its data center, and
participating as Micron’s representative to Microsoft. Later, Mr. Barash became
the technical due diligence leader during Micron’s procurement of other ISPs,
and Mr. Barash delivered assessments of all companies in contention to be
purchased and incorporated under the Micron umbrella. In 1999, Mr. Barash was
given the task of restructuring and incorporating into Micron’s business
WorldWide Hosting in Boca Raton, an acquisition he led. Since January 2000, Mr.
Barash has been operating his own consulting firm, supplying high level IT
solutions and management services. Mr. Barash earned his B.S. from the
California State University at Northridge, School of Computer
Science.
Bennet Van De Bunt has served
as a director since July 21, 2009. Mr. Van De Bunt is a principal of
Guthy-Renker and is Co-President of Guthy-Renker LLC, where he is responsible
for business affairs and new business development. Mr. Van De Bunt joined
Guthy-Renker in 1993. Prior to joining Guthy-Renker, Mr. Van De Bunt was an
attorney at Allen, Matkins. A graduate of Harvard Law School and a member of the
California Bar Association, he also holds a degree in history from UCLA where he
graduated with honors. Mr. Van De Bunt was also on the Board of Directors of the
Electronic Retailing Association (ERA).
Significant
Employees
In
addition to our executive officers and directors, we value and rely upon the
services of the following significant employee in the support of our business
and operations.
Steve
Okun, 45
Senior
Vice President, Marketing
Mr. Okun,
joined CyberDefender in June 2009 from LeadPoint, Inc., where he was in charge
of the company's customer acquisition efforts as their Vice President of Sales
and Business Development from April 2005 to May 2009. As a founding member of
their senior management team, he was instrumental in delivering record level
year-over-year revenue growth during the last four years of his service. From
March 2000 to July 2002,
Mr. Okun also held the position of Vice President of Global Sales at
Commission Junction, the largest pay-for-performance affiliate network, where he
was responsible for leading the growth of the company's U.S. and international
sales and account management teams. He served as a member of the Executive
Committee before Commission Junction was sold to ValueClick. Earlier in his
career, Mr. Okun served in senior management roles at several Internet-related
B2C software technology companies including Success Learning Systems, a
Web-based training and educational products company that he founded and led as
President.
41
Executive
Compensation
Compensation
Discussion and Analysis
This
section explains how our executive compensation programs are designed and
operate with respect to our named executive officers listed in the Summary
Compensation Table below. Our executive officers in 2008 and 2007 were Gary
Guseinov, President and Chief Executive Officer; Michael Barrett, Chief
Financial Officer (February 2008 through December 15, 2008); Ivan Ivanovich,
Chief Financial Officer (January 2007 through January 2008); Igor Barash, Chief
Information Officer; and Bing Liu, Chief Software Architect. Our current Chief
Financial Officer is Kevin Harris, who joined us on January 1,
2009.
Executive
Summary
Our
compensation strategy focuses on providing a total compensation package that
will not only attract and retain high-caliber executive officers and employees,
but will also be utilized as a tool to communicate and align employee
contributions with our objectives and shareholder interests.
Compensation
for our named executive officers consists of the elements identified in the
following table.
Compensation
Element
|
Objective
|
|
Base
salary
|
To
recognize ongoing performance of job responsibilities and as a necessary
tool in attracting and retaining employees.
|
|
Annual
performance-based cash compensation
|
To
re-emphasize corporate objectives and provide additional reward
opportunities for our executive officers (and employees generally) when
key business objectives are met.
|
|
Long-term
equity incentive compensation
|
To
reward increases in shareholder value and to emphasize and reinforce our
focus on team success.
|
|
Severance
and change of control benefits
|
To
provide income protection in the event of involuntary loss of employment
and to focus executive officers on shareholder interests when considering
strategic alternatives.
|
|
Health
and welfare benefits
|
To
provide a basic level of protection from health, dental, life, and
disability risks.
|
Each of
the elements of our executive compensation program is discussed in more detail
below. Our compensation programs are designed to be flexible and complementary
and to collectively serve the compensation objectives described above. We have
not adopted any formal or informal policies or guidelines for allocating
compensation between long-term and short-term compensation, between cash and
non-cash compensation or among different forms of cash and non-cash
compensation.
Determining
Executive Compensation
In
setting compensation for our officers our board of directors, which is currently
comprised of Mr. Gary Guseinov, Mr. Igor Barash, Mr. Kevin Harris and Mr. Ben
Van De Bunt, look primarily at the person’s responsibilities, at salaries paid
to others in businesses comparable to ours, at the person’s experience and at
our ability to replace the individual.
42
Elements
of Compensation
Base salaries. In general,
base salaries for our executive officers were initially established at the time
the individual was hired, taking into account comparable industry compensation
and internal pay equity considerations, as well as the individual’s
qualifications and experience. Base salaries of our executive officers are
reviewed annually by our board of directors. In making decisions regarding
salary adjustments, we review performance, comparable industry compensation and
internal pay equity consideration. We also draw upon the experience that members
of our board of directors may have within our industry. We do not assign a
specific weight to any single factor in making decisions regarding base salary
adjustments.
Bonuses. Bonuses are used to
reward exceptional performance, either by the individual or by the company.
Bonuses are both discretionary and performance based. There is no single method
of computing bonuses. The board of directors may use any criteria to determine
the amount of a bonus.
Long-term equity incentive
compensation. Our executive officers are eligible to receive long-term
equity-based incentive awards, which are intended to align the interests of our
executive officers with the interests of our shareholders and to emphasize and
reinforce our focus on team success. Historically, our long-term equity-based
incentive compensation awards have been made solely in the form of stock options
subject to vesting based on continued employment or the achievement of
performance goals. We believe that stock options are an effective tool for
meeting our compensation goal of increasing long-term shareholder value by tying
the value of the stock options to our future performance. Because employees are
able to profit from stock options only if our stock price increases relative to
the stock option’s exercise price, we believe stock options provide meaningful
incentives to employees to achieve increases in the value of our stock over
time.
All stock
option awards are approved by the board of directors. In determining the size of
a stock option grant, the board of directors takes into account individual
performance, internal pay equity considerations and the value of existing
long-term incentive awards. Employees may receive an initial grant of stock
options in connection with the commencement of their employment. Our board of
directors retains discretion to make stock option awards to employees at any
time.
The
exercise price of each stock option grant is generally the fair value of our
common stock on the grant date or a slight discount of the fair value of our
common stock on the grant date.
Stock
option awards to our current executive officers typically vest over a two- or
four-year period. We believe this vesting schedule appropriately encourages
long-term employment with our company, while allowing our executives to realize
compensation in line with the value they have created for our shareholders. In
the past we have granted options with shorter vesting periods to executive
officers that were employed as consultants due to the short term nature of their
consulting agreements.
Based on
these factors, in 2007 and 2008 the board of directors granted stock options to
the executive officers as set forth below in “Grants of Plan-Based
Awards.”
Severance and change of control
arrangements. Pursuant to their employment agreements, some of our
executive officers are eligible for severance benefits consisting of base salary
continuation (ranging from 6 to 12 months) and paid COBRA coverage for 6 months
if the officer’s employment is terminated by us without cause or as a result of
a constructive termination. We provide these benefits to promote retention and
ease the consequences to the executive of an unexpected termination of
employment.
The
employment agreements with our Chief Executive Officer and our Chief Financial
Officer also provide for accelerated vesting of the executive’s then outstanding
stock options in the event the executive is terminated by us without cause, is
constructively terminated, or following a change of control. These arrangements
are intended to preserve morale and productivity and encourage retention in the
face of the disruptive impact of a change of control and to allow them to focus
on the value of strategic alternatives to shareholders without concern for the
impact on their continued employment, as each of their offices is at heightened
risk of turnover in the event of a change of control.
43
Employee benefits. Our
executive officers receive the same benefits available to our employees
generally. These include participation, sometimes at the employee’s expense, in
health, dental, group life and disability insurance plans. The type and extent
of benefits offered are intended to be competitive within our
industry.
Tabular
Disclosure Regarding Executive Compensation
The
following table reflects all compensation awarded to or earned by our Chief
Executive Officer, our two most highly compensated officers other than the Chief
Executive Officer and any other individuals who are no longer serving, but who
did serve, as an officer during the last two completed fiscal
years.
SUMMARY
COMPENSATION TABLE
Name and Principal
Position
|
Year
|
Salary
|
Bonus
|
Option
Awards(1)
|
All Other
Compensation (8)
|
Total
|
||||||||||||||||
Gary
Guseinov, Chief
Executive
Officer and
President
|
2008
|
$
|
225,000
|
(2)
|
$
|
112,500
|
0
|
$
|
14,024
|
$
|
351,524
|
|||||||||||
2007
|
$
|
225,000
|
(2)
|
$
|
0
|
0
|
$
|
13,757
|
$
|
238,757
|
||||||||||||
Ivan
Ivankovich, former
Chief
Financial Officer
|